Bio-Rad Laboratories, Inc. (NYSE:BIO) Q3 2023 Earnings Call Transcript

Bio-Rad Laboratories, Inc. (NYSE:BIO) Q3 2023 Earnings Call Transcript October 26, 2023

Bio-Rad Laboratories, Inc. misses on earnings expectations. Reported EPS is $2.33 EPS, expectations were $2.87.

Operator: Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Bio-Rad Third Quarter 2023 Financial Results Conference Call and Webcast. [Operator Instructions] And please be advised that today’s call is being recorded on Thursday, October 26, 2023. I would now like to turn the conference over to Edward Chung. Head of Investor Relations. Please go ahead.

Edward Chung: Good afternoon, everyone. Thank you for joining us. Today, we will review the third quarter 2023 financial results and provide an update on key business trends for Bio-Rad. With me on the call 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’d like to caution everyone that we will be making forward-looking statements about management’s 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.

Our actual results may differ materially from these plans, goals and expectations. 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 financials, including net income and diluted earnings per share which are financial measures that are not defined under generally accepted accounting principles. Investors should review these reconciliations of the non-GAAP financial measures to comparable GAAP results contained in our earnings release. With that, I will now turn the call over to Andy Last, our Executive Vice President and Chief Operating Officer, to provide an update on Bio-Rad’s global operations.

Andy Last: Many thanks, Ed, and good afternoon to everybody, and thank you for joining us. Well, the third quarter of the year fell below our expectations. The ongoing challenges within the biopharma segment and economic constraints in China continued to drive lower Life Sciences performance in the quarter. Clinical Diagnostics sales were weaker than we forecasted impacted mainly by the softer China market conditions. We still anticipate a strong year-over-year growth with Clinical Diagnostics Group in the fourth quarter. We continue to successfully maintain focus on tight cost control and on the supply chain front, we experienced modest constraints in supply for our clinical business, which impacted Q3 sales. Backlog remains on track to meet our year-end expectations.

In Q3, we experienced further reduced demand from biopharma customers for our process chromatography resins and from both biopharma and smaller biotech customers for our Life Science research projects — products. The continued tight spending environment in this segment constrained core ddPCR sales, which were roughly flat from the year ago period. Academic and government sales for Life Sciences was strong in the Americas, but showed declines in APAC driven down by China economic and policy constraints. EMEA academic sales were roughly flat, reflecting a soft funding environment in Germany, offset by stronger performance in the other European countries. While ddPCR sales within the quarter were softer than expected as a result of biopharma spending, we remain very positive on the long-term growth outlook for the platform.

During the quarter, we were encouraged by several noteworthy announcements involving ddPCR. On the clinical testing front, our QX ONE platform has been selected for SMA testing for all newborns in Hong Kong. And here in the U.S., Geneoscopy announced they have published the results of their pivotal CRC-PREVENT clinical trial, reporting the highest sensitivity for detecting colorectal cancer amongst similar tests powered by our QXDx ddPCR platform. Additionally, in the U.S., Verily won a major multiyear national wastewater testing contract from the CDC based on our QX600 platform. We see these as contributors to future growth and a strong reinforcement of the versatility and impact of the technology. As highlighted earlier, China was a continued challenge in Q3 for our Life Sciences business.

And unfortunately, the economic constraints have now also impacted our Clinical Diagnostics business, which in the first half of the year has been a positive for us in this region. We have now further constrained our expectations for China for the year-end and look to 2024 before we expect to see signs of recovery. Our clinical business overall had a mixed quarter. We saw growth in demand in the U.S. and Europe as expected, which was partially offset by the softness in China. In particular, we were pleased with the continued momentum for our immunohematology and diabetes franchises in the quarter. Despite the market challenges of this year, we view our strategy framework as being very solid and our platforms and market opportunities as providing sustainable long-term growth.

We continue to focus on driving and improving our execution, and with completion of a single global instance of SAP have now completed a major component of operational improvement. Looking to the end of the year, we continue to expect the biopharma and small biotech company turndown and ongoing constraints in China and Russia to impact the overall growth for our Life Sciences business, although we do expect to see sequentially improved sales in the final quarter of the year. We remain positive on the momentum and continued growth in the Clinical Diagnostics business although somewhat moderated by the greater market constraints in China as well as ongoing trade restrictions in Russia. Thank you. And at this point, I will now pass you to Ilan to review the financial results.

Ilan Daskal: Thank you, Andy. Now, I would like to review the results of the third quarter. Net sales for the third quarter of 2023 were $632.1 million, which is a decline of 7.1% on a reported basis versus $680.8 million in Q3 of 2022 and a 7.9% decline on a currency-neutral basis. The third quarter year-over-year revenue decline was primarily the result of ongoing weakness in the biopharma end markets, impacting the sales of our Life Science tools and bioprocessing products. In addition, we experienced weaker demand in China as a result of the macroeconomic environment as well as the local made in China initiatives. COVID-related sales in Q3 were $300,000 versus about $17.2 million in Q3 last year. Core revenue, which excludes COVID-related sales decreased 5.5% on a currency-neutral basis.

On a geographic basis, currency-neutral year-over-year core revenue decreased in Asia and Europe, partially offset by increased sales in the Americas. Sales of the Life Science Group in the third quarter of 2023 were $263.5 million compared to $317.9 million in Q3 of 2022, which is a decline of 17.1% on a reported basis and a 17.8% decline on a currency-neutral basis. Excluding COVID-related sales, the Life Science Group year-over-year currency-neutral core revenue decreased 13.7% and was primarily driven by lower sales of qPCR, process chromatography, western blotting products and about flat year-over-year ddPCR revenue. Excluding process chromatography sales, the underlying Life Science business decreased 16.7% on a currency-neutral basis versus Q3 of 2022.

The Life Science Group revenue, excluding process chromatography and COVID-related sales decreased 11.6% on a currency-neutral basis. On a geographic basis, Life Science year-over-year core revenue decreased in Asia and Europe, partially offset by modest increased sales in the Americas. Sales of the Clinical Diagnostics Group in the third quarter were $368.1 million compared to $361.9 million in Q3 of 2022 or growth of 1.7% on a reported basis and a 1% growth on a currency-neutral basis. Core Clinical Diagnostics year-over-year revenue, which excludes COVID-related sales increased 1.4% on a currency-neutral basis. Growth of the Clinical Diagnostics Group was primarily driven by blood typing and diabetes products as well as growth from our quality controls portfolio.

On a geographic basis, the Diagnostics group posted currency-neutral year-over-year core revenue growth in the Americas and Europe, partially offset by the decline in Asia. The reported gross margin for the third quarter of 2023 was 53.1% on a GAAP basis and compares to 54.7% in Q3 of 2022. The year-over-year gross margin decline was mainly due to unfavorable product mix, lower manufacturing volumes, higher material costs and inventory reserves and was partially offset by improved logistics costs. Amortization related to prior acquisitions recorded in cost of goods sold was $4.5 million compared to $4.4 million in Q3 of 2022. Third quarter operating expenses benefited from our cost-cutting initiatives as well as a contingent consideration benefit of $18.9 million from last year’s acquisition of Curiosity Diagnostics.

SG&A expenses for Q3 of 2023 were $201.2 million or 31.8% of sales compared to $211.1 million or 31% in Q3 of 2022. The lower SG&A in the quarter included $4.1 million in contingent consideration benefit, as I mentioned earlier, as well as lower employee-related expenses. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.6 million versus $1.8 million in Q3 of 2022. Research and development expense in the third quarter was $43.5 million or 6.9% of sales compared to $66.8 million or 9.8% of sales in Q3 of 2022. The significantly lower R&D expenses recorded in the third quarter included $14.8 million in contingent consideration benefit that I mentioned earlier as well as lower project and employee-related expenses.

Q3 operating income was $90.9 million or 14.4% of sales compared to $94.6 million or 13.9% of sales in Q3 of 2022. Looking below the operating line, the change in fair market value of equity security holdings which are substantially related to Bio-Rad’s ownership of Sartorius AG shares, added $36.4 million of income to the reported results. During the quarter, interest and other income resulted in net other income of $9.7 million compared to net other expense of $13 million last year, primarily driven by increased interest income from investments. The effective tax rate for the third quarter of 2023 was 22.5% compared to 21.5% in Q3 of last year. The effective tax rate this quarter was primarily affected by an unrealized gain in equity securities and the tax rate reported in Q3 of 2022 was primarily affected by an unrealized loss in equity securities.

Reported net income for the third quarter was $106.3 million or $3.64 diluted earnings per share compared to a loss of $162.8 million or $5.48 diluted loss per share in Q3 of 2022. This change from last year is largely related to changes in the valuation of the Sartorius holdings. Moving on to the non-GAAP results. Looking at the results on a non-GAAP basis, we have excluded certain atypical and unique items which 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 the non-GAAP results for the third quarter. In cost of goods sold, we have excluded $4.5 million of amortization of purchased intangibles and a small restructuring expense. These exclusions moved the gross margin from 53.1% for the third quarter of 2023 to a non-GAAP gross margin of 53.9% versus 55.6% in Q3 of 2022.

Non-GAAP SG&A in the third quarter of 2023 was 31.7% versus 30% in Q3 of 2022. In SG&A, on a non-GAAP basis, we have excluded $4.1 million of an acquisition related to the contingent consideration benefit mentioned earlier and in vitro diagnostic registration fee in Europe for previously approved products of $1.9 million, amortization of purchased intangibles of $1.6 million, and $1.3 million of restructuring-related expenses. Non-GAAP R&D in the third quarter of 2023 was 9.2% versus 9.7% in Q3 of 2022. In R&D, on a non-GAAP basis, we have excluded $14.8 million of an acquisition related to the contingent consideration benefit mentioned earlier and a small restructuring benefit. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 14.4% on a GAAP basis to 12.9% on a non-GAAP basis.

This non-GAAP operating margin compares to a non-GAAP operating margin of 15.8% in Q3 of 2022. We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity securities and loan receivable holdings of $36.4 million, $2.5 million gain from the release of an escrow for an acquisition and about a $700,000 loss associated with venture investments. The non-GAAP effective tax rate for the third quarter of 2023 was 23.9% compared to 21.7% for the same period in 2022. The higher rate in 2023 was driven by geographical mix of earnings and reduced compensation-related deductions. We continue to estimate the full year non-GAAP tax rate to be between 22% and 23%. And finally, non-GAAP net income for the third quarter of 2023 was $68.1 million or $2.33 diluted earnings per share compared to $79.2 million or diluted earnings per share of $2.64 in Q3 of 2022.

Moving on to the balance sheet. During the third quarter, we purchased 58,478 shares of our stock at an average share price of $364.61 for a total cost of $21.3 million. We still have nearly $480 million remaining in our Board authorized share repurchase program and plan to continue with our opportunistic approach to buybacks as part of our capital allocation strategy. Total cash and short-term investments at the end of Q3 was $1,765 million compared to $1,728 million at the end of Q2 of 2023. The increase in cash and short-term investments from the second quarter was primarily due to changes in working capital. Inventory at the end of Q3 was $775.8 million, which is slightly lower than the inventory in the prior quarter. For the third quarter of 2023, net cash generated from operating activities was $97.7 million, which compares to $11 million in Q3 of 2022.

This increase mainly reflects changes in working capital and income tax payments. The adjusted EBITDA for the third quarter of 2023 was $112.7 million or 17.8% of sales. The adjusted EBITDA in Q3 of 2022 was $135.7 million or 19.9% of sales. Net capital expenditures for the third quarter of 2023 were $44 million, and depreciation and amortization for the third quarter was $37.3 million. Moving on to the non-GAAP guidance. Given the current market environment, we are revising our 2023 financial outlook as follows. We now expect about a 3.5% currency-neutral year-over-year revenue decline in 2023 versus a growth of about 80 basis points previously. For the full year, we estimate currency neutral year-over-year revenue growth, excluding COVID-related sales to be between 0 and 50 basis points versus about 4.5% in our prior guidance.

