Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and Full Year 2019 Bio-Rad Laboratories Incorporated Earnings Conference call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised, that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Ron Hutton. Thank you. Please go ahead sir..

Thanks, Daniel. Good afternoon and thank you all for joining us. Today, we will review the fourth quarter and full year financial results for 2019.

With me today are, Norman Schwartz, our CEO; Ilan Daskal, Executive Vice President and Chief Financial Officer; Andy Last, Executive Vice President and Chief Operating Officer; Annette Tumolo, President of Life Science Group; and Dara Wright, President of the Clinical Diagnostics Group.

Before we begin our review, I would 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. Our remarks today will also include references to non-GAAP net income and non-GAAP diluted income per share, which are financial measures that are not defined under generally accepted accounting principles.

Investors should review the reconciliations of these non-GAAP measures to the comparable GAAP results contained in our earnings release. I'd now like to turn the call over to Ilan..

Thank you, Ron. Good afternoon and thank you all for joining us. We will review the fourth quarter and full year results for 2019 on a GAAP basis, as well as commentary on a non-GAAP basis. Net sales for the fourth quarter of 2019 were $624.4 million, which is 1.2% increase on a reported basis versus $616.8 million in Q4 of 2018.

On a currency-neutral basis, sales increased 2.3%. The fourth quarter revenue fell short by about $20 million from the midpoint of our guidance, mainly due to the cyber-attack that we reported in early December. We expect to recover in Q1 of 2020 about $5 million of the Q4 revenue shortfall.

During the quarter, we experienced good demand across many of our key product areas and growth in the Americas and in Europe. Sales in Asia were most impacted by the cyber attack, mainly impacting the Life Science group sales.

Sales of the Life Science group in the fourth quarter of 2019 were $242 million compared to $239.6 million in Q4 of 2018 which is 1% increase on a reported basis and 1.8% increase on a currency-neutral basis.

Much of the year-over-year growth in the fourth quarter was driven by a double-digit growth in Droplet Digital PCR and in Food Safety, as well as very strong results for Process Media.

Excluding process Media Sales, the Life Science business declined 2.1% on a currency-neutral basis versus Q4 of 2018 as a result of the cyber attack, which impacted mainly the revenue of Life Science. On a geographic basis, Life Science currency-neutral year-over-year sales grew in the Americas and in Europe.

Our Droplet Digital PCR business continues to have good momentum. The fully integrated QX ONE system was launched in Q4 and we are very pleased with the demand outlook, as we continue to ramp production and shipments.

Sales of the Clinical Diagnostics products in Q4 were $379 million compared to $373 million in Q4 of 2018, which is 1.6% growth on a reported basis and 2.8% growth on a currency-neutral basis. During the fourth quarter, we posted solid growth of Blood Typing, quality control diabetes and immunology product lines.

This growth was somewhat offset by year-over-year decline within the infectious diseases business. On a geographic basis, the Diagnostics group posted growth in Asia and in the Americas. The reported gross margin for the fourth quarter of 2019 was 52.9% on a GAAP basis and compares to 53.9% in Q4 2018.

The fourth quarter gross margin was negatively impacted, mainly by lower revenue fall-through, the temporary production outage and lower manufacturing utilization, due to the cyber-attack, as well as a restructuring reserve.

Amortization related to prior acquisitions recorded in cost of goods sold was $4.5 million compared to $4.2 million in Q4 of 2018. SG&A expenses for Q4 of 2019 were $214.2 million or 34.3% of sales. The SG&A expense in Q4 of 2018 was $214 million or 34.7%.

Total amortization expense related to acquisitions recorded in SG&A for the fourth quarter was $2.1 million versus $1.8 million in Q4 of 2018. The SG&A cost savings initiatives remain a focus area to achieve our 2020 goals. Research and development expense in Q4 was $57.1 million or 9.1% of sales compared to $53.1 million or 8.6% in Q4 of 2018.

Q4 operating income was $59.2 million or 9.5% of sales compared to $227.1 million loss in Q4 of 2018. Looking below the operating line, the change in fair market value of the equity securities holdings added $646 million of income to the reported results and is substantially related to the holdings of the shares of Sartorius AG.

