Bio Rad Laboratories Inc (BIO) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 1 2010 Bio-Rad Laboratories earnings conference call. My name is Modesta and I will be your operator for today. (Operator instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Ron Hutton, Treasurer. Please proceed.

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 Chief Financial Officer

Thanks, Ron. Good afternoon, everyone, and thank you for joining us.

Today we are pleased to report quarterly net sales of $454.2 million, an increase of 13% on a reported basis versus the same period last year sales of $401 million. On an organic basis, excluding the effects of currency and the addition of the Biotest blood typing business, year over year sales growth was in line with our annual guidance of 5%. During the quarter, we had good growth across many of our key diagnostics and life science markets.

The reported gross margin for the first quarter was ahead of expectations at 56.6%, compared to 54.2% last quarter and 57.1% in the year ago period. This strong margin reflects a favorable product mix and improved manufacturing efficiencies, partially offset by the inclusion of the Biotest business which currently has a gross margin lower than the company average. The non-cash purchase accounting expense recorded in cost of goods related to the Biotest acquisition was $2.1 million. Additionally, we continued to include approximately $3.5 million of noncash expense in cost of goods sold related to the DiaMed acquisition.

SG&A expenses for the first quarter were $153.6 million, or 33.8% of sales, compared to 35% of sales last year. This improvement in margin is the result of good head count and expense management over the balance of 2009, as well as our continued focus on cash flow. The current quarter SG&A expenses include $500,000 for amortization of intangibles related to Biotest and another $2 million associated with the DiaMed acquisition. Remember that historical trends usually reflect our lowest SG&A spend in the first quarter, and thus we anticipate these expenses to ramp throughout the year. Research and development expense in Q1 was 8.9% of sales, or $40.3 million, compared to $37 million spent in the first quarter of last year. Our target for R&D spending remains in the 9% to 10% range, as we continue to invest in new products and technologies.

During the quarter, interest and other income was a net expense of $13.4 million, compared to $8.2 million of expense in Q1 of last year. This increase in expense versus last year is largely related to the additional interest expense resulting from our debt offering in May 2009. Also remember that last year we recorded more than $2 million of noncash impairment expense related to our investment portfolio.

The effective tax rate used during the first quarter was higher than expected at 29%, primarily due to additional tax reserves and the expiration of the federal R&D tax credit as of the end of 2009. As we stated on our last call, excluding any discrete items that may occur during the year, we expect the full year effective tax rate to be in the 26% to 28% range.

Net income attributable to Bio-Rad for the first quarter was $34.9 million, an increase of 15% versus last year. This increase reflects our higher profitability, as well as the decrease in income for noncontrolling interest, remembering that we have now purchased 100% of the shares of DiaMed Holding. Diluted earnings per share for the quarter were $1.24.

Now for our segment information. Life science reported sales increased 7.9% to $151.4 million. On a currency neutral basis, sales increased 3.4% and if we exclude the decline in our BSE business, currency neutral sales were up 5.3% compared to last year. We continue to have good year over year growth in our protein-related product lines, as well as realtime PCR instruments and electrophoresis gel products.

Sales to the US, Japan and Asia-Pacific regions posted good growth in the quarter, while the European markets continue to be challenging. We are estimating that sales related to US NIH stimulus spending during the first quarter were around $2 million, plus another $1.5 million from the Japanese program. Overall segment profit for life science after the allocation of management and interest expense was $11.4 million, nearly double the year ago period, reflecting a favorable product mix, as well as continued manufacturing efficiencies. Our clinical diagnostic segment posted another strong quarter, with sales of $299.8 million, an increase of 16.4% on a reported basis when compared to last year.

During the first quarter, we closed the acquisition of the Biotest immunohematology business, and recorded sales of $12.7 million. Sales of the Biotest products were especially strong in the US market. On a currency neutral organic basis, meaning without Biotest, year over year sales grew 5.8% for the diagnostics group. These sales were led by strong performance in our quality control, blood virus, and blood typing product divisions.

Sales to Asia pacific and Japan were especially strong in Q1. During the quarter, we placed six new BioPlex 2200 systems, including four placements in Europe, which brings the installed base up to 140 units. And finally, despite a decrease in gross margins, primarily due to the inclusion of the Biotest business, clinical diagnostic segment profit remains strong at $38.3 million.

