Q2 2020 Bio Rad Laboratories Inc Earnings Call
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Ladies and gentlemen, today's conference is scheduled to begin shortly we continue to standby. Thank you for your patience, ladies and gentlemen, today's conference is scheduled to begin shortly please continue standby think patients.
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After the speakers presentation, there will be a question answer session. [laughter] question. During the session. You want me to press Star one on your telephone. Please be advised that today's conference is being recorded if you require any further it [laughter]. Please press star zero I would now like to hand, the conference or with your speaker today, Kevin Hans <unk>. Please go ahead Sir.
Thank you operator, good afternoon, and thank you all for joining US today, we will review the second quarter 2020, and with me on the phone today, our Norman Schwartz, our Chief Executive Officer alone Daskal Executive Vice President and Chief Financial Officer, Andy last Executive Vice President and Chief.
Operating officer net to Miller, President of Life Science Group and Doro right President of the clinical diagnostics group.
Before we begin overview I would like to caution everyone that we will be making forward looking statements management's goal plans and expectations or future financial performance and other matters. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties.
Rooted in these forward looking statements or statements regarding the impact of the coated 19 pandemic on by Reds resulted in operations and bio Rad is taking in response to the pandemic.
Actual results may differ materially from these plans and expectations and the impact and duration of the Cobiz 90 pandemic is unknown.
It could not be certainty that by Reds responses to the pandemic well be successful that the demand for biomedical. Good 19 related products is sustainable or bio Rad, we'll be able to meet this demand you should not place undue reliance on these forward looking statements and I encourage you to review are finally put the FCC.
Well, we discussed in detail de risk factors in our business.
The company does not intend to update any forward looking statements made during the cold today.
Mark Today will also include references to non-GAAP net income and non-GAAP diluted income per share, which I financial measures that are not defined under generally accepted accounting principles.
Investors should review the reconciliation of these non-GAAP measures to comparable GAAP results contained in our earnings release I'll turn over the Colts long Daskal, our executive Vice President and Chief Financial Officer.
Thank you Kevin Good afternoon. Thank you all for joining us and we hope that you on your family.
Listing hilti during these challenging times.
And also we want to officially welcome caving on its own you'll handle can distort relations getting comes to buy already we the breadth of experiencing finance cut because the markets financial analyses and investment management, primarily into life Sciences and medical technology space.
We believe that he wouldn't make an excellent addition to buy all right.
Now before I begin to detailed quarterly discussion I would like to ask Andy lost our Chief operating officer to provide an update on bio raise operations in life of the current is going to any related environment. This we are experiencing globally Andy.
Okay. Thank you very much Atlanta.
I'd like to stop by taking a few minutes to review our current state of operations around the world.
Before I begin I'd like to recognize our employees around the world to continue to make extraordinary efforts to serve our customers under the current circumstances.
So thank you to all of our employees for your dedication and a continued commitment to the company your efforts a truly appreciate it.
So since the beginning of the pandemic, we're being focused on three key areas to manage through this challenging period.
The ongoing safety if our employees.
Continuing manufacturing operations trends show product supply in support of our customers.
And making sure we continue to make progress on our core strategies.
On employee safety, we've worked hard to put measures in place to go out to well being and safety if our employees.
Early on we implemented work from home globally for all employees, who are not essential to maintaining ongoing production and core R&D.
And we continue to have this policy in place in the U.S.
In Asia I returned back to the workplace resumed relatively faster than the rest of our regions. We're now starting to see resumption in Europe as well.
We have requirements in place for social distancing wearing of mosques temperature checks contact tracing and of course remote working from home depending on the region.
All of these measures hats off to minimize the number of cases, we have experienced throughout bio Rad.
Hi manufacturing operations team have also responded extremely well.
Early on in the pandemic, we experienced some supply chain disruptions as we ramped up production to meet the increased demand of mainly our PCR instruments, but reagents to.
Today, we are on a more appropriately scaled position to meet demand and we have room to continue expanding production should the need of rice.
Lastly, with much time and energy with spends initially to manage through the impacts of the global pandemic.
We have adjusted extremely well to the new working environments and believe that we have executed well given the situation.
We continue to work on a core initiatives and strategies and look forward to sharing more details later this year.
With that opens you I'd like to pass it back to Alaska. Thank you. Thank you Andy and now I would like to review the results of this second quarter.
Net sales for the second quarter of plenty plenty were 500 them $36.9 million, which he is a 6.2% decrease on a reported basis versus $572.6 million in Q2 of 29 team.
On a currency neutral basis sales decreased 4.4%.
On a regional basis strengths in Asia was offset by weakness in other regions.
As Andy alluded to this endemic resulted in a significant change in the mix of product demand across our portfolio.
We saw strong demand for products associated with Colby 19 testing and related research.
Or whether we sold a lower demand in the rest of power business.
We estimate that the koby 19 related sales were about $71 million in the quarter.
Sales of the life Science group in the second quarter of 2020 worth $252.1 million compared to $212.4 million in Q2 of 29 team, which has an 18.7% increase on a reported basis and a 20%.
Rent increase on a currency neutral basis.
The majority of the year over year growth in the second quarter was driven by our core PCR products droplet digital PCR and process media.
Our core PCR and droplet digital PCR products revenue increases were driven by strong demand for Cobiz 19 related products.
Gross seem to like overall in the lifestyle segment was offset by softer academic research. The mine as these lives around the globe, where operating materially below capacity.
Process media, which can fluctuate on a quarterly basis, so significant year over year growth in the quarter, which was primarily due to an easy comp here over the same quarter last year.
Excluding process media sales the life science business grew 14.1% on a currency neutral basis versus Q2 of 29 team.
On a geographic basis lifestyles currency neutral year over year sales grew in Asia and in Europe was the Americas were about flat.
We continue to be excited about our droplet digital Pcr platforms.
The unique sensitivity and specificity of that technology continues to open up new opportunities and applications.
During the current tend to any tt's being deployed to two Monica or source code to prevalence in wastewater streams.
Sales of the clinical diagnostics products into second quarter worth $283.2 million compared to $357.1 million in Q2 of 2019, which is at 20.7% decline on a reported basis and then eight.
10.7% decline on a currency neutral basis.
During the second quarter clinical diagnostics segment experienced weakness across all of these product lines due to the reduced demand from lower non critical hospital and clinic visits.
On a geographic basis, the diagnostics group posted declines across all regions.
We continue to execute on our new product development strategy.
Relaunching the second quarter. The children go imaging system, which provides a benchtop imaging solution in a compact and automated pick edge.
We also launched at new label claim for our genius HIV, one HIV two supplemental essay, which is now approved by the FDA for using blood and plasma donation central city.
The reported gross margin for the second quarter of 2020 was 54.6% on a GAAP basis and compares to 53.7% in Q2 of 2019.
The current quarter gross margin benefited mainly from better product mix and higher utilization, partially offset by an $8 million customs duty charge taken in the quarter relating to product shipped primarily in prior years.
This $8 million expense impacted the gross margin by about 150 basis points.
Amortization related to prior acquisitions recorded in cost of goods sold was $5 million compared to $3.8 million in Q2 of 29 team.
SGN expenses for Q2 of 2020 were $189.3 million or 35.3% of sales compared to $201.3 million or 35.1% in Q2 of 29 team.
Reduction in SGN, a expenses was the result of discipline hiring and lower discretionary spend primarily trivial and marketing expenses due to the impact of cobot 19, as well as ongoing cost savings initiatives.
The year over year decrease on a dollar basis was $12 million and we expect that most of the discretionary cost savings, we gradually come back over the coming quarters as we return back to the workplace.
Total amortization expense related to acquisitions recorded in SGN a for the quarter.
$2.3 million versus $1.6 million in Q2 of 2019.
Research and development expense in Q2 was $52 million or 9.7% of sales compared to $50.1 million or 8.8% of sales in Q2 of 2019.
Q2, operating income was $51.7 million or 9.6% of sales compared to $56.4 million or 9.8% of sales in Q2 2019.
Looking below the operating line the change in fair market value equity Securities Holdings added 1 billion and 183 million of income to the reported results and this is up substantially related to the holdings of the shares of Sartorius AG.
Also during the quarter interest and other income resulted in net other income of $10.7 million compared to $3.2 million of expense last year.
Q2 of 2020 includes an $8.9 million dividend from starts Oreos, which was declared in June and was paid in July.
In 2019, the dividend was declared in March and was paid in April.
The effective tax rate for the quarter was 22.4% compared to 22.2% in Q2 of 29 team.
Reported net income for the second quarter was $966.4 million and diluted earnings per share were $32.15.
This is an increase from last year and be substantially related to changes in valuation of the Sartorius holdings.
Moving on to the non get results.
Looking at the results on a non-GAAP basis, we have excluded certain RTP cause and unique items that impacted both the gross and operating margins as well as other income.
These items are detailed in the reconciliation table in the press release.
Looking at a non-GAAP results for the second quarter in cost of goods sold we have excluded $5 million perform authorization of purchased intangibles and the negligible restructuring benefit.
These exclusions move the gross margin for the second quarter of 2022, a non-GAAP gross margin of 55.5% versus 54.4% in Q2 of 29 team.
Non-GAAP EPS DNA in the second quarter of 2020 was 33.9% versus 34.5% in Q2 of 29 team.
In SDMA on a non-GAAP basis, we have excluded amortization and purchased intangibles of $2.3 million.
Legal related expenses of $2.6 million and restructuring and acquisition related cost of $2.4 million.
Non-GAAP R&D expense in the second quarter of 2020 was 9.8% versus 8.8% in Q2 of 2019.
In R&D on a non-GAAP basis, we have excluded about $700000 restructuring benefit.
The cumulative some of these non-GAAP adjustments, resulting moving the quarterly operating margin from 9.6% on a great basis.
11.8% on a non-GAAP basis.
These non-GAAP operating margin compares to a non-GAAP operating margin in Q2 of 2019 of 11.1%.
We have excluded certain items below the operating line, which already increasing value of this authorial equity holdings of 1 billion and 183 million.
A $1.1 million of loss associated with the venture investments.
And then $11.7 million gain on the sale of a small non core business that was part of our other operations segment.
The non-GAAP effective tax rate for the quarter was 23.8% compared to 26.5% in Q2 of 2019.
The decrease in rate was driven by changing our geographic mix of earnings and the taxation of our foreign earnings.
And finally non-GAAP net income for the second quarter of 2020 was $48.3 million or $1.61 cents diluted earnings per share compared to $44.8 million and one dollar and 49 cents per share in Q2 of 29.
Yes.
Moving onto the balance sheet.
Total cash and short term investments at the end of Q2 were $1.037 billion, which was roughly unchanged from the end of Q1 of 2020.
During the second quarter, our inventory increased by about $71 million from Q1 of 2020 levels.
The increase of inventory that we saw in Q2 of 2020 was driven by normalizing the level of our safety stock, resulting from the cyber attack in late Q4 2019.
And our decision to secure additional components given the supply chain disruption that we experienced during the earlier part of the year.
We expect to reduce inventory levels over the next three quarters.
During the second quarter, we did not purchased any shares of our stock.
In July our board refreshed, our capacity authorizing a $200 million increase to our share buyback program and we now have a total of $273 million available for potential share buybacks.
For the second quarter of 2020 net cash generated from operating activities was $92.1 million, which compares to $155 million in Q2 of 2019.
This reduction mainly reflects the change in working capital and the timing of the sartorius dividend payout.
