Q3 2020 Bio Rad Laboratories Inc Earnings Call
Good afternoon, ladies and gentlemen, this call is scheduled to begin momentarily.
Tom Your lines will again be placed on music hold thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the third quarter Twentytwenty Bio Rad Laboratories incorporated earnings conference call.
This time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
To ask a question during the session you would need to press star one on your telephone keypad. If you require any further assistance. Please press star zero.
I would now like to hit the conference over to your Speaker today director for Investor Relations, Kevin Home you may begin.
Thank you.
Good afternoon, and thank you all for joining US today, we will review the third quarter of 2020 and with me on the phone today are Norman Schwartz, our Chief Executive Officer, along Daskal Executive Vice President and Chief Financial Officer, and he was executive Vice President and Chief operating Officer.
Tumolo President of the life Science group and our right at the end of the clinical diagnostics group before.
Before we begin our review I would like to caution everyone that we will be making forward looking statements about management's goals 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.
Included in these forward looking statements or statements regarding the impact of the COVID-19, pandemic and bio Rad results in operations.
That's my read is taking in response to the pandemic.
Our actual results may differ materially from these plans and expectations and the impact and duration of the COVID-19 pandemic is unknown.
We cannot be certain that bio rads responses to depend on mix will be successful, but the demand for bio Rad COVID-19 related products is sustainable or that 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 FTC, 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 today will also include references to non-GAAP net income and non-GAAP diluted income per share, which are financial measures that are not defined under generally accepted accounting principles.
Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release.
I will now turn over the call back to London School, or executive Vice President and Chief Financial Officer.
Thank you Kevin Good afternoon. Thank you all for joining us and we hope that you and your families are well interesting during these challenging times.
Now before I begin the detailed quarterly discussion I would like to ask Andy loss, our chief operating officer to provide an update on by already its operations.
The current Pandemics related environment since we are experiencing globally.
Okay.
Thanks, <unk>, so I'd like to take a few minutes to review the current state of operations around the world.
Before I begin I would like to recognize our employees globally, who have continued to work above and beyond to serve our customers during the pandemic.
We truly appreciate the hard work and dedication dedication across our organization.
As a reminder, we have three key areas of focus as we continue to manage through this challenging period.
The ongoing safety of our employees continuing manufacturing operations to ensure product supply and support of our customers.
And making sure we make progress on our core strategies.
We have now established routine practices around the world to improve employee safety.
We have adapted our policies and approaches to local conditions and requirements.
I'm pleased with the productivity, we've been able to achieve.
Work from home continues where required and for those in our facilities were continuing to implement brewing safety procedures.
And we continue to experience minimizes case numbers.
In the U.S., we have now implemented a fast turnaround testing solution for suspected cases, using a droplet digital PCR test and can rapidly deliver results back to an employee.
This has enabled us to avoid significant well downtime summing to why we're a full year productivity equivalent side.
And manufacturing our operations teams continued to be flexible in meeting the demands shifts it's driven by the pandemic.
We have flex well to meet the high demand for our PCR products, which increased in Q3 and.
And we have scaled back when needed mainly for diagnostics products.
Right now the majority of the initial scale up issues, we encountered with supply chain disruption early on the pandemic.
I believe we are well positioned to meet future needs.
Lastly, we continue to work on our core initiatives and strategies.
In particular in R&D, where we now have a whole lot lapse operational.
Thank you and now I'll pass it back to Atlanta.
Thank you Andy now I would like to review the results of the third and fourth.
Net sales for the third quarter was 2020 were $647.3 million, which is a 15.5% increase on a reported basis versus $560.6 million in Q3 of 2019.
On a currency neutral basis sales increased 14.9%.
On a geographic basis, we experienced currency neutral growth across all three regions.
We saw strong demand for products associated to be Cobiz, 19 testing and related sort of research.
Whether we so lower demand in the rest of our business.
Overall in Q3, we have seen a gradual improvement in demand for both our life science and diagnostics products in all regions as compared to Q2.
