Q1 2021 Bio Rad Laboratories Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Q1, 2021 and bio Rad Laboratories incorporated earnings conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. At this time you will need to press Star then the number one on your telephone keypad.
If you're at your question has been answered and you would like to withdraw you can press the hashed E or is it.
Thank you I'd like to turn it over to Mr. Ron Hutton you may begin the conference here.
Thank you.
Good afternoon, and thank you all for joining US today, we will review the first quarter results from 'twenty to 'twenty, one with me on the phone today are enormous Schwartz, our chief Executive Officer.
<unk> Executive Vice President and Chief Financial Officer, Andy last Executive Vice President and Chief operating Officer and net.
Tumolo President of the life Science group and Dara Wright President of the clinical diagnostics group.
Before we begin our review I would like to caution everyone that we will be making forward looking statements about managements goals plans and expectations, our future financial performance and other matters.
These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties include.
Included in these forward looking statements are statements regarding the impact of the COVID-19, pandemic and bio Rad results and operations and steps bio Rad is taking and response to the pandemic.
Our actual results may differ materially from these plans and expectations and the impact and the duration of the COVID-19 pandemic is unknown.
We cannot be certain that bio rad and responses to the pandemic will be successful that the demand for bio Rad and COVID-19 related products is sustainable for the bio Rad will 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 SEC, where we discuss in detail the risk factors and our business the.
The company does not intend to up date 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 Earth.
Earnings release.
I will now turn the call over to Ilan, Daskal Executive Vice President and Chief Financial Officer.
Thank you Ron and good afternoon, and thank you all for joining us and we hope that you and your families are well and staying healthy during these challenging times before.
Before I begin the detailed first quarter discussion I would like to us and he lost our chief operating officer to provide and update on bio Rad operations in light of the current pandemic related environment that we are experiencing globally sandy.
And I like to take just a few minutes to review our current state of operations around the world.
As expected and COVID-19 continues to have an impact on our operations, but as previously communicated we have now adapted well for this environment and our employees around the world continues for them to the highest standards.
We continue our focus on the three areas previously communicated the ongoing safety of our employees continuing man manufacturing operations to ensure product supply and support of our customers and making sure. We continue to make progress on our core strategies.
Overall, we continue to be very pleased with our employees' safety and despite the increases and COVID-19 and some areas of the world.
Our internal COVID-19 transmission rates remain extremely low and we are starting to benefit from the vaccination programs.
And Q1, we have maintained the work from home policies, we adopted and 'twenty 'twenty and are continuing to monitor the pandemic closely as we assess the right timing for a more general return to the workplace.
As we enter Q2, we expect to continue to experience the impacts of the pandemic for at least the coming quarter, but our confidence and our ability to meet customer demand, while progressing our core strategies and new product development objectives.
And as the global economy trends towards recovery, we're also paying close attention to our supply chain as accelerated demand for raw materials has the potential to cause constraints and for long higher than typical logistics costs.
Provided positive global progress on controlling COVID-19, we anticipate operations starting to return to more normal operating practice and the second half of for yeah.
So thank you and I'll pass it back to Atlanta.
Thank you Andy and now I would like to review the results of the first quarter.
Net sales for the first quarter of 2021 were $726 $8 million, which is a 27, 1% increase on a reported basis versus $571 $6 million and Q1 of 2020.
On a currency neutral basis sales increased $23 four per cent.
The first quarter year over year revenue growth was impacted by a tough compare of about $10 million revenue carryover to Q1 of 2020 related to the December 2019 cyber attack.
On a geographic basis, we experienced currency neutral growth across all three regions.
We continued to see strong demand for products associated with COVID-19 testing and related research.
Generally we are seeing most academic and diagnostic labs now running about 90% capacity, which is an improvement to what we saw in Q4.
We estimate that COVID-19 related sales were about $94 million in the quarter.
Sales of the life Science group and the first quarter of 2021 were $366 5 million compared to $227 $2 million in Q1 of 2020, which is a 61, 3% increase on a reported basis and $56 nine.
