AERWINS Technologies Q3 2021 Earnings Call Transcript

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October 27, 2021

There are 11 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Q3 2021 Bio Rad Laboratories, Inc. Financial Results Conference Call. My name is Lydia, and I'm your operator today. I would now like to turn the conference call over to your host, Mr. Edward Chung, Head of Investor Relations.

Operator

Please go ahead, Edward.

Speaker 1

Thank you, Lydia. Good afternoon,

Speaker 2

and thank you all for joining us today. We will review the Q3 2021 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 Ilan Daskol, Executive Vice President and Chief Financial Officer Andy Last, Executive Vice President and Chief Operating Officer Annette Tumolo, 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 exceptions, 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.

Speaker 2

Included in these forward looking statements are commentary regarding the impact of the COVID-nineteen 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-nineteen 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 our financial measures that are not defined under generally accepted accounting principles.

Speaker 2

Investors should review the reconciliation of these non GAAP measures to the comparable GAAP results contained in our earnings release. With that, I'll now turn over the call to Ilhan Daskol, our Executive Vice President and Chief Financial Officer.

Speaker 3

Thank you, Ed. Good afternoon. Thank you all for joining us. And we hope that you and your families are well and staying healthy during these challenging times. Before I begin the detailed Q3 discussion, I would like to ask Andy Last, our Chief Operating Officer to provide an update on Bio Rad's operations in light of the current pandemic related environment that we are experiencing globally.

Speaker 3

Andy?

Speaker 4

Thank you, Elan. So good afternoon, everybody. To start with, I'd like to take a moment to thank Annette Tumolo, President of the Life Science Group for nearly 33 years of service at Bio Rad, she plans to retire At the end of this year, Annette's efforts and leadership have contributed to significant growth for the Life Science Group and Bio Rad. And Take a few minutes to review our current state of operations around the world. We're now entering the 7th consecutive quarter of operating within the COVID pandemic.

Speaker 4

And so I shall make my comments brief as we have now established an operating cadence with embedded employee safety practices. Our end markets continued to show improvement during Q3 with demand pickup in both life science and diagnostic markets in all regions. The supply chain constraints highlighted in our Q2 call, however, have persisted, in particular for supply and cost of raw materials, electronic components and higher logistics costs. To date, we have been able to balance supply and demand through careful management. However, we see this supply constraint trend continuing through year end and into 2022 And thus increasing the challenge of adequately meeting customer demand.

Speaker 4

As a result of the COVID-nineteen delta variant, We recently pushed out our return to the workplace date for the U. S. Into early November. During Q3, we introduced We are extremely pleased with the results of this decision. We are believing we believe we are maintaining our commitment to a safe workplace for all our employees.

Speaker 4

As we enter Q4, we expect COVID related demand for our products to be sequentially lower. And overall, we believe the majority of our end markets We're approaching close to normal operations, although we recognize that COVID will continue to create dynamic market challenges. So at this point, I'll turn it back to Ghislain. Thank you.

Speaker 3

Thank you, Andy. Now I would like to review the results of the Q3. Net sales for the Q3 of 2021 were $747,000,000 Which is a 15.4% increase on a reported basis versus the $647,300,000 In Q3 of 2020, on a currency neutral basis, sales increased 13.8%. The 3rd quarter sales include a $32,000,000 settlement for BAC royalties from 10x. Excluding the BEC royalties, the Q3 year over year currency neutral revenue growth was 9%.

Speaker 3

On a geographic basis, we experienced strong currency neutral growth in the Americas and in Asia, While growth in Europe declined slightly due to a tough year over year compare of COVID related sales. We estimate that COVID-nineteen related sales were about $57,000,000 in the quarter As we continue to benefit from spikes in demand in geographies where new outbreaks have occurred. Sales of the Life Science Group in the Q3 of 2021 were $373,500,000 compared to $324,000,000 in Q3 of 2020, which is a 15.3% increase on a reported basis And a 13.9% increase on a currency neutral basis. Excluding the $32,000,000 settlement for Beck Royalties, The underlying Life Science business grew 4.1% on a currency neutral basis versus Q3 of 2020. The year over year sales growth in the Q3 was driven mainly by increases in droplet digital PCR products And excluding COVID related sales, our core qPCR business also experienced nice growth, driven by strong uptake of our newer generation CFX Opus platform.

Speaker 3

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 and the $32,000,000 settlement for BEC royalties, the underlying Life Science business Declined 2% on a currency neutral basis versus Q3 of 2020 due to lower COVID related sales. When also excluding COVID related sales, Life Science year over year currency neutral revenue growth Was 21.8%. Overall, we have seen strong growth in the biopharma market for our Droplet Digital We also continue to see steady adoption of DBPCR in wastewater solutions, supported by government funding towards public health labs. On a geographic basis, Life Science currency neutral year over year sales Grew across the Americas and Asia, but declined in Europe.

