Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q2 2012 Earnings Conference Call

August 07, 2012, 17:00 p.m. ET

Executives

Christine Tsingos - VP and CFO

Norman Schwartz - Chairman, President and CEO

Brad Crutchfield - VP and Group Manager, Life Science

John Goetz - VP and Group Manager, Clinical Diagnostics

Analysts

Dan Leonard - Leerink Swann

Brandon Couillard - Jefferies & Company

Jeffrey Matthews - Ram Partners

Bryan Kipp - CLSA

Operator

Good day, ladies and gentlemen and welcome to the Quarter Two 2012 Bio-Rad Laboratories Incorporated Earnings Conference Call. My name is Ben and I will be your operator for today. At this time, all the participants are in listen-only mode. We will conduct the question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder this call is being recorded for replay purposes.

I’d now like to hand the call over to Ms. Christine Tsingos, Bio-Rad Laboratories Chief Financial Officer. Please proceed, ma’am.

Christine Tsingos

Thank you. Good afternoon everyone and thank you for joining us. Before we begin the call today, I’d 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.

Today we are pleased to report quarterly net sales of $510.4 million a decrease of just over 2% on a reported basis versus the same period last year sales of 521.7 million. The strengthening of the dollar negatively impacted quarterly sales by more than $27 million. On a currency neutral basis year-over-year sales grew 3%.

During the quarter, we had good growth across many of our key diagnostic and life science markets, including $2.3 million of sales contributed by our new digital PCR products. Excluding currency and the addition of QuantaLife, organic sales growth was 2.6%. Overall, the quarterly top line growth was significantly impacted by the continued challenges in Europe, where sales declined year-over-year for both segments of our business.

The reported gross margins for the second quarter was a bit better than expected at 56.4% and is reflective of a favorable product mix as well as increased manufacturing efficiencies, and despite an incremental $2.2 million of amortization expense related to the recent QuantaLife acquisition. For the quarter, the total non-cash purchase accounting expense recorded in cost of goods sold related to acquisitions was $6.7 million, which compares to 3.8 million in the second quarter of last year.

SG&A expenses for the quarter were $162.3 million or 31.8% of sales, which compares to 33.9% in the year ago period. The current quarter SG&A includes two significant one-time items that have the effect of lowering the reported expense and margin. The first item relates to the purchase consideration for QuantaLife. You may recall that a portion of the consideration was in the form of an earn-out that is tied to sales goals. We are required to review the valuation of the purchase consideration for the earn-out every quarter. And with sales running behind the stated goals, we reduced the value by $8.1 million which is booked to SG&A.

The second one-time item that has benefited our margin in the second quarter was a reversal of approximately $5 million of bad debt reserves. During the quarter, Spain paid down the vast majority of its overdue receivables allowing us to recapture these reserves. And finally also recorded in SG&A is $3.1 million for amortization of intangibles related to acquisitions.

Research and development expense in Q2 was 10.3% of sales or $52.3 million compared to 48.2 million last year. The year-over-year increase in R&D spend is primarily related to the addition of QuantaLife, as well as our investment in several new technologies and instruments for the Clinical Diagnostics in research market. Going forward, we expect R&D spend to be in the 9 to 10% of sales range.

Excluding the one-time benefit associated with the QuantaLife purchase accounting and the reversal of the bad debt reserves, the operating margin would have been 11.8% for the second quarter and in line with our previously stated outlook, which included the incremental cost associated with our ERP project as well as the inclusion of the QuantaLife operations.

During the quarter, interest and other income was a net expense of $7.3 million compared to 10.4 million of expense in Q2 of last year. This decrease in expense versus last year is largely related to additional dividend income typically associated with our second quarter. The effective tax rate used during the second quarter was better than expected at 26.4%, primarily due to the reduction in the valuation of the QuantaLife contingent consideration, which is not considered income for tax purposes. Excluding any discrete items that may occur we anticipate the full-year tax rate to be in the 30 to 31% range.

Net income attributable to Bio-Rad for the second quarter was $48.3 million and diluted earnings per share for the quarter were $1.69. Excluding the one-time benefit associated with the QuantaLife purchase consideration adjustment and the reversal of the bad debt reserves, we estimate that diluted earnings per share for the quarter were approximately $1.26.

