Q2 2022 Bio Rad Laboratories Inc Earnings Call
Yeah.
With relaxation of the Lockdown, we announced seeing improved conditions for the second half of the year.
The Lockdown also had some further negative effect on the ongoing supply chain challenges, we have all been experiencing.
Our organization and operations continue 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.
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.
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 a 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 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.
Compared to $334 2 million in Q2 of 2021, which is a three 5% decline on a reported basis and a 0.5% increase on a currency neutral basis.
Despite 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 Q Pcr 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 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 corporate 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.
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 nine 7% of sales.
Impaired 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 expense.
Q2, operating income was $122 million or.
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 BIOLASE ownership of Sartorius AG shares negatively impact impacted the 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.
This 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 in Europe for previously approved products of $2 5 million.
Amortization of purchased intangibles of $1 8 million.
Legal 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.
This 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 and $338 million at.
At $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.
Right 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 or $3 38 diluted earnings per share compared to $106 6 million.
Or $3 54 per share in Q2 of 2021.
Moving on to 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.
In aggregate, we now have approximately $298 million available for potential buybacks.
The adjusted EBITDA for the second quarter of 2022 was 22, 6% of sales.
Adjusted EBITDA for Q2 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 COVID-19 related sales is 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.
These represent 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 more thank.
Thank you Pat.
Thanks for your question please.
I would like to again to ask a question press Star one as a reminder, if you are using.
Speakers please.
Please remember to pick up that one.
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 breakout what youre expecting now for the full year between the two segments on Ireland.
A core growth basis, excluding Covid 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 what.
Level of visibility and confidence you guys had been 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 process 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 eight groups for the full year.
And if you want to add and I think Thats I think thats right.
I've got nothing to add.
Okay, and then maybe Andy sticking with you on the supply chain, you talked about kind of continuing some level.
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.
You objected to get better in the back half and some of maybe the initiatives you guys are taking to 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.
Increased 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 starts to improve.
Our sales pricing in the second half.
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We don't anticipate supply constraints going away completely by the end of the year, but we certainly do expect them to raise as we move forward.
And in terms of actions we're taking.
We continue to.
Put a lot of emphasis internally on the <unk>.
Procurement side of the organization and.
Being flexible Manny.
Manufacturing lines.
As components become available and we expect to continue to do that.
Through the second half.
Great and then last one.
Housekeeping one for you on the tax rate has come in below 20% here two quarters in a row I think your initial guide was kind of in the 22% to 23% range for the year.
Still the right range or any updated thinking on what we should pencil in for the tax rate for the year now thanks, yes.
Generally speaking.
The price range.
Obviously on a quarterly basis, the geographical mix of earnings.
Wade in.
We did get and we will continue probably later in the year and get some benefit from.
The export sales, which does benefiting a little bit the rates.
But overall, yes, we are maintaining it.
Super Thank you thank.
Thank you.
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, what the order growth is.
Some metrics that would 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 put 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 or not and we provided some commentary earlier in the conversation here I'd say that demand across the board. The launch times continues to be how pleased with see recovery.
The core markets and we've got a couple of business side, we just thought we've called out as growth pillars previously, while we continue to see really strong demand.
I see a consumables and assays, we have seen really robust demand in a couple of areas of business should not be moderated to some degree by the supply chain challenges that 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 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.
Mentioned, we've got a 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 because visibility in what that inventory looks like now relative to kind of what you saw last quarter, where we're at now it's building.
Guys. It's almost finished and just wait on one or two things.
Yes.
I think the profile.
The site.
And a lot of.
Work in progress right thing.
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 versus Q4.
So you can see that.
Really staged.
As we get released by procuring the right components or to ship.
So our shipping profiles during the quarters are quite different as well as you might expect.
And I think that will just continue but with the improvement in the second half versus the first half.
Yes, Patrick maybe I can.
Go ahead on OSB as Andy mentioned earlier.
The order backlog.
Healthy and continues to grow.
And the elevated inventory.
Actually.
We will be fulfilled once we were 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 actually we are really encouraged by the order backlog. The FCC held there, yes, 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 orders.
So.
We've got pretty good sense about 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 it's just waiting on one or two days.
It looks like you guys are seeing.
A nice inflection there.
And maybe last one of the largest on the on the cost side you guys, obviously put up some pretty significant restructuring activities.
Looks 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.
That transition when we should see some of those those cost benefits start to show up on the margin side. It feels like that's lever for you Paul.
Sure Yeah. Thanks, Patrick for the question so.
As the first historically.
Structuring 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're 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.
Proven 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 to.
Some of that benefit year over year on the gross margin so.
Again everything is is in line earnings baked into our full year guidance and.
Yes, no delays there.
Great. Thank you guys.
Okay.
Thank you.
Our last question is from the line of Jack Meehan with Nephron Research. Please proceed.
Thanks, Good afternoon.
I 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 million of sales that were impacted with just curious have you caught up on any of that year to date.
And is it possible to quantify.
What impact.
Or what.
<unk> would have been if you didn't have these shortages here in the second quarter.
Yes, we're not going as far as to asset growth the number out there at this point.
Jackpot.
Yes, Youre right we had.
Backlog at the end of Q4.
We didn't anticipate we would 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 backhaul.
Order pipeline is another way to consider it.
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And our work with selling based on our supply chain constraints right now.
And the component shortages that you talk about is it still predominantly semiconductor chips or is it broadened out anything else.
I know, it's mostly electronic components and on a candidate for example is one shift here and there.
The passion that you get some piece of turret bearing door step.
Stefan Larsson, our thumb, some unanticipated component, but it is a modest way electronic components and chips.
Yeah.
And.
And the product families that are impacted it's predominantly DD Pcr or what other products would that hurt.
Yes, all instruments across our instrument lives, whether they are clinical or life science and.
We have a fairly broad portfolio of instrumentation as youre now.
So we see we see it across a large large number of different product areas.
Slide <unk>, just 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 what would the segment have done if not for the Lockdowns.
I think we have to offer on the line.
I noticed you've got a few comments you can make around that.
Sure Yes.
Don't think that we're going to sort of.
Particularly what the growth kind of what would have been if we hadn't had that the lockdown, but it wasn't material impact.
Yeah.
The lockdown lifts for most of the quarter and.
Compounded by sort of logistics challenges and the China Lockdown it was a bit of that.
But one two punch, so we're going to need to catch up catch up from that.
Back half of the year and similar to that.
Instrument supply constraints demand is demand is strong it's just a film.
The challenge and 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 probably in Q2.
No I think I think that profile as well.
Well without getting into it.
Specific details.
Numbers okay.
Okay.
Last question for me is there any color you can give on pricing in the quarter of 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.
Have we did rollout price increases.
Averaging 45%, mostly across the life science industry business in the first half.
It started to see some realization of those price increases now.
Largely offsetting the inflation the cost inflation, we're experiencing.
On logistics and raw materials.
We're assessing further price increases before the end of the year.
We would likely try and track a bit more price in the second half if we feel we can add.
Yes.
But overall.
We are looking to offset the inflationary costs that are coming that are coming assets.
Super Thank you guys.
Thank you.
Thank you.
There are no additional questions waiting at this time I will turn the call over to Ed 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.
Okay.
Okay.
Sure.
Yes.