Ronald W. Hutton - Treasurer & Vice President Christine A. Tsingos - Executive Vice President and Chief Financial Officer John Goetz - Chief Operating Officer John Hertia - EVP & President-Clinical Diagnostics Group.

S. Brandon Couillard - Jefferies LLC Jeffrey L. Matthews - RAM Partners LP Kevin C. Chen - Leerink Partners LLC.

Good day, ladies and gentlemen, and welcome to the Bio-Rad Laboratories, Inc. Q2 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 be given at that time. As a reminder, today's conference may be recorded.

I'd now like to turn the call over. Mr. Ron Hutton, Vice President and Treasurer, the floor is yours..

Thank you, Nicholas. 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 the floor over to Christine Tsingos, Executive Vice President and Chief Financial Officer..

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Net sales for the quarter were $506.1 million, a decrease of 5.7% on a reported basis versus the same period last year sales of $536.8 million. On a currency neutral basis, year-over-year sales grew 4.2%.

The difference in growth rate represents a currency headwind to reported sales of more than $53 million for the quarter.

During the quarter, we had growth across many of our key Life Science and Diagnostic markets, most notably in our Digital and real-time PCR product lines, as well sales of diagnostic products for autoimmune and diabetes testing and quality controls.

If we look geographically, the quarterly top line growth was led by strong sales in the U.S., Latin America, and China, offset by continued competitive challenges for our diagnostic products in Europe and Eastern Europe.

The reported gross margin for the second quarter was in line with our guidance at 55.2% and essentially flat when compared to 55.4% last year. On a sequential basis, the decline in margin is primarily reflective of changes in product mix as well as additional expense related to an increase in sales of royalty-bearing products.

For the quarter, the total non-cash purchase accounting expense recorded in cost of goods sold related to prior acquisitions was $7.3 million, which compares to $8.1 million in the second quarter of last year. SG&A expense for the quarter was $192.8 million, down slightly from the year-ago period.

The decrease in SG&A spending is the combination of a sizeable currency benefit, which was partially offset by a $2.6 million increase in bad debt reserves in some of our smaller emerging markets, contingent consideration expense of $1.3 million, and a one-time cost of $1.9 million for the termination of a distributor.

Also recorded in SG&A is $1.9 million for the amortization of intangibles related to acquisitions. Research and development expense in Q2 was 9.2% of sales or $46.5 million compared to $55.7 million last year.

The year-over-year decrease in R&D spend is a reflection of timing as well as the finalization of some major instrument products coming to market, specifically our new D-100 for A1c monitoring and the new IH-500 for the midrange blood typing market. Changes in foreign currency rates also had the effect of lowering R&D spend.

Going forward, we expect R&D to continue to be 9% to 10% of sales. During the quarter, interest and other income resulted in a net expense position of $665,000 compared to a net income position of $3.1 million in Q2 of last year. This change versus last year is largely related to higher foreign exchange hedging costs as well as lower dividend income.

The effective tax rate used during the second quarter was lower than expected at 28%, reflecting a decrease in tax reserves related to statute lapses in the U.S. Excluding any discrete items that may occur, we anticipate the full-year tax rate to be in the 31% to 33% range.

Net income for the second quarter was $28.4 million, and diluted earnings per share for the quarter were $0.97. This compares to net income of $31.6 million and $1.09 per share in Q2 of last year. The year-over-year decrease in net income is substantially related to the top line currency headwinds I mentioned earlier.

Now looking to the segments, Life Science reported sales for the second quarter were $170.6 million, essentially flat when compared to last year. However, on a currency neutral basis, sales grew an impressive 8.6%. These quarterly results reflect strong growth in both real-time and digital PCR products as well as our cell biology products.

In addition, sales of western blotting instruments and reagents performed well during the quarter, led by good demand for our new imager, the ChemiDoc Touch. On a geographic basis, sales to the U.S., European, and China markets posted sizable increases for Life Science.

Our Clinical Diagnostics segment posted quarterly sales of $332.1 million compared to $362.9 million last year, a decrease of 8.5%. On a currency neutral basis, year-over-year sales for the Diagnostics group grew 2.2%. This growth was led by performance across many product lines, most notably our BioPlex 2200 assays and our quality control products.