[noise] percent increase on a currency neutral basis.
The year over year growth in the first quarter was driven by the continued strength of COVID-19 related Q Pcr products.
In addition, we saw strong double digit year over year sales growth in droplet digital PCR western blot and antibody products.
In addition process media, which can fluctuate on a quarterly basis, so strong double digit year over year growth in the quarter over the same quarter last year.
Excluding process media sales and the underlying life science business grew 56, 2% organic currency neutral basis versus Q1 of 2020.
On a geographic basis life science currency neutral year over year sales grew across all regions.
In addition to continued adoption of droplet digital PCR and Biopharma. We also saw good demand for the <unk> and wastewater testing applications for COVID-19 and we expedited the introduction of COVID-19, there and assays, which are being well received.
Key opinion leaders continue to highlight the sensitivity advantage of droplet digital Pcr.
Sales of the clinical Diagnostics Group, Inc. First quarter were $358 5 million compared to $343 million in Q1 of 2020, which is at five 4% growth on a reported basis and a 2.2% growth.
And currency neutral basis.
During the first quarter, the diagnostics group posted solid growth in diabetes and and quality controls.
We started to see a recovery of market demand for non COVID-19 business with diagnostics led to returning to about 90% of pre COVID-19 levels.
The recovery of routine testing and elective surgeries is still progressing.
On a geographic basis, the diagnostics group posted growth in Asia.
The reported gross margin for the first quarter of 2021 was 55, 1% on a GAAP basis and compares to 55, 5% and Q1 of 2020.
The current quarter, our gross margin percentage declined mainly due to expenses associated with the restructuring initiatives that we communicated earlier this year.
And by better product mix, lower service costs and higher manufacturing utilization.
Amortization related to prior acquisitions recorded in cost of goods sold was $4 6 million.
Compared to $3 $9 million in Q1 of 2020.
SG&A expenses for Q1 of 2021 were $225 9 million.
Or 31, 1% of sales compared to $193 7 million or 33, 9% in Q1 of 2020.
The year over year, SG&A expenses increased mainly due to expenses associated with our restructuring initiatives and higher employee related expenses and equals offset slightly by a $5 million cyber security insurance settlement related to the 2019 cyber attack as well as lower discretionary.
And we spend.
Total amortization expense related to acquisitions recorded in SG&A for the quarter was $2 4 million versus $2 million in Q1 of 2020.
Research and development expense in Q1 was $73 9 million.
Or 10, 2% of sales compared to $49 3 million.
Or eight 6% and Q1 of 2020.
The year over year R&D expenses increased due to expenses associated with our restructuring initiatives and increased project spend.
Q1, operating income was $109 million or.
Or 13, 9% of sales compared to $74 4 million or 13% in Q1, 2020.
Looking below the operating line and the change in fair market value of equity Securities Holdings, Inc.
And $1 billion and $179 million of income to the reported results, which is substantially related to holdings of the shares of Sartorius AG.
During the quarter interest and other income resulted in net other income of $16 9 million compared.
Compared to $3 3 million of expense last year.
Q1 of 2021 included $19 million of dividend income from Sartorius, which was declared this year in Q1.
In 2020 day Sartorius dividend was declared in the second quarter.
The effective tax rate for the quarter was 24, 7% compared to 23, 7% and Q1 and 2020.
The tax rate for both periods were driven by the large unrealized gain in equity securities.
The year over year increase and our effective tax rate was due to the restructuring initiative announced earlier this year.
Reported net income for the first quarter was $977 4 million and diluted earnings per share was $32.38.
This is an increase from last year and is substantially related to changes in the valuation of the Sartorius holdings.
Moving on to the non-GAAP results.
Looking at our results on a non-GAAP basis, we have excluded certain atypical and unique items that that.
And that impacted both the growth and operating margins as well as other income.
These items are detailed in the reconciliation table in the press release.
In cost of goods sold we have excluded for $6 million of amortization of purchased intangibles.
$24 million of restructuring related expenses, and a small legal reserve benefit.
These exclusions moved the gross margin for the first quarter of 2021 to our non-GAAP gross margin of 15, 9% versus 55, 9% in Q1 of 2020.
Non-GAAP SG&A in the first quarter of 2021 was 25, 4% versus 33, 3% in Q1 of 2020.
In SG&A on a non-GAAP basis, we have excluded restructuring related expenses of $34 7 million legal related expenses of $4 4 million and amortization of purchased intangibles of $2 4 million.
In R&D, we have excluded $16 9 million of restructuring related expenses. The non-GAAP R&D expense in Q1 was consequently, seven points and 9%.
Yeah.
The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 13, 9% on a GAAP basis to 25, 8% on a non-GAAP basis.
This non-GAAP operating margin compares to a non-GAAP operating margin in Q1 of 2020 of 13, 9%.
We have also excluded certain items below the operating line, which are the increasing value of the sartorius equity holdings of $1 billion and $179 million.
And $1 $8 million of losses associated with venture investments.
Our non-GAAP effective tax rate for the quarter was 23, 6% versus 25, 7% and Q1 of 2020.
The tax rate was impacted by changes in the geographic mix of earnings.
And finally non-GAAP net income for the first quarter of 2021 was $167 4 million.
Or $5.21 per diluted earnings per share compared to $57 6 million and $1 and 91 per share in Q1 of 2020.
Moving on to the balance sheet.
Total cash and short term investments at the end of Q1 were $1 billion and $25 million compared to $997 million at the end of 2020.
During the first quarter, we purchased 89506 shares of our stock for a total of $50 million hit and average price of approximately $559 per share.
For the first quarter of 2021 net cash generated from operations was $114 million, which compares to $63 million and Q1 of 2020.
The improvement is mainly driven by higher operating profits.
The adjusted EBITDA for the fourth quarter of 2020, one was $232 million.
Or 31, 9% of sales and excluding the sartorius dividend was 29, 3%.
The adjusted EBITDA in Q1 of 2020 was $107 4 million.
Or 18, 8% of sales, which did not include the 2020 sartorius dividend.
Net capital expenditures for the first quarter of 2021 were $19 5 million.
And depreciation and amortization for the first quarter was $32 $7 million.
Moving on to the guidance.
We began the year with a projection of between four five and 5% non-GAAP sales growth and the non-GAAP operating margin of between 16% and 16, 5%.
Even though we continue to be uncertain about the duration and impact of the COVID-19 pandemic given the results of the first quarter and our current outlook. We are now guiding currency neutral revenue growth in 2021 to be between five five and 6% per cent.
This includes COVID-19 related sales, which we estimate to be between 170 and $180 million versus our prior estimate of about $150 and $160 million.
We project most of the 2021 COVID-19 related sales to occur during the first half of the year and we continue to assume a continued gradual return to pre pandemic activity and a more normalized business mix.
Full year non-GAAP gross margin is now projected between 56, five and 57% versus our previous guidance of $56, two and 56, 5%.
And full year and non-GAAP operating margin to be about 17%.
And full year adjusted EBITDA margin to.
To be about 22% versus previous guidance of 21%.
That concludes our prepared remarks, and we will now open the line to pay for questions operator.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
For buses for a moment to compile the Q&A roster.
Okay.
First question is coming from the line of brand and coal ear from Jefferies.
Yeah.
Hey, Thanks, guys.
Afternoon.
And one maybe just starting with <unk>.
And the updated guidance outlook it would suggest that organic growth over the balance of the year would be about flat to maybe plus 1%.
Could you talk about.
What that Embeds in terms of the two segments for the balance of the year and.
And whether you think diagnostics and.
And continued to ramp towards that double digit target you've talked about for sure.
Sure. Thank you Brendan and I believe that you referred to organic and these case ex COVID-19 sales.
Yeah, that's right.
So I'm not sure that we are at about flat actually if you run the math.
You know, it's about seven 5% and.
And for for the full year are you referring go for the first quarter year over year sorry.
Well.
