Bio Rad Laboratories Inc (BIO) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter Bio-Rad Laboratories, Incorporated earnings conference call. My name is Shamika and I will be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Ron Hutton, Treasurer. Please proceed, sir.

Thank you. Before we begin the call, I would like to caution everyone that we will be making forward-looking statements about management's goals, plans and 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 CFO.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Today we are pleased to report quarterly net sales of $401 million, a decrease of 5% on a reported basis versus the same period last year sales of $422.2 million. However, on a currency neutral basis, year over year sales grew more than 3%.

During the quarter we had good growth across many of our key Diagnostic markets as well as selected markets in Life Science. As is typical with our historical pattern, the first quarter generally reflects the strongest margins, both gross and operating, for the fiscal year. The reported gross margin for the first quarter of this year was even higher than expected at 57.1% compared to 55.1% last quarter and 53.7% in the year ago period.

This strong margin reflects the shift in product mix toward higher margin consumables and improved manufacturing efficiencies as well as some one-time benefits. The non-cash purchase accounting expense recorded in cost of goods related to the DiaMed acquisition was $3.4 million, a decrease of approximately $1 million from last year.

SG&A expenses for the first quarter were $140.3 million, or 35% of sales, about equal to the year ago dollars but higher in margin reflecting the currency impacted sales number. The sequential improvement versus the fourth quarter is primarily related to lower selling costs associated with the lower sales number as well as good headcount management.

The current quarter SG&A expenses include $2 million for amortization of intangibles related to DiaMed. Remember that historical trends consistently reflect our lowest SG&A spend in the first quarter and thus we anticipate these expenses to ramp up throughout the year.

Research and development expense in Q1 was 9.3% of sales or $37.1 million compared to $41 million in the fourth quarter and basically flat with the $37.5 million spent last year. During the quarter, interest and other income was a net expense of $8.2 million compared to $10.4 million of expense in Q1 of last year. This improvement versus last year is largely related to changes in foreign exchange results remembering that last year we incurred a $2.5 million currency loss.

Additionally, during the first quarter of this year, we recorded approximately $2.5 million of non-cash impairment expense related to our investment portfolio. The effective tax rate used during the first quarter was as expected at 26% which compares to 27.5% last year. Excluding any discrete items that may occur during the year, we expect the full year rate to be around the 26% level.

Net income attributable to Bio-Rad for the first quarter was $30.3 million, an increase of 14% versus last year. Diluted earnings per share were $1.10. The non-cash amortization of intangibles and purchase accounting adjustments associated with DiaMed negatively impacted operating income by approximately $5.4 million which, using the 26% effective tax rate, equates to about $0.14 per share.

And now for certain segment information, Life Science reported sales declined 9.2% to $140.3 million. On a currency neutral basis, sales decreased 3% and if we exclude the decline in our BSE business, currency neutral sales were actually flat year over year for the Life Science Group. We continue to have good year over year growth in protein related product lines as well as gene amplification products. Both the US and European markets were challenging for Life Science in the first quarter while Asia Pacific and Latin America continued to produce solid double digit growth. Overall, segment profit for Life Science was lower at $6 million, primarily reflecting the lower sales.

Our Clinical Diagnostic segment posted another strong quarter with sales of $257.5 million, a decline of just over 2% on a reported basis when compared to last year. On a currency neutral basis, year over year sales growth exceeded 7%. These sales were led by strong performance across all of our product divisions, most notably quality control, blood virus, and microbiology products. Sales to the emerging markets and the US were especially strong during the quarter. And perhaps most exciting, the first quarter reflects a sizable number of Bio-Plex 2200 placements. During the quarter, we placed 29 new systems including 22 units sold to LabCorp which brings the installed base up to 115 units. Going forward, we anticipate returning to our more typical 5 to 10 placements of Bio-Plex 2200 per quarter.

Diagnostic gross margins increased compared to last year primarily due to favorable product mix, but also related to the Bio-Plex sales to LabCorp which generated a one-time gross profit contribution in the first quarter. Segment profit for the group increased more than 19% to $38 million.

Moving to the balance sheet, as of March 31st, total cash and short term investments were $223 million. The decrease in cash balances versus year end primarily reflects increased cash payments typically associated with our first quarter. This is also reflected in cash generated from operations. Cash balances will likely decrease again during the second quarter as we are acquiring substantially all of the remaining shares of DiaMed Holding for approximately $35 million.

Net cash generated from operations during the quarter were $6.4 million compared to a negative $2.2 million in the year ago period. The first quarter represents a decline from the fourth quarter and is the direct result of more than $30 million paid for commissions, annual royalties, and bonuses associated with our strong 2008 financial results. For the most part, these are annual and one-time payments and thus cash flow in future quarters should improve.

