Christine A. Tsingos - Bio-Rad Laboratories, Inc. Norman D. Schwartz - Bio-Rad Laboratories, Inc. John Hertia - Bio-Rad Laboratories, Inc. Annette Tumolo - Bio-Rad Laboratories, Inc..

Brandon Couillard - Jefferies LLC Dan Leonard - Deutsche Bank Securities, Inc. David Westenberg - C.L. King & Associates, Inc..

Good afternoon, ladies and gentlemen, and welcome to the Bio-Rad Laboratories First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Tsingos, Executive Vice President and Chief Financial Officer..

Thank you, Paige. Good afternoon and thank you for joining us. With me today are Norman Schwartz, our CEO; Annette Tumolo, President of our Life Science Group; and John Hertia, President of our Clinical Diagnostics Group. Today, we will review our results on a GAAP basis and then provide some commentary and insight to our results on a non-GAAP basis.

Before we begin the 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.

Because our actual results may differ materially from these plans 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. So let's move to the first quarter financial results. Net sales for the first quarter of 2018 were $551.5 million and impressive growth of 10.3% versus the same period last year sales of $500.1 million. On a currency neutral basis, sales increased 4.5%.

In addition to strong product sales around the world, the first quarter sales result also include approximately $6 million of recorded sales associated with the settlement of a royalty dispute in our Diagnostics segment as well as $6 million of RainDance sales which compares to $2 million of sales last year.

When comparing the first quarter of last year remember that an estimated $9 million of revenue was pulled forward in anticipation of the go-live of our European deployment of SAP in April 2017.

If we exclude both the acquired and royalty settlement sales from the first quarter of this year as well as neutralize for last year's pull forward, we still estimate the currency-neutral organic growth for the quarter was around 4.5%.

During the quarter, we experienced good currency-neutral growth across many of our key market and product areas within both the Life Science and Diagnostics segments. Of particular note, sales of Droplet Digital PCR, process chromatography media, quality controls and auto immune products were particularly strong during the quarter.

From a geographic standpoint, sales in the quarter grew most notably in North America, China and Asia Pacific, offset somewhat by slower sales in Europe which are primarily reflective of the tough compare to the pull-forward of orders in that region last year. We look a little closer at the segment performance for the quarter.

Life Science sales in the first quarter were $197.8 million, an increase of 13.5% on a reported basis when compared to last year and growth of nearly 9% on a currency-neutral basis.

Much of the growth in the first quarter was driven by strong double-digit sales growth of our Digital PCR instruments and reagents as well as products for the cell biology market, two of our biggest investment areas. We also experienced another solid quarter of demand for our process media product.

On a geographic basis, Life Science currency-neutral sales were particularly strong in North America, China, and Europe. Sales of Clinical Diagnostic products in the quarter were $350.8 million compared to $322.3 million last year, an increase of 8.9% on a reported basis. On a currency neutral basis, year-over-year sales grew 2.4%.

The overall growth rate for the Diagnostics group was negatively impacted by the pull forward of approximately $9 million of sales in the first quarter of last year as we prepared our customers for the go-live of SAP in Europe which were partially offset by the addition of $6 million of revenue related to the settlement of a royalty dispute in the current quarter.

These somewhat unique revenue events reduced the Diagnostic reported growth in the first quarter by approximately 1%. During the first quarter of this year, we posted solid growth of diabetes and autoimmune testing products. Our quality controls also continued to grow nicely in the first quarter.

Looking at the regional view, sales of diagnostic products were particularly strong in China, Asia-Pacific and North America. The reported gross margin for the first quarter was lower than our annual target at 54.8% that compares to 54% last year.

The current quarter margin was impacted by changes in product mix, as well as higher logistics and inventory costs when compared to last year. For the first quarter of 2018, amortization related to prior acquisitions recorded in cost of goods sold was $4.8 million, which compares to $5.1 million in the first quarter of last year.

SG&A expenses for the first quarter were $209.1 million or 37.9% of sales, up versus last year in terms of dollars but down as a percent of sales. When comparing to last year, remember that the first quarter of 2017 included a contingent consideration benefit of $9.4 million.

Other increases in SG&A spend for the first quarter of this year include higher employee related costs, as well as higher than anticipated audit fees. Total amortization related to acquisitions recorded in SG&A for the quarter was $2.1 million versus $1.7 million in the first quarter of last year.

The increase in amortization versus last year reflects the inclusion of RainDance. Research and development expense in Q1 was 9% of sales or $49.4 million, essentially flat when compared to the first quarter of last year and in line with our targeted investment levels.

