Bio-Rad Laboratories' CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: Bio-Rad Laboratories, (BIO)

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

Q1 2012 Earnings Call

May 1, 2012 5:00 PM ET

Executives

Ron Hutton – Treasurer

Christine Tsingos – VP and CFO

Norman Schwartz – President and CEO

Brad Crutchfield – VP and Group Manager, Life Science

John Goetz – VP and Group Manager, Clinical Diagnostics

Analysts

Brandon Couillard – Jefferies

Jeffrey Matthews – Ram Partners

Paul Knight – CLSA

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2012 Bio-Rad Laboratories, Inc. Earnings Conference Call. My name is Carris [ph], and I will be your coordinator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder this call is being recorded for replay purposes.

And now like to hand the call over to your host for today, Mr. Ron Hutton, Treasurer. Please proceed.

Ron Hutton

Thank you very much. Before we begin the call, I’d like to caution everyone that we will be making forward-looking statements about management’s plans, goals, 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 $486.3 million, up slightly on a reported basis versus the same period last year’s sales of $485.1 million. On a currency neutral basis sales increased 1.4%. During the quarter, we had growth across many of our key markets and product areas, including $1.7 million of sales contributed by our new Digital PCR products.

These sales were partially offset by continued weakness in Europe, which resulted in a decline in sales versus last year. Excluding currency and the addition of QuantaLife, organic sales growth was 1.1%. However, it is important to remember that sales in the first quarter of last year included a sizeable one-time sale of blood typing products in Japan of nearly $8 million. Excluding this one-time sale in 2011, our currency neutral organic growth for the quarter was 2.7%.

The reported gross margin for the first quarter was ahead of expectations at 57.3% compared to 57.5% last quarter, and about flat with the year ago period. This strong margin primarily reflects the favorable product mix and improved manufacturing efficiencies. During the quarter, we recorded an one-time charge to correct an immaterial error related to foreign indirect taxes in prior years, $4.1 million of which is included in cost of goods sold in the first quarter results.

The first-quarter cost of goods also reflects an incremental $2.3 million of amortization expense related to the QuantaLife acquisition. In addition, during the quarter we acquired one of our key raw material suppliers for our diagnostics group, which resulted in non-cash charges of $835,000. Thus total purchase accounting and amortization expense recorded in cost of goods sold related to acquisitions was $6.9 million, which compares to $3.6 million in the first quarter of last year.

SG&A expenses for the first quarter was $171.3 million or 35.2% of sales compared to $167.8 million or 34.6% of sales last year, and down approximately $3.6 million from the fourth quarter. As expected, absolute spending is up year-over-year, primarily related to increased personnel and ERP project related expenses. The current quarter SG&A expense also includes $3.7 million for amortization of intangibles related to prior acquisitions.

With sales essentially flat with last year, research and development expense in Q1 was higher as a percentage of sales at 10.9% of $52.9 million, which compares to $42.7 million spent in the first quarter of last year. The sequential increase in R&D spend is primarily reflective of the inclusion of QuantaLife, as well as the development of new instruments for the blood typing, diabetes monitoring, and blood virus testing market.

Our target R&D spending remains in the 9% to 10% of sales range, as we continue to invest in new products and technology.

The operating margin for the first quarter was 11.2%, and is essentially in-line with the full year outlook we provided on our last call. The one-time correction of the prior period indirect taxes negatively impacted our consolidated gross margin by approximately 80 basis points. Additionally, and as expected, QuantaLife lowered our operating income by

approximately $7.7 million.

During the quarter, interest and other income was a net expense of $8.2 million compared to $18.9 million of expense in Q1 of last year. The decrease in expense versus last year is largely related to lower interest expense and foreign exchange losses, as well as a one-time realized gain on the sale of an investment of approximately $4.5 million.

The effective tax rate used during the first quarter was higher than expected at 33%, primarily due to the nondeductibility of the foreign indirect tax related correction, as well as the expiration of the Federal R&D tax credit. As we stated on our last call, excluding any discrete items that may occur during the year, we expect the full year effective tax rate to be in the 30% to 32% range.

