Q2 2022 Bio Rad Laboratories Inc Earnings Call
Turning the call over to Lon basketball.
Vice President and Chief Financial Officer.
Good afternoon, and thank you all for joining us before.
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 rates operations Andi alright. Many thanks <unk> good afternoon everybody.
So the second quarter EBITDA continued with a similar profile to the first quarter.
Overall demand for both life science and clinical diagnostics continues to be strong.
And localized searches of Cognex continued.
China in particular drove higher than expected PCR instrument demand power.
However, the stringent lockdown policies in China, and the extended nature of the Lockdown.
<unk> did have a negative impact on local sales on both sides of the business during the quarter.
With relaxation of the Lockdown, we announced seeing improved conditions for the second half of the year.
Lockdown also had some further negative effect on the ongoing supply chain challenges, we have all been experiencing.
Our organization and operations continued to work efficiently during the second quarter and despite sporadic localized upticks in Covid our offices have remained open.
The expected level of improvement and supply chain constraints in Q2 did not fully materialize in the quarter was again challenging for supply of instruments against the backdrop of backdrop of strong demand.
As a result, our order backlog continued to build along with our inventory levels of raw materials and work in progress instruments.
With that said, we have found our orders to be sticky and our customers' customers are being patient.
During the quarter, we also experienced a continuation of elevated logistics and raw material costs.
Overall, we are putting significant effort into procuring required materials and remain optimistic around improvement and supply chain constraints towards the back half of this year.
With the ongoing Russian invasion of Ukraine and in position to further sanctions on Russia, We did experience a modest decline in our life science business sales to Russia during the quarter, while sales of our clinical diagnostic products were largely unaffected and.
We expect this dynamic to continue through at least the remainder of the year.
As a final comment despite the challenges of Covid impact in China in particular, and the Russian War on Ukraine.
Our organization has continued to excel in managing the supply chain challenges and supporting the needs of our customers and we're very encouraged by the strong and consistent improvement in demand across our life science and clinical diagnostic businesses.
So with that I'll say, thank you and pass it back to Atlanta.
Thank you Andy.
Now I would like to review the results of the second quarter.
Net sales for the second quarter of 2022 were $691 1 million.
Which is a three 5% decline on a reported basis versus $715 9 million in Q2 of 2021.
The second quarter decline in revenue was mainly a result of lower COVID-19 related sales this year.
On a currency neutral basis sales increased 0.5%.
We estimate that Covid related sales were about $33 million in the quarter and continued to reflect an elevated level in demand, particularly in Asia as a result of the ongoing outbreak in China.
Looking ahead, we continue to anticipate significant tapering compared to the last two years and expect about $15 million of Covid related sales in the back half of this year.
Core year over year revenue, which excludes COVID-19 related sales increased five 7% on a currency neutral basis.
On a geographic basis, we experienced currency neutral year over year core revenue growth in the Americas and Europe .
Core revenue in Asia declined, which reflects the extended lockdowns in China that negatively impacted our diagnostics business during the quarter.
As Andy mentioned earlier, we continue to carry an elevated order backlog as a result of supply chain constraints and continued strong customer demand.
We expect improvement relative to the first half of the year, Although we anticipate back orders to continue through the remainder of 2022.
Sales of the life Science group in the second quarter of 2022 were $322 4 million.
Compared to $334 2 million in Q2 of 2021, which is a three 5% decline on a reported basis and is 0.5% increase on a currency neutral basis.
Despite the supply chain constraints, having an impact on instrument placements the underlying life science year over year currency neutral core revenue growth, which excludes colgate's related sales was 10, 6%.
The year over year growth was driven by process media Western blotting droplet digital PCR and <unk> products.
Process media, which can fluctuate on a quarterly basis saw strong year over year double digit growth versus the same quarter last year.
We are pleased with the continued momentum from our process media business and believe that the recently introduced pretax CHD columns should enhance our position in this segment.
Excluding process media sales the underlying life science business declined four 5% on a currency neutral basis versus Q2 of 2021 due to lower COVID-19 related sales.
When also excluding Covid related sales revenue growth was 6% on a currency neutral basis.