Net capital expenditures for the quarter were $18.7 million. Our full year expectation for CapEx remains in the $80 million range as we continue to invest in our future. And finally, depreciation and amortization for the quarter was relatively flat with the fourth quarter at $22.3 million.

While we are pleased with this start to the year, our outlook for 2009 remains relatively unchanged from the guidance we provided in February. That is for top line, currency neutral, organic growth to be in the low to mid single digits. Continued strength in the US dollar could significantly mask the reported growth especially in the first half of the year where the comparisons may be tougher. As discussed earlier, gross margins for the first quarter were stronger than anticipated and likely not sustainable. We continue to anticipate full year gross margin to be in the mid 50% range.

As we discussed on the February call, on a currency neutral basis, our goal is to grow operating income at the same rate as sales. However, on a reported basis, swings in various currencies could temper the results and push operating margins to be in the low double or high single digits. And now we are happy to take your questions

(Operator Instructions) Jon Wood, Bank of America.

Hey, good afternoon. Christine, so the gross margin benefit, the one-time gross margin benefit, that's the LabCorp sale?

Right.

Okay, so you have a gross margin on that instrument that's higher than your core?

No. So typically these instruments are placed under a reagent rental program. And in LabCorp's case, they elected to purchase them. So under reagent rental, we get the gross margin over time, but with a purchase we see it more upfront. So for us, it's a matter of recognizing gross profit upfront for those units.

Okay, but it actually boosted the percentage as well or it was just incremental dollars?

A little bit of both.

Okay. Is that -- so that agreement, is that like Quest? Is it just for the ANA panel or is there a more comprehensive set of tests within that contract now?

Hi, John, this is John Goetz. Yes, it's for a more comprehensive set of panels. We've got the ANA in there as well as EVD. We have an opportunity for vasculitis. It's a pretty nice placement relative to panel utilization there.

Okay, great. So Christine, or if Brad's there, can we just talk about the process chromatography impact you called out in the press release? Is that a function of lower process chromatography business or just a hard comp?

Yes, this is Brad. It is definitely just a hard comp and the business is pretty lumpy obviously. There are some very large customers. And if we looked at it over a four quarter period, it's -- the business is fine and it's certainly growing. It's just the first quarter was a tough comp.

This happened in the fourth quarter, so it's safe to say that both the fourth quarter of '07 and the first quarter of '08, both were elevated quarters and that's what we see in the numbers today?

Yes, in '08 and '09, yes definitely that's the case. It was the last two quarters certainly reflected that and we have a fair amount of visibility of the business going forward, so we can see where that's coming from.

Is the -- so does that comp issue persist in Q2 and beyond? Or is it -- I mean should that impact be largely washed through at this point?

I would say it would largely wash through.

Okay. And it doesn't sound like capital equipment was a drag on Life Sciences this quarter. Is that an accurate statement?

Well it really depends how you define capital equipment. There's a sort of hybrid range of instruments in the $25,000 to $50,000 range. And they were certainly impacted a little, but not as much. We have some new product lines in that area that did really well and actually surprisingly well. But obviously the US market for products over $50,000 really was, it was tough, it was tough sledding for us and as we've seen, everybody.

And I think it's fair to say that instrument sales for Life Science in Q1 were lower than they were in Q4.

Okay, sequentially. But was it a negative -- I guess without the BSE, so you're flat and then you've got a process chromatography in that. I mean did it contribute to a negative impact on the growth rate is where I'm going with that.

On balance, no. It was actually positive in the sense of you're correct if you take the BSE and the process chromatography impact out, actually there was growth on a net currency basis.

Okay, great. And so, Christine, you said $35 million for DiaMed in the second quarter of '09? And that -- so the minority line on the income statement, does that go to a very low level post 2Q '09?

That's a good question. Obviously it's dependent on the profitability of DiaMed in any given quarter. But I would think our best estimate right now is the $1.7 million that we posted this quarter probably goes down to about $1 million a quarter. Because remember, we still have 51% owned subsidiaries that are accounted for under this method. It's not just about the minority shareholders of DiaMed Holding.

Okay, great. All right, thanks a lot.

Barry Malmut, UBS.

Hi. On your earnings release on page three where you quote, when you present the balance sheet, are you sure you're referring to the December 31, 2008 balance sheet? Or is that really the March 31, 2008 balance sheet? The reason I say that is you earned $30 million in the first quarter and shareholders equity is down. Is that possible? It doesn't seem possible to me.

