Bio-Rad Laboratories, Inc.

Good day, ladies and gentlemen, and welcome to the Q1 2019 BioRad Laboratories, Inc. earnings 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. If anyone should require assistance during the conference, please press star, then the number zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Ron Hutton. Sir, you may begin.

Thank you, Jimmy. 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 net 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 their earnings release. With that, I'd like to turn the call over to Ilan Daskal, EBP and CFO.

Thank you, Ron. Good afternoon and thank you all for joining us. Today we will review the first quarter financial results for 2019. With me today, Norman Schwartz, our CEO, Andy Last, Chief Operating Officer, Annette Tumalo, President of the Life Science Group, and John Hurtia, President of the Clinical Diagnostics Group. We will review the results on a gap basis as well as commentary on a non-GAAP basis. Net sales for the first quarter of 2019 were $554 million, which is a 0.4% growth on a reported basis, versus $551.5 million in Q1 of 2018. On a currency-neutral basis, sales increased 4%. During the quarter, we experienced good demand across many of our key product areas and growth in all three regions with a particular strength noted in the Americas. When comparing to Q1 of last year, remember that Q1 of 2018 sales included a royalty settlement of approximately $6 million within the diagnostic segments. also included in Q1 of 2018, is about $6 million of rain-dense sales, compared to about $1 million in Q1 of 2019. If we exclude the rain-dense reduction of sales and the royalty settlement in Q1 of 2018, we estimate that the currency-neutral sales growth for Q1 of 2019 was about 6%. Life science in the first quarter of 2019, the revenue was $215.7 million, compared to $197.8 million in Q1 of 2018, which is an increase of 9.1% on a reported basis, and a year-over-year growth of 12% on a currency-neutral basis. The growth in the first quarter was across all product areas, with particular strengths within cell biology and food safety. Digital PCR also had a nice growth when excluding the range in sales, and our process media product line, which can fluctuate on a quarterly basis, had a very strong quarter. Excluding process media sales, the life science business grew about 5.5% year-over-year on a currency-neutral basis. On a geographic basis, life science currency neutral sales were strong across all three regions and most notable in the Americas. Sales of clinical diagnostics products in the quarter were $334.1 million compared to $350.8 million in Q1 of 2018, which is a 4.8% decline on a reported basis and less than 1% decline on a currency-neutral basis. Excluding last year's tough compare of the royalty settlement, the diagnostics business grew about 1% year-over-year on a currency-neutral basis. Despite the tepid growth, it is important to know that placements of our key diagnostic systems showed consistent growth during the first quarter of 2019 versus Q1 of 2018. During the quarter, the Diagnostics Group posted solid growth in the Americas across all the product areas, and of note growth in blood typing and in autoimmune testing products. This geographic growth was somewhat offset by a weaker quarter in parts of EMEA and in Asia. The decline in Asia was associated with older timing this quarter and a tough compare with Q1 of 2018. Overall, our outlook for Asia remains positive. The reported gross margin for the first quarter of 2019 was 56.3% on a gap basis and compares to 54.8% in Q1 of 2018. The current quarter gross margin benefited from an escrow release of $7.4 million related to an acquisition from 2011 within the Life Science Group. The gross margin also benefited from improved logistics costs and inventory reserves. The improvement was partially offset by product mix and higher service costs. Amortization related to prior acquisitions recorded in cost of goods sold was $3.7 million compared to $4.8 million in Q1 of 2018. SG&A expenses for Q1 of 2019 were $207.6 million or 37.5% of sales compared to 37.9% in Q1 of 2018. Total amortization related to acquisition recorded in SG&A for the quarter was $1.7 million versus $2.1 million in Q1 of 2018. Research and development expense in Q1 was $47.6 million, or 8.6% of sales, compared to $49.4 million, or 9% in Q1 of 2018. Looking below the operating line, the change in fair market value of the equity securities holdings added $1,059,000,000 of income to the reported results, and is substantially related to the holdings of the shares of Sartorius AG. Also during the quarter, interest and other income resulted in net other income of $11.4 million compared to $4.1 million income last year. Q1 of 2019 includes $15.7 million of gross dividend income from Sartorius, which was declared