Bio Rad Laboratories Inc (BIO) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Bio-Rad Laboratories, Incorporated earnings conference call. At this time all participants are in a listen-only mode. We will conduct 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 will now like to turn the call over to your host for today's call, Mr. Ron Hutton, Bio-Rad Treasurer.

Thank you very much. Before we begin the call, I would like to caution everyone that we will make 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. With that, I'd like to turn the call over to Christine Tsingos, Vice-President and Chief Financial Officer.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Today we will review the fourth quarter and full-year financial results for 2008, as well as provide some insight into our thinking for 2009. As you know, we record our financial results on a GAAP basis, which includes several one-time and non-cash impacts to the fourth quarter. We will try to give you as much color as possible to help you understand the true operating achievements of 2008.

Let's start with a review of the quarterly results. Net sales for the fourth quarter of fiscal 2008 were $448 million. This represents a decrease of 2.6% versus a year ago period sales of $459.7 million. However, on a currency-neutral basis, sales grew 3%. This year-over-year growth was fueled by solid performance in our clinical diagnostic segment, somewhat tempered by some industry challenges in our Life Science segment.

Consolidated gross margin for the quarter was a reported 55.1%, up significantly versus last year's gross margin of 50.8%. This improvement reflects a more favorable product mix as well as improved capacity utilization. During the quarter we recorded approximately $3.5 million of amortization expense and foregone profit margins as required under purchase accounting for our DiaMed acquisition. This compares to just over $6 million of expense in the fourth quarter of 2007.

SG&A expense for the fourth quarter was $154.5 million, or 34.5% of sales. This improvement reflects both disciplined spending as well as some positive currency effects. During the quarter reported in SG&A is approximately $2.3 million of amortization expense related to DiaMed, about equal to last year's impact. Research and development expense in Q4 was 9.2% of sales or $41 million. This increase in spending both sequentially and year-over-year, is reflective of our focus on the development of new panels for the Bioflex 2200 as well as our new fully automated instrument for blood typing which we plan to release late in 2009.

During the quarter we recorded more than $28 million of non-cash expense for the impairment of goodwill and a small amount of purchased intangibles. This impairment primarily relates to goodwill associated with the 1999 acquisition of Pasteur Sinofi Diagnostics and the subsequent decline of value in our BSE testing business, a business that has been severely impacted over the past years by a decline in both test volumes and pricing.

Interest and other for the quarter was a net expense of approximately $18 million, compared to $10.5 million last year. This net amount includes a one-time foreign currency loss of $5.2 million, related to the significant and extraordinary swings in some of our major currencies during December. In addition, the Q4 other expense reflects the impairment of investments of $6.2 million. Because the impairment of goodwill in our investments is not deductible for tax purposes, the effective tax rate used during the fourth quarter is somewhat meaningless. Excluding these one-time cash events, our quarterly effective tax rate was approximately 29%.

Reported net income for the fourth quarter was a loss of $8.2 million or minus $0.30 a share on a diluted basis. We are estimating that excluding the one-time charges for impairment of goodwill purchased intangibles and investments of $35 million, coupled with foreign exchange losses of $5 million, diluted earnings per share would be $1.16 for the quarter.

Life Science reported sales for the fourth quarter decreased 7.7% from the year ago period to $170.3 million. On a currency-neutral basis sales decreased 3% for the quarter. This year-over-year decrease reflects the industry-wide drop in capital instrument sales as well as a tough compare to 2007 which included a sizeable process media order. During the quarter we continued to see strong sales of amplification products as well as approaching expressions, separation and analysis products.

Gross margins in Life Science increased significantly, both sequentially and year-over-year, primarily due to a more favorable product mix towards consumables as well as improved manufacturing costs and absorption. In addition to improved gross margins, our Life Science group also posted good operating leverage and segment profits, excluding the impairment charges, increased to more than $13 million as a result.