Generally we are seeing most academic and diagnostics lives now running between 70, and 90% capacity and slowly continuing to improve.
Biopharma labs are broadly running at a slightly higher capacity right.
80% to 90% and we continue to monitor the situation closely.
We estimate that Cobiz nineteena related sales were about $98 million in the quarter.
Sales of the life Science group in the third quarter of 2023.
$324 million compared to $215.7 million in Q3, and 2019, which is a 50.2% increase on a reported basis and at 48.8% increase on a currency neutral basis.
The majority of the year over year growth in the third quarter was driven by our core PCR products droplet digital PCR and process media.
Both core PCR and droplet digital PCR products revenue increases were largely COVID-19 related.
Process media, which can fluctuate on a quarterly basis, so strong double digits year over year growth in the quarter over the same quarter last year.
Excluding process media sales the life science business grew 53% on a currency neutral basis.
Since Q3 of 2019.
Growth in the overall lifestyle segments was offset by continued softness India could any research demand as these lives around the globe were operating below capacity.
We expect a continued gradual increase in line utilization and are carefully monitoring the situation.
On a geographic basis life science currency neutral year over year sales grew across all regions.
We continue to be encouraged by our droplet digital PCR business, which is becoming more broadly adopted in wastewater casting is the gold standard.
Droplet digital PCR is now being used at the environmental Protection Agency They water Research Foundation.
And more than two dozen let's globally for waste water testing, including the state of Michigan, which is establishing a standardized and coordinated network of COVID-19 monitoring systems across the state.
In addition last month, we launched two new PCR systems to see a fixed <unk> 96 and to see a fix opus 384, which strengthens our global response and contribution to that fight against dependent me.
We the launch of the CSX Opus systems by all Saints will use access to a cloud based instrument connectivity data management and analyses platform.
These new PCR systems, along with our droplet digital PCR offering provides a complete solution for all customers.
Sales of clinical diagnostics products in the third quarter was.
$322.2 million compared to $341.8 million in Q3 of 2019, which is at 5.7% decline on a reported basis and 5.9% decline on a currency neutral basis.
On a sequential basis, we experienced improved performance across all regions and product lines and we believe this reflects the recovery of routine testing trends.
During the third quarter strengthening our quality controls products was offset by weakness across the rest of the diagnostics portfolio.
Although clinical labs have seen a significant negative impact by dependent me.
We are now experiencing a gradual recovery from the trough of Q2.
And expect incremental recovery into the end of the year.
We will be closely monitoring the potential impact of the recent and then increase surgeons.
On a geographic basis, the diagnostics group posted declines across all regions.
The reported gross margin for the third quarter of 2020 was 56.7% on a good basis and compares to 54.8% in Q3 of 2019.
The current gross margin benefited mainly from better product mix higher manufacturing utilization and lower service cost tempered somewhat by higher logistics costs.
Amortization related to prior acquisitions recorded in cost of goods sold was $4.8 million compared to $3.9 million in Q3 of 2019.
Its unique expenses for Q3 of 2020 were $198.2 million or the city, 0.6% of sales compared to $201.6 million or.
36% in Q3 of 2019.
We continue with cost saving initiatives to reduce our SGN me.
Total amortization expense related to acquisitions recorded in SSG and need for the quarter was $2.3 million versus $1.9 million in Q3 of 2019.
Research and development expense in Q3 was $59.5 million or 9.2% of sales compared to $47.9 million or 8.6% of sales in Q3 of 2019.
Q3, operating income was $109.6 million or 16.9% of sales compared to $57.5 million or 10.2% of sales in Q3 of 2019.
Looking below the operating line the change in fair market value of equity Securities Holdings added 1 billion and $580 million of inked onto the reported results and be substantially related to holding so this years of soft or use a G.
Also during the quarter interest and other income resulted in an expense of $5.5 million compared to $2.1 million of expense last year.
The effective tax rate for the quarter was 21.9% compared to 22.8% in Q3 of 2019.
Reported net income for the third quarter was 1 billion and $315 million and diluted earnings per share were $43.64.
