Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for patients.
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Ladies and gentlemen, thank you for standing by and welcome to the Q4 and full year 2019, Bio Rad Laboratories incorporated earnings conference call. At this time, all participants' lines are in listen only mode.
The speakers presentation, there will be a question and answer session.
A question during the session you will need to press star one on your telephone please be advised that today's conference maybe recorded.
If you require any further assistance please press star zero.
I would now like to hand, the conference over your speaker today Mr. Ron Hutton. Thank you. Please go ahead Sir.
Thanks Daniel.
Good afternoon, and thank you all for joining US today. We are you review the fourth quarter and full year financial results for 2019.
With me today are Norman Schwartz our CEO.
Lundahl School Executive Vice President and Chief Financial Officer.
The last executive Vice President and Chief operating Officer.
Tumolo President of Life Science group, and Dar right President of the clinical diagnostics group.
Before we get our review I would like to caution everyone that we will be making forward looking statements about management goals plans expectations, our future financial performance and other matters.
Because or 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 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.
Our remarks. They 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 should review the reconciliations of these non-GAAP measures to comparable GAAP results contained in our earnings release.
I'd now like to turn the call over two loans [laughter]. Thank you Ron good afternoon, and thank you all for joining us.
We will review this fourth quarter and 40 year results for 2019 on a good basis as well as commentary on a non-GAAP basis.
Net sales for the fourth quarter of 2019 were $624.4 million, which is 1.2% increase on a reported basis versus $616.8 million in Q4 over 2018.
On a currency neutral basis sales increased 2.3%.
The fourth quarter revenue fell short by about $20 million from the midpoint of guidance, mainly due to the cyber attack. This we reported in early December.
We expect to recover in Q1 off 2020 about $5 million hope that you'll for revenue shortfall.
During the quarter, we experienced good demand across many of our key product areas and growth in the Americas and in Europe.
Sales in Asia, where most impacted by the cyber attack, mainly impacting their life Science group sales.
Sales over the life Science group into fourth quarter of 2019 worth $242 million compared to $239.6 million in Q4 of 20 team, which he is 1% increase on a reported basis and a 1.8% increase on a currency neutral.
Pieces.
Much of the year over year rolls into fourth quarter was driven by a double digit growth in droplet digital PCR and in food safety as well as it very strong results for process media.
Excluding process media sales the life science business declined 2.1% on a currency neutral basis versus Q4 2018, as a result of decide or a tech which impacted mainly the revenue of life science.
On a geographic basis life science currency neutral year over year sales grew in the Americas and in Europe.
Oh droplet digital PCR business continues to have good momentum.
The fully integrated you X one sees them was launched in Q4, and we're very pleased we the demand outlook as we continue to ramp production and shipments.
Sales of the clinical diagnostics products in Q4 was $379 million compared to $373 million in Q4 of 2018, which he is 1.6% growth on a reported bases and 2.8% growth on a currency neutral basis.
Yeah.
During the fourth quarter, we posted solid growth of blood typing quality control diabetes and immunology product lines. This growth was somewhat offset by year over year decline within the infectious diseases business.
On a geographic basis, the diagnostics group posted growth in Asia and in the Americas.
They reported gross margin for the fourth quarter of 2019 was 52.9% Wanna get bases and compares to 53.9% in Q4 of 2018.
The fourth the fourth quarter gross margin was negatively impacted mainly by lower revenue falls through the temporary production outage and lower manufacturing utilization due to the cyber attack as well as a restructuring reserve.
Our monetization related to prior acquisitions recorded in cost of goods sold was $4.5 million compared to $4.2 million in Q4 off 2018.
<unk> expenses for Q4 of 2019 were $214.2 million or 34.3% of sales.
Yes, DNA expense in Q4, 2018 was $214 million or 34.7%.
Total amortization expense related to acquisitions recorded in as she and eight for the fourth quarter.
It's $2.1 million versus $1.8 million in Q4 of 20 team.
Yes, you in a cost savings initiatives remain a focus area to achieve our 2020 goals.
Research and development expense in Q4 was $57.1 million or 9.1% of sales compared to $53.1 million or 8.6% in Q4 or 20 team.
