Q1 2022 Bio Rad Laboratories Inc Earnings Call
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, Simon May President of the life Science Group and Dara Wright President of the clinical diagnostics group.
Before we begin our review I would like to caution everyone that we will be making forward looking statements about managements goals plans and expectations, our future financial performance and other matters. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties.
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.
<unk> 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 Chief Financial Officer Ilan Daskal.
Thank you Ed good afternoon, and thank you all for joining us.
Before I begin the detailed first quarter discussion I would like to ask Andy last our chief operating officer to provide an update on <unk> operations Andy.
Thanks, a lot.
For the first quarter of this year represented an interesting shift in the dynamics of our business overall, our markets have recovered to close to pre pandemic levels of demand as the macro incidence rates of COVID-19 .
And COVID-19 testing as declines.
However, significant more localized surgeries, especially in China drove higher than anticipated PCR instrument demand during the quarter.
The surge in China, and subsequent major city Lockdowns in the country are of course, now creating increased uncertainty around logistics and near term demand Richard protracted could adversely impact Q2 sales.
Overall, we still expect that our COVID-19 related sales will continue to ramp down quickly compared to the last two years.
In addition during Q1, the Russian invasion, if you try and resulted in a position of significant sanctions and actions towards Russia.
While these sanctions did not cause a material impact to Q1 revenues, we will closely monitor this dynamic situation going forward.
Operationally, we have now opened up our offices for a broad return to the workplace and are seeing a positive uptick in business related travel for customer and business meetings.
To date, we have continued to maintain a very high internal safety right for our employees.
The overhang of the pandemic effects on the supply chain, However remains significant and we experienced ongoing difficulty in securing raw materials, especially electronic components as well as higher logistics costs.
We do not see this easing until the second half of the year and continue to carry on order backlog primarily on instruments as a result.
In closing, while we continue to experience supply chain challenges. We are very pleased with our organization's ability to continually adjust to the changing demands of the COVID-19 pandemic and other major macro attractive impacting us.
So at this point I'll say, thank you and pass it back to our lab.
Thank you Anthony now I would like to review the results of the first quarter.
Net sales for the first quarter of 2022 were $701 million, which is a three 7% decline on a reported basis versus $726 8 million.
In Q1 of 2021.
On a currency neutral basis sales decreased 0.8%.
The first quarter of declining revenue was a result of slower Colby related sales this year.
We estimate that Covid related sales were about $45 million in the quarter, which reflect an elevated level in demand.
Looking ahead, we continue to anticipate a significant tapering in COVID-19 related sales compare to the last two years.
Core year over year revenue growth, which excludes COVID-19 related sales increased six 5% on a currency neutral basis.
On a geographic basis, we experienced currency neutral year over year core revenue growth across all three regions, while COVID-19 related year over year sales decline globally.
We know the key the key markets where newly at full recovery.
And to the Lockdowns in China during the final days of March.
As Andy mentioned earlier, we continue to carry an elevated order backlog as a result of supply chain constraints.
Overall, we still anticipate supply chain constraints for the life Science group to ease starting mid year and for the diagnostics group to ease towards the end of this year.
Sales of the life Science group in the first quarter of 2022 were $347 2 million.
Compared to $366 5 million in Q1 of 2021, which is a five 3% decline on a reported basis.
Two 5% decline on a currency neutral basis.
Excluding <unk> related sales the underlying life science year over year currency neutral core revenue growth was 12, 9%.
The year over year growth was driven by process media and droplet digital Pcr.
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 the underlying life science business declined nine 6% on a currency neutral basis.
Since Q1 of 2021 due to lower <unk> related sales.
When also excluding Covid related sales revenue growth was six 2% on a currency neutral basis.
On a geographic basis life science experienced currency neutral year over year core revenue growth in the Americas and in Asia, While Europe was about flat.
Sales of clinical diagnostics group in the first quarter were 351 8 million.
