Bio-Rad Laboratories Earnings Call Nuggets: ERP-Related Expenses and Implementation
Bio-Rad Laboratories Inc. (NYSE:BIO) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.
Brandon Couillard – Jefferies: Christine, just to back on your operating margin commentary there, I mean, what aspect of the ERP timing your expenses were not, I guess, anticipated in your prior outlook? Can you give us an update on just the aggregate dollar amount of ERP-related expenses in the P&L, both in the second quarter and for the full year now?
Christine Tsingos – EVP and CFO: In terms of pure cash out of the door, Brandon, I don’t know that things have changed in terms of our expectations. Basically in the accounting world, while were in the implementation phases of the project, both the designing and the actual implementation, the internal and external labor costs are capitalized. Right now where we are, we‘ve gone live with our first deployment, which you remember was kind of a small segment of the U.S., are keep it close to home, proof-of-concept kind of project, and we’re in the process of supporting that. And then in the fall, we will begin the designing and the implementation of the next deployment, which will be a much larger deployment, and at that time, then the internal and external personnel costs will be capitalized per the accounting rules. So I think when we originally set the budget, while – as I said, cast out of the door probably doesn’t change that much, we didn’t anticipate that we would have this little break in between the first deployment and the second deployment where we would need to temporarily change our accounting treatment.
Brandon Couillard – Jefferies: Can you give us any numbers around that? I mean, I think you talked about the incremental ERP expenses being some $15 million to $20 million in the P&L this year. Any update on that?
Christine Tsingos – EVP and CFO: So probably this change in accounting treatment to the P&L over these months, where we’re in between phases, will be somewhere $5 million to $10 million of range between what was booked in the second quarter and what we’ll book in a good part of the third quarter. Again, we’re looking to restart the next blueprint phase in the fall. So it’s (flat) from CapEx…
Brandon Couillard – Jefferies: If John or Brad are there, I’d be just curious if they could elaborate on what they’re seeing in the government and academic market, particularly the split between the U.S. and Europe.
Brad Crutchfield – EVP and President, Life Science: This is Brad. For Life Sciences, we definitely saw in the second quarter the extramural NIH funded accounts, basically our academic markets came back online. They were basically dormant in the first quarter. The government accounts continue to be off significantly and basically in the intramural research or actual government labs, CDC and the like. So we certainly saw that. In Europe, it’s pretty much status quo. There is overall of austerity across most of the regions in Europe, and we had a fairly nice second quarter but a lot of that was timing from shipments that we really didn’t make it into the first quarter. So it really is sort of status quo.
Brandon Couillard – Jefferies: Christine, would you care to quantify the impact on the operating line from the QuantaLife and AbD Serotec deals, and if not QuantaLife maybe just AbD impact on OP?
Christine Tsingos – EVP and CFO: So both of them obviously they are dragged to operating profit and probably combined between the two of them, probably $5 million or $7 million. But let me see if I can get that more. If you remember the (indiscernible), we talked about that Serotec would be $7 million to $10 million drag on operating expense and we still expected QuantaLife to be $15 million, $20 million plus depending on our level of investment there. And I don’t think things have changed.
Brandon Couillard – Jefferies: Just lastly, any decision on whether or not you’ll decide to call the 8.5% coupon debt in September?
Christine Tsingos – EVP and CFO: Well, good question. Obviously, it’s something that we’re thinking about and they do become callable on September. I don’t know that we will be calling among that exact date, but given that its 8% money and we took on the debt at a time when we were an investment grade. We will be very seriously taking a look at this in and we will likely to do something after the call date
Daniel Leonard – Leerink Swann: Can you give us an update on your ERP implementation now that you’ve got some road under your tires with the first deployment?
Christine Tsingos – EVP and CFO: So as I said, the first appointment was – smaller segment of our U.S. ales probably represent 10% to 15% of the total company revenue. I think for the most part it’s gone pretty well, especially when I hear some of the horror stories from other companies. We have a lot of people involved with it, a lot of process changed. But at the same time we continued, didn’t seem to miss a beat in terms of shipping product to our customers. Where we are now and part of the support mode that I’m talking about is really just adapting to all of the new processes and becoming efficient with those processes. So as I mentioned, cash from operations is lower than we’ve been running, because receivables were up a little. Our folks were focused on working on those new processes. But that’s just a matter of timing, and with each month since we’ve gone live, we’ve seen that efficiency get better and better. So I think on the whole, we’re feeling pretty positive about this. The lessor learned is it’s hard. It is a lot of change and part of our understanding of that is we’ve made the decision now for the next deployment to really focus on finishing the rest of the United States. Originally we were thinking the second deployment we could take our show on the road to Europe, because Europe is where the greatest benefit return resides. But I think we also see benefit in staying in the U.S. and that’s the deployment we will start working on in the fall.
Daniel Leonard – Leerink Swann: Christine, there is follow-up on the cash flow portion of that? How do we think about your cash flow trending to the balance of the year? It was obviously cash flow from operations was lower than we thought in Q2, does that reverse as you get some of these receivables under control or should that stay at depressed levels through the balance of the year?
Christine Tsingos – EVP and CFO: Good question, Dan, and the receivables is a small part of it. I mean, if you look historically, our cash flow is pretty backend loaded. If you look at our historical results because there’s a lot of cash obligations at the beginning of the year and then of course, last year we had that windfall from Spain. So, I think seeing improvement from here would be within our historical pattern, and again I think the receivable growth is more transition and timing in nature and not indicative of some sort of change. And then obviously in the second half of the year, we’re starting in the fall timeframe when we are back into the designing and implementing of the second deployment of SAP, all of these internal and external personnel-related costs will be capitalized, which will affect the investing cash flow but not the operational cash flow. So that obviously will help us as well.
Daniel Leonard – Leerink Swann: My final question is a two-part one for Brad. Brad, could you help me understand how you’re looking at the Asian market for Life Sciences tools in the back half of the year? I think there were some commentary that it had slowed down a bit. Then secondly, the new digital PCR product, what are the differences versus the initial version?
Brad Crutchfield – EVP and President, Life Science: I think if you look at the Asian market, Japan is off. I mean, most of us have seen that, and it’s kind of in a shift in the way that they fund their research. We expect that to come back a little bit in the second half of the year. We also expect our business in China to build in the second half of the year as it always does. Lot of the tenders and government contracts are (likely) to come due in the last quarter. So overall, in general, Asia will continue to build in the last two quarters. As far as the digital PCR, we invested very heavily in taking the original product, which is the QX100 and transforming it into a new generation, the QX200. The principal change there is we drastically expand the type of chemistries that can be used in digital PCR and allow customers to adopt a lot of different workflows using some of the interculating dyes instead of some of the other specific TaqMan probes. So overall that’s the biggest change, and again, it gives us a lot more flexibility and removes one of the sort of challenges that we had or one of the objections that customers had when we brought this product on market in its original form.