Bio-Rad Laboratories, Inc.

Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2018 BioRab Laboratories, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance during the call, please press start and zero on your touch-tone telephone. I would now like to introduce for today's conference Mr. Ron Hutton, Vice President and Treasurer. You may begin.

Thank you. 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 future financial performance, and other matters. Because our actual results may differ materially from our 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 our risk factors in our business. The company does not intend to update any forward-looking statements made during the call today. Our remarks today will also include references to non-GAAP income and non-GAAP diluted income per share, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release. With that, I'd like to turn the call over to Christine Singos, Executive Vice President and Chief Financial Officer.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Today, we will review the fourth quarter and full-year financial results for 2018, as well as provide some insight into our thinking for 2019. With me today are Norman Schwartz, our CEO, Annette Tumalo, President of our Life Science Group, and John Herdia, President of our Clinical Diagnostics Group. Today we will review our results on a GAAP basis and then provide some commentary and insight to our results on a non-GAAP basis. Let's start with the top line. Net sales for the fourth quarter of 2018 were $617.5 million and as expected, slightly lower versus the same period last year record sales of $621.3 million. On a currency neutral basis, sales increased 1.9% and higher than our guidance. During the quarter, we experienced good demand across many of our key product lines with particular strength noted in the Americas and Asia Pacific. Life science sales in the fourth quarter were $239.6 million, a slight increase on a reported basis when compared to last year, and growth of 2.3% on a currency neutral basis. It is important to note that this increase was on top of the 12% currency neutral growth in the year-ago period. Much of the growth in the fourth quarter of this year was driven by continued strong demand for our cell biology, western blot, and digital PCR products, as well as higher than market growth for gene expression and antibody products. This growth was somewhat offset by the tough compare and expected decrease in our process media product line, as well as the expected reduction of sales of Raindance products. The combined decline in sales of Raindance and Process Media products totaled more than $8 million in the fourth quarter. On a geographic basis, LifeScience experienced strong currency-neutral sales growth, most particularly in the US and China. Sales of clinical diagnostics products in the quarter were $373.7 million compared to $378.4 million last year, a decline of 1.3% on a reported basis, but growth of 1.7% on a currency neutral basis. During the quarter, we posted solid growth in the U.S., especially for blood typing, quality control, and autoimmune testing products, as well as growth in Asia Pacific. This geographic growth was partially offset by a decline in Europe. The reported gross margin for the fourth quarter was 54% on a GAAP basis and lower than last year, but certainly improved from recent levels experienced in the second and third quarters. The current quarter margin was impacted by a sizable restructuring charge, changes in product mix, higher service costs, as well as additional inventory-related expense in our European operations. Amortization related to prior acquisitions recorded in cost of goods sold for the quarter was $4.2 million, which compares to $4.9 million in the same period last year. SG&A expenses for the fourth quarter were $212.5 million, or 34.4% of sales. When compared to the third quarter of this year, the sequential increase in spend is the result of higher employer-related expenses as well as a significant increase in litigation costs as we vigorously defend our key intellectual property. Total amortization related to acquisitions recorded in SG&A for the quarter was $1.8 million versus $2.1 million in the third quarter of last year. Research and development expense in Q4 was in line at $53.1 million or 8.6% of sales. During the quarter, we impaired approximately $300 million of goodwill and intangible assets related to prior acquisitions, the lion's share being related to the acquisition of Diamed, which was completed in 2007. The dynamics and pricing environment of the global blood typing market has changed significantly compared to 10-plus years ago, leading us to make the appropriate accounting decision regarding the value on our books. And while we have taken the appropriate accounting action, we continue to be optimistic about the business with future growth and margin expansion opportunity. Looking below the operating line, the change in fair market value of our holdings of equity securities resulted in a loss of $814 million in our reported results for the quarter and is substantially related to our holdings of ordinary and preferred shares of Sartorius. Also during the quarter, interest and other income resulted in net expense of $84,000 compared to $10 million of expense last year. This improvement primarily reflects higher investment income as well as lower foreign exchange hedging costs versus last year. The effective tax rate used during the fourth quarter was 20%. This lower than expected rate was driven by the sizable loss related to our sartorius investment and