Bio Rad Laboratories Inc (BIO) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 2 2012 Bio-Rad Laboratories Inc. earnings conference call. My name is Ben, and I will be your operator 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)

As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to Ms. Christine Tsingos, Bio-Rad Laboratories' Chief Financial Officer. Please proceed, ma'am.

Thank you. Good afternoon, everyone, and thank you for joining us. Before we begin the call today, 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 $510.4 million, a decrease of just over 2% on a reported basis versus the same period last year sales of $521.7 million. The strengthening of the dollar negatively impacted quarterly sales by more than $27 million. On a currency neutral basis, year-over-year sales grew 3%. During the quarter, we had good growth across many of our key diagnostic and life science markets, including $2.3 million of sales contributed by our new digital PCR products. Excluding currency and the addition of QuantaLife, organic sales growth was 2.6%. Overall, the quarterly top line growth was significantly impacted by the continued challenges in Europe, where sales declined year-over-year for both segments of our business. The reported gross margin for the second quarter was a bit better than expected at 56.4%, and is reflective of a favorable product mix as well as increased manufacturing efficiencies and despite an incremental $2.2 million of amortization expense, related to the recent QuantaLife acquisition.

For the quarter, the total non-cash purchase accounting expense recorded in cost of goods sold related to acquisitions was $6.7 million, which compares to $3.8 million in the second quarter of last year. SG&A expenses for the quarter were $162.3 million or 31.8% of sales, which compares to 33.9% in the year ago period. The current quarter SG&A includes two significant one-time items that had the effect of lowering the reported expense and margins. The first item relates to the purchase consideration for QuantaLife. You may recall that a portion of the consideration was in the form of an earn out that is tied to sales goals. We are required to review the valuation of the purchase consideration for the earn out every quarter. With sales running behind the stated goals, we reduced the value by $8.1 million, which is booked to SG&A.

The second one-time item that has benefited our margin in the second quarter was a reversal of approximately $5 million of bad debt reserves. During the quarter, Spain, paid down the vast majority of its overdue receivables, allowing us to recapture these reserves. Finally, also recorded in SG&A is $3.1 million for amortization of intangibles related to acquisitions. Research and development expense in Q2 was 10.3% of sales or $52.3 million, compared to $48.2 million last year. The year-over-year increase in R&D spend is primarily related to the addition of QuantaLife, as well as our investment in several new technologies and instruments for the clinical diagnostics and research markets. Going forward, we expect R&D spend to be in the 9% to 10% of sales range. Excluding one-time benefit associated with the QuantaLife purchase accounting and the reversal of the bad debt reserves, the operating margin would have been 11.8% for the second quarter, and in line with our previously stated outlook, which included the incremental costs associated with our ERP project as well as the inclusion of the QuantaLife operations.

During the quarter, interest and other income was a net expense of $7.3 million, compared to $10.4 million of expense in Q2 of last year. This decrease in expense versus last year is largely related to additional dividend income, typically associated with our second quarter. The effective tax rate used during the second quarter was better than expected at 26.4%, primarily due to the reduction in the valuation of the QuantaLife contingent consideration, which is not considered income for tax purposes. Excluding any discrete items that may occur, we anticipate the full-year tax rate to be in the 30% to 31% range.

Net income attributable to Bio-Rad for the second quarter was $48.3 million and diluted earnings per share for the quarter were $1.69. Excluding the one-time benefit associated with the QuantaLife purchase consideration adjustment, and the reversal of the bad debt reserves, we estimate that diluted earnings per share for the quarter were approximately $1.26. Life science reported sales for the second quarter declined year-over-year to $162.4 million, as compared to $169.9 million last year. On a currency neutral basis, sales were down just under 1%. As I mentioned earlier, sales of QuantaLife products were $2.3 million for the quarter.

The decline in our core life science business reflects the continued sluggishness in the European market, as well as a tough comparison to the second quarter of 2011, especially in North America where life science posted 10% top line growth in the year ago period. Despite these lower than anticipated sales results, our unit growth and market share remain strong. Additionally, the global pipeline for our new digital PCR products is sizable and seems to indicate an acceleration of growth over the next several quarters. Our clinical diagnostic segment posted another solid quarter with sales of $344 million, which is down slightly on a reported basis when compared to last year. However, on a currency neutral basis, year-over-year sales for the diagnostics group grew 4.9%. This growth was led by good performance across many product lines, most notably diabetes monitoring and quality control products.

Sales to Japan and the Eastern European emerging markets were especially strong during the quarter, partially offset by a decline in Europe. Diagnostic margins remained solid for the quarter with segment profit for the group increasing to $55 million, partially aided by the reversal of the bad debt reserves in Spain. Moving to the balance sheet, as of June 30, total cash and short-term investments were $835 million. Cash from operations for the quarter was $76.6 million, down from last year as a result of the lower sales number and remembering that in Q2 of 2011, cash flow reflected a sizable tax refund. EBITDA remains strong at more than $110 million or 21% of sales.

