Q1 2021 Bio Rad Laboratories Inc Earnings Call
[music].
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.
Third the speaker's presentation, there will be a question and answer session to ask a question at this time you even 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 compress 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 and 2021 and with me on the phone today are enormous Schwartz, our chief Executive Officer.
Non das call Executive Vice President and Chief Financial Officer.
And the last executive Vice President and Chief operating Officer, Annette Tumolo President on 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 management's 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 included.
Included in these forward looking statements are statements regarding the impact of the COVID-19 pandemic on 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 responses to the pandemic will be successful that the demand for bio Rad as COVID-19 related products is sustainable or that 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 company does not intend to 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 and investors should review. The reconciliation of these non-GAAP measures to the comparable GAAP results contained in our <unk>.
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 here on.
And your families are well on staying healthy during these challenging times.
Before I begin the detailed first quarter discussion.
I would like to us and he lost our chief operating officer to provide an update on bio Rad operations in la.
And of the current pandemic related environment that we are experiencing globally.
Thank you all and.
Like to take just a few minutes to review our cash.
And on the 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 to this environment and our employees around the world continues to perform to the highest standards.
We continue our focus on the three areas as previously communicated.
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 west place.
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 demands, while progressing our core strategies and new product development objectives.
And as the global economy trends toward 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.
Providing steroids positive global progress on controlling COVID-19, we anticipate operations starting to return to more normal operating practice and the second half of the year.
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, 4%.
The first quarter year over year revenue growth was impacted by a tough compare of about $10 million revenue carryover to Q1 on 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 in 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 a 56 nine.
Percentage 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 the underlying life science business grew 56, 2% on a 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 coffee theory and SA.
<unk>, which are being well received.
Key opinion leaders continue to highlight the sensitivity advantage hoof droplet digital Pcr.
Sales of the clinical diagnostics group and the first quarter were $358 5 million compared to $343 million in Q1, 2020, which is at five 4% growth on a reported basis and a two 2% growth.
On a currency neutral basis.
During the first quarter diagnostics growth 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 labs, and 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 gross margin percentage declined mainly due to expenses associated with the restructuring initiatives that we communicated earlier this year offset 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.
And 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 and insurance settlement related to the 2019 cyber attack as well as lower these question.
And we spent.
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 the restructuring initiatives and increased project spend.
Q1, operating income was $109 million or 13, 9% of sales compared to $74 4 million.
Or 13% in Q1 of 2020.
Looking below the operating line and the change in fair market value of equity Securities Holdings and.
There's $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 2020.
And the tax rates 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 and 38.
And this is an increase from last year and 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 impacted both the gross and operating margins as well as other income.
These items are detailed and they will conciliation tables in the press release.
And cost of goods sold we have excluded $4 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.
Non-GAAP R&D expense in Q1 was consequently, seven 9%.
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.
Non-GAAP operating margin compares to a non-GAAP operating margin in Q1, and 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 loss associated with venture investments.
Our non-GAAP effective tax rate for the quarter was 23, 6% versus 25, 7% in Q1 of 2020 debt.
Tax rate was impacted by changes and the geographic mix of earnings.
And finally non-GAAP net income for the first quarter of 2021 was $157 4 million.
$5 and 21 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 at an 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 2021 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 5% 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% present.
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 non-GAAP operating margin to be about 17% and full year adjusted EBITDA margin.
To be about 22% versus previous guidance of 21%.
That concludes our prepared remarks, and we will now open the line to take your 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.
And what buses for a moment to compile the Q&A roster.
Yes.
First question is coming from the line of brand and <unk> from Jefferies.
Hey, Thanks, guys.
Good afternoon.
And one maybe just starting with.
And the updated guidance outlook.
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 and the balance of the year and whether you think diagnostics and.
Continued to ramp towards that double digit target you talked about.
Sure. Thank you Brendan and I believe that you referred to organic and these case ex COVID-19 sales yes.
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 the full year on Youre, referring go for the first quarter year over year sorry.
Well.