Of the 400 to 450 basis points core revenue guide down, 50 basis points are related to the third quarter revenue shortfall of which approximately 200 basis points is related to weakness in biopharma and remaining 50 basis points related to lower Clinical Diagnostics sales. The remaining 150 to 200 basis points reduction is attributed to reduce process chromatography and other biopharma demand as well as continued softness in China. For the Life Science Group, we expect about a 12% currency-neutral revenue decline for 2023. And when excluding COVID-related sales, the Life Science Group currency-neutral revenue decline is projected to be between 4% and 5%. Excluding COVID and process chromatography related sales, Life Science Group revenue is expected to decline between 2% and 3%.

For the Diagnostics group, while we remain encouraged with the overall demand we are now guiding core revenue growth to be about 4.5% versus 5.5% previously. Full year non-GAAP gross margin is now projected to be about 54% versus about 54.5% previously, reflecting our updated expectation of shift in product mix and volume. We now project full year non-GAAP operating margin to be about 14.5% versus approximately 16% in our prior guidance as we continue to carefully manage discretionary expenses. And full year adjusted EBITDA margin is expected to be between 20% and 20.5%. We versus about 21.5% in our prior guidance. And now I’ll turn the call over to Norman for a few remarks. Norman?

Norman Schwartz: Thank you, Ilan. So, I guess, I just wanted to take a minute here to really to recognize Ilan and his contributions over the last several years. As part of our transformation, Ilan has been a very valued member of the team, kind of working to improve financial planning and reporting processes as well as to enhance the Company’s external profile with the financial community. I think we all very much appreciate his guidance and contributions which do position us well for our continuing transformation. As you might imagine, we have initiated a search for his successor. And in the meantime, we have a strong, capable team who can manage very well in the interim. So, maybe while I have the floor, maybe a closing comment about this year.

Certainly, it’s not unfolded the way we or many of our peers first envisioned it. Coming out of the pandemic, I think it has been challenging to predict the pace of recovery or market normalization, really all exacerbated by inflation we’ve not seen in 20 years, geopolitical events and, of course, the biopharma disruption. If I think about it a little bit, I think what we can be confident of is that our markets are buoyant and I feel the outlook is positive. There could always be a few more bumps in the road in the near term, but I do feel the Company really is well positioned to navigate what might come our way. And just maybe to reemphasize a point that Andy made, longer term, our strategy and vision for the future really has not changed.

With that, operator, I think we’ll open the line up to questions.

Operator: And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Brandon Couillard from Jefferies.

Brandon Couillard: I am sure this is another question for Andy or Ilan, but the magnitude of the guidance reset in Life Sciences, relative to where you started the year, is the most dramatic of any of your peers by far. Why does there seem to be such an inability to accurately forecast the business and demand trends? And how do we assess whether this is, in fact, a market dynamic as opposed to potential share losses?

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Q&A Session

Andy Last: Could you just say the very last piece again, Brandon? I didn’t catch your very last few words.

Brandon Couillard: How do we assess whether this is, in fact, a market dynamic versus potential share losses in Life Science?

Andy Last: Okay. Look, I think that we came out of 2022 with really good trajectory. And the effects that some companies had seen, particularly in bioprocessing, were not showing up for us. And that — I think that’s something that we communicated at the end of the first quarter that that was a surprise. And it took a while within 2023 for those effects to really roll out into our funnel and start to experience the deferred orders being pushed out. But then the other factor that no one anticipated and which was meaningful for us was the Silicon Valley Bank collapse and the knock-on effects of that, which really impacted the spending profile of the smaller biotech companies, and we had significant trajectory in the smaller biotechs for, in particular, our Droplet Digital PCR platform, which also had some halo effect around it.

So I think it took a couple of quarters for those effects to really materialize for us because our profile is a little different to some of the other players. So, that’s how I view it. And then, of course, since then, spending has not improved. The order pushouts have continued and it’s very difficult to gauge the true inflection point right now. And I think that’s probably a message is coming across broadly from other players in the category as well.