Net capital expenditures for the quarter were $40.9 million, which is an increase both sequentially and year-over-year. This increase relates largely to the investment in our ERP projects, as well as growth in our [region] rental instrument base. Our full-year expectation for CapEx remains in the $130 million to $140 million range. Finally, depreciation and amortization for the quarter increased slightly to $31.7 million.

Despite a somewhat slower than expected start to the year, our Outlook for 2012 remains relatively unchanged from the guidance we provided in February. Our beginning of the year estimate for 3.5% to 4.5% currency neutral top line growth is still within sight, albeit more likely at the bottom end of that range, given the continued challenges in Europe, our largest market. Also, unchanged from our prior guidance, we continue to anticipate full-year gross margins to be around 56%, and operating margins to be in the 11% to 12% range. As we have said before, the expected decline in operating profits versus prior-years is driven primarily by two key investments, the building of the digital PCR business and our global ERP project. Now we are happy to take your questions.

(Operator Instructions)

Dan Leonard, Leerink Swann.

I appreciate the geographic commentary on the life sciences business certainly consistent with what we're hearing from other folks. I was wondering if you could drill down into some product commentary, specifically I'm curious what the trends look like at the end of point PCR business. That is something that has been a drag on one of your competitors and I am wondering if it is a similar drag on your business and when that might subside?

This is Brad. I will answer that, Dan. The issue really, and I think it was alluded to a little bit, it is our market share is quite strong, but what we are seeing is a shift to lower priced models. And obviously, that puts pressure on the top line. And so we were fortunate that we have responded with good design in these rings, but certainly it is impacting the top line.

Okay, thanks Brad. And then my follow-up. You recently signed an agreement with Luminex to distribute another one of their products and extend your existing agreement. Can you help me frame that? Is that something that would move the needle for you guys on the organic growth rate in your Business?

I think the thing there is that it is the [mag] fixed products. I think it is a product that has been on the market through other Luminex partners. We took that on and just launched it in the last few weeks really. As far as moving the needle on the overall business, I would not probably say that. But I do see it as being an important part of placements and our ability to put a very sizable menu that we have for this product. So, I think as part of our overall Multiplex amino acid strategy it is solid. But I don't think of it as being something significant enough to move with the needle significantly for the Life Science business.

Okay. And then my final question, just a clarification on guidance. Christine, the communication of 11% to 12% EBIT margins for the full year, does that exclude the benefits, the one-time benefits we talked about in the second quarter?

It is hard to answer, Dan. Because I want to say no, and the reason is that every quarter, we're going to need to review the contingent consideration on the QuantaLife valuation. And certainly, if sales start to ramp rapidly, that could go the other way and it could end up being an expense that we would add rather than a reduction in expense. And as we look to the second half of the year, if sales continue to ramp, so will our investment in both this new digital PCR business, as well as our ERP project, and some other important projects that we have going on, and that could temper the margins. So overall, I think we are going to stick to the 11% to 12%.

Okay, thank you.

Jon Wood, Jefferies.

Good afternoon, this is Brandon Couillard in for Jon. Christine, or if Norman is there, can you give us just the general sense of what you saw in the quarter by end market between pharma, biotech, academic and government and your commercial end markets?

I think that the pharma biotech was probably a little bit stronger in the second quarter than the traditional academic market.

Okay, and if John Goetz is there, could you comment in any update on recent trends in the Clinical Diagnostics business out of Europe? Whether you have observed any change in the pricing environment or the competitive landscape there?

No, there is really not too much of a change. It has been a bit in the doldrums here for a while. If anything, customers are shying away from making commitments to capital equipment. That is affecting us a bit. Other than that, we still have and see, a pretty steady stream of testing going on in laboratories throughout Europe. And we're trying to get our share of that.

I think a couple of trends that we have talked about, we have talked about the pricing pressure that is going on a what is going on in some of the tender business. And in terms of the tenders becoming longer term and more competitive on a price basis, and that was true in Q2, and I think that it seems to be true for the remainder of this year barring any significant turnaround.

Got you. And then Christine, the core margin performance still seems pretty good in spite of what I perceive as some stiff FX related headwinds. You can provide impact of currency on either the gross margins or EPS in the quarter?

I think you are right, the core gross margins are holding up well and I think the capacity utilization, the product mix, and all of that is in our favor. From a currency standpoint, currency does not have as much impact on our gross margin line as it does in our operating margin line, because many of the cost of goods are at well-balanced with where the sales are. So, it's hard for me to get to a currency neutral gross margin. But what we do analyze seems to be minimal effect.

Okay thanks. And then I guess Norman, any chance you could comment on how you perceive the M&A pipeline right now? And whether there is an appetite for incremental activity on the acquisition front in the back half of the year?

Yes there is always something going on. We have a couple of things that we're looking at right now. As usual, you never know whether they are going to and how they are going to proceed. There is good activity.

All right, thank you.

Jeffrey Matthews, Ram Partners.

