Bio Rad Laboratories Inc (BIO) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2012 Bio-Rad Laboratories earnings conference call. My name is Darcelle, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Ron Hutton. Please proceed.

Thank you, Darcelle. 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 results may differ materially from these plans and expectations, I encourage you to review our filings with the SEC where we discuss in details 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 $498.7 million, a decrease of 3.5% on a reported basis versus same period last year sales of $516.5 million. However, on a currency neutral basis, sales increased 3.6% compared to last year. This swing highlights the significant strengthening of the dollar and represents a negative currency impact of more than $36 million in sales. During the quarter, we experienced good currency neutral growth in our diabetes monitoring, quality control, and BioPlex 2200 product line as well as our Life Science product lines most notably process chromatography, imaging, and food science products. Sales of our new QuantaLife Digital PCR products more than doubled from the second quarter to $5.2 million. The overall quarterly growth was tempered by a continued decline in Europe and challenges in certain emerging markets, especially for the Life Science segment. Excluding currency and the addition of QuantaLife, organic sales growth for the quarter was 2.5%.

The gross margin for the quarter was slightly lower than expected at 54.8%, compared to 56.4% last quarter and 57.3% in the year-ago period. When compared to last year, the third quarter gross margin was negatively impacted by a $3.8 million non-cash charge for a long-term environmental remediation program, as well as $2.2 million of amortization expense related to our acquisition of QuantaLife. Excluding the environmental remediation charge, consolidated gross margin for the quarter 55.6%. And finally, the total non-cash purchase accounting expense recorded in cost of goods sold related to prior acquisitions was $6.5 million for the quarter.

SG&A expenses for the third quarter were $160.3 million or 32.1% of sales, compared to $176.9 million and 34.2% of sales last year. The current quarter SG&A spend includes approximately $10 million of reduced expense due to currency translation. And similar to the second quarter, we also recorded $8.5 million of favorable impact due to the reduction in the valuation of the purchase consideration for QuantaLife. These positive items were partially offset by incremental costs associated with our ERP project. Also recorded in SG&A is $3 million for amortization of intangibles related to prior acquisitions. Research and development expense in Q3 was 9.8% of sales of $49 million, compared to $45.4 million last year. This increase is primarily related to the addition of QuantaLife as well as our investment in new technology and platforms for the diagnostic market, including diabetes monitoring and blood typing. Going forward, we continue to expect R&D expense to be 9% to 10% of sales.

Excluding the one-time benefit associated with the $8.5 million reduction in the QuantaLife purchase valuation and the $3.8 million environmental remediation reserve, the operating margin would have been approximately $11.9% for the third quarter, and in line with our previously stated outlook of one 11% to 12%. During the quarter, interest and other income was a net expense of $10.8 million. This compares to $18.1 million of net expense in the year-ago period and $7.3 million in the second quarter. The decrease in expense versus last year is primarily related to the sizable currency losses and hedging costs incurred during the year-ago period.

The effective tax rate used for the third quarter was better than expected at 21%, primarily due to discrete benefits during the quarter including the release of reserves for the closing of certain statute of limitations and the reduction in the QuantaLife contingent consideration which is not considered income for tax purposes. Excluding any future discrete items, we anticipate a full year tax rate in the range of 27% to 29%. Net income for the third quarter was $42.4 million, and diluted earnings per share were $1.48. The decrease versus last year is primarily related to the lower sales result. Excluding the one-time benefits associated with the QuantaLife purchase consideration adjustment and the soil remediation reserve, we estimate that diluted earnings per share for the quarter were approximately $1.27.