Simon May: This is Simon. Maybe I’ll just add to that as well because as we look at our funnels and we look at our win-loss ratios across the portfolio, whether you’re talking about western blot or gene expression or digital PCR or our bioprocess business, we really don’t see any significant shifts there. I mean, obviously, the conditions in China in biopharma have really deteriorated. But the feedback that we consistently get from the field is that there’s still a high level of interest in the products, the products that we’ve launched to be really well received. And again, the funnel dynamics in terms of win-loss ratios are not seeing any significant shifts. So, we really do believe that this is a bunch of transient effects that are compounding and it’s making for a very difficult year but I don’t think there are any macro shifts in our competitive positioning in Life Sciences.

Brandon Couillard: Okay. Ilan, I think the revised guide implies 4Q revenue steps up to about $700 million, I believe. 4Q is usually seasonally very strong for Bio-Rad, but this isn’t a normal environment either. So how derisked is that revenue outlook? What are some of the variables that can swing that target up or down as you’re keeping in mind?

Andy Last: So it’s Andy. The variables that might swing that, I think they’re the same that we’re — the variables would really be the same that we’re experiencing, just a little bit more acute, if China gets definitively worse than the trajectory it’s on, for example, that that would — academia really pulled back some spending, that could have an effect. We’re not expecting a Q4 budget flush this year. That’s not in our thinking. If that materializes, that’s good news, but we’re not planning on that. Other than that, I don’t think we see anything that may be meaningful that we could predict.

Ilan Daskal: And Brandon, I will add to the inputs that Andy just mentioned. Generally speaking, we have not deviated from our approach of kind of coming up with the realistic what we see in front of us in terms of the forecast and the guidance. So I don’t know that we are underestimating or overestimating our projections. And definitely, the fourth quarter this time around is an unusual circumstance in addition to the macroeconomic kind of environment to end this kind of inputs maybe the China environment today. I mean, I think it’s going to continue well into the end of the year. So, the smaller biotechnology companies environment in terms of the funding environment are not expected to improve in our mind through the end of this year. So, I agree with you, historically, traditionally, the fourth quarter used to be a stronger seasonality kind of quarter for us. That is not the case this time around.

Brandon Couillard: Okay. Last one, and then I’ll jump back in the queue. Andy, given you and Ilan started at Bio-Rad around the same time, you’ve worked very closely together. You’ve both been instrumental to Bio-Rad’s transformation last four years or so. In light of his departure, I think investors would like to know, are you happy with the operational direction of the Company? Are you adequately incentivized to stay the course, or do you have an eye to retirement anytime soon?

Andy Last: Yes, Brandon, thanks. First, can I just say I’m really sad to see Ilan move on. And you’re right, we have worked extremely closely. He and I are in each other’s offices virtually every day. So, it’s been a really good journey. I want to thank Ilan for that personally on the call. But my point of view right now is we started this transition. It’s not finished. And the focus really is on the transformation of the Company and executing against the strategy framework, which I firmly believe has the potential to increase operating performance for the Company moving forward.

Operator: Your next question comes from the line of Patrick Donnelly from Citi.

Patrick Donnelly: Maybe another one on the 4Q ramp, but on the margin side, a pretty meaningful step-up from whether it’s sequential or the rest of the — prior part of the year. Can you just talk about the moving pieces to get to that implied margin? I think it’s 16.5%, 17% type margin in 4Q, yes, just a path to get there and get people comfortable that that’s a realistic number.

Ilan Daskal: Sure. Hey Patrick, this is Ilan. I’ll start and Andy can chime in. But obviously, on the top line, we baked in kind of the updated mix with the software Life Science. And overall, I mean, on the operating expenses, we plan to continue some of those initiatives that we have been working on. And already in the third quarter, you can see that the operating expenses came in lower on a dollar basis. So, we continue to work on additional initiatives going into the fourth quarter. And again, overall, for the bottom line, I mean, we feel it is a realistic projection here.