賽默飛世爾科技 (TMO) 2009 Q4 法說會逐字稿

Good day and welcome to the Life Technologies post-earnings Q&A 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 the conference.

(Operator Instructions) I will now turn the call over to your host for today, Eileen Pattinson.

Please proceed.

Thank you, Nikea.

Good morning, everyone, and thank you for joining our Q4 and full-year 2009 post-earnings call Q&A.

This is Eileen Pattinson from Investor Relations and with me today are David Smith, our Treasurer; Susan Crawford, our Vice President of [FP&A]; [Jeremy Sylvaine], our Assistant Controller; and Rebecca Chambers from Investor Relations.

I wanted to remind our listeners that our discussion today will include forward-looking statements including but not limited to statements about future expectations, plans and prospects for the Company.

We believe these statements are based on reasonable assumptions but actual results may differ materially from those indicated.

It is our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995.

Additionally, we will be discussing GAAP and non-GAAP measures.

A full reconciliation of the non-GAAP measures to GAAP can be found in today's press release or on our website.

I will start with some opening remarks and then provide answers to questions we have received since the end of the earnings call.

Let's begin with further clarifications on some guidance items for 2010.

As stated on the call, organic revenue growth is expected to be mid to high single digits, including the impact of the NIH stimulus.

In addition to the information provided on the earnings call, I can provide you with some data points that can help you model the business.

Molecular Biology Systems is expected to grow in the mid single digits, not including the impact from currency.

Growth drivers for this division will be the stimulus, continued strong growth in the assay business and new bench top instrumentation.

Genetic Systems is expected to grow in the mid to high single digits, not including the impact from currency.

Double-digit growth in applied markets and next-generation sequencing will be slightly tempered with flat growth in CE basic research.

Cell systems is expected to grow in the mid to high single digits, not including the impact from currency.

This will be fueled by continued double-digit growth in the stem cell business, strong performance in core research businesses, a pickup in bioproduction and new product launches.

The divestiture of the mass spec joint venture to Danaher is expected to close shortly.

The after-tax proceeds of this divestiture, approximately $290 million, will be used to pay down debt as previously communicated.

Additionally we expect minimal income from the JV in the first quarter.

In total, the divestiture is dilutive to 2010 earnings per share by approximately $0.11 and this includes the interest expense savings from paying down the debt.

It is important to note that this dilution is already factored into the guidance that we have provided today.

Operating margins are expected to expand 100 to 125 basis points over full year 2009.

This expansion is the result of synergy realization and operational excellence.

On a longer-term basis, once synergies have been realized, you can expect that operating margin expansion will be approximately 50 basis points per year.

Moving on to currency.

We have hedged approximately 60% of our operating income exposed to foreign currency fluctuations.

Due to volatility in currency rates over the course of 2009, we provided a range from the impact of currency on 2010 results.

The low end of this range is based on full-year 2009 average rates while the high end is based off of year-end rates.

Using this range, we estimate currency will have a 1 to 2 point impact on revenue and will result in incremental EPS of $0.05 to $0.10.

We calculated what would happen if all currencies moved against the dollar by 5% and our mix of foreign currency stayed exactly the same.

The effect would be $0.10 of earnings per share.

We are currently hedged against fluctuations affecting both balance sheet and cash flow.

Lastly, for modeling purposes, please take into account that we expect Q2 and Q4 to be the highest revenue quarters.

And now moving on to several of the questions we have got on earnings call that could use a bit more color or clarification, there are just a few areas I would like to highlight.

What is the list price of the new SOLiD 4 instrument?

Including the EZ Bead front end workflow system, the list price is approximately $495,000.

For existing SOLiD 3+ customers, it will cost $10,000 to upgrade and an additional $50,000 for the EZ Bead application.

Next, what products do we have manufactured in Singapore?

The answer to that is that all of our PCR instruments are manufactured in Singapore.

Will you get the reagent pullthrough from 7500 machines that were placed into public health labs for H1N1 surveillance?

Yes, we do expect reagent pullthrough on instruments we placed, however, it will be at a lower level than the $45 million we saw in 2009 from H1N1 related sales because a good portion of that revenue was from instruments.

Will you be restating 2009 pro forma results to account for the mass spec divestiture?

We will not be restating 2009 results.

It should be relatively straightforward to determine the impact of this divestiture as a result of the JV or reported on the other income line item.