And now for certain segment information. Life Science reported sales for the third quarter declined year-over-year to $167 million, a decrease of 2.6% on a reported basis. On a currency neutral basis, sales rose 2.2% versus last year. This growth was primarily fueled by sales of our new Droplet Digital PCR system, as I mentioned earlier. Organic currency neutral sales for Life Science declined 1%, reflecting the continued challenges in the European market and increased price competition. Despite these challenges, we believe that our market share remains strong. Segment profit for the Life Science group was negatively impacted by the lower sales as well as the charge for the environmental remediation. And finally, reflective of our intention to increase presence in the cell biology market, during the quarter we acquired an exciting new benchtop cell sorting system from Propel Labs which we plan to begin selling in early 2013. This new technology, combined with the continued momentum of the Digital PCR products as well as several other newly developed products, bode well for increased Life Science sales next year and beyond.

Our Clinical Diagnostic group posted sales of $328.4 million, a decrease of 3.8% compared to last year. However, on a currency neutral basis, diagnostic sales increased an impressive 4.5%. This strong currency neutral growth was fueled by demand for our quality control, diabetes monitoring, and microbiology products, as well as sizable placements of our BioPlex 2200 system. On a geographic view, diagnostic currency neutral sales for the quarter increased in nearly every geography, most notably strong in Asia-Pacific, Japan, and the emerging markets. The growth was tempered somewhat by the challenging economic environment in Europe where sales declined versus last year. Despite the decrease in reported sales, Clinical Diagnostic's segment profit for the quarter remained solid at $47 million.

And now for a quick review of the balance sheet. As of September 30, total cash and short-term investments were $854 million. Cash from operations during the quarter was $71.3 million, an increase of $20 million versus last year. EBITDA remained strong at $97.4 million for the quarter and nearly $298 million year to date. Net capital expenditures for the quarter were $36.6 million. Our full year expectation for CapEx continues to be in the $130 million to $140 million range as we invest in our global ERP project. Depreciation and amortization for the quarter increased slightly to $32.1 million.

Moving to our outlook for the remainder of the year, on our last call we guided currency neutral revenue growth to be at the low end of our 3.5% to 4.5% range. Given our year to date currency neutral growth of about 2.7% and combined with the continued economic challenges, especially in the European region, we now believe the full year currency neutral sales growth for 2012 will likely remain in that same 2.5% to 3% range we have experienced so far this year. As is typical with our historical patterns, the fourth quarter often reflects a sequentially lower gross margin as the product mix shifts toward the higher percentage of instrument sales, as well as the lower operating margin reflecting higher SG&A expenses which are typical of our year end. In addition, the inclusion of the new cell sorting products will negatively impact expenses by $3 million to $5 million a quarter until sales ramp up. But even with that in mind, we continue to believe that our operating results will be within our original guidance given at the beginning of the year, and that is for full year gross margins to be around 56% and operating margins to be between 11% and 12%. As we have mentioned before, the expected decline in operating profit from prior years is driven primarily by two key investments, the building of our Digital PCR business and our global ERP project. As has been our practice in prior years, we will share our thinking and outlook for 2013 in February during the fourth quarter earnings call.

And now we are happy to take your questions.

Jon Wood, Jefferies.

So either Christine or Norman, would love to hear just if you look at the new guidance down, let's call it 50 BPS, 50 to 100 BPS, is it possible to parse out geographically what's changed there? Is it a little bit of everything, or are there specific regions that are -- continue to be slower than you forecast?

I think primarily Europe. I think that's the region that we've talked about the most. And I think a little bit on the Life Science side in the third quarter, again, having to do with the anticipation of potentially cuts in the fourth quarter or cuts next year with sequestration if that happens. So I think that's primarily where it comes from.

Understood, thanks. And if Brad is there, I would love any detail you guys are willing to talk about on the cell sorting system in terms of revenue contribution over the next 12 months or so as you get that ramped up? Would love to hear an update there.

Jon, as far as the revenue contribution, we're going through our budgeting process right now, and we'll have a little more clarity on that when we talk about our 2013 outlook on the February call. Brad can certainly speak to why it's a compelling offering, but I don't think we're ready to talk numbers yet.

