Q3 2021 Bio Rad Laboratories Inc Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the third quarter 2021 bio Rad Laboratory, Inc. Financial results Conference call. My name is Lydia and on your operator today.
If you'd like to ask a question at the end of the presentation. You may do so by pressing star followed by one on your telephone keypad.
I would now like to turn the conference call over to Mr. Edward Chung.
Investor Relations. Please go ahead, that's what.
Thank you Lydia good afternoon, and thank you all for joining us today.
We will review the third quarter 2021 financial results and provide an update on key business trends for bio Rad with me on the phone today are Norman Schwartz our.
Keep executive Officer, Ilan, Daskal Executive Vice President and Chief Financial Officer, Andy last Executive Vice President and Chief operating Officer.
Two more president of the life Science group and our Wright President of the clinical diagnostics group before we get it before we begin our review I would like to caution everyone that we will be making forward looking statements about managements goals plans and exceptions 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 in these forward looking statements are commentary regarding the impact of the COVID-19 pandemic on bio rads results and operations and steps bio Rad is taking in response to the pandemic our actual.
Results may differ materially from these plans and expectations and the impact and duration of the COVID-19 pandemic is unknown.
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 earnings release.
With that I'll now turn over the call to Ilan Daskal Executive Vice President and Chief Financial Officer. Thank you Ed. Good afternoon. Thank you all for joining us and we hope that you and your families are well and staying healthy during these challenging times before I begin the detailed third quarter discussion I would like to us.
Andy last our Chief operating officer to provide an update on <unk> operations in light of the current pandemic related environment that we are experiencing globally sandy.
Thank you your Atlanta, so good afternoon, everybody to start with I'd like to take a moment to thank Annette tumolo.
President of the life Science group for nearly 33 years of service at bio Rad as she plans to retire at the end of this year effort, a net surface and leadership have contributed to significant growth for the life Science group and bio Rad.
And the company has started a search for a successor and we will provide an update in the coming months.
Now I'd like to take a few minutes to review our current state of operations around the world.
We're now entering the seventh consecutive quarter of operating within the Covid pandemic and so I should make my comments brief since we have now established an operating cadence with embedded employee safety practices.
Our end markets continued to show improvement during Q3 with demand pick up in both life science and diagnostic markets in all regions.
The supply chain constraints highlighted in our Q2 call. However have persisted in particular for supply and cost of plastic raw materials electronic components and higher logistics costs.
To date, we've been able to balance supply and demand through careful management power.
However, we see this supply constraint trends continuing through year end and into 2022.
And thus increasing the challenge of adequately meeting customer demand.
As a result of the COVID-19, <unk> ovarian we recently pushed out our return to the workplace dates for the U S into early November.
During Q3, we introduced a mandatory vaccination requirement for all employees in the U S.
Extremely pleased with the results of this decision.
We're believing we believe we are maintaining our commitment to a safe workplace for all our employees.
As we enter Q4, we expect COVID-19 related demand for our products to be sequentially lower.
And overall, we believe the majority of our end markets are approaching close to normal operations. Although we recognize that COVID-19 will continue to create dynamic market challenges.
So at this point I'll turn it back to the lab. Thank you. Thank you Andy now I would like to review the results of the third quarter.
Net sales for the third quarter of 2021 was $747 million, which is at 15, 4% increase on a reported basis versus the $647 3 million.
In Q3 of 2020.
On a currency neutral basis sales increased 13, 8%.
The third quarter sales include a $32 million settlement for back royalties from tenants, excluding the back royalties the Q3 year over year currency neutral revenue growth was 9%.
On a geographic basis, we experienced strong currency neutral growth in the Americas and in Asia, while growth in Europe declined slightly due to a tough year over year compare of Covid related sales.
We estimate that COVID-19 related sales were about $57 million in the quarter as we continued to benefit from spikes in demand in geographies, where new outbreaks have occurred.
