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Executives

Ronald Hutton – Treasurer

Christine Tsingos – VP and CFO

Norman Schwartz – President and CEO

John Goetz – VP and Group Manager-Clinical Diagnostics Group

Brad Crutchfield – Principal, Columbia Technology Ventures

Analysts

Paul Knight – Credit Agricole Securities Inc.

Junaid Husain – Ticonderoga Securities, LLC

Jeffrey Matthews – RAM Partners LP

Jon Wood – Jefferies & Co., Inc.

Bio-Rad Laboratories, Inc. (BIO) Q2 2011 Earnings Call August 2, 2011 5:00 PM ET

Operator

Good day, ladies and gentleman, and welcome to your Quarter Two 2011 Bio-Rad Laboratories Incorporated Earnings Conference Call. My name is Denise, and I’ll be your manager today. (Operator Instructions).

And now, I would like to hand the presentation over to your host for today’s call, Mr. Ron Hutton, Treasurer. Please proceed, sir.

Ronald Hutton

Thank you. 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 $521.7 million, an increase of 11.5% on a reported basis versus the same period last year sales of $467.7 million.

On a currency-neutral basis, year over year sales grew 4.2%. During the quarter, we had good growth across many of our key Diagnostic and Life Science markets. This growth was partially offset by the continued slowness in Europe.

The reported gross margin for the second quarter was in line with expectations, at 56.2%, compared to 57.4% last year. Remember that during the second quarter of last year, we recorded approximately $4.5 million of one-time gross profit related to the settlement of some outstanding intellectual property disputes. Excluding these unique items, the gross margin for the second quarter of 2010 was 56.4%.

The non-cash purchase accounting expense recorded in cost of goods related to the DiaMed and Biotest acquisitions was $3.8 million for the quarter. SG&A expenses for the quarter were $176.7 million, or 33.9% of sales, which compares to 33.4% of sales in the year-ago period. The current quarter SG&A spend includes approximately $15 million of additional expense due to currency translation; increased reserves for receivables in economically challenged markets, primarily in Europe; as well as costs associated with our ERP project. Also recorded in SG&A is $3.1 million for amortization of intangibles related to the Biotest and DiaMed acquisitions.

Research and development expense in Q2 was 9.2% of sales, or $48.2 million, compared to $43.9 million last year and $42.7 million in the first quarter. The sequential increase in R&D spend is primarily related to our investment in new technology for the diabetes monitoring, blood virus testing and blood typing markets. Going forward, we expect R&D spend to be in the 9% to 10% of sales range.

During the quarter, interest and other income was a net expense of $10.4 million compared to $12.8 million of expense in Q2 of last year. This decrease versus last year is largely related to additional dividend income.

The effective tax rate used during the second quarter was higher than expected, at 30.8%, which is reflective of a change in the geographical sales and profit mix. The quarterly tax rate was also impacted by some additional tax reserves related to certain ongoing tax audits. Given the expectation for continued sluggishness in Europe and excluding any discrete items that may occur, we now anticipate the full year tax rate to be in the 29% to 30% range.

Net income attributable to Bio-Rad for the second quarter was $40 million, an increase of 5.5% versus last year. Diluted earnings per share for the quarter were $1.41.

And now, for certain segment information. Life Science reported sales for the second quarter increased 12.8% to $170 million. On a currency-neutral basis, sales grew an impressive 6.7% year over year. These results reflect strong sales of our electrophoresis and imaging product lines, which were buoyed by the launch of new products, as well as growth in process media.

Additionally, sales in North America were particularly strong during the quarter, partially offset by the continued challenges in the European research market. Overall, segment profit for Life Science was $10 million, an increase of nearly 30%.

Our Clinical Diagnostics segment posted another solid quarter, with sales of $348 million, an increase of 10.8% on a reported basis when compared to last year. On a currency-neutral organic basis, year over year sales for the Diagnostics group was 2.8%. These higher sales were led by good performance across many product lines, most notably quality control and diabetes monitoring products. Sales to Latin America, Asia-Pacific, and Japan were especially strong during the quarter.