Thanks everybody. In the press release, you highlighted, or at least you called out, the BioPlex system sales, Boeing diagnostics. Was there anything of note there? I recall last quarter, too, had been a little bit quieter.

Well, as you know we stopped our practice of giving out units on a quarterly basis. But certainly, the placement continued to grow worldwide and the install base is growing. And the average kind of revenue per instrument, annual revenue per instrument is remaining in the $200,000 range. So we are very pleased about that.

But more importantly, the profitability of that business unit continues to improve quarter to quarter. And we are able to continue to lower cost of goods, as well as the associated selling costs that go with the instrument. Now, we are continuing to develop panels, or hoping to get those through the FDA to help drive future placement. But that is a longer-term process.

Sure okay thanks. And then on QuantaLife accounting, does that reflect anything fundamentally about the Business?

No, are you talking about the adjustment?

Yes.

No. I am not sure how to answer that, Jeff. Because just --

I was not sure how to ask it. (laughter)

I think from a business standpoint, and Brad is a better person to answer this than I am, obviously, and he can cut me off there. But I think from a business standpoint, we still feel very good about the business. The sales ramp is a little slower than originally anticipated. And part of that is it's a new technology. Part of it is the budget dollars required. And so, it is a longer sales cycle.

It is not something fundamentally that you are learning about the actual business itself?

No. This is Brad. I think Christine covered it well. We see a commercial success of this product. We see in interest. It is certainly taking a little bit longer, given the financial situation of or the budget situation, so it is more of a lag in sales. But overall fundamentally, these products are being accepted. Papers are being published and there is things that people are doing with them that they could never do before. So we are quite happy.

Yes and as far as the accounting goes Jeff, this kind of a complicated valuation exercise. The earn out is tied to specific goals over eight individual quarters. But each time we have to look at the entire earn out, the entire life of the earn out, not just about specific quarter and kind of do the valuation. So, that is why I say, depending upon the ramp of the sales, the impact to the P&L in any given quarter could go either way.

Sure, I was not so concerned about the impact of the P&L. More is a reflection on the fundamentals itself, which you answered. Okay. And you also called out Asia's strength in the press release. I am wondering, what is new there?

I think that Asia, in general, continues to be good. But I think that Japan has, after a number of years of being fairly flat, has started to come alive a little more.

Do think that is a function of government flooding the spending following the earthquake? Or something else?

I am not sure if it is earthquake-related. So, I guess we had a little bit of an earthquake effect last year for a while. I think it is just general spending. And also I think in our Diagnostics business, we are getting some traction with some of the products there.

Okay. And then my final question, I was curious about the ERP rollout and if there is anything new or different that you are seeing? It sounds like you are not encountering anything unexpected, at least in the terms of is waiting the P&L. I'm wondering if there's anything in terms of the way it is affecting the businesses at this stage?

I think that the spending for the entire program is pretty much in line with what we had budgeted and what we had expected, both on the expense side and the capital side. Where we are in the overall project is we are finalizing our first deployment, meaning we are kind of locking and loading the design and we're starting to do our integrated testing. And as you may recall, our first deployment, which is scheduled for early next year is a portion of our US business. We wanted to keep the first deployment kind of close to home so that we could really test this concept and make sure that it is going to perform well, and then we will start rolling it out on a more global basis. So, knock on wood here, so far so good, and we are proceeding down the path and have our best people working on it.

Thanks very much.

Bryan Kitt, CLSA.

Hello this is Brian Kitt on behalf of Paul Knight at CLSA. Quick question on follow up to Japan. Most (inaudible) said that in Q2 they saw some growth reductions in Japan. Did you guys see that tail up towards the end of the quarter? Was that consistent throughout? Do expect this to continue in the second half, possibly because of the strength of the banks?

Brian, you broke up a little bit. But I think your question was about what was the trend throughout the quarter in Japan. If that was kind of good growth throughout the quarter or more of an uptick at the end?

Yes. Did it start out strong? Was it pretty consistent throughout? Or did it pick up towards the end? And if you guys expect that to continue in the second half? And if you have any insight, maybe is it because of the strength of the yen? Do you think there's another reason?

I think the business for us was fairly strong throughout the entire quarter. I think some of that is a bit specific to us. So for example, we have talked about it in the past, our IH 1000, our new blood typing high throughput instrument has done very well in Japan. And continues to do well, both with new instrument placements, as well as the reagent stream that goes with it. And as Norman talked about, we are seeing some very good strength in Japan in our life science markets. I don't know Brad if you have anything to add to that?

I think in general there has been a resurgence of Japanese government investment in their basic research. And we have been able to enjoy that, certainly within the product areas that we are strong in. Certainly on the protein expression and gene expression validations.

Thank you.

Unfortunately, there are no further questions in queue.

(Operator Instructions).

We still have no further questions in queue at this time.

Okay then. Thank you very much. Thank you everyone for joining us today and hopefully we will be seeing you soon. Goodbye.

Thank you very much Christine. Ladies and gentlemen, that concludes your conference call for today. Thank you for your participation. You may now disconnect. Good day.