Compared to $358 5 million in Q1 of 2021, which is a one 9% decline on a reported basis.
One 1% growth on a currency neutral basis.
Core clinical diagnostics year over year revenue growth, which excludes COVID-19 related sales increased one 7% on a currency neutral basis.
The diagnostics group Canarsie neutral year over year sales increase was driven by blood typing in clinical immunology as well as the recovery of routine testing, which is now approaching pre COVID-19 levels.
Supply chain constraints had an impact on instrument placements within the diabetes franchise.
On a geographic basis, the diagnostics group year over year currency neutral sales grew in the Americas, and Europe and declines in Asia.
The reported gross margin for the first quarter of 2022 was 57, 6% on a GAAP basis and compares to 55, 1% in Q1 of 2021.
The year over year gross margin improvement was mainly due to a decline in expenses associated with the European restructuring initiative in the same period last year, which was partially offset by increased logistics cost and less favorable product mix.
Amortization related to prior acquisitions recorded in cost of goods sold was $4 5 million.
Compared to $4 6 million in Q1 of 2021.
SG&A expenses for Q1 of 2022.
$197 6 million.
Or 28, 2% of sales compared to $225 9 million.
Or 31, 1% in Q1 of 2021.
The year over year SG&A expenses decreased mainly due to higher expenses in the same period last year associated with the European restructuring initiative.
And was partially offset by higher employee related expenses.
Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1 8 million.
Versus $2 4 million in Q1 of 2021.
Research and development expense in Q1 was $62 5 million or eight 9% of sales compared to 50, $273 9 million or 10, 2% in Q1 of 2021.
The year over year R&D expenses decreased due to higher expenses associated with the European instructed restructuring initiative in the same period last year.
Largely offset by increased project spend and employee related expenses.
Q1, operating income was $143 4 million.
Or 25% of sales compared to $109 million.
Or 13, 9% in Q1 of 2021.
Looking below the operating line the change in fair market value of equity Securities Holdings, which are substantially related to <unk> ownership of Sartorius AG shares negatively impacted the reported results by $4 billion and $545 million.
During the quarter interest and other income resulted in net other income of $30 7 million.
Compared to $16 $9 million last year.
Q1 of 2022 included $31 6 million.
Dividend income from Sartorius.
<unk> $219 million last year.
Q1 of 2022 also included $4 million of interest expense related to the recently issued senior notes.
The effective tax rate for the first quarter of 2022 was 22, 9% compared to 24, 7% for the same period in 2021.
The effective tax rate in Q1 of 2022 was primarily affected by the unrealized loss in equity Securities and a tax rate reported in Q1 of 2021 was primarily driven by the unrealized gains in equity securities last year.
Yes.
Reported net loss for the first quarter was $3 billion and $369 6 million and diluted loss per share was $112 57.
Compared to $977 4 million of net income and $32 38 per share in Q1 of 2021.
This decrease from last year is largely related to changes in the valuation of the Sartorius holdings.
Moving on to the non-GAAP results.
Looking at our results on a non-GAAP basis, we have excluded certain atypical and unique items that impacted both the gross and operating margins as well as other income.
These items are detailed in the reconciliation table in the press release.
In cost of goods sold we have excluded $4 5 million of amortization of purchased intangibles and small restructuring expense.
These exclusions moved the gross margin for the first quarter of 2022 to our non-GAAP gross margin of 58, 3% versus 69% in Q1 of 2021.
non-GAAP SG&A in the first quarter of 2022 was 27, 4% versus 25, 4% in Q1 of 2021.
In SG&A on a non-GAAP basis, we have excluded an in vitro diagnostic registration fee in Euro four previously approved products of $2 8 million.
Amortization of purchased intangibles of $1 8 million.
Legal related expenses of $1 $2 million.
Small restructuring related expense.
non-GAAP R&D expense in the first quarter of 2022 was eight 9% versus seven 9% in Q1 of 2021.