Life Science reported sales for the second quarter declined year-over-year to $162.4 million as compared to 169.9 million last year. On a currency neutral basis, sales were down just under 1%. As I mentioned earlier, sales of QuantaLife products were 2.3 million for the quarter. The decline in our core Life Science business reflects the continued sluggishness in the European market as well as the tough comparison to the second quarter of 2011 especially in North America where Life Science posted 10% top line growth in the year ago period.

Despite these lower than anticipated sales results, our unit growth and market share remained strong. Additionally, the global pipeline for our new digital PCR product is sizable and seems to indicate an acceleration of growth over the next several quarters.

Our Clinical Diagnostics segment posted another solid quarter with sales of $344 million which is down slightly on a reported basis when compared to last year. However, on a currency neutral basis, year-over-year sales for the Diagnostics group grew 4.9%, this growth was led by good performance across many product lines most notably diabetes monitoring and quality control products.

Sales to Japan and Eastern European emerging markets were especially strong during the quarter partially offset by a decline in Europe. Diagnostics margins remained solid for the quarter with segment profits for the group increasing to $55 million partially aided by the reversal of bad debt reserves in Spain.

Moving to the balance sheet as of June 30th, total cash and short-term investments were $835 million. Cash from operations for the quarter was $76.6 million down from last year as a result of the lower sales number and remembering that in Q2 of 2011 cash flow reflected a sizeable tax refund. EBITDA remained strong at more than $110 million or 21% of sales.

Net capital expenditures for the quarter were $40.9 million which is an increase both sequentially and year-over-year. This increase relates largely to the investment in our ERP project as well as growth in our reagent rental instrument base. Our full-year expectation for CapEx remains in the 130 to $140 million range.

And finally, depreciation and amortization for the quarter increased slightly to $31.7 million. Despite a somewhat slower than expected start to the year, our outlook for 2012 remains relatively unchanged from the guidance we provided in February. Our beginning of the year estimate for 3.5 to 4.5% currency neutral top line growth is still within sight, albeit more likely at the bottom end of that range given the continued challenges in Europe our largest market. 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.

As we have said before, the expected decline in operating profit versus prior years is driven primarily by two key investments, the building of the digital PCR business and our global ERP project.

And now we are happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Christine, your first question comes from the line of Dan Leonard from Leerink Swann. Your line is live, please go ahead.

Dan Leonard - Leerink Swann

Appreciate the geographic commentary on the Life Science business certainly consistent what we are hearing from other folks. I was wondering if you could drill down into some product commentary, specifically, I'm curious what the trends look like in the end of point PCR business. That is something that's been a drag on one of your competitors and wondering if there is some more drag on your business and when that might subside?

Brad Crutchfield

This is Brad. I’ll answer that. Dan, the issue really and I think it was alluded to a little bit. Our market share is quite strong, but what we’re seeing is a shift to lower price models and obviously, that puts pressure on the top line. So, yes, we were fortunate that we had responded with good designs in these ranges, but certainly it's impacting the top line.

Dan Leonard - Leerink Swann

Then my follow-up, you recently signed an agreement with Luminex to distribute another one of their products and extend your existing agreement. Could you help me frame that, is that something that would move the needle for you guys on the organic growth rate in your business?

Brad Crutchfield

I think the thing there is that it is the (inaudible) product, I think it's the product that's been on the market through other Luminex partners. We took that on and just launched it in the last few weeks really. As far as moving the needle on the overall business, I wouldn't probably say that, but I do see it as being an important part of placements and our ability to put a very sizeable menu that we have for this product. So, I think its part of our overall multiplex immunoassay strategy is solid, but I don't think it's being something significant enough to move the needle significantly for the Life Science business.

Dan Leonard - Leerink Swann

And then my final question, just a clarification on guidance. Christine, the communication of 11 to 12% EBIT margin for the full-year, does that exclude the one-time benefits we talked about in the second quarter?