Speaker 3

When excluding COVID related sales, European region revenue posted a double digit increase from the year ago period. Sales of the Clinical Diagnostics Group in the 3rd quarter were $372,200,000 compared to $322,200,000 in Q3 of 2020, which is a 15.5% increase on a reported basis and a 13.7% increase on a currency neutral basis. During the Q3, The Diagnostics Group posted growth across all of its product lines. The year over year growth Was driven by a recovery of routine testing, which appears to be approaching normal levels with the exception of blood typing, which is On a geographic basis, the Diagnostics Group currency neutral year over year sales grew double digit across all regions. The reported gross margin for the Q3 of 2021 was 58.6% on a GAAP basis and compares to 56.7% in Q3 of 2020.

Speaker 3

The Q3 2021 gross margin improvement was mainly driven by the settlement payment as well as our productivity and efficiency initiatives. Amortization related to prior acquisitions recorded in cost of goods sold was $4,700,000 as compared to $4,800,000 in Q3 of 2020. SG and A expenses For Q3 of 2021 were $216,200,000 or 28.9 percent of sales compared to $198,200,000 or 30.6% in Q3 of 2020. Increases in SG and A spend was mainly the result of employee related expense. Total amortization expense related to acquisitions recorded in SG and A for the quarter was $2,400,000 Versus $2,300,000 in Q3 of 2020.

Speaker 3

Research and development expense in Q3 was $64,500,000 or 8.6 percent of sales compared to $59,500,000 or 9.2 percent of sales in Q3 of 2020. Q3 operating income It was $156,800,000 or 21 percent of sales compared to $109,600,000 or 16.9 percent of sales in Q3 of 2020. Looking below the operating line, The change in fair market value of Equity Securities Holdings added $4,869,000,000 of income to the reported And is substantially related to holdings of the shares of Sartorius AG. Also during the quarter, Interest and other income resulted in a net expense of $3,200,000 primarily due to foreign exchange losses and compared to $5,500,000 of expense last year. The effective tax rate for the Q3 of 2021 was 21.8% compared to 21.9% for the same period in 2020.

Speaker 3

The tax rates for both periods were driven by the large unrealized gain in equity securities. Reported net income for the Q3 was $3,928,000,000 and diluted earnings per share were $129.96 This is an increase from last year and is largely related to Changes in 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 margin as well as other income. These items are detailed in the reconciliation table in the press release.

Speaker 3

Looking at the non GAAP results for the Q3, in sales, we have excluded $32,000,000 related to 10x legal settlement. In cost of goods sold, we have excluded $4,700,000 of amortization of purchased intangibles, $4,100,000 in IP license costs associated with the BEV royalty payment and a small restructuring cost. These exclusions moved the gross margin for the Q3 of 2021 to a non GAAP gross margin of 57.9 percent versus 57.5 percent in Q3 of 2020. Non GAAP SG and A in the Q3 of 2021 was 29.6% versus 29.4% In SG and A, on a non GAAP basis, we have excluded amortization of purchased intangibles $2,400,000 legal related expenses of $2,300,000 and a small restructuring and acquisition related benefit. Non GAAP R and D expense in the Q3 of 2021 was 9% versus 9.2% in Q3 of 2020.

Speaker 3

In R and D, on a non GAAP basis, we have excluded a small restructuring cost. The cumulative sum of these non GAAP adjustments result in moving the quarterly operating margin from 21% on a GAAP basis to 19.4% on a non GAAP basis. This non GAAP operating margin compares to a non GAAP operating margin of 18.8% in Q3 of 2020. We have also excluded certain items below the operating line, which are the increasing value of the Sartorius Equity Holdings of $4,869,000,000 and about a $2,000,000 loss associated with venture investments. The non GAAP effective tax rate for the Q3 of 2021 was 18% compared to 22.5% for the same period in 2020.

Speaker 3

The low rate in 2021 was driven by the geographic mix of earnings. In addition, the effective tax rate was lower as a result of an increase in compensation related tax deductions. And finally, non GAAP net income for the Q3 of 2021 was $112,200,000 or $3.71 diluted earnings per share, And that compares to $90,300,000 $3 per share in Q3 of 2020. Moving on to the balance sheet. Total cash and short term investments at the end of Q3 were $1,343,000,000 compared to $1,167,000,000 at the end of Q2 of 2021.