Our clinical diagnostic group recorded strong sales for the quarter of $274 million, an increase of about 1% on a reported basis, but more than 7% currency-neutral. These sales were led by continued strong performance and quality controls as well as our blood virus, auto immune and diabetes product lines. Diagnostic gross margins were up both sequentially and versus last year, primarily reflecting a more favorable product mix. As a result, reported fourth quarter segment profit for Diagnostics increased to just over $30 million.

Looking at the full year results we are pleased to report annual revenues of $1,764,000,000, an increase of nearly 21% over 2007. This is a 17.8% increase on a currency neutral basis and in line with the high teens guidance we gave at the beginning of the year. Both of our primary segments contributed to growth in 2008. For the year, Bio-Rad diagnostic sales were just over $1.1 billion, an annual growth of more than 30%.

During the year the group launched several new products in diabetes, blood virus, infectious disease and quality controls. On a geographical view, all of our primary regions were strong double-digit growers. During the year we placed several new Bioflex 2200s in the United States and Europe, bringing the installed base to 86 units.

Sales of our MRSA and HIV tests in the United States continue to grow rapidly and, in fact, we are now the number one provider of HIV tests in the United States.

And, finally, the inclusion of DiaMed into the Bio-Rad family has brought new opportunities for both geographic and market expansion, and we are pleased with the success of our integration efforts thus far. Late in the year we acquired two DiaMed distributors in Europe which will contribute to sales and profits in 2009. We are also excited about the upcoming launch of our new fully automated instrument for use with the DiaMed gel card, the gold standard technology for blood typing.

Despite a tough industry environment and another double-digit decline in our BSE business, our Life Science group also posted good annual sales primarily fueled by growth in our core markets of multi-plex protein analysis, electrophoresis and gene expression.

Asia-Pacific and the emerging market continue to be strong growth regions for the tools business. Reported growth in Life Science for 2008 is 4.6%, or 1.4% on a currency-neutral basis. Excluding the BSE decline, core Life Science sales grew more than 6% year-over-year.

During the year we introduced several new products for food testing, protein purification and analysis and gene amplification. Our food pathogen testing business continues to be one of the fastest growing product lines within our Life Science group and during the quarter we expanded our opportunity for growth by acquiring certain assets from Safe Path Laboratories for the testing of trichinella, toxoplasma and salmonella.

The company gross margins for the full year were in line with expectations at 54.6% compared to 54.2% in 2007. This year-over-year increase becomes even more impressive when you consider that the 2008 margin includes the impact of more than $18 million for the amortization of purchased intangibles and inventory write-up related to DiaMed.

Research and development expense in 2008 was also in line with expectations of $160 million or 9% of sales. During the year we launched more than 40 new products worldwide and have several more in the pipeline to help keep our return on R&D investments strong. SG&A expense as a percent of sales was 33.5% for the year, an improvement of more than 100 basis points compared to 2007. Net income for the full year was $89.5 million versus last year's net income of $93 million. Excluding the fourth quarter charges for impairments to goodwill intangibles and investments and the unusual currency loss, we estimate net income for 2008 to be $129 million. The tax rate for the full year of 31% was higher than originally projected due to the non-deductible charges taken in the fourth quarter. Going forward we expect the tax rate to be between 26% and 28%.

For 2008 Bio-Rad's balance sheet also remains strong. As of December 31, total cash and short-term investments were $243 million compared to $224 million at the end of last year. During 2008 we spent more than $50 million to acquire additional shares of DiaMed Holding as well as two European-based distributors. Strong cash collections throughout the year, coupled with better receivables management, has resulted in another year of excellent cash flow for the company. Net cash generated from operations during the fourth quarter was $78 million and $191 million for the full year. Net capital expenditures were $22.1 million for the quarter and $84.8 million for the full year.

Going forward we expect CapEx to be in the $80 million to $90 million range for 2009 reflecting increase investment in information technology and eCommerce, as well as the inclusion of our DiaMed requirement. Finally, depreciation and amortization for the quarter was $22.8 million and $97 million for the full year.

