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Executives

Tina Cuccia - Corporate Communications Manager

Norman Schwartz - President and CEO

John Goetz - VP, Group Manager - Clinical Diagnostics Group

Jim Stark - Corporate Controller

Brad Crutchfield - VP, Group Manager - Life Science Group

Analysts

Jon Wood - Banc of America Securities

Vito Menza - Sandler Capital Management

Charles Haas - Private

Chris Arndt - Select Equity Group

Jeff Matthews - Ram Partners

Bio-Rad Laboratories Inc. (BIO) Q2 2008 Earnings Call August 5, 2008 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen and welcome to the Bio-Rad Laboratories' second quarter 2008 financial results conference call. (Operator Instructions). As a reminder, this conference is being record for replay purposes.

I would now like to turn the presentation over to Ms. Tina Cuccia, Corporate Communications Manager. Please proceed.

Tina Cuccia

Thank you very much. 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.

That having been said, I would like to turn the call over to Mr. Norman Schwartz, President and Chief Executive Officer.

Norman Schwartz

Good afternoon and thank you for joining us. We actually have a number of people out on vacation, or otherwise engaged this afternoon. So we have a thinner crowd than normal, and I have been elected, actually, to sit in for Christine.

So today we are pleased to report the quarterly net sales were $452.4 million, an increase over 33% versus the same period last year sales of $339.1 million. The $113 million increase includes a little over $65 million contributed by the DiaMed acquisition as well approximately $27 million related to foreign currency.

On a currency-neutral basis, year-over-year growth for the quarter was 25.4%. Currency-neutral organic growth, excluding the DiaMed acquisition for the second quarter was 6.6%. During the quarter, we had good growth across many of our key markets, including most of our diagnostic product lines and in life science from our protein and gene expression product line.

Gross margins for the quarter were 54.9%, compared to 53.7% last quarter and 56.0% in the year ago period. Results for the current quarter include an improvement in life science gross margins from really good overhead control and better sales mix. While in diagnostics, margins have been impacted by the purchase accounting associated with the DiaMed acquisition, and by lower royalty revenue in connection with some of our HIV patents.

SG&A expense for the second quarter was $146 .6 million, or 32.4% of sales, compared to $119 .6 million and 35.3% of sales last year. This result is a combination of strong sales growth coupled with cautious spending.

Research and development expense for the quarter was inline with our expectations at $42.1 million or 9.3% of sales. While slightly lower than our historical average, and we anticipate remaining in this range for the remainder of the year. The growth in R&D expense for both life science and diagnostic segments was inline with their respective growth rates.

During the quarter interest and other income was a net expense of $3.8 million, compared to a net zero in the second quarter of last year. Remember that last year; we were carrying higher cash balances on which we were realizing about $4 million a quarter returns prior to the acquisition of DiaMed.

We have also integrated DiaMed into our overall hedging program, tempering foreign currency swings. The effective tax rate used during the second quarter was lower than expected at 19%, compared to about 28% last year.

During the quarter, certain outstanding tax years have been closed and other issues resolved and both of these allowed us to decrease our tax liabilities and consequently our tax expense. We now expect our full year effective tax rate to be in the range of 24% to 25%.

Net income for the quarter was $43.4 million, a 69% improvement from the second quarter of 2007. Diluted earnings per share are at $1.58 and reflect both the positive sales growth and moderation in spending. Now please recall that all of the quarters include the impact of stock-based compensation, which for the current quarter was about $1.5 million.

Now for certain segment information, life science reported sales for the quarter of $161 .6 million, or 10.7% growth over the prior year reported sales of $146 million. On a currency-neutral basis, sales increase 3.2%, but I will remind you that we are still in somewhat of downdraft with BSE. Without BSE, life science growth was currency-neutral 7.8%.

In life science, we continue to do well in many areas, particularly in process chromatography, protein identification and expression. I think the release earlier this year of a series of gene amplification instruments also contributed to the second quarter growth.

In terms of the geographic situation, the regions contributing the most to sales growth rate were North America, Asia and Latin America. Overall, the life science segment profit was $9.3 million, up significantly from the prior year and similar to the first quarter of 2008.

I think this improve in profitability is a result of good sales growth certainly in our core product line, manufacturing and manufacturing efficiencies that we have implemented over the last 12 to 18 months.

In the clinical diagnostic group, sales for the quarter were $287.4 million, growth rate of 51.4%. A little over $63 million in sales came from the inclusion of DiaMed. If you exclude DiaMed, diagnostic sales increased nearly 18%, or 9.4% on a currency-neutral basis.

