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

Thank you. Good afternoon, and thank you all for joining us. Today, we will review the first quarter results of 2021.

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

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 risks and uncertainties.

Included in these forward-looking statements are statements regarding the impact of the COVID-19 pandemic on Bio-Rad's results and operations and steps Bio-Rad is taking in response to the pandemic. Our actual results may differ materially from these plans and expectations, and the impact and the 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 reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release.

I will now turn the call over to Ilan Daskal, our 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 during these challenging times.

Before I begin the detailed first quarter discussion, I would like to ask Andy Last, our Chief Operating Officer, to provide an update on Bio-Rad's operations in light of the current pandemic-related environment that we are experiencing globally.

Andy?.

Thank you, Ilan, and I'd like to take just a few minutes to review our current state of operations around the world. As expected, COVID continues to have an impact on our operations, but as previously communicated, we have now adapted well to this environment, and our employees around the world continue to perform to the highest standards.

We continue our focus on the 3 areas previously communicated, the ongoing safety of our employees; continuing manufacturing operations to ensure product supply and support of our customers; and making sure we continue to make progress on our core strategies.

Overall, we continue to be very pleased with our employee safety despite the increases in COVID in some areas of the world. Our internal COVID transmission rates remain extremely low, and we are starting to benefit from the vaccination programs.

In Q1, we have maintained the work from home policies we adopted in 2020 and are continuing to monitor the pandemic closely as we assess the right timing for a more general return to the workplace.

As we enter Q2, we expect to continue to experience the impact of the pandemic for at least the coming quarter, but are confident in our ability to meet customer demand while progressing our core strategies and new product development objectives.

And as the global economy trends towards recovery, we're also paying close attention to our supply chain as accelerated demand for raw materials has the potential to cause constraints and prolong higher-than-typical logistics costs.

Provided there is positive global progress on controlling COVID, we anticipate operations starting to return to more normal operating practice in the second half of the year. So thank you, and I'll pass it back to Ilan..

Thank you, Andy. Now I would like to review the results of the first quarter. Net sales for the first quarter of 2021 were $726.8 million, which is a 27.1% increase on a reported basis versus $571.6 million in Q1 of 2020. On a currency-neutral basis, sales increased 23.4%.

The first quarter year-over-year revenue growth was impacted by a tough compare of about $10 million revenue carryover to Q1 of 2020 related to the December 2019 cyber-attack. On a geographic basis, we experienced currency-neutral growth across all 3 regions.

We continued to see strong demand for product associated with COVID-19 testing and related research. Generally, we are seeing most academic and diagnostic labs now running about 90% capacity, which is an improvement to what we saw in Q4. We estimate that COVID-19-related sales were about $94 million in the quarter.

Sales of the Life Science Group in the first quarter of 2021 were $366.5 million compared to $227.2 million in Q1 of 2020, which is a 61.3% increase on a reported basis, and a 56.9% increase on a currency-neutral basis. The year-over-year growth in the first quarter was driven by the continued strength of COVID-19-related qPCR products.

In addition, we saw strong double-digit year-over-year sales growth in Droplet Digital PCR, Western Block and antibody products. In addition, Process Media, which can fluctuate on a quarterly basis, saw strong double-digit year-over-year growth in the quarter over the same quarter last year.

Excluding Process Media sales, the underlying Life Science business grew 56.2% on a currency-neutral basis versus Q1 of 2020. On a geographic basis, Life Science currency-neutral year-over-year sales grew across all regions.

In addition to continued adoption of Droplet Digital PCR in BioPharma, we also saw good demand for the QX ONE in wastewater testing applications for COVID, and we expedited the introduction of COVID variant assays, which are being well received. Key opinion leaders continue to highlight the sensitivity advantage of Droplet Digital PCR.

Sales of the Clinical Diagnostics Group in the first quarter were $358.5 million, compared to $340.3 million in Q1 of 2020, which is a 5.4% growth on a reported basis, and a 2.2% growth on a currency-neutral basis. During the first quarter, the Diagnostics Group posted solid growth in diabetes and in quality controls.

We started to see a recovery of market demand for non-COVID business, with diagnostics labs returning to about 90% of pre-COVID levels. The recovery of routine testing and elective surgeries is still progressing. On a geographic basis, the Diagnostics group posted growth in Asia.

The reported gross margin for the first quarter of 2021 was 55.1% on a GAAP basis, and compares to 55.5% in Q1 of 2020.

