Bio-Rad Laboratories, Inc., Q1 2009 Earnings Call Transcript

May. 5.09 | About: Bio-Rad Laboratories, (BIO)

Bio-Rad Laboratories, Inc. (NYSE:BIO)

Q1 2009 Earnings Call

May 5, 2009 5:00 pm ET

Executives

Ron Hutton - Treasurer

Christine A. Tsingos - Chief Financial Officer, Vice President

Bradford J. Crutchfield - Vice President, Group Manager - Life Science Group

John Goetz – Vice President, Life Science Group

Analysts

Jon Wood – Bank of America

[Barry Malmed] – UBS

Richard Glass – Morgan Stanley

Jeff Matthews – Ram Partners

Operator

Welcome to the first 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 call, Mr. Ron Hutton, Treasurer.

Ron Hutton

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 CFO.

Christine Tsingos

Good afternoon everyone and thank you for joining us. Today we’re pleased to report quarterly net sales of $401 million, a decrease of 5% on a reported basis versus the same period last year sales of $422.2 million. However, on a currency neutral basis sales, year-over-year sales grew more than 3%.

During the quarter, we had good growth across many of our key diagnostic markets as well as selected markets in life science. As is typical with our historical pattern, the first quarter generally reflects the strongest margins—both gross and operating—for the fiscal year. The reported gross margin for the first quarter of this year was even higher than expected at 57.1%, compared to 55.1% last quarter and 53.7% in the year ago period. This strong margin reflects the shift in product mix toward higher margin consumables and improved manufacturing efficiencies as well as some one-time benefits.

The non-cash purchase accounting expense recorded in cost of goods related to the DiaMed acquisition was $3.4 million, a decrease of approximately $1 million from last year. SG&A expenses for the first quarter were $140.3 million, or 35% of sales, about equal to year ago dollars, but higher in margin, reflecting the currency impacted sales number. The sequential improvement versus the fourth quarter is primarily related to lower selling costs associated with the lower sales number as well as good headcount management. The current quarter SG&A expenses include $2 million for amortization of intangibles related to DiaMed. Remember that historical trends consistently reflect our lowest SG&A expend in the first quarter, and thus we anticipate these expenses to ramp up throughout the year.

Research and development expense in Q1 was 9.3% of sales or $37.1 million, compared to $41 million in the fourth quarter and basically flat with the $37.5 million spent last year. During the quarter, interest and other income was a net expense of $8.2 million, compared to $10.4 million of expense in Q1 of last year. This improvement versus last year is largely related to changes in foreign exchange results, remembering that last year we incurred a $2.5 million currency loss. Additionally, during the first quarter of this year, we recorded approximately $2.5 million of non-cash impairment expense related to our investment portfolio.

The effective tax rate used during the first quarter was as expected at 26% which compares to 27.5% last year. Excluding any discreet items that may occur during the year, we expect the full year rate to be around the 26% level.

Net income attributable to Bio-Rad for the first quarter was $30.3 million, an increase of 14% versus last year. Diluted earnings per share were $1.10. The non-cash amortization of intangibles and purchase accounting adjustments associated with DiaMed negatively impacted operating income by approximately $5.4 million, which using the 26% effective tax rate equates to about $0.14 per share.

Now for certain segment information, Life Science reported sales declined 9.2% to $140.3 million. On a currency neutral basis, sales decreased 3%, and if we exclude the decline in our BSE business, currently neutral sales were actually flat year over year for the Life Science group. We continue to have good year over year growth in protein related product lines as well as gene amplification products.

Both the US and European markets were challenging for Life Science in the first quarter, while Asia-Pacific and Latin America continued to produce solid double-digit growth. Overall segment profit for Life Science was lower at $6 million, primarily reflecting lower sales.

Our clinical diagnostic segment posted another strong quarter with sales of $257.5 million, a decline of just over 2% on a reported basis when compared to last year. On a currency neutral basis, year over year sales growth exceeded 7%. These sales were led by strong performance across all of our product divisions, most notably quality control, blood virus, and microbiology products. Sales to the emerging markets and the US were especially strong during the quarter, and perhaps most exciting, the first quarter reflects a sizeable number of BioPlex 2200 placements. During the quarter, we placed 29 new systems including 22 units sold to LabCorp which brings the installed base up to 115 units. Going forward, we anticipate returning to our more typical 5 to 10 placements of BioPlex 2200 per quarter.

Diagnostic gross margins increased compared to last year, primarily due to favorable product mix but also related to the BioPlex sales to LabCorp which generated a one-time gross profit contribution in the first quarter. Segment profit for the group increased more than 19% to $38 million.

Moving to the balance sheet, as of March 31st, total cash and short-term investments were $223 million. The decrease in cash balances versus year end primarily reflects increased cash payments typically associated with our first quarter. This is also reflected in cash generated from operations. Cash balances will likely decrease again during the second quarter as we are acquiring substantially all of the remaining shares of DiaMed Holding for approximately $35 million.

