Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Bio-Rad Laboratories Incorporated Earnings Conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Thank you.

I would now like to hand the call over to your speaker today, Mr. Ron Hutton. Please go ahead..

Thank you, Buena. Good afternoon, and thank you all for joining us. Today, we will review the first quarter results for 2020.

With me on the phone 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 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. These statements are based on assumptions and expectations of future events that are subject to risk and uncertainties.

Included in these forward-looking statements, our statements regarding the impact of the COVID-19 pandemic on Bio-Rad results and operations and steps Bio-Rad is taking and response to the pandemic. Our actual results may differ materially from these plans and expectations, and the impact and duration of the COVID-19 pandemic is unknown.

We cannot be certain that Bio-Rad’s responses to the pandemic will be successful that the demand for Bio-Rad's COVID-19 related products is sustainable or that Bio-Rad will be able to meet this demand.

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 will now turn to turn the call over to Ilan Daskal, Executive Vice President and Chief Financial Officer..

Thank you, Ron. Good afternoon, thank you all for joining us. And we hope that you and your families are well and staying healthy. We would like to recognize and thank our employees around the globe who continue to make extraordinary efforts to serve our customers under the current circumstances.

Before I get into detailed quarterly discussion, Andy Last, our Chief Operating Officer, will provide an update on Bio-Rad’s operations in light of the current pandemic related environment that we are experiencing globally.

Andy?.

Thank you, Ilan. So I'd like to take a few minutes to update you on our current state of operations around the world. To closely monitor and keep closed all of our sites, we've established the COVID-19 oversight team to manage and respond to the pandemic situation.

As we manage through the challenging period, we're focused on three key areas; 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.

In the area of employee safety, we have implemented work from home globally for all employees who are not essential to maintaining ongoing production and safe use of our facilities. Travel is limited only to essential customer visits for our field base personnel.

For all employees who are at work, we have implemented safety procedures in line with CDC recommendations and/or local authorities when required.

In China and other Asian region countries where stay at home has been lifted, we have our teams back in the office where we are adopting shifts, monitoring temperatures and still maintaining social distancing and cleaning routines in accordance with applicable local guidelines.

We'll continue to follow this phased return to work approach as other reasons begin lifting shelter in place restrictions. Overall, we're very pleased with the positive response of our employees. Our manufacturing operations teams have responded extremely well to the situation.

And to-date, we've been overall able to maintain continuous production in most of our sites and have been working closely with our customers to ensure product supply continuity.

As part of our response efforts, we've been able to mitigate many of the changes in customer demand both up and down by balancing production and resources across our sites and in a few instances we have temporarily suspended production.

In particular, we saw in the first quarter high demand for our PCR and Droplet Digital PCR products and similar to other companies, have experienced some challenges in procurement and scaling production.

These challenges have generally been due to all suppliers being impacted by shelter in place requirements, as well as their inability to meet increased demands. With the recent launch of our SARS-CoV-2 serology test, we're also now scaling manufacturing both the U.S. and in Europe to meet the expected demand.

As we look forward, we continue to monitor demand across our portfolio to optimally manage this situation, adjust capacity in our supply chain and ensure continuity of high quality product to our customers.

And lastly, while much time and energy has been recently focused on managing through the impact of the global pandemic, we continue to work on our core initiatives and strategies. Thank you. And I'll pass it back to Ilan..

Thank you, Andy. And now, I'd like to review the results of the first quarter. Net sales for the first quarter of 2020 were $571.6 million, which is 3.2% increase on a reported basis versus $554 million in Q1 of 2019. On a currency neutral basis, sales increase 4.3%.

Sales in all regions were impacted by the global spread of COVID-19 as the quarter progressed. This was evident first in Asia. And late in the quarter, we experienced the tapering in demand in the U.S. and in Europe. As you recall, we estimated $5 million revenue carryover from Q4 due to the cyber attack.

We now feel that the first quarter probably benefited by closer to $10 million. As Andy alluded to, the pandemic resulted in a significant change in the mix of product demand across our portfolio.

We saw strong orders for PCR based products related to COVID-19 testing and research, and lower demand mainly within the clinical diagnostics portfolio, which was impacted by shelter in place guidelines.

Sales of the Life Science Group in the first quarter of 2020 were $227.2 million compared to $215.7 million in Q1 of 2019, which is 5.3% increase on a reported basis and 6% increase on a currency neutral basis.

Much of the year-over-year growth in the first quarter was driven by double-digit growth in gene expression, Droplet Digital PCR, antibody products and food safety. Our core PCR, and Droplet Digital PCR products revenue increases were driven by strong demand related to COVID-19 testing and related research.

Growth in the Life Science segment was somewhat offset by softer academic research demand, as well as the tough compare to 2019 related to our Process Media produce line. Excluding Process Media sales, the Life Science business grew 11.1% on a currency neutral basis versus Q1 of 2019.

On a geographic basis, Life Science currency neutral year-over-year sales grew in Asia and in Europe, as well as a nice growth in the Americas when excluding Process Media.

Sales of clinical diagnostics products in the first quarter were $343 million compared to $334.1 million in Q1 of 2019, which is 1.9% growth on a reported basis and the 3.2% growth on a currency neutral basis. During the first quarter, we posted solid growth in blood typing and quality controls.

This growth was somewhat offset by year-over-year decline within our diabetes and immunology product lines, which showed the earliest times of reduced demand due to lower non-critical hospital and clinic visits. Overall, a decrease in routine led testing and elective surgeries impacted the diagnostic group revenue.

On a geographic basis, the diagnostic group posted growth in the Americas and in Europe. As you may have seen in our recent press releases, we are the first company to receive FDA emergency use authorization for a total antibody serology tests for COVID-19. A test, which has also met CE Mark requirement for Europe.

Clinical evaluation of this test is demonstrated diagnostics specificity of more than 99% and diagnostics sensitivity of 98%, eight days after the onset of symptoms. We also received FDA emergency use authorization for our Droplet Digital PCR COVID-19 test kit. The test can detect the virus with high sensitivity even when a low viral load is present.

The reported gross margin for the first quarter of 2020 was 55.5% on a GAAP basis and compares to 56.3% in Q1 of 2019. In 2019, gross margin benefited from an escrow release of $7.4 million related to an acquisition from 2011. Net of this, the current quarter gross margin benefited mainly from better product mix and lower inventory reserves expense.

Amortization related to prior acquisitions recorded in cost of goods sold was $3.9 million compared to $3.7 million in Q1 of 2019. SG&A expenses for Q1 of 2020 were $193.7 million or 33.9% of sales compared to $207.6 million or 37.5% in Q1 of 2019.

Reduction in the SG&A expenses were the result of ongoing cost savings initiatives, as well as disciplined hiring in low discretionary spend, driven by travel and marketing expenses due to the impact of COVID-19. Total amortization expense related to acquisition recorded in SG&A for the quarter was $2 million versus $1.7 million in Q1 of 2019.

Research and development expense in Q1 was $49.3 million or 8.6% of sales compared to $47.6 million or 8.6% in Q1 of 2019. Q1 operating income was $74.4 million or 13% of sales compared to $56.6 million or 10.2% in Q1 of 2019.

Looking below the operating line, the change in fair market value of equity securities holdings is at $827.7 million of income to the reported results, and is substantially related to holding of the shares of Sartorius AG.

Also during the quarter, interest and other income resulted in net other expense of $3.3 million compared to $11.4 million of income last year. Q1 of 2019 included $15.7 million of dividend from Sartorius, which was not declared in Q1 of 2020. The effective tax rate was 23.7% compared to 23.2% in Q1 of 2019.