<unk> the COVID-19 dynamic.
Organic from <unk> to <unk> is about flattish.
Given the 23% that you did in the flow of located okay. So you compare quarter over quarter on the Q4 over Q1.
Kind of the trend for the balance of year could get to the full year, yes.
I would highlight on that brand on 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 2%.
Core growth and the first quarter was an improvement, but not quite as material.
Rebounded and we've seen from some other central lab peers.
Curious on why that might necessarily be the case and which areas are lagging maybe thats a better question for Dr.
Brian and maybe I can make.
Make it quick Savi speaking and.
And we had a strong Q1, we had a strong start last year and that included some of the.
Carryover from the cover it and cyber.
Cyber attack.
Attack and December of 19.
Actually where we were pretty pleased with the.
Recovery of the diagnostics business and Q1.
And it's fairly broad based but I would say most of and Asia Pac is because that was the first region that.
Started to show negative impact.
In 2020.
So I'd sales meeting is really reaching our expectations for our guidance for the year.
Okay.
Shifting over.
Some of the P&L on the SG&A just on a dollar basis was down a lot year over year and and sequentially was there some timing benefit.
Maybe some investments that perhaps may have got pushed out to later in the year.
Are you finding some new areas for cost outs.
Just help us understand.
And the trend and 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 normalized for debt.
So from a normal run rate is higher by $5 million then the other aspect that I would highlight is still kind of slower discretionary expenses associated with the COVID-19 related environment.
And those we believe will.
Come back later in the year, that's our assumption.
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 in terms of the COVID-19 revenue.
Contribution.
Can you break down.
On the contribution toward between PCR instruments, your new COVID-19, EUA, PCR test and how much might be research related and other.
So I can say that the vast majority is the Q Pcr instruments.
That definitely the vast majority.
Everything else is way way way smaller.
So it's still the same as we have experienced in the prior quarter on terms of the ratio of the Q Pcr instruments.
Ill hop back and keep them.
<unk>.
And then and if you'd like to ask a question. Please press Star then the number one on their telephone keypad next question is coming from the line and then Leonard from Wells Fargo.
Thank you so I'll try to ask Brandon's question and a different way. So I appreciate the guidance raise.
But given your strong Q1 performance the magnitude of the raise actually suggest that Q2 through Q4 worse than I was initially thinking.
So are there any offsets you'd want to flag.
So.
Generally speaking and then I'm not sure.
How do 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 is associated with the first quarter.
And COVID-19 related sales some of it is also some assumptions associated.
Later in the year, but most of it is the incremental benefit as we have experienced in the in the first quarter.
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 its seats and.
And updated guidance upwards from the last quarter.
Okay.
And can you speak 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 on a high level then.
It's about volume and mix, if we think about the full year guidance of COVID-19 related sales of between $1 70 to 180 of which about 94 million was in the first quarter.
And COVID-19 related sales are above.
The company average.
That definitely is.
It was a strong quarter for us and debt was the driver and associated with higher utilization and the manufacturing footprint. So when you blend it with the.
Remainder of the year kind of guidance, probably gross margin is going to be lower in the upcoming in the upcoming quarters.
That said you know you can get for the full year on.
Our updated guidance of $56 $5 to 57%.
Okay and final question.
Can you offer and update on how you're progressing with your day 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.
Essentially our message will be progressing as we had planned.
Sure.
We've got a lot of changes going on and multiple functions predominantly in Europe, as we communicated and our.
Our press release and so.
All of our plans are proceeding.
And I know that take time to work through I think we've communicated before that the majority of it but kind of net benefit won't be until 2023, that's still the case.
So at this point and time, it's still early 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 even restructuring activity leverage in terms of SG&A and cost restructuring can you just talk through 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.
And we do not seeing that there would be much benefit out of the restructuring we will start and we expect to see some benefit to start.
Sometime next year.
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 and <unk>.
Specifically you alluded to the gross margin.
And its volume and mix kind of benefit that we are experiencing right now.
Okay understood and then on the capital deployment side nice to see you guys buy back stock.
Timely as well.
And as 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 flow on the table just your thoughts there at the moment.
Okay.
Yeah. So.
Obviously, we continue this is normal and we continue to pursue.
These 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 a net on the wastewater opportunities.
You guys call that out and the strength how.
How should we think about that I know you last quarter Youre talking about or you asked 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.
It is a brand new market and it is developing rapidly.
And we could imagine over time.
Could develop into a 100 or $200 million opportunity.
But it's early days.
That said.
The droplet digital PCR platform was almost made for this application. When you think about what you are trying to do you are searching for a needle on a haystack essentially which is the strength of the product that we have so we.
We're getting good pick up and government University Labs now service labs are picking up.
And 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 on line for people to buy and we're working on.
Pacific wastewater kit that interrogate through all of the variants as well.
Okay, perfect and last one from me just housekeeping I think there was some news flow on the litigation front can.
Can you just give us a quick update there and why.
Thank you guys.
Yes, I can.
To say that our comment really is and this was on Appeals court.
And that upheld earlier findings by the International Trade Commission and so on today's federal Circuit decision was not unexpected at all 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 and 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.
Thanks for the question and let me share with you.
First of all we 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 that most of the COVID-19 related sales will be and the first half of the year.
And we experienced 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.
And 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 youre seeing in Europe, and North America, and like what's how those markets back on a relative basis versus APAC.
Dara do you want to take this one.
Sure.
And as we said in the opening comments, we're operating broadly around 90% to pre COVID-19 levels, but there are regional dynamics embedded and theyre largely related to the mix and what percentage of certain product lines or sold in certain regions and how impact.
And youre not impact that they did buy on cobalt so.
And North America.
Getting up to that pre COVID-19 levels and the performance perspective.
Europe is close.
Still some growth moderated and elective surgeries and that to reach and where we have very strong sales and immuno hematology so that makes sense.
And then APAC was strong largely driven by China, which I think we have seen from us.
And there are announcements to is that China and.
Kind of come and coming back and particularly diabetes with very strong and Q1, and that's more where that product model 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.
So the first question can you repeat the growth of wealth.
What was the growth and process media and the quarter Oh, Okay.
So yes, it is a double digit but you've got the what.
And what we provided was the.
The growth overall for life science.
X processed media. So so you can kind of probably figure out reverse engineer with kind of the number of them.
But it was very strong.
And with that do you think youre seeing demand for COVID-19 vaccines with that.
I mean, we're not.
We're not a major player I think and.
And in Iowa and the.
And the segment, particularly.
And now we're getting some carpet vaccine effect, but nothing like you would expect.
If you were and are 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 of pre strip out the COVID-19 related revenues out of Lifesize as it looks like the base life.
Life Sciences organic growth was up something like 20% and the first quarter can you just touch on.
The primary drivers of that.
Yes.
Sure and.
So youre right it was almost debt.
Debt number.
And actually you know.
We saw a nice growth across.
And.
And all of the verticals of life Science.
And we indicated those but but when you think about a droplet digital Pcr antibody.
The western blotting.
And where specifically strong but the others.
Also.
And a nice growth as well.
And then what.
And Ed if you want to wait and see.
And I was just going to add.
And we're really pleased with that the strength of the recovery across all the businesses.
Probably fuelled by a return to the lab and and <unk>.
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.
<unk> 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 <unk> and <unk>.
I'm, sorry, which program or are you talking about.
And it's an instrument trade up program that.
Touches DD.
GDP CR touches proteomics flow cell culture.
Okay. So it's just yeah sorry.
Wasn't sure which program you're referring to look we occasionally we occasionally.
Put those kind of incentives and for our customers and and I think that the general answer to your question is we wouldn't be doing it if we didn't expect on return on the program.
I think that you know it.
And 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.
Thank you.
Thanks Brandon.
Again, 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.
And so.
And.
Yes.
[music].
Sure.
And.
[music] loans.
And.
[music].
Okay.
Hum.
[music].