Again, in the current quarter most diagnostic product lines contributed to these results. Regionally, growth was most notable in North America and Europe. Segment profit for the quarter in clinical diagnostics was $43.1 million, up significantly from the prior year and appreciably higher than Q1 2008.

Now for a quick review of the balance sheet, as of June 30th, total cash and short-term investments were $227.2 million. Net cash generated from operations during the quarter was approximately $67 million reflecting a higher profitability and higher cash collections.

Net capital expenditures for the quarter were a little over $20 million. Our full year expectation for CapEx is in the $70 million to $80 million range this year. Depreciation and amortization for the quarter relatively unchanged from the first quarter at $25.6 million.

Our outlook for 2008 remains largely unchanged from the guidance we provided in May. That is for top line currency-neutral organic growth to be in the mid to high single-digits and closer to the high-teens when we include the addition of DiaMed.

I will say that given the solid performance to-date that we are optimistic about our full year results. Gross margins are anticipated to be in the 54% to 55% range and SG&A margins are anticipated to be flat-to-down slightly compared to 2007.

Remember that we do not provide pro forma reporting, so these estimates are absorbing the impact of $25 million to $30 million in DiaMed amortization and integration expenses. Finally as I mentioned earlier, we anticipate the full year tax rate to be between 24% and 25%.

So with that, we will be happy to take your questions. Grace Anne, if you want to open up the line.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from line of Jon Wood of Banc of America Securities.

Jon Wood - Banc of America Securities

Hey, Norman.

Norman Schwartz

Hi, Jon.

Jon Wood - Banc of America Securities

How are you?

Norman Schwartz

Good.

Jon Wood - Banc of America Securities

Just a couple of knit-picky questions before general commentary. Was there an inventory step-up charge in the quarter?

Norman Schwartz

Inventories did build in the current quarter, yes. It was not a step-up related to purchasing accounting.

Jon Wood - Banc of America Securities

Okay. So there was $1 million in the first quarter, but that did not recur in the second quarter?

Norman Schwartz

That $1 million charge related to purchase accounting will continue for several quarters and that was in there. First I thought you might have been speaking of the balance sheet.

Jon Wood - Banc of America Securities

No, no. So there was a $1 million inventory step-up charge in the cost of goods sold, correct?

Norman Schwartz

Correct.

Jon Wood - Banc of America Securities

Then on the other expense line, can you give us what interest income was? I mean it looks like there was a large gain. Was that a foreign exchange transaction gain in the quarter?

Norman Schwartz

No. We have a couple of investments that declared dividends in the second quarter and then earn-out that we got. It is similar to the second quarter of the prior year and these are annual events, not quarterly events. So this happened for the one-time this year.

Jon Wood - Banc of America Securities

Okay. Can you give us the net impact there, approximately?

Norman Schwartz

Approximately $4 million.

Jon Wood - Banc of America Securities

Okay. Then, what was the core Bio-Rad gross margin? You gave that out last quarter at 56.3. I might have missed it.

Norman Schwartz

This is the gross margin for the first quarter.

Jon Wood - Banc of America Securities

Yes, just last quarter you provided the core Bio-Rad gross margin, which excluded DiaMed. Do you have that in front of you?

Norman Schwartz

Let's see, it looks like a little over 56%.

Jon Wood - Banc of America Securities

Okay. Then, Norman, can you give us just an update on Bio-Plex, I mean the placement activity in the quarter, your progress on menu I do not know if John is there, but how are you tracking on the new test approvals for 2008?

Norman Schwartz

John is actually on the line. John, are you there?

John Goetz

Yes, yes, I am. Yes Jon, I can give you a little bit of an update there. Our placements throughout '08 are pretty much on track with our placements from '07. The tests that we have in FDA now are two and we expect to have clearance of those later, I think, this quarter. So those were planned to come out about that time in '08. So we are pretty much tracking according to where we thought we would be at the beginning of the year.

Jon Wood - Banc of America Securities

Okay. I mean you had 10 placements in the first quarter. I am not sure what do you mean by on-track with '07'

John Goetz

Yes, Jon, I do not have those numbers right in front of me. In terms of how many placements we have made so far this year.

Jon Wood - Banc of America Securities

Okay. Are the placements you are seeing, is that primarily going to reference labs and large hospitals? Have you seen interest in the mid to smaller volume hospitals yet or are you still targeting primarily the high-end?