Why was your tax rate so low in the fourth quarter as compared to previous quarters in the year?

Tax rate in the fourth quarter was lower than in previous quarters due to higher pretax income and lower tax rate jurisdictions.

Specifically, we had increased sales of instruments manufactured in Singapore where we have a lower tax rate.

We do not expect this benefit to continue into 2010 in any meaningful amount as the sales were mostly due to H1N1 related instruments.

In the fourth quarter, what was included in other income?

In the fourth quarter, other income had contributions from mass spec of $16 million, interest income of $2 million, an FX loss of $3 million and other loss of $1 million.

For the full year, other income was approximately $40 million.

$46 million of mass spec other income contributed to this as well as $5 million of interest income, $8 million loss from currency and a $2 million loss in other income.

What was the APB 14-1 expense in the quarter?

And what is the expectation for 2010?

During the fourth quarter the decline was $11 million.

APB 14-1 impacted GAAP earnings per share by $0.06.

For 2010 we will amortize an additional $38 million of non-cash interest expense due to APB 14-1.

January through July will have higher amortization in the remainder of the year due to the put call date for the 2% convertible in early August.

What were the integration related capital expenditures in 2009?

Total integration related one-time costs were approximately $165 million with integration related capital expenditures of approximately $46 million.

During the fourth quarter, integration CapEx equaled $17 million and total costs were approximately $44 million.

As mentioned earlier, integration related one-time costs will decrease during 2010 to approximately $130 million which includes $30 million in capital expenditures related to the integration.

And what impacted depreciation in the fourth quarter?

The vast majority of our capital expenditures occurred in the latter half of this year.

And now we can open the line for questions.

(Operator Instructions) Jon Wood, Jefferies & Co.

The stock -- did you give stock comp guidance for 2010?

No.

Will you give it?

Stock compensation, we haven't.

We'll look at the numbers and we'll get that information to you before the end of the call.

Okay, can you give me the payables balance, accounts payables balance?

Sure.

This is Jeremy.

That number is $239 million.

Okay, and then tax rate, I might have missed this, for 2010.

Have you discussed that?

Yes, our guidance on the tax rate is to expect a tax rate of 29 to 29.5%.

Okay, and then on the -- I guess there's a couple of deals; so BioTrove, AcroMetrix.

And it looks like you are buying the laser interferometer business from NDS.

Yes.

Can you kind of just -- whatever you are willing to talk about in terms of invested capital and revenue from those three deals.

No, actually for those three deals, we're not really giving out any financial information because they're not necessarily considered material.

Okay, but I mean that's not included in -- whatever revenue there is this kind of outside the top line guidance you have given, right?

No, it's included in our top line.

So it's included in the mid to high organic growth?

Yes, that's correct.

And then on the free cash flow, should we assume -- so it's $130 million of integration capital this year.

Does that just go away totally in 2011?

I think it would drop considerably if not go away completely.

Okay, what are some of the other balance sheet effects to keep in mind?

Just seems like 575 to $600 million of free cash -- it doesn't look like when you adjust for the integration related capital that it's up as much as net income.

So any other things to consider on the balance sheet for free cash flow?

In terms of free cash flow, there were a couple of items.

So we have the full-year impact of bonuses paid to AB employees and that's a cash impact.

In 2009 we paid six months and in 2010, we will be paying 12.

Is that the biggest variance?

Yes.

Isaac Ro, Leerink Swann.

SOLiD 4.0, obviously the pricing you mentioned certainly a little lower than the Illumina system.

So I'm wondering if you can give us little color on the building materials for this new product.

Is there anything materially different from an engineering standpoint?

I'm just wondering how you get to that higher level of performance for (inaudible) because obviously the lower price -- if you had more cameras or more components to the technology that might make the margins a little narrower; I'm wondering if that's the case.

So, no, there's no real material change in the cost of manufacturing the product.

Okay and then in terms of the actual hardware, will you talk a little bit more about how it works?

Talk about how the hardware works?

Yes, how do you achieve (inaudible) of throughput versus the old -- the SOLiD 3+?

This is Rebecca.

It's increased in Bead density.

Okay, and then just in terms of numbers, wondering if you could maybe talk a little bit about pacing of gross margins throughout 2010, understanding David's comments on the fourth-quarter typical sequential decline, how we should think about the first three quarters and maybe interest expense, how that should pace throughout the year when we factor in the debt repayment?