The COVID-19 dynamic it would suggest that organic from <unk> to <unk> is about flattish.
Given the 23% that you did in the flow okay. Okay, so you're comparing quarter over quarter for Q4 over Q1.
Yeah kind of.
The trend for the balance of the year to get for the full year yeah.
I would highlight on that Brandon debt seasonally usually Q4 is a strong quarter for us and the first quarter is usually kind of not as strongest Q4.
So actually having a flat quarter in C stores and excellent results.
Could you speak to kind of what the guide assumes specifically for diagnostics the.
For 2%.
Core growth and the first quarter was an improvement, but not quite as material of a rebound as we've seen from some other central lab peers.
Curious why that might necessarily be the case and which areas are lagging maybe a third question for Dara.
So Brian and maybe I can make.
Saturday's, reaching out and you know we had a strong Q1, we had a strong start last year and that included some of the.
And carryover from the cover at night.
And attack and December of 19.
And actually where we were pretty pleased with the.
Recovery of the diagnostics business and Q1.
And and it's fairly broad based but I would say most of and Asia Pac is because that was the first region.
Started to show negative impact and.
In 2020.
So I'd say its meeting its really meeting our expectations for our guidance for the year.
Okay.
Shifting over.
From the P&L items SG&A, just on a dollar basis <unk> was down a lot year over year and and sequentially was there some timing benefit for.
Maybe some investments that perhaps may have got pushed out for later in the year.
Are you finding some new areas for cost outs right now and just help us understand the.
And the trend in that line sure Brandon. So there are few and probably components to highlight here.
First we have the five 5 million reimbursement and the insurance reimbursement.
Regarding the cyber attack claim.
And so so debt needs to be probably kind of if you normalize for debt.
So from a normal run rate.
Higher by $5 million then the other aspect that I would highlight is still kind of flow or discretionary expenses associated with the COVID-19 related environment.
And those we believe.
Will.
I'll come back later in the year, that's our assumption.
And and some of it is also planned hiring that we still hit for the remainder of the year. So so these are probably the main components that I would highlight there.
Okay, and then it took for the COVID-19 revenue.
Contribution.
Can you breakdown.
And the contribution toward between PCR instruments, your new COVID-19, EUA, PCR test and how much might be research related and and other.
So I can say that the vast majority is the Q Pcr instruments.
That's definitely the vast majority.
And everything else.
Way way way smaller so it's still the same as we've experienced in the prior quarter in terms of the ratio of the <unk> Pcr instruments.
And I'll hop back and keep them.
Thanks.
Yes.
And then and if you'd like to ask a question. Please press Star then the number one and our telephone keypad next question is coming from the line of Dan Leonard from Wells Fargo.
Yeah.
Thank you so I'll try to ask Brandon's question and in a different way. So I appreciate the guidance raise.
But given your strong Q1 performance the magnitude of the raise that actually suggest that Q2 through Q4, our worst than I was initially thinking so are there any offsets you'd want to flag.
So you know generally speaking and then I'm not sure.
And how did you run your math, but I can tell you that the way we think about it.
Most of the incremental kind of portion of the guidance. He is associated with the first quarter you know co.
COVID-19 related sales some of it is also some assumptions associated.
Later in the year, but most of it is the incremental benefit that we are experiencing day in the first quarter.
And when you think about it from a full year perspective diagnostics is still kind of we assume a low double digit kind of growth there and.
We said last time about flat for life Science, now, maybe it's about 2% or so.
So definitely seats and.
And updated guidance upwards from from the last quarter.
Okay.
And can you.
Peak to the margin dynamics associated with the COVID-19 products, just given that your margins were so strong and Q1 and well higher than what you're forecasting for the full year sure so and a high level then.
And it's about volume and mix, if we think about the full year guidance of COVID-19 related sales of between 170 to 180 of which about $94 million was in the first quarter.
And COVID-19 related sales are above.
The company average.
And it definitely you know <unk> is a strong quarter for us and debt was the driver associated with higher utilization and the manufacturing footprint.
So when you blend it with.
And the remainder of the year kind of guidance.