On a geographic basis life science experienced currency neutral year over year core revenue growth across all three regions.
Sales of the clinical diagnostics group in the second quarter were $367 8 million.
Compared to $382 million in Q2 of 2021, which is a three 3% decline on a reported basis and growth of 0.7% on a currency neutral basis.
Core clinical diagnostics year over year revenue growth, which excludes profit related sales increased two 1% on a currency neutral basis.
The diagnostics group currency neutral year over year sales increase was driven by blood typing quality control and clinical immunology and as I mentioned earlier supply chain constraints had an impact on instrument placements.
We have seen both recovery and increasing global demand for blood typing products.
As elective surgeries resume to pre pandemic levels and hospitals seek to expand capacity.
Specifically, we are benefitting from new account expansion in the Middle East and Africa from meaningful new tender wins.
On a geographic basis, the diagnostics group year over year currency neutral core revenue grew in the Americas, and Europe and the decline in Asia.
The reported gross margin for the second quarter of 2022 was 57, 3% on a GAAP basis and compares to 56, 1% in Q2 of 2021.
The year over year gross margin improvement benefited from the stronger U S dollar product mix and continued operational efficiencies, which was partially offset by elevated logistics costs.
Amortization related to prior acquisitions recorded in cost of goods sold was $4 5 million as compared to $4 6 million in Q2 of 2021.
SG&A expenses for Q2 of 2022 were $208 7 million or 32% of sales compared to $213 4 million or 29, 8% in Q2 of 2021.
The year over year SG&A expenses decreased mainly due to the stronger dollar and normalized employee related expenses that was partially offset by higher discretionary spend.
Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1 8 million.
Versus $2 4 million in Q2 of 2021.
Research and development expense in Q2 was $67 million or.
Or nine 7% of sales compared to $63 4 million.
Or eight 9% of sales in Q2 of 2021.
The year over year R&D expenses increased mainly due to project spend.
Q2, operating income was $122 million or 17, 4% of sales compared to $124 8 million or.
Or 17, 4% in Q2 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 impact impacted reported results by $1 billion and $338 million.
During the quarter interest and other income resulted in net other expense of $4 9 million.
Compared to net other income of $1 3 million last year.
Q2 of 2022 included $10 7 million of interest expense related to the $1 2 billion of senior notes issued earlier this year, partially offset by $5 million of interest income as well as an escrow release of $1 4 million.
Related to the sale of the informatics business that in 2020.
The effective tax rate for the second quarter of 2022 was 24, 2% compared to 21% for the same period in 2021.
The effective tax rate reported in Q2 of 2022 was primarily affected by the unrealized loss in equity securities and the tax rate reported in Q2 of 2021 was primarily affected by an unrealized gain in equity securities.
Reported net loss for the second quarter was $927 2 million.
And the diluted loss per share was <unk>, 31, and 12% compared to $914 1 million of net income.
$30 32 per share in Q2 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.
Looking at our non-GAAP results for the second quarter in cost of goods sold we have excluded $4 5 million.
Of amortization of purchased intangibles.
These exclusion moved the gross margin for the second quarter of 2022 to our non-GAAP gross margin of 57, 9% versus 56, 9% in Q2 of 2021.
non-GAAP SG&A in the second quarter of 2022 was 29, 4% versus 29, 2% in Q2 of 2021.
In SG&A on a non-GAAP basis, we have excluded an in vitro diagnostic registration fee in Europe for previously approved products of $2 5 million.
Amortization of purchased intangibles of $1 8 million.
<unk> related expenses of 900000.
And a small restructuring related expense.
non-GAAP R&D expense in the second quarter of 2022 was nine 7% versus nine 1% in Q2 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 17, 4% on a GAAP basis to 18, 8% on a non-GAAP basis.
These non-GAAP operating margin compares to a non-GAAP operating margin of 18, 5% in Q2 of 2021.
We have also excluded certain items below the operating line, which are the decrease in value of the sartorius equity securities and loan receivable holdings of $1 billion at $338 million.
The $1 6 million loss associated with venture investments and $1 4 million gain from the escrow release related to the 2020 informatics business sale.
The non-GAAP effective tax rate for the second quarter of 2022.
