Q3 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the bio Rad laboratories third quarter earnings call.
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I'd now like the other conference over to your Speaker today, Mr., Ron Hutton, Vice President and Treasurer. Please go ahead.
Good afternoon, and thank you for for joining US today, We review the third quarter financial results for 2019.
With me on the call today, our Norman Schwartz our CEO .
On Daskal Executive Vice President and Chief Financial Officer.
The last executive Vice President and Chief operating Officer that Trueblue President of the life Science group and John Hernia President of the clinical diagnostics groups.
Before we begin to review I would like to caution everybody that we will be making forward looking statements about management goals plans expectations, our future financial performance and other matters.
Because our actual results may differ materially from these plans and expectations you should not place undue reliance on these forward looking statements and I encourage you to review our filings with the FCC, where we just discussed in detail the risk factors in our business.
The company does not intend to update any forward looking statements made during the call today.
Our remarks today will also include references to non-GAAP net income and non-GAAP diluted income per share, which are financial measures that are not defined under generally accepted accounting principles investors shouldn't be reviewed the reconciliation of these non-GAAP measures to the comparable GAAP results contained in.
Our earnings release.
I'd like.
During the cold now over to Ilan Daskal below.
Thank you Ron good afternoon, and thank you all for joining US. We we reviewed every thoughts on again, they says as well as commentary on a non get the faces.
Net sales for the third quarter of 2019 were $560.6 million.
We changed any increase of 2.8% on a reported leases versus $545.1 million in Q3 2018.
On a currency news releases sales increased 4.5%.
During the quarter, we've experienced good demand across many of our key product areas and growth in all three regions.
When comparing to the third quarter of last year remember that use real 2018 included about $6 million of sales to customers pulled into the second quarter of 2018 substantially all of these related to our diagnostics business.
If we adjust the easy compare with the sales this customer school. The end last year from Q3, two Q2, we estimate the year over year currency neutral sales growth for Q3, I'm 2019 was about 3.4%.
Sales of the life Science group in the third quarter of 29 team worked to honor them $16.7 million compared to two on it down $6.6 million in Q3 of 2018, we choose an increase of 4.5% on a reported basis in five.
<unk>, 0.7% increase on in currency neutral basis.
Much of the year over year rules scheme, the third quarter was driven by double digit growth in droplet digital PCR Indian food safety as well as good demand within gene expression and western blotting product lines.
Process media, which can fluctuate on a quarterly basis, it a slight year over year growth.
Excluding process media sales the life science business grew about 5.8% year over year on a currency neutral basis.
On a geographic basis Lifesize gonna senior throughout the year over year sales grew across all three regions.
Oh droplet digital PCR platform continues to hit good momentum and we are scheduled to introduce next months. Good. She wants one which is a fully integrated systems.
These allows customers to fully automated the droplet digital PCR work flow and increases the multiplexing capabilities.
We have an initial banco before there's for these new instruments, and we anticipate production and shipments ramp over the next 12 months.
Sales of clinical diagnostics products during the third quarter was $341.8 million.
Theaters to 300 of $34 million in Q3 of 2018, which has a 2.4% growth on a reported basis and the 4.3% growth on a currency neutral basis.
When adjusting for the 6 million dollar sales didn't customers for the last year from Q3 two Q2.
The year over year currency neutral sales growth was about 2.4%.
During the quarter, we posted solid growth of blood typing quality control and immunology products lines.
These growth was somewhat offset by year over year decline within diabetes is the result of price pressure in core markets.
On a geographic basis, the diagnostics group posted nice growth in the Americas and Asia was the macroeconomic environment in euro weighs on the growth rates in the region.
The reported gross margin for the third quarter of 29 team was 54.8% when I get the faces and compares to 52.6% in Q3 2018.
The year over year margin increase is driven mainly by product mix and lower cost of inventory reserves.
I'm authorization related to prior acquisitions recorded in cost of goods sold was $3.9 million compared to $4.7 million in Q3 2018.
It's DNA expenses for Q3, 2019 weren't too on within $1.6 million or 36% or sales.
He is DNA expenses in Q3 hundred 2018 were $201.2 million or 36.9% and including $4 million of contingent consideration Tennessee.
So little mobilization expense related to acquisitions recorded in Haiti, DNA for that quarter was $1.9 million versus $1.8 million in Q3 2018.
Reducing the S.G. and he's been continues to remain a focus area to achieve or 2020 goals.
Research and development expense in Q3 was $47.9 million or 8.6% of sales compared to $49.2 million or 9% in Q3 or 20 team.
All of these it's up to a reported Q3 operating income.
$57.5 million or 10.2% of sales compared to $36.3 million or 6.7% in Q3 of 28.
Looking below the operating line the change in fair market value the equity Securities Holdings reduced the reported income by $390.6 million and de substantially related to the holdings of the shares of Santonio C.G.
Also during the quarter interest in other income resulted in net other expense of $2.1 million compared to $4.2 million last year.
The year over year improvement, primarily reflect higher investment income.
The effective tax rate in Q3 of 29 team was 22.8% and compares to 23.1% in Q3 of 28 team.
Reported net loss for the third quarter was $258.8 million and diluted loss per share for the quarter was $8.68.
The decrease in net income and earnings per share versus last year, he substantially related to devaluation of the Sartorius holdings.
Moving onto the non-GAAP results.
Looking at salary thoughts on a non-GAAP basis, we have excluded certain RTP called and unique items that impacted both the gross and the 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 third quarter in cost of goods sold we have excluded $3.9 million of normalization of purchase intangibles and $3.2 million of restructuring expenses.
These extrusions moved the gross margin for the third quarter of 2019 to a non-GAAP gross margin of 56%.
This is 53.5% in Q3 of 2018.
The non get SGN named the third quarter of 2019 was 35.5% versus 36.3% in Q3 of 2018.
In SDMA on a non-GAAP basis, we have excluded amortization of purchased intangibles of $1.9 million.
And restructuring cost of $2.7 million and $1.9 million adjustment to legal reserves.
In R&D, we have excluded a small amount of restructuring benefit.
The non-GAAP R&D expense in Q3 was 8.5% which is in line with our expectation.
The cumulative some of these non-GAAP adjustments, resulting moving the quarterly operating margin from 10.2% on I get the bases to 12% on a non-GAAP basis.
non-GAAP operating margin compares to a non-GAAP operating margin in Q3 2018 of 8.2%.
We have also exclude certain items below the operating line, which are the decreasing body of that sartorius equity holdings of $390.6 million as well as a small loss associated with venture investments.
The non-GAAP effective tax rate for the quarter was 25.5% and we estimate the full year tax rate on a non get the basis to be approximately 27%, which is primarily driven by the geographic mix of earnings.
And finally, non-GAAP net income and diluted earnings per share for the third quarter of 2019 were $48.6 million and $1.61 cents per share.
Compared to $27.6 million.91 per share in Q3 of 20 team.
Moving onto the balance sheet.
In the first quarter of 2019.
We adopted a new accounting standards are related to leases, which requires us to recognize most leases as assets and liabilities on the balance sheet.
The write off Hughes assets balance in the third quarter was $217.5 million and associated liabilities are included in the other current liabilities and in other long term liabilities.
These balances primarily represent our operating lease obligations for facilities and auto leases.
The adoption of these standards has a minimal effect on the income statement.
Total cash and short term investments at the end of Q3.
Were $985 million compares to $850 million at the end of 2018.
During the quarter, we completed an acquisition off a small manufacturer in the diagnostics group that will expand our capabilities within our quality control products.
Also during the third quarter, we purchased 14745 shares of our stock for $5 million at an average share price of $339.05.
For the third quarter of 2019 net cash generated from operations was about $100 million, which compares to about $62 million in Q3 2018.
This improvement mainly reflects the higher operating profits and improved working capital.
[noise] he adjusted EBITDA for the third quarter of 2019 was $95.1 million or 17% of sales.
The adjusted EBITDA in the first nine months of 2019 was $288.5 million or about 17.1% compared to $253.1 million or 15.1% in the first nine months of 2018.
Net capital expenditures for the third quarter of 2019 were $31.1 million.
We projected full year capex spend will likely be at the low end of the forecasted range of $110 million to $120 million.
Depreciation and amortization for the third quarter was $33.6 million.
Moving onto the guidance.
We are pleased with the overall performance in the first nine months of the year.
We continue to see strong momentum for the fourth quarter. However, we remain cautious of the macroeconomic softness environment in Europe , as well as geopolitical and global trade attention in other parts of the globe.
With that in mind, we are maintaining our full year guidance range.
We estimate that full year over year currency neutral revenue growth between four and 4.5%.
Full year non-GAAP gross margin is projected between 55.5% and 56%.
And full year, non-GAAP operating margin between 12.5% and 13%.
And we did we will open the line to take your questions.
Radar.
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Please what would be compiled acuity roster.
[noise]. My first question comes from lineup Brandon Couillard with Jefferies. Your line is now open.
Thanks, Good afternoon.
Maybe maybe for a long.
Generally think about bio Rad is being the lease macro sensitive business and my coverage universe, you sort of blabbering on what parts of the diagnostics business that you perceive is being a little more macro sensitive perhaps with some instrumentation placements and then on diabetes pricing that you mentioned in the script.
I have a competitive dynamic and what regions is it's is it mostly concentrated then if one or two thanks.
Hey brand is John hurting Kirti I'll take that I'd say that the overall macro diagnostics market in Europe is pretty soft it's not just a function of our product line, but it just in general if you look at many of the market reports out there and that certainly reflected we did see some growth in EMEA in the quarter, we're mindful about.
The fact that this was an easy compare to last year. We do look to continue a modest growth trend from EMEA, but it's all on mentioned, we're you know watchful of the geopolitical instability and how that might impact our business in the.
The middle East and with respect to diabetes, we had been continuing to see price pressure over the quarters, that's certainly affected our business.
And I'd say across most regions, but I'd also say that some of the the a the decline this year was related to timing.
Which sometimes happens with shipments in our diabetes business.
Thanks, and one for a net on the Qx one launch.
Could you just sort of understand that the mix of the current backlog of between the upgrades and new users.
Correct that system to sort of open up.
[noise] accounts, who would adopt it sort of given that the work flow and end up flexing advantages and you sort of speak to sort of the traction of the system in the clinical markets right now thanks.
Sure. This this system was really designed primarily for bio pharma customers and we know that we have current biopharma customers, who are interested in adopting the new system as well, but there are a customers who has been waiting for the two for this system.
Because of the work flow and multiplexing capability.
I'm not sure if that answered all of your questions Brendan.
Oh I think so okay, and then you know maybe I'm not sure if andy's here wheel on you could speak too.
Now that you sort of into the business for about six months, where do you see some of the best opportunities for for cost Alps, and any specifics on the a specific actions with respect to take cover over the next 12 months would be helpful.
He's given I don't I can I I can certainly that's I mean as to you and I continue I think ELAD valves in the script. This is Andy I'm sorry.
Yes, DNA continues to be a focus area for us and.
Continue to work through to reduce that as incentive sales operating efficiencies broadly again.
And I will we're not working to the early just trying to trying to guidance chats or any expectations.
Around that but.
And as Tonight, the primary focus for us.
[noise] already I'll hop back into queue. Thanks.
Thank you.
As a reminder, ladies and gentlemen that is star then one if you'd like to ask a question.
Our next question comes might have Jack Meehan with Barclays. Your line is now open.
Thanks, Good afternoon.
Wanted to continue on with the Qx, one launching just get a sense for the initial game plan is there a menu. It is there a menu that you're looking to launch that with what are some of the key assays you know you're playing a role out over the next year too.
That's a great question so.
We made sure that this platform with 100% compatible with our current platform an assay. So we have thousands of are you little assays that are available for people to buy today and they can find them tomorrow for the Q1 in addition.
We'll be rolling out.
For color version of those athletes are they could increase thermo king.
No in one well with validated assay.
[noise] overtime, we will likely move this platform into the IBT market and that's when we'll have regulated menu develop.
Got it is there any color you can give on the economics of the platform and is there and also maybe just the size of the current installed base. How many of those you expect to move onto the new system.
Well I can I can say that we have.
Welcome with quite a few current customers, who intend to continue to use their old platform and add this platform into their their workflow and we have also spoken to quite a few new customers as well who don't have our platform yet.
This is the higher end platform, then UQM to 200.
So.
You know you get a lot more flexibility and ease of use and work flow flexibility.
And we'll have to pay a little bit more for the platform.
Great.
Keep it going in that or maybe are there any update you can provide in terms of some of the new product development and single cell using the droplet technology.
What I can tell you is a we have several active programs. We just launched a new product for epigenomics than single cell as art taxi product that is generating a lot of interests with our customers and.
And.
Our collaborators are generating a lot of really great data using that Pac kit.
And we're working on next generation systems for a single cell R&D teak as well.
Great and then one final one I'll hop back in the queue or just.
The results are about is in line with my numbers as you can get on the revenue line. So I have to follow up on Brandon's question.
Really the diabetes I was really the only Delta IC you know John you mentioned some there could have been some timing related to that is impossible to quantify how much might have moved into the fourth quarter and not really.
Okay I'll hop back in the queue. Thanks.
We have a follow up questions from the line of branded card with Jefferies. Your line is now open.
Great. Thanks, maybe one for you John one of the other diagnostics players in the space alluded to some material change and the macro environment in China, specifically for diagnostics, just curious if you've seen any.
Changes in the in the enough landscape there.
And well we.
We do can say from a diagnostic perspective, we continue to see significant growth in Asia, but I guess I turn it over to Andy to talk about maybe China in general for the company and then if you have any color questions.
So with respect to China, most specifically.
We've been encouraged <unk> a year to date performance.
We remain optimistic for Q4, I think like everybody else would also put out the caveat that no we're closely watching the geopolitical.
Situation and and impact of tariffs, which have been socofar modest and all in all in our exposure bobs.
We keep an eye on after that for the long term and any changes.
So where we're cautiously optimistic Oh, we look forward in China.
Okay, and then maybe one follow up for a net would love to give an update on the cell analysis portfolio and.
Basically any interest your sand in the C. Five sell imager. Thanks.
Well I you know I think we're seeing good demand.
And our flow and ounces products and with respect to the five we see a lot of traction in farm in Biopharma.
Due to the particular feature set and value proposition it offers those customers.
Right.
Maybe one for for normal just to round out here cash continues to build pretty substantially on the balance sheet. The buyback is relatively immaterial in the third quarter just you know.
Census, perhaps why the buyback and doesn't seem to be a higher priority and kind of your current view on the M&A pipeline and whether or not you might be any closer to to finding something attractive out there. Thanks.
So Brendan Yeah. It's you know it's always.
But had not yeah.
Okay. That's fair you know I think that a you know it's always a balance right you've got opportunities.
That you're looking at trend.
And so you know you where you know the kids.
We believe we try to keep the cash for those but nevertheless, we yeah. We did get in the market 10 did buy back some shares.
During the quarter.
So again, it's a balance between saving a tour for the right acquisition.
And Uh huh.
The buyback so.
We're trying to manage at the best we can.
Alright, thank you.
Thank you.
We have a follow up question from line of Jack Meehan with Barclays. Your line is now open.
Thanks, maybe just to start on a processor isn't business. So I know that was up modestly year over year I think previously you're assuming some modest levels of growth back half of her back half is.
No.
It's still the implied assumption for the fourth quarter.
Okay. Thanks for the question the answer the short answer is yes, I mean, we still a project you know the incremental gross will be these here. So obviously.
Most of the growth.
We projected in Q4.
Okay, and then the gross margin of 56% was.
You know really strong 250, bips year over year was there anything to call out in terms of some of the efficiency initiatives or.
Mix of consumable versus instrument, which might help that progression in the quarter.
Yeah, Great question. Thanks Jen.
So.
The reason, obviously the mix, we more consumable somebody's quarter relative to Q3.
Yeah.
That was definitely one major component there and.
Two other items that I would highlight.
The lower inventory reserves and the lower logistics close. These are two items that you know we called out last year. The same time and these are definitely you know items did an S areas that.
We improved you know and that contributed to the incremental gross margin this quarter.
Great and maybe you know any I know you mentioned you weren't giving 2020 guidance at this point, but at the last analyst day in November 2017, you had the 20% target you know just given the progression you've had the last few years in the trajectory year to date, I mean does that still feel pretty dual.
No.
Yeah, I think where were optimistic about exiting 2020 oh sites, it without stated targets and had.
Nothing at this point to say, we Comped Ci five.
Mm Hmm.
Great and maybe just final one on the income statement the tax rate.
Came in a little bit below my forecast, but still feels like there's a lot.
Opportunity to keep pushing that down over time.
You know it's a one.
There are number you have in mind you know like is there is a good 25.5% number to use on a go forward basis.
So check it. Thank you you know for this year, we project a hit 27% rate.
Overall, you know it depends on the geographic mix that.
That's one way nighttime that does impact the overall non get freight.
And you know.
Long term you may get to the mid Twentys, but I'm not I mean, I'm not ready right now to kind of forecasted 2020, and I'll provide an update on the next phone, but but for this year exceeded the 27 of them.
Sounds good thanks.
I'm showing no further questions in queue at this time, so that will conclude today's question and answer session.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Mm Hmm.