Sales of the life Science group in the third quarter of 2021 were $373 5 million compared to $324 million in Q3 of 2020, which is at 15, 3% increase on a reported basis and 13 point of.
The 9% increase on a currency neutral basis.
Excluding the $32 million settlement for bake royalties the underlying life science business grew four 1% on a currency neutral basis versus Q3 of 2020.
The year over year sales growth in the third quarter was driven mainly by increases in droplet digital PCR products and excluding COVID-19 related sales our core <unk> business also experienced nice growth driven by strong uptake of our newer generation <unk>.
<unk> platform.
Process media, which can fluctuate on a quarterly basis, so strong year over year double digit growth versus the same quarter last year.
Excluding process media sales and a $32 million settlement forbear quantities, the underlying life science business declined 2% on a currency neutral basis versus Q3 of 2020 due to lower COVID-19 related sales.
When also excluding Covid related sales life science year over year currency neutral revenue growth was 21, 8%.
Overall, we have seen strong growth in the biopharma market for our droplet digital Pcr platform.
We also continued to see steady adoption of DD PCR and wastewater solutions supported by government funding towards public health labs.
On a geographic basis life science currency neutral year over year sales grew across the Americas and Asia, but declines in Europe.
When excluding Covid related sales European region revenue posted a double digit increase from the year ago period.
Sales of the clinical diagnostics group in the third quarter were $372 2 million compared.
Compared to $322 2 million in Q3 of 2020, which is at 15, 5% increase on a reported basis and a 13, 7% increase on a currency neutral basis.
During the third quarter, the diagnostics group posted growth.
For all of its product lines.
The year over year growth was driven by a recovery of routine testing, which appears to be approaching normal levels with the exception of blood typing, which is progressing at a slower pace.
On a geographic basis, the diagnostics group currency neutral year over year sales grew double digits across all regions.
The reported gross margin for the third quarter of 2021 was 58, 6% on a GAAP basis and compares to 56, 7% in Q3 of 2020.
The Q3 2021 gross margin improvement was mainly driven by the settlement payments as well as our productivity and efficiency initiatives.
Amortization related to prior acquisitions recorded in cost of goods sold was $4 7 million.
This compares to $4 8 million in Q3 of 2020.
SG&A expenses for Q3 of 2021 were $216 2 million.
Or 28, 9% of sales compared to $198 2 million.
Or 36% in Q3 of 2020.
Increases in SG&A spend was mainly the result of employee related expense.
Total amortization expense related to acquisitions recorded in SG&A for the quarter was $2 4 million.
Versus $2 3 million in Q3 of 2020.
Research and development expense in Q3 was $64 5 million.
Or eight 6% of sales compared to $59 5 million.
Or nine 2% of sales in Q3 of 2020.
Q3, operating income was $166 8 million or.
Or 21% of sales compared to $109 6 million.
Or 16, 9% of sales in Q3 of 2020.
Looking below the operating line the change in fair market value of equity Securities Holdings added.
$4 billion and $869 million of income to the reported results.
And is substantially related to holdings of the shares of Sartorius AG.
Also during the quarter interest and other income resulted in a net expense of $3 2 million.
Primarily due to foreign exchange losses, and compared to $5 5 million of expense last year.
The effective tax rate for the third quarter of 2021 was 21, 8% compared to 21, 9% for the same period in 2020.
The tax rate for both periods were driven by the large unrealized gains in equity securities.
Reported net income for the third quarter was $3 billion 928 million and diluted earnings per share were $129 96.
This is an increase from last year and is largely related to changes in 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 impacted both the gross and operating margin as well as other income these.
These items are detailed in the reconciliation table in the press release.
Looking at the non-GAAP results for the third quarter in sales, we had excluded $32 million related to <unk> X legal settlement.
In cost of goods sold we have excluded $4 7 million of amortization of purchased intangibles.
$4 1 million in IP license cost associated with that royalty payment and a small restructuring cost.
These exclusions moved the gross margin for the third quarter of 2021 to our non-GAAP gross margin of 57, 9% versus 57, 5% in Q3 of 2020.
Non-GAAP SG&A in the third quarter of 2021 was 29, 6% versus 29, 4% in Q3 of 2020.
In SG&A on a non-GAAP basis, we have excluded amortization of purchased intangibles of $2 4 million.
Legal related expenses of $2 3 million and a small restructuring and acquisition related benefit.
Non-GAAP R&D expense in this in the third quarter of 2021 was 9% versus nine 2% in Q3 of 2020.
In R&D on a non-GAAP basis, we have excluded a small restructuring cost.
The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 21% on a GAAP basis to 19, 4% on a non-GAAP basis.
These non-GAAP operating margin compares to a non-GAAP operating margin of 18, 8% in Q3 of 2020.
We have also excluded certain items below the operating line, which are the increasing value of the sartorius equity holdings.
$4 billion and $869 million and about a $2 million loss associated with venture investments.
The non-GAAP effective tax rate for the third quarter of 2021 was 18% compared to 22, 5% for the same.
Same period in 2020.
The low rate in 2021 was driven by the geographic mix of earnings. In addition, the effective tax rate was lower as a result of an increase in compensation related tax deductions.
And finally non-GAAP net income for the third quarter of 2021 was $112 2 million or $3.71 diluted earnings earnings per share and that compares to $93 million.
And $3 per share in Q3 of 2020.
Moving on to the balance sheet.
Total cash and short term investments at the end of Q3 were $1 billion and $343 million.
Compared to $1 billion and $167 million at the end of Q2 of 2021.
During the third quarter, we did not purchase any shares of our stock.
For the third quarter of 2021 net cash generated from operating activities was $234 million, which compares to $135 7 million in Q3 of 2020.
This increase mainly reflects higher operating profits.
Following the end of the quarter, we completed the acquisition of <unk> for approximately $125 million in cash.
<unk> is developing the droplet digital PCR system that could provide a more cost effective solution to streamline the digital PCR workflow for life Science research and diagnostic applications.
We see <unk> is accelerating <unk> entry into the lower end segment of the digital PCR business.
And allow for expansion in the two and a half to $3 billion.
PCR segment, thereby significantly increasing the opportunity for our <unk> platforms.
The adjusted EBITDA for the third quarter of 2021 was 23, 1% of sales the adjusted EBITDA in Q3 of 2020 was 22, 9%.
Net capital expenditures for the third quarter of 2021 were $34 $6 million and.
<unk> and amortization for the third quarter was 33 $7 million.
Moving on to the guidance.
Overall, we expect a continued trend to a more normalized growth rate. However, we are seeing increased supply chain constraints that create an elevated level of uncertainty around timing of customer deliveries.
We are now guiding full year 2021, non-GAAP currency neutral revenue growth to be between 12, and 13% versus our prior guidance of 10 to 10, 5%.
This updated outlook reflects the wider revenue range due to the supply challenges, which we are experiencing.
Full year Covid related sales are now expected in the range of $240 million to $145 million versus our prior guidance of $200 million to $210 million.
Full year non-GAAP gross margin is now projected to be between 57, five and 57, 8% versus prior guidance of 57 and 57, 5%.
Full year non-GAAP operating margin is forecasted to be about 19, 5% versus prior guidance of 19%.
Our updated guidance assumes higher operating expenses in Q4, as we continue to anticipate a gradual return to more normal activity levels.
Our updated annual non-GAAP effective tax rate is projected to be between 21 and 22%.
The lower rate versus our prior guidance is mainly due to an increase in compensation related tax deductions.
Full year adjusted EBITDA margin is now forecasted to be between 23, five and 24%.
Versus prior guidance of 23% and 23, 5%.
Lastly, with the uncertainty surrounding Covid, we are now planning to hold our Investor day in February due to our preference to host an in person event.
That concludes our prepared remarks, and we will now open the line to take your questions operator.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
Withdraw your question. Please press star followed by case and when preparing to ask a question. Please ensure your devices Amit it lightly.
Our first question today comes from Patrick Donnelly of sticky Patrick Your line is open. Please go ahead.
Hey, guys. Thanks for taking my questions.
Maybe not surprisingly start on the Hi, Patrick Your line is open.
Hey, guys can you hear me now.
Our next question comes from Dan Leonard of Wells Fargo.
Your line is open.
Alright. Thank you so hoping first you could elaborate further on the margin guidance in the fourth quarter. It looks like operating margins are stepping down to 15%.
Sure, but then actually operating margin, we are guiding to a higher one and if you break it into the fourth quarter I think it's oh.
So slightly higher.
Are you comparing it year over year sequential quarter versus prior guidance.
Guidance Im trying just to gauge a little bit more.
Versus which guidance are you comparing it to.
Well the the plug for the full year Guide I think you said.
19, 5% for the full year and given the non-GAAP results through the first three quarters were coming up with an implied 15% in Q4 to get to 19 and App.
And that.
That compares lower than previous quarters, either year on year or sequentially.
Yeah. So.
We did indicate slightly higher operating expenses in terms of the fourth quarter sequentially.
And that's.
Seasonality some of the discretionary expenses that are big and some of employee related expenses that are also sequentially higher debt Thats correct, Dan yes.
Okay, and then just a follow up can you offer an update on the progress we're making against the restructuring initiatives you announced back in February or are you seeing any cost savings from those efforts or is that more of a 2022 of that.
Yeah, Hi, Ben it's Andy here.
So a two part question first progress is going very well I would say we're on track with our expectations.
So thinking of contributions to operating performance. It really is a delayed effect the majority of that performance enhancement coming in 2023.
And some will materialize in 'twenty two more to the latter half of the year.
But everything is on track against our expectations right now.
Thank you.
Thanks, Tim.
Thank you Patrick Donnelly of thinking is related to your question. Your line is open.
Hey, guys can you hear me all right now.
Yes, we can think.
Okay, great sorry about that.
Maybe along just touching on the supply and demand issues you guys kind of called out you and Andy can you just talk to you a little more detailed maybe where youre seeing the pressures, whether it's business line or particular segments.
And then again it sounds like Youre expecting it to persist through 'twenty two maybe just talk through what you guys are doing to address it how we can expect that impact to play out over the next.
A couple of quarters.
Yes, Patrick this is Andy so.
Look it is fairly broad and you know the challenge, we felt complex products or you're going to need one components to be missing.
In the supply chain or two of impact here. So.
I don't think we're experiencing anything that's different to the rest of the industry or even beyond the beyond our sector just globally.
And it is very hard to determine when you.
This will tail off so prudently, where we're expecting it to.
Transitioning into 2022 as well.
But it can be as simple as you know an on off switch to full integrated boards and plastics.
For various products. So so that's the that's the issue we're facing what are we doing we are working extremely hard to team on supply chain and procurement.
As you know really working our supply partners and today.
To date, we have been doing very well, but you know.
There are constraints in everything.
I think we view it as prudent to call them out.
Because at some point.
So were impact your abilities.
Customers in a timely way.
Right sure and along with the revenue potential potential disruption, obviously increased costs could come along with it as well along and maybe just talk about are you guys expecting a margin impact from this are you seeing increased golf permits inflation whatever it might be can you just talk about the input cost if youre seeing any impact.
Sir.
Yeah. Thank you Patrick I mean, there are components in some areas that we do see pockets of price increase.
Obviously, we baked in everything into the guidance, we will have to continue and see kind of.
How long does it last and what does it mean, obviously moving forward but.
So far we were able also kind of to balance it off with some of our productivity and initiatives that we have internally. So yes, we did bake some of it into our guidance.
Okay.
And then maybe one for Matt It sounds like this is our last call. So congrats on the retirement.
But maybe on DD PCR it sounds like Biopharma is pretty strong could you just talk about the impact of <unk> one there what youre seeing in terms of the demand how durable you think this is obviously the wastewater picked up around COVID-19, but just how that how that segment is going and the expectations kind of going forward in terms of the growth profile.
Sure. Thanks, Patrick.
Well, we have maintained the strong double digit growth that we were seeing before the pandemic throughout it and.
We continue to believe that there is sustainability to the level of growth that we're seeing in our entire.
Droplet digital Pcr portfolio.
We have.
According to trade at the Biopharma market across on discovery into QC and manufacturing with all of our platform.
<unk>, one playing out more strongly in the <unk>.
In the manufacturing segment.
And you know we have a really strong.
Loan demand and great pipeline moving forward. So we're very very optimistic across the entire product line.
Very helpful. Thank you maybe one quick last one for norm just on the capital deployment side.
Can you just update us on your appetite for larger deals any change to the strategic component of sartorius or how youre thinking about sartorius going forward north.
Yeah. So so.
Obviously, we still think of sartorius as.
Very strategic asset for us.
I think we feel good about fact that we successfully closed the drop works acquisition. This last quarter and we continue to have.
Our portfolio of opportunities.
Uh huh.
We're exploring going forward. So so it's a pretty busy time.
Alright, Thank you very much.
Thank you Patrick.
The next question comes from Jack Meehan of Nephron research.
Please proceed with your question.
Thank you good afternoon.
My first question was on the diagnostics market in China.
Been a lot of focus on centralized purchasing initiatives in the region was curious what you might be seeing on the ground.
Broad that might be and just how you think bio Rad has positioned our businesses position there on the diagnostic side.
Hi, Jade.
We'll let Dara answer this question.
Yeah, So I think in in general.
Bye.
The ongoing sort of trends in the in the China market related to China for China localization. Another implications, we don't really see much impact there just given our mix and where we participate is it certainly is a trend we will continue to monitor to inform both our manufacturing and.
Supply chain strategies, but at this point.
No we don't see any any negative impact from the macro level trends.
Great.
And then one I guess stick with diagnostics.
The recovery looked pretty good in the quarter maybe.
Maybe just comment though do you think delta had any impact on the business during the quarter in terms of utilization.
You know obviously you ended up in a good spot, but what did you see throughout August and September.
Yeah similar to.
Prior quarters, its really sort of region specific and how.
Certain.
Kind of health care systems are able to balance the mix and routine health care delivery in diagnostic testing versus.
Dealing with Adam and Craig.
Burden from Covid related cases.
In North America, really operating sort of to pre pandemic levels, almost almost 100% in Europe, we see a little bit of an impact to elective surgeries that was.
Articulated in the opening comments from Milan, So that's really the only area, where we're a little bit behind pre COVID-19 levels, but overall I would say no.
Health care systems, they're learning how to operate in this new normal delivering routine care and accommodating.
Acute spikes in Covid related care.
Great and then.
My final question I wanted to turn to the life Science business.
So I think I caught you on in your comments, 22% growth ex Covid ex process media.
So by my math, that's compounding in the double digits a lot of your peers are more like mid to high single digits is kind of what we've been seeing.
Not sure if it's all DD PCR, but just maybe broadly how you're feeling about the funding environment and also are there any other products that really have been standing out.
Sure do you want to address the question or.
Sure.
Well, we've seen really good recovery in our base business and you know even when we compare it to 2019.
Throughout the course of the year, we've seen really strong performance from our protein quantitation business certainly process is driving a lot of the growth there as well, but digital PCR continues to be a very important growth driver for the life Science group.
Great, Thanks, and cheering brands in that retirement, yeah. That's helpful.
Okay.
Thank you.
Yes.
Thank you as a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
Our next question comes from Brandon Couillard of Jefferies, Brian Dan Your line is open.
Okay.
Hey, Thanks, good afternoon.
And that one of the Echo best wishes in your.