Norman Schwartz

We are still targeting the high-end right now. We still have quite a bit of interest there.

Jon Wood - Banc of America Securities

Okay. Thank you. As a company, Norman, the direct material input inflation, has that crimped you at all this year, or have you been successful in offsetting that with price increases?

Norman Schwartz

There are some particular areas that we have seen some spikes in general with the higher transportation costs and things that have a petroleum-based. We have seen an updraft in costs. We have put through some selective price increases to offset that, and we feel we are in pretty good shape for the moment. However, this is going to be a moving target for us.

Jon Wood - Banc of America Securities

Okay. I mean if you had to estimate, are you net positive for this year, or more neutral, net pricing increase less inflation?

Norman Schwartz

I do not really have a good number on that. I would hope that we are net neutral.

Jon Wood - Banc of America Securities

Okay. Thanks a lot.

Norman Schwartz

It is obviously something we are going to continue to watch very closely.

Operator

Your next question comes from the line of Vito Menza of Sandler Capital Management.

Vito Menza - Sandler Capital Management

Hey, Norm, how is it going?

Norman Schwartz

Good.

Vito Menza - Sandler Capital Management

Nice quarter you put up.

Norman Schwartz

Thank you.

Vito Menza - Sandler Capital Management

A couple of knit-picky questions for you. You disclosed there was $1 million of purchase accounting in the COGS line. I am just wondering if you can help with the intangible amortization. I think there was $3.5 million in the gross profit line in Q1 and I think there was $2.3 million in the SG&A line, just wondering if those numbers are the same for Q2?

Jim Stark

Yes. This is Jim Stark, I am the Corporate Controller for Bio-Rad. There is about $3.5 million in the cost of goods sold line, $1 million related to this stepped up value in inventory and about $2.5 million rounded for amortization of intangibles.

Vito Menza - Sandler Capital Management

Okay, Great. In the SG&A line, is it about $2.5 million for intangible amortization?

Jim Stark

Yes probably, just to shade lower, but in that same area.

Vito Menza - Sandler Capital Management

Great. So all in all, there is about $6 million of non-cash intangible amortization/inventory step-up expenses in the quarter related to DiaMed?

Jim Stark

Yes, that is a good estimate.

Vito Menza - Sandler Capital Management

The estimate is maybe $10 million for the full-year when it comes to integration expenses? Is that correct?

Jim Stark

I would go lower than that, more like $6 million.

Vito Menza - Sandler Capital Management

Great. Did you get the placements the Bio-Plex's where they stood at quarter-end?

Jim Stark

No, we have got about 70 units installed.

Vito Menza - Sandler Capital Management

70 units installed. Great. Thank you. I appreciate it.

Operator

(Operator Instructions) Your next question comes from the line of Charles Haas, Private.

Charles Haas - Private

Hi, thanks for taking my questions. My first question is if you have selected your ERP system yet? I know you have been evaluating that for a while.

Norman Schwartz

No, we are still in the process of evaluating that.

Charles Haas - Private

When do you expect to have a decision made?

Norman Schwartz

I would hope sometime in the third quarter, we would be getting close on that.

Charles Haas - Private

Okay. My next question was regarding the AACC meeting I wonder if you could give us your assessment on the success that you think you had there, Norman, relative to past years, customer feedback, any color you could give us would be helpful.

Norman Schwartz

Yes. It seemed like a pretty good show, pretty good venue. My view was that may be the booth traffic was or the show traffic was maybe a little bit slower. However, John, if you are only the line you have got another perspective?

John Goetz

Yes. I was there for the entire event, and I felt that the traffic through our booth during this past show was exceptional. We had a very interesting promotion going on in the booth at the time. We had set up a laboratory right in the booth to test people's A1c value who were coming into the booth. That was quite an interesting draw. So people were actually able to come in and get a little card and with that card, that entitled them to get a blood test on the spot.

We were doing that test with our small in2it point-of-care device and before they were able to get their blood test they had of course visit several other sections of the booth. That really promoted I think quite a bit of interaction with those who did go through the booth.

Charles Haas - Private

Okay. How about translation to orders this year? Did you find that you had a similar close ratio to past years, or was this just more of a general fact-finding conference for your customers, or if you could characterize that relative to past years?

John Goetz

Well, these all become leads and then they have to be qualified, so there is really no connection as of this moment to traffic to closes and that will be something that we will be looking at and tracking over the course of the next several months as our sales representatives get these leads and then follow-up with them.

