Q2 2021 Bio Rad Laboratories Inc Earnings Call
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Ladies and gentlemen, this is the operator in today's conference is scheduled to begin shortly please continue to standby and thank you for your patience, ladies and gentlemen. This is the operator today's conference is scheduled to begin shortly discontinue the standby and thank you for your patience.
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Okay.
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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 a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if any once you get quite a few.
During the conference please.
Sorry, you touched on telephone I would now like to turn the conference over to your host Mr. Edward Jones head of Investor Relations. Sir. Please go ahead.
Thank you Joanna good afternoon, and thank you all for joining US today, we will review the second quarter of 2021.
Non financial results and provide an update on key business trends for bio Rad.
With me on the phone today are Norman Schwartz, our Chief Executive Officer, Ilan, Daskal Executive Vice President and Chief Financial Officer, Andy last Executive Vice President and Chief operating officer of net Tomorrow.
Tim alone President.
On the life Science group and our 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.
Expectations on future events that are subject to risks and uncertainties.
Included in these forward looking statements are commentary regarding the impact of the COVID-19 pandemic on bio Rad results operations and steps bio Rad is taking in response to the pandemic. Our actual results may differ materially from these plans and expectations.
<unk> engines, and the impact and duration of the COVID-19 pandemic is unknown 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 in 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 investors should review. The reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earning.
Today release with that I will now turn the call over to the line basketball.
Executive Vice President and Chief Financial Officer.
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.
And also we want to.
Earnings really welcome Eduardo Cheung is our head of Investor Relations.
Before I begin the detailed second quarter discussion I would like to US Andy last our chief operating officer to provide an update on bio rate operations in light of the current pandemic related environment that we are experiencing.
Currency globally Andy.
Thanks for your line, so I'd like to take a few minutes to review our current state of operations around the world.
Overall bio <unk> has adapted well to working constraints that COVID-19 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 improvement in our end markets after a significant downturn a year ago.
We are responding well to increased demand, but as with other manufacturers.
Sciences, we are.
Moving to work hard to procure raw materials in some challenged areas such as plastics and electronic components.
As well as dealing with increased pressure on raw material costs.
We also continued to experience higher than typical logistics costs as indicated on on Q1 call.
Sure.
With the emergence of the COVID-19 Delta Varian, we are maintaining our 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 on a global pandemic situation carefully given the fluidity that delta variances created.
<unk>.
Employee safety remains a 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 Varian will continue to create some challenges and we are maintaining vigilance and flexibility.
As a result.
Overall, we expect to see continued improvement in our end markets through the second half of the year as our customers continue to adapt.
However, the new sales of Varian clearly introduces an element of uncertainty as we move forward.
Thank you for your attention on I'll pass it back.
Ability on that.
Thank you Andy now I would like to review the results of the second quarter.
Net sales for the second quarter of 2021 were $715.9 million, which is a 33, 4% increase on a reported basis.
<unk>.
To eliminate them $36.9 million in Q2 of 2020.
On a currency neutral basis sales increased 27, 5%.
On a geographic basis, 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 a continued growth capacity improvement at both academic 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 in the second quarter of 2021 were $334.2 million.
Compared to $252.1 million in Q2.
2020, which is 32, 6% increase on a reported basis and a 27, 1% increase on a currency neutral basis.
The year over year sales growth in the second quarter was driven mainly by increases in western blotting droplet.
Digital PCR and <unk> Pcr products.
We have seen strong growth in the biopharma market for our droplet digital Pcr platform.
We are also seeing a healthy uptake for <unk> in wastewater solutions.
Government funding towards public health labs.
This is driving increased demand for our DD PCR products that offer automated solutions with high accuracy and sensitivity.
Process media, which can fluctuate on a quarterly basis, so a year over year double digit growth versus the same quarter last year.
Excluding process media sales the underlying life science business grew 29, 1% on a currently constant neutral basis versus Q2 of 2020.
On a geographic basis life science currency neutral year over year sales grew across.
Regions.
Yes.
Before moving on I would like to highlight the broad legal settlement, we tenants genomics announced earlier this week.
This settlement resolves the multiyear global litigation, we connect over outstanding issues in the field of single sales.
Although the global Cross license agreement.
In addition to past and future royalties Bayreuth received broad freedom to operate in the single cell market. It maintained exclusivity to our micro well single cell.
Yes.
We estimate that the future royalty.
Payments from these legal settlement could total $110 million to $140 million over the life of the agreement which runs through the year 2030.
This includes payments of $32 million in the third quarter for back royalties owed to bio Rad for.
For the period from November 2018 through December 2020, as well as force settlement fees and interest.
Sales of the clinical diagnostics group in the second quarter were $382 million.
Compared to $283.2 million.
In Q2 of 2020, which is at 34, 3% increase on a reported basis and a 28% increase on a currency neutral basis.
During the second quarter, 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.
On a geographic basis, the diagnostics group currency neutral year over year sales grew across all regions.
Our diagnostics growth announced last month, a partnership with <unk>, which is a global leader in multiplex molecular diagnostics.
Bio Rad will exclusively market. This teaching test in the U S pending regulatory approvals.
CGM diagnostic products at high sensitivity.
And specificity and are optimized to work with bio Rad see effects real time Pcr systems.
Yeah.
The reported gross margin for the second quarter of 2021 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 that charge. The Q2 gross margin further improved this quarter as a result of our productivity and efficiency initiatives.
However, as mentioned, we currently see increased pressure on raw material cost and higher logistics costs.
Amortization related to prior acquisitions recorded in cost of goods sold was $4.6 million and compares to $5 million in Q2 of 2020.
SG&A expenses for Q2 of 2021 were $213.4 million or 29, 8% of sales compared to $189.3 million or 35, 3% in Q2 of 2020.
Increases in SG&A.
Since it 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.
We.
Research and development expense in Q2 was $63.4 million or 8.9% of sales compared to $52 million or 9.7% of sales in Q2 of 2020.
Q2, operating income was $124.8 million.
Or 17, 4% of sales.
<unk> to $51.7 million.
Or 9.6% of sales in Q2 of 2020.
Looking below the operating line the change in fair market value of equity Securities Holdings.
At 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 resulted in net other income of $1.3 million, primarily due to foreign exchange income.
Compared to $10.7 million of income last year.
Q2 of 2020 includes an $8.9 million dividend from Sartorius, which was declared in June and was paid in July.
In 2021 day 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.
In quarter of 2021 effective tax rate.
Slower also due to a lapse of statute of limitations on certain tax reserves.
Reported net income for the second quarter was $914.1 million and diluted earnings per share.
$70.32.
This is a decrease from last year and is related to changes in valuation of the Sartorius holdings.
Moving on to the non-GAAP results.
Looking at the results on a non-GAAP basis, we have excluded certain RTP call on unique.
Where things that impacted both the growth and operating margins as well as other income these.
These items are detailed in the reconciliation table in the press release.
Looking at our non-GAAP results for the second quarter in cost of goods sold we have excluded $4.6 million of amortize.
<unk> <unk> of purchased intangibles and $1.2 million of restructuring related expenses.
These exclusions moved the gross margin for the second quarter of 2021 to our non-GAAP gross margin of 56, 9% versus 55, 5% in Q2.
Oh 2020.
Non-GAAP SG&A in the second quarter of 2021 was 29, 2% versus 33, 9% in Q2 of 2020.
In SG&A on a non-GAAP basis, we have excluded amortization of purchased intangibles.
$2 million to $4 million.
Legal related expenses of $8.8 million.
And restructuring and acquisition related benefit of $7 million.
Non-GAAP R&D expense in the second quarter of 2021 was 9.1% versus 9.8%.
Most of the 2 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-GAAP adjustments result in moving the quarterly operating margin from 17, 4% on a GAAP basis.
In Q18, 5% on a non-GAAP basis.
These non-GAAP operating margin compares to a non-GAAP operating margin in Q2 of 2020 of 11, 8%.
We have also excluded certain items below the operating line, which are the increase in.
So of the Sartorius equity holdings of $1.031 billion, and the $1.8 million loss associated with venture investments.
The non-GAAP effective tax rate for the second quarter of 2021 was 21, 5% compared to $23.8.
<unk>, 8% for the same period in 2020.
The lower rate in 2021 was driven by the geographic mix of earnings.
And finally non-GAAP net income for the second quarter of 2021 was $106.6 million.
Or $3.54 per diluted earnings.
Value here.
Compared to $48.3 million.
Or $1.61.
Per share in Q2 of 2020.
Moving on to the balance sheet.
Total cash and short term investments at the end of Q2.1 billion and 1.
$167 million compared to $1 billion and $25 million at the end of Q1 of 2021.
During the second quarter, we did not 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.
This increase mainly reflects higher operating profits.
The adjusted EBITDA for the.
Quarter on 2021 was 22, 3% of sales.
Adjusted EBITDA in Q2 of 2020 was 18, 6% and excluding the sartorius.
The dividend was 16, 9%.
Net capital expenditures for the.
The second quarter of 2021 were $23.4 million and depreciation and amortization for the second quarter was $33.7 million.
Moving on to the guidance.
Andy previously alluded to continued uncertainties.
Second rounding the pandemic, which could create some challenges and we look.
As we look to the back half of this year that day.
Being said, we have customers continuing to adapt in this environment, we assume a gradual return to pre pandemic activity and a more normalized business meet.
During.
During the second half of 2021.
We are now guiding non-GAAP currency neutral revenue growth to be between 10, and 10, 5% for 2021 versus our prior guidance of 5.5% to 6%.
This updated outlook assumes the full year of Covid.
<unk> sales to be between 202 hundred $10 million.
Of which approximately $40 million to $50 million of projected for the second half of 2021.
Excluding COVID-19 related sales the non-GAAP year over year currency neutral sales growth in the second.