Okay, but just on the call side is 3.5% to 4% and that's not -- is that net over revenue, Christine?

No, that was more to imply the fourth quarter. And where there are no sales because we don't plan to start selling it until the beginning of next year. And that $3 million, $4 million includes about $800,000, $900,000 a quarter for amortization.

Jeffrey Matthews, Ram Partners.

Hi, can you hear me?

Yes, we can.

Great. I'm going ask all my questions in a bunch because we just got power back on about an hour ago, and I don't trust this cell phone connection. So here it goes. Number one, what is the statute of limitations issue that Christine mentioned in terms of some goodwill item? Number two, what's the nature of the price competition that you highlighted in Life Sciences? Number three, I could have sworn I heard you mention an emerging market weakness, maybe in Life Sciences? I wondered if you -- Norman didn't mention emerging markets and about the sales outlook. And then fourth for Norman, you seem to have added more product lines in the last 24 months, a pretty good clip, more than I recall in years prior. And I just wondered if there's a true acquisition? And I just wonder if there's a theme to them, how they've come about, why you've been able to get them? And I know you're very price sensitive as to why you've been able to really ramp up acquisitions in the last, say, 24 months. Thanks.

Okay, so I'll start with your first question, Jeff. And we really didn't talk anything about goodwill. When we were talking about the tax rate and why it was lower than expected this quarter, there's two primary drivers. One is the reduction in the contingent consideration for QuantaLife of $8.5 million, which is not considered income for tax purposes. So that brought the rate down. And the other is just the normal expiration of the statute of limitations that has to do with audit years. And under the accounting rules, under FIN 48, you take certain reserves as these years remain open. And then as they close, then the reserves are released. And so it seems like every year at this time and this quarter there's some amount of reserves that we end up releasing.

Got it.

The next question was about price competition in Life Science.

And I don't know, Brad, do you want to take that?

Sure. I think there's two issues with price competition. Certainly with the market slowing in the US, a lot of competitors are looking at the attachment rate of reagents and are willing to forego or drastically reduce their price in order to get the sale with the ongoing revenue coming from reagents. We've seen a lot more of that as certainly the budgets have been tight in the US. And as Norman mentioned, even the threat of sequestration, while it's not even scheduled to happen until next year, it's caused a level of people being conservative. There's another factor which is impacting margins is that in the case of BAAT Thermal Cyclers, which is a considerably big product line for us, we've shifted from some higher priced models to some lower priced models. So overall we're seeing an increase in our unit volume and our market share through selling lower priced models. So those would probably be the two things that were most in play there.

Okay. Can I just follow up, Brad, on that? Is the guys deciding they can get reagents at a better price in this environment, that it makes more sense to cut prices on the equipment, is this a short-term effort to drive sales and profits by public companies, or is this some kind of change in strategic direction in the business?

That's a good question. I wish I could know exactly that. I think -- really, it's a short-term view. I think that in the end right now that the markets are slow enough, most of our competitors, most people look at the market at mid to low single digits. And when you're at that level, people are fighting for every sale and placements. People have instrument manufacturing facilities to run, and so they're willing to accept lower gross margins on the front end of the sale with the prospect of getting the reagent attachment. Now as you know, most of these platforms are open so it is nothing that you could certainly guarantee like in a diagnostic sale. But it remains to be seen how that ultimately plays out. But for right now, it's kind of our new reality.

Got it.

I think your third question had to do something with emerging markets and why I didn't call that out as something special in terms of the --.

I thought it had been mentioned in the script in terms of weakness.

For Life Science, that's true.

But relative to our original thoughts and relative to our original plans for the year, I think the emerging markets are more on plan than the European market.

Got it. And along those lines, Norm, could you talk about China? There's a lot of dust in the air over there in terms of whether the slowdown is some kind of systemic issue or more of a short-term issue.

