Bio-Rad Laboratories Q2 2022 Earnings Call Transcript

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July 29, 2022

There are 9 speakers on the call.

Operator

Afternoon. Thank you for attending today's Bio Rad Second Quarter 2022 Earnings Results Conference 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. I would now like to pass the conference over to our host, Edward Chung, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, operator. Good afternoon,

Speaker 2

and thank you for joining us. Today, we will review the Q2 2022 financial results and provide an update on key business trends for Bobcats. With me on the phone today are Norman Schwartz, our Chief Executive Officer Alain Basslow, Executive Vice President and Chief Financial Officer Andy Lapp, Executive Vice President and Chief Operating Officer Simon May, President of the Life Science Group and Daryl 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.

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 Cognex's 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 Investors should review the reconciliation of these non GAAP measures to the comparable GAAP results contained in our earnings release.

Speaker 2

With that, I will turn the call over to Lon Daskol, our Executive Vice President and Chief Financial Officer.

Speaker 3

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

Speaker 1

Andy? Many thanks to Lan. Good afternoon, everybody. So the Q2 of the year continued with a similar profile to the Q1. Overall demand for both Life Science and Clinical Diagnostics continued to be strong and localized surges of COVID continued.

Speaker 1

China, in particular, drove higher than expected PCR instrument demand. However, the stringent lockdown policies in China and the The nature of the lockdown did have a negative impact on local sales on both sides of the business during the quarter. With relaxation of the lockdown, we are now seeing improved conditions for the second half of the year. The lockdown also had some further negative effect on the ongoing Our organization and operations continue to work efficiently during the Q2 And despite sporadic localized upticks in COVID, our offices have remained open. The expected level of improvement in supply chain constraints in Q2 did not fully materialize and the quarter was again challenging for supply of instruments against the backdrop of strong demand.

Speaker 1

As a result, our order backlog continued to build along with our inventory levels of raw materials and work in progress instruments. With that said, we have found our orders to be sticky and our customers' customers are being patient. During the We also experienced the continuation of elevated logistics and raw material costs. Overall, we are putting significant effort into procuring required materials and remain optimistic around improvement in supply chain constraints towards the back half of this year. With the ongoing Russian invasion of Ukraine and imposition of further sanctions on Russia, we did experience a modest decline in our Life Business sales to Russia during the quarter, while sales of our clinical diagnostic products were largely unaffected.

Speaker 1

And we expect this dynamic to continue through at least the remainder of the year. As a final comment, despite the challenges of COVID, This impact in China in particular and the Russian war on Ukraine, our organization has continued to excel in managing the supply chain challenges and supporting the needs of our customers. And we're very encouraged by the strong and consistent improvement in demand across our Life Science and Clinical Diagnostic businesses. So with that, I'll say thank you and pass it back to Alain.

Speaker 3

Thank you, Andy. So I now would like to review the results of the Q2. Net sales for the Q2 of 2022 were $691,100,000 which is a 3.5% decline on a reported basis versus $715,900,000 in Q2 of 2021. The 2nd quarter decline in revenue was mainly a result of lower COVID related sales this year. On a currency neutral basis, sales increased 0.5%.

Speaker 3

We estimate that COVID related sales were about $33,000,000 in the quarter and continue to reflect an elevated level in demand, particularly in Asia, as a result of the ongoing outbreaks in China. Looking ahead, we continue to anticipate a significant tapering compared to the last 2 years and expect about $15,000,000 of COVID related sales in the back half of this year. Core year over year revenue, which excludes COVID related sales, increased 5.7% on a currency neutral basis. On a geographic basis, we experienced currency neutral year over year core revenue growth in the Americas and Europe. Core revenue in Asia declined, which reflects the extended lockdowns in China that negatively impacted our Diagnostics business during the quarter.

Speaker 3

As Andy mentioned earlier, we continue to carry an elevated order backlog as a result of supply chain constraints and continued strong customer demand. We expect improvement relative to the first half of the year, although we anticipate deck orders to continue through the remainder of 2022. Sales of the Life Science Group in the Q2 of 2022 were $322,400,000 compared to $334,200,000 in Q2 of 2021, which is a 3.5% decline on a reported basis and a 0.5% increase on a currency neutral basis. Despite supply chain constraints Having an impact on instrument placements, the underlying Life Science year over year currency neutral core revenue growth, which excludes COVID related sales, was 10.6%. The year over year growth was driven by Process Media, Western Blotting, Droplet Digital PCR and qPCR Products.