We have several items that go through the equity section. The currency translation adjustment on all our foreign owned and foreign currency denominated assets and liabilities also go through there. So you can earn $30 million of profit and have a $70 million change for example in net assets.

That I understand, but how about in shareholders equity?

Well that's where the CTA account goes through. You mean retained earnings or?

I'm looking at the $1,070,000,000 down to $1,058,000,000 -- shareholders equity which is minus $12 million and yet $30 million in profit. I guess --

The currency trend adjustment does go through the retained earning shareholders equity account.

Okay, thanks for the education.

(Operator Instructions). Richard Glass, Morgan Stanley.

Hey guys, nice quarter. I've got a couple of questions. One is, can you tell us about any progress you've made on getting panels approved or assays, individual assays or whichever you want to address? And can you also talk about any geographic differences between your businesses?

Okay, this is John Goetz. I'll speak to the panel question. We've had a panel approved just within the last 45 days and we have planned three more between now and the end of the year and these will be for a total of about nine assays altogether. So by the end of the year we should have a total somewhere around 33 total assays on the system.

Okay, and what are those for, the ones that you just got approved or are working on?

We had a panel for torque IGG and then in the hopper we have a torque IGM, a measles/mumps/rubella, and herpes simplex.

All right, nothing --

They're all in the area of autoimmune and serology testing.

No swine flu in there, huh?

No. We have other tests for that but they're out in the European market.

And on the geographic question?

So I think -- as I talked about a little on the script, I think you have to look at it group by group because for the developed market, the US, Europe, it's been pretty tough for the Life Science products. And I don't know that we're alone in this, I think the whole industry is feeling that. And it's a significant portion of our Life Science business. And yet the emerging markets are still growing very strong for Life Science. If you look at Diagnostics, especially in the first quarter, US was very strong for the Diagnostic group and part of that is the Bio-Plex and the placements there and the sale to LabCorp. But also Quality Control did well and we continued to gain share in Blood Virus in the US. So it's hard to say gee, Bio-Rad as a whole, here's the geographic impact, when it's a little different for each of the groups. And then emerging markets, Latin America, places like that continue to do well for almost the entire product line.

All right. Thank you.

Jeff Matthews, RAM Partners.

Hi there. I have a couple of questions. The first, LabCorp, the deal with LabCorp in the placements, presumably that would have occurred regardless of how you booked the sale whether it was a reagent lease type thing or whether it was an actual follow on sale. And I'm just wondering if there's any particular reason in terms of capital markets, of the credit availability that made the deal happen the way it did or not.

I asked that same question because typically these instruments are placed under reagent rental and I think we would anticipate that in the future as well. And our folks who have been good partners with LabCorp for a number of years believe that this is their general preference. They generally tend to buy instruments, not just from Bio-Rad but from other vendors, as a matter of course.

Okay. And then I have a much more basic question that everybody else on the call probably knows. But I'm just wondering what exactly it is that LabCorp for example, this could be any customer of yours, would be doing with the Bio-Plex. What are they doing -- before the Bio-Plex, what is this replacing or what --

This is John Goetz, I'll try and take that. Generally speaking, these assays are done kind of one at a time, and many times on a distributed instrument base within the laboratory. What we're offering here is the opportunity for them in the laboratory to consolidate at least 11 assays in a single tube and do it in a highly automated random access format. So they can immediately reduce the footprint of the testing platforms that they have in the laboratories. And the other incredibly compelling selling point of this system is the labor savings that are involved when you highly automate a panel of assays.

So you throw on top of that the ability to screen and measure your reflex tests all at the same time and then release those reflex tests based on a doctor's order at a later time without having to redraw the patient. So therein lies a lot of economic upside for the laboratory.

Okay, great. Thanks. And then if I may, I just had more of a capital and acquisition style question. I'm wondering if -- is this a good time with credit markets loosening up and interest rates extremely low historically, is this a good time or not for Bio-Rad to raise capital in the debt market as you've tended to do because perhaps there are acquisition opportunities at prices that are interesting to you or not?

Okay, well there are two parts to that. I think that certainly in the last few weeks it seems like the debt markets have improved quite a bit. Still, the borrowing costs are higher than the two issues that we have outstanding that we did a couple of years ago. But I think it's fair to say that the rates are coming in line and it could be an opportunity for us to do that. In terms of acquisitions, I think that we would have expected more opportunities to be available than there are. It does seem to be a little quiet on the acquisition front or the opportunities front now for acquisition. So we'll see as we go forward.

Sure. Okay. Thanks very much.

There are no further questions in the queue at this time. This concludes the presentation. Thank you for your participation in today's conference. You may now disconnect. Good day.

Okay, thanks, everyone.