Bio-Rad Laboratories Inc (BIO) — Q4 2020 Earnings Call Transcript

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. Now before I begin the detailed fourth quarter and full year 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?

All right. Thank you, Ilan. I would just like to take a few minutes to review our current state of operations around the world. As an opening comment, I would like to recognize the tremendous contributions and flexibility of our employees around the world during 2020, and their response to the shifting needs of operating in a pandemic have been truly exemplary. So at the onset of the pandemic, we set ourselves three key areas of focus to manage through this challenging period, which we continue with into 2021. As a quick reminder, these are 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. As we closed out 2020 and entered into 2021, we’ve now achieved a steady state for operating in the pandemic reflecting employee safety, work from home, and adoption of company and local policy and practices. Overall, we have experienced minimal internal transmission of COVID across the company, and where we have suspected cases have found the internal testing of employees in the U.S. using our Droplet Digital PCR platform to be very valuable in maximizing productivity. As we enter 2021, we are well positioned to meet market and customer demands driven by the pandemic and our manufacturing sites and R&D is operating effectively. In addition, our commercial organization has deployed digital tools where appropriate to minimize onsite visits to only the essentials required to keep customers up and running on our platform. So with that brief overview, I will pass it back to Ilan. Thank you.

Thank you, Andy. And now I would like to review the fourth quarter and full year results for 2020. Net sales for the fourth quarter of 2020 were $789.8 million, which is a 26.5% increase on a reported basis versus $624.4 million in Q4 of 2019. On a currency neutral basis, sales increased 24.4%. The fourth quarter sales included $32 million of damages award related to intellectual property litigation with 10x Genomics, covering the period between 2015 and 2018. Excluding the 32 million, the fourth quarter year-over-year currency-neutral revenue growth was 19.4%. The fourth quarter year-over-year revenue growth also benefited from an easy 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 three regions. We saw strong demand for products associated with COVID-19 testing and related research. Generally, we are seeing most academic and diagnostics labs now running between 70% and 90% capacity, which is similar to what we saw in Q3. We estimate that COVID-19-related sales were about $132 million in the quarter. Sales of life science group in the fourth quarter of 2020 were $428.5 million, compared to $242 million in Q4 of 2019, which is a 77.1% increase on a reported basis, and is a 73.9% increase on a currency-neutral basis, and it was driven by our PCR product lines as well as strong performance in the biopharma segment. The fourth quarter revenue also included a $32 million damages award related to intellectual property litigation. Excluding the $32 million damages award, the currency-neutral revenue growth was 60.9%. The year-over-year growth in the fourth quarter was across all of the life science key product areas. Process media, which can fluctuate on a quarterly basis, showed strong double-digit year-over-year growth in the quarter over the same quarter last year. Excluding process media sales and the $32 million damages award, the underlying life science business grew 64.6% on a currency-neutral basis versus Q4 of 2019. Growth in the overall life science segment was offset by continued softness in academic research demand as these labs around the globe are still operating below capacity. However, we believe that some of the demand was associated with larger than normal end-of-year budget release. Last month, the FDA granted an EUA for our COVID qPCR assay kit, which runs on Bio-Rad's existing CFX PCR platforms as well as qPCR systems from other providers. The assay kit is a multiplex test that targets two separate regions in the viral genome to ensure greater sensitivity and tolerance to potential mutations. In addition, earlier today, we received an EUA approval from the FDA for COVID FluA and FluB qPCR syndromic multiplex test. These tests, which allow discrimination between each of the three different viruses also run on Bio-Rad's CFX PCR platforms as well as qPCR systems from other providers. Sales of clinical diagnostics products in the fourth quarter were $359.6 million compared to $379 million in Q4 of 2019, which is a 5.1% decline on a reported basis and a 6.6% decline on a currency-neutral basis. During the fourth quarter, strength in our quality controls products was offset by weakness across the rest of the diagnostics portfolio, resurgence of COVID cases during the fourth quarter impacted the recovery of routine testing trends and elective surgeries. On a geographic basis, the diagnostics group was relatively flat in the