this year in March and was paid in April. In 2018, the dividend was declared and paid in the second quarter. Remember that in the first quarter of 2018, other income included $9.2 million for the vestiture of a small product line and a sale of surplus land in Europe. The effective tax rate used in Q1 of 2019 was 23.2% and compares to 24% in Q1 of 2018. Reported net income for the first quarter was $865.2 million, and diluted earnings per share for the quarter were $28.74. The increase in net income and earnings per share versus last year is substantially related to the valuation of the Sartorius holdings. Moving on to the non-GAAP results. Looking at our results on a non-GAAP basis, we have excluded certain atypical and unique items that impacted both the gross and operating margins, as well as other income. These items are detailed in the reconciliation table in the press release. Looking at the non-GAAP results for the first quarter, in cost of goods sold, we have excluded $3.7 million of amortization of purchased intangibles, $7.4 million escrow release related to a prior acquisition within the life science group, and a small restructuring adjustment. These adjustments move the gross margin for the first quarter from 56.3% to 55.6%. This non-GAAP gross margin compares to a non-GAAP gross margin of 55.7% in Q1 of 2018. The non-GAAP SG&A in the first quarter of 2019 was 36.4%, an improvement versus 37.1% in Q1 of 2018. In SG&A, on a non-GAAP basis, we have excluded amortization of purchase intangibles of $1.7 million, legal-related expenses of $4.4 million, acquisition-related benefit of $355,000, and a small restructuring cost. In R&D, we have excluded a small amount of restructuring cost. The non-GAAP R&D in Q1 was 8.6%, which is in line with our expectation. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 10.2% on a GAAP basis to 10.5% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin in Q1 of 2018 of 9.7%. We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity holdings of $1,059,000,000, as well as $440,000 associated with venture investments and other non-recurring items. The non-GET effective tax rate for the quarter was 28.5%. This higher tax rate reflects a change in geographic mix of the profitability. However, we still expect the full-year non-GET effective tax rate to be between 27% and 28%. And finally, non-GET net income and earnings per share for the first quarter of 2019 were $49.6 million, and $1.65 per share, compared to $35.4 million and $1.17 per share in Q1 of 2018. We estimate that the Sartorius dividend, net of an estimation of its tax provision, totals $0.40. The estimated EPS benefit of $0.40 shifts from Q2 to Q1 and Sartorius may continue to declare future annual dividend distributions in the first calendar quarter of each year. Moving on to the balance sheet, as of March 31st, total cash and short-term investments were $865 million compared to $850 million at the end of 2018. The first quarter historically has tended to be a heavy cash use quarter, as we typically pay the annual bonuses and commissions, as well as annual software and IT-related maintenance expenses. Also during the quarter, we completed an acquisition of a small company in the life science group that will expand our suite of genomic reagent offerings. In the first quarter, we adopted a new accounting standard related to leases, which requires us to recognize most leases as assets and liabilities on the balance sheet. You will note a $222 million addition to the balance sheet of right-of-use assets and associated liabilities which are included in other current liabilities and in other long-term liabilities. These balances primarily represent our operating lease obligations for the duration of the global facilities and auto leases. The adoption of this standard has a minimal effect to the income statement. For the first quarter of 2019, net cash generated from operations was $43 million, which compares to $40 million in Q1 of 2018. This improvement reflects the higher operating profits partially as a result of a disciplined cost control. The adjusted EBITDA for the first quarter of 2019, which includes the Sartorius dividend, was $101.7 million, or 18.4% of sales. The estimated adjusted EBITDA in Q1 of 2019, and excluding the Sartorius dividend, was about 15.5%. The adjusted EBITDA in the first quarter of 2018, was $81.1 million, or about 14.7% of sales. Net capital expenditures for the first quarter of 2019 were $23.6 million, or 4.3% of sales. Our expectation for the full year CapEx spend remains in the range of $110 to $120 million. And depreciation and amortization for the quarter was $32.9 million. We are currently on track with the annual guidance that was provided during the last call. And with that, Norman, do you have anything you would like to say before we open the call for the questions?