impacted by the benefit from tax reform in the U.S. and the non-deductible goodwill impairment. Now, as we look to our results on a non-GAAP basis, it's important to note that we have excluded certain atypical and unique items that impacted both our growth and operating margins. These items are detailed in the reconciliation chart in our press release. Looking at the non-GAAP results for the fourth quarter, in cost of goods sold, we have excluded amortization of purchase intangibles of $4.2 million, as well as restructuring charges of $5.1 million related to a manufacturing operation in Europe that we will be closing and consolidating into one of our existing facilities in early 2020. This represents another step along the path to optimizing our global supply chain and is expected to result in more than $2 million of annual savings starting in 2020. These adjustments move the growth margin for the fourth quarter from 54% to 55.6%. This non-GAAP margin compares to a non-GAAP margin in the fourth quarter of 2017 of 55%. In SG&A on a non-GAAP basis, we have excluded amortization of purchase intangibles of $1.8 million, legal related expenses of $8.7 million, a small acquisition related benefit, and restructuring costs of $421,000 related to a prior action. In R&D, we have excluded $1.3 million of expense related to restructuring as well as excluded the impairment charge. The cumulative sum of these non-GAAP adjustments result in moving the operating margin for the fourth quarter of 2018 from 11% on a GAAP basis to 14.5% on a non-GAAP basis. This significant improvement compared to the first three quarters of 2018 represents good expense control and early signs of driving operating leverage, especially in SG&A where the margin dropped to 32.7% of sales. We have also excluded the change in fair market value of our equity holdings and a small loss associated with venture investments that are recorded on the equity method of accounting from our non-GAAP results. With all of these various items in mind, we adjusted our tax provision for these exclusions resulting in a non-GAAP effective tax rate of 28%, significantly improved from the third quarter and in line with our guidance given on the last earnings call. And finally, non-GAAP net income and earnings per share for the fourth quarter of 2018 were just over $64 million or 10.4% of sales and $2.13 per share, which compares to $57.3 million and $1.90 per share last year. Looking at the full year results, we are pleased to report annual sales of $2,290,000,000. which represents currency neutral growth of 5% and ahead of our guidance. This growth reflects strength across many product and regions for both life science and diagnostics. Our life science group posted record annual sales of $861.7 million, an increase of 9.7% on a reported basis when compared to 2017, and growth of nearly 9% currency neutral. This impressive growth was driven by continued strong demand for our Droplet Digital PCR product family, as well as solid growth in areas where we are increasing focus and investment, such as cell biology and food safety, all three of these key product areas growing double digits for the year. Equally satisfying is seeing significant increases in sales for our more traditional product areas of gene expression and western blotting. And of course, our process media business came back exceptionally strong in 2018 and finished the year at record levels. From a regional view, life science sales increased in all three geographies, led by double-digit growth in the US and China. For the year, clinical diagnostic sales were $1,412,000,000, an increase of 3.8% on a reported basis and 2.7% currency neutral. This growth was fueled by continued momentum in quality control, blood typing, and autoimmune testing products. During the year, we placed more than 2,000 new instruments around the world. which bodes well for higher consumable sales in the years to come. From a regional view, diagnostic sales increased most notably in the US, China, and Japan, and were partially offset by continued challenges in Europe. We now believe that much of the ERP transition woes in that region are behind us, and we are looking forward to growth returning for diagnostic sales in EMEA in 2019. Looking to the full year operating results on a non-GAAP basis, the 2018 gross margin was 54.6% and compares to a non-GAAP margin of 56.1% in 2017. This 150 basis point decline is attributable to changes in product mix, including pricing pressure, primarily in our diagnostic segment, as well as startup costs associated with our entry into the US blood typing market. We estimate that mix in pricing accounted for approximately 70 basis points of the decline, while startup costs for the US blood typing entry accounted for an additional 25 or so basis points. Also putting pressure on the gross margin during 2018, but not included in our non-GAAP calculation, was more than $10 million of costs associated with the ongoing transition of Europe to a new, more efficient operating model. These costs were primarily related to the write-down of inventory in various locations around Europe. While product mix and market pricing is an ongoing part of doing business, we believe that the European transition-related costs are behind us. And as we build the sales for blood typing products in the US over the coming quarters and years, pressure on the gross margin related to these startup costs will be less of a needle mover. And there's also more good news for the long-term gross margin expansion. And it is important to note that during the year, we made significant progress with building