She's an increase from last year and these again substantially related to the changes in the valuation of Sartorialist holdings.
Moving on to the non-GAAP results.
Looking at the results on a non-GAAP basis, we have excluded certain IP, because 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 the non-GAAP results for the third quarter in cost of goods sold we have excluded $4.8 million from ortho fixation of purchased intangibles and the small restructuring benefit.
These exclusions moved the gross margin for the third quarter of 2022, a known good gross margin of 57.5% versus 56% in Q3 of 2019.
Non-GAAP EPS DNA in the third quarter of 2020 was 29.4% versus 35.5% in Q3 of 29 team.
You know its DNA on a non-GAAP basis, we have excluded amortization of purchased intangibles of $2.3 million.
Legal related expenses of $6 million and restructuring and acquisition related benefits of less than $1 million.
Non-GAAP R&D expense in the third quarter of 2020 was 9.2% versus 8.5% in Q3 of 2019.
In R&D on a non-GAAP basis, we have excluded and negligible restructuring benefit.
The cumulative some of these non-GAAP adjustments, resulting moving the quarterly operating margin from 16.9% on a GAAP basis to 18.8% on a non-GAAP basis.
These non-GAAP operating margin compares to a non-GAAP operating margin in Q3 of 2019 of 12%.
We have also excluded certain items below the operating line, which are the increasing value of this sort or use equity holdings of 1 billion and 580 million and the small losses associated with venture investments.
The non-GAAP effective tax rate for the quarter was 22.5% compared to 25.5% in Q3 of 2019.
The lower rate this quarter was primarily driven by changing our geographic mix of earnings and the taxation of our foreign hearings.
We now estimate that full year tax rate on a non-GAAP basis to be approximately 24%.
And finally non-GAAP net income for the third quarter of 2020 was $90.3 million or $3 diluted earnings per share.
Compared to $48.6 million and $1.61 cents per share in Q3 of 2019.
Moving onto the balance sheet.
Total cash and short term investments at the end of Q3 were 1 billion and $160 million, an increase of $123 million from the end of Q2 of 2020.
During the third quarter, our inventory increased by about $12 million from the second quarter of 2020.
The increase of inventory in Q3 of 2020 was driven by the continued expectation of higher demand for COVID-19 related products.
We expect inventory levels to come down over the next two to three quarters.
We plan to use the cash on hand to repay that $425 million of outstanding senior notes in December.
In addition.
The market value of our holdings in sort of Torrijos AG has increased which technically may deem us as an investment company under than 1940 investment Company Act.
While we are working on this the resolution.
Access to the capital markets may be restricted.
We feel that we have adequate resources to effectively run our business in the near term.
During the third quarter, we did not purchased any shares so far so we.
We have a total of $273 million available for potential share buybacks.
For the third quarter of 2020 net cash generated from operating activities was $135.7 million, which compares to $99.8 million in Q3 of 2019.
The adjusted EBITDA for the third quarter of 2020 was 22.9% of sales.
The adjusted EBITDA in Q3 of 2019 was 17%.
Net capital expenditures for the third quarter of 2020 or $20 million.
And depreciation and amortization for the third quarter was $33.7 million.
We project that the full year capex spend will likely be between 80 and $90 million.
Moving on to the guidance.
We continue to be uncertain about the duration and impact of the COVID-19 pandemic, although we do assume a gradual return to pre pandemic activity levels and business mix.
With that in mind, we currently believe that the full year 2020 year over year currency neutral sales to be up 5.9% to 6.3%.
We estimate 27% to 28% currency neutral revenue growth for life science.
And estimate about 7% currency neutral revenue decline for the diagnostics group in 2020.
This assumes that the fourth quarter, we'll see a gradual improvement in non COVID-19 related product sales and the smaller relative benefit of COVID-19 related product sales versus Q3.
Full year non-GAAP gross margin is projected to be between 56.5% and 57%.
R&D at around 9%.
Full year, good operating margin between 16 and 16.5%.