Net income attributable to Bio-Rad for the first quarter was $31 million, slightly lower than last year’s $33 million, and primarily due to the planned ERP project expense, and the inclusion of QuantaLife in our consolidated results. Diluted earnings per share for the quarter were $1.09.

Life science reported sales increased slightly to $154.8 million. On a currency neutral basis, sales grew 0.7% compared to last year. As I mentioned earlier, sales of QuantaLife products are $1.7 million for the quarter, and the demand pipeline looks strong for the remainder of the year. Sales of life science products in Japan and Asia Pacific continued to show good growth during the quarter, while sales in the US and Europe struggled somewhat versus the year ago period.

We continue to have good year-over-year growth in our electrophoresis and imaging product line, as well as many of our consumable product lines. Overall segment profit for life science decreased versus last year, primarily driven by the inclusion of QuantaLife. Excluding the acquisition, segment profit increased more than 20%.

Sales of clinical diagnostic products were essentially flat at $327.2 million compared to last year. On a currency neutral basis year-over-year grew 1.6% for the diagnostics group. As I mentioned earlier, the first quarter of last year included approximately $8 million of sales of IH1000 automated blood typing instruments for the Japanese Red Cross. Excluding this sale to the JRC, our diagnostics group grew 4% on a currency neutral basis when compared to last year.

During the quarter, we experienced strong performance in our microbiology, quality control, and diabetes product divisions. On our geographic basis, diagnostic sales in the Asia-Pacific and the Americas were especially strong in Q1, partially offset by a decline in Europe. And finally clinical diagnostics segment profit remained strong at more than $45 million.

Moving to the balance sheet, as of March 31, total cash and short-term investments were $807 million. Decrease in cash balances versus year-end reflects cash used typically associated with our first quarter. Despite this spending, net cash generated from operations during the quarter was $35.3 million, compared to $19.8 million in the year ago period, and primarily reflective of a decrease in interest paid.

Net capital expenditures for the quarter were in line with our expectations at $34.7 million. Our full-year expectation for Capex remains in the $130 million to $140 million range, as we continue to invest in ERP, e-commerce and facilities. And finally, depreciation and amortization for the quarter was $31.1 million.

Despite this somewhat slow start to the year, our outlook for 2012 remains relatively unchanged from the guidance provided in February that is for top line currency neutral organic growth to be in the 3.5% to 4.5% range. While we remain very cautious about prospects for Europe in the short term, we believe that our pipeline of new products should contribute to the top line as we move through the year.

Also unchanged from our prior guidance, we continue to anticipate full year gross margins to be around 56%, and operating margins to be in the 11% to 12% range for the full year. As we have said before, this expected decline from prior years is driven primarily by the building of the Digital PCR business, and the increased spending for our ERP project.

And now we are happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Jon Wood with Jefferies. Please proceed.

Brandon Couillard – Jefferies

Hi, good afternoon. This is actually Brandon Couillard in for John.

Christine Tsingos

Hi Brandon.

Brandon Couillard – Jefferies

Christine, on the tax reversal, can you just walk me through the mechanics and explain why that I guess manifests itself in the COGS line as that of below the line?

Christine Tsingos

Sure. So, this isn’t an income tax. This is more of a transaction tax, similar to a VAT kind of thing, which would normally occur in the cost of goods line, and so that is where we booked it for the quarter. And this is cumulative over a five-year period, but of course what it is covering [ph] we are going to take it all through this quarter.

Brandon Couillard – Jefferies

All right. You said that was $4.1 million in the COGS line?

Christine Tsingos

$4.1 million on the COGS line.

Brandon Couillard – Jefferies

Okay. Could you speak to some of the weakness I guess you saw in the clinical diagnostics business in Europe, and how would you characterize the pricing or competitive landscape in that market?

John Goetz

Yes, this is John Goetz, I will take that. We see a fairly soft market in Europe across most of our product lines, particularly in the area of blood typing and blood virus. There are some upsides there in quality control, which is good for us, as well as diabetes, but those first two product lines have been mainly impacted.