long-term efficiency into the supply chain through the closure of numerous warehouses and the consolidation of both direct and indirect procurement. During 2018, these moves already reduced overall spend by an estimated $10 million and should contribute even more in 2019. Despite the lower than expected gross margin, our non-GAAP operating margin for the full year 2018 expanded 150 basis points from 9.2% in 2017 to 10.7% in 2018. This expansion is substantially the result of lower ERP-related spend of approximately $15 million, coupled with savings of more than $20 million from the shutdown of our new bio and rain-dense operations. I would also highlight that non-GAAP SG&A expense for 2018 was held flat to the 2017 level, garnering a 200 basis point improvement in the SG&A margin and evidencing our ability to harness operating leverage. And finally, non-GAAP net income for 2018 increased more than 35% to $176.7 million, or 7.7% of sales, compared to 127 million or 5.9% of sales in 2017. Non-GAAP earnings per share for the year increased to $5.84 compared to $4.23 in 2017. Moving to the balance sheet, as of December 31st, 2018, total cash and short-term investments were $850 million compared to $760 million at the end of 2017 and $866 million at the end of the third quarter. The decrease on a sequential basis primarily reflects cash used for our share buyback program. During the fourth quarter, we purchased 179,000 shares for approximately $49 million. Additionally, during the quarter, we purchased two buildings for approximately $25 million that will primarily be used to accommodate the planned expansion of our digital biology group. We continue to make excellent progress on improving our cash flow. For the fourth quarter of 2018, net cash generated from operations was just over $105 million, which reflects higher cash generated than in all of 2017. Cash generated from operations for the full year 2018 totals more than $285 million and significantly exceeds the cash flow we have been seeing over the past several years. Moreover, free cash flow for the year is the highest we have recorded since 2011. This positive result reflects improvement in both collections and inventory management as we continue to make progress towards optimizing our global operating model and systems. As an example, our DSOs improved by more than 15 days from the 2017 level, and cash conversion days improved by nearly 30 days for the year, bringing these metrics more in line with the pre-ERP disruption results. The adjusted EBITDA for the fourth quarter was $118.2 million, or 19.1% of sales. Full-year adjusted EBITDA, including the Sartorius dividend paid during our second quarter, is $371.2 million, or 16.2% of sales. This year-to-date adjusted EBITDA margin compares to 15.2% in 2017, 100 basis points, and $43 million of improvement. Net capital expenditures for the quarter were $53.9 million, and that includes the property purchase I just mentioned. Full year CapEx was $125.5 million. Excluding the building, CapEx for the year was in line with our expectations of around $102 million. And finally, depreciation and amortization for the quarter was $34.6 million and $138 million for the full year. Now let's move to the outlook for 2019. Today we are excited to share our thinking for 2019, which anticipates continued sales growth near the top of our stated range, as well as continued expansion in operating and adjusted EBITDA margins. Let's start with the top line. For 2019, we are guiding currency neutral sales growth to be in the 4 to 4.5% range. On a reported basis, using current exchange rates, that growth could look more like 3 to 3.5%, but we will see what the dollar does throughout the year. As we look at the components of the estimated 4 to 4.5% currency neutral growth, We are anticipating both segments to drive that growth through new products as well as geographic expansion. For life science, we see continued momentum as funding for research in our major markets seems to be holding steady. As such, we estimate 2019 growth for life science in the 5% to 6% range, which we would point out is on top of the very strong performance of 9% growth recorded in 2018. This outlook anticipates continued growth in all of our key product market areas and regions and also anticipates a significant year-over-year decline in sales of Raindance products. For diagnostics in 2019, we are targeting currency-neutral growth in the 3% to 4% range. This accelerated growth rate when compared to the 2018 results reflect a return to growth in EMEA as well as continued expansion into the U.S. blood typing market. Looking to the margin profile for 2019 on a non-GAAP basis, we are targeting gross margins to be in the 55.5% to 56% for the full year, with the strongest margins coming later in the year as we recognize more savings from our logistics consolidation in Europe and higher sales from blood typing in the U.S. For the non-GAAP operating margin, we are guiding to the 12.5 to 13% range as we continue to manage expenses and drive operating leverage. Research and development expense is targeted at 9% of sales, and the tax rate is estimated to be 27 to 28%. And finally, we are estimating CapEx of $110 to $120 million. We are pleased with the solid progress we have made in 2018, as well as the incremental progress we are targeting for 2019. The top line growth, coupled with the improved margin profile, will also drive our adjusted EBITDA incrementally higher and still in line to achieve our longer-term target of a 20% EBITDA margin by the end of 2020. And now I'll turn the call over to Norman for a few comments.