Looking below the operating line, during the quarter, we recorded several atypical items resulting in additional income of $9.2 million for the divestiture of a small product line that was previously included in our other segment plus a gain on the sale of land in Europe.

In addition, you may have noticed the sizable income related to the change in fair market value of equity securities on our P&L for the quarter. As many of you know, beginning in 2018, a change in accounting regulations now requires us to re-measure the value of our equity holdings through the P&L.

For the first quarter, the change in value from December 31, 2017 to March 31, 2018 was nearly $816 million, substantially related to our holdings of ordinary and preferred shares of Sartorius. Given the potential size and volatility of equity values going forward, we will continue to present this as a separate line item on our P&L.

The effective tax rate used during the first quarter was 24%. This lower than expected tax rate was substantially driven by the sizeable gain related to our Sartorius investment, coupled with the benefit of tax reform in the U.S.

Excluding any discrete items that may occur during the year, we continue to expect the full-year effective tax rate to be in the 26% to 27% range on a GAAP basis. Reported net income for the first quarter was $657 million and diluted earnings per share for the quarter were $21.77.

With that extraordinary result in mind, it is likely not a surprise why we are also now reporting our financial results on a non-GAAP basis. As we look to our results on a non-GAAP basis, we have excluded certain atypical or unique items that impacted both our gross and operating margins, as well as other income.

These items are detailed in a reconciliation chart found in our press release.

Looking at the non-GAAP results for the first quarter and cost of goods sold, we have excluded amortization of purchase intangibles of $4.8 million as well as $188,000 of restructuring costs related to the shutdown of the diagnostic project that we discussed on our fourth quarter earnings call.

These adjustments moved the gross margin for the first quarter from 54.8% to 55.7%. This non-GAAP margin compares to a non-GAAP margin in the first quarter of 2017 of 57%. Remember that the higher margin last year was driven substantially by the pull-forward of sales, which consisted primarily of high margin consumables.

In operating expense on a non-GAAP basis, we have excluded amortization of purchase intangibles of $2.1 million, legal related charges of $3.7 million, acquisition-related contingent consideration of $2.1 million and restructuring cost of $850,000.

Of particular note, we would highlight that our SG&A margin on a non-GAAP basis has decreased from 39.7% in the first quarter of 2017 to 37.1% in the first quarter of 2018, greater than 250-basis-point improvement versus last year.

The cumulative sum of these non-GAAP adjustments results in moving the operating margin for the first quarter of 2018 from 7.9% on a GAAP basis to 9.7% on a non-GAAP basis. This represents a significant improvement over our non-GAAP operating margin of 7.4% in the first quarter of last year.

As I mentioned earlier, we have also excluded certain items below the operating line which are the quarterly increase in value of our equity holdings of $816 million as well as $9.2 million of gains associated with the sale of a small product line and a property owned in Europe.

With all of these various items in mind we adjusted our tax provision as well for these exclusions resulting in a non-GAAP effective tax rate of 27%. And finally non-GAAP net income and earnings per share for the first quarter of 2018 were $35.4 million and $1.17.

Moving to the balance sheet as of March 31, total cash and short-term investments were $768 million compared to $761 million at the end of 2017.

It may seem like a small change but remember that our first quarter historically has tended to be a heavy cash use quarter as we typically pay annual incentive bonuses and commissions, annual hardware and software maintenance costs and so forth. As such historically this has often resulted in negative cash flow from operations for the period.

For the first quarter of 2018, net cash generated from operations was more than $40 million which compares to a negative $56 million in the year-ago period. This positive result reflects good improvement in both collections and payables efficiency in Europe, as we continue to make progress towards stabilization on the new ERP system.

Also noteworthy, the adjusted EBITDA for the first quarter was $88.7 million or just over 16% of sales. Net capital expenditures for the quarter were $27.2 million, down significantly versus the first quarter 2017 of $39.3 million primarily reflecting the decrease in spend on our global ERP project.

Our full-year expectation for CapEx remains in the $100 million to $110 million range. And finally depreciation and amortization for the quarter was $34.3 million. Also of note on the balance sheet is the significant increase in other investments which now include the mark-to-market of the ordinary voting shares of Sartorius.

Associated with this write-up is a significant increase in other long-term liabilities for the tax on our Sartorius gain as well as the increase in retained earnings reflected in stockholders' equity. Moving to the outlook for 2018.