And again.
[music].
And.
[music] zone.
[music].
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Q1, 2020, one 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.
And your question has been answered and you would like to withdraw you compress and hashed E or is it power.
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 and 2021 with me on the phone today are enormous Schwartz, our chief Executive Officer, a low.
And <unk> Executive Vice President and Chief Financial Officer, Andy.
And the last executive Vice President and Chief operating Officer, and that's 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 <unk>.
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 or the bio Rad and 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 SEC, where we discuss in detail the risk factors and our business the.
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 URL.
Earnings release.
I will now turn the call over to Ilan, Daskal Executive Vice President and Chief Financial Officer.
Thank you Ron 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 we lost our chief operating officer to provide an update on bio Rad operations in light of the current pandemic related environment that we are experiencing globally sandy.
Thank you all and on I'd 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 to this environment and our employees around the world continued performance and 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 in 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 in 2020 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 demands, while progressing our core strategies and new product development objectives.
And the global economy trends toward 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 there is positive global progress on controlling COVID-19, we anticipate operation and starting to return to more normal operating practice and in the second half of the year.
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, 4%.
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 Ciber.
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 a 56 nine.
Percentage 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% on a 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 and the first quarter were $358 5 million compared.
Compared to $343 million in Q1 of 2020, which is at five 4% growth on a reported basis and two 2% growth on a currency neutral basis.
During the first quarter, the diagnostics growth 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 labs, and 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 offset 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 it was offset slightly by a $5 million cyber security insurance settlement related to the 2019 cyber attack as well as lower discretion.
Larry 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.
And all 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 $100 9 million.
Or 13, 9% of sales compared to $74 4 million or.
Or 13% in Q1 of 2020.
Looking below the operating line the change in fair market value of equity Securities Holdings and.
There's $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 rates 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 initiatives announced earlier this year.
Reported net income for the first quarter was $977 4 million.
And diluted earnings per share was $32 and 38.
On.
This is an increase from last year and is substantially related to changes in the valuation of the Sartorius holdings.
Yes.
Moving on to the non-GAAP results low.
Looking at our results on a non-GAAP basis, we have excluded certain atypical and unique items that.
And 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.
In cost of goods sold we have excluded $4 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 59% 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.
Nation of purchased intangibles of $2 4 million.
In R&D, we have excluded $16 9 million of restructuring related expenses the.
And the non-GAAP R&D expense in Q1 was consequently, seven 9%.
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.
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 loss associated with venture investments.
Our non-GAAP effective tax rate for the quarter was 23, 6% versus 25, 7% in Q1 of 2020 debt.
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 $157 4 million.
Or $5 and 21 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 at an 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 2021 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 5% and 5% non-GAAP sales growth and a 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% percent.
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 non-GAAP operating margin to be about 17%.
And full year adjusted EBITDA margin.
To be about 22% versus previous guidance of 21%.
That concludes our prepared remarks, and we will now open the line to take your 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.
We will pause for a moment to compile the Q&A roster.
Yeah.
First question is coming from the line of brand and <unk> from Jefferies.
Hey, thanks.
Afternoon.
Oh on maybe.
Starting with <unk>.
The updated guidance outlook it would suggest that organic growth over the balance of the year would be about flat and maybe plus 1%.
Could you talk about.
What that Embeds in terms of the two segments and the balance of the year and.
And whether you think diagnostics.
And continued to ramp towards that double digit target you talked about.
Sure. Thank you Brendan and I believe that you referred to organic in this case ex COVID-19 sales.
Yeah, that's right.
No.
And 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 the full year on Youre, referring go for the first quarter year over year sorry.
Well it is.
<unk> the COVID-19 dynamic suggested organic from <unk> to <unk> is about flattish.
Given the 23% that you did and Oh, okay. Okay, so you're comparing quarter over quarter, the Q4 over Q1.
Yeah kind of.
The trends on the balance of the year could get to the full year.
I would highlight on that brand on 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 EPS to us and excellent result.