Charles Haas - Private

Okay. My last question is regarding the decision-making on purchases from hospitals; there has been lots of volatility in the hospital market with auction rate securities and the credit markets and things like that. I am wondering if you could characterize the status, if you give us some trends that you are seeing in the hospital market on capital purchases of your equipment.

Norman Schwartz

Really, I do not see any change in activity level or decision making from last year. It seems that most of our customers either are unaffected by that, or it does not influence their buying decisions. As you probably know, most of our placements are reagent rental, so capital purchase decision is not always necessarily in front of them.

Charles Haas - Private

Okay, so the sales process is not lengthening in your mind right now?

Norman Schwartz

I do not think so.

Charles Haas - Private

Okay. Thanks.

Operator

Your next question comes from the line of Juliana Tuxedo of Select Equity Group.

Chris Arndt - Select Equity Group

This is Chris Arndt instead of Juliana, in Select Equity Group. Norman, I have a quick question on operating margin in the quarter was particularly good, I thought and a sequential improvement from the first quarter. Was there any unusual licensing revenue that favorably benefited the operating margin or production in SG&A expense?

Norman Schwartz

No. I think it is just a combination of both good sales growth and expense control. I think just widens that margin.

Chris Arndt - Select Equity Group

Yes. Historically at least the last two years, the operating margins in the first half of the year have been higher than the second half of the year. Is there a seasonal pattern to that, or was that just coincidence in the last two years? In other words, just the second quarter margin, could we expect something similar to that if not may be, quite as high in the third quarter and fourth quarters?

Norman Schwartz

In the last few years, it has tended to some seasonality, and I think that is caused by an annual budgeting cycle and the operating groups get started at the beginning of the year and get the program started. The expenses accumulate in the third and fourth quarters, so the third and fourth quarters tend to be a little less profitable than the first half.

Chris Arndt - Select Equity Group

Okay. Would you expect the same seasonal pattern this year, the margin improvement relative to the second quarter a year ago was particularly strong this quarter? Should we at least expect that year-over-year in the third and fourth quarters of this year margins will continue to be up?

Norman Schwartz

We are hoping so.

Chris Arndt - Select Equity Group

Okay. Well, that is good, and congratulations on the strong results in the second quarter.

Norman Schwartz

Okay, thank you.

Operator

Your next question is a follow-up question from the line of Jon Wood of Banc of America Securities.

Jon Wood - Banc of America Securities

Hey, a couple more. You talked about capital equipment was down in life sciences, Norman. Can you give us a sense how big is the capital equipment portion of that business?

Norman Schwartz

Brad Crutchfield is here and maybe he can answer that. He runs Life Science.

Brad Crutchfield

Hey, Jon. This is Brad. It is really in terms of the business affected, it is probably less than 25% of our business that is impacted, but it is relatively big dollars, specifically around some of our Bio-Plex instruments, the life science version and our new protein interaction instrument which sells for near $0.25 million.

Jon Wood - Banc of America Securities

Okay, and then on the DiaMed purchasing out the remaining minority shareholders there, I think you said on your last call you were going to do that in 3Q. Just give us an update there when you conduct that tender as well as remind us of the outlay there?

Norman Schwartz

Yes, sometime in October is the due date for that and it is in the range of $60 million to $70 million.

Jon Wood - Banc of America Securities

Is that incremental, Norman? I know you did 17 in the first quarter, so $60 million to $70 million incremental?

Norman Schwartz

Yes.

Jon Wood - Banc of America Securities

Okay, okay very good. Thank you.

Operator

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

Jeff Matthews - Ram Partners

Hello.

Norman Schwartz

Hi, Jeff.

Jeff Matthews - Ram Partners

How you are doing?

Norman Schwartz

Good.

Jeff Matthews - Ram Partners

I wondered what the acquisition market is like for you these days. Private equity does not have access to much capital right now, but I wondered if the seller prices have come down at all.

Norman Schwartz

They do not seem to have come down very much and there does not seem to be a lot of interesting stuff floating around either. There are one or two mega deals but otherwise there is not a lot.

Jeff Matthews - Ram Partners

Okay.

Operator

You have no questions at this time. I will now turn the call back over to management for closing remarks.

Norman Schwartz

Okay. Well, we thank you all very much for joining us today and welcome you to tune in again next time. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect.

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Source: Bio-Rad Laboratories, Inc. Q2 2008 Earnings Call Transcript
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