Looking to 2009, it is difficult to predict the financial impact of the industry challenges in Life Science, the dramatic moves in foreign currency, and the resulting competitive landscape. Our overarching goal is to organically grow sales in the low to mid-single-digits, and grow operating income, excluding the impairment expense, in that same range. However, with more than 60% of our business outside of the United States, foreign currency translation could easily wipe out that growth on a reported basis, resulting in a year-over-year decline in sales and income. And as you know, the majority of our expenses are US-dollar based, which means that currency could have an even larger negative impact to our operating income. In other words, as a strengthening US dollar results in fewer sales on the top line, we won't have a corresponding effect of fewer expenses on the operating line. And this could result in operating margins on a reported basis returning to the single-digits for 2009.

Given the uncertainty of the global economy, we have instituted a headcount freeze and curtailed some expenses, but ultimately we will not jeopardize our long-term growth opportunities and exceptional customer care programs just to reap a short-term gain. Now I'll turn the call over to Norman for a few comments.

Okay. Thank you, Christine. I think when we look past the fourth quarter impairments, 2008 was a very good year for us, and not only financially, but as Christine mentioned, we also introduced a number of new products. We have been very successful so far in integrating DiaMed and generally good cash flow. I think from Christine's comments you can get the flavor that we're certainly approaching 2009 with some caution. I think about fundamentally the markets that we serve have not been really dramatically affected as some other industries so far.

I can tell you though, that the whole management team is focussed on kind of the fast-changing environment and as the year unfolds, we will watch closely and make any necessary course corrections that hold us in good stead for the long term. And that's really where we are today. So Komisha, with that, we will open it up for questions. .

(Operator Instructions). And your first question comes from the line of John Wood from Bank of America, Merrill Lynch. Please proceed.

Hey, can you hear me, good afternoon.

Hi.

Hey, Christine, so -- or Brad, if he's there, can you just talk about what the capital equipment deterioration did to the growth rate for the Life Science business in the fourth quarter?

Well, John, there are really two ways to look at it. We have capital equipment in terms of instruments and we have some instruments that are in the neighborhood of about $250,000. That certainly had an impact. We also had our process chromatography business which, in effect, is a capital instrument and certainly the kind of investment both in hardware and media. And those really did hurt us in the fourth quarter, contributed significantly to the slow-down ultimately.

All right. So I mean can you give us a range of impact? I mean, if you exclude that hard chromatography comp, and the capital equipment dislocation, are we looking at low, mid-single digit type of growth in Life Science.

I would say maybe mid-single-digits would be the impact of that. It was pretty substantial.

Okay. And in turn -- so think about those impacts for 2008 as a whole, what do you anticipate both the capital equipment as well as process chromatography comparisons did to the whole year in the Life Science business?

The whole year, certainly they did have an impact not clearly as substantial in the fourth quarter. The main impact was in the fourth quarter. It was probably down maybe slightly, but very -- but the main part was really in the fourth quarter.

I guess a better way to ask that, I mean, if you look at 2009, I'm trying to get a sense for how difficult or easy the comp is in the capital equipment side. So do you expect significant incremental deterioration in 2009 over 2008 in particularly the capital equipment side?

You know, obviously there is a clearly a lot of uncertainty in the markets today, especially the US market. But essentially, if we look at the process chromatography business, I have a lot of visibility on those orders and I don't see that as deteriorating or having a significantly negative impact as far as some of our capital instruments.

And now we're talking about a relatively small number as a percentage, but that's still in flux, but if I look at the overall number I don't see that as having a huge impact and, obviously, that has been reflected in Christine's projections.

Okay. And then so Christine, at current rates, what do your forecasts tell you for the FX on the top line in '09?

You know, that a $64,000 question. When we do our planning, and actually how we run our basis, we do our business, we do it on a local currency basis. So when we roll up our goals for '09, we are looking for that low to mid-single-digit growth on both the top-line and operating incomes.