The current quarter gross margin percentage declined mainly due to expenses associated with the restructuring initiative that we communicated earlier this year, offset by better product mix, lower service costs and higher manufacturing utilization.

Amortization related to prior acquisitions recorded in cost of goods sold was $4.6 million compared to $3.9 million in Q1 of 2020. SG&A expenses for Q1 of 2021 were $225.9 million or 31.1% of sales compared to $193.7 million or 33.9% in Q1 of 2020.

The year-over-year SG&A expenses increased mainly due to expenses associated with the restructuring initiative and higher employee-related expenses, and it was offset slightly by a $5 million cybersecurity insurance settlement related to the 2019 cyber-attack as well as lower discretionary spend.

Total amortization expense related to acquisitions recorded in SG&A for the quarter was $2.4 million versus $2 million in Q1 of 2020. Research and development expense in Q1 was $73.9 million or 10.2% of sales compared to $49.3 million or 8.6% in Q1 of 2020.

The year-over-year R&D expenses increased due to expenses associated with the restructuring initiative and increased project spend. Q1 operating income was $100.9 million or 13.9% of sales compared to $74.4 million or 13% in Q1 of 2020. Looking below the operating line.

The change in fair market value of equity securities holdings added $1.179 billion of income to the reported results, which is substantially related to holdings of the shares of Sartorius AG. During the quarter, interest and other income resulted in net other income of $16.9 million compared to $3.3 million of expense last year.

Q1 of 2021 included $19 million of dividend income from Sartorius, which was declared this year in Q1. In 2020, the Sartorius dividend was declared in the second quarter. The effective tax rate for the quarter was 24.7% compared to 23.7% in Q1 of 2020. The tax rates for both periods were driven by the large unrealized gain in equity securities.

The year-over-year increase in our effective tax rate was due to the restructuring initiative announced earlier this year. Reported net income for the first quarter was $977.4 million, and diluted earnings per share were $32.38. This is an increase from last year and is substantially related to changes in 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 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.

In cost of goods sold, we have excluded $4.6 million of amortization of purchased intangibles, $24 million of restructuring-related expenses and a small legal reserve benefit. These exclusions moved the gross margin for the first quarter of 2021 to a non-GAAP gross margin of 59% versus 55.9% in Q1 of 2020.

Non-GAAP SG&A in the first quarter of 2021 was 25.4% versus 33.3% in Q1 of 2020. In SG&A, on a non-GAAP basis, we have excluded restructuring-related expenses of $34.7 million, legal-related expenses of $4.4 million, and amortization of purchased intangibles of $2.4 million. In R&D, we have excluded $16.9 million of restructuring-related expenses.

The non-GAAP R&D expense in Q1 was consequently 7.9%. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 13.9% on a GAAP basis to 25.8% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin in Q1 of 2020 of 13.9%.

We have also excluded certain items below the operating line, which are the increasing value of the Sartorius equity holdings of $1.179 billion, and $1.8 million of loss associated with venture investments. Our non-GAAP effective tax rate for the quarter was 23.6% versus 25.7% in Q1 of 2020.

The tax rate was impacted by changes in the geographic mix of earnings. And finally, non-GAAP net income for the first quarter of 2021 was $157.4 million, or $5.21 diluted earnings per share compared to $57.6 million and $1.91 per share in Q1 of 2020. Moving on to the balance sheet.

Total cash and short-term investments at the end of Q1 were $1.025 billion, compared to $997 million at the end of 2020. During the first quarter, we purchased 89,506 shares of our stock for a total of $50 million at an average price of approximately $559 per share.

For the first quarter of 2021, net cash generated from operations was $114 million, which compares to $63 million in Q1 of 2020. The improvement is mainly driven by higher operating profits. The adjusted EBITDA for the fourth quarter of 2021 was $232 million or 31.9% of sales, and excluding the Sartorius dividend, was 29.3%.

The adjusted EBITDA in Q1 of 2020 was $107.4 million or 18.8% of sales, which did not include the 2020 Sartorius dividend. Net capital expenditures for the first quarter of 2021 were $19.5 million, and depreciation and amortization for the first quarter was $32.7 million. Moving on to the guidance.

We began the year with a projection of between 4.5% and 5% non-GAAP sales growth, and a non-GAAP operating margin of between 16% and 16.5%.