Net cash generated from operations during the quarter was $6.4 million, compared to a negative $2.2 million in the year-ago period. The first quarter represents a decline from the fourth quarter and is the direct result of more than $30 million paid for commissions, annual royalties, and bonuses associated with our strong 2008 financial results. For the most part, these are annual and one-time payments, and thus cash flow in future quarters should improve.

Net capital expenditures for the quarter were $18.7 million. Our full-year expectation for CapEx remains in the $80 million range as we continue to invest in our future. Finally, depreciation and amortization for the quarter was relatively flat with the fourth quarter at $22.3 million.

While we are pleased with this start to the year, our outlook for 2009 remains relatively unchanged from the guidance we provided in February, that is for topline currency neutral organic growth to be in the low to mid single digits. Continued strength in the US dollar could significantly mask the reported growth especially in the first half of the year where the comparisons may be tougher. As discussed earlier, gross margins for the first quarter were stronger than anticipated and likely not sustainable. We continue to anticipate full-year gross margin to be in the mid 50% range. As we discussed on the February call, on a currency neutral basis, our goal is to grow operating income at the same rate as sales. However, on a reported basis, swings in various currencies could temper the results and push operating margins to be in the low double or high single digits.

Now, we’re happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jon Wood from Bank of America.

Jon Wood – Bank of America

Christine, the one-time gross margin benefit, that’s the LabCorp sale?

Christine A. Tsingos

Yes.

Jon Wood – Bank of America

So you have a gross margin on that instrument that’s higher than your core?

Christine A. Tsingos

Typically, these instruments are placed under a reagent rental program, and in LabCorp’s case, they elected to purchase them, so under reagent rental, we get the gross margin over time, but with a purchase, we see it more upfront, so for us, it’s a matter of recognizing gross profit upfront for those units.

Jon Wood – Bank of America

But it actually boosted the percentage as well, or it was just incremental dollars?

Christine A. Tsingos

A little bit of that.

Jon Wood – Bank of America

That agreement, like Quest, is it just for the ANA panel, or is there a more comprehensive set of tests within that contract now?

John Goetz

Yes, it’s for a more comprehensive set of panels. We’ve got the ANA in there as well as EBV. We have an opportunity for vasculitis. It’s a pretty nice placement relative to panel utilization there.

Jon Wood – Bank of America

Can we just talk about the process chromatography impact you called out in the press release? Is that a function of lower process chromatography business or just a hard comp?

Bradford J. Crutchfield

It is definitely just a hard comp. The business is pretty lump obviously there. It’s very large customers. If we looked at it over a 4-quarter period, the business is fine and it’s certainly growing. It’s just that the first quarter was a tough comp.

Jon Wood – Bank of America

This happened in the fourth quarter. It’s safe to say that both the fourth quarter of ’07 and first quarter of ’08 both were elevated quarters, and that’s what we see in the numbers today?

Bradford J. Crutchfield

In ’08 and ’09, yes, definitely that’s the case. The last two quarters certainly reflected that, and we have a fair amount of visibility to the business going forward, so we can see where that’s coming from.

Jon Wood – Bank of America

So does that comp issue persist in 2Q and beyond or should that impact be largely washed through at this point?

Bradford J. Crutchfield

I’d say it’s largely wash through.

Jon Wood – Bank of America

It doesn’t sound like capital equipment was a drag on Life Sciences this quarter. Is that an accurate statement?

Bradford J. Crutchfield

Well, it really depends on how you define capital equipment. There is a hybrid range of instruments in the $25,000-$50,000 range, and they were certainly impacted a little, but not as much. We have some new product lines in that area that did really well and actually surprisingly well, but obviously the US market for products over $50,000 really was tough. It was tough for us and as we have seen for everybody.

Christine A. Tsingos

And I think it’s fair to say that instrument sales for Life Sciences in Q1 were lower than they were in Q4.

Jon Wood – Bank of America

Without the BSE so you’re flat, and then you’ve got a process chromatography in that. Did it contribute to a negative impact on the growth rate?

Bradford J. Crutchfield

On balance, no. It was actually positive. You’re correct. If you take the BSE and the process chromatography impact out, actually there was growth on a net currency basis.

Jon Wood – Bank of America

Christine, you said $35 million for DiaMed in the second quarter of ’09, so the minority line on the income statement, does that go to a very low level post 2Q ’09?

Christine A. Tsingos

That’s a good question. Obviously, it’s dependent on the profitability of DiaMed in any given quarter, but I would think our best estimate right now is that $1.7 million that we posted this quarter probably goes down to about $1.25 because remember we still have 51% subsidiaries that are accounted for under this method. It’s not just about the minority shareholders of DiaMed Holding.

