Bio-Rad Laboratories, Inc.

Good day, ladies and gentlemen, and welcome to Bio-Rad Laboratory's second quarter 2019 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 be given at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to Ron Hutton, Treasurer, and Vice President. You may begin.

Thank you, Tiffany. Good afternoon and thank you all for joining us today. Today we will review the second quarter financial results for 2019. With me today are Norman Schwartz, our CEO, Ilan Daskal, Executive Vice President and Chief Financial Officer, Andy Last, Executive Vice President and Chief Operating Officer, Annette Tumalo, President of the Life Science Group, and John Herdia, President of the Clinical Diagnostics Group. Before we begin our review, 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 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. 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 reconciliations of these non-GAAP measures to the comparable GAAP results contained in our earning release. I'd now like to turn the call over to Ilan.

Thank you, Ron. Good afternoon, and thank you all for joining us. We will review the results on a GAAP basis as well as commentary on a non-GAAP basis. Net sales for the second quarter of 2019 were $572.6 million, which is a 0.6% decline on a reported basis versus $575.9 million in Q2 of 2018. On a currency-neutral basis, sales increased 2.7%. During the quarter, we experienced good demand across many of our key product areas, and growth in all three regions. When comparing to the second quarter of last year, remember that Q2 of 2018 included about $6 million of sales that customers pulled in from Q3. Q2 of 2018 also included about $4 million higher sales associated with the discontinued Raindance Marriott account, and we expect it to be immaterial as of Q3. If we exclude the myriad reduction of sales and the sales that customers pulled in last year from Q3 to Q2, we estimate that the year-over-year currency-neutral sales growth for Q2 of 2019 was about 4.6%. Sales of the life science group in the second quarter of 2019 were $212.4 million compared to $217.8 million in Q2 of 2018, which is a decline of 2.5% on a reported basis and about flat on a currency-neutral basis. Process media, which can fluctuate on a quarterly basis, was slow in the second quarter after a very strong sales in Q1 of 2019. All other product areas within life science had a solid year-over-year growth and of note, a double-digit growth in droplet digital PCR, antibody business, and in food safety. Our droplet digital PCR growth continues to have good momentum due to its high sensitivity, precision, and thousands of optimized assays. To date, it is cited in several thousand of peer-reviewed publications. Excluding process media sales, the life science business, grew about 7.5% year-over-year on a currency-neutral basis, driven by continued biopharma demand. On a geographic basis, life science currency-neutral sales, excluding process media, were strong across all three regions, and most notably in the Americas. Sales of clinical diagnostics products in the quarter were $357.1 million compared to $354 million in Q2 of 2018, which is a 0.9% growth on a reported basis and a 4.8% growth on a currency-neutral basis. During the second quarter, we posted solid growth of diabetes and quality control products. Immunology also hit strong quarter, which has driven by sorry, which was driven by a reagent pull-through, a very high one. We also received this quarter an FDA approval for a bioplex Lyme disease panel, which has been much anticipated by our customers. On a geographic basis, the diagnostics group posted a year-over-year currency-neutral sales growth across all three regions. The reported gross margin for the second quarter of 2019 was was 53.7% on a gap basis and compares to 52.4% in Q2 of 2018. If you recall, in Q2 of 2018, we experienced product mix headwind and atypical inventory-related expenses. Much of the year-over-year margin increase is driven by improvements in these two areas. Amortization related to prior acquisitions recorded in cost of goods sold was $3.8 million compared to $4.7 million in Q2 of 2018. SG&A expenses for Q2 of 2019 were $201.3 million or 35.1% of sales compared to 36.5% in Q2 of 2018. Total amortization related to acquisitions recorded in SG&A for the quarter was $1.6 million versus $2.1 million in Q2 of 2018. Reducing the SG&A spend remains a focus area to achieve our 2020 goals. Research and development expense in Q2 was $50.1 million, or 8.8% of sales, compared to $47.5 million or 8.2% in Q2 of 2018. Looking below the operating line, the change in fair market value of the equity securities holdings added $716.4 million 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 expense of $3.2 million compared to $9.9 million income last year. The year-over-year decrease primarily reflects the Sartorius dividend that was declared this year in Q1 versus Q2 last year. The effective tax rate used in Q2 of 2019 was 22.2%, and compares to 21.2% in Q2 of 2018. These rates are primarily driven by the sizable gain related to our sartorius investment, and in Q2 of 2019 also included tax reform related benefits. Reported net income for the second quarter was $598.8 million, and diluted earnings per share for the quarter were $19.86. The increase in net income and earnings per share versus last year is substantially related to the valuation of the Sartorius holding. 