On a geographic basis, sales to the Americas were especially strong for Diagnostics during the quarter, as well as good continued momentum in Asia. This growth was partially offset by a continued decline in Europe. With the newly launched instruments for diabetes monitoring and blood typing, we hope to ramp up growth in several non-U.S.

markets during the second half of the year. Now moving to the balance sheet, as of June 30, total cash and short-term investments were $727.6 million. Net cash generated from operations during the quarter was $38.5 million compared to $29.5 million last quarter and $77 million in Q2 of last year.

This decrease in cash flow versus last year is substantially related to lower customer collections resulting from the decrease in reported sales and includes approximately $40 million of currency headwinds in receivables. EBITDA for the quarter was $77 million, or just over 15% of sales.

Net capital expenditures for the quarter were $32.2 million, which is a slight increase both sequentially and year over year. Our full-year expectation for CapEx has been in the $130 million to $140 million range. Given the year-to-date spend of around $60 million, we may likely be at the lower end of that range.

And finally, depreciation and amortization for the quarter was $32.1 million, about flat with the first quarter. For the remainder of the year, we expect depreciation to increase, reflecting the successful implementation of our second deployment of SAP.

The decrease in total depreciation and amortization when compared to the year-ago period is largely related to currency.

And now moving to the outlook, at the beginning of the year we laid out our guidance for 2015, and 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 revenue 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 half of the year results, the currency impact is certainly significant and negatively impacted sales by more than $97 million and operating profit by around $21 million.

Even so, we are pleased with our year-to-date performance in a somewhat mixed geographic market environment, and today are maintaining the guidance given at the beginning of the year.

Currency neutral sales growth for the first half of the year is 2.8%, just shy of our guidance, and we are cautiously optimistic that newly released products for the diagnostic market will help to accelerate growth in the second half of the year.

And from a profitability standpoint, both gross and operating profits are running slightly ahead of expectations for the first half of the year. But we believe much of this better than expected margin is a matter of timing.

Remember from historical experience that our margins tend to drift down as we move through the year and ramp up spending for new projects. I would also remind you that the third quarter historically can be choppy for us, primarily related to seasonality outside the U.S.

And given the current business environment challenges in Europe, seasonality this year could have a heightened effect. And now we're happy to take your questions..

And our first question will come from the line of Brandon Couillard with Jefferies. Your line is open. Please proceed with your question..

Thanks, good afternoon..

Hi, Brandon..

Christine, in the last several quarters, you've been pretty good by giving a core EPS number ex-discrete items.

If we back out the three one-timers in the period, do you have a cleaner EPS number for us?.

I should have known to do that. I don't, and remember the tax rate was also lower than expected. So you can probably do the calculation yourselves. And on a regular basis, we look at 32% – 33% as the base tax rate. I think the lower than expected tax rate picked up about $0.07 for us in the quarter.

But as far as the math on some of the one-timers or the more discrete items in SG&A, you can probably do that math..

Okay. And then I don't know if John Goetz is there, maybe one for him, probably this is best for him. But I know you completed the SAP rollout in North America.

Could you speak to the benefits enabled by that deployment with the platform? And to what extent did it affect 2Q revenues at all?.

I'll take that. This is John. Yes, we rolled out our second deployment at the beginning of July, and we're still, I would say, in the stabilization mode with that particular rollout right now. We're still assessing what effect it might have had in terms of top line, but we know this to be a usual situation having had some experience with D1.

And so far in terms of any benefit that we might get from D2, that's still down the road for us..

And I agree with John that it's difficult to know what the revenue impact may have been on the second quarter, Brandon. We did let many of our customers in the U.S. know that we were going to be going live the first week of July.

And so if some of them may have placed orders in advance of that, that wouldn't surprise me, but it would be hard for us to decipher exactly how much that was..

Sure, and then one for John Hertia. With respect to the IH-500 launch in the U.S., could you speak to the opportunity there in that low to mid-volume market in terms of total hospitals or number of units? And I would love to hear your perspective on just the general trend in blood donations and how you think that affects really the market growth..

So a couple things in there. The first thing to point out is that the IH-500 was launched outside of the U.S. So that's for....

Okay..

...our international markets. Later this year, we're hoping to introduce the IH-1000 in the U.S. along with our gel product line. We're hoping to get that in the fourth quarter, which is targeted towards particularly high volume laboratories.

