Bio-Rad Laboratories' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Nov. 1.11 | About: Bio-Rad Laboratories, (BIO)

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

Q3 2011 Earnings Call

November 1, 2011 5:00 PM ET

Executives

Ronald Hutton – Treasurer

Christine Tsingos – VP and CFO

John Goetz – VP and Group Manager, Clinical Diagnostics

Brad Crutchfield – VP and Group Manager, Life Science

Norman Schwartz – President and CEO

Analysts

Jon Wood – Jefferies & Co., Inc

Paul Knight – CLSA

Julian Cochran [ph] – Leerink Swann

Operator

Good day, ladies and gentleman, and welcome to Q3 2011 Bio-Rad Laboratories Inc Earnings Conference Call. My name is Reitz, and I will be the coordinator for today. At this time all the participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of the today’s conference call (Operator Instructions).

I will now turn the presentation over to your host for today’s conference, Mr. Ron Hutton, Treasurer. Please go ahead.

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 $515.5 million, an increase of 9.5% versus the same period last year sales of $471.5 million.

On a currency-neutral basis, sales increased just over 1% compared to last year. During the quarter, we experienced strength in our quality controls in BioPlex 2200 product line as well as our many of our Life Science product lines most notably electrophoresis and imaging. This overall growth was hampered by continued weakness in Europe and certain emerging markets especially for the Diagnostic segment.

The gross margin for the quarter was higher than expected at 57.3%, compared to 56.2% last year and 56.5% in the year ago period and primarily the result of favorable product mix in selling margins as well as good capacity utilization. The non-cash purchase accounting expense recorded in cost of goods related to the Biotest and DiaMed acquisitions was $4.1 million for the quarter.

SG&A expenses for the third quarter were $176.9 million, or 34.2% of sales, compared to 148.7% and 31.5% of sales last year. The current quarter SG&A spend includes approximately $12 million of additional expense due to currency translations plus incremental costs associated with our ERP projects. Also recorded in SG&A is $3.3 million for amortization of intangibles related to the DiaMed and Biotest transactions.

Research and development expense in Q3 was 8.8% of sales, or $45.4 million, compared to $42.9 million last year. This increase is primarily related to our investment in new technology and platforms for the diagnostic market including diabetes monitoring, and blood typing. Going forward, we expect R&D expense to be in the 9% to 10% of sales range.

During the quarter, interest and other income was a net expense of $18.1 million. This compares to $16.9 million of net expense in the year ago period and $10.4 million in the second quarter. The sizable increase versus last quarter is partially the result of higher currency losses and hedging costs incurred during this particularly volatile period. The tax rate used for the third quarter was better than expected, at 18%, which compares to 22% last year. The lower than expected tax rate is primarily related to discrete benefits during the quarter including the release of reserves for the closing of certain statute limitations, lower tax rates related to royalty income in R&D credits in France and U.S. federal taxes return.

Excluding any future discrete items the anticipated tax rate in the range of 27% to 29% for the fourth quarter. Net income for the third quarter was $45.9 million, an increase of approximately 2% versus last year. Diluted earnings per share were $1.61.

And looking at our segments; Life Science reported sales for the quarter increased nearly 12% compared to last year to $171.5 million. On a currency-neutral basis, sales rose 5.1%. This growth was led by new electrophoresis and imaging products as well as continued strength in our amplification and multiplexing consumables. Geographically the Life Science markets continues to be somewhat challenging in the U.S. and Europe offset by solid growth in the emerging markets in Asia Pacific region. Overall Life Science segment profit increased 10% to $12.5 million primarily the result of improved gross margins.

Our Clinical Diagnostics group posted sales of $341.3 million, a growth of 8.4% compared to last year. However on a currency-neutral basis, Diagnostic sales declined about 1%. Sales during the quarter were tempered somewhat by a challenging economic environment in Europe as well as the tough comparison for last year when the third quarter included sales from tenders in emerging market countries that were either smaller this year or did not repeat. Despite the decline in sales, Clinical Diagnostic segment profit for the quarter was flat with last year at $45.9 million.

Now for a quick review of the balance sheet. As of September 30, total cash and short-term investments were $910 million. We anticipate this balance to be lower in the fourth quarter reflecting our recent acquisition of QuantaLife. Cash from operations during the quarter was $51.2 million, down both sequentially and versus last year principally result of higher taxes paid and slower collection. EBITDA remains strong at $98.5 million for the quarter and more than $291 million year-to-date.

Net capital expenditures for the quarter were $24.6 million. Our full year expectation for CapEx continues to be in the $100 million range as we ramp up our global ERP projects. Depreciation and amortization for the quarter was relatively unchanged at $30.4 million.

And looking to the remainder of the year, we are pleased to report another solid quarter of operating results despite a challenging microenvironment. At the beginning of the year, we guided currency-neutral revenue growth of 5%. Given our year-to-date currency-neutral growth of about 3.5% and combined with the current economic challenges especially in the European region, we now believe that the full year organic sales growth for 2011 would likely by in the 3.5% to 4% range.

As is typical with our historical pattern, the fourth quarter often reflects a sequentially lower gross margin as the product mix shift towards a higher percentage of instrument sales as well as the lower operating margins reflecting higher SG&A expenses which are typical of our year end. 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 in the 56% to 56.5% range and operating margins to be between 13% and 13.5%.

As has been our process in prior years, we will share our thinking and outlook for 2012 in February during fourth quarter earnings call. And now we are happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question is from Jon Wood from Jefferies. Please go ahead.

Jon Wood – Jefferies & Co., Inc

Hi, thanks. Can you hear me?

