OptimumBank Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2025

There are 10 speakers on the call.

Operator

Thank you for standing by. My name is Frilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bio Rad Fourth Quarter and Full Year twenty twenty four Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the conference over to Edward Chung, Head of Investor Relations. You may begin.

Speaker 1

Thanks, operator. Good afternoon, everyone, and thank you for joining us. Today, we will review the fourth quarter and full year '20 '20 '4 financial results and provide an update on key business trends for Bio Rad. With me on the call today are Norman Schwartz, our Chief Executive Officer John DiVincenzo, President and Chief Operating Officer and Rublakaraju, Executive Vice President and Chief Financial Officer. Before we begin our review, I would like to remind everyone that we will be making forward looking statements about management's goals, plans and expectations, our future financial performance and other matters.

Speaker 1

These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties. Our actual results may differ materially from these plans, goals 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. Finally, our remarks today will include references to non GAAP financials, including net income and diluted earnings per share, which are financial measures that are not defined under generally accepted accounting principles.

Speaker 1

Investors should review the reconciliation of these non GAAP measures to the comparable GAAP results contained in our earnings release. With that, I will now turn the call over to our Chief Operating Officer, John DiVincenzo.

Speaker 2

Hello, and thank you, everyone, for joining today's call. Since joining Bio Rad five months ago, I'm excited to share the progress we've made in aligning our strategic priorities, focusing on execution and achieving key milestones in our transformation. First, I'm pleased to report that we successfully met our revised 2024 guidance for both revenue and operating margin as presented last August. Our Clinical Diagnostics business performed slightly better than forecasted, while our Life Science segment was affected by continued softness in the biopharma market. Despite some revenue challenges, we achieved gross margin expansion in 2024 through our productivity improvements, driven by our lean initiatives in our manufacturing sites and supply chain, execution of our global footprint rationalization and effective cost management.

Speaker 2

These will be sustained improvements in our P and L in 2025. I'm also excited to announce that we've entered into a binding offer to acquire STILA Technologies, a move we believe will significantly complement our digital PCR portfolio. Going forward, Stila's platform would enhance our product strategy in applied research and clinical diagnostics, allowing us to expand our offerings in digital PCR. We expect the transaction to close by the end of Q3 twenty twenty five, subject to consultation with relevant employee representatives, regulatory approvals and customary closing conditions. Additionally, we've taken further steps to streamline our cost structure.

Speaker 2

These actions are designed to better position Bio Rad for success as we move toward our strategic and financial goals for 2025 and beyond. Looking across our markets, we saw the continued trends we've experienced over the past year. Diagnostic performed as expected with broad based global demand. However, the Asia Pacific region saw a decline due to the earlier than expected adoption of a reimbursement change for diabetes testing in China during the fourth quarter. This adjustment not related to volume based procurement standardizes rates for certain clinical diagnostic tests nationwide.

Speaker 2

We don't currently anticipate further reimbursement changes for diagnostics in 2025. Keep in mind that China represents high single digit percentage of Bio Rad's total revenue. In Life Science, we are seeing a modest recovery though demand in biopharma in China remains soft. We did see a seasonal uptick from academic customers and biopharma research accounts. And our process chromatography sales improved in the second half of twenty twenty four and we expect growth in this area in 2025.

Speaker 2

We are also encouraged with the increased activity in new programs using our media, which bodes well for the future outlook for our process chromatography business. For our droplet digital PCR portfolio, we saw continued strong demand for reagents and consumables with low double digit growth year over year. Interest in our assays for oncology and cell and gene therapy applications remains high and we're maintaining strong win loss ratios for our platform. Entering 2025, we expect a gradual recovery particularly in the biopharma sector. While demand for instruments remains soft, we are having more conversations with biopharma customers and building a healthy order funnel.

Speaker 2

However, this gradual pace of recovery is likely to impact the uptake of life science instrumentation in the short term. In the academic segment, research funding globally has been soft throughout 2024 and we have not factored in any change in dynamics for 2025. However, we need more information to understand the impact if any of last week's announcement on the cap for U. S. NIH indirect funding.