Also, during the quarter, interest and other income, resulted in net other expense of $5.8 million compared to about $84,000 last year. The year-over-year increase primarily reflects losses and impairments on some of our venture investments. The effective tax rate in Q4 of 2019 was 20.9% and compares to 20.4% benefit in Q4 of 2018.

Reported net income for the fourth quarter was $553.5 million and diluted earnings per share for the quarter were $18.31. The increase in net income and earnings per share versus last year is substantially related to the valuation of the Sartorius holdings. Moving on to the non-GAAP results.

Looking at our results on a non-GAAP basis, we have excluded certain atypical and unique items that impacted both the gross and operating margins as well as other income. These items are detailed in the reconciliation table in the press release.

Looking at the non-GAAP results for the fourth quarter, in cost of goods sold, we have excluded $4.5 million of amortization of purchased intangibles, $1.5 million of acquisition-related benefits and $4.4 million of restructuring expenses.

These exclusions move the gross margin for the fourth quarter of 2019 to a non-GAAP gross margin of 54.1% versus 55.4% in Q4 of 2018. The non-GAAP SG&A in the fourth quarter of 2019 was 31.7% versus 32.7% in Q4 of 2018.

In SG&A, on a non-GAAP basis, we have excluded amortization of purchased intangibles of $2.1 million, $1.3 million of acquisition-related benefits, a restructuring cost of $13.2 million and $2.2 million adjustment to legal reserve. In R&D, we have excluded a restructuring cost of $6.1 million. The non-GAAP R&D expense in Q4 was consequently 8.2%.

The cumulative sum of these non-GAAP adjustments, result in moving the quarterly operating margin from 9.5% on a GAAP basis to 14.3% on a non-GAAP basis, which is about flat from Q4 of 2018.

We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity holdings of $646 million and $1.8 million losses associated with venture investments. The non-GAAP effective tax rate for the quarter was 17.7%. A change in the tax rules this quarter enabled us to apply higher foreign tax credits.

And finally non-GAAP net income for the fourth quarter of 2019 was $70 million or $2.32 diluted earnings per share compared to $63.1 million and $2.09 per share in Q4 of 2018. Moving on to the full year results. Net sales for the full year were $2,312 million, which is 3.3% growth on a currency-neutral basis.

The annual revenue is about $20 million below the midpoint of our guidance, mainly due to the fourth quarter cyber attack. We expect to recover in Q1 of 2020 about $5 million of the fourth quarter revenue shortfall.

Sales of the Life Science group for 2019 were $885.9 million, which is an increase of 2.8% on a reported basis and 4.6% on a currency-neutral basis. Much of the full year-over-year growth was driven by double-digit growth in Droplet Digital PCR, Food Safety and Process Media.

On a geographic basis, Life Science currency-neutral full year-over-year sales grew in the Americas and in Europe driven mainly by the demand from biopharma market. Life Science sales in Asia were mostly impacted by the cyber-attack in December.

Sales of Clinical Diagnostics products for 2019 were $1,412 million, which is about flat on a reported basis and 2.8% growth on a currency-neutral basis. The full year-over-year growth was driven mainly by Quality Control, Blood Typing and Autoimmune testing products.

During the year, we continue to see a nice year-over-year increase in new instrumental installations. On a geographic basis, Clinical Diagnostics full year-over-year sales saw growth in the Americas and in Asia as well as a modest growth in Europe. The full year non-GAAP gross margin was 55% compared to 54.5% in 2018.

The year-over-year margin increase was driven mainly by product mix, manufacturing efficiencies and lower cost of inventory reserves, but was negatively impacted by cost associated with the cyber attack. Full year non-GAAP SG&A was 34.4% compared to 35.2% in 2018. The SG&A remains a focus area for us to achieve our 2020 goals.

Full year non-GAAP R&D was 8.5% versus 8.7% in 2018 and full year non-GAAP operating income was 12% compared to 10.7% in 2018. Lastly, the full year non-GAAP tax rate was 24.1% versus our guidance of 27%. The lower tax rate was mainly driven by a change in the tax rules, which enabled us to apply higher foreign tax credits.

Moving on to the balance sheet, total cash and short-term investments at the end of Q4 were $1,120 million compared to $850 million at the end of 2018 and $985 million at the end of the third quarter. We reclassified $425 million of the outstanding bonds that are due in December of this year from long-term liabilities to current liabilities.

During the fourth quarter, we purchased 22,343 shares of our stock for $8 million at an average share price of approximately $358. For the fourth quarter of 2019, net cash generated from operations was $160 million, which compares to about $105 million in Q4 of 2018.

This improvement mainly reflects the higher operating profits and improved working capital. For the full year of 2019, net cash generated from operations was $458 million versus $285 million in 2018. The adjusted EBITDA for the fourth quarter of 2019 was $116.8 million or 18.7% of sales.

Full year adjusted EBITDA, including the Sartorius dividend that was declared in Q1 and paid in Q2 was $405.3 million, or about 17.5% compared to 16.2% in 2018. Net capital expenditures for the fourth quarter of 2019 were $21.6 million and full year CapEx was $98.4 million.

Depreciation and amortization for the fourth quarter was $34.5 million and $134.2 million for the full year. Moving on to the guidance for 2020. We are pleased with the overall performance in 2019 and we continue to see strong momentum in 2020. We are guiding a currency-neutral revenue growth in 2020 between 4.5% and 5.25%.

It is too early for us to estimate at this point of time the potential global impact of the coronavirus outbreak. We estimate 7% to 8% currency-neutral revenue growth for the Life Science group and between 3% to 4% for the Diagnostics group in 2020. We continue to assume that we will experience a quarterly revenue fluctuation for Process Media.

Q1 revenue is expected to be lower for Process Media compared to Q1 of 2019. However, we estimate an overall double-digit growth for the full year. Full year non-GAAP gross margin is projected between 55.7% and 56.1% and full year non-GAAP operating margin between 13.8% and 14.3%.

We estimate the non-GAAP full year tax rate to be about 26% and CapEx is projected between $100 million and $110 million. Overall, we are on track to achieve our goal of 20% adjusted EBITDA run rate by the end of this year. And now, I'll turn the call to Norman for a few comments..

Okay. Thanks, Ilan. Just a few general comments, I think if you look – for me, if you look past all the viruses that are floating around, I think we are pleased with the underlying progress and we continue to make on the 2020 goals that we've been pursuing. That progress is for me a combination of good steady sales growth and expense discipline.

On the sales side of the equation, the markets for our products continue to grow around the world and our outlook for 2020 is positive.

I think for me that outlook is driven by the robust markets, but also by the planned introduction of new products and platforms across the business and the full year effect of products introduced in 2019, most notably probably the QX ONE Droplet Digital PCR System introduced late in the year.

I think the outlook also factors in the effect of two acquisitions we completed in 2019 one in Life Science and one in Diagnostics. So as you see from the results we also continue to make progress on improving our operating income largely driven by a focus on SG&A expenses.

But we also benefited from some of the supply chain improvements that, we've previously talked about. I guess, there's certainly more we can do to capture the benefits of the investments, we've made in systems and the organization and in the markets that we're pursuing. And I do look forward to another year of progress..

Thank you, Norman.

We will now open the line to take your questions, Operator?.

Question-and:.

[Operator Instructions] Please stand by while we compile the Q&A roster. Our first question comes from Brandon Couillard with Jefferies. Your line is now open..

Thanks. Good afternoon. Ilan, if I interpret your comments right you only expect to recapture $5 million of the $20 million from the cyber-attack, in the fourth quarter. Is that right? And should we just consider the other $15 million, as just lost orders? And any chance you could quantify the impact of the cyber-attack on gross.

And operating margins in the fourth quarter specifically?.

Thank you, Brandon. I appreciate the question. So to your first question, the answer is yes. I mean, we plan to capture $5 million out of the $20 million. And the remaining $15 million, we currently don't anticipate or plan or kind of forecast to recover the $15 million from Q4.