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. We are pleased with the continued momentum from our Process Media business and believe that the recently introduced pre tax CHT columns should enhance our position in this segment. Excluding Process Media sales, The underlying Life Science business declined 4.5% on a currency neutral basis versus Q2 of 2021 due to lower COVID related sales. When also excluding COVID related sales, revenue growth was 6% on a currency neutral basis. On a geographic basis, Life Science experienced currency neutral year over year for revenue growth across all three regions.

Speaker 3

Sales of the Clinical Diagnostics Group in the 2nd quarter were $367,800,000 compared to $380,200,000 in Q2 of 2021, which is a 3.3% decline on a reported basis and growth of 0.7% on a currency neutral basis. Core Clinical Diagnostics' year over year revenue growth, which excludes COVID related sales, increased 2.1% on a currency neutral basis. The Diagnostics Group currency neutral year over year sales increase was driven by blood typing, quality control and clinical immunology. And as I mentioned earlier, supply chain constraints had an impact on instrument placements. We have seen both recovery and increasing global demand for blood typing products as elective surgeries resume to pre pandemic levels and hospitals seek to extend capacity.

Speaker 3

Specifically, we are benefiting from new account expansion in the Middle East and Africa from meaningful new tender wins. On a geographic basis, the Diagnostics Group year over year currency neutral core revenue grew in the Americas and Europe and the decline in Asia. The reported gross margin for the Q2 of 2022 was 57.3% on a GAAP basis and compares to 56.1% in Q2 of 2021. The year over year gross margin improvement benefited from the stronger U. S.

Speaker 3

Dollar, product mix and continued operational efficiencies, which was partially offset by elevated logistics costs. Amortization related to prior acquisitions recorded in cost of goods sold was $4,500,000 as compared to $4,600,000 in Q2 of 2021. SG and A expenses for Q2 of 2022 were $208,700,000 or 30.2 percent of sales compared to $213,400,000 or 29.8 percent in Q2 of 2021. The year over year SG and A expenses decreased mainly due to the stronger dollar and normalized employee related expenses that was partially offset by higher discretionary spend. Total amortization expense related to the acquisitions recorded in SG and A for the quarter was $1,800,000 versus $2,400,000 in Q2 of 2021.

Speaker 3

Research and development expense in Q2 was $67,000,000 or 9.7 percent of sales compared to $63,400,000 or 8.9 percent of sales in Q2 of 2021. The year over year R and D expenses increased mainly due to project spend. Q2 operating income was $120,200,000 or 17.4 percent of sales compared to $124,800,000 or 17.4 percent in Q2 of 2021. Looking below the operating line, the change in fair market value of Equity Securities Holdings, which are substantially related to BioRay's ownership of Sartorius AG shares negatively impacted the reported results by $1,338,000,000 During the quarter, interest and other income resulted in net other expense of $4,900,000 compared to net other income of $1,300,000 last year. Q2 of 2022 included $10,700,000 of interest expense related to the $1,200,000,000 senior notes issued earlier this year, partially offset by $5,000,000 of interest income as well as an escrow release of $1,400,000 related to the sale of the Informatics business that in 2020.

Speaker 3

TSST's tax rate for the Q2 of 2022 was 24.2% compared to 21% for the same period in 2021. The effective tax rate reported in Q2 of 2022 was primarily affected by the unrealized loss in equity securities and the tax rate reported in Q2 of 2021 was primarily affected by an unrealized gain in equity securities. Reported net loss for the 2nd quarter was $927,200,000 and the diluted loss per share was $31.12 compared to $914,100,000 of net income or $30.32 per share in Q2 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.

Speaker 3

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. Looking at the non GAAP results for the Q2. In cost of goods sold, we have excluded $4,500,000 of amortization of purchased intangibles. This exclusion moved the gross margin for the Q2 of 2022 to a non GAAP gross margin of 57.9% versus 56.9 percent in Q2 of 2021.

Speaker 3

Non GAAP SG and A in the Q2 of 2022 was 29.4% versus 29.2% in Q2 of 2021. In SG and A, on a non GAAP basis, we have excluded an in vitro diagnostic registration fee in Europe for previously approved products of $2,500,000 amortization of purchase intangibles of $1,800,000 Legal related expenses of $900,000 and a small restructuring related expense. Non GAAP R and D expense in the Q2 of 2022 was 9.7% versus 9.1% in Q2 of 2021. In R and D, on a non GAAP basis, we have excluded a small restructuring benefit. The cumulative sum of these non GAAP adjustments results in moving the quarterly operating margin from 17.4% on a GAAP basis to 18.8% on a non GAAP basis.

Speaker 3

This non GAAP operating margin compares to a non GAAP operating margin of 18.5% in Q2 of 2021. 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 1,000,000,000,000 a $1,600,000 loss associated with venture investments and $1,400,000 gain from the escrow release related to the 2020 Informatix business sale. The non GAAP effective tax rate for the Q2 of 2022 was 19% compared to 21.5% for the same period in 2021. 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 Q2 of 2022 was $101,400,000 or $3.38 diluted earnings per share compared to $106,600,000 or $3.54 per share in Q2 of 2021.

Speaker 3

Moving on to the balance sheet. Total cash and short term investments at the end of Q2 were 1.9 $73,000,000 compared to $2,079,000,000 at the end of Q1 of 2022. Inventory at the end of Q2 reached $657,100,000 from $605,500,000 in the prior quarter. The increase was the result of the ongoing supply chain constraints. For the Q2 of 2022, Net cash generated from operating activities was $50,200,000 which compares to 1 $154,600,000 in Q2 of 2021.

Speaker 3

The lower quarterly operating cash flow mainly reflects changes in working capital. During the Q2, we purchased 255,000 shares of our stock for a total cost of $125,000,000 Last week, the Board authorized an additional $200,000,000 for share repurchase on top of our existing program. In aggregate, we now have approximately $298,000,000 available for potential buybacks. The adjusted EBITDA for the Q2 of 2022 was 22.6 percent of sales. The adjusted EBITDA in Q2 of 2021 was 22.3%.

Speaker 3

Net capital expenditures for the Q2 of 2022 were $14,200,000 and depreciation and amortization for the 2nd quarter was $32,600,000 Moving on to the non GAAP guidance. Based on the stronger than anticipated COVID sales contribution in the first half of this year, We now assume full year COVID related sales of about $93,000,000 of which approximately $15,000,000 are projected for the second half of twenty twenty two. We now anticipate full year currency neutral revenue growth to be at the high end of our guidance of 1% to 2%. Core revenue growth, which excludes COVID related sales, is now expected to be at the lower end of our prior guidance range of 8.5% to 9.5% on a currency neutral basis as we continue to balance between the ongoing strong customer demand and supply chain constraints. We achieved 6% currency neutral revenue growth in the first half of the year and expect it to approach 11% for the second half of this year versus the second half of twenty twenty one.

Speaker 3

This represents about 9% growth in the second half of twenty twenty two over the first half of twenty twenty two. We are maintaining the full year gross margin projection to be approximately 57.5 percent, operating income margin at about 19% and adjusted EBITDA to be between 24% 24.3%. That concludes our prepared remarks, And we will now open the line to take your questions. Operator?

Operator

The first question is from the line of Brandon Couillard with Jefferies. Please proceed.

Speaker 4

Hey, guys, this is Matt on for Brandon. Thanks for taking my questions. Ilan, appreciate all the color on the updated guidance. Could you just break out What you're expecting now for the full year between the two segments on a core growth basis excluding COVID? And then In terms of the step up you talked about in the back half kind of plus 11% from the plus 6% in the first half, can you just talk about level of visibility and confidence you guys have in that acceleration in the back half of the year here?

Speaker 3

Sure. So I'll start with the first part. We generally maintain the overall guidance for both of It's Bruce, similar to what we provided earlier in the year. Specifically in the Q2, we saw some softness in the Diagnostics business, specifically in China. But again, generally, we are maintaining the guidance for each of the business groups for the full year.

Speaker 3

I don't know, Andy, if you want to add on.

Speaker 1

No, I think that's right. I got nothing to add now.

Speaker 4

Okay. And then maybe Andy sticking with you on the supply chain, you talked about kind of continuing some level of The challenges in the back half of the year, 2 stocks went on a relative basis, do you expect it to ease versus kind of what you saw here in the first half, the level you expected to get better in the back half and some of maybe initiatives you guys are taking to kind of And while that may be worse for a longer type scenario.

Speaker 1

Sure. No, absolutely. We do expect it to ease in the second half relative To the first half, which has been challenging, obviously. You did know that we mentioned we increased inventory during Q2, A lot of work in progress, just sitting, waiting on some for instruments, sitting, waiting on small handful of components. So When they come in, we're a stage to improve our sales pacing in the second half.