Christine Tsingos

Yes, hi Jon.

Jon Wood – Jefferies & Co., Inc

Hi. So for John Goetz if he is there, just can try to give us some color into the tender related impact in the diagnostic business. So if you were to kind of exclude more of the lumpy tender related business, how does the diagnostic business do on an underlying basis?

John Goetz

Hi Jon, this is John Goetz. Yes, that contributed to approximately 2 to 2.5 percentage points of growth that came off the table for the quarter.

Jon Wood – Jefferies & Co., Inc

Okay. And so what else you kind of – you pointed out Bioplex is solid, the controls business is solid. So what came in below kind of trend line to kind of contribute that lower single-digit revenue growth trajectory?

John Goetz

Yes, that was largely across our European region but also into our emerging markets in the area of diabetes.

Jon Wood – Jefferies & Co., Inc

Okay.

John Goetz

As well as blood virus testing.

Jon Wood – Jefferies & Co., Inc

For diabetes, okay, great. And then follow-up for I guess it’s for probably Norman or Brad. Anything you are willing on offer on QuantaLife next year, it’s been obviously its emerging asset with little or no revenue at this point but any clarity you guys are willing to go into for ‘012 in terms of revenue or kind of operating impact, operating loss impact would be great if not I guess we’ll wait till next quarter but any preliminary view would be great.

Brad Crutchfield

Hi Jon, this is Brad. We’re just in the process of rolling this product out to the U.S. in sort of the greater release at the end of the year for the rest of the world. Right now we’re just trying to make that assessment, so I really couldn’t give you anything specific but needless to say we’re working really hard to maximize this technology.

Christine Tsingos

So Jon, certainly in our expectation for the full year, we’ve included the impact of QuantaLife and as you rightfully pointed out, it isn’t an operating drag as well as once we layer on top amortization of intangibles, it will be a bigger negative impact but we’re only just now started the valuation and when we get to our next earnings call, we’ll have a greater detailed understanding of what that impact will be.

Jon Wood – Jefferies & Co., Inc

Okay, very good. Thank you.

Operator

Thank you for your question. Next question is from Paul Knight from CLSA. Please go ahead.

Paul Knight – CLSA

Hi Christine, could you give geographical breakouts in terms of the growth, can you quantify on the Asian side, emerging market side?

Christine Tsingos

We typically do not give out our growth rate by region especially not to level of detail on a quarterly basis. But as you can imagine they continue to be higher than company averages in terms of growth.

Paul Knight – CLSA

And your Life Science growth. Can you talk specifically to the new electrophoresis products?

Brad Crutchfield

This is Brad. I’ll take that. We’ve launched a number of new products in our electrophoresis and imaging including blotting product lines that have been really well received in the marketplace as we’ve had a strong position but over the last couple of years we’ve refreshed those product line and again we’ve been very happy with how the customers will receive them.

Paul Knight – CLSA

Are you seeing any impacts from the sequencing activity that’s been going on in the market? Is it that or you think it’s just your products?

Brad Crutchfield

Well I think in general the – I think you’re correct that sequencing has moved a lot in the area of protein expression analysis as people are starting to validate gene expression data. So certainly the new product lines and new workflows we have that shrinks the amount of time that takes and improve the information that we give our customers put us on a relative position on both fronts.

Paul Knight – CLSA

With the tall and pretty consistent through the quarter on the academic side?

Brad Crutchfield

On the academic side, certainly if you take Europe and North America, things are tight, I mean certainly – we certainly work susceptible to some of the big ticket aspects of the – from the increase the funding that occurred last year and early this year but in general the business has been fairly stable for us but that being said its still relatively low single-digit growth rates.

Paul Knight – CLSA

Yes, okay. Thank you.

Operator

Thank you. Next question is from Dan Leonard from Leerink Swann. Please go ahead.

Julian Cochran – Leerink Swann

Hi, this is actually Julian Cochran in for Dan today. I wonder if you could comment further on your comments to figure out economic pressures specifically with relating to the Diagnostic business and also I guess it seems like it looks like the Life Science business looks relatively strong for the second quarter in a row and so what I am wondering is why would the Life Science business be shielded from some of the economic troubles, is it due to your market positioning or product mix or something else, if could you just comment on that?

Norman Schwartz

Yes, it is Norman. I think that the success in Life Science does seem to be more around the products and the kind of the directions that Life Science has taken with their products. Generally if you think about the economic situation around the world, I think – well first of all on the Life Science side as Brad said we didn’t have as much of upside from stimulus, so I think we don’t have quite as much of a tough compare. So between that and the new products I think we’ve done pretty well in Life Science. But having said that, the economic situation in Europe continues. You’ve got Southern Europe which has financial problems, and I think we suffer a little bit from that, and kind of people being careful all around the world.

Julian Cochran – Leerink Swann

Okay, and then just another question with regards to QuantaLife, I know you said you’re not really raise a comment on sort of the operating impact but could you provide at all your belief on the potential size of the market opportunity or is it too early for that as well?

Norman Schwartz

I mean obviously if you look at the research amplification market today, it’s – I don’t know probably little over $1 billion and as you could imagine that you could think of this being potentially a several hundred million dollar market.

Julian Cochran – Leerink Swann

Okay.

Operator

And there are no further questions at this moment. (Operator Instructions) There are no questions, I hand the conference back to you sir.

Norman Schwartz

Okay.

Christine Tsingos

Okay. Thank you everyone for your time today and joining us and we look forward to seeing you soon. Bye.

Operator

Thank you ladies and gentlemen. This concludes your conference call for today. You may now disconnect. Thank you for joining. Have a great day.

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