Americas but posted declines in the other regions. The reported gross margin for the fourth quarter of 2020 was 58.3% on a GAAP basis and compares to 52.9% in Q4 of 2019. The current quarter gross margin benefited mainly from better product mix, lower service costs, higher manufacturing utilization, as well as $23 million gross margin benefits associated with a 10X Genomics damages award. Amortization related to prior acquisitions recorded in cost of goods sold was $4.6 million compared to $4.5 million in Q4 of 2019. SG&A expenses for Q4 of 2020 were $219.1 million or 27.7% of sales compared to $214.2 million or 34.3% in Q4 of 2019. The year-over-year SG&A expenses benefited from ongoing cost savings initiatives and lower discretionary expenses and was offset somewhat by higher employee-related expenses. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $2.4 million versus $2.1 million in Q4 of 2019. Research and development expense in Q4 was $65.8 million or 8.3% of sales compared to $57.1 million or 9.1% of sales in Q4 of 2019. Q4 operating income was $175.2 million or 22.2% of sales compared to $59.2 million or 9.5% of sales in Q4 of 2019. Looking below the operating line, the change in fair market value of equity securities holdings added $904 million of income to the reported results, and this is substantially related to holdings of the shares of Sartorius AG. During the quarter, interest in other income resulted in a net expense of $1 million compared to $5.8 million of expense last year. Our GAAP effective tax rate for the fourth quarter of 2020 was 22.2% compared to 20.9% for the same period in 2019. Our GAAP tax rate in 2020 and 2019 were affected by the large unrealized gains in equity securities. In addition, the 2019 tax rate included a discrete benefit which allowed us to apply higher foreign tax credits. Reported net income for the fourth quarter was $839.1 million and diluted earnings per share were $27.81. This is an increase from last year and is again substantially related to changes in the valuation of the Sartorius Holdings. Moving on to the fourth quarter non-GAAP results. Looking at the 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 the non-GAAP results for the fourth quarter in sales, we have excluded the $32 million damages award. In cost of goods sold, we have excluded $8.7 million IP-licensed cost associated with the damages award, $4.6 million of amortization of purchased intangibles and a small restructuring benefit. These exclusions move the gross margin for the fourth quarter of 2020 to a non-GAAP gross margin of 58.2% versus 54.1% in Q4 of 2019. Non-GAAP SG&A in the fourth quarter of 2020 was 28.2% versus 31.7% in Q4 of 2019. In SG&A on a non-GAAP basis, we have excluded amortization of purchase intangibles of $2.4 million, legal-related expenses of $6.3 million and restructuring and acquisition-related benefits of $3.1 million. Non-GAAP R&D expense in the fourth quarter of 2020 was 8.7% versus 8.2% in Q4 of 2019. 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 22.2% on a GAAP basis to 21.4% on a non-GAAP basis. These non-GAAP operating margins compare to a non-GAAP operating margin in Q4 of 2019 of 14.3%. We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity holdings of $904.3 million, $2.1 million associated with venture investments and $3 million of interest income associated with a 10X damages award. Our non-GAAP effective tax rate for the fourth quarter of 2020 was 24.3% compared to 17.7% in 2019. The non-GAAP tax rate for the fourth quarter of 2019 was lower compared to 2020 due to a discrete benefit, which enabled us to apply higher foreign tax credits. And finally, non-GAAP net income for the fourth quarter of 2020 was $121 million or $4.01 diluted earnings per share, compared to $70 million and $2.32 per share in Q4 of 2019. Moving on to the full year results, net sales for the full year of 2020 were $2.546 billion on a reported basis. Excluding the 10X damages award of $32 million, sales were $2.514 billion, which is 8.9% growth on a currency neutral basis. We estimate that COVID-19 related sales were about $313 million. Sales of life science group for 2020 were $1.23108 billion. Excluding the 10X damages award of $32 million, the year-over-year growth was 35% on a currency neutral basis. The majority of the year-over-year growth was driven by our four PCR products, droplet digital PCR, and process media. On a geographic basis, life science currency neutral full year-over-year sales grew across all three regions. Sales of clinical diagnostics products for 2020 were $1.305 billion, which is down 7.1% on a currency neutral basis. On a full year basis, clinical labs have seen a significant negative impact of the pandemic, which was slightly offset by growth within quality controls. On a geographic basis clinical diagnostics full year-over-year sales, declined across all regions. The full year non-GAAP gross margin was 56.9% compared to 55% in 2019. The year-over-year margin increase was driven mainly by product mix and manufacturing efficiencies, which was somewhat offset by higher logistics