Bio-Rad Laboratories, Inc. (BIO) Q3 2007 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen and welcome to your Q3 2007 Bio-Rad Laboratories Inc Earning Conference Call. My name is Mike. I’ll be your operator today. At this time, all participants are in a listen-only mode. We will be taking questions at the conclusion of today’s presentation. [Operator Instructions]. As a reminder, ladies and gentlemen, this conference is being recorded replay purposes. I would now like to turn the presentation over to your host for today’s call Ron Hutton, Treasurer. Sir, please proceed.

Thank you. Before we begin the call, we 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, we 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 would like turn the call over to Christine Tsingos, Vice President and Chief Financial Officer.

Thanks Ron. Good afternoon everyone and thank you for joining us. Today, we are pleased to report quarterly net sales of $339.7 million, an increase of 11.5% versus the same period last year sale of $304.8 million. Currency neutral revenue growth for the quarter was a solid 8%. Our diversification in both product offering and geographic reach continues to help the topline stay strong on a consolidated basis. During the third quarter, we had good growth within our diagnostic group with strong performance across all of our primary product family. Our core life science division also increased with strong sales of our protein expression… and interaction product line as well as continued growth in process chromatography. The growth margin for the quarter was little strong than expected at 55.4% compared to 56% last quarter and 54.7% in the year ago period. The year-over-year improvement can be attributed to a favorable product mix as well that are manufacturing utilization. SG&A expenses for the third quarter were $117.7 million or 34.6% of sales compared to $106 million and 34.8% of sales last year. Improvement in the SG&A margin for the second quarter of this year is related to seasonally slower spending typically associated with our third quarter results outside United States. Research and Development expense for Q3 was inline at $33 million or 9.8% of sales. The increase in last year primarily related to the development of new panel for BioPlex 2200 system. During the quarter, interest in other income was a net expense of $2.4 million. This compares to $2.6 million of income in the year ago period, which benefited from a one-time $4.7 million gain, related to our investment in Accent Optical, which was purchased by Nanometrics. Going forward, we expect interest and other income to be a sizeable net expense as more than $400 million of our cash was deployed on October 1st for the purchase of DiaMed and that’s in the future we will not earn much interest income. The tax rate used for the third quarter was much lower than expected at 20.3%. During the quarter, we reported the one-time benefit related to the favorable revolution of tax audits as well as a required true up adjustment necessary to reflect our actual federal tax liability. Excluding any future discreet item, we continue to anticipate a rate in the range of 28% to 29% in the fourth quarter. Net income for the third quarter was $28 million, an increase of nearly 21% versus last year. Diluted earnings per share were $1.3 for the quarter compared to $0.86 last year. And now for certain segment information. Life science reported sales for the quarter grew 4% compared to last year to $143 million. On a currency neutral basis, sales increase just over 1%. This revenue growth was affected by a more than 20% decline in our BSE business, still our core life science sales growth excluding BSE was over 8%. We continue to have good momentum in our profit chromatography and protein expression product line. Sales of our new ProteOn system continue to grow as customer adopted easy-to-use and accurate protein interaction technology. Sales in U.S. and Asia-Pacific regions were particularly strong for life science this quarter, while Japan market continued to be challenging. Overall, life science segment profit was $5.2 million this quarter, up significantly from Q2. This increase in profitability is primarily a reflection of improved gross margin due to a more favorable product mix, coupled with focused management of SG&A spending. Our clinical diagnostic group sales for the quarter were $193.3 million a growth more than 17/% compared to last year. On a currency natural basis, sales grew 13.5%. These sales were led by continued strong performance across all of our divisions and geographies, especially our quality control, clinical system, and microbiology product line in the U.S. and Asia-Pacific. Clinical systems benefited from strong demand for our key diabetes monitoring system as well as contribution from our BioPlex 2200 autoimmune and EBV panel. During the quarter, we placed more two dozen instruments that Quest Laboratories across the country and expect to begin supplying test panel by early next year. Our microbiology division posted strong sales of our Aspergillus and Dengue fever test as well as our market leading MRSA test in Canada. And the recently FDA cleared MRSA test for the U.S. bodes well for more opportunity in the quarters to come. With good margins, clinical diagnostic segment product profit for the quarter was $24.5 million compared to $16 million last year and $26.4 million in the second quarter. And now for a quick review of the balance sheet. As of September 30, total cash and short-term investments for $543 million. Net cash generated from operations during the quarter was approximately $55 million, resulting from the higher profitability as well as higher cash collection. Net capital expenditures for the quarter were $18.7 million, reflecting a sizeable investment in our website and new e-commerce channel as well as increased placement of the BioPlex 2200. Our full year expectation for CapEx is now in the low $60 million range as we continue to invest in our future. Depreciation and amortization for the quarter was relatively unchanged to $14.5 million. And finally, as I mentioned before, going forward, we expect the cash balance and interest income to decline significantly, reflecting our October 1 purchase DiaMed. We are pleased with posting another successful quarter for 2007. The strength of our diagnostic business through the first nine months of the year has helped to offset some of the headwind we anticipated at the beginning of the year. Having said that, the performance of our life science segment year-to-date has been somewhat weaker then we anticipated. Still the combined nine month performance of our two primary businesses has resulted in a revenue growth and in the mid single digit and inline with the expectations we set at the beginning of the year. Excluding the impact of DiaMed, we continue to anticipate mid single digit topline growth. Given year-to-date performance, full year gross margin were likely to be at the high-end of our previously forecasted 54% to 55% range. However, I will remind you that Q4 is generally our lowest margin quarter as the budget year comes to end from many of our customers than the product mix shift towards the sale of instrument. The fourth quarter also generally reflects our highest operating spend as projects that are ramped through the year become fully funded. As a result, the combination of the two is generally produced the year’s lowest quarterly operating profit margins in Q4. As I mentioned, this outlook for Q4 excludes our recent acquisition of DiaMed. We are in the process of recasting and auditing the historical financial results of DiaMed in U.S. GAAP, which we will file in an 8-K in December. During the fourth quarter, we will also be assessing the purchase accounting impact and integration needs of the business. As such, it would be imprudent for us to discuss the near-term financial impact of DiaMed on our consolidated results at this time. As has been our practice in prior years, we will share our thinking and outlook for 2008 in February during the fourth quarter earnings call. And now we are happy to take your questions. Question and Answer