Q4, operating income was $59.2 million or 9.5% of sales compared to a 200 into $127.1 million laws in Q4 off 2018.
Looking below the operating line the change in fair market value of the equity Securities Holdings added $646 million of income to be reported results Andy substantially related to the holdings of this years of sort of Torrijos AG.
Also during the quarter interest in other income resulted in net other expense of $5.8 million compared to about $84000 last year.
The year over year increase primarily reflects losses and impairments on some of our venture investments.
The effective tax rate in Q4, 2019 was 20.9% and compares to 20.4% benefit in Q4 of 2018.
Reported net income for the fourth quarter was $553.5 million and diluted earnings per share for the quarter were $18.31.
The increase in net income in earnings per share versus last year, he substantially related to the valuation of the Sartorialist holdings.
Moving on to the non get results.
Looking at our results on an ongoing basis, we have excluded certain RPP call 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 good and non-GAAP results for the fourth quarter in cost of goods sold we have excluded $4.5 million from organization of person and purchase intangibles $1.5 million of acquisition related benefits and $4.4 million off restructuring expenses.
These exclusions moved the gross margin for the fourth quarter of 2019 to a non-GAAP gross margin of 54.1% versus 55.4% in Q4 2018.
Then on get SGN named the fourth quarter of 2019 was 31.7% versus 32.7% in Q4 of 2018.
As gionee on a non get basis, we have excluded amortization of purchased intangibles of $2.1 million $1.3 million of acquisition related benefit.
And restructuring cost of $13.2 million and $2.2 million adjustment to legal reserve.
In R&D, we have excluded the restructuring cost of $6.1 million.
The non-GAAP R&D expense in Q4 was consequently, 8.2%.
The cumulative some of these non-GAAP adjustments, resulting in moving the quarterly operating margin from 9.5% on a GAAP basis to 14.3 present on a non-GAAP basis, which is about flat from Q4 of 2018.
We have also excluding certain items below the operating line, which are the increasing value of the sartorial equity holdings of $646 million and $1.8 million losses associated with venture investments.
The non-GAAP effective tax rate for the quarter was 17.7% it change in the tax rules this quarter enabled us to apply higher foreign tax credits.
And finally non-GAAP net income for the fourth quarter of 2019 was $17 million or two daughters, and 32 cents diluted earnings per share compared to $63.1 million and $2 a nine cents per share in Q4 off 2018.
Moving on to the full year results.
Net sales for the full year, where 2 billion and $312 million, which is 3.3% growth on a currency neutral basis.
The annual revenue is about $20 million below the midpoint of our guidance, mainly due to the fourth quarter cyber attacks.
We expect to recover in Q1 in 2020 about $5 million over the fourth quarter revenue shortfall.
Sales of the life Science group for 2019 were $885.9 million, which is an increase of 2.8% on a reported basis and 4.6% on a currency neutral basis.
Much of the full year over year growth was driven by double digit growth in droplet digital PCR food safety and process media.
On a geographic basis life science currency neutral full year over year sales grew in the Americas and in Europe, driven mainly by the demand from Biopharma market.
Like science sales in Asia, where most impacted by the cyber attack in December.
Sales of clinical diagnostics products for 2019 were 1 billion in $412 million, which is about flat on a reported basis and 2.8% growth on a currency neutral basis.
The full year over year growth was driven mainly by quality control blood typing and auto immune testing products.
During the year, we continued to see a nice year over year increase in new instrument installations.
On a geographic bases clinical diagnostics full year over year sales so growth in the Americas, and Asia as well as a modest growth in Europe.
The full year non-GAAP gross margin was 55% compared to 54.5% in 2018.
The year over year margin increase was driven mainly by product mix manufacturing efficiencies and lower cost of inventory reserves, but was negatively impacted by cost associated with the cyber attack.
Full year non get asked DNA was 34.4% compared to 35.2% in 2018.
Yes, DNA remains a focus area for us to achieve our 2020 courts.
Full year known good R&D was 8.5% versus 8.7% in 2018 and full year non-GAAP operating income was 12% compared to 10.7% in 2018.
Lastly, the full year non-GAAP tax rate was 24.1% versus our guidance of 27%.
The lower tax rate was mainly driven by changing the tax rules, which enabled us to apply higher foreign tax credits.
Moving onto the balance sheet.
Total cash and short term investments at the end of Q4 were 1 billion and $120 million compared to $850 million at the end of 2018 and $985 million at the end of the third quarter.
We reclassified $425 million off of the outstanding bonds that are you in December of this year from long term liabilities to current liabilities.
During the fourth quarter, we purchased 22343 shares of our stock for $8 million, It's an average share price of approximately $358.
For the fourth quarter of 2019 net cash generated from operations was $160 million, which compares to about $105 million in Q4 of 2018.
This improvement mainly reflects the higher operating profits and improved working capital.
For the full year of 2019 net cash generated from operations was $458 million versus $285 million in 2018.
The adjusted EBITDA for the fourth quarter of 2019 was $116.8 million or 18.7% of sales.
Full year adjusted EBITDA, including the Sartorius dividend that was declared in Q1 and paid in Q2 was $405.3 million or about 17.5% compared to 16.2% in 2018.
Net capital expenditures for the fourth quarter of 2019 were $21.6 million and for your Capex was $98.4 million.
Depreciation and amortization for the fourth quarter was $34.5 million and $134.2 million for the full year.
Moving onto the guidance for 2020.
We are pleased with the overall performance in 2019, and we continue to see strong momentum in 2020.
We are guiding get currency neutral revenue growth in 2020 between 4.5% and five in a quarter percent.
It is too early for us to estimate at this point of time, the potential global impact of the Corona virus outbreak.
We estimate 7% to 8% currency neutral revenue growth for the life Science group.
And between 3% to 4% for the diagnostics group in 2020.
We continue to assume that we will experience a quarterly revenue fluctuation for process media.
Q1 revenue is expected to be lower for process media compared to Q1 off 2019, However, we estimate and overall double digit growth for the full year.
Full year non-GAAP gross margin is projected between 55.7% and 56.1% and full year non-GAAP operating margin between 13.8% and 14.3 groups that.
We estimate the non get full year tax rate to be about 26% and capex is projected between 101 hundred $10 million.
Overall, we are on track to achieve our goal of 20% adjusted EBITDA run rate by the end of this year.
Now I'll turn the call to Norman for a few comments.
Okay. Thanks, a lot just a few general comments I think if you look.
For me if you look past all that all the viruses that are floating around I think we are pleased with the underlying progress and we continue to make on the 2020 goals that we've been pursuing.
The progress is for me a combination of good steady sales growth and expense discipline on the sales side of the equation.
The markets for our products continue to grow around the world at our outlook for 2020 is ER is positive.
I think for me that outlook is driven by that robust markets, but also by the plan introduction of new products and platforms across the business.
And the four year effect of products introduced in a.
2019 motor Snow simply probably the a the qx one droplet digital PCR system introduced late in the year.
The outlook also factors in the effect of two acquisitions, we completed in two.
2019, one in life science and one in diagnostics.
So as you see from the results. We also continue to make progress on.
Pruning our on operating income.
Largely driven by focusing on Sta expenses.
But we also benefited from some of the supply chain improvements that we've previously talked about.
I guess, there's certainly more we can do to capture the benefits of the investments, we've made and systems and the organization and then the markets that we're pursuing.
And I.
I do look forward to another year of progress.
Thank you know run a we will now open the line to take your questions operator.
As a reminder to ask a question you'll never press star one on your telephone to withdraw your question press the pound key please stand by what we compile the Q and a roster.
Our first question comes from Brendan who yard with Jefferies. Your line is now open.
Thanks, Good afternoon.
A lot if I interpret your comments right you only expected recapture five of the 20 million from the cyber attack in the fourth quarters that right. Then should we just consider did the other 15 million assist just lost orders and any chance you could quantify the impact of the cyber attack on gross and operating margins in the fourth quarter specifically.
Thank you Brendan I appreciate the question so.
To your first question. The answer is yes, I mean, we plan to picture 5 million out of the 20 and the remaining 15, we currently don't and they don't plan or.
For close to two.
Cover that 15 million from Q4.
And when you think about the overall expenses and the impact on the operating expenses you know it was broad based overall I mean, you can think about a you know to disruption to manufacturing to operations in general and there was a tell you know throughout the quarter. So it's very difficult to kind of caught.
RV thoughts from you know the ongoing results and so what we decided to do is just to kind of announced what would the overall results he told baked into.
The results that we announced.
Okay, and everything about the full year operating.
Operating margin can you just help us reconcile the adjusted operating margin guidance 30 point at 14.3 relative to your comments about the.
EBITDA exit rate should we just.
Plug that sartorius dividend, even though it pays in the first half the year into the fourth quarter to try to think about.
Stability and exiting the year.
Right and swear to do the math yeah. So so you know sartorius, usually historically at least tend to pay the dividend either in Q1 on Q2 into first half of the or sometime and the way we think about the EBITDA overall Brendan is is a run rate of 20% when when when.
You take into account the dividend from sort of torrijos.
On a full year basis, each would be in 2021.
Thanks for then.
Question, maybe for for Andy If you could just perhaps elaborate on some of the cost initiatives some of the areas of the business.
That.
You'll be focused on in 2020 in terms of cost outs and if he could perhaps quantify the net savings you anticipate from the European restructuring plan, which I think should be done by the second quarter.
Yes, so maybe fitness between Atlanta myself, I mean, there's no real commentary on changes in our focus for for cost out some and we continue to.
Pursue a improvements NSG and I overall.
Broadly based.
And of course, I think as Weve talked before.
You know, we're starting to China rights or to longer term manufacturing strategy and our overall footprint.
Forward, which will elaborate more on lights up later in the yeah.
I think there was another piece of that question or was that did I cover things seem Brendan you I think you color.
Okay. So it's a brand on the I mean as Andy mentioned.
The focus is to continue to extract leverage from mainly on the us into focuses on DNA line for 2020, you know we do plan to have an investor day sometime in the second half of the year, which we will lay out kind of that full on strategy beyond 2020, and and we'll communicate more than.
And then just one follow up few alon it could you quantify the contribution you anticipate from the two acquisitions on 2020 revenue growth. There's there was sort of think longer term. So help us think about the runway for that for the tax rate to continue.
Come down over time.
Maybe I can comment that the first one yeah. Yeah. So I mean these protect this was small kind of early phase technology tuck ins.
So I mean, it's kind of an it's not it's just very small number.
The new products coming out from and other work or Don on those I've talked to him.
So I will contribute we're looking forward to its more a focus on getting that was established in the marketplace and we can build on that position and twentytwenty water.
In Britain until your other question regarding the tax rate. So the change that was made this quarter was retroactive for 2018. So the overall rate was down to 24% on an ongoing basis.
You know, it's about 26%, maybe we think about long term right now with our current tax structure somewhere in the mid Twentys. That's that that's the way we think about it right now.
All right I'll jump back. Thank you. Thank you. Thank you.
Thank you. Our next question comes from Dan Leonard with Wells Fargo. Your line is now open.
Hi, Thank you my first one on China appreciate it's tough to tell the impact of the current a virus, where we stand today, but can you speak to your supply chain exposure in China.
Ah, Yes, I think first to reiterate your first comment it is tough to tell the full outlook on on the impact in China.
In our supply chain in China, I think is.
Probably very similar to two other major life science and diagnostic companies we do.
Yeah, we do at manufacturing and in Singapore, and you know Dcs around the region. So so were just with subject to the same or let's call. It reduced workforce challenges that exist in the warehouses and that the channel support infrastructure in China.
I think when I better or worse than anybody else at this point in time.
[laughter] you don't source any meaningful amount of material that would go into your you're putting into from from China am I hearing right.
Decided against them. We did you. So you don't source a meaningful amount of raw materials from China do we do source. Some obviously some electronic parts and those kinds of things from China. Today, you know we haven't seen.
Rick disruptions in that again, we'll just have to wait and see.
Okay, and then just a couple follow up questions on on the trends in diagnostics.
It sounds like that the European diagnostic business, where it was negative again in the quarter. When do you expect that regional bottom and then secondly on diabetes, specifically I think the performance in 29 team was a bit lumpier than typical can you maybe mark to market in terms of what was the total diabetes growth rate in 2019.
What you expect the trends look like there. Thank you.
Sure Hi, this entire right. So I'll start with the European comments, so our growth largely mirrors the market growth and that we see probably right is that it's been rod moderated in recent years I like consolidation and downward price pressures that I would say those are fairly consistent trends.
At this point now that is offset by bright spots in more rapid growth outside of some of the more mature European countries for example in eastern Europe.
On the diabetes front I think you asked about at some of the Lumpiness I think Q4 was a bright spot we had a meaningful contract win in North America, and we continue to see increased adoption, both in new installations and test volume in parts of Asia Pacific and.
On those regions.
Asking for it.
Thanks for the color.
Thank you then.
Thank you as a reminder, ladies and gentlemen that Star then one to ask a question.
Our next question comes from Jack Meehan with Barclays. Your line is nope.
Thank you good afternoon.
Wanted to start just for clarification on the 20 million impacting the quarter first what was the split between life science in diagnostics I know that Bioplex asaib older. As an example was down so there was some diagnostic impact.
And then what is the 2020 guidance assume in terms that you just assume you have an easy comp in the fourth quarter.
So so to your first question Jack.
The most of the revenue was we'd life science for the fourth quarter.
And and the guidance.
Everything is olean, and Q4 will be an easier comp yes.
Okay.
And then you know I think in the fourth quarter. Your Abbey 8-K about the repositioning of the Salesforce in Europe. I was just wondering if you could talk maybe elaborate a little bit more on the strategy, there and know how you're going to market.
Yeah, the sandy so so.
We took a a broad by kind of restructuring charge in Europe and Q4.
The channel was certainly a piece of that as we look that our.
Let's call it a channel structure across the diagnostics business relative to last consolidation for example.
And so.
We are really fine tuning the channel and up and our infrastructure that reflect.
Another European performance and the 60 the consolidation that's going on on the diagnostic side, Yeah. I mean, we plan to repurpose some of it you know check obviously with the consolidation that Andy mentioned in Europe for me in the strategy is really to.
We purposely to the growth areas and locations.
So it was you know in Europe in a few other locations as well or the restructuring itself.
Great and then maybe one final one on I guess the on single cell what the droplets I think there was an update on litigation front yesterday related to the DTC I was wondering just what if any impact that has and then maybe for an AD. If you could just give us an update you know in terms of expectations for.
Potentially in new product launch and on the thing we'll sell side that would be helpful.
Okay. So yeah, we have that decision out of the international Trade Commission that were found to indirectly infringe three of the tenants patent on our Ngs sample prep products. This is completely unrelated to draw.
But digital PCR products, and although were really focused on on developing new products and building our market present in the thing single cell area. The impact of that decision on on current revenue isn't material at all.
And you know we have a vibrant and active R&D program to develop new products. In this area. We released one last year I called the attack seek Arnie.
Sample prep product. So we you know we're in this market for the long run, but this decision doesn't really have material impact on our revenues.
Thank you and I guess I'll add one more thing it really won't impact our customers either because we took steps to have manufacturing domestic manufacturing for all of those products.
Thank you once again, ladies and gentlemen that Star then one to ask a question.
Our next question comes from Patrick Donnelly with Citi. Your line is now.
Great. Thanks, maybe just one on the margin side.
She got to reiterate the target can you just talked about the rents were causing any additional spend kind of this year beginning a 2020, including we end up 29 team that caused you got to take a different path to get there in other words would you have to pull some other levers to keep on course for about 20% after the unexpected cyber attack.
Yes. Thank you Patrick I. Appreciate the question. So you know there was an incremental close mostly in Q4.
The re some tail end you know going into Q1, but as you can see you know specifically when you look into the operating expenses.
We have been investing a lot in terms of improving you know the and the focus on the as DNA and we'd be incremental cost you're not seeing you know the result sees a is we're very satisfied with what you know we end up you know that Q4.
Results and and so it's all baked in the forecast for 2020, and DHR and so there is some small detailing and tail and you know going into Q1 most of it was baked into Q4.
Okay, and then on the 2020 guide encouraging to hear you guys talked about 70% type growth life Sciences can you just talk about what the growth looks like him on the beauty PCR side, how big that business is getting for you guys know I know youre norm, you've talked about the Pam kind of moving up a few times okay.
More and more traction maybe just update us on your swaps.
What is market could look like for years.
So we have a very optimistic outlook for the droplet digital PCR business we.
We're expecting our first full year revenue from our new platform as Norman mentioned and and really I think we're just beginning to scratched the surface.
In the opportunities in diagnostics for this business. So you know we don't.
Usually talk about the exact size of the business, but we have been in very robust double digit growth for your upon your I pod here, we don't expect that could change and we're investing heavily in that business.
Okay, and then maybe just one on the capital deployment side you guys. Obviously, you have the share repurchase out there it's been pretty muted nice to see some activity this quarter, but the but obviously not too much but are you guys in a stage, where you're kind of preferring the M&A side and the cash buildings.
In order to pursue that.
And on that side, what would the metrics look like for a deal you guys would target how large would you go and then also what will be important here in terms.
Yes.
So there were about four or five questions in there.
So so certainly I think every quarter. It's a you know it it said decision we have to make between or you know I know that between how we deploy that capital and you know if you have acquisition opportunities then.
And.
Then you have to balance that against share repurchases and.
We just try to do that corridor by corridor.
So the second part of the question again was.
Yeah, just in terms of what are you guys feeling like share you prefer M&A what would it take a look like how large Richard you wanting to go okay. Yeah. So so obviously you know considering that the cash on our balance sheet and the.
And the you know the lack of debt we have with very little that we have in the earnings. We've got we've got a fair amount of capacity, we could do something fairly reasonably sized.
Again for us, it's always been about the evaluations and that.
Yeah, and making sure that we hit a good payback on it.
Okay. Thanks norm.
Thank you. Our next question as a follow up from Brennan Cool yard with Jefferies. Your line is now open.
Thanks launch just wanted to circle back with you I mean, the operating cash flows pretty remarkable do you sort of store speak to the runway that you see to continue to bring down working capital should we still expect a inventories to continue to come down on a on a sequential basis and what are some of the drivers of that operationally.
Yes sure. Thanks, Brendan So you know in Q4 inventory was down about 34 million and you know most of it actually was associated with the cyber attack that we had to deplete some of our safety Stoke overall, we hit the targets to reduce year over year, you know inventory, which is part of the city.
Before and so the way to think about it going into 2020.
He will go up probably somewhat you know in the first hub and the reason not to target you know to take it back down towards the end of 2020.
Hey, good thanks.
Thank you and our next question as a follow up from Jack Meehan with Barclays. Your line is now open.
Thank you again, one follow up on the diagnostics business, so guiding that 3% to 4%.
Organic growth this year.
Can you maybe just talk about the various products within that are there any changes you're expecting in terms of trend rate for the businesses within that.
Yes.
Drivers in the regional performance that we've been experiencing 2019, we expect to be fairly consistent in in in 2020. So we'll continue to focus on one of our core value proposition around laboratory productivity.
Focus on quality control enablement as total lab automation supports and then from a regional perspective were focused on regional expansion in both blood typing and diabetes platform and then also new test menu, we launched a aligned to these assays last year will have full year benefit of fat.
It's not listen I kind of late in year after year clearances that further floods, having platform in North America as all some other label claims extend just some of our rapid infectious disease and platforms I will get full year benefit us.
Great.
And then on the life Science side I was curious you know talked about the headwind from the potential headwind from current a virus, but I was curious without any your products could actually see a potential tailwind you know related to some of the testing needs.
Yeah, I mean, we have certainly seen an uptick in demand across all of our PCR products, both reagents and platforms. So yeah. I mean, I think I think we might get a little upside there.
Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to management for any closing remarks.
Okay. Thank you very much for your interest and for joining US is joining us. This afternoon, we look forward to talking to and being in touch next quarter. If not earlier. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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