Currency is the wild card and we can look at rates at 12/31, we can look at rates at 1/31, and we've seen some of the biggest swings that have been generated in a number of years. So it's hard to project. I mean, if I take current rates, that we could be low to mid-single digit decline on a reported basis. But who knows what currency is going to do?

Just so I'm clear, the low to mid-single-digit operating income growth is -- that's excluding currency totally?

Yes, and I also took out the $28.8 million of the one-time impairment that's above the operating income line in '08 just to be fair to make it true operating, operating.

Okay. But that is an organic number and from there we have to take--

You're right, so reported number will be likely lower than that, because of currencies. And the impact on the operating income line is greater than the impact on the sales line when currencies are going in this direction, because the majority of our spend is dollar-based.

Okay. Okay. That makes sense sense. In the fourth quarter, can you give us the placements for the Bioflex 2200? Was it six placements? Because I have written down on the third quarter call it was about 80 instruments at the end of the third quarter.

We said nearly 80. I think it was probably 8 or so placements in the fourth quarter.

Okay.

Eight or nine.

What is left to consolidate on the DiaMed side, so that Christine, when you do an acquisition of a distributor, is that separate from buying out the minority shareholders?

Yes. Although some of the distributors are also minority shareholders, but we won't go down that slippery slope. So, there is a couple of things that are going on. One is, we said from the beginning we'd like to acquire some of these DiaMed distributors to bring those sales direct, which is more in line with our traditional business model, obviously means we get the benefit of 100% of the end user sales and the profits as well. So we are going to continue to pursue selectively picking up some of these distributors and bringing them directly into our business.

Separate from that, we still have the need to -- the requirement to purchase the remaining minority shares of DiaMed Holdings. We did pick up some more during the quarter, but we have about 6% of the outstanding shares, which I'm guessing is around $38 million, which we do plan to acquire hopefully in the first half of '09.

So, we will continue to have a minority interest line on the P&L because there continue to be minority shareholders of DiaMed Holding, but more importantly, the biggest chunk of that minority interest line relates to some key subsidiaries, where we don't own 100% of the stock. And at some point in the future, we may look to buy the other half of these subs that we don't own and that can bring that minority interest line down.

Okay. Brad, could you perhaps give us some qualitative, whatever you ar comfortable in doing, some qualitative with the NIH budget boost, the stimulus boost, how quickly can you see that and how material could that be, given the numbers you've seen out there?

That's a very good question and I think that's something that's really shaping up almost on a daily basis. We certainly know that our customers are beginning to get some feedback into the granting committees and how that money is going to be spent.

Certainly, we're optimistic. Because if you look at a lot of the money is dedicated for instruments under $50,000 into existing grant holders with the caveat that it be spent this year. So we see that as a potential upside given our product line of real time thermocyclers, things like Bio-Plex systems and then, of course, the suite of laboratory apparatus we have.

The question is really timing and how these granting committees are ultimately going to push this through. We would expect probably, this is our certain guess, to see a real positive impact of that starting probably early as May, but sort of more of a second half of the year occurrence. But it does -- it seems substantial.

That being said, we do see that, and we saw some of this in the fourth quarter, is that people are generally conservative. You know, their own personal finances, their own 40k's, their own view of the economy, causes them to be a little bit more conservative with their budgets, even though in the case of a lot of NIH budgets you can't save it year-over-year. Things have changed appreciably, really in the last 10 days on this.

Okay. Thank you very much.

And your next question comes from the line of Amy Wilson from Ramsey Asset Management, please proceed.

Hi, thanks for taking my question. I was wondering what the placements were quarter by quarter in 2008 for the Bio-Plex?

We don't really have that number at hand.

I guess you've mentioned on previous calls so I can look there. And then the second question would be there -- just looking back at inventory levels in the fourth quarter of 2004, I mean 2007, versus the fourth quarter in 2008, it was quite low in 2007, and then spiked up through the rest of 2008. What can we attribute that to?