Reported net income for the first quarter was $685.9 million and diluted earnings per share were $22.72. This is a decrease from last year and is substantially related to the valuation of the Sartorius Holdings. Moving on to the non-GAAP results.

Looking at the results on a non-GAAP basis, we have excluded certain critical 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 first quarter.

In cost of goods sold, we have excluded $3.9 million of amortization of purchased intangibles and $1.5 million of restructuring benefit. These exclusions move the gross margin for the first quarter of 2020 to a non-GAAP gross margin of 55.9% versus 65.6% in Q1 of 2019. Non-GAAP SG&A in the first quarter of 2020 was 33.3% versus 36.4% in Q1 of 2019.

In SG&A on a non-GAAP basis, we have excluded amortization of purchased intangibles of $2 million, legal related expenses of $1.8 million and restructuring and acquisition related benefit of $600,000. In R&D, we had excluded $400,000 of restructuring benefit. And the non-GAAP R&D expense in Q1 was consequently 8.7%.

The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 13% on a GAAP basis to 13.9% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin in Q1 of 2019 of 10.5%.

We have also excluded certain items below the operating line, which are the increasing value of the Sartorius equity holdings of $827.7 million and $1.3 million of loss associated with venture investments. The non-GAAP effective tax rates for the quarter was 25.7% versus 28.5% in Q1 of 2019.

The tax rate was impacted by changes in the geographic mix of earnings. And finally, non-GAAP net income for the first quarter of 2020 was $57.6 million or $1.91 diluted earnings per share compared to $49.6 million and $1.65 per share in Q1 of 2019. Moving on to the balance sheet.

The cash and short-term investments at the end of Q1 were $1.42 billion compared to $1.120 billion at the end of 2019. During the first quarter, we purchased 291,941 shares of our stock for a total of $100 million at an average price of approximately $342 per share.

For the first quarter of 2020, net cash generated from operations was $63 million, which compares to about $43 million in Q1 of 2019. This improvement mainly reflects the higher operating profits and improved working capital. Following the end of the quarter, we completed the acquisition of Celsee for $100 million in cash.

Celsee is an exciting early stage company with products focused on detection and analysis of single cells. We plan to further invest in new applications to enhance Celsee's technology. We also completed in early April a divestiture of a small non-core business that’s used to be part of our former analytical instruments group.

The proceeds from this transaction were about $12 million. The adjusted EBITDA for the first quarter of 2020 was $107.4 million or 18.8% of sales. The adjusted EBITDA in Q1 of 2019 was $101.7 million or 18.4% of sales, which included the 2019 Sartorius dividend. The adjusted EBITDA in Q1 of 2019, excluding the Sartorius dividend, was about 15.5%.

Net capital expenditures for the first quarter of 2020 or $21.6 million and depreciation and amortization for the first quarter was $33.6 million. Moving on to the guidance. Given the uncertainties regarding the duration and impact of the COVID-19 pandemic, we are withdrawing our previously issued annual guidance for this year.

We currently believe that the second quarter year-over-year sales may decline by 10% to 15%. We continue to assess various demand and supply indicators, as well as return to work protocols. We believe that the COVID-19 impact will be transitory and we would expect some recovery in the second half of the year.

But currently it is difficult to predict the rate of recovery that we might experience. That concludes our prepared remarks and we will now open the line to take your questions.

Operator?.

[Operator Instructions] And your first question is from the line of Brandon Couillard..

I’d actually start with Dara just on the serology antibody test. You faced an entrenched market with many of our high volume immunoassay systems that have great tests as well.

At a high level, what is Bio-Rad’s kind of fight to win in the category? And secondly, any color you can share with us in terms of your manufacturing capacity, where it stands today in terms of number of tests per month where you expect that to be in a few months from now, expected ASP? And then any color on the EVOLIS platform in terms of installed kind of throughput metrics you can help us with?.

So starting with your first question around positioning. I mean, as you said, there are other players with a variety of throughput capabilities who are entering the market.

We believe that a key differentiator for our platform is that is an opens system and incredibly well suited for medium sized labs, or as a complementary format to high throughput systems, which are typically closed systems.

And so as recent testing starts to ramp up in those large laboratories, we also expect that there will be more competition for volume on those closed systems.

And so we believe that our platform offers a really, really nice approach to either do batch processing alongside those systems and/or we think the work flow is really great for medium sized labs. It can be run on our EVOLIS platform, which is our automated plate reader that we refer to, of which there are more than 3,000 installs globally.

Or it can be adapted to any plate based system of which there are tens of thousands of systems globally, to automate both the kind of the pipe heading and the plate handling. So, great flexibility there. From a capacity perspective, this is an exceptionally scalable format from manufacturing approach as well.

So we've got the capability to manufacturer few millions of tests a week if the demand is there. And as you've probably read, the adoption of serology routine practice is still being established but we believe that the opportunity is meaningful. And then lastly, you asked about ASP.

So that the pricing for CPP code in North America still being established, we think that ASP will depend on volume, as well as other market entrants but likely to be in the mid-single-digit range.

Was that all your questions, Brandon?.

Maybe just one more on the science. You talked about measuring antibodies eight days post infection, many others have kind of oriented around a 21-day window.

And then secondly, could you sort of speak to the value of the total antibody approach rather than just measuring say IgA as many others have decided to sort of focus on?.

Our product is designed to protect IgM, IgG and IgA. And IgM is the first antibody type that appears post symptom onset as early as six, seven days post infection.

So by virtue of having a kit that's designed to detect all of these serotypes, it enables earlier detection, so upwards of about 100%, 99% sensitivity as early as eight days post symptom onset.

So as these tests are being used to complement diagnostic workup, especially if a patient has a negative PCR test, we believe the earlier detection is really quite useful..

And one follow up for Ilan just in terms of the 2Q directional commentary being down 10 to 15. actually one of the tightest ranges we've seen from many other companies to-date so far.

Could you get a sense of how that might break down between Life Sciences, is the main wildcard just the pace of lab reopenings? And any chance you might be able to sort of quantify the positive COVID tailwinds that might be through there relative to the COVID related sort of headwinds from let's say lap closures?.

There are several components that obviously we have to consider when we think about the potential Q2 revenue. Generally speaking, the return to work and if you think about Asia or China, it's a gradual return to work. And we have to wait to see kind of how it evolves in the other regions.

And obviously, we do see continued demand for the core PCR instruments. So, that will continue to be kind of a driving driver for the Q2 revenue. And then we had to continue to monitor in terms of the elective surgeries and return to kind of the to the clinics, and how they kind of impact the diagnostics group.

So, so far, we've seen different scenarios and that's how we came up with a range for Q2, and we'll have to wait and see how Q2 is going to evolve..

Your next question is from the line of Patrick Donnelly..

Ilan, maybe one for you. Certainly appreciate the guidance range. Can you just talk about on the margin side? It’s obviously been a big focus for you guys and when times are good revenue was kind of growing nicely in the mid-single-digits there.

Can you talk about what levers you guys are pulling here in the near-term given the pressure on the revenue that obviously nobody saw coming? How nimble can you be with some of those initiatives that you have out there?.

Andy, do you want to start on….

Your question was to Ilan, I'm sure hell add on at the end. On the supply chain side, clearly makes an overhead absorption, critical factors when looking at margin. And we'll be watching that closely as we go, as we go through the quarter.

Some areas of mitigation for us are closely monitoring demand versus supply, so that we can reduce our capacity quickly and also be in a position to respond again, so if demand picks up we had a pace and expectation. So that’s how we’re looking at our supply chain situation and its impact on margin..

And I would add to that, Patrick, also that overall, we continue to be very disciplined. And so the discretionary expenses, whether its travel, whether its disciplined hiring, and we’ll react to any change in the marketplace..