The IH-500 is targeted toward smaller to medium size hospital blood banks or small donation centers, and it's the largest part of the segment that we didn't (16:05) addressed before, and we're really looking at the opportunity for growth..

Super, okay, one more for you. You called out the BioPlex 2200 assays as a growth contributor in the second quarter.

Were there specific assays or recent launches that were I'd say outsized contributors to that dynamic?.

Maybe three things. First we introduced over the last six months an HIV antibody antigen test, a fifth-generation test, which was just FDA approved for use in the U.S. We approved a vitamin D test, and both of those are beginning to add to the panel. And we've seen a lot of growth in our MMRV test, which is for measles.

And with the measles outbreak in the United States, that stimulated the interest in a lot of new systems..

Super, I'll hop back in the queue. Thanks..

Our next question comes from the line of Jeffrey Matthews with RAM Partners. Your line is now open. Please proceed with your question..

Hi, can you hear me?.

Yes..

Hi, Jeff..

Great. Hi, everybody, a couple questions. Number one, the bad debt reserves in emerging markets, I'm trying to square that with your comments that your weakness sounded like it was more in Europe.

Was this just because of currency issues or what?.

So one of the sizable ones, for example, was in Greece. So technically, that is Europe. Maybe I'm remiss to call it an emerging market. But that was certainly one of the countries where we increased our reserves given what's going on..

Got it. Okay, that makes sense.

And then the Asian growth in diagnostics that you called out, does that include China?.

Yes..

Okay..

So the part of Asia that's still a bit of a challenge for us on both sides of the business is Japan..

Okay, all right. And it sounds like SAP round two went well.

Where are you in the whole process, and what are the next steps?.

Sure, so we went live with our second deployment in July, which is basically bringing in the rest of the U.S. for Diagnostics and also bringing in our Life Science group. And I think the implementation, the go-live went pretty smooth. We'll be going through our first close here pretty soon.

So the team right now is focused on what they call hypercare, making sure people who are new to the system, we more than doubled the number of users on the system, know how to use it. They're using it properly, et cetera. If all continues to go well with that, shortly we'll be able to roll into beginning to do the design and blueprinting for Europe.

And Europe, as we've talked about in the past, is extremely complex, with 40 entities and more than 10 systems, et cetera. And so they'll be spending the better part of all of 2016 really working on that design and implementation. And barring any bumps in the road, we're hoping to start to go through a series of deployments in 2017 in Europe..

Okay.

And just, Christine, can you frame it in any way as far as any initial indications you've seen from the deployment, any information that you're getting from it or the speed at which you're getting information that ultimately this is going to make your life a lot easier relative to your earlier expectations? Is it better than you might have thought it could be or is it as you thought it could be, or are there disappointments in it?.

Good question, Jeff. I think overall it's probably even better. There are always challenges along the way. But you may remember that when we did our first deployment in April 2013, we created a shared service center for all the back office accounting transactions, AR, AP, things like that.

And now with the second deployment, that team was ready to catch the ball, and that transition went well. And frankly, having it all in one location helps with the close process, it helps with the analysis process, it helps with the audit process, and so that's great.

But frankly, I think the bigger benefit is to the business itself and the ability to operate more efficiently, to have that visibility in the supply chain and from planning and ordering right through logistics. And then that of course directly helps our customers in terms of our ability to service our customers.

So I think a lot of good news all the way around..

Okay, great. And then I would normally jump off and come back later, but I'll just ask the question I was going to ask now anyway. I guess for Norman or John, I don't know how you pronounce it, Theranos or Theranos getting FDA approval for the herpes test.

What does those mean long term for the industry in general and Bio-Rad in particular, if anything? Thank you..

So it's obviously I think an open question. Obviously, Theranos has a very interesting business model. There's some discussion about whether this opens up really a new category of patients that want to be diagnosed. It is more of a newer patient model.

I think we've seen a number of things in the past several years leading towards more point-of-care and more of what I guess I would call patient-centric model, and I think this is just one piece of it. I think we'll see how this plays out over the coming years..

Okay, thanks..

Our next question comes from the line of Dan Leonard with Leerink Partners. Your line is now open. Please proceed with your question..

Hi, this is actually Kevin in for Dan. Good afternoon.

Could you guys comment on the pricing pressure and dynamics in Europe given the weakness in the diagnostic market?.