Diagnostics gross margins decreased compared to last year, primarily due to the one-time impact of the 2010 intellectual property settlement I mentioned earlier. Segment profit for the group was $46.6 million, about flat with last year.

Moving to the balance sheet, as of June 30, total cash and short-term investments were $886 million. Cash from operations for the quarter was especially strong at $110 million, reflecting higher collections and investment income, and EBIDTA remains strong at more than $99 million.

Net capital expenditures for the quarter were $24.7 million. Our full year expectation for CapEx remains in the $80 million to $90 million range as we ramp up our facilities and ERP related spending in the second half of the year. And finally, depreciation and amortization for the quarter increased to $29.6 million.

We continue to be pleased with our year-to-date results, which have been in line with expectations. Additionally, the uptick in growth for our Life Science segment seems to be a good sign for the future.

However, given the challenges in certain geographies and markets around the world, our outlook for 2011 remains relatively unchanged from the guidance we gave in February, that is, for top line currency-neutral organic growth to be in the 5% range. Also unchanged, we continue to anticipate full year gross margins to be in the 56% to 56.5% range and full-year operating margins to be around 13%.

As with past years, we are somewhat cautious about the third quarter, where an already tough seasonality effect could be magnified in the current economic environment, affecting both sales and operating profits.

And finally, as I mentioned earlier, our expectation for the effective tax rate is to be in the 29% to 30% range.

And now we are happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Paul Knight. Please proceed.

Paul Knight – Credit Agricole Securities Inc.

Hi. Good evening.

Christine Tsingos

Hi, Paul.

Paul Knight – Credit Agricole Securities Inc.

Regarding the expression of challenges in Europe, is this academic? Is it clinical? Where do you see it?

Norman Schwartz

It’s really kind of across the board, both in academic and, again, in the Diagnostics market.

Paul Knight – Credit Agricole Securities Inc.

Norman, do you think that where in the European – as Europe stands now, is it reflecting austerity measures passed so are we kind of in a normal state of slow growth, or is it kind of unrolling now?

Norman Schwartz

Boy, that’s kind of hard to tell.

Paul Knight – Credit Agricole Securities Inc.

I guess the question would be did you see deceleration in Europe in Q2 or tone of business still all right? Or was it kind of the same is Q1?

Norman Schwartz

I think it’s been about the same. There have been no dramatic changes one way or the other.

Paul Knight – Credit Agricole Securities Inc.

And then how did Asia look in the quarter?

Norman Schwartz

Not too bad.

Paul Knight – Credit Agricole Securities Inc.

Up or down or any change, do you think?

Christine Tsingos

I think it was up. Maybe the growth rate wasn’t quite as robust as we’ve seen historically, but it was still good growth given the current situation.

Paul Knight – Credit Agricole Securities Inc.

And then relative to an operating margin that I think was a little lighter than we had estimated, is the 13% margin, was SG&A a little higher? Was it currency affecting that? What was the color on the items affecting the margin in the quarter?

Christine Tsingos

Sure. So, I think the biggest component was SG&A was up year over year, and some of that was currency. In the prepared remarks I highlighted about $15 million of the increase year over year. And $10 million it is probably related to currency; the other $5 million is kind of split between our ERP spend and a decision that we made to increase some of the reserves on receivables for parts of Europe where the economies – I mean, you guys read about them in the newspaper every day – where some of the economies are really slowing down.

Paul Knight – Credit Agricole Securities Inc.

And so that – the reserves would be in that SG&A line, Christine...

Christine Tsingos

Yeah.

Paul Knight – Credit Agricole Securities Inc.

... or is it cost of goods line?

Christine Tsingos

No, it’d be in the SG&A line.

Paul Knight – Credit Agricole Securities Inc.

Okay. Thank you.

Operator

And your next question comes from the line of Junaid Husain. Please proceed.

Junaid Husain – Ticonderoga Securities, LLC

Good afternoon, everyone.

Christine Tsingos

Hi, Junaid.

Junaid Husain – Ticonderoga Securities, LLC

I don’t know if John is on the line?