Second half is expected to be between 13 and 14%.
This represents between 4.5% 5.5% growth in the second half of 2021 over the first half of 2021.
Full year on non-GAAP gross margin is now projected to be between 57.
Then and 57, 5%.
Full year on non-GAAP operating margin is forecasted to be about 19%, which assumes higher operating expenses in the second half of 2021 versus the first half as we are anticipating continued gradual return to more.
More normal activity levels.
This guidance excludes any benefit related to the settlement with Tenex genomics.
Our updated annual non-GAAP effective 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 operator.
Thank you, ladies and gentlemen, if you would like.
Question, you made fresh sorry, then the number 1 on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. You May press the pound key.
Your first question comes from the line of Patrick Donnelly from Citi. Your line is open.
Thanks, guys maybe to start on the margin.
I got you on I mean, really strong performance, making C can flow through to 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 I know a lot 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.
On the margin side, what levers you guys are pull on there.
Yeah. Good afternoon, Patrick Thanks for the question.
Yeah.
When you think about the margin and let's start with the gross margin.
We do see already you know.
A lot of benefit from the various initiatives that we had around the efficiency.
Currencies 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.
On the worst some headwinds associated associated with.
FX et cetera, but for the most part the benefit is a.
Weighted with the ongoing initiatives around productivity and initiative are similarly, we continue to see the follow through not only from the higher guidance on the top line.
And obviously you know improved utilization in the second half but continued also.
Benefits from from those.
Patient season productivity.
And then.
Yes, correct, sorry, and then then you have the mix impact for the Covid versus.
First half versus second half.
Obviously, the drop off of the Covid related sales to about 40% to $50 million in the second half.
It does.
Create kind of some some some level of headwind to the overall margins.
Are you seeing anything that can be offset in terms of input costs or supply chain issues here on that from a few periods. Just wondering what you guys are seeing on that from.
He wants to take it day 1.
I don't think we're breaking it out yes, we are certainly.
Experiencing and absorbing the.
From high cost coming through from logistics and.
The rest Israeli some modest from a raw material increases and then that's just challenges and procure on them.
The time frame.
Right Okay.
And then maybe.
1 for a net on the single cell side, it's great to see the litigation.
Over for you guys.
With cell C. I know you guys had previously talked I think about seeing some products maybe rollout potentially later this year is that still the plan and again it feels like the tenex stuff clears the decks for you guys. So I just wanted to get update.
On that front in terms of timing and expectations.
Yes.
If youre on the if you're able to true response sure.
Sure so yeah.
Yeah, we we acquired healthy on their technology was pretty early stage and I will admit that we.
We were slow down a little bit by Covid and getting all the staff on board for the investment we want to make in R&D that said, we're making really good progress and we expect our products to start rolling out in early 2022.
Okay. That's helpful and 1 quick last 1.
For norm just on the balance sheet capital allocation any changes in terms of your thoughts on sartorius or large M&A I know you guys are always looking.
Love just an update in terms of what the pipeline looks like and your desire there.
Yeah, I mean, I guess I would say we continue to evaluate.
A robust number of what I call, both tuck in and technology opportunities and.
And candidly.
Candidly to look for something more transformational. So we continue to work on all of that.
Understood. Thank you guys.
Thank you.
Your next question comes.
Your line of Brandon courtyard of Jefferies. Your line is open.
Yeah.
Hey, Thanks, good afternoon.
A lot on 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 most upside in and could you share sort of an updated view on the 2 segments, what you're penciling in for the full year in terms of organic growth between life Sciences and Dx.
Sure Andy do you want to start from Shaw.
So I think the uptick that we forecast.
<unk> has been granted.
Fairly broad based.
Clearly the core business is coming back on both academic and in the institutional side as well as.
The industrial side, which has been more robust in the background anyhow clinical is coming back nicely.
Across all the regions.
Maybe with the exception of.
Electric surgeries, which still seem to be.
Lagging a little bit behind the more routine testing.
And that's broad based as well.
And as we look to the second half it's really.
Cros.
1 of our product line in both market segments and.
In all regions.
So I think that's the summary version of a second half.
Again, Brent and I will add also the.
Also when we compare it to the 2019 kind of result.
On a 2 year stack overall for bio Rad represents over 10% for the 2 years day growth right right yes.
Okay. So as a follow up on that I mean any.
Color you can share with us the line in terms of the phasing of revenues and margins in between <unk> and <unk> I mean <unk> is typically.
Revenue quarter and as a result, the most profitable seasonally.
Any color you're able to share as we sort of update on model for the back half.
Yes.
Obviously as you mentioned brand on.
In the fourth quarter.
Seasonally usually is higher.
But based.
On your highest this year is a little bit.
Kind of unpredictable on the first half was a very.
Very good.
First half.
Generally speaking the recent benefit always from the fall through to the utilization in the gross margin when you hit on higher top line.
So so he said gradual.
Improvement.
On the bottom line is melinda as the gross margin.