costs. Full year non-GAAP SG&A was 30.9% compared to 34.4% in 2019. The lower SG&A was driven by our ongoing cost savings initiatives and lower discretionary expenses, offset somewhat by higher employee-related expenses. Full year non-GAAP R&D was 9.1% versus 8.5% in 2019 and full year non-GAAP operating income was 17% compared to 12% in 2019. Lastly, the non-GAAP effective tax rate for the full year of 2020 was 24% compared to 24.1% in 2019. The non-GAAP effective tax rate for 2020 was consistent with our guidance of 24%. Moving on to the balance sheet, total cash and short-term investments at the end of 2020 was $997 million, compared to $1.120 billion at the end of 2019 and $1.160 billion at the end of the third quarter of 2020. In December, we repaid the $425 million of outstanding senior notes. Year-end inventory decreased by about $18 million from the third quarter of 2020. The decrease in inventory was driven by higher demand for COVID-19 related products. During the fourth quarter, we did not purchase any shares of our stock. We have a total of $273 million available for potential share buybacks. Full year share buybacks was about 292,000 shares for $100 million. In 2019, we purchased about 88,000 shares of our stock for $28 million. For the fourth quarter of 2020, net cash generated from operating activities was $284.7 million, which compares to $159.8 million in Q4 of 2019. For the full year of 2020, net cash generated from operations was $575.3 million versus $457.9 million in 2019. The adjusted EBITDA for the fourth quarter of 2020 was 25.2% of sales. The adjusted EBITDA in Q4 of 2019 was 18.7%. Full year adjusted EBITDA included the Sartorius dividend was $546.4 million or about 21.7% compared to 17.5% in 2019. Net capital expenditures for the fourth quarter of 2020 were $39.2 million and full year CapEx spend was $98.9 million. Depreciation and amortization for the fourth quarter was $36.2 million and $138.1 million for the full year. In December, we communicated our long-range plan. We project revenues to grow to an overall range of $2.75 billion and $2.85 billion by the end of 2023. This growth will be driven by Droplet Digital PCR, single cell applications, clinical diagnostics, bioproduction, and increasing growth in biopharma customers. We expect non-GAAP gross margin in 2023 to land in a range of 57% to 57.5%. We expect this positive increase to come from footprint optimization and better capacity utilization. Adjusted EBITDA margin should be in the range of 23% and 24% based on top-line growth, productivity improvements, and SG&A leverage. Last week, we initiated a strategy-driven restructuring plan to improve operating performance as part of our 2023 goals. The restructuring plan primarily impacts our operations in Europe and includes the elimination of certain positions, the consolidation of certain functions and the relocation of certain manufacturing operations from Europe to Asia. The restructuring plan is expected to eliminate a total of approximately 530 positions, approximately 200 positions in manufacturing and 330 positions across our SG&A and R&D functions and subsequently creation of a total of about 325 new positions approximately 100 new positions in manufacturing and 225 new positions across SG&A and R&D functions. The restructuring plan will be implemented in phases over the next two years. As a result of this restructuring plan, we expect to incur between approximately $125 million and $130 million in total costs, which we anticipate will consist of approximately $86 million cash expenditures in the form of one-time termination benefits to the affected employees. Approximately $19 million in capital expenses associated with the restructuring plan and about $20 million to $25 million in one-time transaction cost. We anticipate about $80 million to $90 million of restructuring charges related to this restructuring plan will be recorded in the first quarter of 2021 with a balance recorded by the end of 2022. Moving on to the non-GAAP guidance for 2021. While we are pleased with the overall performance in 2020, we continue to be uncertain about the duration and impact of the COVID-19 pandemic although we assume a gradual return to pre-pandemic activity levels and normalized business mix. We are guiding a currency-neutral revenue growth in 2021 to be between 4.5% and 5%. We estimate about 10% to 11% revenue growth for the diagnostics group, the life science group year-over-year revenue is expected to be about flat as we projected COVID-related sales in 2021 to be about half versus 2020. We continue to assume that we will experience quarterly revenue fluctuations for process media although we estimate an overall double-digit growth for the full year. Full year non-GAAP gross margin is projected to be between 56.2% and 56.5% and full year non-GAAP operating margin to be between 16% and 16.5%. We estimate the non-GAAP full year tax rate to be between 24% and 25%. CapEx is projected between $120 million and $130 million and full year adjusted EBITDA margin of about 21%. And now, I'll turn the call to Norman for a few comments.