Product gross margin is going to be lower in the upcoming in the upcoming quarters with that said you know you can get for the full year, our updated guidance of $56, 5% to 57%.
Okay and final question.
Can you offer and update on how you're progressing with your you recently initiated restructuring plans and we see the expenses and the P&L, but would love some color commentary. Thank you.
Yes, sure this is Andy and.
Essentially a message from PE is progressing as we had planned.
We've got a lot of changes going on and multiple functions predominantly in Europe as we've communicated.
Our press release so all.
All of those plans are proceeding.
And they take time to work through I think we've communicated for the majority of it for.
And a net benefit won't be until 2023 thats still the case.
So at this point and time.
And our restructuring efforts, but we're pleased with the progress.
Okay. Thanks for the time thanks, Tim.
Next question is coming from the line of Patrick Donnelly from Citi.
Great. Thanks for taking the question guys, along and maybe just building on that last one in terms of the margin guidance increase how are you thinking about the combination of mix and then EBIT restructuring activities leverage in terms of the SG&A and cost restructuring.
And I guess, the different levers that youre thinking about kind of moving that margin number up a little bit this year.
Sure. Thanks, Patrick.
So when you think about the the restructuring generally speaking.
This year we.
We do not seeing that there will be much benefit out of the restructuring we will start and we expect to see some benefit to start.
Sometime next year.
And and to fully realize 18, 2023 and debt as part of our kind of long term strategy and that's part of what we have been communicating since December.
But again for this year, we do not anticipate to gain much benefit out of the restructuring.
The gross margin and general and the operating margin you know it.
And specifically you alluded to the gross margin.
Volume and mix kind of benefit that we are experiencing right now.
Okay understood and then on the cap deployment side nice to see you guys buyback from stock.
And we as well it sounds like a nice net price.
How should we think about that going forward always good to get an update from norm in terms of how you feel about the pipeline the larger deal still on the table just your thoughts there at the moment.
Okay.
Yeah. So.
Obviously, we continue this is normal and we continue to pursue.
Oh.
The inorganic opportunities.
We did look at several several things and the first quarter and.
Nothing that we've landed yet, but we'll continue to be very active in this area.
Okay.
And then maybe one for for a net just gone to wastewater opportunities here, you guys called that out of them.
Strength, how should we think about that I know last quarter, you were talking about or you asked for becoming a little bigger of an opportunity. How do you think about that market overall and how it's developing over the last couple of quarters.
Sure.
You know it is a brand new market and and it is developing rapidly.
We could imagine over time, this could develop into a 100 or $200 million opportunity.
But but it's early days.
That said.
The the droplet digital PCR platform was almost made for this application. When you think about what you are trying to do you're searching for a needle in a haystack essentially which is the strength of the product that we have so we you know we're getting good pickup and government University Labs now service labs there.
Picking up.
At first it really was a U S opportunity and it's spread across Europe, now and other geographies as well.
So I think we're optimistic about it and.
We've worked on putting their Ian assays online for people to buy and we're working on.
Pacific wastewater kit that Interrogates for all the variants as well.
Okay, perfect and last one from me and housekeeping I think there was some news flow on the litigation front kind of ex U.
And just give us a quick update there and then where are you.
And thank you guys.
Yes.
I'd say that I'll comment really is and this was and appeals court.
And that upheld earlier findings by the International Trade Commission and so todays federal circuit decision was not unexpected and told and it really doesn't impact our business.
And so I think thats, probably the only comments that we would we would make around the litigation at this point.
Alright, Thanks, Andy Youre welcome.
Next is from Jack from Nephron.
Hi, This is <unk> on for Jack to ask Dan and Brandon's question, a third way how much did the first quarter beat your internal target by it was 12% above our forecast, which is why I think we're all surprised that the full year guidance is only moving up by one point.
So thanks for the question and let me share with you you know first of all.
Usually and we do not guide by quarter, but generally speaking if you recall in our guidance from last quarter.
We did indicate and we emphasize it today.