Could you speak to kind of what the guide assumes specifically for diagnostics the.
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 thats a better question for Dara.
So Brian and maybe I can make.
<unk> <unk> and now.
And we had a strong Q1, we had a strong start last year and that included some of the.
Carryover from the cover it and.
Cyber attack.
Attack and December of 19.
Actually where we were pretty pleased with the.
Recovery on the diagnostics business and tier one.
And it's fairly broad price, but I would say most of our and Asia Pac is because that was the first region.
Started to share a negative impact.
In 2020 so.
This meeting is fairly.
And meeting our expectations for our guidance for the year.
Okay.
Okay, maybe shifting over.
Some of the P&L on the SG&A just on a dollar basis was down a lot year over year and and sequentially was there some timing benefit from maybe some investments and perhaps maybe got pushed out to later in the year on.
Are you finding some new areas for cost outs right now just help us understand.
The trend and that one sure Brandon So there are few and probably components to highlight here.
First we have the five 5 billion reimbursement and the insurance reimbursement.
And regarding the cyber attack Lane and.
And so so that needs to be probably kind of if you normalize for debt. So from a normal run rate is higher by $5 million. Then the other aspect that I would highlight is still kind of lower discretionary expenses associated with the COVID-19 related environment.
And those we believe will.
Come back later in the year, that's our assumption.
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 on the COVID-19 revenue.
Contribution.
Can you break down.
The contribution toward between PCR instruments, your new COVID-19, EUA, PCR test and how much might be research related and and other.
So.
And I can say that the vast majority is the Q Pcr instruments.
And that definitely the vast majority.
Everything else is way way way smaller so it's still the same as we have experienced in the prior quarter on terms of the ratio of the Q Pcr instruments.
And I'll hop back and keep them.
Thanks.
And then and if you'd like to ask a question. Please press Star then the number one on the telephone Keypad next question is coming from the line of Dan Leonard from Wells Fargo.
Thank you so I'll try to ask Brandon's question and a different way. So I appreciate the guidance raise.
But given your strong Q1 performance the magnitude of the raise actually suggests that Q2 through Q4 are worse than I was initially thinking so are there any offsets you'd want to flag.
So.
Generally speaking and then I'm not sure.
How do you run your math, but I can tell you that the way we think about it.
Yes.
Most of the incremental kind of portion of the guidance is associated with the first quarter.
And COVID-19 related sales and some of it is also some assumptions associated with.
Later in the year, but most of it is the incremental benefit that we have experienced in the in the first quarter.
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.
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 the last quarter.
Okay.
And can you speak to the margin dynamics associated with the COVID-19 products, just given that your margins were so strong and Q1 and.
And while higher than what you're forecasting for the full year sure. So on a high level then.
It's about volume and mix, if we think about the full year guidance of COVID-19 related sales of between $1 70 to 180 of which about 94 million was in the first quarter.
And COVID-19 related sales are above.
The company average.
And that definitely 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 the remainder of the year kind of guidance.
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 on.
Our updated guidance of $56 $5 to 57%.
Okay and final question.
Can you offer and update on how you're progressing with your 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.
Essentially a message from payers and progressing as we had planned.
Sure.
We've got a lot of changes going on and.
Multiple functions predominantly in Europe as we've communicated.
Our press release.
All of our plans are proceeding.
And they take time to work through I think we've communicated before that the majority of the kind of net benefit won't be until 2023, that's still the case.
So at this point and time, it's still early and our restructuring efforts Pops, 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 even restructuring activity leveraged in terms of SG&A and some cost restructuring can you just talk through I guess, the different levers that youre thinking about kind of moving that margin number up a little bit.
Sure.
Sure. Thanks, Patrick.
So when you think about the the restructuring generally speaking.
This year.
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 to fully realize it in 2023 and debt as part of our kind of long term strategy and Thats part of what we have.
And communicating since December but again for this year, we do not anticipate to gain much benefit out of the restructuring.
The gross margin in general and the operating margin.
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 capital deployment side nice to see you guys buy back stock.