And when you think about the overall expenses and the impact on the operating expenses, it was broad-based overall. I mean you can think about to the disruption, to manufacturing, to operations, in general. And there was a tail, throughout the quarter. So it's very difficult to kind of carve it out from the ongoing results.

And so, what we decided to do is just to, kind of announce what were the overall results. It's all baked into the results that we announced..

Okay. And as we think about the full year operating margin.

Can you just help us reconcile the adjusted operating margin guidance, 13.8% and 14.3% relative to your comments of the EBITDA exit rate? Should we just plug that Sartorius dividend even though it pays in the first half of the year, into the fourth quarter to try to think about profitability in exiting the year, the right way to do the math?.

Yeah. So, Sartorius usually, historically at least, tend to pay the dividend either in Q1 or Q2, and the first half of the year sometime. And the way we think about the EBITDA overall Brandon is a run rate of 20%, when you take into account the dividend from Sartorius. On a full year basis, it would be, in 2021..

Thanks.

And then, a question maybe for Andy, if you could just perhaps elaborate on some of the cost initiatives, some of the areas of the business that you'll be focused on in 2020, in terms of cost outs? And if you could perhaps quantify the net savings you anticipate from the European restructuring plan, which I think should be done by the second quarter?.

Yeah. So, I'll maybe split this between, Ilan and myself. I mean, there's no real commentary on changes in our focus for cost outs. I mean we continue to pursue improvements in SG&A, overall on a -- broadly based. And of course I think, as we've talked before. We're starting to turn it right to longer-term manufacturing strategy.

And our overall footprint going forward, which will elaborate more on later in the year.

I think there was another piece of that question? Or is that -- did I cover everything there?.

I think, Brandon -- I think, you have covered the question..

I think I covered that, Okay..

So Brandon, yeah, I mean, as Andy mentioned, the focus is to continue to extract leverage from -- mainly on the SG&A. And the focus is on the SG&A line for 2020. We do plan to have an Investor Day sometime in the second half of the year, which we will lay out kind of the follow-on strategy beyond 2020. And we'll communicate more then..

Okay. And then just one follow-up for you Ilan, and since you quantified the contribution you anticipate from the two acquisitions on 2020, revenue growth.

And as we sort of think longer-term, can you sort of help us think about the runway for the tax rate to continue to come down over time?.

Maybe I can comment on that..

The first one yeah..

Yeah. So, I mean these were small kind of early phase technology tuck-ins. So I mean, it's kind of -- and it's not -- it's a very small number. There'll be new products coming out from the work we've done on those tuck-ins. So it will contribute.

We're looking forward to it, as well a focus on getting those established in the marketplace so we can build on that position in 2021 and beyond..

And Brandon to your other question regarding the tax rate. So the change that was made this quarter was retroactive for 2018. So the overall rate was down to 24% on an ongoing basis, it's about 26% maybe we think with regarding long-term right now with our current tax structure somewhere in the mid-20s. That's the way we think about it right now..

All right. I’ll jump back. Thank you..

Thank you..

Thank you..

Thank you. Our next question comes from Dan Leonard with Wells Fargo. Your line is now open..

Thank you. My first one on China. Appreciate it's tough to tell the impact of the coronavirus, where we stand today.

But can you speak to your supply chain exposure in China?.

Yeah. I think first to reiterate your first comment it is tough to tell the full outlook on the impact in China. Our supply chain in China, I think is probably very similar to other major Life Science and Diagnostic companies. We do have manufacturing in Singapore and DCs around the region.

So we're just -- we’re subject to the same let's call it reduced workforce challenges that exist in the warehouses and the channel support infrastructure in China. I think we're no better or no worse than anybody else at this point in time..

But you don't source any meaningful amount of material that would go into your equipment from China? Am I hearing right?.

Can you say it again Dan?.

We do source….

You don't source a meaningful amount of raw materials from China do you?.

We do source some -- obviously some electronic parts and those kinds of things from China. To date, we haven't seen big disruptions in that. Again we just have to wait and see..

Okay. And then just a couple of follow-up questions on the trends in Diagnostics. It sounds like the European Diagnostics business was negative again in the quarter. When do you expect that region will bottom? And then secondly on diabetes specifically, I think the performance in 2019 was a bit lumpier than typical.