And just be clear, the 20% has been also pulled, correct?.

The 20%, generally, yes. And we'll have to see how the second half of the year will shape up, and this 20% EBITDA..

And then maybe one on blood typing. And obviously, there's a great need and demand for that right now in this environment. It seems like people have been mostly unwilling or reluctant to go to donation center.

So how should we’d be thinking about the growth for that business in the near-term here?.

So I think there maybe two ways to look at it. One is -- maybe I'll take that for a second, one way to look at it is things getting back to normal.

Obviously, with elective surgeries down, the blood typing has been a little weaker as that market -- as people kind of returned to elective surgeries and hospitals open up, I think we'll come back to seeing that more normally. Overall, it's a slow growing market.

And so we would expect it to, again, come back to some degree of normalcy and then continue at that pace..

And then last one, on the share repo $100 million in the quarter, really, really encouraging to see. I think it's the biggest number certainly I've seen you guys do. Was it just being opportunistic given the market pullback? Should we expect higher cadence going forward? Maybe just dive into that a little bit? Thanks..

It was part of the approach that we took and we have been communicating this approach for a while. And currently, we have about $70 million left in the pool. But with that said, we have to see how the market evolves and what does it mean, and what type of clarity we get and visibility we get to the rest of the year.

And generally speaking, we'll continue to be opportunistic..

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

So first a question on your diagnostics business.

Could you offer like what proportion of that business would you say is sensitive to noncritical testing volume versus what might be more insulated in run rate in any environment?.

Do you want to take that Ilan, or would you like me to?.

Sure, you can take that Dara….

I think it’s, for any of the products that are being used routinely like our quality controls, those are relatively protective and/or aspects of that you miss in hematology business are not tied to surgeries. Things like diabetes testing obviously has been constraint as people have been staying away from the routine kind of testing environment.

But as certain countries start to lift shelter in place orders what we expect that to come back to previous levels..

And then on the PCR business, Andy, I think you mentioned supply chain issues.

Can you elaborate on when these issues might resolve? And is it right to infer that in PCR right now, you're selling everything you can and the only rate limiting factor is the supply constraints?.

So the supply chain side, I think is increasingly becoming more and more solvable. When COVID hit, there was this crazy rush for demand and it was surge demand that the industry hadn't expected. So I think broadly everyone stuck with the same problems.

And to a large degree, I would say that at the moment, we've been able to sell pretty much everything we can produce. And we've been working hard to expand capacity at a couple of sites that we manufacture, both co-PCR and Droplet Digital PCR platforms, and consumables and reagents.

There is a little competition out there for some core components but largely, we've been able to secure our fair share with that..

And then my final question is just hoping somebody could elaborate on the Celsee acquisition. What are the objectives there? Is it more of an IT play like RainDance or is it something that you expect you’re going to develop and perhaps obsolete the DDC over time or complement the DDC? Any elaboration would be helpful, and thank you..

I think we'll invite Annette on that one..

Yes, I'd be happy to take that. I can say it's certainly the acquisition comes with important intellectual property. But this technology is one that we think has broad applications in the single cell partitioning and sorting markets and it's flexible, its cost effective, scalable to high throughput cell analysis.

And it's really well suited to the kind of transcriptomic and genomic and multiomic applications that customers trying to interrogate single cells are so interested in doing, so we're really excited.

And we have now the flexibility of choosing the right test tube for right application and droplets are certainly a good test tube for many of the kinds of things we're trying to do. But right now, we're focused on expanding the Celsee platform to the many applications in single cell that people are so interested in doing..

[Operator Instructions].

Okay, operator, if there are no more questions, can you pull the line again?.

No questions at the moment sir. Please continue..

Okay, thank you everyone. We appreciate you joining the call today..

Ladies and gentlemen, this concludes today's conference call. And thank you for your participation. You may now disconnect..