[Operator Instructions]. And the first question comes from the line of Jason Weiss with Robert W Baird.

Good afternoon and congratulations on a great quarter.

Thanks Jason.

So, clinical diagnostics has steadily improved in terms of growth rate in the past three quarters. Have we turned a corner here? Do you expect this strength to be on going?

The strength to be on going you mean continuing to go till we reach the moon or--?

Continuing in terms of the double digit growth that we have seen in Q3. Do you expect that strength… the momentum of that to continue on?

We got pretty good momentum. I think it’s probably a little too much to predict that it would continue at exactly the same rate but we do have pretty good momentum in diagnostics.

Okay. Then, I guess, in terms of life sciences, are you expecting a stronger growth performance there in Q4?

I think certainly, Q3 was a good quarter for them. We are starting to see the U.S. strengthen. Remember we didn’t see that so much in the first half of the year. And I think that bodes well for continuing forward. What we always combat obviously as is the industry growth rate in academic which is where we are primarily focused as opposed to the big pharma. And those rates are still relatively modest. We still have a bit of a headwind on the BSE side, although, I think that as time goes by that will become less strong so I think that modest improvement is probably is probably doable but still combating some forces beyond our control.

Okay. in terms of FX in fact, I don’t know if you've shared this in the past but could you provide a general geographic split of your revenues?

You're talking about as reported sales by geography?

Yes.

Yes Jason. You will have to give me a minute. I’m not sure. I’m not sure that its much different than the last time we brought it up. And I think where we're going to see it changes with the consolidation of DiaMed.

And I appreciate that you are still in the process of going through those numbers. But I’m wondering in terms of DiaMed now that the transaction is closed could you talk about any strategy that you might have to further develop the markets that DiaMed addresses geographically?

But I still think it’s a little bit early to address that we still are assessing where the opportunities are and what we might do so I would ask you just to stay tuned a little bit till we have a little bit of a handle on these various regions. But certainly, I think there will be opportunities.

Okay. I’ll hop back in the queue then. Thank you very much.

[Operator Instructions]. And your next question comes from the line of Vito Menza of Sandler Capital. Please proceed.

Hi Norman. Hi Christine, great quarter. Just a question for you, can you give us a little color on the geographic mix of business and how different geographies grew for you?