Well, you're correct that we have been building inventory and it was extraordinary, though, in 2007, in fact we got caught with some back orders and things like that, so we did build inventory during '07 -- during '08. We also have several new products that we were ramping up for launch in '08, as well.

So I guess most of the -- how much of the gross margin improvement that we saw year-over-year can we attribute to the higher inventory level?

We don't have that well quantified, but I think it's probably fairly low.

Okay.

I know where you're going, but I don't think that's a big factor. We've been actually watching that fairly closely because otherwise you build a kind of a ticking time bomb and certainly we don't want to do that. We're trying to balance between obviously keeping the inventories under control, but serving the customers, so that's the balance we're trying to strike.

The other thing you can see in my comments in the reported numbers, Amy, that is important to see, a lot of the gross margin improvement is actually on the Life Science side of our business, where this is real achievements, sustainable achievement on their part. Manufacturing has been moved, some of the pipelines to Singapore, we reengineered some of the products that are actually being produced at a lower cost. And these are real improvements that are sustainable, whereas a lot of the inventory build is facilitated on the diagnostic side of the house where we're building for future orders and we build whole lots at a time.

Our quality control group did very well during the year, and in that case we build multi-year lots and hold them on behalf of the customer. And then, of course, not all of our inventory is held in the United States, so currency sometimes can have an impact on the values.

Okay. Thank you very much.

You're welcome .

And your next question comes from the line of Steven [Jelman], Investor, please proceed.

Hi. I was curious, I had two questions. The first is the Sartorius investment, if that was included as part of the $28 million write down or if that is independent and doesn't have to be mark to market.

And the second question is, I caught the conference call late, so excuse me if you've already gone over it, but if you're planning to do any layoffs or have any other reductions to increase the profitability?

We're not really planning other kind of layoffs at this point. As we said in the conference call, we're -- we've instituted kind of a headcount stabilization, so we're basically staying -- trying to stay with our same headcount through '09 as we had at the end of '08. So that is kind of where we are.

And having said that, obviously part of our being diligent about the business is looking at each of the product areas that we operate in to make sure that they're appropriate for our long-term growth.

In term of the impairment, it didn't have anything to do with Sartorius whatsoever, it was related to assets that were acquired as part of the acquisition of Pasteur-Sinofi Diagnostics in '99, assets that related to the food-testing business primarily, the BSE testing business, which has lost value over the last several years as that business has declined.

So can you make any -- because the Sartorius investment is a huge investment. I don't know if you can comment on that.

It is still an investment on our books. So you can see in our financial statements that the majority of our investment is in the form of voting shares, what they call ordinary shares, and those are held on our books at cost. So it's in a different category than we would look at in some of these other actions.

Okay. Thank you very much.

You're welcome .

And your next question comes from the line of from [Carthig Krishnan] from [ING], please proceed.

Yes, thank you for taking my question. I was wondering if you could comment how the first two months of the year are looking in terms of general business conditions, and I have one more question.

Well, we're still in business. I think one month doesn't make the quarter, and the business still seems to be ticking over at a pretty reasonable rate, and we'll be back in a little while with the first quarter, and tell you how it's going.

I think probably currency is going to have the biggest play in year over year comparison.

Okay. And my next question is with regards to operating margin line item. Should I look for a step function decrease in the first quarter and then possible improvements from that point onwards, or do you think it's going to be a gradual impact to the operating margin compression this year?

Oh, boy, we generally don't give quarterly guidance or look at that level or discuss that level of granularity externally. I think that the -- it is safe to say that the comparisons will be much tougher in the beginning of the year than they will be at the end of the year. But, again, who knows what currency is going to do to the operating results. So I think we're just going to stick with giving high-level guidance for the full year.

Okay. And the last question I had was is there any changes in terms of your hedging programs for the dollar?

Not significantly. It's interesting, one of the currencies that had a big contribution to this unusual loss in the fourth quarter was the Brazilian real which traditionally was traditionally is a currency we haven't hedged because it was just exorbitantly expensive to hedge.