But again it will depend on how the top line will shape up.
Got you Okay, 1 for a net under the DD Pcr business.
Can you just talk about what you see as kind of the top 3 drivers of.
Growth right now in terms of end markets or applications and any color you can share between the mix of demand has evolved between the <unk>.
1 and the legacy platform.
About a year into that launch now.
Sure.
Really strong demand in our.
In Biopharma for the Q1 system because it was really.
Frankly developed for that that market segment, so really strong growth as having a lot of incremental growth to the business from the Q1, but we also have strong demand for our <unk> 200 system.
Farm.
On the.
The wastewater.
Surveillance market is.
Evolving and we're now seeing more uptake in EMEA.
In the U S. We don't expect that to slow down.
And we still sell an awful lot of.
Some 200 systems into pharma and Biopharma as well.
So you know really strong and and and our academic market has always been strong and it's a good.
Mix across all 3 segments of platforms and and the consumables that go along with it.
Yeah.
I'll jump back in.
Thank you Brendan.
Your next question Scott is coming from the line of bond net from Wells Fargo. Your line is open.
Thank you. So I was hoping maybe you could elaborate further on the demand drivers in your life Sciences business, even excluding Covid. If you look at the 2 year stack compared to 20.
But the growth rates are double digits in life science and that that is.
Not the trajectory, where we're used to seeing from that business sort of any further color you could offer on the big demand drivers.
And then do you want to take this 1 sure sure. We we were definitely.
<unk> seen a strong recovery so that's.
That's part of what what's behind it but you're right our growth. If you look at growth over 2019 pre COVID-19 is really strong.
Strong funding environment.
1 of the benefits may be of the.
Pandemic is that government certainly in the U S and 2.
Some extent the EU have really cored a lot of funding into translational medicine infectious disease vaccine development and we have a broad product portfolio that speaks to the customer.
We need across all of that so we think that that's really driving a lot of the growth and we're on.
Domestic about the environment moving forward.
Yeah.
So that touches a bit on my next question is do you think that this is sustainable or is it something you're worried about as a challenging comparison as we roll into 2022.
So then.
We cannot comment today on the 2020 tool numbers generally speaking I mean, let's let's say this when we guide on that.
A line a couple of quick clarifications on the on the royalty settlement first off did you say youre going to not include.
<unk> any royalties from <unk> genomics in your in your P&L, you'll non-GAAP those out.
So no I'm not sure that I'm going to non-GAAP, but it was not included in our guidance that I provided.
Okay and is that $110 million plus number is that a net number net of the royalties you might have with them or is.
Is that.
Is that what they'll oyu potentially between now and 2030.
So net of what are you referring to them exactly sorry.
Got it.
The cross license 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.
These are the amounts that we anticipate to receive from tenants 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 on the back half of the year.
Just as you kind of look at the tail here do you have any view as to what might carry on beyond.
2021, how much is there some portion that seems more durable do you like wastewater in there.
So sandy.
So there's the potential for wastewater to be more durable.
It's very much depends on the funding environment.
As you know the majority of our revenues have been driven by instrumentation and we do view that market is becoming very saturated in terms of capacity right now.
We do have some test revenue from it it's very small.
In relation to the instruments and true.
Sure.
Per se so.
We currently see Covid trailing off.
There are 2 relatively small number by the end of this year.
And then we'll see what <unk> brings.
Our guidance range, Thanks, Jay 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 life Sciences was wondering.
If there was anything specific that's been driving that demand or if you just spent gets more kind of funding in general that's been supportive.
I think it's more.
Laura General funding trend and it's kind of a staple in labs. So so we view it as labs are getting up and running and just kind of the routine kind of characterization work that day.
Typically there.
You know Adam did dry up during COVID-19.
The last day coming back.
Protest.
Price per ton.
Great.
And then.
Maybe just.
On the diagnostic side was just curious you called out the elective procedures, but if you look at kind of the product families within clinical diagnostic.
6.
Do you think any are taking longer to come back than you might have expected or.
Could have some lingering impact as you exit the year.
Dara do you want to answer this question.
Sure No just that 1 really I mean blood blood typing.
It's a product family that's associated with elective surgeries. So that you know that the area that is most impacted when the hospital systems get overwhelmed by by Covid cases.
But all other areas of routine testing you know diabetes quality controls et cetera are all in line with what Alon said.
Is that right around 95 per cent to pre COVID-19 levels.
I really couldn't recovery across the core and across all regions.
Great Thats all I have have a good night. Thank.
Thank you Jay.
Thank you once again, if you would like to ask a question you May press star 1 on your telephone keypad.
I am not showing any other question Joseph this momentum I would now like to turn the conference back to management.
Thank you for joining today's call and we appreciate your interest and we look forward to connecting soon bye.
Bye bye.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.
As you know.
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Yeah.
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Good afternoon, ladies and gentlemen, and welcome to the Q2 'twenty 'twenty 1.
On Bio Rad Laboratories, Inc. Financial results conference call at this time, all participants are in at least on.
Only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if any once you get quite assistance. During the conference. Please press star zero on your Touchtone telephone I would now like to turn the conference over to your host.
Mr. Edward Jones head of Investor Relations Sir Please go ahead.
Thank you Joanna 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 non <unk>.
On the Schwartz, our Chief Executive Officer, Ilan, Daskal Executive Vice President and Chief Financial Officer, Andy last Executive Vice President and Chief operating Officer, a net 10.
Malone President on the life Science group and our Ryan President on the clinical diagnostics for <unk>.
Before we begin our.
Our review I'd like to caution everyone that we will be making forward looking statements about managements goals plans expectations or future financial performance and other matters. These statements are based on assumptions and expectations on future events that are subject to risks and uncertainties.
These forward looking statements are.
Our commentary regarding the impact of the COVID-19 pandemic on bio Rad results operations and steps bio Rad is taking in response to the pandemic actual results may differ materially from these plans and expectations and the impact and duration of the COVID-19 pandemic is unknown 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 in 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.
Are which are financial measures that are not defined under generally accepted accounting principles investors should review. The reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release with that I will now turn the call over to on the hospital.
By credit President and.
Chief Financial Officer.
Thank you Ed good afternoon, and thank you all for joining us and we hope that you on your families are well and staying healthy during these challenging times.
And also we want to officially welcome Eduardo Channel is our head of Investor Relations.
Before I begin the detailed.
Second quarter discussion I would like to ask Andy last our Chief operating officer to provide an update on bio rate operations in light of the current pandemic related environment that we are experiencing globally Andy.
Thanks, Sheila so I'd like to take a few minutes to review our current state of operations.
Operations around the world.
Overall bio Rad has adapted well to working constraints the coveted imposed upon us and we find ourselves able to respond and react well to every day operational changes and demand.
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 downturn a year ago.
Responding well to increased demand, but as with other manufacturers in life Sciences, we are having to work hard to procure raw materials in some challenged areas such as plastics.
And electronic components.
As well as dealing with increased pressure on the raw material costs were.
We also continued to experience higher than typical logistics cost as indicated on our Q1 call.
With the emergence of the COVID-19 Delta Varian, we are maintaining our work from home Paula.
Losses from our near term as we work on return to the workplace plans targeted for later this quarter and we continue to monitor on a global pandemic situation carefully given the fluidity of the Delta variances created.
Employee safety remains a 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 area will continue to create some challenges and we are maintaining vigilance and flexibility as a result.
Overall, we expect to see continued improvement in our end markets through.
The second half of the year as our customers continue to adapt.
The new sales ovarian clearly introduces an element of uncertainty as we move forward.
Thank you for your attention on our path back to Orlando.
And now I would like to review the results of the second quarter.
Net sales for the second quarter of 2021 were $715.9 million, which is a 33, 4% increase on a reported basis versus $536.9 million in.
In Q2 of 2020.
On a currency neutral basis.
<unk> sales increased 27, 5%.
On a geographic basis, 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 a continued gradual capacity improvement at both academic 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 in the second quarter of 2021 were $334.2 million.
Compared to $252.1 million in Q2 of 2020, which is at 32, 6% increase on a reported.
<unk> basis.
On the 27, 1% increase on a currency neutral basis.
The year over year sales growth in the second quarter was driven mainly by increases in western blotting droplet digital PCR and <unk> Pcr products.
We are seeing.
Seeing strong growth in the Biopharma market for our droplet digital Pcr platform.
We are also seeing a healthy update for DD PCR in wastewater solutions.
Government funding towards public health labs is driving increased demand for our DD PCR products that offer automated.
Automated solutions with high accuracy and sensitivity.
Process media, which can fluctuate on a quarterly basis, so a year over year double digit growth versus the same quarter last year.
Excluding process media sales the underlying life science business.
<unk> grew 29, 1% on a currently currency neutral basis versus Q2 of 2020.
On a geographic basis life science currency neutral year over year sales grew across all regions.
Before moving on I would like.
To highlight the broad legal settlements, we tenants genomics announced earlier this week.
This settlement resolves the multiyear global litigation with Tenex over outstanding issues in the field of single cell and includes a global cross license agreement.
In addition to pass.
Past and future royalties bio Rad received broad freedom to operate in the single cell market is maintained exclusivity to our micro well single cell.
We estimate that the future royalty payments from this legal settlement could total 110 to.
$140 million over the life of the agreement, which runs through the year 2030.
This includes payments of $32 million in the third quarter for our back royalties owed to bio Rad for the period from November 2018 through December 2020, as well as.
For settlement fees and interest.
Sales of the clinical diagnostics group in the second quarter was $382 million.
Compared to $283.2 million in Q2 of 2020, which is at 34, 3% increase.
<unk> on a reported basis and a 28% increase on a currency neutral basis.
During the second quarter, 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.
On a geographic basis, the diagnostics group currency neutral year over year sales grew across all regions.