Yes, obviously it's hard to say. They've been on quite a roll, and obviously they've got quite a big export market. And so it makes sense that when the rest of the world slows down a little bit, they might slow down as well. But I continue to think that this is going to be a good, strong market. They are investing very heavily both in life science and certainly in establishing a healthcare system. So we continue to look for a lot of good growth to come out of there.

Got it.

And I guess the other question you had was something about the theme of acquisitions.

Right. It just seems like you're coming up with these new press releases more frequently lately. I don't know if that's just my imagine or not.

I don't know. I think it's maybe a little bit of luck of the draw. We've been a little more successful recently in some of these. It's the same theme for us. It's trying to expand our base and acquire things that are complementary. These are obviously typically base hits. And that seems to work well for us.

James Shurtleff, ICM.

Thanks for the question, mine relates to the premier agreement. To what extent does that agreement for blood reagents open up the market? And then secondarily, are the legacy DiaMed products a part of that?

This is John Goetz. I'll take that. Yes, that agreement is -- that we announced is largely around our immunohematology product line that we offer here in the United States. So that just is mainly our Biotest acquisition product line. And at the moment, our DiaMed product line is not offered in the US.

Do you have any timeframe on when that should be available? I recall years back it was a few years, but it wasn't real firm.

Yes, we're still continuing to forge ahead with our Biotest product line. We are preparing ourselves for products to be introduced in the United States, but I don't have a timeline I can give you.

Jon Wood, Jefferies.

Hi again. Operator was a lot more excited to get me off the line than I was.

(Laughter).

Okay, so I'd love it hear from John just -- I understand overall Norman's comments on Europe, but if I look at the diagnostics markets in Europe, would love to hear from John if we've seen sort of a flattening out there? Is it still getting worse? Just give us kind of a state of the union in terms of what's different from the second quarter?

I would say from a diagnostic point of view, the emerging markets are a good bright spot for us. We've recognized some pretty decent growth, and kind of how we define that region. We have products across our product line going in there and being placed. So at least -- I think I would say that's probably one of the things that balances out our Company. We do have opportunities in diagnostics that we're taking well advantage of there.

Okay. In Europe, John?

On the European side, it's slow for us. We continue to slug it out with increasing competition and price pressure there. It's a tough market.

Would you say it's still deteriorating from a volume and price perspective, or have you seen things flatten out at least? And I think you guys started talking about Europe and diagnostics probably the second half of last year. So just trying to get a sense of do you feel like you found the bottom there? Is it still very uncertain?

I'd say it's uncertain, but I certainly don't see a precipitous cliff here. We see the same competitors. We see the same pricing questions. It's just highly competitive, that's what it is.

And I think we expect that to continue in the fourth quarter.

Yes.

That's kind of why we landed on this, what's our growth rate year to date and I'm not sure it would be much different.

If you're looking for a turnaround question, no. I think we see this continuing for the near-term anyway.

Understood. So Christine, can you give us some -- just where the ERP expenses shook out for the quarter? And I think the last time we spoke, you were expecting a $28 million expense for the year. Is that still a good number?

So for the quarter, incrementally, the fence is probably up $2 million plus, $2 million to $3 million versus just last year and even up sequentially. In terms of full year, total OpEx spent on this is in that $25 million-ish range.

Okay, and that's not incremental, right?

No, the incremental is somewhere between $10 million and $15 million.

Okay, great. And then QuantaLife actually did quite a bit better in the third quarter. So Brad, would you expect that upward trajectory to continue in the fourth? And if -- Christine, I'd love to get an update from you on the operating burn there for the quarter and year?

John, it's Brad. Yes, we certainly do see a ramp-up of this product line. And quite candidly, it took a little bit longer than we originally thought. Certainly the budget restrictions have made it a little bit harder for people to get a discretionary $80,000, $90,000. We see a real strong take-up in the US market, and our projections are that it's going to continue. What's very exciting about this product is we're now seeing a lot of publications come out. And as we expected, our customers are doing great things with this instrument. So it's even greater than we could have even appreciated. So we're quite happy about it.