Sure, Kevin, this is John Hertia. I would say the pricing pressure has stayed pretty constant during the course of the year. We have some mature markets over there in diabetes and immuno-hematology, and that's where we're seeing the majority of the price compression. You're also seeing some lab consolidation in France, and that's adding to it.

We're hoping with the introduction of two new systems in those areas where we're seeing price compression, the D-100 for diabetes and the IH-500 for immuno-hematology, we'll be able to reverse that trend. And so far, the recent indicators have been pretty good..

Great.

And to that point, do you think those launches and your upcoming launches as well, can those launches make the Diagnostic business go from a low single digit growth to a mid-single digit?.

Probably not in the near-term timeframe, but it can't hurt..

Sure..

We just can't quantify exactly what the percentage rise that we get out of that yet..

Okay, got it..

And so we're sticking to our 3% currency neutral growth for the year, and that's across the board. But I think that is what we're targeting for Diagnostics as well..

Okay, and just one last one.

Could you provide an outlook on the Chinese and European academic markets given the macro?.

Say that again, we didn't quite get the question..

Yes, could you just provide your outlook on the Chinese and European academic markets?.

I think that as we've seen, especially in China, that they've backed off their budgets a little bit in China just in general. And it's still obviously growing at an above-average rate. I think the interesting part for us is that it seems that Europe is doing very well, and that's been a very pleasant surprise for us.

I would say, by the way, that also you've got a resurgence of interest in funding in the NIH and some of these new initiatives, precision medicine funding. They're talking about continuing to ramp up NIH funding. So I would say that it seems that the outlook in the life science tool space is pretty decent..

Okay, I appreciate the color. Thank you..

And our next question is a follow-up from the line of Brandon Couillard with Jefferies. Please proceed with your follow-up..

Thanks. Maybe for Christine, I believe in the first quarter you mentioned a drag in the diagnostics business from older deferrals ahead of new product launches.

Did that persist in the second quarter, or was there any catch-up benefit for normalization?.

I would imagine at least early in the first part of the quarter, it did continue to persist. The D-100 was launched for a good portion of the quarter, so that's probably going away, but the other part of the demand is on the blood typing side, and we just launched the IH-500.

So a part of it probably persisted and probably contributed during the quarter and it's....

So is it fair to say it's still probably a net negative dynamic then?.

Probably, yes..

Okay, and then one for John. So at a high level, it's been about a year since you took over the COO role. I'd love to get just a progress report on the areas of the business where you've been focused on and what your priorities are as you look out the next six to 12 months..

Okay. As you probably know, we have made some organizational change here, carving out our supply chain into a separate entity globally.

And so one of the things that we're focusing on here is in the area of cost of goods and all of the things that go into that number, from sourcing raw materials to looking at our manufacturing plants, how many we have, whether those can be consolidated, where we have products that limit themselves to one particular plant or not.

So there's a lot of analysis going on in that particular area, and I'm pretty well focused on that one. In addition, we've consolidated all of our selling organization into a single global entity.

And while that may not give us a lot of let's say strategic change, but it will certainly allow us to I think get a good handle on setting goals and objectives in a more classically uniform way. So those are a couple of areas that I focused on.

The groups led by Shannon Hall and John Hertia are focusing on delivering and developing new products into their areas. And we still look at our business as two segments, Clinical Diagnostics and Life Sciences, and we consolidate all our results there, and so we hold them responsible for that. So I guess those are my first comments.

And maybe lastly is to really ensure that as we roll out ERP to the rest of the company, I think Christine touched on it. Europe is going to be a big hairy project, and we're already planning and gearing up for that, even though we're in hypercare for deployment too. So that's what keeps me busy..

That's very helpful. Just as a follow-up, to what degree do you have any additional cost actions or cost takeout planned for the balance of the year? At the end of the year, last year, you closed one. You shut down one unprofitable product line and closed a couple of facilities.

Is there anything embedded in your guidance for additional actions like that? And to what extent do you see room for additional opportunities there say in the near term?.

No, not in the near term, Brandon..

Fair enough, thank you..

Thank you. And with no further questions in the queue, I would like to turn the call over to Christine Tsingos for closing remarks..

Okay, great. Thank you, Nicholas, and thank you, everyone, for taking the time to join us today. Bye-bye..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Have a good day, everyone..