Q2 2020 Bio Rad Laboratories Inc Earnings Call
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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.
Norman Schwartz, our Chief Executive Officer, Blonde, Daskal Executive Vice President and Chief Financial Officer, Andy last Executive Vice President and Chief operating Officer.
Similar patent life Science 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 forward looking statements.
Management's goal funding expectations.
Future financial performance and other matters. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties.
Included in these forward looking statements or statements regarding the impact of the cobot 19 pandemic on bio Rad to result 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 cobot 90 pandemic is unknown.
We cannot be certain that by regimen responses to the pandemic well be successful that's the demand for buyer medco bit 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.
George you to review or 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.
March today will also include references to non-GAAP net income and non-GAAP diluted income per share, which our financial measures that are not defined under generally accepted accounting principles.
Your should review the reconciliation of these non-GAAP measures to comparable GAAP results contained in our earnings release.
I'll turn over the Colts, one 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 families are willing to staying hilti during these challenging times.
And also we want to officially welcome Kevin.
As our new head of Investor Relations getting comes to buy already we the breadth experiencing finance couple because the markets financial analyses and investment management, primarily into life Sciences and medical technology space.
We believe that he will 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 color I'm going to any related environment. This we are experiencing globally Andy.
Okay. Thank you very much Atlanta, and 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 continued commitment to the company you referenced a 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 to put measures in place to God, well being and safety if our employees.
Early on we implemented work from home globally for all employees. So we're not a 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. We're 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 Hong depending on the region.
All of these measures have to minimize the number of cases, we have experienced throughout bio Rad.
Hi manufacturing operations team I've 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 to 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 a core initiatives and strategies and look forward to sharing more details later this year.
With that overview I'd like to pass it back to a lot. Thank you. Thank you Andy and now I would like to review the resolved. So this second quarter.
Net sales for the second quarter of 2020 were 500 them $36.9 million, we choose 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 strings in Asia was offset by weakness in other regions.
As Andy alluded to defend Danny 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 over 2020 worth 200 than $52.1 million compared to $212.4 million in Q2 of 2019, which he 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 roles 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.
Driven by strong demand for Cobiz 19 related products.
Gross seem to like overall in the lifestyle segment was offset by soft or academic research. The mine is 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 leases versus Q2 of 29 team.
On a geographic basis lifesize currency neutral year over year sales grew in Asia in Europe was the Americas were about flat.
We continue to be excited about or droplet digital Pcr platforms.
Unique sensitivity and specificity of the technology continues to open up new opportunities and applications.
During the current and Danny Tt's being deployed to Monique or source cool 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 he is a 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 precinct on hospital and cleaning business.
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 chills they'll go imaging system, which provides a benchtop imaging solution in a composite and automated pitch.
We also launched at new label claim for our genius HIV, one HIV to supplement the legacy which has now improved by 54, using blood and plasma donation central city.
The reported gross margin for the second quarter of 2020 was 54.6% Wanna get the bases in compares to 53.7% in Q2 2019.
The current quarter gross margin benefited me 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.
These $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.
I see an expenses for Q2, as 2020 were $189.3 million or 35.3% of sales compared to $201.3 million or city, 5.1% in Q2 of 29 team.
[noise] reduction in its DNA expenses was the result of undisciplined hiring and lower discretionary spend primarily travel and marketing expenses due to the impact of Cobiz 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 returned 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 29.
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 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 these up substantially related to the holdings of the shares of sanatorium say Gee.
Also during the quarter interest in other income resulted in net other income of $10.7 million compared to $3.2 million expense last year.
Q2 of 2020 includes an $8.9 million de then from selling through use which was declared in June and will stay in July.
2019 that easy then was declared in March and it was based 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's an increase from last year and be substantially related to changes in valuation of the source or use holdings.
Moving on to the known good results.
Looking at the results on a non get basis, we have excluded certain TV 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 good and non-GAAP results for the second quarter in cost of goods sold we have excluded $5 million perform authorization home purchase intangibles and the negligible restructurings NFI.
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 was 29.
Non get SGN named the second quarter of 2020 was 33.9% versus 34.5% in Q2 of 29 team.