Christine Tsingos

He is.

Junaid Husain – Ticonderoga Securities, LLC

John, I’ve got my quarterly obligatory hospital CapEx question for you. As we’ve been doing our checks with hospitals, especially in this CapEx environment, my sense is that the for-profit hospitals have the money and the not-for-profit hospitals are the ones that are struggling to do any capital investments. Is that your sense as well?

John Goetz

Yes, it is. We see more and more of our instrument placements actually being reagent rental than we have in, let’s say, prior periods. And I would say that kind of reflects that situation.

Junaid Husain – Ticonderoga Securities, LLC

Yes. And then can you tell me, in any given quarter, in the U.S., what is your mix of for-profit and not-for-profit customers who are purchasing your high-end clinical diagnostic systems?

John Goetz

We don’t have that breakout. Generally, for us, a customer is a customer. And when they buy something from us, they get our full service regardless. So we don’t really look at it in that way.

Junaid Husain – Ticonderoga Securities, LLC

Got you. And then if Brad is on the line?

Brad Crutchfield

Yes.

Junaid Husain – Ticonderoga Securities, LLC

I guess, Brad, in a post-debt ceiling world, my sense is that there’s going to be less appetite for expanding out the NIH budgets and if anything, we could see a contraction. From years past, when you’ve seen either flat to lower NIH budgets, what’s the trickle-down impact to the Life Sciences business?

Brad Crutchfield

Well, that’s only – yeah, we’re trying to get that too. In the end, we have a broad product line, which helps us. And certain of the – there was a while where there were certain sequencing product lines and there was things in demand on maybe mass spec that really drove a lot of that growth and benefited from some increased budgets.

Like, we have a very broad appeal of products. And even in this quarter, we’ve seen a really good impact from our imaging and electrophoresis lines, which really kind of fly a little bit below the budget ceiling. So I think we, kind of, balance it a little bit.

Junaid Husain – Ticonderoga Securities, LLC

Got you. Got you. And then, Christine or Norman, if you could help me a little bit on pricing for your products more at the aggregate level in terms of the impact on overall corporate margins. How has, first, pricing held in relative to the overall portfolio? Was it up, down or net neutral?

Norman Schwartz

I think it’s probably net neutral when we think about it. I mean, obviously, there continue to be pressures on pricing all the way around, with the constrained budgets in life science and certainly with the pressure on healthcare costs. I think both of those are something that we feel. But I don’t think it’s any worse this quarter than it has been.

Junaid Husain – Ticonderoga Securities, LLC

All right. Got it. And, Christine, last question for you. Relative to your European implementation, could you remind me of the incremental expenses associated with the implementation; maybe any incremental operating expenses versus the capitalized expenses for the software?

Christine Tsingos

Sure. So I think this year we were expecting ERP spend to kind of be in the $15 million-plus range on the expense side, and something equal to that, if not a little higher, on the capital side. We’re now starting to ramp up the services of outside professionals more. So that will continue to increase the capital spend.

Overall, for the entire project, we’ve talked about this being in $100 million to $150 million-plus range over many, many years – four years or so. And our best estimate at this point is, of the $150 million, maybe two-thirds of that ends up being more capital and then the other third is expense. And the next couple of years will be the highest spending in both buckets, I think.

Junaid Husain – Ticonderoga Securities, LLC

Great. And then as a follow-up to that, I’ve noticed with other companies that have gone through major ERP implementations, you do see some efficiencies, as employees plow through the integration. As you look at the timeline, where would you expect to see, perhaps, a negative impact from the implementation and how material would you expect it to be to your business?

Christine Tsingos

Not even sure how to answer that. It’s a good question. I don’t disagree with you that many companies, when you look at them going through these programs, they’re costly. They can be disruptive. I think we’re trying to be very diligent and deliver it in how we manage this project, which is partially why we’ve chosen to do it over a number of years rather than very quickly, big bang, where you increase the opportunity for a disruption.

