Bio-Rad Laboratories, Inc. (BIO) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Bio-Rad Laboratories Incorporated Q1 2015 Earnings Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would like to introduce your host for today’s conference call, Bio-Rad Vice President and Treasurer, Ron Hutton. You may begin, sir.

Thanks, Kevin. 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, our financial future performance and other matters. Because our actual results may differ materially from these plans and expectations, you should not place undue reliance on these forward-looking statements. And I encourage you to review our filings with the SEC, where we discuss in detail the risk factors in our business. The company does not intend to update any forward-looking statements made during the call today. With that, I’d like to turn it over to Christine Tsingos, Executive Vice President and Chief Financial Officer.

Thanks Ron. Good afternoon, everyone, and thank you for joining us. With me today are Norman Schwartz; John Goetz; Shannon Hall, President of our Life Science Group; and John Hertia, President of our Clinical Diagnostics Group. Net sales for the first quarter of 2015 were $472.8 million, a decrease of 7.2% on a reported basis versus the same period last year sales of $509.3 million. This decline reflects the anticipated strong currency headwinds, which represented a negative impact on sales of nearly $44 million. On a currency neutral basis, sales increased 1.4%. During the quarter, we experienced good currency neutral growth across many of our key markets and product areas, most notably in our Life Science segment, as well as certain products and markets in our Diagnostics segment. Sales growth in the quarter was partially offset by continued weakness in the European diagnostics market, as well as challenges in the Asia-Pacific region, both of which posted a decline in currency neutral sales versus last year. Offsetting these tepid regions was solid growth in the U.S. and selected emerging markets. The reported gross margin for the first quarter was higher than expected at 57.1% compared to 54% last year. This strong margin is primarily the result of a favorable product mix and improved manufacturing efficiencies, as well as savings associated with product lines that were discontinued during 2014. Also contributing to the higher margins, amortization expense related to acquisitions recorded in cost of goods sold was lower at $6.8 million, which compares to $8.3 million in the first quarter of last year. SG&A expenses for the first quarter were also lower at $188.6 million or 39.9% of sales, compared to $202.3 million or 39.7% of sales last year. This lower SG&A expense during the quarter benefited from the strong U.S. dollar. Also, when comparing to last year, remember, that during the first quarter of 2014, we recorded an accrual of $9.8 million related to the FCPA matter. Excluding the currency benefit and the FCPA accrual, SG&A spending increased approximately $5 million versus last year. This increase is substantially the result of personnel-related costs, typically associated with our first quarter. Total amortization of intangibles related to acquisitions recorded in SG&A for the quarter was $1.9 million. Research and development expense in Q1 was in line with expectations at 10% of sales or $47.2 million, which compares to $52.5 million or 10.3% of sales in the first quarter of last year. The decline in spending, both sequentially and versus last year, is primarily a matter of timing of various projects. R&D expense also benefited some from currency translation, but to a lesser extent, as much of our spend is denominated in U.S. dollars. During the quarter, interest and other income was a net expense of $7.7 million, compared to $5.9 million of expense in Q1 of last year. This increase in net expense versus last year is largely related to higher foreign exchange hedging costs. The effective tax rate used during the first quarter was in line with our guidance at 33%. This rate continues to include the expiration of the U.S. federal R&D tax credit, which typically has lowered our tax rate by 2 percentage points. Excluding any discrete items that may occur during the year, we continue to expect the full-year effective tax rate to be in the 33% to 35% range. Net income for the first quarter more than doubled versus last year to $17.8 million and diluted earnings per share for the quarter were $0.61. Life Science sales in the first quarter were $155.9 million, a decline of 3.4% on a reported basis. However, on a currency neutral basis, sales grew an impressive 4% when compared to last year. This growth was driven by continued strong demand for our Droplet Digital PCR products, as well less strong sales of process chromatography media and our cell biology products. On a geographic basis, Life Science sales were particularly strong in the U.S. On a currency neutral basis, Europe and the emerging markets also posted gains. This growth was partially offset by slower sales in the Asia-Pacific region. Sales of Clinical Diagnostics products were $313.6 million, compared to $344.3 million last year, a decrease of nearly 9% on a reported basis. On a currency neutral basis, year-over-year sales were up slightly for the Diagnostics Group, highlighting a currency headwind to sales of more than $31 million. This slower overall growth reflects continued competitive and pricing pressures, especially in Europe, partially offset by good double-digit currency neutral growth in China and the emerging markets. From a product standpoint, sales of quality controls and autoimmune testing products continue to grow nicely. Of particular note, demand for our BioPlex 2200 instrument and assay continues to gain momentum as many customers around the world adopt this system. Today we have more than 50 assays available for the BioPlex. And during the first quarter, we experienced increased demand for our measles tests, given the recent outbreak in the U.S. Moving to the balance sheet. As of March 31, total cash and short-term investments were $710.7 million. Net cash generated from operations during the quarter was just over $29 million, compared to $40 million last quarter, and $66 million in the year-ago period. This decrease in cash flow versus last year is primarily the result of lower customer collections resulting from the decrease in reported sales, which includes more than $30 million of currency headwinds in receivables, as well as increased employee-related payments are associated with various 2014 incentive plans. Net capital expenditures for the quarter were slightly lower than expected at $27 million. As with much with our results, currency translation also impacted CapEx, essentially lowering the reported amount by approximately $7 million. Our full-year expectation for CapEx remains in the $130 million to $140 million range, as we continue to invest in our global ERP system. And finally, depreciation and amortization for the quarter was $32.3 million. On our last earnings call, we laid out guidance for 2015. That is, for currency neutral sales growth of around 3%, full-year gross margins in the 55% range and an operating margin of 9% on a currency neutral basis. We also highlighted that strengthening of the U.S. dollar against our major currencies could actually result in a top line currency headwind of $175 million to $200 million, and consequently a decline in year-over-year reported sales. And while we do have some natural hedge with our expense mix, we guided that this sizable headwind could negatively impact our projected currency neutral operating margin by as much as 150 basis points for the full-year. As you can see with our first quarter results, the currency impact is certainly significant, negatively impacting sales by nearly $44 million and operating profit around $10 million. Still, despite the relatively slow sales growth start to the year of 1.4%, we are maintaining our guidance given at the beginning of the year. And as we move through 2015, we have numerous new product launches in the queue including a new diabetes monitoring system, the D-100, and a new mid-range blood typing instrument, the IH-500, both of which should help fuel diagnostics growth outside the U.S. in the second of the half of the year. And now we are happy to take your questions.