And full year, adjusted EBITDA margin to be between 21 and 21.5%.
Our significantly higher operating profit over last year was driven by discretionary cost control measures and better product mix.
It's our operations begin to return back to normal we expect a gradual reversal of these benefits that we experienced in 2020.
Lastly.
Due to the uncertain nature of the current and that means we will not host an investor day. This year and instead look to host 18 2021 when business activity normalizes.
With that said in December we plan on updating you with our revenue growth and margin targets.
That concludes our prepared remarks, and we will now open the line to take your questions.
Christy.
Ladies and gentlemen, as a reminder to ask a question do we need to press star one on your telephone keypad to withdraw your question. Please press the pound a hashi. Please stand by while we compile acuity roster at this time.
Okay.
Our first question comes from line of Patrick Donnelly from Citi.
Great. Thanks, guys.
You on probably one for you can you break out the cobot sales a bit more than you know the expectations going into Fourq, you certainly appreciate smaller relative benefits, but but any more granularity there would be helpful. [noise] basically just wondering how much was related to.
BD PCR versus maybe some of the more instrument build outs and then how you're expecting that to trend.
Sure. Thank you Patrick.
So.
First of all the $98 million was the incremental revenue that was associated with the Cobi 19 related.
Sales are the vast majority is associated with our core Pcr.
And de PCR lesser extent, I mean, a very small number was associated with our sirolimus. He does.
And again, most will be taller instruments and that's a that's the speed and when you think about Q4. We currently believed that it would be a lower number than the Q3 number.
Okay.
I guess I'm, just kind of wondering should we expect a significant step down or is it going to be in the same ballpark just slightly down from about call it 100 million or so.
You know in Q2, if you recall it was about $71 million overall, we you know a similar kind of split between you know the core PCR the PCR and the Sirona GE in terms of the ratios.
And so far it's it's a little bit difficult to tell its going to be probably somewhere in between those two but but maybe slightly lower but.
But.
It's probably not going to be much less below the Q2 numbers. That's what we think about right now.
Okay, that's helpful and treatment.
And then on the margin side, you know clearly we saw some nice drop through from most of the Big revenue beat there are you able to parse out how much of the margin expansion was related to the co. Good revenue coming in obviously well above what we expected I think you guys expecting as well versus more kind of that core expansion that youve been obviously working on.
The initiatives there.
Yes so.
Definitely you know the Cobiz related sales contributed both you know the mix side as well as on the utilization.
And these were the main components there was some headwinds associated with you know freight for example, but for the most part eighties.
He is the mix and the contribution of COVID-19 related products as well as for the utilization.
In in some of them on filtering footprint.
Okay.
And then one maybe it might be for norm, if he's there I mean, given the strong cash flow you guys are seeing how are you guys thinking about the M&A landscape I know over the past few quarters, you talked a little bit about being more acquisitive on the larger side, obviously sartorius stake to your point there. It's gotten so big you can kind of to look at some different regulations on the investment side.
You wanted to monetize that clearly a lot of a lot of dry powder. So how should we think about your activity what the pipeline looks like and again your appetite maybe on a larger scale given.
Given your Ah there's flexibility there yeah, I think as you know over the you know over the over the past several years, we've done a few more of these early stage things and and I think it is fair to say that our appetite and the kinds of things we're looking at today our.
You know are a little larger in size.
Are you know and and more established companies as opposed to these Ah Ah technology plays that we've.
Invested in so and so again, we've got a we've got several things in the pipeline.
If we can land one or two of them.
Okay, and one last quick housekeeping one you out I know you mentioned in December we'll get something on the revenue side I guess what venue. He couldn't be just you get a press release, new three year targets I just want to make sure. We are thinking about that right. Thank you guys yeah.
Yeah. So we plan to Ah press release, you know some financial measures and you know states you own you know, but we'll follow up with the several clubs as well.
Okay look forward to it thanks, guys think investment.
All right. Our next question comes from the line of Brent and Cologuard from Jefferies.
Thanks, Good afternoon.
Oh, Wow I want to maybe start with you. That's you know leverage obviously pretty good in the in the third quarter should we view this as kind of a new base or that you think might be sustainable kind of under the 30% range.
Maybe if he could chime in and touch on some of the areas where.
You see opportunity for additional cost savings in the business maybe specific priorities.
The true what can I run that would be helpful.
Thank you Brendan you know I'll start and Andy will chime in you know generally speaking we definitely continue to enjoy a you know the some of the you know lower discretionary expenses. Although some of these expenses these start to come back, but they definitely not at the level of pre pandemic.
So you know assuming that we'll get back to pre pandemic level SG and they will continue to be higher from the prior quarter and some will be towards associated associated also with employee related expenses. So if.
If you think about you know the mid Thirtys level. That's the word there we continue with our you know cost saving initiatives that we started you know before the pandemic and we are very successful in terms of realizing savings there.
With that said you know we believe that currently running below our normalized level of SGN name. So I'm you know expecting some are kind of in between.
<unk>.
Yeah, I think certainly a brand and we you know if this does give us an opportunity to rethink some of the way we operate I think that I think we've all seen how successful we've.
We've been working in a remote environment and it wouldn't surprise me if if as we return to normal there is somewhat less travel than than we've experienced in the past and a and I'm sure. There's some other areas like that.
That weekend.
Or that we can think about where we can continue to to work on our SGN anyway.
[noise] already Oh, maybe what friend that we'd love to get some color from you on.
Areas of the D. PCR business number one just around the wastewater opportunity, whether that's really the needle mover on more of a niche application.
I know there are multiple or kind of technologies that are also being dabbled with out there for that application.
As well as the you know any color you might be able to share.
Sort of a non Kobe down.
Related areas of demand, particularly the qx, one and be interested if you're looking at a lot of great program.
For that system right now.
Okay. Thanks Brandon.
So the waste water surveillance market is is a brand new opportunity for us.
For total bed and you know we're doing some background work to try and understand you know the the size of the market opportunity, but you know we think the need for surveillance to detect early community outbreak is likely to be a longer term need and we're very well positioned.
To support this with our de PCR product.
Yes, there are other technologies that you can use but you know looking for that needle in the haystack.
In an environment with a lot of inhibitors as you might imagine is is a situation that TD PCR can you can really serve quite well.
So you know we're pleased with the uptake we've taken so far and you know we're really take.
Taking a harder look at what the longer term opportunity is.
A second quick Oh, so non coal bed.
You know like the clinical diagnostics market. We're seeing you know some some gradual return to normal we're not quite there yet, but you know sequentially, we see the improvement revenue coming in from our core product and this means people are back at the lab doing.
Paramount Western blotting things like that so we're we're optimistic I think you know like our own R&D teams I think you know research labs around the world. There are figuring out the right algorithm to have people come back in the lab and stay safe.
And get some work done so I think we're we're starting to see that as part of the return to normal.
That's right and then last one I don't know maybe Ilottery, Andy a mini update kind of where things stand with Textron Elmex litigation right now and when you might actually expect to receive some of that cash that's been accrued that they owe you.
So sandy.
We were not [laughter] typically commenting on the litigation situation with regard to 10, X. and so I think we'll kind of continue to.
Work worked through that litigation as well.
Basically report when there's something that we feel we can we can disclose.
All right I'll hop back in the queue. Thank you think.
Thank you Brendan.
Our next question comes from the line of check me Han from Nephron research.
Thank you good afternoon, I'm wondering to probe a little bit more on the co bid a expectations going from the third to the fourth quarter is there any color you can provide around your capacity on the omni testing I say side and within you know you expect overall sales to go down.
Sequentially, but I'd do you assume that piece that stepping up into year end.
So I mean, then that can certainly chime in as well on the back end of my comments, but as you probably know the majority of our covered related sales.
Instrument placements since we we don't have an established molecular diagnostics franchise.
So with you know while sales are more related to capacity building.
Then I said they are Tesco three.
So so and I'll hop points of view on Q4 is you know demanded that we think is going to be over a little bit softer than Q3.
Great and then on the Oh go ahead.
No I'm, sorry, I was just going to add you know.
Where were somewhat new to the molecular diagnostics market, but we have.
Submitted.
You can see our cats to the FDA for at an emergency use authorization so stay tuned for that.
Would you need a you wait to be able to watch a test in the market. We're you know is that could you actually roll something out in advance of that.
Oh, we need.
Your why yep yep choose to create their own LDC true components from pulling them together or that they have a full limits you to do that and that's obviously why many you're buying Oh system.
And then on that building there on that side.
Got it.
And then as you look across both businesses is it possible to quantify at all if there was any potential catch up and investment in the third quarter from the second quarter.
Yeah. That's a good question I, there's nothing that's evident to us that that's not to say that they may not be in a bucket of catch up here and there, but nothing that we would say.
They were.
I was evident to us is very material to the Q3.
Q3 results.
Got it and then on the quality control side I know you called that out as kind of an area strengthen diagnostics I was wondering if there was anything that stood out you know for men a menu perspective do you think kobin testing could have helped that.
I don't I lost Arts way at all or some of my initial response, which is that no I think our quality our quality control business right broad based across routine testing.
And and Kobe relates it controls it really on a small component. So it's it's more indicative to wassa sequential improvement and and routine testing across the board.
Got it.
And last one if I can squeeze. It then is how is progress going with southeast since the acquisition and then any updates in terms of timeline for your products there.
They were part and I went through in that Yep.
Sure. So you know it's certainly early days with the technology, but we are seeing be you know some traction in the market.
We are investing.
In a new next generation platform and the work is progressing quite well. We're also developing a series of application base kit for the single cell market. So we're very excited about the R&D, that's going on in Ann Arbor, and I'm like I said supporting.
In that with significant investment.
Thank you.
Thank you Jay.
Our next question I'm sorry, our next question comes from the line of Dan Lonard from Wells Fargo.
[laughter]. Thank you. So so my first question you know for whoever wants to take it how much time are you spending on on contemplating and thinking about how to better leverage you're up your larger installed base of PCR equipment and molecular testing post pandemic, how much of a focus is that for you.
Yes.
Yeah. That's a that's an interesting question that you know certainly we we've spent a fair amount of time thinking about that and and and it's and it's an obvious opportunity for us.
And and a you know it's in that said, we've got a we've got a anyway and that in the F.D.A. now on that on the shorter term, but but yes, we are thinking about longer term what more could we do.
Okay, and then just trying to.
The frame the potential risks as we have them a renewed wave of shutdowns you know it seems like that's happening in France I have just stuck in my mind that year over index to France, but that could be 15 years old you know memory. So so can you marquita market kind of where do you see your greatest exposure from from a a renewed wave of closure.
Is it and how are you trying to frame that.
I I think that that's a is that pretty global.
You know I don't I don't see any one particular geography, that's where were more or less exposed and and again. It's you know it's it's an area that we're watching very closely to at or you know quite aware of the fact that oh.
This this thing isn't going away.
You know my add an extra time mentioned to that I think so so obviously the resurgence is something that.
We need to.
Kind of keep our eye on extremely closely though I think were also experiencing glass. Many people have learned how to work.
Now we've been covered as a backdrop and so unlike the first subject to yeah. We think it is likely to be a more moderated, but it's certainly not going to go without impact.
And so it's much harder to gauge how how much impact might be from this current resurgence that's going on.
Okay and then maybe my final question for along the line you mentioned, some technicality that might might get bio Rad classifies as an investment company you know what would be the implications of that.
Yeah, I think it anything it's a great question I mean, basically you know in the near term or we don't think it has any impact on our operations.
And obviously you know we are currently working going on the resolution so that.
That's our thinking right now.
Okay. Thank you very much. Thank you then.
There are no more questions at this time.
Right.
Okay. Thank you everyone for joining us today, and we look forward to connecting with you in the next quarter. Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect at this time.
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