Bio-Rad Laboratories Inc. Q1 2008 Earnings Call Transcript

| About: Bio-Rad Laboratories, (BIO)
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Bio-Rad Laboratories Inc. (NYSE:BIO) Q1 2008 Earnings Call May 6, 2008 5:00 PM ET

Executives

Ron Hutton - Treasurer

Christine Tsingos - VP and CFO

Bradford Crutchfield - VP GM - Life Science Group

Norman Schwartz - President, CEO, Director

John Goetz - Vice President, Group Manager - Clinical Diagnostics Group

Analysts

Jon Wood - Banc of America Securities

Weidong Huang - TimesSquare Capital Management

Richard Glass - Morgan Stanley

Jeff Matthews - Ram Partners

Operator

Good day ladies and gentlemen and welcome to the Bio-Rad Laboratory's first quarter 2008 financial results conference call. My name is [Jen] and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today's conference. (Operator Instructions) As a reminder this conference call is being recorded for replay purposes. I will now turn the presentation over to Mr. Ron Hutton, Treasurer. Please proceed sir.

Ron Hutton

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'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 $422.2 million an increase, an increase of 31% versus the same period last year sales of $322.5 million. This $100 million increase includes $62.7 million contributed by our newly acquired DiaMed organization, as well as approximately $22 million related to foreign currency. On a currency-neutral basis year-over-year revenues increased 24%.

Peeling the onion back a little further currency neutral organic growth for the first quarter was inline with guidance at 4.5%. During the quarter, we had good growth across many of our key markets including quality control, clinical systems, process chromatography and microbiology. The reported gross margin for the quarter was 53.7% compared to 50.8% last quarter and 55.6% in the year ago period. The first quarter reported gross margin reflects approximately $3.4 million of amortization plus an additional $1 million charge as required under purchase accounting. Gross margin for the base Bio-Rad business improved year-over-year to 56.2%. This improvement can be found in our life science segment where increased sales coupled with lower factory cost and improved capacity drove margins higher by 2.4 percentage point. SG&A expenses for the first quarter were $139.7 million or 33.1% of sales about equal to the year ago 33.4% of sales.

The current quarter SG&A expense include $2.3 million for amortization of intangible plus the incremental DiaMed operating expenses. The sequential improvement versus the fourth quarter is primarily related to a lower selling cost associated with the lower sales number. However, this sequential decline in spending is not unlike our historical pattern where projects and firing generally ramped throughout the year, making Q1 our most favorable margin quarter for the year. Research and development expense in Q1 was about 9% of sales or $37.5 million compared to $40 million in the fourth quarter and $32.8 million last year.

The year-over-year increase primarily reflects the inclusion of DiaMed in our consolidated result. During the quarter interest in other income was a net expense of $10.4 million compared to $1.4 million in Q1 of last year. A higher net expense compared to last year reflect nearly $5 million less interest income due to lower cash balances as well as $2.5 million of foreign exchange losses mainly related to DiaMed. Going forward, we expect currency swings to be tempered greatly as we incorporate DiaMed into our overall hedging program. The effective tax rate used during the first quarter was higher than expected at 27.5% which compares to 27.9% last year.

The current rate is higher than our 24% to 26% expectation due to discreet items during the quarter including new issued guidance and trends regarding R&D credit which necessitated a one time catch up. Excluding additional discreet items that may occur during the year, we continue to expect the full year rate to be in the 25% to 26% range. As you may remember, with the acquisition of DiaMed, we now have minority reporting requirements related to the remaining shares of DiaMed Holding which we will tender for later this year as well as a few DiaMed subsidiaries where we do not own 100% of the stock.

Net income for the first quarter was $26.5 million about flat with last year. Diluted earnings per share were $0.96. As we do not use pro forma reporting, please remember that our operating income includes the impact of FAS 123 stock compensation expense of $1.6 million. Before I move on to the segment information let me just take a brief moment to reiterate a couple of data points. As you can clearly see our sales increased about $100 million year-over-year and yet on a reported GAAP basis net income was essentially flat. The major drivers of that seeming mismatch are $6.7 million of non-cash acquisition related expenses, $5 million of left interest income and $2.5 million in one time currency losses. If we add that just the non-cash acquisition expense in the one time currency lot, net income would increase by nearly 23% compared to last year.

And now for certain segment information, life science reported sale grew 9.2% to $154.6 million. On a currency neutral basis, sales increased 2.3%. However currency neutral sales excluding our BSE business increased 4% year-over-year. We continue to have strong year-over-year growth in our protein related product line especially separation products as well as process chromatography products. Both Asia Pacific in the emerging markets produced solid double digit growth during the quarter. However, this growth was offset so much by a slowing in sales of our higher price capital equipment line especially in the US as well as continued softness in Japan.

Overall segment profit for life science was $9.7 million this past quarter compared to $5.5 million last year. The year-over-year increase in profitability is primarily related to the improved gross margin I mentioned earlier. Our clinical diagnostic segment posted another strong quarter with sales of $263.7 including DiaMed's $63 million which equates to a growth of 48% compared to last year excluding DiaMed diagnostic sales increased just over 13% or 6% on a currency neutral basis. These sales were led by strong performance across all of our product divisions most notably quality controls microbiology and clinical systems products.

Sales to the Asia-Pacific region and the US were especially strong during the quarter for both diabetes monitoring and autoimmune. Diagnostic growths in the operating margins were negatively impacted by the $6.7 million of non-cash amortization in purchase accounting cost. Despite this expense though, segment profit for the group increased more than 20%, to $32 million compared to last year.

Moving to the balance sheet, as of March 31st total cash and short-term investments were $177 million, a decrease in cash balances versus year end primarily reflects increase cash payments typically associated with our first quarter. This is even more clearly reflected in cash generated from operations. Net cash generated from operations during the quarter was a negative $2.2 million, compared to a negative $12.6 million in the year ago period as sales and cash received increased. However, the first quarter results represent a significant swing from the fourth quarter and as a direct result of more than $40 million paid for bonuses, commissions and annual royalties associated with our strong 2007 financial results. For the most part these are annual and one-time payments and thus are not a prediction of cash flow in future quarters.

Net capital expenditures for the quarter were $19 million, Given this early results, our full year expectation for CapEx to be in the $60 million $70 million range will likely be closer to high end of that range. And finally, depreciation and amortization for the quarter was relatively flat with the fourth quarter at $23.7 million.

Our outlook for 2008 remains unchanged from the guidance we provided in February. That is for top line currency neutral organic growth to be in the mid to high single digit and closer to the high teens when we include the additional DiaMed sales. Gross margin 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 on a GAAP basis.

In other words, these estimates include more than $20 million for the amortization intangibles related to the DiaMed transaction as well as another $5 million to $10 million in anticipated integration expenses. And finally, as I mentioned earlier, we anticipate the full year tax rate to be between 25% and 26%. And now we're happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Jon Wood with Banc of America Securities.

Jon Wood - Banc of America Securities

Hey, can you hear me?

Christine Tsingos

I can hear you.

Jon Wood - Banc of America Securities

Hi, Christine. Is Norman there?

Christine Tsingos

He is here.

Jon Wood - Banc of America Securities

Hey Norman.

Ron Hutton

Norman had a cold.

Jon Wood - Banc of America Securities

Well okay, I'll start with Christine. Can you just go over how much of the life science the business mix is actually capital equipment and not electrophoresis, the apparatus business but the high end capital equipment?

Christine Tsingos

Yeah, it's actually not a huge percent of our mix. Jon, as you know 70% of the sales are more recurring in nature either consumables or apparatus and then another chunk are the instruments that not really be these high tickets capital instrument. However, having said that we have a couple of new ones that have been doing well in the U.S. recently and we just saw a brief change during Q1. I will let Brad add some color as to how that may change over the course of the year.

Brad Crutchfield

This is Brad Crutchfield. As far as, it's about 30% of our business roughly which would be in the more capital instrument and subject to that kind of sales cycle and we just saw a fairly soft quarter. We don’t really see this as lost opportunities but more differed opportunities. Are fairly confident that that won't be something we see through the end of the year.

Jon Wood - Banc of America Securities

Brad, is that just the Life Science or you mean total Bio-Rad, on 30?

Brad Crutchfield

I am talking specifically total Life Science only.

Jon Wood - Banc of America Securities

Okay Life Science only. Okay and then its split in the press release, you kind of talked about academic plus biopharma. Is it any one particular customer group to single out there or is it just both was relatively weak?

Brad Crutchfield

I would say it was really across the board. Our biopharma, our for-profit customers, were fairly conservative in terms of when and putting off some purchasing and in general, we have seen a cycle over the last 2 or 3 years with the sort of traditionally government sponsored research. Our researchers being a little bit conservative in the first quarter and kind of holding back on their budget in purchases but again as we saw in the last two years that generally corrects itself throughout the year.

Jon Wood - Banc of America Securities

Okay and then the instruments I mean, you've talking about the BioPlex for the research use only. I mean can you name a couple of the instruments?

Brad Crutchfield

It would be in the area of protein expression like you said BioPlex but certainly impacts our real time amplification products which are really capital related and then as Christine alluded to our new Protein Interaction platform PROTEAN these are all fairly high ticket instruments and subject to that kind of sales cycle.

Jon Wood - Banc of America Securities

Okay. And its MJ research on the thermal cycler market.

Brad Crutchfield

It's actually primarily, well it's, -- we look at them as all one but yeah some of the product that came from MJ but also Bio-Rad has always been a leader in the area, a real time PCR. So at this point since we've launched all new products, it really harmonizes our complete line. And that certainly is helping us in our gross margin right now.

Jon Wood - Banc of America Securities

Okay, great. Can you update us on the BioPlex 2200 placements? I think you had around 50 at the end of the last year, anything to speak off there.

John Goetz

Yeah this is John Goetz. Yeah, we've got at this point now 60 placements around the world. Majority of those are in the US and they are contributing pretty nicely to a nice uptake on our auto immune testing area.

Jon Wood - Banc of America Securities

Great. And then Fujirebio, just looked like they bought a controls business, is that something to worry about maybe I don’t if I understand the dynamics perfectly but don’t they buy controls from Bio-Rad currently and I mean, do you see them getting into the controls business now as an OEM?

John Goetz

Well, we were aware of that. We think that this is more of a vertical integration move on their product. However, we are keeping our eye on it. A lot of our sales in Japan go through our direct sales force and through her local representatives there. So we are watching it. We are not bringing our hands over.

Jon Wood - Banc of America Securities

Okay. Has there been any change I guess this is for Brad, is there been a change in the competitive landscape in your Life Science business. I just noticed that Beckman had a massive quarter in their Life Science business, I am not so sure why. But, have you seen any change in the competitive dynamics in any of the key franchises there?

Brad Crutchfield

Not really, again, we have a fairly diverse product line capital through sort of mid range instrument apparatus and then reagents. I really haven't seen a lot, I think there is the dynamic of more content reagent business being driven through e-procurement platforms, but certainly not any real change in any of that. Our franchises are even the sort of competitive pressure, I mean certainly amplification thermal cyclers that area is a very competitive. There are lot of people in that space and very formidable competitors, but we've seem be to able to hold our own.

Jon Wood - Banc of America

Okay, thanks a lot.

Operator

Your next question is from Weidong Huang with TimesSquare Capital Management.

Weidong Huang - TimesSquare Capital Management

Hi, good afternoon. I think I missed the number you gave for the DiaMed sales. Could you also repeat that number and also may be comment on the organic growth rate of DiaMed in the quarter?

Christine Tsingos

The DiaMed sales are $62.7 million and we didn’t make a comment about the organic growth rate during the quarter. Remember, we didn't own them last year at this time, so it would be kind of tough for us to do that.

Weidong Huang - TimesSquare Capital Management

And how much of that do you think it benefited from the foreign currency?

Christine Tsingos

Some of it, I'm sure it's currency driven. When you look at how much has moved, both whether you're looking at euro or Swiss franc, but again, we just can't get to the exact breakout of that.

Weidong Huang - TimesSquare Capital Management

Okay, thank you.

Operator

Your next question is from Richard Glass with Morgan Stanley.

Richard Glass - Morgan Stanley

Hey guys, nice quarter.

Christine Tsingos

Thank you

Richard Glass - Morgan Stanley

So, just to, may be, be very clear in this, in terms of the earnings, I was coming with maybe a little shy of what you guys said, but it looks like a buck 18 then or so. Or am I way off if I have to pull out the kind of one timers that we're talking about?

Christine Tsingos

Well, I mean, I'll let you do your own math but I just wanted to highlight those three one timers and in my math, I was only trying to do two of them. That are once that are more DiaMed related and then just use the tax rate that we had reported during the quarter, but obviously, if you want to use all three including the interest income decline year-over-year, you're going to get to a higher number.

Richard Glass - Morgan Stanley

Well, I wasn't including the interest income because that is what you get, you do have to pay it

Christine Tsingos

Exactly, that's why I didn't include it either.

Richard Glass - Morgan Stanley

Okay, but it is still nice increase. I still have a few questions as well as. Can you talk about new assays that are on the come here in terms o what kind of what pace we might expect because that just seems to drive a lot of positive things for you guys.

Bradford Crutchfield

These are assays in which area?

Richard Glass - Morgan Stanley

Well you talked about new assays is helping the growth in the --

Bradford Crutchfield

Who in the BioPlex in the Life Science area.

Richard Glass - Morgan Stanley

Yeah

Bradford Crutchfield

Yeah, it's obviously, its just a continuing pace of new assay is being developed in Life science and being introduced and I would expect that to continue throughout the year. And in diagnostics, of course, it’s a little different picture because it tends to be, the introduction tends to be a little slower because they are longer-term developments, FDA approval that kind of thing.

Richard Glass - Morgan Stanley

Okay. Can you maybe help us understand the or go into a little bit more more detail on the MRSASelect test that you talked about in your release, in terms of it continuing to gain market acceptance? Is this sort of -- how big could this be? Clearly there are companies out there which are enjoying massive benefits from this which -- what we wonder is whether this could be a bombast on the Mad Cow scale or what kind or what kind of product this could be?

John Goetz

Well this is John Goetz, speaking about this product. This is a product we have had let's say on the market outside the U.S. for, let's say 2 or 3 years and we have recently brought it into the U.S. after having some pretty nice success in Canada. We're watching that market grow and there is lots of interest in the lets say in the Healthcare community as to what is the benefit of screening every single patient that comes in to a hospital lab and you definitely have a couple of camps out there. Our product is of fairly traditional approach to the test itself from a technology point of view. Its not a PCR based, however it’s a pretty rapid chromogenic media base test and it's not that expensive for a laboratory to be able to get in and actually do screening. So we are seeing a nice uptick here in the U.S. having just introduced it a little more than a year ago.

Richard Glass - Morgan Stanley

So, comparing it to the products that are out there maybe it’s a little bit slower but its less expensive as well as or longer to get a result?

John Goetz

In terms of let's say a traditional approach to testing for MRSA it’s a fairly a rapid test, but again its using traditional micro-biology approach in terms of time to resolve. When you compare that to lets say a PCR type of an assay, a PCR type assay will take less than half the time to produce an answer. There in however, there is a huge price differential between a PCR assay and what we are offering today. So, we think we have some competitive advantage when a hospital really sits down and evaluates what's really, really important in terms of cost or turn around time.

Christine Tsingos

And Richard, I think, it's important. You brought up the BSE comparison and while the products are doing quite well, as a percent of diagnostics total sale it still relatively small.

Richard Glass - Morgan Stanley

Right, okay at least you guys a little low cost been this one?

Unidentified Company Representative

Right.

Richard Glass - Morgan Stanley

My last question is in terms of the CapEx, can you tell us what that’s going towards this fiscal year?

Christine Tsingos

In terms of the mix?

Richard Glass - Morgan Stanley

Yeah. Where we are spending the money in?

Christine Tsingos

Well, so remember there is three buckets we have kind of maintenance CapEx, we have new equipment which could be either on the IT side or on the manufacturing side. We have buildings and then we have our reagent rental on the diagnostics where the instruments are placed in the lab and we capitalize the cost of those. The mix really hasn’t changed too much. About a third is related to the reagent rental program. Right now I think the-- what's going into equipment is probably the biggest portion of CapEx and we've talked over the last several quarters about the significant investment we are making in our website in the e-commerce program. So that’s a part of it and then of course what different from last year is taking on the DiaMed CapEx that we didn’t have last year and that probably the $4 million or so.

Richard Glass - Morgan Stanley

How much leverage did you get out of the DiaMed CapEx, I mean is it totally different facilities or overtime should there be some leverage out of that?

Christine Tsingos

It's kind of early to tell. Overtime, I think there will be, but the other thing I'll say is over time, there is probably some investments we need to make especially on the IT system side, but in terms of facilities they seem to be in pretty good shape and obviously there is some facilities that we'll even rationalize with our own infrastructure.

Richard Glass - Morgan Stanley

Okay, all right, thanks, good quarter.

Christine Tsingos

Thank you.

Operator

Your next question is from Jeff Matthews with Ram Partners.

Jeff Matthews - Ram Partners

Hey there, can you hear me?

Christine Tsingos

Yes.

Jeff Matthews - Ram Partners

Hi, I'm in a really noisy spot, so I'm going to ask three questions and put the phone on mute. First, you may have explained this, Christine. What were the foregone profit margins that you mentioned in the release? The second thing is what's the biggest change in DiaMed plus or minus since you actually made the acquisition? And the third is on the MRSAtest, what kind of hospitals are actually buying it and how are they actually employing it? Thank you very much.

Christine Tsingos

Okay.

John Goetz

I didn't get his second question, exactly.

Christine Tsingos

The second question was what the biggest change either positively or negatively that we noticed about DiaMeds since we acquired it? I think that's it, anyway. So, Jeff, as far as, I know in the press release, we said foregone profit and in my script I talked about purchase accounting but you remember back in the fourth quarter we had a charge of $3 million or $4 million related to finished goods inventory that under purchased accounting we had to write up and then it go through COGS. Now what we're doing is working through what was the work in progress inventory, so it was $1 million this year and we might see that going forward in future quarters probably $1 million may be less. Obviously, it will go down over time, but the next several quarters will have that additional cost on top of the amortization. And then, I will let John talk about DiaMed and MRSA.

John Goetz

I guess, as I look at this acquisition, I guess, I really can't point to anything that's super negative or plus on either side. All I can see is really the opportunity for being able to capitalize on some very positive, positive initiatives. Christine had touched on this notion of integration, I think we have some great opportunities there relative to combining sales forces on our infectious disease line particularly in the blood bank area. I think, I've mentioned that may be on the last call, so we're just now starting to get our arms around those kinds of strategies now but in the mean time, it's pretty much business as usual. I did have the chance to visit a customer or two while I was in Switzerland on my last trip and we did have very a interesting discussion about the level of service and the quality of customer care, coming out of our facilities in Cressier.

And, if that customer is any indication of our customers that we have in general, I feel pretty confident about the future there. You know I suppose on the negative side you could say that we have had some management turn over there. Not all of it let's say feeling bad about. I thought that I just mention that. So going on--

Christine Tsingos

It's really a positive.

John Goetz

Yeah, yeah right. I'm sure you may have a couple of follow up questions on that but probably I can answer most of those. Okay on the MRSA side we're finding general hospitals in the 400 bed to 750 to a 1000 bed are buying this product. It's no one particular market segment or customer segment that's buying this product. So, we see it having pretty broad appeal. I hope that answers your question.

Jeff Matthews - Ram Partners

And, can I follow up on that? What are they using it for? Is it a screening tool, are they screening everybody or they are using it just in the emergency room?

John Goetz

Yeah, they're using it for two purposes. One is diagnostics and one is to actually diagnose a person actually does have it and to a lesser degree, they're using it as a screening test.

Jeff Matthews - Ram Partners

Okay great thanks.

Operator

Ladies and Gentlemen (Operator Instructions) The next question is a follow up question from Jon Wood with Banc of America Securities.

Jon Wood - Banc of America Securities

Hey, Christine did you guys buy in any of the outstanding minority interest in DiaMed in the quarter?

Christine Tsingos

Actually John we did. It was part of the original purchasing agreement. There was a existing dispute with the minority shareholder that we we're able to resolve and as part of that resolution, we did purchase some of their minority shares.

Jon Wood - Banc of America Securities

Okay and that’s the $17 million on the cash flow statement?

Christine Tsingos

Yes it is. And I think all out of the door there was probably $22 million between all the components of this purchasing the shares and settling the dispute etcetera.

Jon Wood - Banc of America Securities

Okay and so how much more are you going to spend to bring that 100% in-house over the course of the year?

Christine Tsingos

Well you know even though it's gone down, I think it’s probably $60 million or $70 million. Even though we've just brought this in, the fact of the matter is that you've seen the value of the Swiss franc and the dollar has changed pretty dramatically. So, I'm guessing it will be $60 million to $70 million that we'll spend and we will conduct a tender in and have that completed by October 1.

Jon Wood - Banc of America Securities

Okay. So in the future quarter, quarters of '08, the minority line does that go down in the future quarter from 2.1?

Christine Tsingos

Probably. Now it all depends on whether DiaMed profits are and if it lands in areas where subsidiaries, 50% on subsidiaries have the profit. Obviously we have to share those. So even as we bring in the tender, yes one would think that it would go down. But, it could be offset somewhat by the 50% on subsidiary. I guess the point I'm trying to make is, even when we buy the minority shareholders there probably will be a minority interest line remaining on our P&L until we purchase the other half of these few subsidiaries where we don’t own a 100% of the stock. And, we haven’t yet made the decision which of any of those subsidiaries we would like to do that well.

Jon Wood - Banc of America Securities

Okay, great. And now one last one for Norman if he is feeling up to it. The acquisition pipeline out there, are you happier about the valuations you are seeing or have expectations been largely unchanged in the last, I don’t know six or seven months?

Norman Schwartz

I think we've probably talked about this earlier and my expectation was that the valuations will become a little more reasonable. But, some of the recent deals that we've participated in-- the prices are still pretty high.

Jon Wood - Banc of America Securities

Okay. Thanks a lot.

Operator

(Operator Instructions) And as there are no further questions in the queue, I will turn the call back to management for closing remarks.

Christine Tsingos

Okay, great. Thanks, Jen. Thank you, everyone, so much for taking the time to be with us today. As always, we appreciate your interest and are available for any follow-up questions you may have. Bye.

Operator

Ladies and gentlemen we do thank you for your participation in today conference. This concludes the presentation. You may now disconnect.

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