Bio-Rad Laboratories, Inc.
Q1 2021 Earnings Call Transcript

Published: 30 Apr 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Q1 2021 Bio-Rad Laboratories, Inc. Earnings Conference Call. . Thank you. I'd like to turn it over to Mr. Ron Hutton. You may begin the conference, sir.

[Ronald Hutton:]

Thank you. Good afternoon, and thank you all for joining us. Today, we will review the first quarter results of 2021. 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; Annette Tumolo, President of the Life Science Group; and Dara Wright, President of the Clinical Diagnostics Group.

[Ilan Daskal:]

Thank you, Ron. Good afternoon. Thank you all for joining us, and we hope that you and your families are well and staying healthy during these challenging times. Before I begin the detailed first quarter discussion, I would like to ask Andy Last, our Chief Operating Officer, to provide an update on Bio-Rad's operations in light of the current pandemic-related environment that we are experiencing globally. Andy?

[Andrew Last:]

Thank you, Ilan, and I'd like to take just a few minutes to review our current state of operations around the world. As expected, COVID continues to have an impact on our operations, but as previously communicated, we have now adapted well to this environment, and our employees around the world continue to perform to the highest standards. We continue our focus on the 3 areas previously communicated, the ongoing safety of our employees; continuing manufacturing operations to ensure product supply and support of our customers; and making sure we continue to make progress on our core strategies. Overall, we continue to be very pleased with our employee safety despite the increases in COVID in some areas of the world.

[Ilan Daskal:]

Thank you, Andy. Now I would like to review the results of the first quarter. Net sales for the first quarter of 2021 were $726.8 million, which is a 27.1% increase on a reported basis versus $571.6 million in Q1 of 2020. On a currency-neutral basis, sales increased 23.4%. The first quarter year-over-year revenue growth was impacted by a tough compare of about $10 million revenue carryover to Q1 of 2020 related to the December 2019 cyber-attack. On a geographic basis, we experienced currency-neutral growth across all 3 regions. We continued to see strong demand for product associated with COVID-19 testing and related research. Generally, we are seeing most academic and diagnostic labs now running about 90% capacity, which is an improvement to what we saw in Q4. We estimate that COVID-19-related sales were about $94 million in the quarter. Sales of the Life Science Group in the first quarter of 2021 were $366.5 million compared to $227.2 million in Q1 of 2020, which is a 61.3% increase on a reported basis, and a 56.9% increase on a currency-neutral basis. The year-over-year growth in the first quarter was driven by the continued strength of COVID-19-related qPCR products. In addition, we saw strong double-digit year-over-year sales growth in Droplet Digital PCR, Western Block and antibody products. In addition, Process Media, which can fluctuate on a quarterly basis, saw strong double-digit year-over-year growth in the quarter over the same quarter last year. Excluding Process Media sales, the underlying Life Science business grew 56.2% on a currency-neutral basis versus Q1 of 2020.

[Operator:]

. First question is coming from the line of Brandon Couillard from Jefferies.

[Brandon Couillard:]

Ilan, maybe just starting with the updated guidance outlook. It would suggest that organic growth over the balance of the year would be about flat to maybe plus 1%. Could you talk about what that embeds in terms of the two segments for the balance of the year? And whether you think diagnostics can continue to ramp with that double-digit target you talked about before?

[Ilan Daskal:]

Sure. Thank you, Brandon. And I believe that you refer to organic in this case, ex-COVID sales?

[Brandon Couillard:]

Yes, that's right.

[Ilan Daskal:]

So I'm not sure that we are at about flat. Actually, if you run the math, It's about 7.5%. And -- for the full year, are you referring? Or for the first quarter year-over-year, sorry?

[Brandon Couillard:]

Well, including the COVID dynamic, it would suggest that organic from 2Q to 4Q is about flattish, given the 23% that you did in the first quarter.

[Ilan Daskal:]

Okay, okay. So you compared quarter-over-quarter, the Q4 over Q1?

[Brandon Couillard:]

Yes, kind of the trends of the amount to be here, to get to the full year.