The adjusted EBITDA for the second quarter of 2020 was 18.6% of sales and excluding the sartorius dividend was 16.9%.
The adjusted EBITDA in Q2 of 2019 was 16%.
Net capital expenditures for the second quarter of 2020 were $18.1 million and depreciation and amortization for the second quarter was 37 $34.7 million.
Moving on to the guidance.
We continue to be uncertain about the duration and impact of the cobot 19 pandemic.
With that said, we currently believe that a third quarter year over year currency neutral sales may be flat to up 5%.
This assumes that the third quarter, we'll see a gradual improvement from June levels.
Smaller relative benefit of cobot 19 related products sales versus Q2.
And the modest benefit from our serology Chris.
We continue to assist various demand and supply indicators as well as return to the workplace protocols.
We continue to believe that the coffee 19 impact will be transitory and we would expect gradual recovery in the second half of the year, but currently it is difficult to predict the rate of recovery that we might experience.
This concludes our prepared remarks, and we will now open the lines will take your questions operator.
As a reminder to ask a question you wanted to press star one on your telephone to withdraw your question press the pound coal fleet down by what we compile the culinary rocker.
Our first question comes from the line of Dan Leonard from Wells Fargo. Your line is now open.
Thank you so a question on.
The kobin surge demand in the quarter, how much of that 71 million what was equipment related versus consumables and do you have any efforts to perhaps be more directly involved in testing. So so.
In other there must be a 100 Q PCR tests out there, but I don't think bio Rad has one yet in so curious your thoughts on that.
Okay that highest as Andy here I think what we'd say is the majority of the sales ever where instrument of course, we do have.
Reagents to and on our core PCR business.
There are some some embedded droplet digital PCR sales tour.
That was the answer your first part of your question could you just repeat the second part.
Yes. The second part we do you have any aspirations to be more directly involved in the testing effort I mean I note I notice you don't have year on Q PCR tests and I'm uncertain. If you have plans to develop develop one or otherwise.
Yes, so we've got a DD PCR your way back that was approved and I'll.
Allowing that pass through and that the to answer that question on the Cupid GPCR question.
Okay. Thanks, Dan the.
Yes, Andy said, we have.
Quite a large footprint in instrument, but we did see dramatic.
Increase in demand for our reagent and our classic consumables that go along with it and we we chose to put.
Droplet digital Pcr.
Toby test kit out first.
And we are always evaluating whether putting a key PCR test that would make sense for us I mean, it may and that's something that we could always choose to do.
Okay. Thank you and my follow up question and what are your expectations on the pace of academic government debt market demand into Q3. It seems you're over index. There in life Sciences, and it seems like Thats an important variable in the Q3 outlook. Thank you.
And the one particular show I can take that so so we expect to continue to see a gradual increase in opening as regard through Q3.
We're not expecting any sudden changes in pace.
To be fab.
We saw a gradual opening through Q2 picking up in the second half a bit.
And and you know where we were thinking the same as we go through Q3.
Thanks to the color.
Thank you then.
Thank you. Our next question comes from the line of Patrick Donnelly from Citi. Your line is now open.
Great. Thanks, Eli maybe one for you on the margins very encouraging and probably the most environment can see to the expansion. There can you just talk through the shrink controversy with the onetime headwind you guys case, and then the expectations going forward how much of it was mix. So you can you talked about the Coca benefit maybe a little.
Lower as we go forward, how much was related to that versus some of the internal initiatives that you guys had going for some time.
Yes. Thank you Patrick I appreciate the question.
So yes this quarter we had.
Obviously.
A better gross margin.
Due to the you know better mix.
As well as you know some benefit from the inventory buildup that started you know.
Post Q4 of 2019.
Generally speaking when I think about on the full year.
I don't think that there will be a big impact on the full year gross margin.
We plan to take the utilization to be lower into second half.
Since we have buildup you know some inventory this quarter.
And also it depends on on the mix that will experience in the second half, but assuming that.
We'll have a gradual continued recovery out there it will have a balancing kind of effect on the overall kind of mix and the benefit.
On on the gross margin going into the second half.
Okay. That's helpful. Let me just on the clinical diagnostic side can you just talk through the trends as we progressed through the quarter how much improvement did you see as we went.
Through June there and then also as we've seen this really uptick appropriate in July referred some kind of sandy elective Stuffings has pulled back a little bit rate. If you could just talk through what you're seeing quarter to date as well on that side did you see things come back and then take a little bit of a pause or have progressed very well.
There are do you want to take that question.
Sure we did start to experience some modest recovery.
June and.
You know.
Lastly, as you as you said, you're still muted by elective procedures and routine testing you don't really not being back to historical averages.
So we're in watchful watchful waiting that we did see an improvement in June.
Great and maybe a last one just on the.
Maybe Pcr side.
Yeah, you guys getting this technology in from customers that perhaps you weren't accessing before program meeting has the demand uptick to a level where.
Yes, the installed base you also strengthening quite a bit in the technology is getting out there in a more broad sense, whereas on the other side of cobot now maybe you have been a much stronger franchise given given the acceleration there.
Yes, I'll address that question too on that.
Sure.
I think the general answer that to your question is yes that that's likely what what's happening we we've been experiencing good growth.
With this platform for quite quite a long time, and we continue to see it.
We had not focus.
The technology on infectious disease, and I think what has emerged is.
How it can be.
Quite useful.
In in this area in biology in particular, so I think we'll have kind of the lasting effect there and certainly we've already been.
Presence in waste water.
Monitoring for waste water, that's being reuse they monitor for pathogens are using the platform because it's highly sensitive and very precise.
It's being used by governmental agencies for environmental monitoring public safety lending area. So I think we're seeing an uptick there are people getting in.
Monitoring for those reasons.
Our now, saying Gee, maybe we should be looking to monitor for Sars. So I think we're going to get some lasting kind of.
Customers in that area well.
Very helpful. Thank you.
Thank you Patrick.
Thank you as a reminder to ask a question wanting to press star one on your telephone to withdraw your question press the pound on our next question comes from the line of Jack will again from that Bond Research. Your line is now open.
Thanks, Good afternoon, I was hoping just a little bit more granularity on that 71 million benefit from cobot in the quarter, how much that was in life sciences versus.
Whatever benefit you might have seen with surajit on the diagnostic side.
Hi, Jackie this is Andy the majority came through the life Science PCR Digital Pcr.
Side of the business contribution from Sirona GE was very modest we launched our product light right in a late in the quarter.
Yes, I was a very modest contribution.
Okay and.
I guess you're capacity constrained in the second quarter.
And I know your third quarter guidance calls for a step down sequentially in the contribution, but I guess why would that be the case. If you know the manufacturing footprint is where it needs to be going into the summer.
And that you wish to answer that question.
Sure I can take that so we you know at the beginning of this pandemic. We experienced you know as did many others are real upswing in demand and we.
Ben.
Several months in the end of the first quarter and into the second quarter scaling our manufacturer can meet.
Demand across our.
Platform, our reagent and our plastic consumable line I think we're in a good place now to meet demand and and scale further if we have Q.
You know.
We do it we do have to watch out for supply chain constrain you know as our other manufacture other life science companies do as well, but I think I think moving into the third quarter and through the end of year, we've gotten ourselves into a good position to meet demand.
Got it and then if I look at the life Science results. If the cobot tailwind was concentrated there and you add the.
Yep bio chromatography process media tailwind, yeah, I'm getting something like the core business.
I don't know if my math, sorry, I'm trying to do what we go but down you know well over 20% can you just talked about some of the additional products and the expectations for recovery going into the back half within the life Science segment.
Yeah, I think I think when we look at that question I think we we fail businesses kind of down in line with with.
The majority of the other.
Reported.
Reported for Q2 and.
End of.
Hi teams percentage mm.
We're dogs, we don't see a core lifestyle and staying down over 20%.
And you know the way, we think about Jack also thinking about the second half you know obviously part of our guidance for the third quarter and.
You know he sees a continued gradual recovery and that goes back to a more normalized kind of mix.
Throw the portfolio.
I didn't I think we felt quite comfortable with where weve given the market conditions as we mentioned the now.
So that's that's right.
Quite a line by line with the market dynamics I think.
[laughter] and if I can squeeze in one final one I was curious just thoughts around capital allocation.
Yes, the sartorius stake if you just walk over the last year and a half it's gone from almost $3 billion closing in on 7 billion now.
The pandemic no change your views at all around the strategic nature of that and looking to build it works. The way you think about potentially pursuing larger M&A.
So obviously.
Certain turia to continue to do very well, hence that the increase in their their market cap. It's a you know obviously, it's been a it's been a pretty good investment for us.
Yeah, I would add also you know a check in terms. So the overall capital allocation I mean, it's a similar strategy that we've been discussing you know in the past year.
We have continued interest you know we the strategy of those smaller tuck in acquisitions, which we continue to pursue.
As well as you know we the you know much higher appetite for a entertaining get larger transaction.
And that's obviously will be more opportunistic I mean, you need to wait for those to become available.
And and again that would be complemented by the share buyback, which the board authorized to increase the plan.
Great. Thank you all thank you Jim.
Thank you. Our next question comes on the line of Brandon Couillard from Jefferies. Your line is now open.
Thanks.
Along maybe as you look in the back half a year or they specifically around the third quarter. Any you know parameters you can share with us as far as the step down.
Sequentially of good Kobe tailwind to the over half your lesson happy expected to capture in the third quarter and then.
Well look at the Opex line.
Yes, and give them out leverage in July and in the second quarter I'm sure. That's been comes back into the model.
In the second half the year yeah. Thank you Brandon I think you know for your first question I think it's a little bit premature to assist you know how Q4 is going to shape up.
You know we can tell you now based on the last several months that a lot is happening you know every few weeks.
So I don't know that you know the.
General seasonality that that we experience every year will will be similar this year.
Thinking about you know the operating expenses so most of the saving specifically this quarter.
Our are going to come back at some point I mean, and it will take a few quarters.
With that said I can tell you that obviously that we will have to revisit kind of how do we spend a discretionary expenses and.
How do we managed potentially with less travel et cetera.
So if I have to kind of categorize it most of it is still associated with discretionary specifically this quarter.
Some of it is associated with our long term initiatives to reduce our operating expenses and as you can see also on the R&D side, we continue to invest on a dollar basis actually it was slightly higher we do not have any intention to reduce our R&D investments.
Maybe one for a net.
Any PCR, let's give an update.
Now I guess six or eight months since the launch of the Qx one platform.
Specifically, which customers adopting Baptist.
What percent of replacements, there are upgrades from the legacy system or anything you can you share with us and how that watch is proceeding.
Sure.
Well, Fortunately, it's proceeding quite well and you know the primary segment, where we focus the this product was biopharma and you know to a large extent in acute in manufacturing part in the cell and gene therapy market and you know we.
We had a we have many customers who adopted our Q at 200 for that application and we see some of those customers, adding Qs one to their repertoire, we see some of those customers looking toward Gee, you know I liked pick that one maybe I'll convert to Q.
Just one but you know where we're pleased with the progress that that the product introduction that made.
One quick question along.
Just to confirm the non-GAAP gross margin.
That's still include the $8 million customs charge just to make sure you did back that out of the non-GAAP. Yes. He does I did not as you don't make you don't just correct, so and it's about 150 basis points.
Okay. So margins would have a 150 better excluding that okay.
Very good. Thank you. Thank you.
Thank you at this time showing no further questions I would like to turn the call back over that Ilan does call for closing remarks.
Thank you operator, thank you everyone for joining our call today, and we look forward to connecting with you in the near future.
Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.
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Ladies and gentlemen, thank you for standing by welcome to the Q2 2020 Bio Rad Laboratories Inc. earnings Conference call. At this time, all parts of the belies Arnold and only low after the speakers presentation. There won't be a question asked the question.
A question during especially when you want me to press Star one on your telephone. Please be advised the today's conference is being recorded if you require any further [laughter] towards zero I would now like to have the Congress or weaker speaker today, Evan Hot <unk>. Please go ahead Sir.
Thank you operator, good afternoon, and thank you all for joining US today, we will review the second quarter of 21.
With me on the phone today, our Norman Schwartz, our Chief Executive Officer, Oh on Daskal Executive Vice President and Chief Financial Officer, Andy last Executive Vice President and Chief operating Officer.
Tim Miller, President of lifestyle group, and Dora right President of the clinical diagnostics group.
Before we begin overview I would like to caution everyone that we will be making towards looking statements management's goal funds in expectations, our future financial performance and other matters.
These statements are based on assumptions and expectations.
Future events that are subject to risks and uncertainties.
Included in these forward looking statements or statements regarding the impact of the covert 19 pandemic on buying brad's resulted in operations.
Well I read is taking in response to the pandemic.
Actual results may differ materially from these plans and expectations and the impact and duration of the code 90 pandemic is unknown.
We cannot be certainty that buyer grads responses to the pandemic what would be successful that the demand I regimen, well get 19 related products is sustainable or bio Rad, we'll be able to meet this demand.
You should not place undue reliance on these forward looking statements and I encourage you to review our filings with the FCC, where we discussed in detail de risk factors in our business.
The company does not intend to update any forward looking statements made during the call today.
Mark Today will also include references to non-GAAP net income and non-GAAP diluted income per share, which I financial measures that are not defined under generally accepted accounting principles.
Sure should review the reconciliation of these non-GAAP measures to comparable GAAP results contained in our earnings release.
Turning the call Blondest go our executive Vice President and Chief Financial Officer.
Thank you Kevin Good afternoon. Thank you all for joining us and we hope that you on your family are well and staying healthy during these challenging times.
And also we want to officially welcome caving Han is O'neill head of Investor relations getting comps to buy already we the breadth of experience in finance topical markets financial analyses and investment management.
And then really into life Sciences, and medical technology space.
We believe that he will make an excellent addition to buy over it.
Now before I begin to detailed quarterly discussion I would like to ask Andy lost our chief operating officer to provide an update on by the rates operations in life of the color Pandemics related environment. This we are experiencing globally Andy.
Okay. Thank you very much Atlanta, I'd like to stop by taking a few minutes to review our current state of operations around the world.
Before I begin I'd like to recognize our employees around the world to continue to make extraordinary efforts to serve our customers under the current circumstances.
So thank you to all of our employees for your dedication and a continued commitment to the company your efforts I truly appreciate it.
So since the beginning of the pandemic, we've been focused on three key areas to manage through this challenging period.
The ongoing safety if our employees.
Continuing manufacturing operations trends show product supply in support of our customers.
And making sure we continue to make progress on our core strategies.
On employee safety, we've worked hard spoke measures in place to God, well being and safety if our employees.
Early on we implemented work from home globally for all employees, so another central to maintaining ongoing production and core R&D.
And we continue to have this policy in place in the U.S.
In Asia I returned back to the workplace resumed relatively faster than the rest of all regions and were now starting to see resumption in Europe as well.
We have requirements in place for social distancing wearing masks temperature checks contact tracing and of course remote working from home depending on the region.
Well as these measures have served to minimize the number of cases, we have experienced throughout bio Rad.
Hi manufacturing operations team have also responded extremely well.
Early on in the pandemic, we experienced some supply chain disruptions as we ramped up production to meet the increased demand of mainly our PCR instruments, but reagents true.
Today, we are in a more appropriately scaled position to meet demand and we have room to continue expanding production should the need of rice.
Lastly, with much time and energy with spent initially to manage through the impacts of the global pandemic.
We have adjusted extremely well to the new working environments and believe that we have executed well given the situation.
We continue to work on our core initiatives and strategies and look forward to sharing more details later this year.
With that Overdrew I'd like to pass it back to allow thank you. Thank you Andy and now I would like to review the results of this second quarter.
Net sales for the second quarter of 2020 were $536.9 million, which is a 6.2% decrease on a reported basis versus $572.6 million in Q2 of 29 team.
On a currency neutral basis sales decreased 4.4%.
On a regional basis strengths in Asia was offset by weakness in other regions.
As Andy alluded that pandemic resulted in a significant change in the mix of product demand across our portfolio.
We saw strong demand for products associated with Colby 19 testing and related research.
However, we sold a lower demand in the rest of our business.
We estimate that the koby 19 related sales were about $71 million in the quarter.
Sales of the life Science group in the second quarter of 2020 worth $252.1 million compared to $212.4 million in Q2, 2019, which is an 18.7% increase on a reported basis and a 20%.
Rent increase on a currency neutral basis.
The majority of the year over year growth in the second quarter was driven by our core PCR products droplet digital PCR and process media.
Our core PCR and droplet digital PCR products revenue increases were driven by strong demand for Cobiz 19 related products.
Gross seem to like overall in the lifestyle segment was offset by softer academic research demand as these lives around the globe, where operating materially below capacity.
Process media, which can fluctuate on a quarterly basis, so significant year over year growth in the quarter, which was primarily due to an easy comp year over the same quarter last year.
Excluding process media sales the life science business grew 14.1% on a currency neutral basis versus Q2 of 29 team.
On a geographic bases life science currency neutral year over year sales grew in Asia and in Europe was the Americas were about flat.
We continue to be excited about our droplet digital Pcr platforms.
Unique sensitivity and specificity of the technology continues to open up new opportunities and applications.
During the current and demand Keith is being deployed to two Monica or source code to prevalence in wastewater streams.
Sales of the clinical diagnostics products into second quarter worth $283.2 million compared to $357.1 million in Q2 of 2019, which is at 20.7% decline on a reported basis and then.
18.7% decline on a currency neutral basis.
During the second quarter clinical diagnostic segment experienced weakness across all of these product lines due to the reduced demand from lower non critical hospital and clinics visits.
On a geographic basis, the diagnostics group posted declines across all regions.
We continue to execute on our new product development strategy.
Relaunching the second quarter detailed local go imaging system, which provides a benchtop imaging solution in a composite and automated package.
We also launched at noon label claim for our genius HIV, one HIV two supplemental essay, which is now approved by the FDA for use in blood and plasma donation central settings.
The reported gross margin for the second quarter of 2020 was 54.6% on a get the bases and compares to 53.7% in Q2 2019.
The current quarter gross margin benefited mainly from better product mix and higher utilization, partially offset by an $8 million customs duty charge taken in the quarter relating to product shipped primarily in prior years.
This $8 million expense impacted the gross margin by about 150 basis points.
Amortization related to prior acquisitions recorded in cost of goods sold was $5 million compared to $3.8 million in Q2 of 29 team.
SGN expenses for Q2, as 2020 were $189.3 million or 35.3% of sales compared to $201.3 million or 35.1% in Q2 2019.
Reduction in DNA expenses was the result of undisciplined hiring and lower discretionary spend primarily travel and marketing expenses due to the impact of cobot 19, as well as ongoing cost savings initiatives.
The year over year decrease on a dollar basis was $12 million and we expect that most of the discretionary cost savings will gradually come back over the coming quarters as we return back to the workplace.
Total amortization expense related to acquisitions recorded in SGN eight for the quarter.
Was $2.3 million versus $1.6 million in Q2 of 2019.
Research and development expense in Q2 was $52 million or 9.7% of sales compared to $50.1 million or 8.8% of sales in Q2 of 2019.
Q2, operating income was $51.7 million or 9.6% of sales compared to $56.4 million or 9.8% of sales in Q2 of 2019.
Looking below the operating line the change in fair market value equity Securities Holdings added 1 billion and 183 million of income to the reported results and these up substantially related to the holdings of the shares of Sartorius AG.
Also during the quarter interest and other income resulted in net other income of $10.7 million compared to $3.2 million of expense last year.
Q2 of 2020 includes an $8.9 million dividend from starts Oreos, which was declared in June and was paid in July.
In 2019, the dividend was declared in March and was paid in April.
The effective tax rate for the quarter was 22.4% compared to 22.2% in Q2 of 29 team.
Reported net income for the second quarter was $966.4 million and diluted earnings per share were $32.15.
He is an increase from last year and be substantially related to changes in valuation of the Sartorius holdings.
Moving on to the non get results.
Looking at the results on a non-GAAP basis, we have excluded certain RTP cause and unique items that impacted both the gross and operating margins as well as other income.
These items are detailed in the reconciliation table in the press release.
Looking at a non-GAAP results for the second quarter in cost of goods sold we have excluded $5 million perform authorization of purchase intangibles and the negligible restructuring benefit.
These exclusions moves the gross margin for the second quarter of 2022, a non-GAAP gross margin of 55.5% versus 54.4% in Q2 of 2019.
Non-GAAP EPS DNA in the second quarter of 2020 was 33.9% versus 34.5% in Q2 of 29 team.
In SDMA on a non-GAAP basis, we have excluded amortization and purchased intangibles of $2.3 million.
Legal related expenses of $2.6 million and restructuring and acquisition related cost of $2.4 million.
Non-GAAP R&D expense in the second quarter of 2020 was 9.8% versus 8.8% in Q2 of 2019.
In R&D on a non-GAAP basis, we have excluded about $700000 restructuring benefit.
The cumulative some of these non-GAAP adjustments, resulting moving the quarterly operating margin from 9.6% on a great basis.
11.8% on a non-GAAP basis.
These non-GAAP operating margin compares to a non-GAAP operating margin in Q2 of 2019 of 11.1%.
We have excluded certain items below the operating line, which are the increasing value of this auditoriums equity holdings of 1 billion and 183 million.
And $1.1 million of loss associated with venture investments.
And then $11.7 million gain on the sale of small non core business that was part of our other operations segment.
The non-GAAP effective tax rate for the quarter was 23.8% compared to 26.5% in Q2 2019.
The increase in rate was driven by changing our geographic mix of earnings and the taxation of our foreign earnings.
And finally non-GAAP net income for the second quarter of 2020 was $48.3 million or $1.61 cents diluted earnings per share compared to $44.8 million and one dollar and 49 cents per share in Q2 of 2019.
Moving onto the balance sheet.
Total cash and short term investments at the end of Q2 were $1.037 billion, which was roughly unchanged from the end of Q1 of 2020.
During the second quarter, our inventory increased by about $71 million from Q1 off 2020 levels.
The increase of inventory that we saw in Q2 of 2020 was driven by normalizing the level of our safety stock, resulting from the cyber attack in late Q4 2019.
And our decision to secure additional components given the supply chain disruption that we experienced during the earlier part of the year.
We expect to reduce inventory levels over the next three quarters.
During the second quarter, we did not purchased any shares of our stock.
In July our board refreshed, our capacity authorizing a $200 million increase to our share buyback program and we now have a total of $273 million available for potential share buybacks.
For the second quarter of 2020 net cash generated from operating activities was $92.1 million.
Compares to $155 million in Q2 of 2019.
This reduction mainly reflects the change in working capital and the timing of the sartorius dividend payout.
The adjusted EBITDA for the second quarter of 2020 was 18.6% of sales and excluding the sartorius dividend was 16.9%.
The adjusted EBITDA in Q2 of 2019 was 16%.
Net capital expenditures for the second quarter of 2020 were $18.1 million and depreciation and amortization for the second quarter was 37 $34.7 million.
Moving on to the guidance.
We continue to be uncertain about the duration and impact of the cobot 19 pandemic.
With that said, we currently believe that a third quarter year over year currency neutral sales, maybe flat to up 5%.
This assumes that the third quarter, we'll see a gradual improvement from June levels.
As smaller relative benefit of cobot 19 related product sales versus Q2.
And the modest benefit from our serology Chris.
We continue to assess various demand and supply indicators as well as return to the workplace protocols.
We continue to believe that the coffee 19 impact will be transitory and we would expect gradual recovery in the second half of the year, but currently it is difficult to predict the rate of recovery that we might experience.
This conclude our prepared remarks, and we will now open the lines will take your questions operator.
As a reminder to ask a question you wanted to press star one on your telephone to withdraw your question, perhaps the powerful weighed down by what we compile the culinary roster.
First question comes from the line of Dan Leonard from Wells Fargo. Your line is now open.
Thank you so a question on.
The kobin surge demand in the quarter, how much of that 71 million what was equipment related versus consumables and do you have any efforts to perhaps be more directly involved in testing. So so.
In other there there must be a 100 Q PCR tests out there, but I don't think bio Rad has one yet and so curious your thoughts on that.
Okay that high is Andy here I think what we'd say is the majority of the sales ever where instrument of course, we do have.
Reagents to and on our core PCR business.
There are some some embedded droplet digital PCR sales tour.
That was the answer your first part of your question could you just repeat the second part.
Yeah. The second part with do you have any aspirations to be more directly involved in the testing effort I mean I note I noticed you don't have your own Q PCR tests and I'm uncertain. If you have plans to develop develop one or otherwise.
Yes, so we've got a DD PCR your way back that was approved and I'll.
Allow a net pass through on that but to answer that question on the Cupid GPCR question.
Okay. Thanks Sandy.
Yes, Andy said, we have.
Quite a large footprint in instrument, but we did see dramatic.
Increasing demand for our reagent and our classic consumables that go along with it.
We we chose to put.
Droplet digital Pcr.
Toby test kit out first.
And we are always evaluating whether putting a key PCR test that would make sense for us I mean, it may and that's something that we could always choose to do.
Okay. Thank you and my follow up question and what are your expectations on the pace of academic government end market demand into Q3. It seems you're over index. There in life Sciences, and it seems like Thats an important variable in the Q3 outlook. Thank you.
And the ones that they can show I can take that so so we expect to continue to say a gradual increase in opening as we go through Q3.
We're not expecting any sudden changes and pace.
Be fab.
We saw a gradual opening through Q2 picking up in the second half a bit.
And and wed with we're thinking the same as we go through Q3.
Thanks to the color.
Thank you then.
Thank you. Our next question comes from the line of Patrick Donnelly from Citi. Your line is now open.
Great. Thanks, Eli maybe one for you on the margins very encouraging.
Ramos environment can see to the expansion. There can you just talk through the strength and possibly with the onetime headwind you guys space and then the expectations going forward how much of it was mix. So you kind of talked about coking benefit maybe a little smaller as we go forward how much was related to that versus some of the internal initiatives you guys had going for for some time.
Yes.
Yes. Thank you Patrick I appreciate the question.
So yes this quarter we had.
Obviously.
Better gross margin.
Due to the you know better mix.
As well as you know some benefits from the inventory buildup that started.
Post Q4 of 2019.
Generally speaking when I think about.
The full year.
I don't think that there will be a big impact on the full year gross margin.
We plan to take the utilization to be lower into second half.
Since we have buildup you know some inventory this quarter.
And also it depends on on the mix that will experience into second half, but assuming that.
We'll have a gradual continued recovery out there it will have it balancing kind of effect on on the overall kind of mix and the benefit.
On on the gross margin going into the second half.
Okay. That's helpful. Let me just on the clinical diagnostic side can you just talk through the trends we are as we progressed through the quarter how much improvement did you see as we went.
Through June there and then also as we've seen this really uptick appropriate in July referred some kind of sandy elective stuff is pulled back a little big Big Ray If you could just talk through what you're seeing quarter to date as well on that side did you see things come back and I take a little bit of a pause or have progressed pretty well.
There are the wants to take that question.
Sure we did start to experience some modest recovery in June and.
You know.
Lastly, as you as you said, you're still muted by elective procedures and routine testing you don't really not being being back to historical averages.
So we're we're in watchful watchful waiting that we did see and improvement in June.
Great and maybe a last one just on the.
Maybe Pcr side.
Yes, you guys getting this technology in front of customers, perhaps you weren't accessing before covert meeting has the demand uptick to a level where.
Yes, the installed base you all some strengthening quite a bit in the technology is getting out there in a more broad sense, whereas on the other side of Kobin now maybe you have a bit of a stronger franchise given given the acceleration there.
Yeah, I'll address that question too on that.
Sure.
I think the general answer that to your question is yes that that's likely what what's happening we we've been experiencing good growth.
With this platform for quite quite a long time, and we continue to see it.
We had not focus.
The technology on infectious disease, and I think what has been merged is.
How it can be.
Quite useful.
In in this area in biology in particular, so I think we'll have kind of a lasting effect there and certainly we've already been presence in waste water.
Monitoring for a waste water, that's being reuse they monitor for pathogen, they're using the platform because it's highly sensitive and very precise.
Being used by governmental agencies for environmental monitoring public safety lending area. So I think we're seeing an uptick there are people getting in.
Monitoring for those reasons.
Our now thing T., maybe we should be looking to monitor for Sars. So I think we're going to get some lasting kind of.
Customers in that area as well.
Very helpful. Thank you.
Thank you Patrick.
Thank you as a reminder to ask a question we're wanting to press star one on your telephone to wasn't draw. Your question press. The pound clone. Our next question comes from the line of Jack will again from map on research. Your line is now open.
Thanks, Good afternoon, I was hoping just a little bit more granularity on that 71 million benefit from cobot in the quarter. How much that was then life sciences versus.
Whatever benefit you might have seen with serology on the diagnostic side.
Hi, Jack Yes. This is Andy the majority came through the life Science PCR Digital Pcr.
Side of the business.
Contribution from Sirona GE was very modest we launched our product lights very late in the quarter.
Yes, I was a very modest contribution.
Okay and.
I guess you were capacity constrained in the second quarter.
And I know your third quarter guidance calls for a step down sequentially in the contribution, but I guess why would that be the case.
No the manufacturing footprint is where it needs to be going into the summer.
Now that you wish to answer that question.
Sure I can take that so we.
At the beginning of this pandemic a we experienced you know as did many others are real upswing in demand and we.
Ben.
Several months in the ended the first quarter and into the second quarter scaling our manufacturer can be.
Demand across our.
Platform, our reagent and our plastic consumable line I think we're in a good place now to meet demand and enter scale further if we have to.
You know.
We do it you know we do have to watch out for supply chain constrain you know as our other manufacture other life science companies do as well, but I think I think moving into the third quarter and through the end of year, we've gotten ourselves into a good position to meet demand.
Got it and then if I look at the life Science results. If the covert tailwind was concentrated there and you add the.
Yep bio chromatography process media tailwind, yeah, I'm getting something like the core business.
I don't know if my math, sorry, I'm trying to do it where we go but down you know well over 20% can you just talked about some of the additional products in the expectations for recovery going into the back half within the life Science segment.
Yeah, I think I think when we look at that question I think we we fail businesses kind of down in line with.
The majority of the other.
Reported.
Reported for Q2 and.
Kind of.
Hi teens percentage.
We're dogs were not say, our core life science bring down over 20%.
In the way, we think about Jack also thinking about the second half obviously part of our guidance for the third quarter and.
You know he sees a continued gradual recovery and that goes back to a more normalized kind of mix.
Throw the portfolio.
I didn't think we felt quite comfortable with where we were given the market conditions as we match it now.
So that's that's right.
Quite a line by line with the market dynamics I think.
And if I can squeeze in one final one I was curious.
Just thoughts around capital allocation.
Yes, the sartorius stake could you just walk over the last year and a half it's gone from almost 3 billion. The closing in on 7 billion now.
The pandemic no change your views at all around the strategic nature of that and looking to build it works. The way you think about potentially pursuing larger M&A.
So obviously.
Certain Tories has continued to do very well, hence the increase in their their market cap. It's a you know obviously, it's been a it's been a pretty good investment for us.
Yes, I would add also you know a check in terms. So the overall capital allocation I mean, it's a similar strategy that we've been discussing you know in the past year.
We have continued interest you know we the strategy of those smaller tuck in acquisitions, which we continue to pursue.
As well as you know we did you know much higher appetite for.
Entertaining larger transaction.
And that's obviously will be more opportunistic I mean, you need to wait for those to become available.
And and again that would be complemented by the share buyback, which the board authorized to increase data plan.
Great. Thank you all thank you Jim.
Thank you. Our next question comes from the line of Brandon Couillard from Jefferies. Your line is now open.
Thanks.
Along maybe a silicon the back half a year, they specifically around the third quarter.
You know parameters you can share with us as far as the step down.
Sequentially of good Kobe Tailwinds as Oh, perhaps you are less than half is expected to capture in the third quarter and then.
Well look at the Opex line.
The significant leverage in DNA and in the second quarter I'm sure. That's been comes back into the model.
The second half a year yeah. Thank you Brandon I think you know to your first question I think it's a little bit premature to assist you know how Q4 is going to shape up.
You know we can tell you now based on on the last several months that a lot is happening you know every few weeks.
So I don't know that.
The.
General seasonality that that we experience every year will will be similar this year.
Sinking about you know the operating expenses so most of the savings specifically this quarter.
Our.
Going to come back at some point I mean, and it will take a few quarters.
With that said I can tell you that obviously that we will have to revisit kind of.
How do we spend a discretionary expenses and.
How do we managed potentially with less travel et cetera.
So if I have to kind of categorize it most of it is still associated with discretionary specifically this quarter.
Some of it is associated with our long term initiatives to reduce our operating expenses and as you can see also on the R&D side, we continue to invest on a dollar basis actually it was slightly higher we do not have any intention to reduce our R&D investments.
Maybe one for a net.
Any PCR, let's give an update.
Now I guess six or eight months since the launch of the Qx one platform.
Specifically, which customers adopt the fastest.
What percent of replacements, there are upgrades from the legacy system or anything you can you share with us on how that launch is proceeding.
Sure.
Well Fortunately it is proceeding quite well and you know the primary segment, where we hope that this product was biopharma and you know to a large extent in acute CN manufacturing part in the cell and gene therapy market and you know we.
We had we have many customers who adopted our Q Act 200 for that application and we see some of those customers, adding Q1, two their repertoire, we see some of those customers looking toward Gee, you know I liked pick that one maybe I'll convert to Q.
Just one but you know where we're pleased with the progress that that the product introduction has made.
[laughter] Shalane.
Just to confirm the non-GAAP gross margin.
Thats still include the $8 million customs charge just to make sure you did back that out of the non-GAAP.
He does I did not have you done bucket of that's correct, so and it's about 150 basis points.
Okay. So margins would have a 150 better excluding that okay.
Very good. Thank you. Thank you.
Thank you at this time showing no further questions I would like to turn the call back over that Ilan does call for closing remarks.
Thank you operator, thank you everyone for joining our call today, and we look forward to connecting with you in the near future.
Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.