In R&D on a non-GAAP basis, we have excluded a small restructuring benefit.
The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 25% on a GAAP basis to 22% on a non-GAAP basis.
These non-GAAP operating margin compares to a non-GAAP operating margin in Q1 of 2021 of 25, 8%.
We have also excluded certain items below the operating line, which are the decreasing value of the sartorius equity securities and loan receivable holdings of $4 billion and $545 million.
And about a $1 million loss associated with venture investments.
The non-GAAP effective tax rate for the first quarter of 2022 was 19, 6% compared to 23, 6% for the same period last year.
The lower rate in 2022 was driven by the geographical mix of earnings as well as benefit associated with preferential tax rate related to export sales.
And finally non-GAAP net income for the first quarter of 2022 was $149 1 million.
Or $4 94 diluted earnings per share.
<unk> to $157 4 million and $5 21 per share in Q1 of 2021.
Moving on to the balance sheet.
Total cash and short term investments at the end of Q1 was $2 billion and $79 million compared.
Compared to $875 million at the end of 2021.
The change in cash and short term investments from the fourth quarter was primarily due to proceeds from the recent $1 2 billion senior notes offering.
During the first quarter, we did not purchase any shares of our stock and we have a total of $223 million available for potential share buybacks.
For the first quarter of 2022 net cash generated from operating activities was $46 million, which compares to $114 million in Q1 of 2021.
The decrease in operating cash flows was driven mainly by the change in working capital.
The adjusted EBITDA for the first quarter of 2022 was $211 1 million.
32% of sales.
And excluding the sartorius dividend was 25, 6%.
The adjusted EBITDA in Q1 of 2021 was $232 million.
Or 31, 9% of sales and excluding the sartorius dividend was 29, 3%.
Net capital expenditures for the first quarter of 2022 were $28 9 million.
And depreciation and amortization for the first quarter was $32 million.
Moving on to the guidance.
We maintain our full year currency neutral revenue growth guidance to be between one and 2% or eight five to nine 5% when excluding COVID-19 sales.
Taking into account the current supply chain challenges, we anticipate full year core growth for the diagnostics group to be between two and 3% versus our prior guidance of 3% to 4%.
For the life Science group, we now expect 2022 core growth to be at the high end of our prior guidance between 16% to 18%.
Given the higher sartorius dividend declared in the first quarter, we are increasing our adjusted EBITDA guidance Accordingly.
We now project full year adjusted EBITDA to be between 24, and 24, 3% versus our prior guidance of $23 five and 23, 8%.
That concludes our prepared remarks, and we will now open the line to take your questions.
<unk>.
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To your question.
We will pause here to briefly ask questions registered.
The first question is from the line of Patrick Donnelly with Citi. Please proceed.
Hey, guys. Thank you for taking the questions.
Maybe on the life Science business, you have to be touched on the therapy.
Just the year maybe comes out at the top end of that guide.
And again the guide initially certainly well above what we were expecting a nice nice growth rate can you just talk about what you saw in the quarter there.
First of all to come in above expectations, and secondly, again to give you the confidence to raise that I know there are some supply chain things and things you guys are watching.
But would love some color around the drivers of that business doing a little bit better.
Patrick I think this is Andy.
I'll take that one.
<unk>.
Good performance from these two PCI guidance.
And also process crime was particularly strong in Q1.
When we look through to the full year now we did we did have supply chain constraints in Q1.
But when we look through to the full year, we see.
Good visibility to those constraints kind of.
Easing off by the middle of the year for the life Science business and so that's the basis of the.
Slight shift in guidance on the life science business.
Yes.
Okay.
And then maybe on the margin side, obviously kind of reiterating that.
It kind of op margin guide there can you just talk about how the quarter tracked relative to your guys expectations again visibility into kind of hitting that number I know the restructuring.
Should start to help at the end of the year, but maybe just talk about the different levers you guys have for what you saw in the quarter on the margin front.
Sure. Thank you Patrick I appreciate the question.
I'll start maybe with the gross margin.
There were several moving parts, obviously, starting the quarter.
But as the quarter progressed.
There were areas that we knew in advance for example, the product mix.
The COVID-19 kind of subsiding, which is a little bit of a headwind to margin.
There were others that were some tailwind.
Logistics is still a headwind.
Elevated freight that's another component that was different.
Definitely out there.
We saw some of the discretionary expenses that starting to come back.
As well as service.
Service cost that will be kind of.
Within the customer's premises and servicing customers and that's kind of when you think about it year over year definitely we see a difference there and the last point that I'll call out here.
There are some headwinds specifically this quarter, which is associated with our ramp in our Singapore facility with some of the transitioning from our European kind of closure and these are costs that we did expense earnings part of the gross margin and so it's kind of a duplication of costs for this quarter that that we saw.
Okay. That's helpful.
And then maybe on the product side, you guys gave a good amount of detail on DD PCR at the analyst day.
The update in terms of how that performed in the quarter expectations for that for the remainder of the year I don't know, maybe Simon Barry talk a little bit about.
What you saw in the quarter, and then again kind of how youre thinking about the year playing out.
I'd say overall, we were pretty pleased with the performance in the quarter.
The supply chain challenges that we've experienced led through to moderate degree Jimmy.
The DD PCR products overall remains pretty strong and on site, we got a pretty bullish outlook on the full year.
Alright, and last one maybe for you just on the capital allocation.
Acacia side, you mentioned no shares repurchased in <unk> with the stock hovering at call. It 500 Bucks.
You guys have been opportunistic in the past.
What is the window look like here given the market volatility.
Yes, Thanks, Patrick I appreciate the question.
There are few aspects here first we obviously will continue to be opportunistic in the approach and.
Similar to the past once we feel comfortable.
We won't be shy to step in with larger amounts of the buyback with that said, we continue to balance sheet.
The other capital allocation kind of matrix is in terms of.
Potential inorganic activities and we need to prioritize into balance between all the other aspects.
And that will continue to be kind of the driver for us in terms of determining.
The right timing to slipping in terms of the buyback.
Understood. Thank you.
Sure. Thank you.
Thank you Mr Dominantly.
The next question is from the line of Brandon <unk> with Jefferies. Please proceed.
Hey, Thanks, good afternoon.
A lot of in terms of the slightly lower diagnostics outlook for the year is that all tied to the China Lockdowns and I think you've mentioned.
The patient have some impact in <unk>, you're able to quantify that.
Yes, it's largely related to supply constrained.
Frankly.
Sizing related supply constraints, and particularly because we're in a highly regulated environment. Its not turn it is easy to source and replace components, particularly electronic components, which are plaguing the industry broadly.
Frankly, that's it.
The demand demand is good we're supporting our customers.
Provide a bit of headwind.
For a bit longer throughout the year.
Yes.
And maybe just sticking with that might be helpful. If youre able to just quantify that.
Pursuit of the China business that is diagnostics.
In general.
So.
Generally generally speaking.
Asia is just just over 20% for US overall, China is a material portion of the overall kind of Asia.
Revenue.
We historically did not kind of split between the two groups but.
But.
<unk>.
That's kind of if I had to quantify it on high level Brendan.
Okay.
Maybe one for Simon and process media do you think youre gaining share in that market are you, having better success, winning earlier stage programs and do you expect the process media strength to continue through the second half of the year. It feels like you might be lapping some pretty tough comps.
Yes, I think overall, we're pretty pleased with the growth that we saw in Q1 for sure.
And as we think about the portfolio strength.
Our play our exciting <unk> play is pretty is et cetera, some sweet spots.
<unk> therapeutic modality areas that are growing and I still think we're relatively underpenetrated it'll continue to remain a little bit lumpy from quarter to quarter, but I think we see the momentum continuing.