Sure, one of our best growers for both groups is in the U.S. and I think I have to deal with not just the market but some new products that we had are gaining attraction and acceptance. I think Europe was a little slow. Very little year-over-year but I think that’s more their seasonality of their summer quarter than it is indicative of anything systematic and in the market place. Asia pacific outside of Japan continues to do pretty well for us. The Eastern Europe market especially in diagnostics continues to be pretty strong. So our, back to Jason’s earlier question I think our revenues split kind of year-to-date, it’s pretty similar to what we saw last year and it’s 43%, 44% in year up and probably the same in the Americas, I mean that may be a little higher on the Americas side than it was a year ago because of the strength in the U.S. and then the balance of the 14%, 15% in the Asia Pacific region so I think Japan, especially in the Life Science market continues to be a struggle, for not just us but other people in the market and we will just see how that plays out going forward.

Just, I know you said it earlier and I think I missed it, just to clarify organic sales, ex-currency for both divisions were they?

The others or a part?

A part, each individual division and also when you axe out the BSE testing out of Life science when you get all some.]

Right. For Life science, their currency mutual growth just for the third quarter was just over 1% and that’s almost all organic, there’s a little bit related to the Ciphergen acquisition, I think that this is belated, the September quarter will be the last quarter where they would not have been about a year ago but it was pretty small.

Okay.

On the diagnostic side the currency neutral growth was 13.5% and again that is primarily organic, they did a couple of small acquisitions last year but really not enough to make a huge difference in the growth rate.

And did you axe out the BSE testing from Life science?

If you axe out the BSE testing the reported growth was 8% and on a currency neutral basis it was about 4.5%.

Okay. And last question. Without getting to any specifics at all on DiaMed I guess it stands to reason there will be a significant portion of non cash amortization that comes along with this and also I am guessing some upfront, whether it’s IT or just integration calls how do you plan to break those out to the investment community and deal with them.

I think what we will probably do is what we have done historically and that is in the purchase accounting to the extent that there is an initial one time write offs for example, Purchase and profits, R&D, we will probably give it it’s own line item on the P&L so that very clear for everyone to see and certainly we will discuss it in our disclosures. We are… historically we have not done pro forma reporting and I am not sure that we would move to pro forma reporting as some other companies do. However we try to give the color surrounding the amortization impact, for example when we acquired MJ Research in August of 2004 so sometime after that we gave some color around that and I would anticipate with the DiaMed transaction we would do the same and try and help you understand what the non cash impact is.

Okay. Would you guys give some pro forma non GAAP like Chemo and your peers but that’s okay, makes us do more work, its okay.

I will send it for you.

Thanks a lot guys, great quarter.

Thanks.

And the next question comes from the line of Quintin Lai with Robert W. Baird. Please proceed. Quintin Lai – Robert W. Baird: Hi, good afternoon. Nice quarter.

Thanks. Quintin Lai – Robert W. Baird: Can you hear me okay I am on the road.

Yes. Quintin Lai – Robert W. Baird: Okay, super. Following up on Jason’s question so, with the guidance of mid single digit organic revenue growth, I guess the question is… is that one… is that assuming BSE continues it’s downward decline and then that assumes that clinical diagnosis continues it’s strong business to help offset that… to get to that number?

There are a lot of attentions there. Yes, I think that we do expect the BSE business to continue to edge down and as I think Christine mentioned, Life sciences business seems to be picking up a little bit and maybe we’ll moderate a little bit with the diagnostics business, that’s probably kind of the mix of things…

Yes. Quintin Lai – Robert W. Baird: When we are looking at Clinical Diagnostics, really, really strong quarter stronger than what you have historically talked about being mid to high single digit, is there something special that went on this quarter in terms of easy top or was this, a lot of the strength coming from new product introductions or market share gains or help us get a little color on what happened this quarter?

Hi, Quin, this is John Goetz. Quintin Lai – Robert W. Baird: Hello.

Yes, we did have a pretty strong second quarter and I think largely it came in a couple of areas but if you really focus on the U.S. that’s really where we had some very, very nice performance. We are in the process of beginning and carrying forward a pretty big conversion of some business in the blood virus testing area there. One of our competitors has kind of backed out of that market and we are picking up some very nice business there and then in addition to that our controls business in the U.S. has really picked up nicely and that was quite unexpected, I have to say. You add that to some additional performance from around the world in some of these emerging markets you just, I don’t know just like a lot of stars aligned for this quarter. Quintin Lai – Robert W. Baird: Excellent. Thank you and then at the start of the year Christine you talked a little bit about some spending that you were thinking that might occur with as you launched or increased the awareness for BioPlex 2200 as well as the integration of Ciphergen? Where we are now, now that we are nine month into the year?

We are still spending and I think there is… and that was according to plan that there were certain costs that were associated throughout the year on, for example, the Ciphergen side, and then, certainly, in the second half of the year as we continue to ramp up the BioPlex. So, I think that spending is still ongoing, but that strength on the topline is litigating some of that impact. Quintin Lai – Robert W. Baird: So, again, I understand that one that you just had with DiaMed and wanting to kind of ProteOn talking about the numbers, but I guess does that mean that we’re in the level of uncertainty then, as we look out to 2008 until you know what DiaMed has, whether or not you need to have more infrastructure spending or do you think that were will tap some of that?

Yes. That is very good question Quintin. All I can do is just try to talk about what we talked about already. I mean, I think you are having a general idea of how big their business is on the topline and certainly if the company that will require integration spending, this is a private Swiss company that is now part of a U.S public reporting company. So, you can imagine what that entails. Having said that, it has been a good business, historically, I think our hesitation is until we get it into GAAP, which is different than the Swiss private accounting methodology and that’s audited and we really get a handle on where we need to do some integration spending. We hate to put a total stake in the ground. What I will tell you though is that as we gain clarity on that, we will try and give you more color, not just on purchasing accounting impact, but also on kind of ongoing contribution of the business as oppose… initial contribution which maybe impacted by purchase accounting and integration. Quintin Lai – Robert W. Baird: All right. And then, just one question on just topline for DiaMed year-to-date. In the… can you give us any kind of ballpark figure or what do you think that 2007 revenue run rate look likes? And what kind of growth that is off of 2006?

It’s actually hard to know that answer. Again, we are trying to… predict our numbers in the U.S GAAP. I think what we did talk about when made the acquisition was that… in ’06, it was about a $200 million year business and the growth rates are kind of mid single digit DiaMed, I mean, diagnostic market growth rates. I think it’s the best assumption we can use at this point. Quintin Lai – Robert W. Baird: All right. Thank you very much.

And the next question comes from the line John Wood of Banc of America Securities. Please proceed.

Thanks. This is Brandon Culler [ph] in for John. How many BioPlex instruments have you placed net of the arrangement there? And are smaller and mid sized hospitals interested? Yes.

Yes. Is this John?

No. This is Brandon. I’m here for John.

Okay. This is John Goetz, on the diagnostic side. In addition to what has been placed there, we are looking at probably about another 20 or so. We are in that low 40’s right now in terms of overall placements.

Okay. And have you seen impact from bioMerieux’s exist from the U.S Microplate market and do you care to quantify that?

I want to quantify for you, but it certainly was a contributor for us in the third quarter.

Okay. When can DiaMed… if you willing to comment on it, when can they enter the U.S directly with an instrument solution?

Well, I guess we are looking at really the agreement that we’ve got in place and these are confidential agreements. But to say, I guess, to be a little bit more specific in that, it's a few years from now.

Okay. Can you quantify or give any more detail on what your MRSA product line is in terms of sales and how fast growth was in Canada in the quarter?

I can’t give you specifics on that other than to say we are pretty nice market position in Canada. And I think as you probably just saw we just received FDA clearance on MRSA here in the U.S. So, we are hopeful if that will have a nice upward effect for us going into… actually going into next year.

Okay. Do care to discuss your longer term operating margin outlook for the Company? And do you think you are capable of retracing 15% to 20% operating margin range that you historically did over the next few years?

Brandon, we’ll give you ’08 outlook on the February call. The only thing we can say now is what we said all along and that is our long-term goal is to get the operating margin backup to the kind of that low to mid teen level. That is a longer term goal.

Okay. Thanks.

And the next question comes from the line of David Cohen with Newday [ph] Asset Management. Please proceed.

Good afternoon, congrats, a wonderful quarter. Norman, I wondered if you could comment just a bit on balance sheet and how you guys are thinking about it after the DiaMed acquisition obviously put to you some of the cash, but still say particularly un-levered if you could just talk a bit about that? Thank you.

Only obviously we have been looking for good opportunities for the cash and I think as Christine mentioned the… certainly this will have a slight negative effect on the interest turn but we would hope to more then make that up with the operating margin earned on deploying that cash. And going forward we have talked about whether it would be advisable to do a little more financing, the markets are right we might actually do a little bit more debt financing so I probably would not get, I mean we are not going to get tremendously levered but I think we will have the opportunity given the income to do a bit more.