On our last earnings call, we shared our thinking for 2018 and that is our goal for currency neutral sales growth of 3.5% to 4%, full-year gross margins in the 55.5% to 56% range and targeting the operating margin at 10%. Today we are reiterating that guidance.

The strong top-line performance in the first quarter coupled with the positive outlook in many of our key end markets reinforces our confidence in achieving the 3.5% to 4% sales growth goals, as well as our ability to expand margins throughout the year.

When thinking about our guidance on a non-GAAP basis and using current foreign exchange rate, the operating margin target increases from an estimated 10% to an estimated 11.5% for the full year. And with that, we are happy to take your questions..

Your first question is from the line of Brandon Couillard with Jefferies..

Thanks. Good afternoon..

Hey, Brandon..

Christine, two part question for you on gross margins.

Any chance you could split out the effect of that pull-forward in the first quarter of last year that made the comp tougher? And then secondly, what would your gross margin outlook be on a non-GAAP basis for the year?.

So in terms of kind of recasting last year without the pull-forward, we haven't done that specific math but on average our consumables certainly carry a higher than the consolidated gross margin of the company and what we had our customers who are on standing orders to do is pull forward those consumables.

So, the short answer is Brandon, we didn't make that specific calculation, but in general the consumables carry margins that that can be 60% or better, so that was part of it.

And then your second question?.

If you could recast the gross margin guidance for the year on a non-GAAP basis?.

Sure. So we were talking about operating margin going from 10% to 11% and some of that is gross margin improvement but also operating margin improvement. And on the gross margin the 55.5% to 56% probably is now 56% to 56.5% if you will and then the balance of that improvement getting to a target of 11.5% is found on the operating line..

Thanks. That's helpful. And then as we look at the balance of the year, can you help us think through how you anticipate the cadence of year-over-year margin expansion to progress through the year.

And in particular, I think if you get back to the Analyst Day, I think you had pointed to SG&A in terms of absolute dollars I believe that will be in flat on a local currency basis for the year.

How should we expect that to progress as we move over the next few quarters?.

Yeah, that's a great question.

And as we progress through the year, we do anticipate improvement in our margins with a particular note as we look short term to the second quarter you will remember that quarter we experienced quite a bit of disruption related to the ERP go-live which would then imply easier to compare on the top-line this year and if we have good solid growth on the top-line that helps with margin expansion.

So it wouldn't surprise me to see strength in the margins and in the second quarter in terms of how it rolls out through the years and then, Q3 being back to our seasonal type of tough quarter and maybe something more that we've seen historically and then ending with a good strong Q4.

Much of the margin improvement is driven by continued growth and performance on the top-line. And as you look at SG&A spend, if we continue to work to hold it flat throughout the rest of this year, then as we grow the top line, you'll see the SG&A margin continue to expand.

The other thing that is important to point out is the 3.5% to 4% reiterating on the top-line takes into consideration that we have just divested a small product line which represented about $8 million a year of sales for us. So we are looking at keeping our top-line guidance and finding other way to make up for that $8 million..

Thanks. That's helpful, and then I guess, lastly for you Norman, any update you can share with us on the M&A pipeline, how you're thinking about the assets that are out there and the types of businesses you might be looking at right now. Thanks. Thanks..

So there continue to be a number of things of interest I would say mostly in the tuck-in category. We continue to be encouraged by what we're seeing and we'd hope that there would be something we can do this year..

All right. I'll hop back. Thank you..

Your next question is from the line of Dan Leonard from Deutsche Bank..

Thank you. So first off, a question on the revenue guidance, so Christine can you help me put in context – so you had a strong first quarter of 4.5% organic revenue growth which is above your guide. The Q2 comp looks pretty favorable given the ERP disruption in the prior year.

Is there anything you're seeing as potential caution flags in the second half of the year that would make you -- where are you thinking about a revenue number a bit higher than 3.5% to 4% for in the full year?.

No. And maybe it's a good time to remind everyone that the 3.5% to 4% was organic currency neutral on a reported basis. Certainly you can end up being higher than that, but the second half of the year has a couple of tough compares, Q3 becomes a tough compare because that's the quarter we made up last year for the disruptive quarter of Q2 last year.

And then of course Q4 was a very big quarter for us in 2017. So the growth rates probably are tougher to compare and especially in the fourth quarter..

Okay.

Makes sense and then secondly when you were walking through some of the points of strength, I notice you didn't say blood typing or immunohematology, so can you remind us, are you getting any revenue yet from that LabCorp contract win you announced in November and any update on the progress of the immunohematology ramp in the U.S.?.