You know CNH on a non get the 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 extensively in the second quarter, 2020 was 9.8% versus 8.8% in Q2 of 2019.
In R&D on an ongoing 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 grid faces to 11.8% on a non-GAAP basis.
These non-GAAP operating margin compares to a non-GAAP operating margin in Q2 2019 of 11.1%.
We have excluded certain items below the operating line, which already increasing value this sort of through equity holdings of 1 billion in 183 million.
At $1.1 million of losses associated with venture investments.
And then $11.7 million gain on the sale of the small non core business that was part of our other operations segment.
The non get 60 stocks rate for the quarter was 23.8% compared to 26.5% in Q2 2019.
The decrease in rate was driven by changing our geographic mix of running.
And then 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 $1.49 cents per share in Q2 of 29.
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 uptick in late Q4 2019.
And our decision to secure additional components, even 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 a forest though.
In July our board the 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 Tories dividend payout.
The adjusted EBITDA for the second quarter of 2020 was 18.6% of sales and excluding the sort of Tories dividend was 16.9%.
The adjusted EBITDA in Q2 of 29 team 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.
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Moving on to the guidance.
We continue to be uncertain about the duration and impact of the Cobiz 19 pandemic.
With that said, we currently believe the 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.
Smaller relative benefit of Cobiz 19 related products sales versus Q2.
And the modest benefit from our Sirona fetus.
We continue to assist there is demand and supply indicators as well as return to the workplace protocol.
We continue to believes 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 want me to press Star one on your telephone to withdraw your question press the pound cool. Please stand by what we compile the Q and a roster.
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.
The kobin surge demand in the quarter, how much of that 71 million what was equipment related to <unk> versus consumables and do you have any efforts to perhaps be more directly involved in testing. So you know there there must be 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 highs as Andy here I think what we'd say is the majority of the South Africa, where instrument of course, we do have.
Reagents to and on our call PCR business.
Oh that you know 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 notice you don't have your own Q PCR tasks and I'm uncertain. If you have plans to develop develop one or otherwise.
Yeah. So we've got a de PCR your way that that was approved and I'll.
Allowing that I'll pass through and that the to answer that question on the Cupid GPCR question.
Okay. Thanks, Sandy yeah that he 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 we we chose to put.
Droplet digital PCR Oh, Toby test kit out her.
And we are always evaluating whether putting a acute PCR tests out 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 know you're over index. There in life Sciences, and it seems like that's an important variable and not the Q3 outlook. Thank you.
Andy do you want to take a show I can take that so so we expect to continue to see a gradual increase in opening as we go through Q3.
We're not expecting any sudden changes in pace.
Be fab.
We saw a gradual everything through Q2 picking up in the second half a bit.
And and you know 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 a line of Patrick Donnelly from Citi. Your line is now open.
Great. Thanks, Eli maybe one for you on the margins you know very encouraging and particularly in this environment can see see the expansion. There can you just talk through the strength in country with getting the onetime headwind you guys space and then the expectations going forward how much of it was mix. So you can you talked about the Coca benefit maybe a little small.
Or as we go forward, how much was related to that versus some of the internal initiatives. As you guys had gone for for some time.
Yeah. Thank you play Threeq I appreciate the question. So yes. This quarter. We had you know obviously it 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 2019.
Generally speaking when I think about or the full year I don't think that there would be a big impact on the full year gross margin.
We plan to take the utilization that it'd be lower into second half.
Since we have build up you know some inventory this quarter and also it depends on on the mix that will experience into second half like assuming that.
We'll have a gradual you know continues 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 huh.
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.
You'll get a July referred some kind of sandy elective stuff is pulled back a little bit big right. If you could just talk through you know what you see 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.
Darren do you want to take that question.
Sure we did start to experience some modest recovery in June and.
You know exactly as you as you said no still muted by elective procedures and routine testing you don't really not being back to historical averages. So you know we're in watchful watchful waiting, but we did see an improvement in June.
Great and maybe last one just on the.
Maybe Pcr side.
Are you guys getting this technology in front of customers that perhaps you weren't accessing before cobot meeting the demand uptick to a level where.