Okay, great. Thanks, Ilan. I don't really have a lot to add. I do think companies would say that 2020 is certainly one for the history books. As I think back on the year and I think as Andy alluded to in the beginning, it was certainly an all-out effort this last year to manage a myriad of challenges and not to lose sight of where we're headed in the longer term. I think as well, as Ilan pointed out, the COVID-related revenues are expected to moderate in 2021. But I do feel that there is still a big question of when the pandemic will come under control. So in the meantime, we'll continue to work on our core initiatives to allow us to make progress over the next few years, and certainly we appreciate your continued interest in Bio-Rad. So thank you.

Thank you, Norman. Operator, we will now open the line to take your questions.

So my first question, can you help frame the restructuring announcement? What's the annual savings target you hope to achieve when the dust settles? And how would you characterize the efforts? Is it part of an ongoing journey or is this the big bang on the path to 2023 with the balance of the margin lifts coming from fixed costs leverage?

I will start and Andy probably will chime in, Dan, thanks for the question. Generally speaking, Dan, it's part of our three years trajectory that we have communicated back in December. This restructuring will go through the end of next year, so it's a two-year initiative to complete it. And basically, everything is kind of baked in, in all the three years kind of projections that we provided in order to achieve our 2023 goals. It's not necessarily a one big bang. I mean, there are different phases to this plan. And again, it would take throughout the next two years. Andy, I don't know if you have...

I don't have anything material to add to that. I mean, we're working on other things as well, of course, continually, but it is a major and material restructuring.

Okay. And then just my follow-up, could you elaborate on performance in your clinical segment, it does seem like the quarter-on-quarter weakening in the organic growth rate, it seems a bit discordant with what some of the markets are saying, some of your customers are saying, so could you elaborate further on what you think that the drivers of that were either from a product mix standpoint or a regional standpoint and any color would be helpful? And then, of course, what would improve that?

Sure. So, really, it is a story of product mix and region. So at a macro level, we're about 80% to 90% of pre-COVID levels. And in North America, we're very close to pre-COVID performance. The real material dynamic is related to Europe, and the step up in restrictions and lockdowns that we saw in Q4 had a pretty big impact on elective surgeries. So, I would say blood typing is a real story there in Europe as an area that still is kind of getting back to pre-COVID kind of routine levels. And then in China as well, we saw a little bit of a shift from typical wellness program to COVID-related, infectious disease programs that moderated a bit the diabetes business. So, it kind of puts and takes regionally, puts and takes within different product lines, but certainly things continue to move in the right direction with North America being kind of the bright spot there.

One, in terms of the '21 top-line outlook pretty encouraging, given some of the comps you're lapping and kind of the roll-off of these COVID tailwinds. Can you help us understand some of the upside and downside variables that you're thinking about? And as far as the recovery in diagnostics, should we anticipate that to mostly come in the back half of the year? Any color you can help us with in terms of the phasing of organic growth overall sort of moving through the year?