So in regarding the financial impact, Jon, I think at the beginning of the year we talked about QuantaLife would have a negative impact on the operating line of about $25 million. And we estimated maybe $10 million of that is amortization, $15 million is operating. And obviously as we move through the year and the sales start to grow, the loss is more heavily weighted to the first half of the year and the second half of the year, but we're obviously still upside down. And again, moving into next year, when we finish our budgeting process, hopefully that will show that QuantaLife becomes operating neutral and starts to really move forward. And obviously this conversation excludes the one-time non-cash bring back of the purchase consideration, which could go the other way next year. But in terms of impact to the 2012 outlook, that $25 million seems to be pretty much in line, excluding the one-time reversals with what we're going to achieve, what we're going to experience here in 2012.

Okay, great. thanks a bunch.

Are you done, Jon?

I am, thank you.

Good. There you go. Got them all.

Wouldn't want to cut him off.

(Operator Instructions)

Justin Bowers, Leerink Swann.

Just piggybacking on the prior question. Did you -- do you expect to see similar momentum in terms of revenue growth for the PCR system?

For the PCR system?

The Digital?

Yes.

You mean the new sales order?

Yes. I guess maybe -- (multiple speakers) -- sorry -- maybe the question is how did that progress versus your expectations?

Say that again.

So how did that progress versus your expectations?

That's a good question. So when we laid out our guidance at the beginning of the year and a full percentage point of the growth was related to the QuantaLife products, and I think we talked about it being $20 million was our estimate. And we may be in that ballpark, perhaps just shy, we'll see how Q4 unfolds. So it could be just shy of that for the full year, but we'll see. But the fact of the matter is that the pipeline is very strong, and we remain so encouraged by the prospects for this product. It's just the sales cycle is a little longer than we originally anticipated when we laid out our plans and our guidance. So even '12 could come slightly shy of the original $20 million, but the momentum is pretty strong.

Got it. And then you may have addressed this earlier, but how are you guys thinking about sequestration and maybe managing a business any differently if an amendment isn't made? And then if Congress steps in and does make a change there, what impact do you think that will have on spending at a more macro level?

Okay, so the first big question is whether you really think it's going to happen. I guess I have a hard time believing it's really going to happen. But if it does, and you think about the percent of our sales that come from NIH relative to our total business, it's a relatively small percentage. So what do we have to do to adjust? We might have to make some minor course corrections, but have a little bit different focus in terms of what we do. But I don't think it will be major.

Got you. And then just, I may have missed this too, but what was the organic growth rates for the segments for Life and Clinical?

So organic growth, currency neutral growth for Life Science was 2.2%, but much of that was driven by QuantaLife. So if you strip out currency and QuantaLife, Life Science declined 1% for the quarter.

Okay.

And then Diagnostic organic currency neutral growth was 4.5%.

Jeffrey Matthews, Ram Partners.

I just want to follow up on the acquisition question. I'm wondering if it's harder to be a smaller company these days, both from a regulatory perspective and then in terms of options of going public. Is it easier for smaller businesses to look for a home with someone like you? Is that anything out there that may be helping you?

I've got one anecdote for you, and this is someone here in the Bay Area who's been a long-time venture capitalist. And talking with her recently, she said that it's impossible to get funding for, in her case is medical device companies. And she pointed out that it's both Sarbanes-Oxley and the regulatory environment that cause investors to be very -- to not want to put their money in these kinds of investments. So that's just one anecdote that says that yes, it's harder for a small company these days to get, first of all, funding to get started, and then of course, to finance them out. So I guess you could infer from that maybe there would be some more opportunities for us. As you can see, recently we've picked up a couple of things that have been what I call earlier stage. So it's potentially an opportunity.

And there are no further questions at this time.

Okay, great. Thank you, everyone, for taking the time to join us today. And we look forward to seeing you soon. Bye-bye.

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