We are and I'll just make a quick comment and then I'll let John Hertia pipe in and that's probably my doing on the script in terms of not mentioning in it specifically because it is a mixed result. They had the tough compare in Europe.

Because a lot of the pull-forward last year was in blood typing products, but they also had very, very good growth in the U.S. as we gained traction in this very important market for blood typing, so John Hertia, that's a good set up for you to talk a little more about it..

Sure. Things in the U.S. are going very, very well for blood typing. I would say the LabCorp implementation is about 85% done with just a few sites finishing up validation and revenue will kick in strongly after that. And we're also getting really good acceptance from the low volume systems that we announced at the beginning of the year.

And they're both as backup systems for the IH-1000 and then, kind of introduction in what has been somewhat of a tired market in the past and this is the first time some new technology has been introduced.

And also in Asia Pacific, blood typing has been growing very, very strong for us so both North America and Asia have been doing really, really well with respect to blood typing..

Okay. I appreciate that color and then this is my final question and I'll hop back in queue. Christine, possible that of the 230 basis points of year-on-year operating margin expansion on the non-GAAP comparison, operating margin expansion, how much of that was due to foreign currency to weaker U.S.

dollar?.

Dan, good question, I don't have the details. I don't have the details with me..

Okay. Thank you very much..

Your next question is from the line of David Westenberg with C.L. King..

Hi, thanks for taking the question and congrats on a good quarter..

Thank you..

So you continue to talk about the strength in the Droplet Digital PCR instrument, in RainDance you acquired last year.

So can you talk about maybe some of the synergies that you're seeing or anticipate seeing in the RainDance acquisition with your own Digital Droplet PCR system, whether it be R&D or sales synergy?.

So I think Annette, that....

Okay. So I think we are very happy with our Digital PCR results and we continue to grow the QX200 and our automated Droplet generators that go along with it. We certainly gained a lot of knowhow and intellectual property with the RainDance acquisition and we're really able to integrate that quite well into our R&D programs moving forward.

So we're really happy with that as well..

All right. Yeah. Thank you.

And then when we take your guidance, can you talk about considerations of new products versus geographic expansion versus just general growth in the market and how that might break down?.

And so, Dave, I just want to make sure I understand you're just talking in general going back to kind of the Investor Day looking at our growth?.

Exactly. Components of the growth and those are the three that you laid out in terms of this guidance.

Is that still kind of the proportions that you're looking out there in this year's guidance?.

I think it is still in line. Obviously as time moves on towards our 2020 target, you start to have cumulative impacts of new products and the geographic expansion.

But I think for the first quarter out of the gate we do experience the negative of the pricing pressure, et cetera, but as Annette and John Hertia pointed out in a couple of their product line lines we're seeing very good both geographic extension as well as some new market, new product activity..

Got it. And I noticed on your – in the breakout of the non-GAAP numbers, there is not any inclusion of consultant fees in anticipation of the ERP.

I was just wondering, are you still seeing that this year or had those completely fell off?.

No, no. We still have costs this year and at this point, it's hard to call those either atypical or unique.

I think it is part of the investment in our business and so it's not something that we would non-GAAP out, but as you may remember when we were talking about the outlook for the year we were looking at pretty significant reduced spend in the ERP project for 2018. And that's part of the benefit of the margin expansion.

But it's not something that we're going to highlight or non-GAAP out..

I appreciate it. I'll jump back in queue. And then thanks very much for taking the questions, and congratulations on a good quarter..

Thank you..

Your next question is from the line of Brandon Couillard with Jefferies..

Hey, thanks.

One question for Annette, if you could share with us any updates or any progress you might have made with respect to the licensing activity for the Droplet Digital PCR IP?.

Hi, Brandon. We're rolling – we're getting ready to roll that program out. We really wanted to be thoughtful about how we were going to do that. But we're engaged right now with several parties for commercials that – commercially use licenses for the technology. So it's moving along as we had hoped..

Okay.

And then maybe one for Norman, any update you could share with us as far as the COO search and whether you're looking more externally or internally, whether a candidate might be pretty close to coming onboard?.

So we've got both internal and external candidates. And I would imagine we'll have something in the not-too-distant future..

All righty. Thank you..

We have no further questions. Thank you. At this time, I would like to turn it back to management for any further comments or closing remarks..

Okay. Thank you, Paige. Again thank you everyone for taking the time to join us today. We appreciate your interest and look forward to the next time we have a chance to speak. Bye-bye..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect..