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Executives

Ronald Hutton – Treasurer

Christine Tsingos – Chief Financial Officer, Vice President

John Goetz – Vice President, Group Manager - Clinical Diagnostics Group

Norman Schwartz – President, Chief Executive Officer

Brad Crutchfield – Vice President, Group Manager - Life Science Group

Analysts

Brandon Couillard – Banc of America Securities

[Doug Fischer – Kennedy Capital]

Bio-Rad Laboratories, Inc. (BIO) Q3 2008 Earnings Call November 6, 2008 5:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2008 Bio-Rad Laboratories Incorporated Earnings Conference Call. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Ron Hutton, Bio-Rad Treasurer. Please proceed sir.

Ronald Hutton

Thank you very much. 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.

Christine Tsingos

Thanks, Ron. Good afternoon everyone and thank you for joining us. Today we are pleased to report quarterly net sales of $441.8 million, an increase of 30% versus the same period last year's sale of $339.7 million. This increase includes our DiaMed business which finished the quarter a $63.5 million. Excluding DiaMed, our sales growth for the third quarter was 11.4% while currency-neutral organic growth was 5.6%. During the quarter we had good growth within our diagnostics group especially microbiology, quality control, and diabetes products. Our core life science division also increased with strong sales of protein expression, gene amplification, and consumable products.

The gross margin for the quarter was in line with expectations at 54.4% compared to 55% last quarter and 55.4% in the year ago period. The third quarter reported gross margin reflects approximately $3.7 million of amortization plus an additional $2 million charge as required under purchase accounting. The gross margin for the base Bio-Rad business improved year-over-year to 56.2% which can be attributed to favorable product mix as well as better manufacturing utilization in our life science business.

SG&A expenses for the third quarter were $150.5 million or 34% of sales compared to $117.7 million and 34.6% of sales last year. The current quarter SG&A expenses include $2 million for amortization of purchasing tangibles plus the incremental DiaMed operating expenses when compared to last year. The sequential increase in SG&A margin is in line with our historical patterns and will likely increase further in the fourth quarter.

Research and development expense for Q3 was just under 9% of sales at $38.8 million. The increase from last year's primarily related to the inclusion of DiaMed as well as development of new panels for our BioPlex 2200 system.

During the quarter, interest and other income was a net expense of $7.7 million. This compares to $2.4 million of expense in the year ago period which benefited from higher interest income earned on the higher cash balances. In addition, the current includes approximately $1 million of one-time expense related to the write-down of a discontinued strategic investment.

The tax rate used for the third quarter was slightly higher than expected at 29% which primarily reflects a slight reduction in the anticipated R&D tax benefit in the US and France for the year 2008. Remember that last year's tax rate was unusually low around 20% due to the favorable resolution of some outstanding audits. Excluding that in future discrete events, we continue to anticipate a rate in the range of 26% to 27% in the fourth quarter.

Net income for the third quarter was $27.8 million, about flat with last year. Excluding the non-cash purchase accounting expenses, net income grew by more than 20%. The FAS 123 stock compensation pre-tax expense for the quarter was $2.2 million.

Life science reported sales for the quarter grew 9.7% compared to last year to $157 million. On a currency neutral basis, sales increased 4.4%. Excluding the decline of BSE sales, the life science currency-neutral growth for the quarter was higher at 5.7%. We continue to have good momentum in our chromatography and protein expression product line. In addition, sales of PCR instruments and reagents as well as multiplexing assays continue to gain momentum.

Asia Pacific and the emerging markets were particularly strong for life science this quarter while the US market remains somewhat challenging especially for the higher priced instruments. Overall, life science segment profit was $9.3 million this quarter, up significantly from last year. This increase in profitability is primarily a reflection of improved gross margins due to a more favorable product mix coupled with lower factory cost and improved capacity.

Our clinical diagnostic group posted another strong quarter with sales of $281.4 million, a growth of more than 45% compared to last year and including $63.5 million contributed by our DiaMed business. Excluding DiaMed, diagnostics sales grew 12.7% or 6.5% on a currency-neutral basis. These sales were led by continued strong performance across all of our divisions and geographies especially our quality control clinical systems in microbiology product lines in the US and Asia Pacific. In addition, the placement of new BioPlex 2200 systems and corresponding sales of test continues to do well.

We have nearly 80 placements in the field with more than 70 of those now generating revenue. While both the growth in operating margins were negatively impacted by the $7.7 million of non-cash amortization and purchase accounting cost. Clinical diagnostics segment profit for the quarter was $34.3 million, compared to $24.5 million last year, a 40% increase.

With the passing of our one-year anniversary marking the acquisition of DiaMed, we can look back at the incremental success this business has brought to Bio-Rad and we remain pleased with our integration progress to date. Remember also that with the passing of the one-year mark we will now move into growth rates that are more typical of our industry which are in the low to mid-single digits.

And now for a quick review of the balance sheet, as of September 30th, total cash in short-term investments were $234 million and net cash generated from operations during the quarter was approximately $46 million. Net capital expenditures for the quarter were $23 million which reflects a sizeable investment in our web site and new e-commerce channel as well as the increased placements of the BioPlex 2200. Our full-year expectation for CapEx is in the low to mid-$80 million range as we continue to invest in our future. Depreciation and amortization for the quarter was relatively unchanged at $25 million.

We are pleased with our third quarter and year-to-date results which have been in line with our expectations despite the slowing in some of our markets such as BSE testing, research in Japan and capital equipment sales. As we look to the final quarter of 2008, we see many signs of continued growth and strength in our base business as well as the continuation of some of the more recent headwinds. We have seen with prior years that the fourth quarter is generally one of our strongest in terms of revenue but also the most challenging in terms of growth and operating margins due to product mix and year-end spending levels.

While we still expect our usual margin pressure, what is different this year is the strength of the US dollar. Just since the first of July, we have seen the dollar strengthen by more than 20% against our major foreign currencies. For the fourth quarter alone, this new currency level effectively reduces our forecast by more than $50 million in sales and $10 million in operating income. As such and combined with the slow capital equipment demand, it wouldn’t surprise us if the fourth quarter top line growth was in the low single digit on a currency-neutral basis and flat to slightly down on a recorded basis when compared to last year. Despite this change in fourth quarter expectations, for the full-year, we should still be within our original guidance which was currency-neutral growth in the mid to high-single digits for the base business and high teens including DiaMed, gross margins in the 54% to 55% range and SG&A margins flat to down from the 2007 level. As has been our practice in prior years, we will share our thinking and outlooks for 2009 in February during the fourth quarter earnings call.

And now we’re happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) You have a question from the line of Jon Wood with Banc of America Securities.

Brandon Couillard – Banc of America Securities

Thanks this is actually Brandon in for Jon tonight. Guys, on the minority interest line, looks materially higher than what you’d been running, and it doesn’t look like you’ve purchased, if I’m correct, that the outstanding DiaMed minority piece. Can you give us a sense of what the run rate on that line that should be going forward and what the outlook is on buying the rest of the outstanding fees?

Christine Tsingos

Yes. Sure, Brandon. That’s actually a great question. You’re right. It was a little higher at $3 million this quarter. I think we’ve been running closer to 2 or just under. And I think that the $2 million mark is more of the appropriate run rate until we do retire the remaining shares. But during the quarter it did bump up to 3. Some of that's related to the success and profitability of the DiaMed business and then of itself, some adjustments that were made for historical changes, tax and things like that. But I think you’re right. The $2 million is more of the appropriate quarterly run rate until we tender for the remaining 10% of the shares. We’re still hoping that we can achieve that before the end of the year. It's certainly not much longer than that if possible. Remember that even when we do tender for the remaining 10% of the shares of DiaMed holding, there will still be a small minority interest line because of subsidiaries where we own 50% or 75% but not fully owned on the DiaMed side.

Brandon Couillard – Banc of America Securities

Okay. Do you expect to complete that in the fourth quarter or ?

Christine Tsingos

I think we would like to be able to do that. There’s some quite a bit of work that needs to get done for us to achieve that but we’ve made good progress today and we’re going to keep working towards that goal.

Brandon Couillard – Banc of America Securities

Okay. Thanks for that. The BioPlex placement looks tremendous in the quarter. Can you give us sense – did that account for – is LabCorp included in that and has LabCorp made a real commitment on the BioPlex? Are they still evaluating that?

Christine Tsingos

Yes. I’ll let John answer more on the color but let me just point that nearly 80 is the total placements that we have not, 80 placements just in Q3. But still, more that 70 of them are generating revenue now.

Brandon Couillard – Banc of America Securities

Right.

John Goetz

Jon, what was your other question? Just –

Brandon Couillard – Banc of America Securities

Yes. We heard out in the field that LabCorp was evaluating the BioPlex in initial stages and I was just wondering if you could maybe give us a comment. Are they still evaluating it? Have they made a real commitment yet?

John Goetz

Yes. Brandon, this is John. Yes, I guess the short answer to that one is yes they are in the evaluation process. We hope to have some good news along those lines in the near future.

Brandon Couillard – Banc of America Securities

Okay. Any update on that you can give us on menu expansions maybe before the end of the year maybe heading in to 2009, the new kits that you might expect to commercialize for the BioPlex?

John Goetz

We have a Torque IgG kit that's in the FDA right now. We hope that'll be released pretty soon from the FDA and that would put us in the position to launch it right at the end of the year. And then in 2009, we’re looking at several panels coming forward, a lot of them in the serology area. So, that’s what the pipeline looks like.

Brandon Couillard – Banc of America Securities

Okay. On pricing, have you done the off-cycle price increases this year or do you plan to do an above average price increase maybe in 2009?

Christine Tsingos

What’s an off-cycle price increase? Just without a new –

Brandon Couillard – Banc of America Securities

Several other competitors in the space of taking some additional price on their regular cycles that were this quarter some more than history. Just curious if you have taken any price, if it’s above normal historical annual levels, any comments there?

Norman Schwartz

We have taken some price increases. This is Norman. We have put through some price increases that's I think most people have – if you look at its cost especially energy-related costs and the plastics, those kinds of things, the costs have drifted up and but we’ve tried to try to pass that along to customers. In some cases, I guess, you could say that's partially reflected in our results but in a lot of cases these are longer term commitments and contracts that we have so those will be reflected I think in the future quarters as well.

Brandon Couillard – Banc of America Securities

Okay and lastly, have you seen any deterioration in the life science capital equipment trends thus far in the fourth quarter and can you quantify how – what kind of – how much that impacted growth may be in the third quarter?

Brad Crutchfield

Brandon, this is Brad Crutchfield, I’ll take that. The answer is yes. Certainly in the US markets, a little bit in Europe, capital instruments, things that are in excess of the $50,000 seem to be lighter purchase decisions are being put off and we generally see that as a tightening of credit markets.

As far as the fourth – so that certainly is something we talked about all year really. I really haven’t seen it get particularly worse or change much in the last six or eight weeks. We have a pipeline for the fourth quarter that seems to be pretty much in line what where we started the year but we’ll have to see whether those come through. One thing for life science is that we still have a fairly diverse product line so we have a lot of consumables and reagents and those sort of help soften the blow as it were from a purely capital instrument play.

Brandon Couillard – Banc of America Securities

Okay. Great. Thanks so much.

Operator

(Operator Instructions) Your next question comes from the line of Doug Fischer with Kennedy Capital.

[Doug Fischer – Kennedy Capital]

Hi, congratulations on another solid quarter. I wondered if I can get from you if you have the number for the total purchase and tangibles that were in the quarter and not just the DiaMed portion?

Christine Tsingos

Well, DiaMed is vast, vast majority beyond that. You’re talking about amortization. You look at total amortization for the quarter versus the DiaMed piece, there’s maybe a million dollars more that’s related to some historical acquisitions.

[Doug Fischer – Kennedy Capital]

Okay. Can you talk about the BSC side whether you may not start to stabilize a little bit that headwind. It almost looks like comparing the difference between the constant currency growth rate reported and then XBSC (ph 00:20:49) that maybe that started to flatten out a little bit here.

Brad Crutchfield

Yes. I'll take that this brad again by this year number, yes we have the BSC business has gotten small enough that it doesn’t have as much have been impact and still has a business going away fairly dramatically but just by that shear of size of it it’s dropped off. So obviously its impact going forward will be less and less.

[Doug Fischer – Kennedy Capital]

Okay. Can you talk about a little bit about fourth quarter whether you have a feel for cash flows – what that might be or any kind of ball park figure you might expect to finish up the full year?

Christine Tsingos

Boy, Doug, that's just not something that we’ve usually talked about on a forward-looking basis 'cause there's just so many things that can impact cash flows both positively and negatively and then of course now we’re dealing with currency as well. So I don’t think I want to get in the position of predicting that.

[Doug Fischer – Kennedy Capital]

Okay. I just thought that it had been – generally been relatively followed for the – in the fourth quarter and years past, but I understand what you’re saying. Okay. Thank you.

Operator

And I’m sure you have no further questions at this moment.

Christine Tsingos

Okay, then. Well, thank you very much for taking the time to join us today. As always, we’re available for any follow-up questions you may have. Bye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Bio-Rad Laboratories, Inc. Q3 2008 Earnings Call Transcript
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