I'm sorry, the second part of your question was interest expense?

Yes.

Okay, so in terms of the gross margin, I would follow the revenue seasonality.

And in the last quarter of the year, we always experience decline in gross margin as we talked about on the call due to lower price realization and a different mix of OEM and instruments.

In terms of interest payments on the debt, the timing of the mass spec payment will be as sson as that transaction close, we will turn around on that.

So you can expect that that will close in the next couple weeks and we will be turning around and making that payment in the first quarter.

And then the rest of the payments will be spread out across the year, every quarter.

Tycho Peterson, JPMorgan.

Thanks for holding the follow-up call.

A couple of quick ones on the announcements from last night.

I guess on SOLiD 4, you talk about sample prep time down by 90%.

Can you just comment on what the sample prep time is now with the new EZ Bead application?

Yes, actually I can.

Didn't Mark say that on the call (multiple speakers).

We will look that up for you right now and answer that question before the end of the call.

Okay.

The informatics investments you talked about in the release last night, $300 million over three years, is that going to be fairly evenly paced or is it front loaded or how --?

That's not an incremental spend, just to make that clear.

That's part of our existing investment in R&D and in terms of pacing, I wouldn't expect there to be a material spend in the first half of this year.

And we will make investments throughout this year and the remaining two.

Okay, on mass spec, [lingering the tail] of revenues that are going to still come from that, can you remind us exactly what they are?

Is it some service agreements?

No, there's no revenue associated with the mass spec deal.

Like I said, it's expected to close in the first quarter here in the next few weeks.

So you'll see about one month of other income impact from that.

Tycho, I think what you are referring to is the small amount of mass spec other revenue.

Yes, that's what I was referring to.

Right, so 50% of that is going away with the deal and the other 50% is very little margin.

And we expect for the full year basis for it to be around the $10 million mark.

And that's going to be reported in Molecular Biology Systems.

Okay and then I guess as we think about the go-to-market strategy for the flow cytometry business as Greg highlighted on the call, can you comment on whether you need infrastructure investments around that and how you kind of target those markets given some of the entrenched competitors?

No, we don't need an infrastructure investment in that.

We are using our existing salesforce.

We already sell products, reagents, into that market so those are our current customers.

And it will be our AB instrument sales force or the folks from the AB instrument sales force selling that instrument.

Okay, that's it for me.

Thank you.

Marshall Urist, Morgan Stanley.

Thanks also from me for holding the call.

A couple of questions.

First one, what is the flu assumption that's right now in top line guidance?

I'm sorry, the what assumption?

The flu, H1N1.

So right now -- I mean we had $45 million of H1N1 related revenues in 2009 and we expect that to tail off quite considerably.

I can tell you in the beginning of the first quarter, we haven't seen a large impact from flu related revenues.

So we don't expect that to be a material impact in revenue in 2010.

With that said, we did place a lot of instruments as a result of the swine flu and we do expect some reagent pullthrough on that new installed base.

So -- but included in that mid to high is some headwind year on year?

Yes, the vast majority of that $45 million is considered a headwind to that.

Okay, gotcha.

And then David made a comment about investing 50% of incremental operating profit.

Was that solely from stimulus?

Yes, so what we're going to do is -- because of the opportunity associated with stimulus revenues coming in, we're taking this opportunity to take some of that operating income profit and reinvest it back into the business, approximately 50% of the operating impact from the NIH stimulus.

Okay, got it.

And then I just wanted to be clear on one other thing.

Greg made the comment that the biggest difference from mid to mid to high single digit was stimulus.

Is it basically -- is that the whole thing or is there kind of underlying momentum that you guys -- underlying acceleration that you guys are baking in?

It's difficult to predict, right?

We're starting to see the funds start to flow and now we need to have a better understanding of the timing of that impact and whether or not it does flow into 2001.

And so the low range of our guidance assumes that it does flow into 2011 to some degree.

The high end of our range assumes that the majority of the $100 million that we have estimated falls into 2010 and I would say regardless of whether it goes into 2010 or 2011, it would be back end loaded in this year.

Okay, got you.

So that 100 hasn't changed though, it's exactly the same number, it's just how much of that falls into 2010.

Yes, exactly.

It's $100 million over the life of the stimulus program, exactly.

Okay, got it.

And then from an SG&A perspective, should we be thinking that sort of -- that as a percentage of revenue, are we going to see much leverage there this year or is that going to stay kind of constant as you [discuss with] R&D?

No, that's going to stay relatively constant.

Okay, got it.

I'll stop there.

Thanks, guys; appreciate it.

Doug Schenkel, Cowen & Co.

Maybe a little bit more of a detailed question than it's appropriate for this forum but I'll throw it out there anyway and if not, you can just tell me to hold off for a subsequent event when you will give out this level of detail.

But bioscope, in terms of the bioscope's ability to address some of the data requirements, right now the way you are looking at going from I guess 100 GB per run to 300 GB per run, are you thinking that at least initially essentially the bioinformatics, storage and -- well I guess just the storage requirements may be a hurdle to adoption or do you think when you get to a point where you're at 300 GB per run that you'll be in a position where data storage is isn't going to be an issue?

I think you can think about Greg's comments on the earnings call will about as part of our R&D spending, $100 million towards bioinformatics over the next three years; part of that spend is to address that issue.

But by the time we have SOLiD HQ on the market which would be in the last half of this year, we would have the capacity issue rectified.

Even though it says you guys are already spending that over three years, I'm just trying to kind of connect the dots here and make sure there's no disconnect here.

Yes, that's right.

So I think the $100 million is to make vast improvements in the bioinformatics associated with all of the data coming off these sequencers.

But I think the time HQ comes online at least in the short-term, that capacity issue you just described should be alleviated.

Okay and then I just want to go back to I think one of Jon's very early questions.

I think it was Jon who asked about M&A contributions and how that's incorporated into your guidance.

What level of M&A on I guess either a per deal basis or an aggregate basis would be material enough for you guys to break that out?

I think we just would like to know kind of -- is this really a rounding error or in the aggregate, is this material enough where we should paying attention to it?

Well for those three specific deals, they would not be material enough for you to pay attention to it.

In the aggregate.

In the aggregate.

The revenue associated with those deals, that's all included in our top line guidance.

That's also included in our bottom-line guidance.

Derik De Bruin, UBS.

I wanted to follow up on one of Tycho's questions.

On the revenue line, the other -- so that basically -- that's going to get rolled into the Molecular Biology Systems, so that basically zeros out for 2010.

Yes, so we have, as you all know, we have a mass spec other line item that we've been reporting.

So what's going to happen is 50% of that revenue will go with the divestitures and the remaining 50% will go -- will be absorbed into the Molecular Biology Systems division.

But keep in mind that it's pretty small and it doesn't have any margin impact.

Gotcha.

I just wanted to make sure everything was clean on that.

And I guess most of the questions have been answered and I'm going to see you guys at lunch, so I'll catch you.

All right, well see you then.

It's an all Life day, come on.

It really is.

That's what we like to provide.

Quintin Lai, RW Baird.

Just a quick question on the tax pacing.

Should we be fluctuating the tax rate assumption based off of big instrument quarters?

No, I would actually assume -- I would spread the tax evenly throughout the quarters.

And then for those of us who are not in New York, could you give us a little preview of what you might be talking about today at lunch?

Yes, so luncheon today is really just we're having a guest speaker, Dr.

Van Hoff, and he's going to be giving a short presentation on his views on where the future of genomic medicine are going to be.

Dan Leonard, First Analysis.

Just a couple of housekeeping questions.

I hate to keep harping on the M&A, but do those three deals at least offset the headwind from the LIMS divestiture?

Yes.

Okay, so I should be looking for no positive or negative contribution material in 2010 from M&A from deals done?

For the deals that have already been done at the end of 2009, yes.

Yes, okay and then my other question, the Ignite relationship, you guys made a deal on the conference call of calling that a partnership and a collaboration.

I just want to clarify, are there any obligations for Life Tech outside of supplying Ignite with instruments and related services?

No, no obligation.

And I have an answer on the sample prep.

So sample prep in SOLiD 4 is going down to one day, approximately eight hours, and that's with the EZ Bead application.

Okay?

Any more questions?

(Operator Instructions)

All right.

Well thank you very much everyone.

I appreciate the questions and the call and we will talk to you all soon.

You know how to get ahold of us.

Appreciate it, thanks.

This concludes today's presentation.

You may now disconnect.

Good day.