We used to consider that as an acquisition, I think in the past you have talked about be prepared to take the leverage up quite a lot higher than where it is if you found the right acquisitions.

For the right acquisition, yes. Certainly we would but and obviously we are continuing to evaluate opportunities as it’s not a linear process.

Could you talk a little bit about that process how its going pricing out of the range of what you are comfortable paying or just you could talk a little bit about what you are seeing on the acquisition side?

I don’t know the pricing sourcing to be kind of on the high side, there has been a couple of recent ones that we looked at and kind of this $20 million, $30 million, $40 million companies that in our minds has still gone for some fairly high prices especially in life science. The hope is that the pricing will settle down a little bit, haven’t seen much sign of that yet but that’s the hope.

Could you also talk a little bit about the way you think about outsourcing cost base in Asia relative to cost base in high and high cost countries. If there have been any development from light of the company and how you are thinking about that?

We don’t think quite as much about outsourcing because we like to have control over our destiny and control of the products and we think that gives us a best long-term result. We have and I am sure you have seen announcements of our 54 we have moved our manufacturing to Singapore recently that is up and running and seems to be doing pretty well. And we are considering a few other opportunities for some other things that we are working on.

And then lastly if you could just give us an update on the board and the board structure. I think we talked about it before but that the board has obviously been around for quite a while. The average age is quite a high for a public company, and if you could just talk about what the company is thinking about that when you life to the board?

Okay. As you know over the last couple of years, we have added really two new members which bring the age down a little bit and we are continuing to work that and think about what kind of other things, what kind of other expertise we want on the board, and talking to a few people.

Thank you very much

Okay

And our next question is a follow up from the line Jason Weiss with Robert W. Baird. Please proceed.

Hi. Thanks for taking my follow-up. On the acquisition of DiaMed, do you plan to conduct a tender offer for the remaining 12.7% within Q4?

Probably not within Q4, but we will conduct a tender next year.

Okay. And congratulations on the FDA clearance of your Merieux product. Could you give us a little insight as to the… perhaps per test cost or the amount of what time would be required to run that test?

I can comment on the time to resolve. We have a claim on the product that delivers a result within the 24 hour period, but recently quick turnaround when you consider this is a Petri type of approach. What distinguishes it is it’s sensitivity on one hand and it’s price position in the market compared to some other alternatives. So, we think we have a good niche opportunity here to make some headwind.

Is the market strategy for this to… there has been a lot of talk about hospitals doing general active surveillance, is your thoughts for surveillance type environment or is this more of a diagnostic product?

It’s both. And it will depend on the protocols that the hospitals will be employing. Depending on what kind of a product that they will select. So ours can be both.

Okay. And up to this point have you gone at I guess at any given institution had to have what some of the molecular tests out there and can you talk about some of the feed back you might have received as the facilities were considering their options.

We are just under way with this product here so it’s too soon for me to tell you kind of what our experience base has been particularly against the molecular product right now?

Okay. Great. Thanks for taking my follow ups.

And the next question is a follow up from the line of John Wood of Banc of Banc of America Securities. Please proceed.

Thanks, why don’t you give us an overview of your food testing franchise, how big is it can you provide an update on a potential launch of a molecular product for food testing and do you have all the necessary licenses for that? Thanks.

This is Brad Crutchfield. I will take that call. Our food testing we have received clearance in the U.S. first of all we have all the necessary licenses and we have complete freedom to operate. We have launched all of the four major food passages and now we've added a quality indicators to go with that and we have launched it and have approval now for the confirmatory test that goes with it again chromogenic-based product. So, overall we're entering the U.S. market have just received some of the clearances on some of the passages we have a few more to go. Should we expect those by the end of the year and are actively now marketing that product where we can at least in the certain passages we have approval in the U.S. We have complete approval in Europe and already starting to see the switch of that business. Its still a business that’s less than $20 million but its one that we see an opportunity for the future but it’s a longer term growth opportunity in the sense that you got fairly conservative groups of people that are making these calls and company's in testing labs makes a decision to switch to a molecular test from maybe more traditional test.

Great. Thanks.

Currently, no other questions.

Okay. Then, thank you everyone for taking that time to joining us this afternoon and as always we are available for any follow-up questions that you may have and we look forward to seeing you hopefully soon. Bye.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect. Thank you very much and have a great afternoon.