Sure. I think Elon covered the quarter well. I just wanted to say that it's great to have both Elon and Andy, Andy last on board. Both recently joined us, and they both bring a wealth of experience and fresh perspectives to Bio-Rad. As you may know, Elon's background is in accounting and finance, and he has spent most of his career in the semiconductor industry, mostly with global companies. Andy is rooted in the biological science. and over the years has progressed through product and general management at some recognizable names like Applied Biosystems, BD, and Affymetrix, and bringing with him a wealth of industry and operational experience. I think they both join us as we're off to a good start for the year, and the organization looks forward to their contributions. And with that, Jimmy, I think we'll open up the line to take your questions.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please hit star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may hit the pound key. Again, if you'd like to queue up to ask a question, please hit star, then one on your touchtone telephone. Our first question comes from Michael Sarkone with Deutsche Bank. Your line is now open.

Thanks. Good afternoon. This is Mike Sarcona for Dan Leonard. Just first, on the life sciences business, you called out particularly strength in the Americas. Can you give us some more granularity on what you saw in APAC in Europe?

Hi. This is Annette. So we saw good growth across all our geographies. We called the Americas out because they were particularly strong. So, you know, I don't have anything bad to say about growth in Europe and EMEA and Asia. They are growing across all our key product areas.

Got it. Thanks. And just one on the clinical diagnostics business. You gave a positive mention to autoimmune and blood typing. Can you maybe delve into any areas where you saw a particular weakness just to get some granularity there?

Mike, you're looking for a year-over-year increase for both of those?

No. Well, no, you had mentioned you called out the positives in the quarter for clinical diagnostics.

Right.

I was just curious if there was anything that stood out as being particularly weak in the quarter and if you could kind of talk to that.

Particularly weak in the quarter? Yes. Well, I think in the earlier narrative, we talked a little bit about Asia and and parts of Europe being a little bit weak, Asia because of sort of the ordering lumpiness, and there were certain parts of Europe, I'd say probably non-core Europe, that were a little bit weaker. We did see some growth in quality control and diabetes on a global level, but we didn't highlight that because it wasn't as strong as both the bioflex autoimmune business and blood typing.

And let me add to that that also for Asia specifically, we believe it's a timing issue. and it's not kind of a sustained weakness that we see so far.

Got it. Thank you. And last one for me. Are you still expecting AMEA on the clinical diagnostic side to return to growth this year?

Yes. We did actually see some growth in quarter one. I think we've mentioned over the last few calls, if you go back a couple of years, there was some consolidation in Europe, and that had slowed growth, and then we talked at our last earnings call about EMEA having worked through the D3 transition for SAP, that seems to be continuing, and they did show growth overall for this quarter, which is encouraging. Okay. Thank you. Thank you.

Thank you. And our next question comes from Brandon Couillard with Jefferies. Your line is now open.

Hey, thanks. Good afternoon. Good afternoon. I'd actually like to start with Andy. I'm curious, you know, if there are any similarities you can draw from your time at Affymetrix where, you know, I think you took the operating margins up something like 600 basis points over time that you can apply and adhere at BioRat. And what are some of your near-term priorities as you sort of take over this COO role and some of the biggest opportunities you see near-term?

Thank you, Brendan. So 600 basis points was it? Okay. Well, look, I think the main comments I would make is that was really a question of probably managing the portfolio of the company and applying the resource where the biggest growth opportunities were. When I come into BiRAT, I'd say I'm a couple of weeks in. It's very early. I've got to... fully understand the business and the profile of the business. But it's got a similar mix to Appometrics, and I feel confident that we can apply the same principles as we move forward.

All right, super. And then maybe one for you, Alana. I realize it's early, but based on your first few weeks at the company, Any reason to back off the 2020 targets? How would you just sort of describe your level of comfort with those that were established sort of by your predecessor? And any thoughts as to how you might be able to use the balance sheet more sensibly? And do you think carrying $400 million to $500 million of net cash is an optimal position for the balance sheet?

Yeah, sure. Thanks, Brendan. So let me start, you know, with the 2020 EBIT target. I did have kind of a top-down look at it, and, you know, the first kind of conclusion I think that is it's a reasonable target to achieve, and that's by the end of 2020. We have several initiatives within the company, several, you know, that are focused in the SG&A and in gross margin expansion. Andy and I are going to look into those initiatives on a bottom-up basis, and we're going to dive into each one of them. But overall, again, it is a target that I believe we can achieve by the end of 2020. Going back to your second question regarding the capital allocation model. When you look at it, we have a $250 million buyback program right now. We did about 49 so far. And when you think about the inorganic activities, as an example, the acquisition that we did this quarter, we continue to have the same kind of activity. kind of approach of either attacking technology acquisition or IP or alternatively acquisitions with nice cash flow this year in order to augment the free cash flow overall. And at least for the time being, we think this is the best, you know, use of the overall capital allocation model that we'll deploy.