Even though we continue to be uncertain about the duration and impact of the COVID-19 pandemic, given the results of the first quarter and our current outlook, we are now guiding currency-neutral revenue growth in 2021 to be between 5.5% and 6%.

This includes COVID-related sales, which we estimate to be between $170 million and $180 million versus our prior estimate of about $150 million and $160 million.

We project most of the 2021 COVID-19-related sales to occur during the first half of the year, and we continue to assume a continued gradual return to pre-pandemic activity and a more normalized business mix. Full year non-GAAP gross margin is now projected between 56.5% and 57% versus our previous guidance of 56.2% and 56.5%.

And full year non-GAAP operating margin to be about 17%, and full year adjusted EBITDA margin to be about 22% versus previous guidance of 21%. That concludes our prepared remarks, and we will now open the line to take your questions.

Operator?.

[Operator Instructions]. First question is coming from the line of Brandon Couillard from Jefferies..

Ilan, maybe just starting with the updated guidance outlook. It would suggest that organic growth over the balance of the year would be about flat to maybe plus 1%.

Could you talk about what that embeds in terms of the two segments for the balance of the year? And whether you think diagnostics can continue to ramp with that double-digit target you talked about before?.

Sure. Thank you, Brandon.

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

Yes, that's right..

So I'm not sure that we are at about flat. Actually, if you run the math, It's about 7.5%.

And -- for the full year, are you referring? Or for the first quarter year-over-year, sorry?.

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

Okay, okay.

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

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

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

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

So Brandon, maybe I can make it quick, it's Andy speaking. We had a strong Q1. We had a strong start last year, and that included some of the carryover from the COVID -- the cyber ninth attack in December of '19.

Actually, we were pretty pleased with the recovery of the diagnostics business in Q1 and it's fairly broad-based, but I would say more so in Asia Pac as that was the first region that started to show a negative impact in 2020. So I'd say it's meeting -- it's really meeting our expectations for our guidance for the year..

Okay. Maybe shifting over to some of the P&L lines. SG&A, just on a dollar basis, was down a lot year-over-year and sequentially.

Was there some timing benefits from maybe some investments that perhaps may have gotten pushed out to later in the year? Are you finding some new areas for cost outs right now? Just help us to understand the trend in that line?.

Sure, Brandon. So there are a few probably components to highlight here. First, we have the $5 million reimbursement, the insurance reimbursement regarding the cyber-attack claim. And so that needs to be probably kind of, if you normalize for that, so from a normal run rate, it's higher by $5 million.

Then the other aspect that I would highlight is, still kind of lower discretionary expenses associated with the COVID-related environment. And those, we believe, will come back later in the year. That's our assumption. And some of it is also planned hiring that we still have for the remainder of the year.

So these are probably the main components that I would highlight there..

Okay.

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

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

[Operator Instructions]. Next question is coming from the line of Dan Leonard from Wells Fargo..

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

So are there any offsets you'd want to flag?.

So generally speaking, Dan, I'm not sure how did you run your math, but I can tell you that the way we think about it -- most of the incremental kind of portion of the guidance is associated with the first quarter COVID-related sales, some of it is also -- some assumptions associated with later in the year, but most of it is the incremental benefit that we have experienced in the first quarter.

When you think about it from a full year perspective, Diagnostics is still kind of -- we assume, a low double-digit kind of growth there. And we said last time about flat for Life Science, now maybe it's about 2% or so. So definitely, it's an updated guidance upwards from the last quarter..

Okay.

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

Sure. So on a high level, Dan, it's about volume and mix.

If we think about the full year guidance of COVID-related sales of between $170 million to $180 million, of which about $94 million was in the first quarter, and COVID-related sales are above the company average, that definitely is a strong quarter for us, and that was the driver associated with higher utilization in the manufacturing footprint.

So when you blend it with the remainder of the year kind of guidance, probably gross margin is going to be lower in the upcoming quarters. With that said, you can get for the full year, our updated guidance of 56.5% to 57%..

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

Yes, sure. This is Andy. Essentially, [indiscernible] is progressing as we had planned. We've got a lot of changes going on and multiple functions, predominantly in Europe, as we communicated in our press release. So all of those plans are proceeding. They take time to work through.

I think we've communicated before that the majority of the kind of net benefit won't be until 2023. That's still the case. So at this point in time, it's still early in our restructuring efforts, but we're pleased with the progress..

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

Ilan, maybe just building on that last one.