Was 19% compared to 21, 5% for the same period in 2021.
The lower rate in 2022 was driven by the geographical mix of earnings as well as benefit associated with preferential tax rates related to export sales.
And finally non-GAAP net income for the second quarter of 2022 was $101 4 million.
Our $3 38 diluted earnings per share compared to $106 6 million.
Or $3 54 per share in Q2 of 2021.
Moving onto the balance sheet.
Total cash and short term investments at the end of Q2 were $1 billion and $973 million.
Compared to $2 billion and $79 million at the end of Q1 of 2022.
Inventory at the end of Q2 reached $657 1 million.
From $605 5 million in the prior quarter.
The increase was the result of the ongoing supply chain constraints.
For the second quarter of 2022 net cash generated from operating activities was $52 million, which compares to $154 6 million in Q2 of 2021.
The lower quarterly operating cash flow, mainly reflects changes in working capital.
During the second quarter, we purchased 255000 shares of our stock for a total cost of $125 million.
Last week the board authorized an additional 200 million for share repurchase on top of our existing program.
We now have approximately $298 million available for potential buybacks.
The adjusted EBITDA for the second quarter of 2022 was 22, 6% of sales DHS.
The adjusted EBITDA of acute in Q2 of 2021 was 22, 3%.
Net capital expenditures for the second quarter of 2022 were $14 2 million.
And depreciation and amortization for the second quarter was $32 6 million.
Moving on to the non-GAAP guidance.
Based on the stronger than anticipated Kobe sales contribution in the first half of this year.
We now assume full year COVID-19 related sales of about $93 million of which approximately $15 million are projected for the second half of 2022.
We now anticipate full year currency neutral revenue growth to be at the high end of our guidance of 1% to 2%.
Core revenue growth, which excludes corporate related sales.
Now expected to be at the lower end of our prior guidance range of eight five to nine 5% on a currency neutral basis as we continue to balance between the ongoing strong customer demand and supply chain constraints.
We achieved 6% currency neutral revenue growth in the first half of the year and expect it to approach 11% for the second half of this year versus the second half of 2021.
This represents about 9% growth in the second half of 2022 over the first half of 2022.
We are maintaining the full year gross margin projection to be approximately 57, 5%.
Operating income margin at about 19%.
And adjusted EBITDA to be between 24 and 24, 3%.
That concludes our prepared remarks, and we will now open the line to take your questions operator.
And Lee if you would like to ask a question. Please press star followed by one on Mike Olsen keypad.
Yes.
Thanks.
Justin Please press star followed by Q.
To ask a question press star one.
If you are using speaker.
Speakers please.
Please remember that pick up.
With your question first.
First question is from the line of Brandon Couillard with Jefferies. Please proceed.
Hey, guys. This is Matt on for Brian . Thanks for taking my questions. I. Appreciate all the color on the updated guidance could you just break out what youre expecting now for the full year between the two segments.
A core growth basis, excluding corporate and then in terms of the step up you talked about in the back half kind of plus 11% from the plus 6% in the first half can you just talk about.
Level of visibility and confidence you guys have in that acceleration in the back half of the year here.
Sure so.
Currently the first part we generally.
Maintain the overall guidance.
For both of the business growth similar to what we provided earlier in the year.
Specifically in the second quarter, we saw some softness in the diagnostics business, specifically in China, but again generally we are maintaining the guidance for each of the business closed groups for the full year.
And if you want to add I think I think that's right.
I've got nothing to add.
Okay, and then maybe Andy sticking with you on the supply chain you talked to.
Continuing some level of them.
The challenges in the back half of the year.
Can you just talk about on a relative basis do you expect it to ease versus kind of what you saw here in the first half.
Will.
Do you expect it to get better in the back half and some of maybe the initiatives you guys are taking to that.
Kind of handle that may be worse for longer type scenario.
Sure.
Absolutely, we do expect it to ease in the second half relative to the first half which has been challenging obviously.
You did note that we mentioned.
<unk> inventory during Q2.
A lot of work in progress just sitting waiting on some for instruments sitting waiting on a small handful of components.
When they come in where it started to improve.