Very good. And one for you, Annette. Could you speak to sort of the demand trends you're seeing in the DDPCR business, any moderation growth there at all, and what are some of the key drivers and applications that are driving adoption of that system? And any chance you could share with us an update on where the global installed base stands now? Thank you.

Okay, I can probably answer some of those questions, Brandon. So we continue to see really good adoption for liquid biopsy applications. It's growing across all geographies. So we're very happy about that, and we see really strong sales into the biopharma segment, both in discovery and in the QC and manufacturing, and as people are manufacturing some of these newer cell-based drugs. So those are two areas that continue to drive good growth for us. Tell me what your other question was. We don't really talk about our install base, but to say it's growing and, you know, we expect this year to really continue the consumable pull-through on all of those products as well.

Very good. And then maybe last one for John, perhaps a little bit of a slower start, arguably, you know, some timing dynamics in there. in diagnostics in Asia. But you still expect that business to grow 3% to 4% for the year. And then specifically on the blood typing business, how do you think your growth stacks up relative to that of the market? And could you sort of speak to perhaps your competitive win rate as you launch some of these newer platforms in the U.S.? Thank you.

I guess I'd start with the first question, Brandon. Overall guidance and confidence for us at both the group level and in Asia is fine. We would stick with that. Blood typing continues to be strong. We don't really talk about competitive shares, but we grew the business nicely in the first quarter. Adoption in the U.S. has been really good with the, you know, recent FDA approvals of the IH24 and then just last month the IH500. We expect that to improve. We always thought the, you know, medium volume market was the largest part of the market in the United States, and the IH500 has particularly well-suited for that. So we continue to see good prospects for that business overall.

Very good. Thank you.

Thank you, Brendan.

Thank you. And our next question comes from Patrick Donnelly with Goldman Sachs. Your line is now open.

Great. Thanks. Maybe just one on the life science business. You obviously put up a great quarter. Maybe just talk through the magnitude of the beat there, the durability of the growth. I know the guidance is for more kind of 5% to 6% type growth, nice double-digit growth to start the year. It doesn't seem like the outlook changed much. But, yeah, maybe just talk us through the dynamics. Was there any pull-forward dynamic or any reason, I think, that the growth will slow materially again to get closer to that guidance range?

Yeah, I mean, you know, we were happy that we had really strong growth across all of our core businesses and some of our newer businesses. and good growth from process chromatography resins. And that's one of those businesses where we can see fluctuations quarter to quarter in customer orders. We don't like to, but we call that a lumpy business. So in the first quarter, we did have some pull through of orders that we expected to come in in Q2. We got them in Q1. So I think, you know, that moderates some of our expectations moving forward.

Okay, that makes sense. And then, Elon, maybe just on the margin story, you know, particularly this year seems a little ahead of schedule. You know, we had it a little more back half-weighted. So can you just talk through, you know, what came in a little ahead of expectations on the margin side? What levers have you guys been able to pull, again, maybe a little ahead of expectations? Sure.

Yeah, so first, you know, let's recap, you know, on a non-GAAP basis, the margin was about 55.6, which is about flat year over year. You know, when you back out the rain dance revenue as well as, you know, the royalties from last year, you get a pickup of about a point or so. A lot of, you know, that pickup was an outcome of the initiative from last year. if you recall, the consolidation of the warehouses and logistics and supply chain kind of improvement. And that contributed, you know, a lot of, you know, of the incremental kind of margin. And obviously Process Chrome was, you know, the other piece for this quarter.

Okay. And then last one for me, just on the the softness in Asia. Can you just give a bit more color on the order timing? Did things slip into 2Q that you've already recognized and expect to see a catch-up on REZ in 2Q, or was it more uncertain in terms of the timing there?

Brandon, it's John Hardy. I think we'll, again, guidance hasn't changed, so we think over the course of the year, the anticipated orders that we're expecting for Asia will come in.

Thank you. Thank you. Thank you, and as a reminder to our listeners, if you'd like to ask a question, please hit star, then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may hit the pound key. Our next question comes from Jack Nehan with Barclays. Your line is now open.

Thank you. Good afternoon. I was hoping you could start on the diagnostics business. I was curious how the quality controls business performed in the quarter, just given that's usually pretty steady, Eddie. I'm surprised it wasn't called out for growth. Were there any one-time factors in the quarter or geographic points you would highlight?