[Operator Instructions] Our first question comes from Brandon Couillard with Jefferies.

Christine, with respect to the gross margin experience in the first quarter, any chance you could break down the components of the improvement between mix and the cost savings actions that you took last year? And really is it sustainable over the coming periods in that context it would make your full-year guidance seem somewhat conservative, if that’s the case?

Sure, great question. So I think that without breaking out the detail of each individual component, Brandon, quite a bit of the improvement is more about sales mix in the quarter and about some of the efficiencies that we had manufacturing in the quarter. And it's always tough to predict sustainability of things like that, especially as you know, sales mix changes through the year between instruments and reagents and different products groups et cetera. And then certainly the decrease in amortization for a little over $1 million, $1.4 million or something and some savings from the discontinued product lines from last year obviously sustainable. But I think the vast majority it's hard to say sustainable when it relates to product mix and efficiencies in the quarter in terms of manufacturing side.

Helpful. And if John Hertia is there, with respect to the diagnostics business in the period. Could you elaborate on the trends that you're seeing in Europe. Is this largely still a function of the lab consolidation activities that are going on in France, and if there is any new competitive dynamic that’s playing out here, in terms of the competitive landscape in any particular product areas?

Sure. I think you have the picture pretty correct. There is still consolidation in both clinical and transfusion labs in Europe, particularly in France. And I'd say pricing pressure has been pretty stable during the - pretty consistent during last year and this year.

Realize that France dynamics are going on for several years. I mean, how far in the process do you think we are? Are we in the eighth inning, or the third inning of their eventual wind down of the lab base?

It feels like it's more in the later innings. We just hope it's not going to extra innings.

But I think the market is aware of some of your new products that you're about to launch in Europe.

Okay. And then, maybe one for Norman. In the press release, you alluded to a new globalized management structure and future operational efficiencies. Could you elaborate on exactly the steps you've taken, and perhaps quantify said efficiencies?

Yes. Obviously it's hard at the moment to quantity those efficiencies, but we've been working on this for a while, and I guess this is really the kind of the final step with the appointment of John Goetz as Chief operating officer, and there is two probably significant pieces of this. One is the worldwide globalization as a sales organization, which was under kind of a bifurcated management before, and the second is the globalization of our supply chain. So including procurement, manufacturing and logistics, there are obviously some real benefit to that in terms of kind of utilizing certain sites, centers of excellence that kind of thing. I think we can get at some of those efficiencies going forward. And obviously on the procurement side, being able bundle up purchases little better and negotiate. I think those are the places we’re going to see it come from.

Super. I'll hop back in the queue. Thank you.

Our next question comes from Jeffrey Matthews with Ram Partners.

Hello, can you hear me?

Yes, we can hear you.

Yes, hi Jeff.

I just want to get up to speaker. On the spending incentives related to 2014 that you booked in the first quarter, was there anything different about this year's level versus prior years? I don't recall it ever being called out before but I just might not have been remembering.

You're talking about the kind of the year-over-year comparison of expenses?

I think, Christine mentioned that there was - there were personnel - in the SG&A line, there were personnel costs related costs in Q1 that related to 2014?

Yes. So I think from time to time, Jeff, we do bring it up, because the first quarter is generally when we are doing the merit increases. We’re paying out incentive plans or commission plans from the prior year royalties, things like that. And so Q1 is generally a cash flow challenge, if you will. And as we peel back the onion just looking at that SG&A without the accrual from last year and without the help of currency, because remember as it makes our sales lower and it makes also expenses lower rates, it’s kind of netted out to about $5 million, and much of that can be traced to employee-related costs that are typically associated with our first quarter.

