Q2 2021 Bio Rad Laboratories Inc Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the Q2.2021 bio Rad Laboratories, Inc. Financial results Conference call at this time all participants are in.
In a listen only mode. Neither we will conduct the question and answer session and instructions will follow at that time, if any once you get quiet assistance during the conference the grass Star zero on your Touchtone telephone I would now like to turn the conference of worthy of host Mr. Edward Jones head of Investor Relations. Sir. Please go ahead.
Thank you Joanna and good afternoon, and thank you all for joining us.
Today, We will review the second quarter of 2021 financial results and provide an update on key business trends for bio Rad with me on the call today are Norman Schwartz, our Chief Executive Officer, Ilan, Daskal Executive Vice President and.
Chief Financial Officer, and the last executive Vice President and Chief operating officer of net.
Malone President of the life Science group and Dara Wright President of the clinical diagnostics group.
Before we begin our review I'd like to caution everyone that we will be making forward looking statements about management's goals.
Plans 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 of our commentary regarding the impact of the COVID-19 pandemic on bio Rad the results operation.
And the steps bio Rad is taking in response to the pandemic.
Results may differ materially from these plans and expectations and the impact and duration of the COVID-19 pandemic is unknown you should not place place undue reliance on these forward looking statements and I encourage you to review our filings with the SEC.
<unk> discussed in detail the risk factors and our business. The company does not intend to update any forward looking statements made during the call. Today. Finally, our remarks today will include references to non-GAAP net income and diluted earnings per share, which are financial measures that are not defined under generally accepted accounting principles.
And where we just investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release with that I will now turn the call over to Ilan Daskal Executive Vice Pres, President and Chief Financial Officer.
Thank you Ed good afternoon, and thank you all for joining us and.
Poles that you and your families are well and staying healthy during these challenging times.
And also we want to officially welcome Edward Chang, who is our head of Investor Relations.
Before I begin the detailed second quarter of discussion I would like to ask Andy last 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 Andy.
Thank you Ya Lan so I'd like to take care of few minutes to review our current state of operations around the world.
And overall buyer right has adapted well to the work and constraints.
<unk> the Covid has imposed upon us and we find ourselves able to respond and react well to every day operational changes and demands.
We continue to make solid progress on our core strategies support of our customers and the safety of our employees.
With the improvement in our end markets after the significant.
Difficult downturn a year ago.
Responding well to increase demand, but as with other manufacturers and life Sciences, we are having to work hard to procure raw materials and some challenged areas such as the plastics and the electronic components.
And as well as dealing with increased pressure on the raw material costs.
We also continued to experience higher than typical logistics costs as indicated and off Q1 of the cool.
With the emergence of the COVID-19 Delta vary and we are maintaining of work from home policies for the near term as we work on return to the workplace plans targeted for later this quarter.
And we continue to monitor the global pandemic situation carefully given the fluidity of the Delta variances created.
Employee safety remains the principal focus and.
We are pleased with our safety record and the growing vaccination status of our organization.
As we enter Q3.
We expect the emergence of the Delta vary and will continue to create some challenges and we are maintaining vigilance and flexibility as a result.
Overall, we expect to see continued improvement and our end markets through the second half of the year as our customers continue to adapt.
However, the new sales are very clearly.
Introduces an element of uncertainty as we move forward.
Thank you for your attention and I'll pass it back to of land.
Thank you Andy and now I would like to review the results of the second quarter.
Net sales for the second quarter of 2021 were $715.9.
Clearly in dollars, which is a 33, 4% increase on a reported basis.
$536.9 million.
In Q2 of 2020.
On a currency neutral basis sales increased 27, 5%.
On the geographic.
$9 million, we experienced currency neutral growth across all 3 regions.
Sales of our core products in the second quarter of last year were negatively impacted by the pandemic and generally we are seeing of continued gradual capacity improvement at both academic.
Basic and diagnostic labs, which we estimate between 90 and 95% of pre COVID-19 levels.
We estimate that the COVID-19 related sales were about $68 million in the quarter.
Sales of the life Science group and the second quarter.
The remaining 21 were $334.2 million.
Compared to $252.1 million and Q2 of 2020, which is F 32, 6% increase on a reported basis and the 27, 1% increase on a currency neutral basis.
The year over year sales growth and the second quarter was driven mainly by increases in western blotting droplet digital PCR and Q Pcr products.
We have seen strong growth in the biopharma market for our droplet digital Pcr platform.
We are also seeing.
And a healthy uptick for DD PCR in wastewater solutions.
Government funding towards public health labs, he's driving increased demand for our DD PCR products that offer of automated solutions with high accuracy and sensitivity.
Process media, which can fluctuate.
Troy it on a quarterly basis, so a year over year of double digit growth versus the same quarter last year.
Excluding process media sales the underlying life science business grew 29, 1% on of currently currency neutral basis versus Q2 of 2020.
1 of the geography basis life science currency neutral year over year of sales grew across all regions.
Before moving on I would like to highlight the broad legal settlement, we turn ex genomics announced earlier this week.
The settlement to resolve the matter.
The year of global litigation, we can ex over outstanding issues in the field of single cell and includes the global Cross license agreement.
In addition to past and future royalties Bayreuth received broad freedom to operate in the single cell market and.
It maintained exclusivity.
Multi 2 hour micro well single cell.
We estimate the the future royalty payments from this legal settlement could total $110 million to $140 million over the life of the agreement which runs through the year 2030.
This includes.
<unk> payments of $32 million in the third quarter 4 of back royalties owed to bio Rad for the period from November 2018 through December 2020, as well as force settlement fees and interest.
Sales of the clinical diagnostics group and the second quarter.
There were $382 million.
Compared to $283.2 million and Q2 of 2020, which is at 34, 3% increase on a reported basis and.
And the 28% increase on a currency neutral basis.
During the second quarter of.
And the diagnostics group posted double digit growth across all of its product lines.
The year over year growth was driven by a recovery of routine testing.
Elective surgery recovery is still progressing although at a slower pace.
And the diagnostics group currency neutral year over year sales grew across all regions.
Our diagnostics group announced last month, the partnership with <unk>, which is a global leader in multiplex molecular diagnostics.
Bio Rad will exclusively market the seeking tests.
In the U S pending regulatory approvals.
C G. Instead of Ignostic products, if high sensitivity and specificity and they are optimized to work with bio Rad and see effects real time Pcr systems.
Yeah.
The reported gross margin for the second quarter of 'twenty.
21 was 56, 1% on a GAAP basis and compares to 54, 6% in Q2 of 2020.
Recall that the gross margin in Q2 of 2020 included an $8 million customs duty charge.
And excluding the charge the Q2.
Gross margin further improved this quarter as a result of our productivity and the efficiency initiatives.
However, as mentioned, we currently see increased pressure on raw material costs and higher logistics costs.
Amortization related to prior acquisitions recorded in cost.
And of goods sold was $4.6 million and compared to $5 million and Q2 of 2020.
SG&A expenses for Q2 of 2021 were $213.4 million or 29, 8% of sales compared to 100.
$89.3 million.
Or 35, 3% in Q2 of 2020.
Increases in SG&A expenses was mainly the result of employee related performance compensation expense.
Total amortization expense related to acquisitions recorded in SG&A.
For the quarter was $2.4 million versus $2.3 million in Q2 of 2020.
Research and development expense in Q2 was $63.4 million or 8.9% of sales compared to $52 million or 9.7% of sales.
Sales in Q2 of 2020.
Q2, operating income was $124.8 million or 17, 4% of sales compared to $51.7 million.
Or 9.6% of sales in Q2 of 2020.
Looking below the operating line and the change in fair market value of equity Securities Holdings, and the $1 billion and $31 million of income to the reported results any substantially related to the holdings of the shares of Sartorius AG.
Also during the quarter interest and other income.
And resulted in net other income of $1.3 million, primarily due to foreign exchange and compared to $10.7 million of income last year.
Q2 of 2020 include an $8.9 million dividend from Sartorius, which was declared.
In June and was paid in July in.
In 2021, the sartorius dividend was declared in the first quarter.
The effective tax rate for the second quarter of 2021 was 21% compared to 22, 4% for the same period in 2020.
The tax rate for both periods were driven by the large unrealized gains in equity securities.
In addition, the second quarter of 2021 effective tax rate was lower also due to a lapse of statute of limitations of certain tax reserves.
Reported net income for the second quarter was $914.1 million and.
And diluted earnings per share were $30 and 32.
This is the decrease from last year and is related to changes in valuation of the Sartorius holdings.
Moving on.
And 2 the non-GAAP results.
Looking at the results on a non-GAAP basis, we have excluded certain atypical and unique items 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.
Looking at the non-GAAP results for the second quarter and cost of goods sold we have excluded $4.6 million of amortization of purchased intangibles and $1.2 million of restructuring related expenses.
These exclusions moved the gross margin for the second quarter of 2020.
2 of non-GAAP gross margin of 56, 9% versus 55, 5% in Q2 of 2020.
Non-GAAP SG&A and the second quarter of 2021 was 29, 2% versus 33, 9% in Q.
And 1 of 2020.
In the SG&A on a non-GAAP basis, we have excluded amortization of purchased intangibles of $2.4 million legal related expenses of $8.8 million and.
The restructuring and acquisition related benefit of $7 million.
2 of them get R&D expense in the second quarter of 2021 was 9.1% versus 9.8% and Q2 of 2020.
In R&D on a non-GAAP basis, we have excluded $2.1 million of restructuring benefits.
The cumulative sum of these non.
No adjustments result, and moving the quarterly operating margin from 17, 4% on a GAAP basis to 18, 5% on a non-GAAP basis.
Non-GAAP operating margin compares to a non-GAAP operating margin in Q2 of 2020 of 11.
GAAP and <unk>, 8%.
We have also excluded certain items below the operating line, which are the increasing value of the sartorius equity holdings of $1.031 billion and the $1.8 million loss associated with venture investments.
The non-GAAP.
And if tax rates for the second quarter of 2021 was 21, 5% compared to 23, 8% for the same period in 2020.
The lower rate in 2020, 1 was driven by the geographic mix of earnings.
And finally non-GAAP net income for the second.
Second quarter of 2021 was $106.6 million or $3.54 per diluted earnings per share compared to $48.3 million or $1.61 per share in Q2 of 2020.
Moving.
The effect of the balance sheet.
Total cash and short term investments at the end of Q2 were $1 billion and $167 million compared.
Compared to $1 billion and $25 million at the end of Q1 of 2021.
During the second quarter we.
<unk> gone and purchase any shares of our stock.
For the second quarter of 2021 net cash generated from operating activities was $154.6 million, which compares to $92.1 million in Q2 of 2020.
We didn't know this increase mainly reflects higher operating profits.
The adjusted EBITDA for the second quarter of 2021 was 22, 3% of sales.
The adjusted EBITDA in Q2 of 2020 was 18, 6% and excluding the Salto.
He was the dividend was 16, 9%.
Net capital expenditures for the second quarter of 2021 were $23.4 million and depreciation and amortization for the second quarter was $33.7 million.
Total <unk> moving on to the guidance.
Andy previously alluded to continued uncertainties surrounding the pandemic, which could create some challenges and and we look.
Sorry, as we look to the best of half of this year that being said with customers continuing to adapt in this environment.
We assume and gradual return to pre pandemic activity and the more normalized business me.
During the second half of 2021.
We are now guiding non-GAAP currency neutral revenue growth to be between 10, and 10, 5% for 2020.1 versus our prior.
Guidance of 5.5% to 6%.
This updated outlook assumes the full year of Covid related sales to be between 202 hundred $10 million.
Of which approximately $40 million to $50 million of projected for the second half of 2021.
And then excluding COVID-19 related sales and the non-GAAP year over year of currency neutral sales growth in the second half is expected to be between 13 and 14%.
This represents between 4.5 and 5.5% growth in the second half of 2021 over the first half of 2.
2021.
Full year and non-GAAP gross margin is now projected to be between 57 and 57, 5%.
Full year and non-GAAP operating margin is forecasted to be about 19%, which assumes higher operating expenses in the second.
<unk> half of 2021 versus the first half as we are anticipating continued gradual return to more normal activity levels.
This guidance excludes any benefit related to the settlement with Penn ex genomics.
Our updated annual non-GAAP effective.
The tax rate for 2021 is projected to be between 23 and 24%.
Full year adjusted EBITDA margin is forecasted to be between 23 and 23, 5%.
That concludes our prepared remarks, and we will.
Now open the line to take your questions.
Later.
Thank you, ladies and gentlemen, if you would like to ask the question you made the branch sorry, and the number 1 on your Touchtone telephone and if your question has been answered or you wish to remove yourself and the Q you make branch of the mountain.
Your first question comes from the line of Patrick.
Natalie from Citi. Your line is open.
Thanks, guys.
Maybe to start on the margin Elon and I mean really strong performance nice to see kind of flow through to the the raise in the back half can you just talk through I guess, the levers youre seeing how much of it is just the high margin COVID-19 stuff coming through versus.
Batch of out of the restructuring is kind of the out years, but just in terms of some of the cost initiatives you have going.
Just kind of wondering the moving pieces on the margin side, what levers you guys of pulling there.
And good afternoon, Patrick Thanks for the question. Yeah, you know when you think about the margin and and let's start with the gross margin.
We do see already and you know a lot of benefit from the various initiatives that we had around the efficiencies and productivity.
And that was definitely part of the results for this quarter and will continue to be part of.
The guidance in the second half of the year the.
First some headwinds and so the associated with.
FX et cetera, but for the most part of the benefit is associated with the ongoing initiatives around productivity and initiative are similarly, and we continue to see the follow through not only from you know the higher guidance on the top line.
And obviously, you know improved utilization and the second half.
And that continued also.
Benefits from from those efficiencies and productivity.
And then yes.
Yes go ahead, sorry, and then then you have the mix impact for the Covid versus first half versus second half.
Obviously, you know the drop of of the Covid related sales to about $40 million to $50 million and the second half the crew.
Kind of some some some level of headwind to the overall margins.
And are you seeing anything and can be offset in terms of input cost of supply chain issues and hearing back from the few periods.
And just wondering what you guys are seeing on that flow.
Do you want to take that well and.
And I don't think we're breaking it out yeah, we are certainly experiencing anecdote veins.
The and us from high cost coming through some of them.
<unk> and.
The rest of Israeli and some of them some modest raw material increases and then.
So just challenges and procure them and yeah.
And Frank Yeah, Yeah.
Okay, and then maybe 1 for net on the single cell side, it's great to see the litigation and it'll be over for you guys.
And with cell C and I know you guys had previously talked I think about seeing some products maybe rollout potentially later this year.
And that's still the plan and again it feels like the Tenex stuff clears the decks for you guys. So and just wanted to get update on that front in terms of timing and expectations.
Yeah and that if you're on the if you're able to true response cooler.
Sure. So you know where are we.
And we acquired healthy and their technology was pretty early stage and I will admit that we were slowed down a little bit by Covid and getting all of the staff on board for the investment we want to make and R&D that said, we're making really good progress.
And we expect our product and start rolling out.
We early 2020.2.
Okay. That's helpful and 1 quick last 1.
Norm just on the the balance sheet capital allocation of any changes in terms of your thoughts on sartorius or large M&A. I know you guys are always looking we'd love just an update in terms of what the pipeline looks like and.
And your desire of there.
And.
Candidly to look for something more transformational. So we continue to work on all of that.
And the understood. Thank you guys.
You bet.
Your next question comes from the line of Brandon Couillard of Jefferies. Your line is open.
Hey, Thanks, good afternoon.
A lot of that so you took up the the core growth guidance for the year by 400 basis points.
Of which the Covid revenues only account for 100 bps of that can you just talk about what areas of the business you are seeing the <unk>.
Most of the upside Ann could you share sort of an updated view on the 2 segments, what youre of Pennsylvania for the full year in terms of organic growth between life Sciences and Dx.
Sure Andy do you want to start to show up.
And I think the uptick that we are forecast and brand and its fairly broad based.
Clearly the core business is coming back.
On both academic and and the institutional side as well as.
And the industrial side, which has been.
And more robust and the background anyhow are critical of coming back nicely across all the regions.
Maybe with the exception of <unk>.
Electric surgeries, which still seem to be.
Having a little bit behind the more routine testing.
And Thats broad.
Price as well, so and as we look to the second half it's really across.
All of our product lines and.
Both market segments, and and all regions.
So I think that's that's the summary version of a second half.
And Brendan.
And also the also when we compare it to the 2019 kind of results on a 2 year stack overall for bio ready the represents over 10% for the 2 year stack growth right right yeah.
Okay. So there's a follow up on that I mean any day.
And our relative to share with us the line in terms of the phasing of revenues and margins and between <unk> and <unk> Force you typically your highest revenue.
And as a result, most of the profitable seasonally and.
Just call you're able to share as we sort of the update our models for the back half of it.
Yeah, you know.
Obviously as you mentioned the breakdown.
And the.
A couple of years quarter seasonally usually the higher.
But this is the series of little bit you know I'm kind of unpredictable. The first half was the very.
Very good.
The first half.
Generally speaking the reach some benefit always from the fall through to the utilization and the gross margin.
The <unk> and you hit the higher top line.
So so it's a gradual improvement.
On the bottom line is more of is the gross margin.
But again it will be it will depend how the topline will shape up.
Got you Okay, 1 for a net under the DD Pcr.
<unk> business.
Can you just talk about what your view of kind of the top 3 drivers of growth right now in terms of the end markets or applications and the color you can share between how the mix of demand has evolved between the Q ex.
And the legacy platform.
The about a year and so that launched now.
Sure.
Being really strong demand in pharma and Biopharma for the Q1 and system because of what's really frankly developed for that that market segment. So really strong growth, it's adding a lot of the incremental growth to the business and the Q1, but.
We also have strong demand for our <unk> 200 systems.
You know the.
The the wastewater surveillance market as is.
Evolving and and we're now seeing more uptake in EMEA and we had started and the U S. We don't expect.
We all go down.
And and we still sell and awful lot of <unk> 200 systems into the fundamental requirement as well. So you know really strong and and and our academic market has always been strong and it's a good mix.
Mix across all 3 segments of the platforms and and the can.
And those that go along with it.
The growth come back and when you think.
Thank you for them.
Your next question Scott is coming from the line of Bond and then I'd somewhere else. The Fargo. Your line is open.
But thank you. So so I was hoping maybe you could elaborate further on the demand.
And your life Sciences business, even excluding Covid. It's if you look at the 2 year stack compared to 2019 of the growth rates are double digits and life science and that that is not the trajectory. We're used to seeing from that business. So any further color you could offer on the big demand drivers.
Drivers of you want to take this 1 sure sure. We we were definitely seeing a strong recovery. So so that that's part of what what's behind it but you're right all of our growth. If you look at growth over 2019 pre Covid is really strong is the strong funding environment.
And then.
1 of the day.
Benefits maybe out of the pandemic is that government, certainly and the U S and and.
2.
Some extent the EU have really poured a lot of funding into translational medicine and infectious disease vaccine development.
And then and we have a broad product portfolio that speaks to the customer need across all of that so we think that that's really driving a lot of the growth and we're optimistic about the environment moving forward.
So that touches a bit of my next question and you think the this is.
Is sustainable or is it something you're worried about is the challenging comparison as we roll into 2022.
So then we.
We cannot comment today on the 2020 tool the numbers generally speaking I mean, let's let's say with when we guide for that.
A lot.
And a couple of quick clarifications on the on the royalty settlement first off did you say youre going to not include any royalties from <unk> genomics and your and your P&L Your non-GAAP those out.
So no I'm not sure of that I'm going to non-GAAP, but it was not included in our guidance the debt provided.
Okay.
And is that $110 million plus number is the is that a net number net of the royalties you might all of them or is that.
Is that what they are.
You potentially between now and 2030.
So net of what are you referring to them exactly sorry, so it was the cross license.
The agreement right. So presumably there is some chance you pay them some money. They pay you. Some money is the $110 million of a net number or is it a gross number so that these of the amounts that we anticipate to receive from Tenex from tax okay. Thank you.
Sure.
Your next question is from the line of Jack Meehan from Nephron Research. Your line is open.
Thank you good afternoon.
I was wondering if you could give a little bit more color on the duration of the Covid revenue that you see so you have $40 million to $50 million and the back half of the year.
And just as you kind of look at the tail here or do you have any view as to what might carry on and beyond 2021, how much is there some portion of that seems more durable do you like wastewater and there.
So of Sandy.
So there's the potential for wastewater to be.
The merger of all the guy in that debt.
It's very much depends on the funding environment, but.
You know the majority of our revenues are being driven by the instrumentation and we do view of that market is becoming very saturated in terms of capacity right now.
And we do have some.
And some test revenue.
Small.
In relation to the instruments and true ups.
And our peer set so.
We currently see Covid trailing off.
2.2 relatively small number by the end of this year.
And then we'll see what 'twenty, 2 and brings it all and our guidance for next year when we get there.
Got it.
And this is the second consecutive quarter, you've called out Western blotting as an area of strength within the life Sciences was wondering.
There was anything specific that's been driving.
Giving that demand or if you just think it's more kind of funding in general that's and supportive.
I think it's more a general funding trend and its kind of of stifle and labs. So so we view it as labs of getting up and running and and just kind of narrative of.
The routine kind.
And the characterization work that type of thing.
And of the draw.
My Africa during Covid and NAV.
Lots of coming back and it's protest.
The price per ton.
Great.
And then maybe.
Maybe just.
On the diagnostic side.
Was just curious you called out the elective procedures, but if you look back at kind of the product family is within clinical diagnostics.
Do you think any are taking longer to come back than you might've expected or you know.
Could have some lingering impact as you exit the year.
Dara do you want to answer the question.
Sure No just that 1 really I mean blood blood typing is the is the product family.
The associated with elective surgeries and so that's the area. That's most impacted when the hospital systems get overwhelmed by Covid cases.
But all other.
And of routine testing you know diabetes quality controls et cetera are all in line with what Alon said right around 95 per cent to pre COVID-19 levels. So a really good recovery across the core and across all regions.
Great Thats all I have have a good night. Thank.
Thank you James.
Thank you once again, if you would like to ask the question you May Press Star 1 on your telephone Keybanc.
Okay.
And I am not showing any other question in terms of this momentum I would now like to turn the conference back to the management.
Thank you for joining today's call and we appreciate your interest and we look forward of connecting soon bye.
Bye bye.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you all for joining Kimi now disconnect.
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