Speaker 3

During the Q3, we did not purchase any shares of our stock. For the Q3 of 2021, net cash generated from operating activities was $230,400,000 which compares to $135,700,000 in Q3 of 2020. This increase mainly reflects Higher operating profits. Following the end of the quarter, we completed the acquisition of Robworks For approximately $125,000,000 in cash, DropWorks is developing a droplet based digital TCR system that could provide a more cost effective solution to streamline the digital PCR workflow for life science research and Diagnostic Applications. We see Dropbox as accelerating Bio Rad's entry into the lower end segment of the digital PCR business And allow for expansion in the $2,500,000,000 to $3,000,000,000 qPCR segment, thereby significantly increasing For our ddPCR platforms.

Speaker 3

The adjusted EBITDA for the Q3 of 2021 was 23.1 percent of sales. The adjusted EBITDA in Q3 of 2020 was 22.9%. Net capital expenditures for the Q3 of 2021 were $34,600,000 And depreciation and amortization for the Q3 was $33,700,000 Moving on to the guidance. Overall, we expect a continued trend to a more normalized growth rate. However, we are seeing increased supply chain constraints that create an elevated level of uncertainty around timing of customer deliveries.

Speaker 3

We are now guiding full year 2021 non GAAP currency neutral revenue growth to be between 12% 13% versus our prior guidance of 10% to 10.5%. This updated outlook reflects the wider revenue range due to the supply challenges, which we are experiencing. Full year COVID related sales are now expected in the range of $240,000,000 $245,000,000 versus our prior guidance of $200,000,000 to $210,000,000 Full year non GAAP gross margin It's now projected to be between 57.5% 57.8% versus prior guidance of 57% 50 7.5%. Full year non GAAP operating margin is forecasted to be about 19.5% versus prior guidance of 19%. Our updated guidance assumes higher operating expenses in Q4 As we continue to anticipate a gradual return to more normal activity levels.

Speaker 3

Our updated annual non GAAP effective tax rate is projected to be between 21% 22%. The lower rate versus our prior guidance is mainly due to an increase in compensation related tax deductions. Full year adjusted EBITDA margin is now forecasted to be between 23.5% 24% versus prior guidance of 23% and 23.5%. Lastly, with the uncertainty surrounding We are now planning to hold our Investor Day in February due to our preference to host an in person event. That concludes our prepared remarks, and we will now open the line to take your questions.

Speaker 3

Operator?

Operator

Our first question today comes from Patrick Donnelly of Citi. Our next question comes from Dan Leonard of Wells Fargo. Dan, your line is open.

Speaker 5

Hi. Thank you. So hoping first you could elaborate further on the margin guidance in the Quarter, it looks like operating margins are stepping down to 15%.

Speaker 3

Sure, Dan. Actually operating margin, we are guiding to a higher one. And if you break it into the Q4, I think it's Also slightly higher. Are you comparing it year over year sequential quarter versus prior On the guidance, I'm trying just to gauge a little bit more versus which guidance are you comparing it to?

Speaker 5

Well, the plug for the full year guide, I think you said 19.5% for the full year and given the non GAAP results Through the first three quarters, we're coming up with an implied 15% in Q4 to get to 19.5%. And that compares lower than Previous quarters either year on year or sequentially?

Speaker 3

Yes. So we did indicate Slightly higher operating expenses in terms of the 4th quarter sequentially. And that's seasonality, some of the

Speaker 5

Okay. And then just a follow-up. Can you offer an update on the progress you're making against the restructuring initiatives you announced back in February? Are you seeing any cost savings from those efforts? Or is that more of a 2022 event?

Speaker 4

Yes. Hi, Dan. It's Andy here. So, two parts of the question. 1st, progress is going very well.

Speaker 4

I would say we're on track with our expectations. So thinking of contributions to operating performance, it really is a delayed effect, the majority of that Performance enhancement coming in 2023. Some will materialize in 2022 more to the latter half of the year. But everything is on track against our expectations right now.

Speaker 3

Thank you. Thanks, Dan.

Operator

Thank you. Patrick Donnelly of Citi has reregistered a question. Your line is open.

Speaker 6

Hey, guys. Can you hear me all right now?

Speaker 3

Yes, we can. Thank you, Ithik.

Speaker 6

Okay, great. Sorry about that. Maybe, Alain, just touching on the supply and demand Issues you guys kind of called out, you and Andy. Can you just talk through a little more detail maybe where you're seeing the pressures, whether it's business line or particular segments? And then again, it sounds like you're expecting it to persist through 2022.

Speaker 6

Maybe just talk through what you guys are doing to address it? How we can expect that impact Play out over the next couple of quarters.

