Bio-Rad Laboratories, Inc.

Good afternoon. Thank you for attending today's Bio-Rad Laboratories Q1 2022 financial results call. My name is Hannah, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Ed Chung, Head of Investor Relations with Bio-Rad Laboratories. Please go ahead.

Thanks, Hannah. Good afternoon, and thank you all for joining us. Today, we will review the first quarter 2022 financial results and provide an update on key business trends for Bio-Rad. With me on the phone today are Norman Schwartz, our Chief Executive Officer, Elon Doskell, Executive Vice President and Chief Financial Officer, Andy Last, Executive Vice President and Chief Operating Officer, Simon May, President of the Life Science Group, and Dara Wright, 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. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties. Included in these forward-looking statements are commentary regarding the impact of the COVID-19 pandemic on Bio-Rad's results and operations, and steps Bio-Rad is taking in response to the pandemic. Our actual results may differ materially from these plans and expectations, and the impact and duration of the COVID-19 pandemic is unknown. 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. Finally, our remarks today will include references to non-GAAP net income and diluted earnings 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 gap results contained in our earnings release. With that, I will now turn the call over to Chief Financial Officer, Elan Daskal.

Thank you, Ed. Good afternoon, and thank you all for joining us. Before I begin the detailed first quarter discussion, I would like to ask Andy Lust, our Chief Operating Officer, to provide an update on BioRed's operations. Andy?

Many thanks, Elan. So the first quarter of this year represented an interesting shift in the dynamics of our business. Overall, our markets have recovered to close to pre-pandemic levels of demand as the macro incidence rates of COVID and COVID testing has declined. However, significant more localized surges, especially in China, drove higher than anticipated PCR instrument demand during the quarter. The surge in China and subsequent major city lockdowns in the country are of course now creating increased uncertainty around logistics and near-term demand, which if protracted could adversely impact Q2 sales. Overall, we still expect that our COVID-related sales will continue to ramp down quickly compared to the last two years. In addition, during Q1, the Russian invasion of Ukraine resulted in imposition of significant sanctions and actions towards Russia. While these sanctions did not cause a material impact to Q1 revenues, we will closely monitor this dynamic situation going forward. Operationally, we have now opened up our offices for a broad return to the workplace and are seeing a positive uptick in business-related travel for customer and business meetings. Today, we have continued to maintain a very high internal safety rate for our employees. The overhang of the pandemic's effects on the supply chain, however, remains significant, and we experience ongoing difficulty in securing raw materials, especially electronic components, as well as high logistics costs. We do not see this easing until the second half of the year and continue to carry an order backlog, primarily on instruments as a result. In closing, While we continue to experience supply chain challenges, we are very pleased with our organization's ability to continually adjust to the changing demands of the COVID pandemic and other major macro factors impacting us. So at this point, I'll say thank you and pass it back to Alain.