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

Sure. Thanks, Patrick. So when you think about the restructuring, generally speaking, this year, we do not think that there would be much benefit out of the restructuring.

We will start, and we expect to see some benefit to start sometime next year, and to fully realize it in 2023, and that's part of our kind of long-term strategy, and that's part of what we have been communicating since December. But again, for this year, we do not anticipate to gain much benefit out of the restructuring.

The gross margin in general and the operating margin, it's -- and specifically, you alluded to the gross margin, it's a volume and mix kind of benefit that we are experiencing right now..

Okay, understood. And then on the cap deployment side, nice to see you guys buy back some stock, very timely as well, sounds like a nice price.

How should we think about that going forward? Always good to get an update from Norm in terms of how you're feeling about the pipeline? Is the larger deal still on the table? Just your thoughts there at the moment..

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

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

How do you think about that market overall? And how it's developing over the last couple of quarters?.

Sure. It's a brand-new market, and it is developing rapidly. I mean, I think we could imagine over time, that this could develop into a $100 million or $200 million opportunity, but it's early days. That said, the Droplet Digital PCR platform was almost made for this application.

When you think about what you're trying to do, you're searching for a needle in a haystack, essentially, which is the strength of the product that we have. So we're getting good pickup in government university labs, now service labs are picking up. At first, this really was a U.S.

opportunity and it's spread across Europe now and other geographies as well. So I think we're optimistic about it, and we've worked on putting variant assays online for people to buy, and we're working on a specific wastewater kit that interrogates for all the variants as well..

Okay. Perfect. And last one for me, just housekeeping. I think there was some news flow on the litigation front with Tenax.

Can you just give us a quick update there and where you stand?.

Yes. I'd say that our comment really is, so this was an appeals court that upheld the earlier findings by the International Trade Commission and so today's federal circuit decision was not unexpected at all and it really doesn't impact our business.

And so I think that's probably the only comments that we would make around the litigation at this point..

Next is from Jack from Nephron..

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

So thanks for the question. And let me share with you, first of all, we usually -- and we do not guide by quarter, but generally speaking, if you recall in our guidance from last quarter, we did indicate and we emphasized it today that most of the COVID-related sales will be in the first half of the year.

And we experienced obviously stronger-than-expected first quarter COVID-related sales. And that's most of the incremental guidance that we have alluded to, right? I mean, so generally speaking, we are operating under the assumption that in the second half of the year, the business mix is going to normalize. So I think we are pretty consistent there..

Got it.

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

Dara, do you want to take this one?.

Sure. So as we said in the opening comments, we're operating broadly around 90% to pre-COVID levels, but there are regional dynamics embedded in there, largely related to the mix and what percentage of certain product lines are sold in certain regions, and how impacted or non-impacted they've been by COVID.

So North America is really getting up to that pre-COVID level from a performance perspective. Europe is closed, except where there's still some growth being moderated in elective surgeries, and that's a region where we have very strong sales of immunohematology, so that makes sense.

And then APAC was strong, largely driven by China, which I think we've seen from other announcements, too, is that China is kind of coming back and particularly, diabetes were very strong in Q1. And that's the scenario where that product line is really quite strong. Other parts of Asia Pacific continue to really be challenged by COVID.

So it's kind of a country-by-country story, frankly..

Got it. And one more.

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

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

What was the growth in Process Media in the quarter?.

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

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

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

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

Ilan, if we strip out the COVID-related revenues out of Life Sciences, it looks like the base Life Sciences organic growth was up something like 20% in the first quarter.

Can you just touch on the primary drivers of that?.

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

Annette, sorry, do you want to add anything?.

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

Got you. And then maybe one more for you, Annette. We noticed you're running an instrument trade-up program in Life Sciences in the U.S. in the second quarter.

Is this a new commercial initiative for Bio-Rad? I don't recall seeing something like this before, and should we expect any material revenue or gross margin impact from this in 2Q?.

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

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

Okay. So it's just in -- yes, sorry, I wasn't sure which program you were referring to. Look, we occasionally put those kind of incentives in for our customers. And I think that the general answer to your question is, we wouldn't be doing it if we didn't expect some return on the program.

I think that it's certainly not at the center of what's driving all of our growth, but it's one of the typical kinds of promotions that our global commercial organization runs from time to time..

[Operator Instructions]. We have no questions at this time. Presenters, you may continue..

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

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