Can you maybe mark that to market in terms of what was the total diabetes growth rate in 2019? And what you expect the trend to look like there? Thank you..

Sure. Hi, this is Dara Wright. So I'll start with the European comment. So our growth largely mirrors the market growth that we see broadly right? It's been moderated in recent years by lab consolidation and downward price pressures. But I would say those are fairly consistent trends at this point.

Now that is offset by bright spots in more rapid growth outside of some of the more mature European countries, for example, in Eastern Europe. On the diabetes front, I think you asked about some of the lumpiness. I think Q4 was a bright spot.

We had a meaningful contract win in North America and we continue to see increased adoption both in new installations and test volume in parts of Asia Pacific and we'll continue to focus on those regions as we move forward..

Thanks for the color..

Thanks, Dan..

Thank you. [Operator Instructions] Our next question comes from Jack Meehan with Barclays. Your line is now open..

Thank you. Good afternoon. I wanted to start just with a clarification on the $20 million impact in the quarter.

First, what was the split between Life Science and Diagnostics? I know the BioPlex assay builder as an example was down, so there was some Diagnostic impact? And then what is the 2020 guidance assume in terms of -- do you just assume you have an easy comp in the fourth quarter?.

So to your first question Jack, the -- most of the revenue was with Life Science for the fourth quarter. And the guidance, yeah, everything is all-in and Q4 will be an easier comp, yes..

Okay. And then I think in the fourth quarter, you had the 8-K about the repositioning of the sales force in Europe. I was just wondering if you could talk -- maybe elaborate a little bit more on the strategy there.

And how you're going to market?.

Yeah. This is Andy. So we took a broad-based restructuring charge in Europe in Q4. The channel was certainly a piece of that. As we looked at our let's call it channel structure across the Diagnostics business relative to lab consolidation for example.

And so, we're really fine-tuning the channel and our infrastructure there to reflect the European performance and the consolidation that's gone on on the Diagnostic side..

Yes. I mean, we plan to repurpose some of it Jack obviously with the consolidation that Andy mentioned in Europe. I mean, the strategy is really to repurpose it to the growth areas and locations. So, it was in Europe and a few other locations as well the restructuring itself..

Great. And then maybe one final one on I guess the -- on single cell with the droplets. I think there was an update on the litigation front yesterday related to the TVC.

I was wondering just what if any impact that has? And then maybe for Annette, if you could just give us an update in terms of expectations for potentially a new product launch on the single-cell side that would be helpful..

Okay. So, yes, we had a decision out of the International Trade Commission that we are found to directly infringe three of the 10X patents on our NGS sample prep products. This is completely unrelated to Droplet Digital PCR products.

And although, we're really focused on developing new products and building our market presence in the single-cell area, the impact of that decision on current revenue isn't material at all. And we have a vibrant and active R&D program to develop new products in this area. We released one last year called the ATAC-Seq RNA sample prep product.

So we're in this market for the long run. But this decision doesn't really have material impact on our revenues..

Thank you..

And I guess, I'll add one more thing. It really won't impact our customers either because we took steps to have manufacturing domestic, manufacturing for all of those products..

Thank you. [Operator Instructions] Our next question comes from Patrick Donnelly with Citi..

Great. Thank you Maybe just one on the margin side, nice to see you guys reiterate the target.

Can you just talk about that the ransomware caused any additional spend kind of this year beginning of 2020 including the end of 2019 that caused you guys to take a different path to get there? In other words did you have to pull some other levers to keep on course for that 20% after the unexpected cyber attack?.

Yes. Thank you, Patrick. I appreciate the question. So, there was an incremental cost mostly in Q4. There is some tail end going into Q1, but as you can see specifically when you look into the operating expenses, we have been investing a lot in terms of improving the -- and the focus on the SG&A.

And with the incremental cost, I think the results is -- we are very satisfied with what we end up the Q4 results. And so it's all baked in the forecast for 2020 and the actual. And so, there is some small tail in -- tail end going into Q1 most of it was baked in Q4..