Moving to the balance sheet, as of March 31, total cash and short-term investments were $692 million. The decrease in cash balances versus year end reflects increased cash payments typically associated with our first quarter, as well as the Biotest purchase. Despite this spending, net cash generated from operations during the first quarter remain strong at $22.3 million, compared to $6.4 million in the year ago period. Net capital expenditures for the quarter were somewhat lower than expected at $16.1 million. Our full year expectation for capex remains in the $80 million to $90 million range, as we continue to invest in e-commerce, IT systems and facilities. And finally, depreciation and amortization for the quarter was $27.5 million.

While we are pleased with this start to the year, our outlook for 2010 remains relatively unchanged from the guidance we provided in February. That is, for top line, currency-neutral, organic growth to be in the 5% range. In addition to that 5% growth, we estimate that Biotest will contribute $55 million to $60 million to the top line. We continue to anticipate full year gross margins to be in the 55% to 55.5% range, and operating margins to be around 12%, including the impact of the Biotest business and purchase accounting.

And now we are happy to take your questions.

(Operator Instructions). Your first question comes from the line of Larry Solow with CJS Securities. Please proceed.

Hi. Good afternoon. Could you maybe give us a little more color -- I imagine you can't probably talk too much about it, but anything on this Foreign Corrupt Practices Act that you could share with us?

No. You know, I think that we really don't intend to add any color. I think we've disclosed that pretty well in our press release. You know, we are early in the investigation and I think it's really too early to speculate.

Okay. Was it an internal whistleblower? Any way you can say how it was discovered?

Internal audit.

Okay. An update on the BioPlex, I know you had I think targeted 5 to 7 installations per quarter so it looks like that's pretty much in line. Nice to see that Europe added 4 this quarter. I don't think you've had too many in Europe to date, right? So maybe an update on your outlook there and an update on what you expect for new panels in 2010.

Yes, this is John Goetz. I can take that. Yes, we were delighted to see that we had four placements in Europe in the quarter. And, in fact, we have made some investments in personnel on the ground there to promote that line a little more heavily than we have in the past. So we should expect to see Europe starting to pull its weight a little more. As far as assays go, we expect to launch this year a measles, mumps, and rubella as well as a rheumatoid arthritis kit and a toxo/rubella/Chlamydia kit.

Okay, so it will be three. And then the stimulus, I've heard from some other companies that stimulus funds from the NIH, a lot of those have already been exhausted. Is that fair to say that you haven't seen a huge impact, I don't think you ever really targeted a huge impact, but is it fair to say that it's not really moving the needle too much, considering $5 million on a $500 million base on the quarter?

This is Brad Crutchfield. I'll take that. The stimulus funds have been essentially given out. Approximately 80% have been assigned in the original sort of granting system. But, very few of those dollars have been spent.

Okay.

So we expect, like most of our competitors, to see most of that money spent in the second and third quarter. And now I think we, along with everybody else, see some of this money being pushed out into 2011. It is sort of a delay. There's another pool of money coming due, or will be pushed into the system in the second and third quarter for so called challenge grants. Some of the larger ticket instruments will be funded and our grants and proposals will be funded there. We don't see a particularly big upside. The only product line that we have that would probably enjoy that or take advantage of that would be our ProteOn protein interaction system. So overall, the issue, is the money there. It just takes a while for the bureaucracy for it to get spent.

Got it. Just last question, you've only had the Biotest for a couple of months now, but -- now that it's sort of in-house, any initial thoughts, any positive or negative surprises?

This is John Goetz again. I'll take that. Yeah, we have, as you know, acquired Biotest in the early part of January. Since then our focus early on was to do a lot of training. It's a new line for our US sales representatives. They haven't really entered into the blood typing markets. This is our first foray with that, with the Biotest line. To tell you the truth, it's been very satisfying. Contacts with customers have been very positive. They're very receptive to another competitor in the market. And we have a pretty optimistic outlook for the year.

Okay, great. Thanks.

Your next question comes from the line of Dan Leonard with First Analysis. Please proceed.

Thanks. I'd like to talk a little bit about the gross margin. You turned in a better than expected result in the first quarter. Why do you expect that gross margins will deteriorate to the 55% range after you posted a 56.6% number in Q1?