Okay.
For Alon SG&A.
non-GAAP number was down like $30 million sequentially.
Elaborate on the bridge there and how should we think about the Opex Phase Inc. As we move through the balance of the year.
So it wasn't I get that it was down it was mainly the restructuring.
Last year on a non-GAAP actually it was slightly up from one like 184 to $1 92.
And so these are <unk>.
Employee related and.
Some some insurance payment that we had that we received last year. So these were mainly at pretty minor changes, but overall the gift that you're alluding to is more on a GAAP basis not on a non-GAAP basis.
From a balance sheet now alright. Thanks.
Thank you Mr. Hilliard.
The next question is from the line of Jack Meehan with Nephron Research. Please proceed.
Thank you good afternoon.
Ilan to start was wondering if you could give some color around what your expectations are for core growth by segment.
The second quarter.
Yeah. So.
Sure. Thanks for the question.
We are guiding on a full year basis.
And Thats, where probably will.
<unk> kind of in terms of the overall guidance.
What I can say as we mentioned during the call the supply chain constraints.
We expect them to ease by midyear for life science in that part of.
The reason that we felt comfortable to up the midpoint of the guidance for <unk> for life science to the higher end of the range of between 16 and 18%.
For diagnostics it will take probably through the end of the year and Thats. The reason that we are little bit lower.
The guidance range over there.
Okay, and then on the Covid front.
Is your target for the full year changed at all.
And within China, you talked about some additional instrument demand are you exposed on the consumable side to any of the mass testing, which is going on.
Suzanne.
Just to clarify the last piece of your question you.
Referring to Covid testing in China on the consumer correctly.
Yes, yes.
So to answer the last bit first no not particularly.
Our footprint has really been on the instrumentation for the remarks through the entire pandemic.
I'm, sorry could you repeat the first part of the Christian Toro.
Sure, Yes, just the target for the full year has that changed at all related to the Covid contribution.
We're not we're not currently adjusting our courtyard covered.
Guidance number right at this point in time.
Yes, Jay.
We originally thought about.
Most of the amount to be more on the first half of the year right.
Currently don't have a better visibility that we feel comfortable to change that number.
Great. Okay, and then you mentioned the return to work.
Increase in sort of travel cost.
Possible.
Unifi, just what sort of step up you expect for the remaining of the year related but some of the discretionary costs coming back into the business.
So first of all.
We baked it into our forecast already in the beginning of the year.
We do not assume that it's going to go back to pre pandemic level that was not part of our guidance.
But it's.
No.
Above the 50% level that it was.
During the pandemic.
Okay.
50%.
From the pre pandemic and above the pandemic itself.
Got it.
And then final question.
Obviously, you've had pretty unprecedented market volatility this year it seems like one thing after another.
Just curious in the midst.
You did the debt raise.
Redid your credit agreement I was just curious how the backdrop might influence your thinking around <unk>.
Interest to appetite and larger deals.
<unk> been vocal around interest and merger of equals as well just curious if you could weigh in on all of that.
Yes, maybe I'll, maybe I'll take that yes, I mean, obviously, we continue to be interested in.
In an inorganic.
Growth as well as the organic growth, which is actually going pretty well.
Yes.
On the M&A side, we do have several things that we're looking at.
And.
And as we said I mean, we obviously, we do have an appetite for doing.
Something larger but but.
Those are few and far between.
So we'll have to wait and see.
In the meantime, we're thank you norm and doing a number yes, we are continuing to pursue a number of of.
Kind of tuck in opportunities.
Thank you Mr Monahan.
There are no additional questions waiting at this time I will turn the call over to Anton for closing remarks.
Thank you for joining today's call. We appreciate your interest and we look forward to connecting soon take care.
That concludes today's call. Thank you for your participation you may now disconnect your lines.
Okay.