Speaker 2

In Europe, funding remains mixed with modest increases in Germany and The UK while France continues to be soft. And in Asia, we're seeing some early signs of improvement in research funding in China due to its stimulus programs. So in 2025, our focus remains on operational and commercial excellence. We aim to increase consumables attachment and prioritize e commerce as part of our growth strategy. And as I discussed with many of you, innovation remains at the heart of Bio Rad's long term growth strategy.

Speaker 2

Beyond our anticipated acquisition of STILA, we're excited about key updates to our portfolio, including a refreshed NGC chromatography platform, the ChemiDoc Pro imaging system and a new version of our QX600 digital PCR system for the diagnostic market. We're also expanding our process chromatography portfolio with the launch of a larger 45 centimeter pre packed column and additional NUVIA resins that enhance purification capabilities. Our QX continuum program is making significant progress and we continue to see it as an important part of our digital PCR portfolio in 2025 and beyond. So given the moderated revenue growth outlook, we view 2025 as a stepping stone towards stronger profitable growth. We will continue driving innovation, enhancing our supply chain and implementing cost and productivity initiatives to support margin improvement.

Speaker 2

As the Life Science market normalizes, we believe Bio Rad is well positioned to leverage top line growth. Thank you for your continued support. I will now pass you to Roop to review the financial results.

Speaker 3

Thank you, John. Good afternoon. I'd like to start with a review of the fourth quarter and full year 2024 results. Net sales for the fourth quarter of twenty twenty four were approximately $668,000,000 which represents a 2% decline on a reported basis versus $681,000,000 in Q4 of twenty twenty three. On a currency neutral basis, this represents a 2.3% year over year decrease and was due to lower sales in our Life Science segment.

Speaker 3

Sales of the Life Science group in the fourth quarter of twenty twenty four were $275,000,000 compared to $291,000,000 in Q4 of twenty twenty three, which is a decline of 5.5 on a reported basis and approximately 6% on a currency neutral basis. Protein neutral sales decreased across all regions. Excluding process dermatography sales, Core Life Science Group revenue increased 2.5% year over year and 2% on a currency neutral basis. Core Life Sciences growth was driven by consumable sales and improved low single digit sequentially and mid single digit year over year. Sales of the Clinical Diagnostics group in the fourth quarter of twenty twenty four were approximately $393,000,000 compared to $389,000,000 in Q4 of twenty twenty three, which is an increase of 0.9% on a reported basis and 0.7% on a currency neutral basis.

Speaker 3

Growth of diagnostics was primarily driven by increased demand for our quality control and blood typing products. Offsetting the higher demand, our diabetes portfolio experienced a revenue decline due to the intra quarter China reimbursement change that reduced sales by an estimated mid single digit million or approximately 75 basis points and effective Q4 gross margin by the same amount. On a geographic basis, currency neutral sales increased in EMEA and Americas. Q4 reported GAAP gross margin was 51.2% as compared to 53.8 in the fourth quarter of twenty twenty three. The decrease in gross margin was driven by restructuring expense to further rightsize our footprint and the impact of the reimbursement reduction for diabetes test in China.

Speaker 3

As John alluded to earlier, we are continuing to proactively manage our cost structure including the recent implementation of a 5% workforce reduction to further align headcount for our global organization. The impact of these actions is contemplated in our guidance and should yield savings of $50,000,000 to $55,000,000 in 2025 with fully annualized savings of approximately $60,000,000 to $65,000,000 in 2026. SG and A expenses for fourth quarter of twenty twenty four were approximately $2.00 $4,000,000 or 30.6 percent of sales compared to $2.00 $7,000,000 or 30.4% in Q4 of twenty twenty three. Research and development expense in the fourth quarter was approximately $80,000,000 or 11.9% of sales compared to $64,000,000 or 9.4 percent of sales in Q4 of twenty twenty three. Q4 operating income was approximately $58,000,000 or 8.7% of sales compared to $95,000,000 or 14% of sales in Q4 of twenty twenty three.