Operator

Your next question comes from the line of [Barry Malmed] of UBS

Barry Malmed – UBS

On your earnings release, on page 3, when you present the balance sheet, are you sure you’re referring to the December 31, 2008, balance sheet, or is that really the March 31, 2008, balance sheet? The reason I say that is your $30 million first quarter in shareholders equity is down. Is that possible? That doesn’t seem possible to me.

Bradford J. Crutchfield

We have several items that go through the equity section. The currency translation adjustment on all our foreign owned and foreign currency denominated assets and liabilities also go through there. So you can earn $30 million in profit and have a $70 million change for example in net assets.

Barry Malmed – UBS

That I understand, but how about in shareholders equity?

Bradford J. Crutchfield

That’s where the CTA account goes through. The currency translation adjustment does go through the retained earnings and shareholders equity account.

Barry Malmed – UBS

Thanks for the education.

Operator

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

Richard Glass – Morgan Stanley

Can you tell us about any progress you’ve made on getting panels approved or individual assays or whichever you want to address, and can you also talk about any geographic differences between your businesses?

John Goetz

I’ll speak to the panel question. We’ve had a panel approved just within the last 45 days, and we have planned three more between now and the end of the year, and these will be for a total of about 9 assays altogether, so by the end of the year, we should have a total somewhere around 33 assays on the system.

Richard Glass – Morgan Stanley

What are those four that you just got approved or are working on?

John Goetz

We had a panel for TORCH IgG and then in the hopper we have a TORCH IgM; a measles, mumps, rubella; and herpes simplex. They’re all in the area of autoimmune and serology testing.

Richard Glass – Morgan Stanley

No swine flu in there?

John Goetz

No. We have other tests for that, but they’re out in the European market.

Richard Glass – Morgan Stanley

On the geographic question?

Christine A. Tsingos

As I talked about a little on the script, I think you have to look at it group by group because for the developed market—the US and Europe—it’s been pretty tough for the Life Science products, and I don’t know that we are alone in this. I think the whole industry is feeling that, and it’s a significant portion of our Life Science business, and yet the emerging markets are still growing very strong for Life Science. If you look at diagnostics especially in the first quarter, US was very strong for the diagnostic group and part of that is the BioPlex and the placements there and the sales to LabCorp, but also Quality Control did well, and we continue to gain share in blood virus in US, so it’s hard to say Bio-Rad as a whole here is the geographic impact when it’s a little different for each of the groups, and then emerging markets, Latin America and places like that continue to do well for almost the entire product line.

Operator

Your next question comes from the line of Jeff Matthews with Ram Partners.

Jeff Matthews – Ram Partners

First, the LabCorp placements, presumably that would have occurred regardless of how you book the sales whether it was reagent release type thing or whether it was actual follow-on sale, and I’m just wondering if there is any particular reason in terms of capital markets or credit availability that made the deal happen the way it did or not.

Christine Tsingos

Yes. I asked that same question because typically these instruments are placed under reagent rental, and I think we would anticipate that in the future as well. Our folks who have been good partners with LabCorp for a number of years believe that this is their general preference. They generally tend to buy instruments, not just from Bio-Rad but from other vendors as the matter of course.

Jeff Matthews – Ram Partners

I’m just wondering what exactly it is that LabCorp for example or this could be any customer of yours would be doing with a BioPlex. What were they doing before the Bio-Plex? What is this replacing?

John Goetz

Generally speaking, these assays are done one at a time and in many times on a distributed instrument base within the laboratory. What we are offering here is the opportunity for them in the laboratory to consolidate at least 11 assays in a single tube and do it in a highly automated random access format, so they can immediately reduce the footprint of the testing platforms that they have in the laboratories, and the other incredibly compelling selling point of this system is the labor savings that are involved when you highly automate a panel of assays, so you throw on top of that the ability to screen and measure your reflex test all at the same time and then release those reflex tests based on a doctor’s order at a later time without having to redraw the patient, so therein lies a lot of economic upside for the laboratory.

Jeff Matthews – Ram Partners

I’m wondering if this is a good time or not with credit markets loosening up and interest rates extremely low historically for Bio-Rad to raise capital in the debt market as you tended to do because perhaps there are acquisition opportunities at prices that are interesting to you or not?

Ron Hutton

There are two parts to that. I think certainly in the last few weeks, we’ve seen the debt markets have improved quite a bit. Still the borrowing costs are higher than the two issues that we have outstanding that we did a couple of years ago, but I think it’s fair to say that the rates are coming in line, and it could be an opportunity for us to do that. In terms of acquisitions, I think that we would have expected more opportunities to be available than there are. It does seem to a little quiet on the acquisition front or the opportunities front for acquisition, so we’ll see as we go forward.

Operator

There are no further questions in the queue at this time. This concludes the presentation. Thank you for your participation in today’s conference.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!