But the devaluation moves in Brazil that caused a big swing had the silver lining impact to make the cost of hedging much less expensive than it ever has been in the past that I've seen. So that is one change we may make. But generally, we cover our exposure and not try and predict movements one way or another.

Okay. Thank you for that.

And your next question comes from the line of Doug Fisher from Kennedy Capital, please proceed.

Yes, thanks for taking the questions and nice job on the fourth quarter in a tough environment.

Thanks, Doug.

You talked about the process chromatography business being an impact on the fourth quarter. Can you give me some feel, just broad-brush, how large that business is for you guys?

Again, we don't report our division and operating results by division publicly. But certainly the year-over-year decline in the process orders was enough to make a good impact on Life Science sales for the quarter.

If you took that and you took the true capital equipment business or the more traditional I guess, capital equipment part of the business, of those two impacts on the fourth quarter, which one was larger would you say?

The process orders.

Okay. Okay. That's helpful. And can you just remind me on the Life Science side what percentage of the business is kind of tied to government and academic customers, roughly?

Doug, this is Brad. I'll take that. We try to look at it, it's about -- on a worldwide basis at about 65% or 70% of our business is tied specifically to government-sponsored research, and then the rest would be in a for-profit sector, whether it is pharmaceutical, food diagnostic, and other areas.

Okay. Okay. That's helpful. And on BSE testing, another decline there, we kind of had hoped that business was going to flatten out in '08. When you think about '09, what have you embedded in your expectations, and I do realize it is getting to be a less and less important part of the overall business, but I want a feel of what the impact is going to be on the Life Science growth on '09.

I was hoping, too. It was a lot funner on the way up. But the reality is that it is going to have an impact. And one of the things that happened at the latter part of this year is that they changed the age of testing, so the market is going to reduce even further on almost a stepwise function.

Frankly, the numbers had begin to stabilize a little bit because obviously portionality is working to our advantage, but the stepwise function we see in Europe is going to have another impact. Really no appreciable change to our market share but it's, again, the overall markets just going to get that much smaller.

And can you give me any feel in terms of either growth rate or reduction or size, dollar value size, some idea of what the impact is going to be in the quarter I'm sorry, in the year?

Well, you know, Doug, we've talked about that in '08, we are expecting that business to go down to about a $40 million or $45 million a year business, and that's probably not too far off.

In terms of what will happen in '09, it could be another incremental double-digit decline with this change in age of testing across the entire EU community, but the good news is that at some point here soon, hopefully,p the fabulous growth in the traditional food safety, food pathogen testing business, will outstrip the decline of the BSE business.

I mean, I'm looking at those numbers, or what I think they are, maybe by 2010, given the trajectory of the two businesses, they get to be the same size?

Maybe even late this year, we'll see.

Okay.

I mean, it just depends of growth of one and decline of the other obviously. So 2010 is certainly reasonable.

Okay. And just in terms of the Bio-Plex, how should we think about the placements? I know it is impossible to have real clarity or visibility on that, but if we look at the fourth quarter placement rate, could we think about that kind of a run rate going into '09, or how should we think about it?

You know, I think as we go into 2009 we're going to have more panels that get approved and that are on the system, and that should kind of enhance the placement rate inn 2009. So the thought is that that will pick up a little bit in 2009.

Okay. Okay. Thanks for the feedback.

Okay .

At this time there are -- I'm sorry, there is one more question in queue from the line of John Gibbons, from Odin Partners, please proceed.

Hi, Christine, I love your website, but do you know your website is not updated with the results that you reported.

I did not know that, John, thanks for pointing that out. If you love our website now, just wait until we launch the new one.

I love it, it's got lots on it. But I was so surprised they never updated the results.

Thanks for that tip.

At this time there are no questions in queue.

Okay. Well, thank you all for joining us today. We appreciate all of your continued interest, and look forward to seeing you on the next conference call.

Bye.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a wonderful evening.