Thank you, Andy. Now I would like to review the results of the first quarter. Net sales for the first quarter of 2022 were $700.1 million, which is a 3.7% decline on a reported basis versus $726.8 million in Q1 of 2021. On a currency-neutral basis, sales decreased 0.8%. The first quarter decline in revenue was a result of lower COVID-related sales this year. We estimate that COVID-related sales were about $45 million in the quarter, which reflects an elevated level in demand. Looking ahead, we continue to anticipate a significant tapering in COVID-related sales compared to the last two years. Core year-over-year revenue growth, which excludes COVID-related sales, increased 6.5% on a currency-neutral basis. On a geographic basis, we experienced currency-neutral year-over-year core revenue growth across all three regions, while COVID-related year-over-year sales declined globally. We know that the key markets were nearly at full recovery prior to the lockdowns in China during the final days of March. As Andy mentioned earlier, we continue to carry an elevated order backlog as a result of supply chain constraints. Overall, we still anticipate supply chain constraints for the life science group to ease starting mid-year and for the diagnostics group to ease towards the end of this year. Sales of the life science group in the first quarter of 2022 were $347.2 million, compared to $366.5 million in Q1 of 2021, which is a 5.3% decline on a reported basis and a 2.5% decline on a currency-neutral basis. Excluding COVID-related sales, the underlying life science year-over-year currency-neutral core revenue growth was 12.9%. The year-over-year growth was driven by process media and droplet digital PCR. Process media, which can fluctuate on a quarterly basis, saw strong year-over-year double-digit growth versus the same quarter last year. Excluding process media sales, the underlying life science business declined 9.6% on a currency-neutral basis versus Q1 of 2021 due to lower COVID-related sales. When also excluding COVID-related sales, revenue growth was 6.2% on a currency-neutral basis On a geographic basis, Life Science experienced currency-neutral year-over-year core revenue growth in the Americas and in Asia, while Europe was about flat. Sales of Clinical Diagnostics Group in the first quarter were $351.8 million, compared to $358.5 million in Q1 of 2021, which is a 1.9% decline on a reported basis, and a 1.1% growth on a currency-neutral basis. Core clinical diagnostics, year-over-year revenue growth, which excludes COVID-related sales, increased 1.7% on a currency-neutral basis. The diagnostics group, currency-neutral year-over-year sales increase, was driven by blood typing and clinical immunology, as well as the recovery of routine testing, which is now approaching pre-COVID levels. Supply chain constraints had an impact on instrument placements within the diabetes franchise. On a geographic basis, the diagnostics group year-over-year currency neutral sales grew in the Americas and Europe and declined in Asia. The reported gross margin for the first quarter of 2022 was 57.6% on a GAAP basis and compares to 55.1% in Q1 of 2021. The year-over-year gross margin improvement was mainly due to a decline in expenses associated with the European Restructuring Initiative in the same period last year, which was partially offset by increased logistics costs and less favorable product mix. Amortization related to prior acquisitions recorded in Cost of Goods Sold was $4.5 million compared to $4.6 million in Q1 of 2021. SG&A expenses for Q1 of 2022 were $197.6 million or 28.2% of sales compared to $225.9 million or 31.1% in Q1 of 2021. The year-over-year SG&A expenses decreased mainly due to higher expenses in the same period last year associated with the European Restructuring Initiative and was partially offset by higher employee-related expenses. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.8 million versus $2.4 million in Q1 of 2021. Research and development expense in Q1 was $62.5 million, or 8.9% of sales, compared to $73.9 million, or 10.2% in Q1 of 2021. The year-over-year R&D expenses decreased due to higher expenses associated with the European Restructuring Initiative in the same period last year, partially offset by increased project spend and employee-related expenses. Q1 operating income was $143.4 million, or 20.5% of sales, compared to $100.9 million, or 13.9% in Q1 of 2021. Looking below the operating line, the change in fair market value of equity securities holdings, which are substantially related to Bioret's ownership of Sartorius AG shares, negatively