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 incomes. These items are detailed in the reconciliation table in the press release. Looking at the non-GAAP results for the second quarter, in cost of goods sold, we have excluded $3.8 million of amortizations of purchased intangibles and small restructuring adjustments. The exclusions move the gross margin for the second quarter of 2019 to a non-GAAP gross margin of 54.4%, versus 53.4% in Q2 of 2018. If you recall, Q2 of 2018 included a headwind from product mix and at-typical inventory-related expenses, and again, much of the year-over-year margin increase is driven by improvements in these two areas. The non-GET SG&A in the second quarter of 2019 was 33.9%, an improvement of more than a point versus the 35.1% in Q2 of 2018. In SG&A, on a non-GAAP basis, we have excluded amortization of purchase intangibles of $1.6 million, legal-related expenses of $5.4 million, and small amounts for restructuring costs and acquisition-related benefits. In R&D, we have excluded a small amount of restructuring benefits The non-GAAP R&D in Q2 was 8.8%, which is in line with our expectations. The cumulative sum of these non-GAAP adjustments results in moving the quarterly operating margin from 9.8% on a GAAP basis to 11.7% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin in Q2 of 2018 of 10%. We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity holding of $716.4 million, as well as a small loss associated with venture investments. The non-GAAP effective tax rate for the quarter was 26.4%, which was primarily driven by the geographic mix in the second quarter earnings. We continue to estimate the annual tax rate on a non-GAAP basis to be in the 27 to 28% range. And finally, non-GAAP net income and diluted earnings per share for the second quarter of 2019 were $47.4 million and $1.57 per share, compared to $49.5 million and $1.64 per share in Q2 of 2018. Moving on to the balance sheet. In the first quarter of 2019, we adopted a new accounting standard related to leases, which requires us to recognize most leases as assets and liabilities on the balance sheet. The right of use assets balance in the second quarter was $215.5 million, and the associated liabilities included in other current liabilities and in other long-term liabilities. These balances primarily represent our operating lease obligations for facilities and auto leases. The adoption of this standard has a minimal effect on the income statement. The total cash and short-term investments at the end of Q2 were $987 million, compared to $850 million at the end of 2018. and $865 million at the end of the first quarter. During the second quarter, we purchased 51,398 shares of our stock for $15 million at an average share price of $291.85. For the second quarter of 2019, net cash generated from operations was about $155 million which compares to about $78 million in Q2 of 2018. This improvement mainly reflects the higher operating profits, improved working capital, the payment of the Sartorius dividend that was declared in Q1, as well as a tax refund. The adjusted EBITDA for the second quarter of 2019 was $95.1 million, or 16.6% of sales. The adjusted EBITDA in the first six months of 2019 was $196.7 million, or about 17.5%, compared to $180.3 million, or 16% in the first six months of 2018. Net capital expenditures for the second quarter of 2019 were $22.2 million, or 3.9% of sales. The full year expectation for CapEx spend is at the low end of the forecasted range of $110 to $120 million. Depreciation and amortization for the second quarter was $33 million. And lastly, I'd like to mention that we are pleased with the federal court's recent ruling upholding the decision against 10X Genomics and the $23.9 million award and injunction related to our Droplet Digital PCR intellectual property. Moving on to the guidance. We are pleased with the overall performance in the first half of the year, and we continue to maintain the annual guidance range. We expect a full year-over-year currency-neutral sales growth of 4% to 4.5%. We continue to target a non-GAAP gross margin in the 55.5% to 56% range for the year, and non-GAAP operating margin range of 12.5% to 13%. And with that, we will open the line to take your questions. Tiffany?