Most of the COVID-19 related sales would be and the first half of the year.
And and we experience, obviously stronger than expected first quarter COVID-19 related sales and.
And Thats most of the incremental guidance that we've alluded to right I mean, so generally speaking.
We are operating under the assumption that in the second half of the year the business mix is going to normalize.
So so I think we are pretty consistent there.
Got it could you also elaborate on the regional growth and diagnostics that you're seeing in Europe, and North America, and like what's held those markets back on a relative basis versus APAC.
There are other you want to take this one.
Sure.
So and as we said and in the opening comments for operating broadly around 90% to pre COVID-19 levels, but there are regional dynamics and <unk>.
And they're largely related to the mix and what percentage of certain product lines are sold and certain regions and how impacted or non impact that they did buy a cobalt. So north America, you know really getting up to that pre COVID-19 levels from a performance perspective.
Europe is closed except for there is still some growth being moderated and elective surgeries and that's the reach and where we have very strong sales and immuno hematology for that makes sense.
And then APAC with strong largely driven by China, which I think we've seen from other announcements too is that China.
Come and coming back and particularly diabetes with very strong and Q1, and that's an area where that product line and it's really quite strong other parts of Asia Pacific continued to be challenged by COVID-19. So it's kind of a country by country story frankly.
Got it thank you and one more so what was the growth and process media and the quarter and do you think youre seeing demand for COVID-19 vaccine.
For the first question can you repeat the growth of what.
What was the growth and profit for media in the quarter Oh, Okay.
So yes, it is a double digit but you've got the.
And what we provided it was the.
The growth overall for life science.
Ex process media. So so you can probably figure out reverse engineered kind of the number there.
But it was but it was very strong.
And with that do you think youre seeing demand for COVID-19 vaccines with that.
Okay.
And we're not.
We're not a major player I think it's true.
And now and the hidden and the.
This segment, particularly well.
And now we're getting some carpet vaccine effect, but nothing like you would expect.
If you were and I one of the majors.
And for that segment.
Got it thank you.
Thank you.
Again, if you would like to ask a question. Please press star one on your telephone and keep it we have a follow up question coming from the line of brand and cleared from Jefferies.
Thanks.
A lot if we strip out the COVID-19 related revenues out of life's high since it looks like the base lifespan.
Life Sciences organic growth was up something like 20% and the first quarter can you just touch on.
Primary drivers of that.
Yes.
Sure and.
So youre right it was almost that debt.
That number and.
And actually you know.
We saw a nice growth across.
All the verticals of life science.
And we indicated those but but when you think about the droplet digital PCR the antibody.
The western blotting.
More specifically strong but the others.
And also.
And the nice growth as well.
Okay.
And then what.
And then sorry, if you want to wait and yes.
I was just going to add.
We're really pleased with that the strength and the recovery across all the businesses.
You know probably fuelled by a return to the lab and and some pent up demand for some of the core products that we have is people are back at the lab bench.
Got you and then maybe one more for you and that we noticed you're running and instrument tray.
Trade up program and life Sciences, and the U S and the second quarter is this a new.
Commercial initiative for bio Rad I don't recall seeing something like this before and should we expect any material revenue or gross margin impact from this and <unk>.
I'm, sorry, which program or are you talking about.
And it's an instrument trade up program that.
Touches DD.
<unk> PCR touches proteomics flow cell culture.
Okay. So it's just yeah, sorry, I wasn't sure which program you're referring to look we occasionally we occasionally.
And put those kind of incentives and for our customers and and I think that you know the general answer to your question is we wouldn't be doing it if we didn't expect non return on the program.
I think that you know, it's it's certainly not at the center of what's driving all of our growth, but it's one of the typical kind of promotions that our global commercial organization runs from time to time.
Good morning, Thank you.
Thanks Brendan.
And if he would like to ask a question. Please press star one.
We have no questions at this time presenters you may continue.
Thank you all for joining today's call. We appreciate your interest and we look forward to connecting soon.
Okay.
This concludes today's conference call. Thank you all for participating you may now disconnect.
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