[Ilan Daskal:]

Yes, that's fair. I would highlight on that, Brandon, that seasonally, usually, Q4 is a strong quarter for us, and the first quarter is usually kind of not as strong as Q4. So actually, having a flat quarter is to us an excellent result.

[Brandon Couillard:]

Could you speak to what the guide assumes specifically for Diagnostics? The 2% core growth in the first quarter was an improvement, but not quite as material of a rebound as we've seen from some other central lab peers. Curious why that might necessarily be the case and which areas are lagging? Maybe that's a better question for Dara.

[Andrew Last:]

So Brandon, maybe I can make it quick, it's Andy speaking. We had a strong Q1. We had a strong start last year, and that included some of the carryover from the COVID -- the cyber ninth attack in December of '19. Actually, we were pretty pleased with the recovery of the diagnostics business in Q1 and it's fairly broad-based, but I would say more so in Asia Pac as that was the first region that started to show a negative impact in 2020. So I'd say it's meeting -- it's really meeting our expectations for our guidance for the year.

[Brandon Couillard:]

Okay. Maybe shifting over to some of the P&L lines. SG&A, just on a dollar basis, was down a lot year-over-year and sequentially. Was there some timing benefits from maybe some investments that perhaps may have gotten pushed out to later in the year? Are you finding some new areas for cost outs right now? Just help us to understand the trend in that line?

[Ilan Daskal:]

Sure, Brandon. So there are a few probably components to highlight here. First, we have the $5 million reimbursement, the insurance reimbursement regarding the cyber-attack claim. And so that needs to be probably kind of, if you normalize for that, so from a normal run rate, it's higher by $5 million. Then the other aspect that I would highlight is, still kind of lower discretionary expenses associated with the COVID-related environment. And those, we believe, will come back later in the year. That's our assumption. And some of it is also planned hiring that we still have for the remainder of the year. So these are probably the main components that I would highlight there.

[Brandon Couillard:]

Okay. And then in terms of the COVID revenue contribution, can you break down the contribution sort of between PCR instruments, your new COVID EUA PCR test, and how much might be research related and other?

[Ilan Daskal:]

So I can say that the vast majority is the qPCR instruments, that's definitely the vast majority. Everything else is way, way, way smaller. So it's still the same as we have experienced in the prior quarter in terms of the ratio of the qPCR instruments.

[Operator:]

. Next question is coming from the line of Dan Leonard from Wells Fargo.

[Daniel Leonard:]

Thank you. So I'll try to ask Brandon's question in a different way. So appreciate the guidance raise, but given your strong Q1 performance, the magnitude of the raise actually suggests that Q2 through Q4 are worse than I was initially thinking. So are there any offsets you'd want to flag?

[Ilan Daskal:]

So generally speaking, Dan, I'm not sure how did you run your math, but I can tell you that the way we think about it -- most of the incremental kind of portion of the guidance is associated with the first quarter COVID-related sales, some of it is also -- some assumptions associated with later in the year, but most of it is the incremental benefit that we have experienced in the first quarter. When you think about it from a full year perspective, Diagnostics is still kind of -- we assume, a low double-digit kind of growth there. And we said last time about flat for Life Science, now maybe it's about 2% or so. So definitely, it's an updated guidance upwards from the last quarter.

[Daniel Leonard:]

Okay. And can you speak to the margin dynamics associated with the COVID products, just given that your margins were so strong in Q1 and well higher than what you're forecasting for the full year?

[Ilan Daskal:]

Sure. So on a high level, Dan, it's about volume and mix. If we think about the full year guidance of COVID-related sales of between $170 million to $180 million, of which about $94 million was in the first quarter, and COVID-related sales are above the company average, that definitely is a strong quarter for us, and that was the driver associated with higher utilization in the manufacturing footprint. So when you blend it with the remainder of the year kind of guidance, probably gross margin is going to be lower in the upcoming quarters. With that said, you can get for the full year, our updated guidance of 56.5% to 57%.

[Daniel Leonard:]

Okay. And final question. Can you offer an update on how you're progressing with your recently initiated restructuring plans? We see the expenses in the P&L, but we'd love some color commentary.