Speaker 3

During the quarter, interest and other income resulted in net other income of $9,000,000 which is unchanged versus the prior year. The change in fair market value of equity security holdings, which are substantially related to the ownership of Sartorius AG shares, led to a $977,000,000 loss, which resulted in a reported net loss of $716,000,000 or $25.57 diluted loss per share. The effective tax rate for the fourth quarter of twenty twenty four was 21.2% compared to 18.4% for the same period in 2023. Effective tax rate reported in these periods was primarily affected by the accounting treatment of our equity securities. Moving to the non GAAP results.

Speaker 3

Non GAAP financial measures, which exclude certain atypical and unique items that impact both gross and operating margins and other income are detailed in the reconciliation table in our press release. Fourth quarter non GAAP gross margin was 53.9% compared to 54.4% in Q4 of twenty twenty three. Fourth quarter non GAAP operating margin was 13.8% compared to 15.5% in 2023. Non GAAP effective tax rate for the fourth quarter of twenty twenty four was 20.9% compared to 22.3% for the same period in 2023. Finally, non GAAP net income for the fourth quarter of twenty twenty four was $81,000,000 or $2.9 diluted earnings per share.

Speaker 3

And now for the full year results. Net sales for the full year of 2024 were $567,002,000 which represent a 3.9% decline on a reported basis versus $671,002,000 in 2023. On a currency neutral basis, this represents a 3.6% decrease and was driven primarily by lower sales in our Life Science segment. Sales of the Life Science group for 2024 were approximately $1,028,000,000 dollars compared to $1,078,000,000 dollars in 2023, which is a decline of 12.8% on a reported basis and 12.6% on a currency neutral basis. Our tenures for sales decreased across all regions.

Speaker 3

Sales of the Clinical Diagnostics Group for 2024 were $1,538,000,000 dollars compared to $1,489,000,000 dollars in 2023, which represents a 3.3% increase on a reported basis and 3.7% growth on a currency neutral basis. Growth of diagnostics was primarily driven by increased demand for our quality control and blood typing products. On a geographic basis, currency neutral revenue grew across all three regions. As we had targeted, overall full year non GAAP gross margin reached 55% compared to 54.2 in 2023. The year over year margin increase was driven mainly by the impact of operational improvements made throughout the year and a favorable product mix.

Speaker 3

Full year non GAAP SG and A expense was $799,000,000 or 31.1% of sales compared to $815,000,000 or 30.5% in 2023. The decrease in dollars of SG and A expense was primarily due to a reduction in discretionary spending and lower employee related costs. Full year non GAAP RD was $282,000,000 or 11% of sales versus $255,000,000 or 9.5% in 2023. The increase in non GAAP R and D was primarily due to a one time acquired in process research and development expense of $30,000,000 related to the Sabre Bio acquisition. Full year non GAAP operating margin was 12.9% compared to 14.2% in 2023, which reflects the effects of revenue decline and the aforementioned in process R and D expense, offset by favorable product mix and the impact of operational improvements.

Speaker 3

Lastly, the non GAAP effective tax rate for the full year of 2024 was 23.6%. Moving to the balance sheet. Total cash and short term investments at the end of Q4 twenty twenty four were $1,665,000,000 dollars compared to $1,628,000,000 dollars at the end of Q3 twenty twenty four. Inventory at the end of Q4 was $760,000,000 down from $8.00 $4,000,000 in the prior quarter as we continue to make progress on reducing inventory. For the fourth quarter of twenty twenty four, net cash generated from operating activities was approximately $124,000,000 compared to $81,000,000 for Q4 of twenty twenty three.

Speaker 3

For the full year of 2024, net cash generated from operations improved to $455,000,000 versus three seventy five million dollars in 2023 and was driven by the focused efforts in improving working capital efficiency. Net capital expenditures for the fourth quarter of twenty twenty four were approximately $43,000,000 and full year net capital expenditures were $166,000,000 Depreciation and amortization for the fourth quarter was $39,000,000 and $152,000,000 for the full year. Fourth quarter of twenty twenty four free cash flow was approximately $81,000,000 which compares to $39,000,000 in Q4 twenty twenty three. For the full year of 2024 free cash flow was approximately $290,000,000 which compares to $218,000,000 for the full year 2023. Full year 2024 buybacks totaled 691,000 shares for approximately two zero two million dollars Over the past years, we've deployed over $630,000,000 for share repurchases.

Speaker 3

Considering the current dynamic environment, we expect to do further share repurchases and have approximately $577,000,000 available for buybacks under the current board authorized program. Moving on to the non GAAP guidance for 2025. We're guiding a currency neutral revenue growth for the full year to be between 1.53.5%, which excludes any revenue from acquisitions. On an as reported basis, Q1 is expected to be approximately 5% to 7% lower on a year over year basis and then sequentially improving each quarter. The Life Science Group year over year currency neutral revenue growth is expected to be between 1.53.5% with our process chromatography business poised to increase high single digits.

Speaker 3

Note that this outlook contemplates a soft dynamic, but soft academic environment, but does not consider last week's proposed NIH indirect spending actions. Overall, NIH funding is not a significant component of our total sales. Specifically, we estimate that The U. S. Academic And Government segment represents approximately a high single digit percent of Bio Rad revenue.

Speaker 3

A subset of our U. S. Academic and government segment is federally funded research including the NIH. We estimate our total federally funded research exposure as approximately 4% of our revenue. For the Diagnostics Group, we estimate currency neutral revenue growth to be between 23%.

Speaker 3

As a reminder, our growth outlook for clinical diagnostics includes approximately 100 basis point impact in 2025 due to the partners exit from the donor screening business and approximately a 60 basis impact from the reimbursement reduction for diabetes testing in China. Full year non GAAP gross margin is projected to be between 5555.5% and includes the approximately 60 basis point incremental gross margin headwind related to the reimbursement reduction for our diabetes business. On a quarterly basis, we expect Q1's gross margin to be like Q4 twenty twenty four. Subsequent to Q1, we expect steady sequential improvement because of the continued productivity and efficiency benefit from our operational initiatives and improved sales volume. We look to target exiting the year in the high 55% gross margin range.

Speaker 3

Full year non GAAP operating margin is projected to be between 1313.5%. This includes the 60 basis point effect from the reimbursement change as mentioned earlier as well as the headwinds from the strengthening of the U. S. Dollar representing approximately $70,000,000 or two fifty basis point headwind through 2025 revenue and an approximate 40 basis point drag on operating margin. In addition, we are making nice progress with Sabre Bio, which we purchased last summer and plan to achieve a key development milestone in 2025.

Speaker 3

The result is a potential $10,000,000 R and D expense or a 40 basis point impact, which would impact both GAAP and non GAAP results and have been considered in our guidance range. We estimate the non GAAP full year tax rate to be approximately 23%. CapEx is projected to be approximately $160,000,000 to $180,000,000 as we continue to invest in our infrastructure to support our multi year transformation. We anticipate full year free cash flow of approximately $310,000,000 to $330,000,000 for 2025 as compared to $290,000,000 for 2024. With that, I'll now turn the call over to Norman for his remarks.

Speaker 4

Thanks, Roop. Just maybe take a minute and build on John and Roop's comments. I think that 2024 was certainly a productive year. First, we assembled a new leadership team that's been tasked with driving performance at Bio Rad. They've certainly hit the ground running, kind of focused on improving top line growth and driving margin expansion, all despite the headwinds in several of our key end markets.

Speaker 4

As for the innovation and building on our core portfolio, I think we've advanced our ddPCR platform with expanded applications, introduced new key portfolio refresh products like the ChemiDoc Go imaging system and grown our cell biology product offerings. I think it's important that we also made investments in companies with potentially best in class diagnostics using our ddPCR technology like Geneoscopy and OncoCyte. To support our growth initiatives, we have looked to M and A to complement what we're doing internally. I think a good example is our anticipated acquisition of STILA, which should broaden and accelerate our ability to provide enabling tools in the digital PCR space. As mentioned, we also recently acquired Sabre Bio, an entirely new platform utilizing our core droplet technology, really enabling high throughput discovery of novel antibodies and T cell receptors, principally for the biopharma market.

Speaker 4

So all in all, I guess I'd like to reiterate that we view our strategy and our focus for the future growth of the company to be very much intact. In clinical diagnostics, our business has returned to its normalized growth rate post pandemic. We have leading market positions here globally for our core platforms and are investing to support their growth while building a position in new molecular diagnostics segment. Similarly, in life science, we continue to focus on the biopharma area, especially for our digital PCR and process chromatography products as well as new development around cell biology. And of course, we continue to invest to broaden our offerings in digital PCR and other focus areas in our academic markets.

Speaker 4

I guess in summary overall, I believe we're well aligned and well positioned to drive long term growth in our markets as we move through this current dynamic period. And thank you all for your support and interest in Bio Rad. So with that, maybe I'll turn it back over to Ed. Ed?

Speaker 1

That concludes our prepared remarks today. We'll now open the line to take your questions. Operator?

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Patrick Donnelly with Citi. Please go ahead.

Speaker 5

Hi. You have Lizzie on for Patrick. Thanks for taking my questions.

Operator

I just I guess just

Speaker 5

on the life sciences guide, what does that imply I guess for ddPCR growth at 1.5% to 3.5%? I know you said process chrome was high single digit, but just wondering what ddPCR is considered?

Speaker 3

Yes. So from a ddPCR overall, we gave an overall it's more towards kind of the 1% to 2% from a ddPCR with process chrome in that high single digit range.

Speaker 5

Got it. And then just

Speaker 3

Just to reinforce and as a reminder, the acquisition that we just announced or proposed acquisition that we just announced isn't included in that range. And so we would see that as potentially being additive depending upon where that closes this year.

Speaker 5

Got it. And then just on the margin guide, the gross margin guide for this year, the 50 to 55.5. I guess can you walk through the different scenarios like what gets you the high end, what gets you the low end and just be curious there, but that's it for me. Thank you.

Speaker 3

Yes, of course. So obviously the midpoint beat about at 13.25%. The ability to march up is really end market dependence primarily. And so academia is soft as we come into the year. Biotech, biopharma although there are some signals of improvement still remains relatively soft.

Speaker 3

And I think as we think about how China continues to evolve, can the stimulus actually provide any uplift these sort of things. So those are things that can take us to the higher end. And I guess I would say depending upon how those end markets react, if they were on the negative side or a little bit more negative than what we've assumed that might lead us towards the lower end of that range.

Speaker 5

Great. Thank you.

Operator

Question comes from the line of Dan Leonard with UBS. Please go ahead.

Speaker 6

Hi. Thank you. I have a couple. The first one on process chromatography, just want to confirm my math here. Did that product line decline more than 50% in the fourth quarter and ended declining about 50% for the full year.

Speaker 6

Is that correct?

Speaker 3

Yes. That's about right, Dan.

Speaker 6

And then, Roop, that's been a very wide variable. What's your conviction in that high single digit growth forecast for 2025?

Speaker 3

Yes. We feel pretty strong about that with kind of the destocking that we've talked about continuing with our customers. Obviously, our part of our conviction is around the direct customer conversations that we've been having. So we feel good about that high single digit number.

Speaker 6

Okay. And then as a follow-up, I just wanted to better understand the operating margin bridge for 2025. It looks like it's about 100 basis point year on year decline if you correct 2024 for the IPRD charge. And it sounds like that decline is entirely due to China diagnostics and foreign currency. So I guess, one, can you confirm that?

Speaker 6

Two, it sounds then like if that math is right, operating margins would have otherwise been flat. But how would that reconcile a flat operating margin picture with that 5% headcount reduction. So I know that's kind of a multi parter there, but just any help you could offer.

Speaker 3

Yes, of course. So let me try and take it piece by bit there. In terms of the March, the first part is the China reimbursement is 60 basis points, right? So that's one. The best part of that is the FX effect which is 40 basis points headwinds.

Speaker 3

So that gets you to about 100 basis points. The other piece that I mentioned which is also 40 basis points that we've factored into with the guide that we provided which will likely be a Q3 event is an additional $10,000,000 1 time R and D in process R and D expense that will incur for the Sabre Bio acquisition that we just completed last summer. The developments of the products there are moving along pretty well and as such there's some earn outs that would be achieved as a result of that and therefore that charge would be there. So the total of that is about 140 basis points overall, Dan. And so if you march that up from the guide, I would say it from our guide perspective of 13.25% midpoint that kind of gives you a sense of where we would be in kind of the mid to high 14% stands those sort of headwinds.

Speaker 3

As it relates to the 5% workforce reduction, Obviously, that was a difficult thing for us to do. However, what it does provide us is to offset otherwise some of the expenditures that would roll over on a year over year basis whether that's merits and other

Speaker 4

aspects of that.

Speaker 6

Okay. Thank you, Roop.

Speaker 7

Yes.

Operator

And your next question comes from the line of Brandon Couillard with Wells Fargo. Please go ahead.

Speaker 7

Hey, thanks. Good afternoon. Just on the Distiller acquisition, I mean, it's been around a while. Why now? What is complimentary about it that your portfolio didn't already have?

Speaker 7

And can you share any financials about the asset, revenue base, installed base? And I imagine, would the business be dilutive? I guess, if you're losing money, would it be dilutive to margins and keep putting numbers around that?

Speaker 1

Yes. This is John Duchennezo. I'll take

Speaker 2

the first part. I mean, it's true that the company has been around for a while, very solid team developing a portfolio. But they launched a new platform last year. It's kind of an all in one solution based on their proprietary chip technology, great workflow and essentially they sell themselves with a great product without a real global reach. So that's why we're excited about bringing that into our portfolio with our not only content that we have put on and our expertise, but being able to get out and support more researchers around the world.

Speaker 2

So I think that's the key point of why we're very attracted to it today.

Speaker 3

Yes. And Brandon, let me add to John's comments. The other part in terms of I think application here with the CILA potential CILA products, it allows us to address not just the entry level of the digital PCR market, but also allows us to address the high end of the qPCR market where we don't today. As to the cannibalization, we don't think it's actually cannibalizing anything. We actually think it expands market opportunities for us and allows us to compete very effectively with other players in the marketplace.

Speaker 3

The way we think about it, it does have revenue today and I think that's the other thing we promised in terms of as we think about our M and A strategy moving towards companies with products that are on market that have revenue. And I think once we get them integrated and we think it should be accretive within eighteen to twenty four months from close. And obviously, we'll work to try and get that accretive even faster, but we think it will be a value add. So hopefully, that's helpful.

Speaker 7

Okay. One clarification, Roop. I think you said first quarter reported revenue down 5% to 7%. I guess that implies organic is down maybe low to mid singles. Then do you expect a return to positive growth starting in the second quarter over the balance of the year?

Speaker 7

Is that how we think about sort of the phasing?

Speaker 3

Yes. I think that's a reasonable way to think about the phasing.

Speaker 7

Okay. And then last one, just on the RIF and the cost structure streamlining. Can you Give me more color around kind of what areas are targeted, what parts of the P and L we'll see that manifest and why now and is this part of a larger evaluation of the portfolio or strategy of the company?

Speaker 3

Yes. I mean, I think the why now, I think as we continue to evaluate our business, business structure and where we stand firm from a performance standpoint, and just from an overall market perspective with the softness across different areas, we thought it's something it was the appropriate time to take such action. With that said, it's broad based. There's the majority of the actions are in the OpEx area. There is a little bit up in the infrastructure area within cost within our supply chain organization, but the predominance of it sits within our OpEx areas, R and D plus some SG and A areas.

Speaker 7

Very good. Thank you.

Speaker 3

Thank you.

Operator

And your next question comes from the line of Jack Meehan with Nephron Research. Please go ahead.

Speaker 8

Thank you. Good afternoon. Wanted to start with the first quarter forecast. If I heard it right, you're assuming down 5% to 7% on sales. Can you talk about what you're assuming by segment within that?

Speaker 8

And I guess just why the trend would be so different than kind of what we saw in the fourth quarter?

Speaker 3

Yes. Thanks, Jack. So maybe just a clarification to make sure everyone's got it right. The 5% to 7% is on a year over year basis to give that comparative there. So that's that.

Speaker 3

Obviously from a sequential standpoint, it also would be down from a Q4 twenty twenty four. To your point as to the why, there's a few different dimensions there. Number one, the continued softness within the academic market and biotech biopharma. The other thing is we've now factored in the full effect of both the donor screening business as well as the China reimbursement fees there. And then you got FX headwinds that are all factoring into there.

Speaker 3

And then over as we get through the year sequentially, we expect to see some level of recovery both on in the diagnostic space for us as well as the life sciences space for us.

Speaker 8

Got it. And just to clarify, that down 5% to 7% year over year, that's an all in number inclusive of FX headwinds?

Speaker 3

That's right.

Speaker 8

Okay. And it sounds like based on the commentary you said, it's probably roughly even across both segments in the first quarter?

Speaker 3

Yes. Just in terms of the downtick?

Speaker 8

Correct. Yes.

Speaker 3

Yes. That's a reasonable check.

Speaker 4

Okay. And then wanted to

Speaker 8

turn to China. So you said the region's high single digit percentage of revenue, these reimbursement pressures concentrate in the diagnostics business, in diabetes today. If it's a $20,000,000 kind of annualized cut you're talking about, it seems like pretty meaningful relative to probably what the exposure is. I was just wondering if you could confirm that. And then second is, just any thoughts around that spreading to other areas of the testing portfolio?

Speaker 3

Yes. Maybe I'll start with the latter because that's obviously was one of our concerns and especially as China adopted the reimbursement rate change for the A1C earlier. Originally it was supposed to kick in 2025 and they brought it into fourth quarter mid fourth quarter and so we learned of it in the mid to late November timeframe. So we related to that we don't think we don't expect at this time and obviously things seem to be subject to change. But we don't have any expectations that it should affect us in other areas that we support in the marketplace.

Speaker 3

So I think that's one aspect of it. In terms of the effect of it, the I guess, I think the way we said it in the script is not $20,000,000 I think that Jack that's the number you used there. More in the mid teens kind of levels is what you ought to take out of that.

Speaker 8

Okay. Yes, I think I was tacking on $5,000,000 or so in the fourth quarter.

Speaker 3

Thank you.

Speaker 8

Yes, that's what I was thinking.

Speaker 4

And then the last one, do you

Speaker 9

have a cash flow target for

Speaker 8

the year? It seemed like you made some progress on the working capital. Just be curious how you're thinking about that for 2025?

Speaker 3

Yes. Free cash flow, I gave a range of kind of $3.10 to $3.30 ish kind of range. $3.10.

Speaker 8

Okay.

Speaker 3

So and we finished that $2.90, so incremental amount and obviously we're working towards further improved working capital efficiencies across the board.

Speaker 8

Okay. Thank you.

Speaker 3

Thanks,

Operator

Your next question comes from the line of Connor McNamara with RBC Capital Markets. Please go ahead.

Speaker 3

Hey guys, thanks for the question. First off, on the NIH exposure, we appreciate the color and the numbers you gave around that. But and I recognize it's only been a week, but have you had conversations with customers and how are they changing their buying patterns? Or are they does this put them on a halt of spend? Or was there already some slowdown that they were anticipating some NIH cuts?

Speaker 3

Or how should we think about that? If that's the case, how that's rebounding?

Speaker 4

Yes. I think it has come as a little bit of a shock to researchers. And I think they're in kind of a little bit of a wait and see mode as to what really happens. So I would imagine especially for capital equipment that that will probably be probably more effective than anything else in the near term.

Speaker 3

Okay, great. Thanks for that. And then, just on the overall end markets in life sciences, what kind of assumptions are you making for the rebound in the back half of the year? Are you assuming a gradual improvement with things returning kind of to normal at the end of the year? Or how should how are you thinking about end markets?

Speaker 3

Yes. I guess, Connor, I wouldn't necessarily say we're going to say that it's going to get back to normal because I think that's an open question as to what is the new normal. With that said, we are expecting to see improvement as we go through the year with we'd anticipate Q4 being kind of the highest quarter, but it's a sequential improvement from Q1 to Q2 and through the rest of the year. Got it. And then last one for me is just on the ddPCR franchise.

Speaker 3

Can you talk about how that market is progressing both from a competitive standpoint and just from the acquisition and then from continuum or how should we think about the market growth and your ability to maintain share in the DDPCR market?

Speaker 4

I mean, it's certainly a competitive market. Today, we've got a number of players in the market. And of course, we continue to invest in the technology, both internally and through acquisition. We as we look forward, we look to the segmentation of our product line of our platforms within that product line. And of course continuing to build on the kind of assay portfolio is an important consideration as well.

Speaker 4

So I don't know. I think there continue to be lots of opportunities there. And of course, we have yet to really scratch the surface on the diagnostic side.

Speaker 2

Yes. So the CILA platform actually allows us at a price point to compete where we don't participate today, which is a robust part of the marketplace. And I think that that's part of the excitement. It kind of bridges kind of where we are with Continuum once that launch later this year to really the be with the high end QPCR marketplace and kind of more lower end segments of the DBPCR platform. So from a competitive standpoint, it allows us to participate in a market we don't really compete in today.

Speaker 3

Great. Thanks guys. Appreciate the questions. Thanks, Carter.

Operator

And your next question comes from the line of Tycho Peterson with Jefferies. Please go ahead.

Speaker 9

Hey, thanks. So on digital PCR guidance up 1% to 2% for the year, does that assume equipment is down again this year? And maybe can you put a finer point on the decline?

Speaker 3

Yes. Tycho, it doesn't presume that it's down, but its instruments is still relatively soft. Consumables continue to be strong and has were strong through Q4. We're expecting that to continue into 2025. And so that's kind of the major assumption there is that instruments and that's really tied to biopharma biotech continue to be soft as well as academia.

Speaker 9

Okay. And then for this year you laid out a handful of new product introductions. I guess any way to think about contributions from those in aggregate?

Speaker 3

They're not overly significant. They're not significant in terms of the introductions. They'll build into 2026 and beyond, which is the most critical piece of getting them out to the market.

Speaker 9

Okay. Two other quick ones, I guess, the messaging on capital allocation, I think you've kind of been messaging you could do bigger deals. You've obviously invested in Geneosophy and OncoCyte. You did the deal today. So are you still focused on, I guess, smaller scale?

Speaker 9

Are you considering larger assets? And how do you think about balancing that with the buyback?

Speaker 4

Yes. I think that it's there are a couple of factors there. As you know, we've done a lot of kind of earlier stage things in the last couple of years. And I think we certainly have pivoted now. It still is a great example to things that come with our revenue generating.

Speaker 4

And as I think John said, they fit in our portfolio and I think we can accelerate that through our global distribution. And then, yes, so mid sized or larger deals would be on our radar screen.

Speaker 9

Okay. And then last one just on pricing. What are you kind of assuming ex the China diagnostic dynamics?

Speaker 3

Yes. I guess if I net the China effect, we're somewhere around 1%. We're kind of 1.5 ish thereabouts without it in that ballpark.

Speaker 9

Okay. Thank you.

Speaker 3

Thanks, Taco.

Operator

And I'm showing no further questions at this time. I would like to turn it back to Edward Tung for closing remarks.

Speaker 1

All right. Thank you for joining today's call. We hope to catch up with you in person in the coming months. We're also finalizing plans for an Investor Day that we're targeting for mid November. We'll look to get out a save the date notice as details become more concrete.

Speaker 1

And as always, we appreciate your interest and we look forward to connecting soon. Thank you.

Operator

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
OptimumBank Q4 2024
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