Our sales pricing in the second half.
Sure.
We don't anticipate supply constraints going away completely by the end of the year, but we certainly do expect them to rise as we move forward.
And in terms of actions we're taking.
We continue to.
Put a lot of emphasis internally.
Procurement side of the organization and.
Being flexible manner.
Manufacturing lines.
As components become available and we expect to continue to do that.
Through the second half.
Great and then last one more of a.
Housekeeping one for you on the tax rate has come in below 20% here two quarters in a row I think initial guide was kind of in the 22% to 23% range for the year, that's still the right range or any updated thinking on what we should pencil in for the tax rate for the year no. Thanks, yes.
Generally speaking.
The right range.
Obviously on a quarterly basis, the geographical mix of earnings.
Does <unk>.
We did get tenant will continue probably later in the year and get some benefit from.
LTE export sales, which does benefiting a little bit the rate.
But overall, yes, we are maintaining it.
Super Thank you. Thank you.
Hugh.
Thank you.
The next question is from the line of Patrick Donnelly with Citi. Please proceed.
Hey, guys. Thanks for taking the questions.
Maybe one on the life Science business, you talked about kind of the backlog.
Continuing to build order growth healthy supply chain seems to be holding you back a little bit. There can you just talk about I guess the demand environment, maybe if you're willing to quantify the backlog relative to what it was to start the year with the order growth is.
Maybe some metrics as to help us kind of think about what you guys are seeing and what you could deliver I guess in a normalized supply chain environment. You guys are putting up good numbers feels like it could be better if the supply chain was normal so just trying to flesh that out a little bit.
Hi, Patrick it's Simon here I'll take that one in terms of the backlog, we're not going to hang numbers are not then we provided some commentary earlier in the conversation here.
Sorry, not demand across the board the launch volumes continues to be held for use with seeing recovery in the core markets and we've got a couple of business I mean, just that we've called out as growth pillars previously, while we continue to see really strong demand.
I see.
Consumables and assays, we've seen really robust demand in a couple of areas of business should not be moderated to some degree by the supply chain challenges. We've already spoken about here I think as we enter the second half of the year.
I would echo Andy's comments on how we're thinking about an improvement in supply chain, but the underlying demand remained strong and we've got a healthy outlook.
Okay, and then Andy on the supply chain side I know last time, we chatted you kind of mentioned.
Lot of work in progress inventory with waiting on one or two inputs chip here. There is that still the case or is it kind of just waiting on some of those things to ease and again maybe.
Visibility in what that inventory looks like now relative to kind of what you saw last quarter, where I know it's still good. Thank you.
It's almost finished and just wave on one or two things.
Yes.
I think that the profile is.
<unk>.
And a lot of.
Work in progress at <unk>.
Sometimes it's just one component.
Hi.
Inventory levels increased about $50 million quarter over quarter Q2 over Q1, and we had a lift in Q1 two versus Q4.
So you can see that we're really staged.
We get relief by procuring the right components or to ship.
So our shipping profiles during the quarters are quite different as well as you might expect.
<unk>.
I think that will just continue but with improvement in the second half versus the first half.
Yes, Patrick maybe I'll add.
Go ahead Andy.
Andy mentioned earlier.
Are there a dialogue.
These healthy and continues to grow and the elevated inventory.
<unk>.
<unk> will be fulfilled philosophy, we are able to procure a few more component so.
Generally.
We are encouraged we don't we don't see any risk of that inventory and.
And we're really encouraged by the order backlog the FCC held there yeah I would just to add on the order backlog and I'm sure. It's kind of common across in a number of players in the industry right now.
It's very sticky.
We feel really good about our customer relationships, we do not see a lot of attrition against our borders.
So we're.
We've got pretty good sense that what's going on there.
Okay. That's good to know on the inventory side as well, where these things are kind of ready to go the orders are there and just wait and I wanted to congratulate.
You guys will be able to see a nice inflection there.
We lost one of the largest on the on the cost side you guys, obviously put up some pretty significant restructuring activities.
Feels like they should start to take hold as we work our way through the back half year can you just kind of update us where you are on that transition when we should see some of those those cost benefits start to start to show up on the margin side. If you have a nice lever for you Paul.