Christine Tsingos

Really that's hard to answer Dan, because I want to say no. And the reason is that every quarter we’re going to need to review the contingent consideration on the QuantaLife’s valuation and certainly if sales start to ramp rapidly that could go the other way, and it could end up being an expense that we would add rather than a reduction in expense. And as we look to the second half of the year, if sales continue to ramp so will our investment in both of this new digital PCR business as well as our ERP project and some other important projects that we have going on and that could temper the margins. So overall, I think we’re going to stick to the 11 to 12%.

Operator

The next question comes from the line of Jon Wood from Jefferies. Please proceed.

Brandon Couillard - Jefferies & Company

This is Brandon Couillard in for Jon. Christine or if Norman is there, could you give us just a general sense of what you saw in the quarter by end market between pharma, biotech, academic and government in your commercial end markets?

Norman Schwartz

I think that pharma biotech was probably a little bit stronger in the second quarter than the traditional academic market.

Brandon Couillard - Jefferies & Company

And if John Goetz is there could you comment on any update on recent trends in the Clinical Diagnostics business out of Europe, whether you’ve observed any change in the pricing environment or the competitive landscape there?

John Goetz

No, there is really not too much of a change, it’s been upbeat in the doldrums here for a while. If anything customers are shying away from making commitments to capital equipment that's affecting us a bit. Other than that we still have and see pretty steady stream of testing going on in laboratories throughout Europe and we are trying to get our share of that.

Christine Tsingos

I think couple of the trends that we’ve talked about, we’ve talked about the pricing pressure that are going on and what’s going on with some of the tender business and in terms of those tenders become longer term and more competitive on a price basis and now it's true in Q2 and I think it seem to be true for the remainder of this year borrowing any significant turnaround.

Brandon Couillard - Jefferies & Company

Christine the core margin performance still seems pretty good in spite of what I’d perceive is stiff FX related headwinds. Could you quantify the impact of currency on either the gross margins or EPS in the quarter?

Christine Tsingos

So, I think you're right, the core gross margins are holding up pretty well and I think the capacity utilization, the product mix, all of that is in our favor. From a currency standpoint, currency doesn't have as much impact on our gross margin line as it does so on our operating margin line because many of the cost of goods are pretty well balanced with where the sales are and so it's hard for me to get to a currency neutral gross margin, but what we do analyze seems to be minimal effect.

Brandon Couillard - Jefferies & Company

And then I guess Norman, any chance you could comment on how you perceive the M&A pipeline right now and whether there is an appetite for incremental activity on the acquisition front in the back half of the year?

Norman Schwartz

There is always something going on. We have a couple of things that we are looking at right now. As usual you never know whether they are going to and how they are going to proceed, but there is good activity.

Operator

The next question comes from the line of Jeffrey Matthews from Ram Partners. Please proceed.

Jeffrey Matthews - Ram Partners

In the press release you highlighted or at least you called out the BioPlex system sales, Boeing diagnostics. Was there anything of note there, I recall last quarter if you had been a little bit (inaudible)?

Christine Tsingos

Well, as you know we stopped our practice of giving out units on a quarterly basis, but certainly the placement continue to grow worldwide and the install-base is growing. And the average kind of revenue per instrument, annual revenue per instrument is remaining in that $200,000 range, so we are very pleased about that. More importantly, the profitability of that business unit continues to improve quarter-to-quarter as we are able to continue to lower cost of goods, as well as the associated selling cost that go with the instrument. Now, we are continuing to develop panels and hoping to get those through the FDA to help drive future placements, but that's a longer term process.

Jeffrey Matthews - Ram Partners

And then on QuantaLife accounting, does that reflect anything fundamentally about the business?

Christine Tsingos

No. So, you are talking about the adjustment?

Jeffrey Matthews - Ram Partners

Yes.

Christine Tsingos

I didn't know. I mean I'm not sure how to answer that, Jeff.

Jeffrey Matthews - Ram Partners

I wasn’t sure how to ask it.

Christine Tsingos

Yes. I think from a business standpoint, and Brad is a better person to answer this than I’m, obviously he can cut me off here, but I think from a business standpoint, we still feel very, very good about the business. The sales ramp is a little slower than originally anticipated and part of that is it's a new technology, part of it is the budget dollars required and so it's a longer sales cycle, but…

Jeffrey Matthews - Ram Partners

It's not something fundamentally you are learning about the actual business itself?