The installed base of all of sudden strengthening quite a bit technologies getting out there in a more broad sense, whereas on the other side of Tobin now maybe you have been a much 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 you know weve been experiencing good growth with this platform for quite quite a long time and we continue to see it.
We had not focused the technology on a infectious disease and I think what has emerged is.
You know 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 wastewater monitoring for a waste water that's being reuse they monitor for pathogens are using the plot.
Form because it's highly sensitive and very precise it's being used by governmental agencies for environmental monitoring public safety for slimming area. So I think we're seeing an uptick there are people getting in.
Monitoring for those reasons are 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 as well.
Very helpful.
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 clone. Our next question comes from the line of Jack Mayhem from that far 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 or whatever benefit you might have seen with surajit I'm a diagnostic side.
Hi, Jack Yeah. This is Andy the majority came through the life Science PCR Digital Pcr.
Outside of the business a contribution from Sirona GE was very modest we launched our product light right in the late in the quarter. That's I was a very modest contribution.
Okay and you.
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. 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 Oh, 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 manufactured can eat.
Demand across our.
Platform, our reagent and our plastic consumables line I think we're in a good place now to meet demand and you know and to 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 cobot tailwind was concentrated there and you add b.
Yep bio chromatography process media tailwind.
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 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 a business is kind of down in line with with.
The majority of the other reports that reports for Q2, and a kind of you know high teens percentage <unk>.
Well, we dogs, we don't see a cool life science being down over 20%.
And you know the way, we think a body jinkosolar thinking about the second half you know obviously, you know parcel for 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.
Yeah.
I think we felt quite comfortable with where we were given the market conditions as we mentioned the now.
So that's that's right I think like quite a line.
In 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. The sartorius, Steve could you just look over the last year and a half it's gone from almost 3 billion. The closing in on 7 billion now.
You know does the pandemic no change your views at all around the strategic nature of that and looking to build Ed or.
The way you think about potentially pursuing larger M&A.
So obviously, a it's it's certain turia sets continue to do very well, hence that 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 had been discussing you know in the past year.
We have continued interest you know we the strategy of those smaller talking you know acquisitions, which we continue to pursue.
As well as you know we did you know much higher appetite for Ah Hey, you know 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 this would be a complemented by the share buyback, which are the board authorized to increase the plan.
Great. Thank you all think teacher.
Thank you. Our next question comes from the line of Brandon Couillard from Jefferies. Your line is now open.
Thanks start a along maybe a silicon 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 stepped down.
Sequentially, a good Kobe tailwinds of the over half your lesson happy expected to capture in the third quarter and then.
Look at the Opex line significant Mount leverage in DNA in this in the second quarter I'm sure. That's been comes back into the model.
The second half a year.
Yeah. Thank you Brendan 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 what we can tell you know based on on the last several months to a lot is happening you know every few weeks.
So I don't know that you know the.
General seasonality that a this we experience every year will will be similar this year.
I'm thinking about you know the operating expenses. So most of the saving specifically this quarter I'm Hall, or Hum 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 this we will have to revisit the kind of how do we spend a discretionary expenses and how do we manage potentially with less travel et cetera.
So if I have to kind of categorize it most of it 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 and that I'm GPCR, let's give an update I'm now I guess six or eight months into the launch of the Qx one platform.
Specifically, you know which customers adopting fastest.
What percent of replacements, there are upgrades from the legacy system or anything you can share with its an outlet.
Watches proceeding.
Sure.
Well, Fortunately, it's proceeding quite well and you know the primary segment, where we focus the this product was bio pharma and you know to a large extent in the QC and manufacturing part in the cell and gene therapy markets and you know.
We had a we have many customers, who who adopted our Q2 hundred 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 like the Qs one maybe all convert to Q.
Next one, but you know where we're pleased with the progress that that's the product introduction has made.
[laughter] Shalonda.
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. So yes. He does I did not have you don't pick it up that's correct, so and it's about down 50 basis points.
Okay, So margins, what about 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 to 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 todays conference call. Thank you for working for meeting you may now disconnect.
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