This is John Herria. It did grow a little bit in the quarter, but not a call-out business. A part of that mitigated growth was related to the earlier comments that we had on ordering patterns in China and in certain parts of Europe.

Got it. And then I was curious on the droplet digital side how some of the liquid biopsy rollout, how that's going. And similarly, any updates on timing of rollout of applications in single cell?

Sure. So you may have heard that we achieved FDA clearance of the first droplet digital platform and test for use in liquid biopsy. to monitor molecular response to chronic myeloma leukemia. And we are going to launch that product in the second quarter, by the end of the second quarter. So that was a really big development for us. And we expect to see that help expand the adoption of lab-developed tests on that platform. So these are all things that are helping us expand our share in the liquid biopsy market. On the NGS sample prep single-cell front, we have announced that we are launching in the next few weeks a new application for interrogating the epigenomics of single-cell. It's an ATT&CK-seq kit. for single-cell NGS sample prep. So that's our next application coming out.

Great. And just one final question. Could you give a little bit more color on the sizing and the nature of the acquisition on the life science side in the quarter? And any thoughts around the attractiveness of buyback at this point?

I can answer the first part. The – we acquired a technology for – a novel technology for a genomic reagent application, and right now we're kind of heads down, focused on getting the products transferred into our manufacturing plants. We plan to launch probably in the fourth quarter of this year, and we'll have more to say about it closer to launch.

And, Jake, to your second question. So in Q1, I mean, after we filed, you know, we had to close windows, so we were not able, you know, since the beginning of the year to be in the market. Generally speaking, you know, we will continue to be opportunistic with the buyback, and, you know, it depends on, you know, the timing and when we feel that it's the right opportunity for us to step in.

Okay. That makes sense. Thanks, Juan.

Thank you.

Thank you, and I am showing no further questions in the queue at this time. I'd like to turn the call back to Elon Tuskell for any closing remarks.

Do you want to pull one more time, maybe?

Certainly. Ladies and gentlemen, if you'd like to ask a question, please hit star then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may hit the pound key. We'll take a moment to see if any final questions appear in the queue. We do have a follow-up from Jack Nehan with Barclays. Your line is now open.

I'll continue with a couple others that I had. I guess, you know, you call that some of the one-timers in the first quarter. Is there anything, just as we think about the progression into the second quarter and into the second half, you would note just in terms of one-timers you're aware?

So, you know, one-timer, for example, on the top line of the process Chrome, it's going to fluctuate as it does, you know, every year. And that's the one that I can think about, you know, right now.

Okay. And then the other progression I wanted to ask was on the gross margin side. I know there's been a little bit of movement related to the blood typing instrument versus reagent pieces. But just as we think about the progression through the rest of the year, anything on that you would point out too?

In blood typing specifically?

Or just overall, which would impact the gross margins for the business?

So generally, you know, we don't break down the specific of each product line. But, you know, the growth between blood typing, you know, is very nice. And the pull-through continues to be healthy. And we are very pleased, you know, with the progress, I mean, including the penetration into the U.S. market.

Okay. Do you still think 55.5 to 56 is a good range for the full year?

Yes, we do.

Okay. Thank you, guys.

Thank you. Thank you. And we have a question from Christine Singos, a private investor. Your line is now open.

Thank you. Hello, everyone. Hi, Christine. Hi. I just wanted to take a minute to say farewell and certainly thank the investment community for your interest and support over these many years. I've certainly enjoyed working with you very much. And I also wanted to say that I'm confident that Bio-Rad is in good hands and well positioned for the future. And like you, I'll be excited to watch that future unfold. So with that, I'll say goodbye and best wishes for continued success. And hopefully our paths will cross again one day.

Thank you, Christine. I wanted to thank you also for your support in my transition here in the past few weeks. I don't know, Norman, if you want to add anything. Okay, good. Thank you, Christine.

Okay, thank you.

Thank you.

Thank you. And as one last check, if you'd like to ask a question, please hit star then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may hit the pound key. We'll take a moment to see if any final questions appear in the queue. Speakers, I am showing no questions in the queue at this time.

Okay, thank you, everyone, for joining our call today, and we appreciate your continued interest. Thank you.

Ladies and gentlemen, thank you for your participation in today's program. This does conclude it, and you may all disconnect. Everyone have a great day.