impacted the reported results by $4,545,000,000. During the quarter, interest and other income resulted in net other income of $30.7 million compared to $16.9 million last year. Q1 of 2022 included $31.6 million of dividend income from Sartorius compared to $19 million last year. Q1 of 2022 also included $4 million of interest expense related to the recently issued senior notes. The effective tax rate for the first quarter of 2022 was 22.9% compared to 24.7% for the same period in 2021. The effective tax rate in Q1 of 2022 was primarily affected by the unrealized loss in equity securities, and the tax rate reported in Q1 of 2021 was primarily driven by the unrealized gain in equity securities last year. Reported net loss for the first quarter was $3,369.6 million, and the diluted loss per share was $112.57 compared to $977.4 million of net income and $32.38 per share in Q1 of 2021. This decrease from last year is largely related to changes in the valuation of the Sartorius Holdings. Moving on to the non-GAAP results. Looking at the 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. In cost of goods sold, we have excluded $4.5 million of amortization of purchased intangibles and a small restructuring expense. These exclusions move the gross margin for the first quarter of 2022 to a non-GAAP gross margin of 58.3% versus 59% in Q1 of 2021. Non-GAAP SG&A in the first quarter of 2022 was 27.4% versus 25.4% in Q1 of 2021. In SG&A, on a non-GAAP basis, we have excluded an in vitro diagnostic registration fee in Europe for previously approved products of $2.8 million, amortization of purchased intangibles of $1.8 million, legal related expenses of $1.2 million, and a small restructuring related expense. Non-GET R&D expense in the first quarter of 2022 was 8.9% versus 7.9% in Q1 of 2021. In R&D, on a non-GAAP basis, we have excluded a small restructuring benefit. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 20.5% on a GAAP basis to 22% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin in Q1 of 2021 of 25.8%. We have also excluded certain items below the operating line, which are the decrease in value of the Sartorius equity securities and loan receivable holdings of $4,545,000,000 and about a $1,000,000 loss associated with venture investments. The non-GET effective tax rate for the first quarter of 2022 was 19.6% compared to 23.6% for the same period last year. The lower rate in 2022 was driven by the geographical mix of earnings as well as benefit associated with preferential tax rate related to export sales. And finally, non-GAAP net income for the first quarter of 2022 was $149.1 million, or $4.94 diluted earnings per share, compared to $157.4 million and $5.21 per share in Q1 of 2021. Moving on to the balance sheet. Total cash and short-term investments at the end of Q1 were $2.79 billion compared to $875 million at the end of 2021. The change in cash and short-term investments from the fourth quarter was primarily due to proceeds from the recent $1.2 billion senior notes offering. During the first quarter, we did not purchase any shares of our stock, and we have a total of $223 million available for potential share buybacks. For the first quarter of 2022, net cash generated from operating activities was $46 million, which compares to $114 million in Q1 of 2021. The decrease in operating cash flows was driven mainly by the change in working capital. The adjusted EBITDA for the first quarter of 2022 was $211.1 million, or 30.2% of sales, and excluding the Sartorius dividend was 25.6%. The adjusted EBITDA in Q1 of 2021 was $232 million, or 31.9% of sales, and excluding the Sartorius dividend was 29.3%. Net capital expenditures for the first quarter of 2022 were $28.9 million, and depreciation and amortization for the first quarter was $32 million. Moving on to the guidance. We maintain our full-year currency-neutral revenue growth guidance to be between 1% and 2%, or 8.5% to 9.5% when excluding COVID sales. Taking into account the current supply chain challenges, we anticipate full-year core growth for the diagnostics group to be between 2% and 3% versus our prior guidance of 3% to 4%. For the life science group, we now expect 2022 core growth to be at the high end of our prior guidance between 16% and 18%. Given the higher Sartorius dividend declared in the first quarter, we are increasing our adjusted EBITDA guidance accordingly. We now project full-year adjusted EBITDA to be between 24 and 24.3% versus our prior guidance of 23.5 and 23.8%. That concludes our prepared remarks, and we will now open the line to take your questions. Operator?