Speaker 1

We don't anticipate supply constraints going away completely by the end of the year, but we certainly do expect them to ease as we move forward. And in terms of actions we're taking, I mean, we continue to put a lot of emphasis internally on the procurement side of the organization and being flexible on manufacturing lines as components become available, and we expect to continue to do that through the second half.

Speaker 4

Great. And then last one, more of a housekeeping one for you, Elon. On the tax rate, it's come in below 20% here 2 quarters in a row. I think initial guide was kind of in the 22% to 23% range for the year. Is that still the right range or any updated thinking on what we should pencil in for the tax rate for the year now?

Speaker 4

Thanks.

Speaker 3

Yes. It's still generally speaking, the right range. Obviously, on a quarterly basis, the geographical mix of earnings does weigh in. We did get and we'll continue probably later in the year and get some benefit from the export sales, which does benefit a little bit the rate. But overall, yes, we are maintaining it.

Speaker 4

Super. Thank you.

Speaker 3

Thank you.

Operator

Thank you. The next question is from the line of Patrick Donnelly with Citi.

Speaker 5

Please proceed. Hey guys, thanks for taking the questions. Alana, maybe one on the Life Science business, you talked about kind of the backlog continuing to build order growth healthy, supply chain seems to be holding you back a little bit there. Can you just talk about, I guess, The demand environment, maybe if you're willing to quantify the backlog relative to what it was at the start of the year, what the order growth is, maybe some metrics just help us kind of think about What you guys are seeing and what you could deliver, I guess, in a normalized supply chain environment? Because again, putting on good numbers feels like it could be better if the

Speaker 6

Hi, Patrick. It's Simon here. I'll take that one. In terms of the backlog, we're not going to hang numbers on that. I think we provided some commentary earlier in the conversation here.

Speaker 6

I'd say that demand across the board in Life Science continues to be healthy as we're seeing recovery in The core markets and we've got a couple of business areas that we've called out as growth pillars previously, where we continue to see really strong demand. And I think in consumables and assays, we've seen really robust demand in a couple of areas of business, and that's To some degree by the supply chain challenges that we've already spoken about here. I think as we enter the second half of the year, And I'd echo Andy's comments on how we're thinking about improvement in supply chain, but the underlying demand remains strong and we've got a healthy backlog.

Speaker 5

Okay. And then Andy, on the supply chain side, I know last time we chatted, you kind of mentioned You had a lot of work in progress inventory with waiting on 1 or 2 inputs, a chip here or there. Is that still the case? Is Kind of just waiting on some of those things to ease and again maybe just visibility and what that inventory looks like now relative to kind of what you saw last quarter where Right now, it's building up a little bit on you guys with things almost finished and just waiting on 1 or 2 things.

Speaker 1

Yes. I mean, I think that the profile It's the same. A lot of work in progress waiting on sometimes just one component. Our inventory levels increased about $50,000,000 quarter over quarter, so Q2 over Q1, And we had a lift in Q1 too versus Q4. So you can see that we're really staged as we get relief by procuring the right component to ship.

Speaker 1

So our shipping profiles during the quarters are quite different as well as you might I think that will just continue, but with improvement in the second half versus the first half.

Speaker 3

Yes. And Patrick, maybe I'll add to that also. Okay.

Speaker 5

Go ahead, Alon.

Speaker 3

Obviously, Andy mentioned earlier that the order backlog is And the elevated inventory level actually Will be fulfilled once we are able to procure a few more components. So generally, We are encouraged. We don't see any risk to the inventory. And actually, we are really encouraged by the order backlog that we see out there.

Speaker 1

Yes. And just to add on the order backlog, and I'm sure it's kind of common across a number of players in the industry right now. It's very sticky. We feel really good about our customer relationships. We do not see a lot of attrition against our orders.

Speaker 1

So we've got pretty good sense about what's going on there.

Speaker 5

Okay. That's good to know on the inventory side as well where these things are kind of ready to go, the orders are there and it's just waiting on 1 or 2 things.

Speaker 1

Exactly. Once

Speaker 5

that flips, you guys will be able to See a nice inflection there. And maybe last one, Alain, just on the cost side, you guys obviously put in some pretty significant restructuring activities. It feels like they should start to take hold as we work our way through the back half here. Can you just kind of update us where you are on that transition? When we should see some of those cost benefits start to show up on the margin side, it feels like a nice lever for you guys to pull.

Speaker 3

Sure. Yes. Thanks, Patrick, for the question. So I'll first start with the restructuring itself and the activities associated with the restructuring All on track in terms of the activities both in Europe as well as in Asia. And we're starting to ramp Some of that activity already in Asia.

Speaker 3

And in addition, even if you look already in this quarter's results, part of the gross margin Improvement year over year is associated with improved efficiency and productivity that we are seeing. Another piece there was Obviously, benefiting from foreign exchange ratio and there were some elevated on the other hand, elevated logistics costs. But Definitely, the efficiency and productivity did contribute to some of that benefit year over year on the gross margin. So Again, everything is in line and is baked into our full year guidance and yes, no delays there.

Speaker 5

Great. Thank you, guys.

Speaker 3

Thank you.

Operator

Thank you. Our last question is from the line of Jack Meehan with Nephron Research. Please proceed.

Speaker 7

Thanks. Good afternoon. Wanted to continue on the Supply chain theme. I guess my first question is, back in the Q4, you talked about, I think, dollars 30,000,000 of sales that were impacted. I Was just curious if you caught up on any of that year to date.

Speaker 7

Is it

Speaker 4

possible to

Speaker 7

quantify what impact or what The sales would have been if you didn't have these shortages here in the Q2?

Speaker 1

Yes. We're not going as far as To actually put the numbers out there at this point, from the trade check, but yes, you are right. We had A backlog at the end of Q4, we didn't anticipate we would recapture all of that backlog in the following quarter. But since then, our backlog has increased, reflecting the supply constraints. You could look at it as a healthy Back in a strong order pipeline is another way to consider it.

Speaker 1

But We're selling based on supply chain constraints right now.

Speaker 7

And The component shortages that you talk about, is it still predominantly semiconductor chips or has it broadened anything else?

Speaker 1

It's mostly electronic components and iron, it can be as simple as one chip here and there. Occasionally you get some esoteric bearing or a stepper motor or some unanticipated component, but it is mostly electronic Components and chips are the biggest culture.

Speaker 7

And the product families that are impacted, it's Predominantly ddPCR or what other products would that hurt?

Speaker 1

Yes. All instruments. It's across our instrument lines, whether they're clinical or life science. And we have a fairly broad portfolio of instrumentation, as you know. So we see it across a large number of different product areas, and our ability to supply those just Fluctuates based on getting that first component set.

Speaker 7

Okay. Thanks for humoring those questions. I did have a Couple of other ones, just China, is it possible to so that's the one region that declined this quarter. Just talk about the rate of the decline in the Diagnostics business, like what would the segment have done if not for the lockdowns?

Speaker 1

I think we have Dara on the line. And I know she's probably got a few comments she can make around that.

Speaker 8

Sure. Yes, I don't think that we're going to sort of articulate what the growth Kind of what would have been if we hadn't had the lockdown, but it was a material impact. The lockdown was for most of the quarter and compounded by sort of logistics challenges and the It was a bit of a one two punch. So we're going to need to catch up from that in the back half of the year. I mean, similar to the instrument supply constraints, demand is strong.

Speaker 8

It's just fulfillment challenges, frankly. I don't know, Andy, if there's anything you want to add specifically about China other It was a real impact probably in Q2.

Speaker 1

No, I think that profiles it well without getting into Specific details on the numbers. Okay.

Speaker 7

Last question for me. Is there any color you can give on Pricing in the quarter or the year, just how that's trending? Do you feel like, have you been more active in trying to manage that in this inflationary environment?

Speaker 1

Yes. Very good question. And yes, we have we did roll out price increases averaging 4% to 5%, mostly across the Life Science Industry Business in the first half. We've started to see some realization of those Price increases now. It is largely offsetting the inflation with the cost inflation we're experiencing On logistics and raw materials, we're assessing further price increases before the end of the year.

Speaker 1

We will likely try and take a bit more price in the second half if we feel we can. And But overall, we are looking to offset the inflationary costs that are coming at us.

Speaker 7

Super. Thank you,

Speaker 5

guys. Thank you.

Operator

Thank you. There are no additional The conference call is now open at this time. So I will turn the call

Speaker 1

over to Ed Chung for closing remarks.

Speaker 5

Thanks everyone for joining

Operator

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

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