Part of it, Dan, is our historical pattern. It's what we've experienced in years past. Certainly, as we move on in the year and product mix shifts more towards instruments, that can have a downdraft on the gross margin. That's probably the biggest thing.

And you sounded surprised by the results in the first quarter. What about the gross -- what drove the surprise for you guys internally on gross margin in the first quarter?

I think it was continued favorable product mix to some of our higher margin consumables, both in life science and in diagnostics.

Okay. You had pockets of instruments that were strong, correct? You mentioned strength in realtime PCR instruments.

Yes. And, you know, keep in mind that our realtime PCR instrument family is relatively new and with the new products and the design that we have behind them, they're pretty decent margin products compared to some of the older instruments.

Okay. Thank you.

(Operator Instructions). Your next question comes from the line of Jon Wood with Jefferies. Please proceed.

Great. Thanks for taking the question. This is actually Brandon Couillard in for Jon. On the process chromatography side, I believe you lapped a fairly easy comparison in the quarter. Was that a growth catalyst for the life science business in the period?

This is Brad. I'll take that. Yes, it certainly helped us in this quarter. It was, again, like you said, a relatively easy compare. We had a good book of business for the quarter.

Can you quantify that for us at all, either on a percentage basis or a dollar basis?

Yes.

No.

Go for it.

We don't give out, Brandon, as you know, that level of detail in terms of sales by product or division. It is a relatively small division, so even though it's high growth percent in terms of moving the overall needle of the life science group or the company, it's a much lower impact, obviously.

Okay. Fair enough. How would you characterize pharma and biotech demand in the period?

This is Brad again. Actually, it wasn't too bad. Again, the first quarter last year was pretty slow. We see in general pretty good demand. Now that sort of is countered by some of the consolidation, as certain sites are closed down and consolidated. But then on top of that we see some good growth in Asia Pacific through some of the contract management -- contract manufacturing organizations and contract service organizations. And then on top of that, maybe a little bit of slowness in Europe. But if I put the whole thing together, overall there's been pretty good growth from that segment.

Okay. And Christine, can you quantify how dilutive Biotest was on the operating income line in the period? Was there an inventory step-up charge in the cost of goods line?

In terms of the dilution from the business itself, that's not something that we've talked about or quantified specifically except to say that the business isn't making any money right now. And then, of course, the noncash expense I talked about in the call in terms of $2.1 million in cost of goods sold, and another $0.5 million in SG&A. And there was -- there was a small step-up in the quarter for Biotest, $2 million.

$2 million on the inventory step-up, okay.

A little over $7 million for the --

Okay. Thank you.

Your next question comes from the line of Richard Glass with Morgan Stanley. Please proceed.

Hi, guys. Nice quarter

Thanks, Rich.

You know, but as a shareholder I can't sit here and be too comfortable that you guys aren't going to say anything about this investigation at all. Because, you know, your stock's going to get whacked on this tomorrow. You don't have to say anything too specifically, but you could say whether it's a relatively major or minor piece of business, whether you think it's going to impair the business in any way. What stage the investigation's at, when this came up, what have you. Because these things don't tend to amount to a whole lot at the end of the day if you look at the historical pattern. But when you say absolutely nothing, you let people's imaginations run wild and go to the worst extreme.

Well, I understand. I think, you know, it's just too early to speculate. You know, we'd love to be able to quantify it a little more for you, but I think we'll all have to be just a little bit patient.

Well, you know, the market's not going to be patient with it. It's really a negative in terms of sitting on this side of the equation. No one's asking you to quantify it. You could talk about it qualitatively as well and reduce some of the uncertainty.

I understand. This is where we are with it.

Your next question is a follow-up question from Larry Solow with CJS Securities. Please proceed.

First of all, I agree with Rich 100%. I think you should try and say something else. But I think that's an argument for another day. Quick question, just on the acquisition environment. I know you guys have $700 million in cash. I know historically you like to have the money first. Any thoughts on what you're seeing out there?

Things seem to be picking up just a little bit. We do have a couple of opportunities that we're looking at. As usual, you never know if they're going to come to fruition. We're more encouraged than we have been for awhile.

Okay. Thanks.

That was your final question.

Okay. Thank you very much for joining us, everyone. We look forward to answering any other questions you have and seeing you at a conference soon. Bye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.