Having said that, I think there are always blips in the road. Our goal is to try and not have it be a significant financial blip or impact on our business. In the short term, we’re putting some of our best folks on the project, and those positions need to be backfilled. And that always takes a little bit of time. But while we can’t guarantee no blips along the way, we’re going to be as diligent and prescriptive as possible in running a successful project.

Junaid Husain – Ticonderoga Securities, LLC

All right. Good enough. Thanks, guys. That’s all I’ve got.

Operator

And your next question comes from the line of Jeff Matthews. Please proceed.

Jeffrey Matthews – RAM Partners LP

Hi. Can you hear me?

Norman Schwartz

Yes, we can.

Jeffrey Matthews – RAM Partners LP

Great. Thanks. First of all, the 2.8% same-store organic growth in Diagnostics is a pretty big slowdown if I recall. And you highlighted growth in emerging markets and also Japan, so I’m wondering what happened in the U.S. and Europe in Clinical Diagnostics. And obviously, you didn’t highlight blood typing, so I wonder if there was any change in that side of the business.

John Goetz

Yes, Jeff, this is John. Just a couple of points of explanation there. Our blood virus business really has been a little lackluster, particularly in second quarter. I’m saying blood virus. And in this particular case, we’ve been presented with some tender opportunities where pricing, quite frankly, is not really that interesting. So we’ve kind of held the line on some of those and in some of those cases we’ve lost tenders, which I am not too broken up about that. Profitability with that business is still performing well, so I think that’s been one contributor to that slower...

Jeffrey Matthews – RAM Partners LP

And that’s in the U.S., John?

John Goetz

I’m sorry?

Jeffrey Matthews – RAM Partners LP

That’s in the U.S.?

John Goetz

That’s actually in the U.S. and in European emerging markets.

Jeffrey Matthews – RAM Partners LP

Okay.

John Goetz

And then in the blood typing part of the business, I think I mentioned earlier that we do see more of our customers, at least in this recent period, opting for reagent rental deals as opposed to cash sales for instruments. So when you start to get into a little comparison there, there is a little bit of a downward swing there. However, I will say that the units of placement and reagent sales in those businesses are continuing to grow very nicely.

Jeffrey Matthews – RAM Partners LP

Okay. And then my second question. Christine called out reserves for receivables in some of the weaker European economies. I don’t even remember you guys doing that during the crisis. Am I wrong? I mean, it sounds like it’s hit a level that it didn’t even hit in the crisis of significance. I’m wondering if, (a), that’s true, and (b), is this a matter of your systems catching up with bad receivables that have been around for a long time, or is this something materially worse in part of your European customer base, which wouldn’t be a surprise given the headlines?

Christine Tsingos

No, Jeff, I wouldn’t read that into it. You’re right. It’s probably not something that we’ve called out before, and maybe we didn’t even need to call it out this time. We have always done what is appropriate around the world and I don’t know that this would signal something very different specifically within our own business. It’s more reflective of what truly is going on in that region, and given the debt situation, et cetera, it just seems to be appropriate and a trend among those of us who are GAAP reporting companies. But I wouldn’t read anything into it that something had specifically changed in our business.

Jeffrey Matthews – RAM Partners LP

Sure. And then if I could just follow up on that, along that line, I wonder if Norman might speak for this maybe, or John. In terms of Europe, which has always been very big for Bio-Rad, disproportionately big relative to I think your size, there is a lot of dust in the air, not only from the headlines that we see today, but the UK pressuring the National Health Service spending. Could you kind of take us around Europe and kind of what the outlook might be over the next 12 months in general?

Norman Schwartz

Well, I think the outlook is probably – for my guess is kind of more of the same. We’re going to continue to see those pressures. And I think that’s about it. I don’t think there’s any place – obviously, places like the UK have announced measures and probably they have been a little more affected, although you’ve got other regions that are also – I guess of all the ones, Germany continues to kind of be the brighter star in Europe. They seem to be the healthiest of the bunch. But I think that’s about the picture.