Brandon Couillard – Jefferies

Thanks, and I think one of your competitors in the blood typing space actually had what looked like a pretty soft first quarter experience, could you give us an update on your traction that you may be seeing in the US with some of the Biotest products?

John Goetz

We continue to bring products to the US market on the Biotest product line, and we are making good inroads with the instruments that we call the Tango. We feel still pretty optimistic and that is one of our faster growing product lines within the United States. So I am pretty happy with that.

Brandon Couillard – Jefferies

Thanks, and then Christine you still feel comfortable with about $20 million of QuantaLife revenue contribution for the year, understanding that it will be skewed more towards the second half, but any update on the full year view?

Christine Tsingos

Sure. So I think we have said all along that we expect it to ramp during the year, but Brad is probably in a better position to comment on the pipeline than I am.

Brad Crutchfield

Yes. This is Brad. Our pipeline and the initial customer acceptance strictly leads us to believe to still support that forecast. There is just the natural sales cycle, which is sort of 6 to 9 months, and we are working through that.

Brandon Couillard – Jefferies

Thank you.

Operator

(Operator instructions) And the next question comes from the line of Jeffrey Matthews with Ram Partners. Please proceed.

Jeffrey Matthews – Ram Partners

Hi, can you hear me?

Norman Schwartz

Yes, sure.

Christine Tsingos

Hi Jeff.

Jeffrey Matthews – Ram Partners

Thanks very much. First, Norman, condolences.

Norman Schwartz

Thanks.

Jeffrey Matthews – Ram Partners

It was a privilege to have met your father and have the opportunity to speak with him over the last decade or so.

Norman Schwartz

I appreciate it.

Jeffrey Matthews – Ram Partners

I like -- first, the Digital PCR sales, where are they going customer wise, is it in customer base, or…

Brad Crutchfield

This is Brad. I will take that. Pretty much additional customer base, maybe skewed a little bit more towards the pharmaceutical companies, mainly because they probably have a shorter cycle in terms of budgeting. But we are seeing it pretty broadly and almost exclusively in the US and slightly in Europe as we rolled it out so far.

Jeffrey Matthews – Ram Partners

Okay, and then SG&A seemed a little lower than I might have expected given the slow patch in sales that Norman talked about in the press release plus the ERP, and I’m wondering if there was anything in there to know about, to be called out?

Christine Tsingos

Not anything that would lower it. Obviously, when currency lowers the top line a little bit, it does lower expenses a little bit, and so there was probably $2 million of FX impact on the expense line. But remember as we talked about the ERP, incremental spend this year; we had $25 million in Opex, or $15 million of Opex incremental and $25 million of Capex incremental. So that spending will roll out through the year.

Jeffrey Matthews – Ram Partners

Okay. All right. You mentioned Europe, I just kind of wonder if you could take us around a little bit on what you are seeing out there, the state of your customer base and how the year looks like it might shape up relative to where you thought it might 3 or 6 months ago?

Ron Hutton

I think we still feel about the same that we have that you know the US seems to be stabilized that Europe is still kind of a troubled area, and then the other markets, Asia-Pacific, Latin America, continue to grow. You know, sometimes that may be a little bit slower paced. You might imagine all these economies are connected somewhat, but that is kind of our view. I think it is the same as it has been.

Jeffrey Matthews – Ram Partners

All right, and then finally Norman, there was kind of a premature celebration in the market that maybe Bio-Rad would suddenly go on the auction block, and I think the prevailing view that was expressed in a Bloomberg article was that maybe you yourself might not be as committed to Bio-Rad as an independent company as your parents have been. I kind of think the company has done a pretty fine job building value for shareholders over the last 10 years without the help of investment bankers, but I will be interested in your views?

Norman Schwartz

Okay. So, you know, I haven’t had the time or the energy really to track down the ultimate source of these rumors. But I can only tell you that they are obviously misguided and these people are extremely misinformed. You know, we intend to continue.

Jeffrey Matthews – Ram Partners

Good. I appreciate that. Good luck. Thanks.

Christine Tsingos

Thanks Jeff.