And very timely as well.
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 flow on the table just your thoughts there at the moment.
Okay.
Yeah. So.
Obviously, we continue this is normal and we continue to pursue.
And all.
These inorganic opportunities.
And we did look at several several things and the first quarter.
Nothing that we've landed yet, but we will continue to be very active in this area.
Okay.
And then maybe one for a net just on the wastewater opportunities.
I'd call that out and the strength.
How should we think about that I know you last quarter Youre talking about or you actually are coming 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.
It is a brand new market and and it is developing rapidly.
And we could imagine over time this could develop into a 100 or $200 million opportunity.
But it's early days.
That said.
The droplet digital PCR platform was almost made for this application. When you think about what you are trying to do you are searching for a needle and I hate that essentially which is the strength of the product that we have so we you.
And now we're getting good pick up in government and University Labs now service labs are picking up.
At first and 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 very and assays on line for people to buy and we're working on a specific wastewater kit that interrogates for all the variants as well.
Okay, perfect and last one from me housekeeping and I think there was some news flow on the litigation front can.
And you just give us a quick update there and when.
Thank you guys.
Yes, I can.
I'll say that I'll comment really is and this was on appeal court.
And that upheld earlier findings by the International Trade Commission and so on today's federal Circuit decision was not unexpected at all and it really doesn't impact our business.
And so I think that's probably the only comments that we would we would make around the litigation at this point.
Alright, Thanks, Andy and 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.
First of all we.
Usually and we do not guide by quarter, but generally speaking if you recall and our guidance from last quarter.
And we did indicate and we emphasize it today that most of the COVID-19 related sales will be and the first half of the year.
And we experienced obviously stronger than expected first quarter COVID-19 related sales 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 youre seeing in Europe, and North America, and like what's held those markets back on a relative basis versus APAC.
Dara you want to take this one.
Sure.
So as we said in the opening comments, we're operating broadly around 90% to pre COVID-19 levels, but there are regional dynamics embedded and they're largely related to the mix and what percentage of certain product lines or sold in certain regions and how <unk>.
And you are non impact that they've been bike and powered.
So and North America.
Really getting up to that pre COVID-19 levels and a performance perspective Europe is close.
There's still some growth big moderated and elective surgeries and that to reach and where we have very strong sales and immuno hematology where that makes sense and.
And then APAC was strong largely driven by China, which I think we've seen from other announcements too is that China and kind of come and coming back and.
<unk> diabetes.
Strong and Q1, and that's narrow and where that product line and it's really quite strong other parts of Asia Pacific continued to be challenged by COVID-19, So 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.
So the first question can you repeat the growth of work.
What was the growth and process media and the quarter Oh, Okay. So yes. It is a double digit but you've got the what.
And what we provided was the.
The growth overall for life science.
Ex process media. So so you can probably figure out reverse engineer with kind of the number there.
But it was very strong.
And with that do you think youre seeing demand for COVID-19 vaccines with that.
Okay.
We're not.
We're not a major player I think and probably.
And I renovated and the segment, particularly.
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.
Thank you.
And then 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.
And if we strip out the COVID-19 related revenues out of Lifesize as it looks like the base lifes.
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 debt.
Debt number.
And actually we.
We saw a nice growth across.
All of the vertical of life science.
And we indicated those but but when you think about a droplet digital Pcr antibody.
The western blotting.
Where specifically strong but the others.
And also.
And the nice growth as well.
Okay.
And then.
And as already do you want to wait on it yes.
I was just going to add.
We're really pleased with that the strength of the recovery across all the businesses.
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 run into and instrument trade.
<unk> 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 <unk> and <unk>.
I'm, sorry, which program or are you talking about.
And it's an instrument trade up program that.
Touches PD.
<unk>, such as proteomics flow cell culture.
Okay. So as you said, yes, 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 the general answer to your question is we wouldn't be doing it if we didn't expect on return on the program.
I think that you know it.
And 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.
Thank you thanks.
Thank you Brenda.
Again, if you 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.