[Andrew Last:]

Yes, sure. This is Andy. Essentially, is progressing as we had planned. We've got a lot of changes going on and multiple functions, predominantly in Europe, as we communicated in our press release. So all of those plans are proceeding. They take time to work through. I think we've communicated before that the majority of the kind of net benefit won't be until 2023. That's still the case. So at this point in time, it's still early in our restructuring efforts, but we're pleased with the progress.

[Operator:]

Next question is coming from the line of Patrick Donnelly from Citi.

[Patrick Donnelly:]

Ilan, maybe just building on that last one. In terms of the margin guidance increase, how are you thinking about the combination of mix? And then even restructuring activities, leverage in terms of the SG&A, some cost restructuring, can you just talk to, I guess, the different levers that you're thinking about, kind of moving that margin number up a little bit this year?

[Ilan Daskal:]

Sure. Thanks, Patrick. So when you think about the restructuring, generally speaking, this year, we do not think that there would be much benefit out of the restructuring. We will start, and we expect to see some benefit to start sometime next year, and to fully realize it in 2023, and that's part of our kind of long-term strategy, and that's part of what we have been communicating since December. But again, for this year, we do not anticipate to gain much benefit out of the restructuring. The gross margin in general and the operating margin, it's -- and specifically, you alluded to the gross margin, it's a volume and mix kind of benefit that we are experiencing right now.

[Patrick Donnelly:]

Okay, understood. And then on the cap deployment side, nice to see you guys buy back some stock, very timely as well, sounds like a nice price. How should we think about that going forward? Always good to get an update from Norm in terms of how you're feeling about the pipeline? Is the larger deal still on the table? Just your thoughts there at the moment.

[Norman Schwartz:]

Yes. Obviously, we continue -- this is Norman. We continue to pursue these inorganic opportunities. We did look at several things in the first quarter. Nothing that we've landed yet, but we continue to be very active in this area.

[Patrick Donnelly:]

And then maybe one for Annette, just on the wastewater opportunity, because it's nice to hear you guys call that out of the strength. How should we think about that? I know you -- last quarter, you were talking about o U.S. becoming a little bigger of an opportunity. How do you think about that market overall? And how it's developing over the last couple of quarters?

[Annette Tumolo:]

Sure. It's a brand-new market, and it is developing rapidly. I mean, I think we could imagine over time, that this could develop into a $100 million or $200 million opportunity, but it's early days. That said, the Droplet Digital PCR platform was almost made for this application. When you think about what you're trying to do, you're searching for a needle in a haystack, essentially, which is the strength of the product that we have. So we're getting good pickup in government university labs, now service labs are picking up. At first, this really was a U.S. opportunity and it's spread across Europe now and other geographies as well. So I think we're optimistic about it, and we've worked on putting variant assays online for people to buy, and we're working on a specific wastewater kit that interrogates for all the variants as well.

[Patrick Donnelly:]

Okay. Perfect. And last one for me, just housekeeping. I think there was some news flow on the litigation front with Tenax. Can you just give us a quick update there and where you stand?

[Andrew Last:]

Yes. I'd say that our comment really is, so this was an appeals court that upheld the earlier findings by the International Trade Commission and so today's federal circuit decision was not unexpected at all and it really doesn't impact our business. And so I think that's probably the only comments that we would make around the litigation at this point.

[Operator:]

Next is from Jack from Nephron.

[Nisarg Shah:]

This is Nisarg on for Jack. To ask Dan and Brandon's question a third way, how much did the first quarter beat your internal target by? It was 12% above our forecast, which is why I think we're all surprised that the full year guidance is only moving up by 1 point.

[Ilan Daskal:]

So thanks for the question. And let me share with you, first of all, we usually -- and we do not guide by quarter, but generally speaking, if you recall in our guidance from last quarter, we did indicate and we emphasized it today that most of the COVID-related sales will be in the first half of the year. And we experienced obviously stronger-than-expected first quarter COVID-related sales. And that's most of the incremental guidance that we have alluded to, right? I mean, so generally speaking, we are operating under the assumption that in the second half of the year, the business mix is going to normalize. So I think we are pretty consistent there.