Operator

And your next question comes from the line of Paul Knight with CLSA. Please proceed.

Paul Knight – CLSA

Hi, could you comment on where your academic growth was in North America in the quarter, and are you able to get -- what is your feel on where this year is rolling out on that side of the NIH academic budget.

Brad Crutchfield

This is Brad. I will take that. You know, it was slower in sort of a year-over-year comparison. But we still feel that it will be in the low single digit, like everything in the academic way the budgets roll out, typically it is stronger in the second and third quarter. So overall for the year about the same, but it did start a little slower than we would have expected.

Paul Knight – CLSA

And then Christine could you comment, your organic ex-the year ago comparison was what?

Christine Tsingos

Ex the tough compare and ex the acquisition was 2.7.

Paul Knight – CLSA

And are you giving any new color on where you think organic is going to fall out on FY12?

Christine Tsingos

Well, I think we’re still thinking in that kind of low single digit as we have talked about, when we laid out our expectation on the year end call, we talked about reported growth of 3.5 to 4.5, and with the addition of QuantaLife is about a point. So, organic growth would make that 2.5 to 3.5, and despite a bit of a slower start, I think we are still feeling those goals are achievable.

Paul Knight – CLSA

And when do you think the margin expansion or when is the pressure off of margins, meaning where are we in the post ERP era?

Christine Tsingos

Yes, that is a good question Paul. I think obviously this year we are anticipating the margins to be down, and it wouldn’t surprise me if they were down next year as well as we look at the ERP project, and where the bulk of the spending is, it is this year and next year where we have our most significant rollout. Expenses next year being a focus of the European market, where we have many, many systems that would need to be converted and brought into the single global ERP that we are building.

But I think we’re a couple of years away on the expense side from seeing margin expansion. Having said that, you know, we’re constantly looking at ways to improve our gross margins, and redesign our products to manufacture at lower costs and hopefully we will have little things here and there that will help offset some of that spending. But ultimately, it is an investment year for us.

Paul Knight – CLSA

Where do you think post-ERP operating margin should be?

Christine Tsingos

Well, I think higher than where we were before we started down this path of investment. It is obviously our goal, and that is mid-teens plus.

Paul Knight – CLSA

Yes. Okay. Thank you.

Christine Tsingos

On a GAAP basis.

Paul Knight – CLSA

Meaning higher than that 14.7 of a couple of years ago?

Christine Tsingos

Yes.

Paul Knight – CLSA

Okay. Thank you.

Operator

And at this time there are no further questions in queue.

Christine Tsingos

Okay, then. Operator, why don’t you just poll one more time, and if not then we will sign off.

Operator

(Operator instructions) And you do have a question from the line of Jeffrey Matthews of Ram Partners. Please proceed.

Jeffrey Matthews – Ram Partners

Sure, why not. On the acquisition side, Norman, with Europe in the condition that it is in, I wonder if you are seeing any interesting opportunities over there?

Norman Schwartz

You know, I wouldn’t say that there is anything different from what we have seen. There are things that are bubbling along, but I don’t think it is -- there has been a big change in opportunities that we’re seeing.

Jeffrey Matthews – Ram Partners

Your sense that…

Norman Schwartz

You know, as time goes on, I think it is a good point, as time goes on and things are, if they remain slow in Europe, there could be more opportunity.

Jeffrey Matthews – Ram Partners

What would you guess the odds are that sometime in the next five years you will make a large acquisition, not a tuck in, or product line extension, but a large one?

Norman Schwartz

I think there are opportunities to do that. And you know, as you know those opportunities are few and far between. But I don’t think it is unreasonable to expect that we might be able to do one of those.

Jeffrey Matthews – Ram Partners

All right, good. Well, I appreciate it, and again I appreciate the last 10 years, and I look forward to the next 10.

Norman Schwartz

Great. Thank you.

Operator

And at this time, there are no further questions in queue.

Christine Tsingos

Okay, great. Thank you so much everyone for joining us, and we look forward hopefully to seeing you soon. Bye-bye.

Operator

And ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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