Future retirement as well.
And a follow up question on the <unk> business couple.
Couple of things a chance you could give us a sense of the mix today, where it stands between capital equipment and recurring consumables and maybe comment just kind of on the competitive landscape. We've seen some new introductions out there from a couple of other companies just curious what impact this might be havent if at all.
Sure sure well we are we have essentially closed system. So we get really really good pull through on all of the systems that we sell and I think.
Last I looked it was.
Almost 50 50.
So really good balance between the consumable pull through and the platform sale.
We were certainly aware of of new entrants into the market.
I know that there are no recently launched a new low throughput digital PCR system and we occasionally see these new new products in the field, but frankly, we continue to win sales based on.
Our differentiated value proposition and superior performance.
And.
Think we feel pretty confident in our strategy and the current product offering that we have.
I think if anything the new competition really validates the utility of this digital PCR application in the in the bigger.
Our market.
Yeah.
We're feeling pretty good about where we are.
As a follow up to that it would be curious if you could just elaborate a little bit more on the drop works business you'd shared the revenue base with those kind of margin profile a since of growth over the last couple of years.
And I'll also be curious if you could kind of touch on exactly why this platform is particularly suited for the low end market more basic research and diagnostics, whereas the culex, one maybe isn't the right tool for that type of customer.
Mhm.
Sure.
The Q1 was really.
Developed for the Biopharma market, where high throughput.
And automation.
It was really and very high performance were really the key driver.
When we want to address a broader.
Hey, even Q PCR market with digital products, we certainly were looking forward.
Integrated workflows, and that's something that we have with the drop works platform and the design and.
This platform is well suited for cost sensitive segments. The low end of the digital PCR market and certainly we think we can disrupt.
Some of the higher end of the Q PCR market with this product as well.
Okay, maybe I'll on any financials, you can kind of share with us in terms of the.
Revenue base or margin profile is it profitable or not any numbers on that business.
Yeah, we usually Brendan don't breakdown at this level of details.
In the each of the business groups.
Yeah.
Okay, maybe I'll follow up then.
Just a clarification on the core growth for the year of 12% to 13% does that include the $32 million of back royalties from Pemex.
I want to be sure.
No that does not include the $32 million of mechanics does not.
Got you okay.
And then lastly, just.
You sort of think about 'twenty, two and granted not expecting you sort of give guidance at this point, but you also said that how we should sort of think about the profitability trend next year as your ability to manage the P&L as the COVID-19 revenues likely come down next year.
Would it be relevant to think about the fourth quarter as kind of a good baseline in that context, where most of the COVID-19 revenues have kind of washed out next.
Next year.
Yeah, It's a great question Brandon.
Obviously generally at this point we are not.
He had prepared for to comment on the full 2020 tool, but you know if you think about kind of.
Regarding our initial thinking.
We do believe that for us COVID-19 related sales.
<unk> will continue to go down I know if you think about the guidance this quarter. It implies already in the fourth quarter in the range of about 20% to $25 million for the Covid related sales and we believe it will continue to go down.
Well, we'll have to balance the different inputs the supply chain constraints.
JBT and what is it going to and how is it going to impact in our thinking about 2022.
The material cost is different.
Aspect that we still need to kind of compile and see what does it mean for the overall guidance.
In terms of the core.
Klein.
We continue to believe that.
We hit.
Really good kind of base too.
To think about kind of the next level in terms of the 2022.
We if you think about it we continue to be in the path to achieve our 2023 target model that we communicated back in December.
That's our current thinking.
Got you.
Thank you.
Thank you.
Thank you as a final reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
We have nice all the questions in the queue, So I'll hand back to the team to place.
Thank you Lydia. Thank you everyone for joining today's call. We appreciate your interest and we look forward to connecting soon thank you.
This concludes today's call. Thank you for joining US you may now disconnect your lines.
Okay.
Uh huh.
Yes.
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Okay.
Okay.
Okay.
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