Got it. And without getting too granular, is it outside the normal realm, or is it a pretty much in the ballpark of how it generally tends to look in a normal year?

So compared to last year, it definitely is more sizable, because we turn back the clock to ‘14, many of our internal plans were not and the payout was lower this time in March of ‘14 than it was in March of ‘15. But having said that, it’s certainly in line with other years where we have paid kind of at the target of the bonus of the [indiscernible].

Okay. That makes sense. And then, secondly on GnuBIO. You're spending pretty heavily on that. And I just wonder - and not that that's a bad thing. I just wonder what your visibility is into when and if that there might be a product on the market. Is that a two-year thing, three-year thing or sooner possibly?

We’re hoping to have something on the market in 2016. So we've got some development work left to do to get that ready to go, and then of course traverse through the FDA. So it's probably a 2016 event.

Has there been any significant positive or negative surprises along the way versus what you might have thought originally when you've actually made the acquisition recognizing that it was not a product on the market already in that typical of a Bio-Rad acquisition?

No, I think it has been moving along at a pretty steady pace. They seem to be solving the problems and just kind of getting to the issues. So far it seems to be on track and pretty much what we expected.

Great. And then, my third question and last one is, about the gross margin. And again I know, this is a quarterly number. It's one number covers 90 days. But does it - is there anything in there directionally that you can see that is a result of the work you've been doing on the ERP side, that’s potentially the sign of kind of efficiencies that are working their way through or is it strictly just one quarter's worth of mix and amortization [ph]? Thanks.

Yes. Again it's really hard to break those down. All we can give you is kind of anecdotal information or people seem to the see it as a tool for increasing productivity. But I think the - kind of if you looked at the schedule of gains, it's probably still on the lower end of - it’s probably not our biggest gainer there.

Sure.

I think, Jeff, that remember, typically one of our strongest margins is the one we post in the first quarter and as we move through the year and the instrument mix changes. We can see that margin trend down a little from the first quarter, as it was in our last year which was a little different. But typically, that's a pattern that we see. It’s hard to trace to the ERP, but certainly as Norman mentioned, that will be one of the pockets of benefits as more of the organization comes up on SAP.

Okay. And many thanks. And if you don't mind, if I just ask one more, and then I will jump back in the queue and get back on later and ask it. You talked about some new products coming. Is the new product flow this year heavier than it’s been in past years would you say?

For diagnostics, definitely. We've had a couple of years since we’ve introduced any major systems. And this year, it will be - we are in the process right now of rolling out the D-100. This is our diabetes system in Europe. And hopefully later on, depending on the FDA in the U.S., we'll be releasing kind of a mid-sized immunohematology system, the IH-500, which will go into Europe first and then migrate around the rest of the world from there. And then we're also looking at introducing the IH-1000, which is our large immunohematology system along with the reagents in the - maybe the last quarter of this year for the U.S. too. So, three pretty good sized system introductions.

And John, would you say that your customer base is looking forward to it?

They have been waiting. Yes.

Okay. Thanks very much and good luck.

Our next question comes from Brandon Couillard with Jefferies.

Thank you. John, just one follow-up on the blood typing launch in the U.S. Have you developed a pricing strategy for how you're going to proceed in the U.S. with an automated platform? The peers in this duo-poly market generate gross margins in north to 70%. Is that your expectation that initial revenue contribution will be at a gross margin level above your composite average?

Hard to say. It's just still pre-launch. So much of it is based on the velocity of the instruments at the beginning, and it will be a trickle-in effect. We won't get systems placed until the last quarter of this year. And as you know, in diagnostics you place the systems in the regions growing top of that. So it will probably be a situation where revenue and gross margin momentum will build as we roll it out.

But our strategy is not normally a pricing strategy. It's a value strategy.

Got you. And then, with respect to the vitamin D kit launched on the BioPlex 2200 just recently. Is there an opportunity for LabCorp and Quest to potentially adopt that? I believe they already use alternative platforms, mass spec and other immunoassay system, but I know you've got a big installed base with both of those accounts of BioPlex systems.

There is always the opportunity, yes.

Okay. Fair enough. And last one, Norman. Any update on the M&A pipeline? It's been about a year since you did a deal. Would you say - given your focus is internally and with ERP perhaps another dilutive deal is unlikely in the near-term?

Probably. Yes. Obviously we've got, as always, two things that we're looking at, and I think our focus is on something that has sales and revenue. Net sales and profit.

Very good. Thank you.

And I'm not showing any further questions at this time. I’d like to turn the conference back over to our host.

Can you just poll one more time, please?

[Operator Instructions] And I'm not showing any questions at this time.

Okay. Thanks Kevin. Thank you everyone for taking the time to join us today, and hopefully we'll be seeing you soon. Bye.