Certainly. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Patrick Donnelly with Citi. Please proceed.

Hey, guys. Thank you for taking the questions. Alon, maybe on the life science business, you touched on it there at the end, suggesting the year maybe comes in at the top end of that guide. And again, the guide initially was certainly well above what we were expecting and a nice growth rate. Can you just talk about what you saw in the quarter there? First of all, to come in above expectations. And secondly, again, to give you the confidence to raise that. I know there's some supply chain things and things you guys are watching. But, you know, we'd love some color around the drivers in that business doing a little bit better.

So, Patrick, I think this is Andy. I'll take that one. You know, Q1, we had, you know, good performance from digital PCR again, and also process crime was particularly strong in Q1. When we look through to the full year, now, we did have supply chain constraints in Q1. But when we look through to the full year, we see a good visibility to those constraints kind of easing off by the middle of the year for the life science business. And so that's the basis of the slight shift in guidance on the life science business.

Okay. And then, Alon, maybe on the margin side, you know, obviously kind of reiterating that kind of margin guide there. Can you just talk about how the quarter tracked relative to your guys' expectations? Again, visibility into kind of hitting that number. I know the restructuring should start to help at the end of the year, but maybe just talk about the different levers you guys have to pull and what you saw in the quarter and the margin from.

Sure. Thank you, Patrick. Appreciate the question. You know, I'll start maybe with the, you know, gross margin. There were several moving parts, obviously, starting, you know, the quarter and But as the quarter progressed, you know, there were areas that we knew in advance, for example, the product mix, you know, with the COVID kind of subsiding, you know, which is a little bit of a headwind to margin. There were others that were, you know, some tailwind. Logistics is still a headwind, you know, with elevated freight. That's another component that was definitely, you know, out there. We saw some of the discretionary expenses that are starting to come back, as well as service costs that will be within the customer's premises and servicing customers. When you think about it year over year, definitely we see a difference there. The last point that I'll call out here, there was some headwind specifically this quarter which is associated with our ramp in our Singapore facility with some of the transitioning from our European kind of closure. And these are costs that we did expense, and it's part of the gross margin. And so it's kind of a duplication of costs for this quarter that we saw.

Okay, that's helpful. And then maybe on the product side, you guys gave a good amount of detail on DDPCR at the analyst day. Just wanted an update in terms of how that performed in the quarter, expectations for that for the remainder of the year. I don't know if maybe Simon's there to talk a little bit about what you saw in the quarter and then again, kind of how you're thinking about the year playing out.

Yeah, I'd say overall we were pretty pleased with the performance in the quarter. Some of the supply chain challenges that we've experienced led through to a moderate degree. But demand for DDP CR products overall remains pretty strong. And I'd say we've got a pretty bullish outlook on the full year.

All right. And last one, Alam, maybe for you, just on the capital allocation side, you mentioned no shares repurchased in one queue, you know, with the stock hovering at call it 500 bucks. You guys have been opportunistic in the past. What does the window look like here given the market volatility? Thank you.

Yeah, thanks, Patrick. Appreciate the question. You know, there are a few aspects here. First, we obviously will continue to be opportunistic in the approach and similar to the past, you know, once we feel comfortable, we won't be shy to step in with larger amounts of a buyback. With that said, you know, we continue to balance it with the other capital allocation kind of matrices in terms of potential inorganic activities, and we need to prioritize and to balance between all the other aspects. And that will continue to be kind of the driver for us in terms of determining, you know, the right timing to step in in terms of the buyback.

Understood. Thank you.

Sure. Thank you.

Thank you, Mr. Donnelly. The next question is from the line of Brandon Couillard with Jefferies. Please proceed.

Hey, thanks. In terms of the slightly lower diagnostics outlook for the year, is that all tied to the China lockdowns? And I think you mentioned anticipation of some impact in 2Q. Are you able to quantify that?

Yeah, it's largely related to supply constraints, you know, frankly. Oh, sorry. It's largely related to supply constraints, and particularly because we're, you know, in a highly regulated environment. It's not sort of as easy to source and replace components, particularly electronic components, which are plaguing the industry broadly. So, frankly, that's it. You know, the demand is good. You know, we're supporting our customers, provide a bit of headwind for a bit longer throughout the year.

And maybe just sticking with that, I think it might be helpful if you're able to just quantify the percent of the China business that is diagnostics in general.

So, you know, generally speaking, you know, Asia is, you know, just over 20% for us overall. China is a material portion of the overall kind of Asia revenue. You know, we historically did not kind of split between the two groups, but, you know, that kind of, if I had to quantify it on a high level, Brendan.

Okay. Um, the maybe one for Simon in process media, you think you're gaining share in that market and are you having better success winning earlier stage programs? And would you expect the process media strength to continue through the second half of the year? It feels like you might be laughing some pretty tough comps ahead.

Yeah, I think overall we're pretty pleased with the growth rate that we saw in Q1 for sure. And as we think about the portfolio strength there, our play, our technology play is pretty esoteric, and it hits some sweet spots in therapeutic modality areas that are growing, and I still think we're relatively under-penetrated. It'll continue to remain a little bit lumpy from quarter to quarter, but I think we see the momentum continuing.

Okay, and then lastly for Alon, SG&A, non-GAAP number was down like 30 million sequentially. Can you just elaborate on the bridge there and how should we think about the OPEX phasing as we move through the balance of the year?

So it was on a GAAP that it was down. It was mainly the restructuring last year. On a non-GAAP, actually, it was slightly up from 184 to 192. And so these are, you know, employee-related and some insurance payment that we received last year. So these were many pretty minor changes. But overall, you know, the gap that you're alluding to is more on a gap basis, not on a non-gap basis.

Okay. I'll check my map. All right. Thanks.

Thank you, Mr. Couillard. The next question is from the line of Jack Meehan with Nefron Research. Please proceed.

Thank you. Good afternoon. Elon, to start, was wondering if you could give some color around what your expectations are for core growth by segment in the second quarter?

Yeah. So, Jack, thanks for the question. We are guiding, you know, on a four-year basis. And, you know, that's where probably will remain kind of in terms of the overall guidance. What I can say, you know, as we mentioned during the call, the supply chain constraints, we expect them to ease, you know, by mid-year for life science. And that's part of, you know, the reason that we felt comfortable to up the midpoint of the guidance for life science to the higher end of the range of between 16 and 18%. For diagnostics, it will take probably through the end of the year, and that's the reason that we a little bit lowered, you know, the guidance range over there.

Okay. And then on the COVID front, has your target for the full year changed at all? And within China, you talked about some additional instrument demand. Are you exposed on the consumable side to any of the mass testing which is going on?

This is Andy. Just to clarify the last piece of your question, you're referring to COVID testing in China on the consumer side? Correct.

Yes.

Yeah, no, not – so to answer the last bit first, no, not particularly – Our footprint has really been on the instrumentation pretty much through the entire pandemic. And so could you repeat the first part of the question as well?

Sure, yeah. Just the target for the full year, has that changed at all related to the COVID contribution?

No, we're not currently adjusting our full year COVID guidance number right at this point in time. Yeah, Jay, I mean, we'll...

We originally thought about most of the amount to be more on the first half of the year. We currently don't have a better visibility that we feel comfortable to change that number.

Great. Okay. And then you mentioned the return to work and increase in sort of travel costs. Is it possible to quantify just what sort of step up you expect for the remaining of the year related to some of the discretionary costs coming back into the business?

So, first of all, we baked it into our forecast already in the beginning of the year. We do not assume that it's going to go back to pre-pandemic level. That was not part of our guidance. but it's, you know, above the 50% level that it was, you know, during the pandemic. Okay. So it's 50%, you know, from the pre-pandemic and above the pandemic itself.

Got it. And then final question, you know, obviously we've had pretty unprecedented market volatility this year. Seems like one thing after another. Was just, Curious, you know, in the midst of, you know, you did the debt raise, you just redid your credit agreement. I'm just curious how the backdrop might influence your thinking around interest, appetite, and larger deals. I know you've been vocal around interest and merger of equals as well. Just curious if you could weigh in on all that.

Yeah, maybe I'll take that. I mean, you know, obviously we continue to be interested in the in organic growth as well as the organic growth, which is actually going pretty well. On the M&A side, we do have several things that we're looking at. As we said, obviously, we do have an appetite for doing something larger, but obviously those are few and far between. So we'll have to wait and see. In the meantime, we're pursuing a number of, yeah, we are continuing to pursue a number of kind of tuck-in opportunities.

Thank you, Mr. Meehan. There are no additional questions waiting at this time, so I will turn the call over to Ed Chung for closing remarks.

Thank you for joining today's call. We appreciate your interest and we look forward to connecting soon. Take care.

That concludes today's call. Thank you for your participation. You may now disconnect your line.