Yes, Brandon, I'll try and put a bit more color around that. So yes, obviously, a big step back on the COVID sales anticipated as we indicated, but core clinical diagnostics continuing the recovery trend that Dara talked about, but not until second half after we get back to full normal consumption in our view. The first half has still got some COVID effects, we're guided to roughly half of last year for COVID sales, and we expect the majority of that to be in the first half of the year. Below that, recovery in the core research, life science research products, and on a good recovery in the clinical diagnostics franchise as the year progresses.

In terms of your new COVID PCR test, to what extent if at all have you baked in any incremental contribution from those tests? Can you talk about your manufacturing capacity on a monthly basis and remind us approximately how big is your global PCR installed base?

So, I'm going to ask Annette if she would like to comment and then I might add on that.

Sure. We spent a lot of the year scaling manufacturers to meet demand both for our platforms in other reagents and consumables. And I think we're in a pretty good place right now to meet customer demand across all of our PCR products, so that's good news for us and our customers. We have been selling qPCR products for well over a decade, and there are thousands and thousands and thousands of products out there and we certainly sold an awful lot this year, Brandon. So, we're going to be as you might imagine, making sure we approach those customers with our new test options, certainly as they may need to scale or have a need for reliable second sources.

Thanks Annette. And I'd say, Brandon thinking about the numbers, we've baked in a modest contribution within our COVID-related sales, since we now relate. Our strategy is generally second source to the installed base. And so, it's a modest contribution as we look at our year.

Got you. Maybe a follow up for you, Annette, on the DD PCR business, can you give us a sense of just how fast overall that business is growing, maybe including or ex-COVID? And are you pushing hard enough into diagnostics specifically? I mean, you've got one FDA approved test on the platform, are any other kits in development that could help accelerate uptake in that setting?

That's a great question. So you probably know that we talked about strong double-digit growth pretty much at every earnings release from that product area, and we continue to anticipate that in the future. The research market is still growing strongly. The biopharma, discovery, and production markets are growing strongly, and we certainly, you can imagine that, are investing quite significantly, I think in moving into diagnostics with our partitioning platforms. So, I think, stay tuned for what's to come there.

So, we certainly haven't at the Board level talked about a tax-free spin. As we said in the past, we continued to see that as a long-term investment, and I think we've got seven or eight years to go on the trust. Obviously, they continue to do very well. And so, that's kind of where we are today. As you know, we've always considered to be a strategic investment. But obviously, if something more strategic comes along, there is the possibility to liquidate that position.

And Brandon, regarding the question about the investment, we continue to work to resolve it, and as we mentioned in the last quarter, it probably will take a few more quarters for us to resolve this item.

Norman, maybe we got you staying on that topic there with Sartorius, in the past quarters and past meetings we've had with you, there's been some willingness to kind of address larger deals and it felt like maybe you were kind of wanting to do something larger. It sounds like now correct me if I'm wrong, maybe softening a little bit on that and kind of happy with where Sartorius is, can you just talk about I guess the M&A landscape. How you guys are feeling on the capital deployment side? And yes, we'll just be curious to hear your perspective on the opportunities out there.

Yes. So, I think like many of our peers, we do continue to look for those products and technologies to add to our portfolio. I think as you know and we've said more recently, we're especially interested in the idea of doing something larger and maybe even transformational. But of course, as these larger transformational opportunities are few and far between, but we continue to pursue the opportunities that come our way.

Sure. Thank you, Patrick. Generally speaking, you're right. I mean, we took into account what we project and what we believe that the second half of the year will kind of normalize. And we will see the gradual improvement in diagnostics and the tailwind from the COVID-related sales will start to tail-off. So, the way that if you think about kind of calendarizing, the first half in our projection, we would benefit way more from the COVID-related to the second half that's the way we think about it. And we'll have to see how everything will shape up. But hopefully, the vaccines, et cetera, the second half will normalize.

This is a new and rapidly developing market. Our best estimates suggest it could reach around $200 million over the next four to five years. Currently, most of the demand is based in North America, but we are working to raise awareness of the utility of this type of surveillance internationally. We are about to launch an application kit that will support the surveillance effort and will introduce more variants as we progress. We are committed to supplying the market with effective products.

Okay, great. And then, just a quick housekeeping, one for you, Andy, appreciate you saying the PCR test is a modest benefit. Just got a couple investor questions in terms of what modest means? Should we think about $10 million, $20 million or just any ballpark would really help in terms of the dollar amount?

Yes, I think you should be roughly in that range. As I said, our upside was driven predominantly by the instrument placements. And so, we would be recognized, we went into the molecular diagnostics segment, this is coming late and we've got well-reasoned aspiration on those products.

I was hoping you could give a little bit more color on the bioprocessing business. It sounds like from the commentary, you ended on a pretty strong note. Was there anything you could call out in terms of demand and maybe COVID vaccines help contribute to that?

Annette, you want to take that one?

Sure. Well, certainly, all of the vaccine developers are already our customers in this area. We, this is a business that whilst there are some fluctuations quarter-over-quarter overall has been delivering strong double-digit growth. And primarily, it's because of the markets that we address with these products, the biologic drug development and now, vaccine development and production. So, I can't say that the result was primarily because of uptake from vaccine manufacturers, although we're there in all those accounts. The business is strong and growing.

And then, on the litigation award that you recognized in the quarter that covered the period 2015 through 2018? What about 2019 through 2020? And how are you going to account for this kind of on a go-forward basis?

I was just going to say, we really, we still have open litigation and we don't really discuss that in advance, but perhaps Ilan has something to add about how we're going to treat it.

Yes, you're absolutely right. So we don't anticipate booking anything additional, so long the litigation is still on.

Got it. I know, when you laid out the new targets, one of the growth drivers you've talked about is single cell. Andy or Annette, I was wondering if you just give us an update on some of the work you're doing there. And any updates we can maybe expect in terms of products and from Celsee this year?

Sure. It's still early, we haven't even had a year yet post acquisition. And certainly, it was an unusual time to acquire a startup. We are investing, I think significantly in that area in our Celsee acquisition. And our goal is to put compelling tools for single cell analysis that really provide best-in-class biological insights. And we think, towards the latter part of this year, you're going to start seeing some of those products roll out the door.

Great. And maybe just one cleanup. Can you just confirm in terms of the COVID testing tailwinds are you going to be booking that entirely on the life science side or only the test kits be reported in diagnostics in 2021?

I mean, it's predominantly still life science based. If there's any pick up on, we've got the serology test on the diagnostic side is very, very small. We've got some antigen-based sales, but they'll get reported in clinical if they become material contributors.

In terms of maybe Ilan or Annette, in terms of the COVID benefit in the fourth quarter was all of that PCR instrumentation and was DD PCR a big part of the sequential uptick?

Brandon, most of it was associated with our qPCR products. Certainly, there was some upside from wastewater in Q4, but mostly we were getting kind of organic growth out of the Droplet Digital PCR business. And by the fourth quarter, we had really completed scale up of all of our manufacturing for the platforms, so that helps a lot.

Okay. And then, Ilan FX rates have obviously moved more favorably recently. Do you have a general sense of what currency should add to the top-line in 2021, and then maybe a sense of how accretive that might be to the year-over-year margin expansion?

Yes, it's a great question, Brandon. It was probably about 2% for 2020, so when you think about 2021, I mean, with the projection that the dollar will continue to weaken. So obviously, it does contribute to the top line. There is, obviously some, negative impact on the operating expenses, as well as on the manufacturing. I mean net-net, there is still some fall through but, I don't have a specific number to call out. But for sure, on the top line, it is a contributor.

Last one for me, are you still planning to host some type of Analyst Day event in the first half of the year?

We do plan to host it sometime later this year. Yes, and we have to find the right timing. I mean, hopefully, again, with vaccines everything will normalize, so that would be a great opportunity. Thank you. Okay. So we appreciate you joining the call today and your interest in Bio-Rad and we look forward to connecting soon. Thank you, everyone.