Sure Yeah. Thanks, Patrick for the question so.
The first thing I'll start with the restructuring itself in the activities associated with the restructuring are all on track in terms of the activities both in Europe as well as in Asia.
And we are starting to ramp.
Some of that activity already in Asia.
In addition, even if you look already in this quarter's results part of the gross margin.
Improving improvement year over year is associated with.
Improved efficiency and productivity that we're seeing another piece there was obviously benefiting from foreign exchange ratio and there were some elevated on the other hand elevated logistics costs, but definitely the efficiency and productivity did contribute.
Some of that benefit year over year on the gross margin so.
Again everything is is in line and it's baked into our full year guidance and.
Yes, no delays there.
Great. Thank you guys.
Thank you.
Thank you.
Our last question is from the line of Jack Meehan with Nephron Research. Please proceed.
Thanks, Good afternoon.
Wanted to continue on the supply chain team I guess my first question is back in the fourth quarter, you talked about I think 30.
$30 million of sales that were impacted.
Just curious have you caught up on any of that year to date.
Is it possible to quantify.
What impact.
Or what the sales would have been you didn't have the shortages during the second quarter.
Yeah.
Yes, we're not going as far as to asset growth the number out there at this point.
Jackpot.
Yes, you are right we had.
Backlog at the end of Q4.
We didn't anticipate rate with recapture all of that backlog in Q in the following quarter.
But since then our backlog has increased reflecting the supply constraints.
You could look at it.
Healthy backlog.
Order pipeline is another way to consider it.
<unk>.
And our work with.
Selling price from a supply chain constraints right now.
And the component shortages that you talk about is it still predominantly semiconductor chips or is it broaden that anything else.
Now, it's mostly electronic components and on a candidate eventful as one chip here and there.
Passion that you get some piece of turret bearing door step amongst some somehow anticipated component of it as a modest way electronic components and chips.
And.
And the product families that are impacted it's predominantly DD Pcr or what other products would that hurt yes.
Yes, all instruments across our instrument line, whether that clinical or life science and.
We have a fairly broad portfolio of instrumentation as you know.
So we see we see it across a large large number of different product areas.
Slide <unk> fluctuates based on getting that first component.
Okay.
Thanks for those questions I did have a couple of other ones just China is it possible that so that's the one region that decline this quarter just talk about the rate of decline in.
The diagnostics business like what would the segment have done if not for the Lockdowns.
I think we have to on the line.
<unk>, probably got a few comments you can make around that.
Sure Yes.
Think that we're going to sort of.
Articulate.
The growth kind of what would have been if we hadn't had that the lockdown, but it wasn't a material impact.
Yeah.
The lockdown lifts for most of the quarter end.
Compounded by sort of logistics challenges and the China Lockdown it was a bit about a bit of a one two punch so.
We're going to need to catch up catch up from that.
Back half of the year I mean similar to that.
Instrument supply constraints demanded demand is strong it's Jim.
Challenging frankly.
I don't know Andy if there's anything you want to add specifically about about China other than.
With the rail the rail impact broadly in Q2.
No I think I think that profile as.
Well without getting into it.
Specific details on that.
Okay.
Okay.
Last question for me is there any color you can give on pricing in the quarter or the year just how that's trending do you feel like have you been more active in trying to manage that in this inflationary environment.
Very good very good question and yes, we have.
Have we did rollout price increases averaging.
<unk>, 45%, mostly across the life science industry business in the first half.
We're starting to see some realization of those price increases now it is largely offsetting the inflation.
Cost inflation, we're experiencing.
On logistics and raw materials.
We're assessing further price increases before the end of the year.
We would like to try and take a bit more price in the second half if we feel we can and.
But overall.
We are looking to offset the inflationary costs that are coming that are coming at us.
Super Thank you guys.
Thank you.
Thank you.
There are no additional questions waiting at this time, so I will turn the call over to John for closing remarks.
Thanks, everyone for joining today's call. We appreciate your interest and we look forward to connecting soon.
Yes.
That concludes today's call. Thank you for your participation you may now disconnect your lines.
Yeah.
Okay.
Okay.