Speaker 4

Yes, Patrick. This is Andy. So Look, it's fairly broad. And the challenge, we sell complex products. So you only need one component to be missing In the supply chain to impact you.

Speaker 4

So I don't think we're experiencing anything that's Different to the rest of the industry or even beyond our sector, just globally. And it is very hard to determine when this will tail off. So Prudently, we're expecting it to transition into 2022 as well. But it can be as simple as An on off switch to full integrated boards and plastics for various products. So that's the issue we're facing.

Speaker 4

What are we doing? We are working extremely hard. The team on supply chain and procurement is really working our supply partners. And today, we've been doing very well. But there are constraints and I think we view it as prudent to call them out Because at some point, they start to impact your ability to meet customers in a timely way.

Speaker 6

Right. Sure. And along with the revenue potential disruption, obviously, increased costs could come along with it as well, Alain. Maybe just Talk about are you guys expecting a margin impact from this? Are you seeing increased costs from this, inflation, whatever it might be?

Speaker 6

Can you just talk about the input costs, if you're seeing any impact there?

Speaker 3

Yes. Thank you, Patrick. I mean, there are components And some areas that we do see pockets of price increase. Obviously, we baked in everything into the guidance. So we'll have to continue and see kind of how long does it last and what does it mean obviously moving forward.

Speaker 3

But So far, we were able also kind of to balance it off with some of our productivity and initiatives that we have internally. So, yes, we did bake some of it into our guidance.

Speaker 6

Okay. And then maybe one for Annette. It sounds like this is her last call, so congrats on the retirement. But maybe on ddPCR, it sounds like biopharma is pretty strong. Can you just talk about The impact of QX1 there, what you're seeing in terms of the demand, how durable you think this is?

Speaker 6

Obviously, the wastewater picked up around COVID, but Just how that segment is going and the expectations going forward in terms of the growth profile?

Speaker 7

Sure. Thanks, Patrick. Well, we have maintained the strong double digit growth that we were seeing before the pandemic throughout it. And we continue to believe that there is a sustainability to the level of growth that we're seeing In our entire droplet digital PCR portfolio, we certainly have penetrated the biopharma Market, across from discovery into QC and Manufacturing with all of our platforms, the QX1 playing out more strongly in The QC in the manufacturing segment and we have a really strong demand and great pipeline moving forward. So we're very, very optimistic across the entire product line.

Speaker 6

Very helpful. Thank you. Maybe one quick last one for Norm. Just on the capital deployment side, can you just update us on your appetite for Larger deals, any change to the strategic component of Sartorius or how you're thinking about Sartorius going forward, Norm?

Speaker 8

Yes. So obviously we still think of Sartorius as a very strategic asset for us. I think we feel good about the fact that we successfully closed the DropWorks acquisition this last Quarter and we continue to have a kind of a portfolio of opportunities that we're Going forward, so it's a pretty busy time.

Speaker 4

All right. Thank you very much.

Speaker 3

Thank you, Patrick.

Operator

The next question comes from Jack Meehan of Nephron Research. Jack, please proceed with your question.

Speaker 1

Thank you. Good afternoon. My first question was on the diagnostics market in China. There's been a lot of focus on centralized purchasing initiatives in the region. Was curious what you might be seeing on the ground, How broad that might be and just how you think Bio Rad's business is positioned there on the diagnostic side?

Speaker 3

Hi, Jake. I will let Dara answer this question.

Speaker 9

Yes. So I think in general, kind of despite the ongoing sort of Trends in the China market related to China for China and localization and other implications, we don't really see much Impact there, just given our mix and where we participate, it certainly is a trend we will continue To monitor to inform both our manufacturing and supply chain strategies, but at this point, we don't see any negative

Speaker 1

With diagnostics, the recovery looked pretty good in the quarter. Maybe just comment though, do you think Delta had Any impact on the business during the quarter in terms of utilization? Obviously, you ended up in a good spot, but what did you see throughout August September?

Speaker 9

Yes, similar to prior quarters, it's really sort of Region specific and how certain kind of healthcare systems are able to balance the mix of Routine healthcare delivery and diagnostic testing versus dealing with an increased burden from COVID related cases. In North America, really operating sort of to pre pandemic levels, almost 100%. In Europe, we see a little bit of an impact to elective surgeries as was articulated in the opening comments from Elan. So that's really the only Area where we're a little bit behind pre COVID levels, but overall I would say the healthcare systems are learning how to sort of operate in this new normal of delivering routine care and accommodating sort of acute spikes in COVID related care.

Speaker 1

Great. And then my final question, I wanted to turn to the life science business. So I think I Cut, Ilan, in your comments, 22% growth ex COVID, ex Process Media. So by my math, that's compounding in the double digits. A lot of your peers are more like mid to high single digits is kind of what we've been seeing.

Speaker 1

Not sure if it's all ddPCR, but just maybe broadly how you're feeling about the funding environment and also are there any other Products that really have been standing out.

Speaker 3

Sure. Annette, do you want to address the question or?

Speaker 7

Sure. Well, we've seen really good recovery in our base business and even when we compare it to 2019. Throughout the course of the year, we've seen really strong performance from our protein quantitation business. Certainly, process is driving a lot of the growth there as well, but digital PCR continues to be a very important growth driver For the Life Science Group.

Speaker 1

Great. Thanks, and congrats on that on the retirement. Yes, that's

Speaker 7

helpful. Thank you.

Operator

Thank you. Our next question comes from Brandon Couillard of Jefferies. Brandon, your line is open.

Speaker 10

Hey, thanks. Good afternoon. Annette, I want to echo best wishes in your future retirement as well. And a follow-up question on the GDPR business, a couple of things. Any chance you could give us a sense of the mix today where it stands Capital Equipment and Recurring Consumables.

Speaker 10

And any comments just kind of on the competitive landscape? We've seen some new introductions out there from a couple of other Company is curious what impact those might be having, if at all?

Speaker 7

Sure. Well, we have Essentially closed systems. So we get really, really good pull through on all the systems that we sell. And I think, last I looked it was almost fifty-fifty. So really good balance between the consumable pull through and the We're certainly aware of new entrants into the market.

Speaker 7

We In the field, but frankly, we continue to win sales based on our differentiated value proposition and superior performance. And I think we feel pretty confident in our strategy and the current product offering that we have. I think if anything, the new competition just really validates the utility of this Digital PCR application in the bigger PCR market. So we're feeling pretty good about where we are.

Speaker 10

As a follow-up to that, I'd be curious if you could just elaborate a little bit more on the JobWorks business. You shared the revenue base with us, kind of the margin profile, a sense of growth over the last couple of years. And I'll also be curious if you could kind of touch on exactly Why this platform is particularly suited for the low end market, more basic research and diagnostics, whereas the QX-one maybe Isn't the right tool for that type of customer?

Speaker 7

Sure. The QX1 was really Developed for the biopharma market, where high throughput and automation It was really and very high performance were really the key drivers. I think When we want to address a broader, say even qPCR market with digital products, We certainly were looking for integrated workflows and that's something that we have with the Dropbox platform And the design and of this platform is well suited for cost sensitive Segment, the low end of the digital PCR market. And certainly, we think we can disrupt some of the higher end of the qPCR market with Product as

Speaker 10

well. Okay. Maybe Alon, any financials you can kind of share with Revenue base or margin profile, if it's profitable or not, any numbers on that business?

Speaker 3

Yes. We usually, Brendan, don't break down that level of details within each of the business groups.

Speaker 10

Okay. May I follow-up then. Just a A clarification, Alain. The core growth for the year of 12% to 13%, does that include the $32,000,000 of back royalties from 10x? Want to be sure?

Speaker 3

No, that does not include that EUR 32,000,000 of 10x, does not.

Speaker 10

Got you.

Speaker 4

Okay.

Speaker 10

And then lastly, if you sort of think about 2022 And granted it's not expecting you sort of give guidance at this point, but just as to how we should sort of think about the profitability trend next year as Your ability to manage the P and L as the COVID revenues likely come down next year. And would it be relevant to think about the Q4 as Kind of a good baseline in that context where most of the COVID revenues have kind of washed out next year?

Speaker 3

Yes. It's a great question, Brendan. Obviously, generally, at this point, we are not yet prepared for To comment on the full 2022, but if you think about kind of regarding our initial thinking, we do believe that for us, COVID related sales will continue to go down. If you think about the guidance this quarter, it implies already in the 4th Quarter range of about €20,000,000 to €25,000,000 for the COVID related sales. And we believe it will continue to go down.

Speaker 3

We'll have to balance the different inputs, the supply chain constraints, the longevity and what is it And how is it going to impact in our thinking about 2022? The material cost, there are different Aspect that we still need to kind of compile and see what does it mean for the overall guidance. In terms of the core top line, we continue to believe that we have Really good kind of base to think about kind of the next level in terms of the 2022. We if you think about it, we continue to be in the path to achieve our 2023 target model that we Communicated back in December. That's our current thinking.

Speaker 10

Got you.

Speaker 3

Thank you. Thank you.

Operator

We have no further questions in the queue. So I'll hand back to the team to close.

Speaker 3

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

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