John Goetz

Jeff, I think one of the things about our market is that we do make products that are needed. At the end of the day, when people come to their position and present themselves at hospitals and have operations, the products that we market and sell are needed and will be consumed. I guess the question will be, will those governments be able to pay their bills. But at the end of the day, I really do see a fairly insular effect based on the product lines that we sell.

Jeffrey Matthews – RAM Partners LP

Understood. And then I’d like to just follow up once more, and I’m not a big quarterly EPS guy, as you know, but just in terms of the Diagnostics business, if you’re up a couple, 2%, 2.8%, or whatever the organic number was, you highlighted growth in developing markets as opposed to the U.S. and Europe. Does that mean U.S. and Europe were flat to down, and is that meaningful?

John Goetz

Yeah, I would say, yes. I mean I would say they’re flat to slightly up, it’s not flat to down.

Jeffrey Matthews – RAM Partners LP

Okay. All right. Thanks very much.

Operator

(Operator Instructions) Your next question comes from the line of Jon Wood. Please proceed.

Jon Wood – Jefferies & Co., Inc.

Hi, thanks a lot. This is for Brad so can you call it – Brad, I know you had a weak comp in the second quarter of ‘10 on the Process Chromatography side and I think at that time, we called it out as being $7 million year over year. Can you just comment on the effect of the process chromatography business in the second quarter of ‘11?

Brad Crutchfield

Yes, you’re very correct. And there was – although we had very good growth kind of on the broad appeal of – across our broad product line, process did help in the second quarter. I can’t give you the exact number, but it did have an impact.

Jon Wood – Jefferies & Co., Inc.

And maybe even if – I guess what I’m getting at here, Brad, is even if I adjust for that kind of fluctuation in 2010, for second quarter of ‘10, it still looks like your life science business has stepped up quite a bit from kind of s ongoing core growth perspective, so despite your comments on Europe on austerity and the like. So what is driving this kind of better trend, this accelerating trend in the underlying business at this point?

Brad Crutchfield

Well, we launched a lot of new products. And in a lot of cases, we are taking market share. And I think certainly in North America, we have done very well., the general business climate – and again it’s the broad range of products that we offer that have to do with really how the average lab runs.

And coming out of the stimulus program where a lot of people were hired, facilities were staffed, that has really helped us well. And in kind of our core franchise of electrophoresis, plotting and imaging, we’ve looked very hard over the last couple of years to effectively redo that line and kind of change some of the paradigms in the marketplace and we’ve been successful. And that’s helped us a lot. We still have a very strong PCR product line, and we continue to take market share in that area as well. So overall, we’ve done well and we’d certainly like to do better, and would like to keep consistent in this way, but overall the product line’s up.

Jon Wood – Jefferies & Co., Inc.

Understood. Okay, great. Norman or Christine, just any comments you can share on kind of the M&A backdrop, the cash level here continues to build to astronomic levels. Any itchy fingers lately on the M&A side? And if you will comment, just parse out the Clinical Diagnostics versus Life Science picture there.

Norman Schwartz

Well, okay. So while we have these astronomical balances as you call them, so do some others. And the market continued to be pretty competitive and as you know, a lot of these assets have gotten bid up recently. I would say that there still continue to be a number of opportunities. It seems like kind of more of these are presenting themselves on both the Life Science and the Diagnostics side. And we currently have a couple on our radar screen.

Jon Wood – Jefferies & Co., Inc.

Okay, great. Last one for Christine is on the ERP side. So you kind of called out about a $5 million delta between reserves and ERP. So my question is do we still have another step up in the third quarter in terms of the expense side, or are we at a run rate for ERP that will be pretty consistent in the back half of the year?

Christine Tsingos

No, I think we probably continue to step up through this year, as we build the team and go through our global design process. And then it should start to be a little more consistent on the expense side. And of course over time the capital side will continue to rise.

Jon Wood – Jefferies & Co., Inc.

Okay. Okay. Thanks a lot.

Operator

At this time we have no further questions in the queue.

Christine Tsingos

Okay. Great. Well, thank you, everyone, for joining us today. We appreciate your interest and look forward to speaking with you soon. Bye-bye.

Operator

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

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