[Nisarg Shah:]

Got it. Could you also elaborate on the regional growth in Diagnostics that you're seeing in Europe and North America? And like what's held those markets back on a relative basis versus APAC?

[Ilan Daskal:]

Dara, do you want to take this one?

[Dara Wright:]

Sure. So as we said in the opening comments, we're operating broadly around 90% to pre-COVID levels, but there are regional dynamics embedded in there, largely related to the mix and what percentage of certain product lines are sold in certain regions, and how impacted or non-impacted they've been by COVID. So North America is really getting up to that pre-COVID level from a performance perspective. Europe is closed, except where there's still some growth being moderated in elective surgeries, and that's a region where we have very strong sales of immunohematology, so that makes sense. And then APAC was strong, largely driven by China, which I think we've seen from other announcements, too, is that China is kind of coming back and particularly, diabetes were very strong in Q1. And that's the scenario where that product line is really quite strong. Other parts of Asia Pacific continue to really be challenged by COVID. So it's kind of a country-by-country story, frankly.

[Nisarg Shah:]

Got it. And one more. So what was the growth in Process Media in the quarter? And do you think you're seeing demand for COVID vaccine?

[Ilan Daskal:]

For the first question, can you repeat? The growth of what?

[Nisarg Shah:]

What was the growth in Process Media in the quarter?

[Ilan Daskal:]

Oh, okay. So yes, it is a double digit. But you got the -- what we provided was the growth overall for Life Science, ex-Process Media. So you can kind of probably figure out, reverse engineer kind of the number there. But it was very strong.

[Nisarg Shah:]

And with that, do you think you're seeing demand for COVID vaccines with that?

[Andrew Last:]

I mean we're not a major player, I think, as you probably know, in this segment, particularly. All -- we're getting some COVID vaccine effect, but nothing like you would expect if you were one of the majors selling into that segment.

[Operator:]

. We have a follow-up question coming from the line of Brandon Couillard from Jefferies.

[Brandon Couillard:]

Ilan, if we strip out the COVID-related revenues out of Life Sciences, it looks like the base Life Sciences organic growth was up something like 20% in the first quarter. Can you just touch on the primary drivers of that?

[Ilan Daskal:]

Sure. And so you're right, it was almost that number. And actually, we saw nice growth across all the verticals of Life Science. And we indicated those. But when you think about it, Droplet Digital PCR, the antibody, the western blotting, more specifically strong, but the others also had a nice growth as well. Annette, sorry, do you want to add anything?

[Annette Tumolo:]

No, I was just going to add, we were really pleased with that. The strength of the recovery across all the businesses, probably fueled by return to the lab and some pent-up demand for some of the core products that we have as people are back at the lab bench.

[Brandon Couillard:]

Got you. And then maybe one more for you, Annette. We noticed you're running an instrument trade-up program in Life Sciences in the U.S. in the second quarter. Is this a new commercial initiative for Bio-Rad? I don't recall seeing something like this before, and should we expect any material revenue or gross margin impact from this in 2Q?

[Annette Tumolo:]

I'm sorry, which program are you talking about?

[Brandon Couillard:]

It's an instrument trade-up program that touches DD PCR, touches proteomics, flow, cell culture.

[Annette Tumolo:]

Okay. So it's just in -- yes, sorry, I wasn't sure which program you were referring to. Look, we occasionally put those kind of incentives in for our customers. And I think that the general answer to your question is, we wouldn't be doing it if we didn't expect some return on the program. I think that it's certainly not at the center of what's driving all of our growth, but it's one of the typical kinds of promotions that our global commercial organization runs from time to time.

[Operator:]

. We have no questions at this time. Presenters, you may continue.

[Ilan Daskal:]

Thank you all for joining today's call. We appreciate your interest, and we look forward to connecting soon.

[Operator:]

This concludes today's conference call. Thank you all for participating. You may now disconnect.