Okay. And then on the 2020 guide, encouraging to hear you guys talk about kind of 7% to 8% type growth in Life Sciences. Can you just talk about what the growth looks like on the ddPCR side? How big that business is getting for you guys now? I know, Norm you talked about the TAM kind of moving up a few times as you guys gain more and more traction.

Maybe just update us on your thoughts on what this market could look like in a few years..

So, we have a very optimistic outlook for the Droplet Digital PCR business. We're expecting our first full year of revenue from our new platform as Norman mentioned. And really I think we're just beginning to scratch the surface in the opportunities in Diagnostics for this business.

So, we don't usually talk about the exact size of the business, but we have been in very robust double-digit growth for year upon year upon year. We don't expect that to change and we're investing heavily in that business..

Okay. And then maybe just one on the capital deployment side, you guys obviously have the share repurchase out there has been pretty muted nice to see some activity this quarter, but obviously not too much.

I mean, are you guys in a stage where you're kind of preferring the M&A side and the cash build is kind of in order to pursue that an element on that decide what would the metrics look like for a deal you guys would target? How large would you go? And then also what would be important to you in terms of a deal target?.

So, there were about four or five questions in there. So, certainly, I think every quarter, it's a decision we have to make between how we deploy that capital. And if you have acquisition opportunities and then you have to balance that against share repurchases and we just try to do that quarter-by-quarter.

So the second part of the question, again was?.

Yeah, just in terms of what are you guys feeling like you prefer M&A? What would the deal look like? How large would you be willing to go?.

Okay. Yeah. So obviously considering the cash on our balance sheet and the lack of debt we have or the very little debt we have, and the earnings we've got. We got a fair amount of capacity we could do something fairly reasonably sized. Again for us, it's always been about the valuations and making sure that we get a good payback on it..

Okay. Excellent..

Thank you. Our next question is a follow-up from Brandon Couillard with Jefferies. Your lien is now open..

Thanks. Ilan just want to circle back with you. I mean, the operating cash flow is pretty remarkable.

Could you just sort of speak to the runway that you see to continue to bring down the working capital? Should we still expect inventories to continue to come down on a sequential basis? And what are some of the drivers of that operationally?.

Yeah. Sure. Thanks, Brandon. So in Q4 inventory was down about $34 million. And most of it actually was associated with the cyber-attack that we had to deplete some of our safety stock.

Overall, we had a target to reduce year-over-year inventory, which is part of the $34 million and so the way to think about it going into 2020, it will go up probably somewhat in the first half. And there is another target to take it back down towards the end of 2020..

Very good. Thanks..

And our next question is a follow-up from Jack Meehan with Barclays. Your line is open..

Thank you, again. One follow-up on the Diagnostics business.

So guiding to 3% to 4% organic growth this year, can you maybe just talk about the various products within that? Are there any changes you're expecting in terms of trend rates for the businesses within that?.

Yes. So the growth drivers and the regional performance that we've been experiencing in 2019, we expect to be fairly consistent in 2020. So we'll continue to focus on some of our core value proposition around laboratory productivity. So we'll focus on quality control enablement of total lab automation support.

And then from a regional perspective, we're focused on regional expansion in both Blood Typing and diabetes platforms and then also new test menu we launched a Lyme disease assay last year. We'll have a full year benefit of that as well as some kind of late in year FDA clearances.

So – for the blood typing platform in North America as well as some other label claim extensions in some of our rapid infectious disease platforms we'll get full year benefit of..

Great. And then on the Life Science side. I was curious we talked about the headwind from – the potential headwind from coronavirus.

But I was curious, if you thought any of your products could actually see a potential tailwind related to some of the testing needs?.

Yeah. I mean, we have certainly seen an uptick in demand across all of our PCR products both reagents and platforms. So yeah, I mean, I think we might get a little upside there..

Thank you..

I'm not showing any further questions at this time. I would now like to turn the call back over to management for any closing remarks. Ron Hutton Okay. Thank you very much for your interest and for joining us this afternoon and we look forward to talking to you and being in touch next quarter if not earlier. Thank you very much..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..