Our diagnostics group announced last month a partnership.
Sheep with CGM, which is a global leader in multiplex molecular diagnostics.
<unk> will exclusively market is seeking test in the U S pending regulatory approvals.
<unk> diagnostic products at high sensitivity and specificity and are optimized to work with bio.
Alright, CFS real time PCR systems.
The reported gross margin for the second quarter of 2021 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 that charge. The Q2 gross margin further improved this quarter as a result of our productivity and efficiency initiatives.
However, as mentioned, we currently see increased pressure.
<unk> on raw material costs and higher logistics costs.
Amortization related to prior acquisitions recorded in cost of goods sold was $4.6 million and compares to $5 million in Q2 of 2020.
SG&A expenses for Q2 of 2020.
21 were $213.4 million or 29, 8% of sales compared to $189.3 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 <unk> <unk>.
$63.4 million or.
Or 8.9% of sales compared to $52 million.
Or 9.7% of sales in Q2 of 2020.
Q2, operating income was $124.8 million or 17, 4%.
Net sales compared to $51.7 million.
Or 9.6% of sales in Q2 of 2020.
Looking below the operating line the change in fair market value of equity Securities Holdings added.
At $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 resulted in net other income of $1.3 million, primarily due to foreign exchange and compared to $10.7 million of.
Comp last year.
Q2 of 2020 include an $8.9 million dividend from Sartorius, which was declared in June and was paid in July.
In 2021 day Sartorius dividend was declared in the first quarter.
The effective tax.
Right 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 2000.
21 effective tax rate was lower also due to a lapse of statute limitations on certain tax reserves.
Reported net income for the second quarter was $914.1 million and diluted earnings per share were $30.
32.
This is a decrease from last year and is related to changes in valuation on the Sartorius holdings.
Moving on to the non-GAAP results.
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 in cost of goods sold we have excluded $4.6 million of amortization of purchased intangible.
Bose and $1.2 million of restructuring related expenses.
These exclusions moved the gross margin for the second quarter of 2021 to our non-GAAP gross margin of 56, 9% versus 55, 5% in Q2 of 2020.
Non-GAAP SG&A in the second quarter of 2021 was 29, 2% versus 33, 9% in Q2 of 2020.
In SG&A on a non-GAAP basis, we have excluded amortization of purchased intangibles of $2.4 million.
Legal.
<unk> expenses of $8.8 million annually.
And our restructuring and acquisition related benefit of $7 million.
Non-GAAP R&D expense in the second quarter of 2021 was 9.1% versus 9.8% in Q2 of 2020.
In.
Related to <unk> on a non-GAAP basis, we have excluded $2.1 million of restructuring benefits.
The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 17, 4% on a GAAP basis to 18, 5% on a non.
RMB basis.
Non-GAAP operating margin compares to a non-GAAP operating margin in Q2 of 2020 of 11, 8%.
We have also excluded certain items below the operating line, which are the increase in value of the sartorius equity holdings.
GAAP $1.031 billion, and the $1.8 million loss associated with venture investments.
The non-GAAP effective tax rate for the second quarter of 2021 was 21, 5% compared to 23, 8% for the same period in 2020.
Oh from a lower rate in 2021 was driven by the geographic mix of earnings.
And finally non-GAAP net income for the second quarter of 2021.
$106.6 million or $3.54 per diluted earnings per share.
Compared to $48.3.
On $1.61.
<unk> per share in Q2 of 2020.
Moving on to the balance sheet.
Total cash and short term investments at the end of Q2 were $1 billion and $167 million compared.
$3 million $1.025 billion at the end of Q1 of 2021.
During the second quarter, we did not purchase any shares of our stock.
For the second quarter of 2021 net cash generated from operating activities was 100.
$254.6 million, which compares to $92.1 million in Q2 of 2020.
This increase mainly reflects higher operating profits.
The adjusted EBITDA for the second quarter of 2021 was 22.
103% of sales.
The adjusted EBITDA in Q2 of 2020 was 18, 6% and excluding the sartorius.
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.
Moving on to the guidance.
Andy previously alluded to continued uncertainties surrounding the pandemic, which could create.
Challenges and we look.
Sorry, as we look to the back half of this year that being said with customers continuing to adapt in this environment, we assume a gradual return to pre pandemic activity and a more normalized business me.
During the second half of 2021.
Sandy on our guiding non-GAAP currency neutral revenue growth to be between 10, and 10, 5% for 2021 versus our prior guidance of 5.5% to 6%.
This updated outlook assumes the full year of Covid related sales to be between 200.
$210 million.
Of which approximately $40 million to $50 million are projected for the second half of 2021.
Excluding COVID-19 related sales the non-GAAP year over year currency neutral sales growth in the second half is expected to be between 13 and.
And in percent.
This represents between 4.5 and 5.5% growth in the second half of 2021 over the first half of 2021.
Full year on non-GAAP gross margin is now projected to be between 57 and 57, 5%.
For full year on non-GAAP operating margin is forecasted to be about 19%, which assumes higher operating expenses in the second half of 2021 versus the first half as we are anticipating continued gradual return to more normal activity levels.
This guidance.
This excludes any benefit related to the settlement with Tenex genomics.
Our updated annual non-GAAP effective tax rate for 2021 is projected to be between 23 and 24%.
Full year adjusted EBITDA margin.
<unk> forecasted to be between 23 and 23, 5%.
That concludes our prepared remarks, and we will now open the line to take your questions operator.
Thank you, ladies and gentlemen, if you would like to ask a question you made rich sorry, and the number 1 on.
It's fortunate on the telephone if your question has been answered or you wish to remove yourself from the queue.
Your first question.
Question comes from the line of Patrick Donnelly from Citi. Your line is open.
Thanks, guys maybe to start on the margin you on I mean really strong performance.
On yet to flow through to 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 I know a lot of the restructuring is kind of the out years, but just in terms of some of the cost initiatives you have going.
Kind of wondering the moving pieces on on the margin side, what levers you guys are put on there.
Hey, good afternoon, Patrick Thanks for the question.
Yeah.
When you think about the margin and let's start with the gross margin.
We do see already you know a lot of benefit from the various initiatives that we had around the efficiencies and productivity and that.
So definitely part of the results for this quarter and will continue to be part of.
The guidance in the second half of the year.
There were some headwinds so the associated.
FX et cetera, but for the most part the benefit is associated with the ongoing initiatives around productivity.
Sandy initiative.
Similarly, we continue to see the follow through not only from the higher guidance on the top line.
And obviously you know improved utilization in the second half but continued also.
Benefits from from those efficiencies and productivity.
And then.
Yes go ahead, sorry, and then then you have the mix impact for the Covid versus first half versus second half on.
Obviously, the drop off of the Covid related sales to about $40 million to $50 million in the second half.
Create kind of some some some level of a headwind.
On the review of the overall margins.
Are you seeing anything in terms of the offset in terms of input costs or supply chain issues and you could hear on that from a few periods I'm. Just wondering what you guys are seeing on that from.
Do you want to take that 1.
I don't think we're breaking it out yes, we are certainly experiencing anecdote.
Okay.
Towards from high cost coming through from.
Logistics on.
The rest of Israeli some on some modest from a raw material increases on man just challenges on procurement and freight and freight.
Right Okay.
Maybe 1 for a net on the single cell side, it's great to see the litigation.
It'll be over for you guys.
With cell C. I know you guys had previously talked I think about 3 on some products maybe rollout potentially later this year is.
Is that still the plan.
Again, it feels like the Tenex stuff clears the decks for you guys. So I just wanted to get update on that front in terms of timing and expectations.
Yes.
You're on.
If you're able to true response cooler.
Sure so.
Yes.
We acquired healthy on their technology with pretty early stage.
And I will admit that we were slowed down a little bit by Covid and getting all the staff on board.
Net net we want to make in R&D that said, we're making really good progress.
We expect Capex to start rolling out in early 2022.
Okay. That's helpful and 1 quick last 1.
Norm just on the balance sheet capital allocation.
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 your desire there.
Yes, I mean I guess.
I would say we continue to evaluate.
A robust number of what I call both tuck in in technology.
Opportunities and.
And you know candidate to look for something more transformational. So we continue to work on all of that.
Understood. Thank you guys.
Thank you.
Your next question comes from the line of Brandon Couillard of Jefferies. Your line is open.
Hey, Thanks, good afternoon.
A line. So you took up 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 there.
Most.
Upside in and could you share sort of an updated view on the 2 segments, what you're penciling in for the full year in terms of organic growth between life Sciences and Dx.
Sure Andy do you want to start from Shaw.
So I think the uptick that we are forecasting brand and its fairly broad based.
Clearly the.
The core business is coming back on.
On both academic and in the institutional side as well as.
The industrial side, which has been more robust in the background anyhow.
Medical is coming back nicely across all the regions.
Maybe with the exception.
Electric surgeries, which still seem to be.
Lagging a little bit behind the more routine testing.
And that's broad based as well.
And as we look to the second half it's really.
Across.
All of our product line.
Thanks Mark.
Market segments in.
In all regions.
So I think that's that's the summary version of our second half cash.
And Brandon I'll add also that.
Also when we compare it to the 2019 kind of results on a 2 year stack overall for bio relative presents.
10% for the 2 year stack growth right right yes.
Okay. So there's a follow up on that I mean any.
You know what color you can share with us the line in terms of the phasing of revenues and margins in between 3 Q on 4 key I mean force use typically your highest revenue quarter and as a result, the most profitable seasonally.
He just call you're able to share some sort of update our models for the back half.
Yeah, you know.
Obviously as you mentioned brand on.
The fourth quarter.
Seasonally usually is higher.
But this year is a little bit.
Kind of unpredictable and on the first.
Half was a very very.
Very good.
First half.
Generally speaking the reach some benefit always from the fall through to the utilization in the gross margin when you hear from higher top line.
So so he said gradual improvement.
On the bottom line is more or is the gross margin.
But again it will be it will depend on how the top line would shape up.
Got you Okay, 1 for a net under the DD Pcr business.
Can you just talk about what you see as kind of the top 3 drivers of growth right now in terms of end markets or applications and any color you can share between.
How the mix of demand has evolved between the <unk>.
And the legacy platform.
About a year on to that launch now.
Sure.
Seeing really strong demand in pharma and Biopharma for the Q1.
Because it was really.
Frankly developed for that that market segment, so really strong growth as having a lot of incremental growth to the business from the Q1, but we also have strong demand for our <unk> 200 systems.
You know.
The the wastewater.
Really surveillance market is.
Evolving and we're now seeing more uptake in EMEA.
It started in the U S. We don't expect that to slow down.
And we still sell an awful lot of <unk> 200 systems into pharma and Biopharma as well so.
No.
You know really strong and and and our academic market has always been strong and it's a good.
Mix across all 3 segments of platforms and and the consumables that go along with it.
The growth come back in the queue. Thanks.
Thank you Brendan.
Your.
<unk> mentioned, Scott, it's coming from the line of Bob then I'd somehow Fargo your line of Hilton.
Thank you.
I was hoping maybe you could elaborate further on the demand drivers in your life Sciences business, even excluding Covid I think if you look at the 2 year stack compared to 2019 the growth rates are double digits in life science and that that.
Net.
Not the trajectory, where we're used to seeing from that business. So any any further color you could offer on the base.
Demand drivers.
And Ed do you want to take this 1 sure sure.
We were definitely seeing a strong recovery so that's part of what.
That is what's behind it but you're right our growth. If you look at growth over 2019 pre Covid is really strong it's a strong funding environment.
1 of the bed.
Benefits maybe out of the pandemic is that governments that certainly in the U S and.
To.
Some extent the EU have really poured a lot of funding into translational medicine infectious disease vaccine development 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 on my next question is do you think that this is sustainable or is it something you're worried about as a challenging comparison as we roll into 2022.
So.
We cannot comment.
Growth there on the 2020 tool numbers generally speaking I mean, let's let's say with when we guide for that.
A lot 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 in your in your P&L.
Your non-GAAP those out.
So no I'm not sure that I'm going to non-GAAP, but it was not included in our guidance that <unk> provided.
Okay and is that $110 million plus number or is that a net number net of the royalties you might have with them or is that.
Is that what they are.
Momentum potentially between now and 2030.
So net of what are you referring to them exactly sorry. So it was a cross license agreement right. So presumably there is some chance you pay them some money. They pay you some money as the $110 million of a net number or is.
Huge number so.
Of the amount that we anticipate to receive from tenants from taxes.
Thank you.
Sure.
Your next question is from the line of Jack Meehan from Nephron Research. Your line is open.
Thank you good afternoon.
Is it a growth.
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 on the back half of the year.
Just as you kind of look at the tail here or do you have any view as to what might carry on beyond 2021, how much.
Or is there some portion that seems more durable do you like wastewater in there.
So sandy.
So that's the potential for wastewater to be more durable.
It's very much depends on the funding environment.
As you know the majority of.
You guys have been driven by instrumentation, and we do view that market has become.
Very saturated in terms of capacity right now.
They actually we do have some tests revenue, but it's very small.
In relation to the instruments and true.
I'll pass.
On a revenue so.
We currently see Covid trailing off.
2 relatively small number by the end of this year.
And then we'll see what <unk> brings in a guidance range. Thanks, Jim 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 life Sciences was wondering.
If there was anything specific that's been driving that demand or if you just think it's more kind of funding in general that's been supportive.
I think it's more a general funding.
And on it's kind of a staple in labs. So so we view it as labs are getting up and running and just kind of.
The routine kind of characterization work that they typically there.
You know relative to dry Africa during COVID-19.
Lots of coming back.
On a trip robust.
From a price per ton.
Great.
And then.
Maybe just.
On the diagnostics side was just curious you called out the elective procedures, but if you look at kind of the product family is within clinical diagnostics.
And do you think any are taking longer to come back than you might've expected or.
Could have some lingering impact as you exit the year.
Dara do you want to answer this question.
Sure No I'm, just that 1 really I mean blood blood typing.
Family.
That's associated with elective surgeries. So that's the area. That's most impacted when the hospital systems get overwhelmed by Covid cases.
But all other areas of routine testing diabetes quality controls et cetera are all in line with what Alon said right around 90.
<unk> per cent to pre COVID-19 levels.
I really good recovery across the core and across all regions.
Great Thats, all I have have a good night.
Thank you Jay.
Thank you once again, if you would like to ask a question you May press star 1 on your telephone keypad.
I am not showing any other questions asked on this moment I would like to turn the conference back to management.
Thank you for joining today's call. We appreciate your interest and we look forward to connecting soon bye.
Alright.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.