Brad Crutchfield

No. This is Brad. I'll just take it; I think Christine covered it well. We see a commercial success of this product, we see an interest, it's certainly taking a little bit longer given the financial situation or the budget situation but with more of a lag in sales, but overall fundamentally, these products are being accepted, papers are being published and there is things that people are doing what they could never do before. So, we are quite happy.

Christine Tsingos

Yes. As far as the accounting goes, Jeff, it's kind of a complicated valuation exercise. The earn-out is you tied a specific goal over eight individual quarters, but each time we have to look at the entire earn-out, or the entire life of the earn-out, not just that specific quarter and kind of do the valuation. So, that's why I say depending on the ramp of the sales the impact to the P&L in any given quarter could go either way.

Jeffrey Matthews - Ram Partners

Sure. I wasn't quite so concerned about the impact on the P&L more as the reflection on the fundamentals itself, which you [alluded]. You also called out Asia strengths in the press release, so I'm wondering what's new there?

Brad Crutchfield

I think that Asia in general continues to be good, but I think that Japan has after a number of years of being fairly flat has started to come alive a little more.

Jeffrey Matthews - Ram Partners

Do you think that’s a function of just government flooding spending following the earthquake or something else?

Brad Crutchfield

I’m not sure if its earthquake related, so there's I guess we had a little bit of an earthquake affect last year for a while. I think it’s just general spending and it’s also I think in our Diagnostics business we’re getting some traction with some of the products there.

Jeffrey Matthews - Ram Partners

And my final question, I was curious about the ERP rollout and if there is anything new or different that you are seeing. It sounds like you are not encountering anything unexpected at least in terms of is waiting the P&L. I wonder if there was anything in terms of rates (inaudible) affecting the businesses at this stage.

Christine Tsingos

So, I think that the spending for the entire program is pretty much in line with what we had budgeted and what we had expected both on the expense side and the capital side. Where we are in the overall project is we are finalizing our first deployment, meaning we’re kind of locking and loading the design and we are starting to do our integrated testing and as you may recall our first deployment, which is scheduled for early next year is a portion of our U.S. business. We wanted to keep the first deployment kind of close to home, so that we could really test this concept and make sure it’s going to perform well, and then we will start rolling that out on a more global basis. So, knock on wood here so far so good and we are proceeding down the path and have our best people working on it.

Operator

The next question comes from the line of Bryan Kipp from CLSA. Your line is live, please proceed.

Bryan Kipp - CLSA

Quick questions as a follow-up to Japan. Most of your competitors said that in 2Q, they saw some growth reductions in Japan. Did you guys see that tail up towards the end of the quarter, was that pretty consistent throughout and you expect this to continue in the second half possibly because of the strength of the yen?

Christine Tsingos

Bryan, you broke up a little bit. But I think your question is about what was the trend throughout the quarter in Japan if it was kind of good growth throughout the quarter or more of an uptick at the end?

Bryan Kipp - CLSA

Yes. Did it start out strong or was it pretty consistent throughout or did it pick up towards the end and if you guys expect that to continue in the second half, and if you have any insight maybe is it because of the strength of the yen or do you think there is another reason?

Christine Tsingos

Well, I think that the business for us was fairly strong throughout the entire quarter and I think some of that is a bit specific to us. For example, we’ve talked about in the past our IH-1000, our new blood typing high throughput instrument has done very well in Japan and continue to do well both with new instrument placements as well as the reagent stream that goes with it. And as Norman talked about we are seeing some very good strength in Japan in our Life Science markets, and I don't know Brad if you have anything to add to that.

Brad Crutchfield

I think in general there has been a resurgence of Japanese government investment in their basic research and we’ve been able to enjoy that certainly within the product areas that we are strong in, certainly in the protein expression and gene expression validation.

Operator

Unfortunately, there are no further questions in the queue. (Operator Instructions) We still have no further questions in the queue at this time.

Christine Tsingos

Ben, thank you. Thank you very much. Thank you everyone for joining us today and hopefully we will be seeing you soon. Bye.

Operator

Thank you very much, Christine. Ladies and gentlemen, that concludes your conference call for today. Thank you for your participation. You may now disconnect. Good day.

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!

Source: Bio-Rad Laboratories' CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts