Good afternoon, ladies and gentlemen, and welcome to the Q2, 2021 Bio-Rad Laboratories, Inc. Financial Results 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.

[Operator Instructions] I would now like to turn the conference over to your host, Mr. Edward Chung, Head of Investor Relations. Sir, please go ahead..

Thank you, Joanna. Good afternoon and thank you all for joining us.

Today, we will review the second quarter 2021 financial results and provide an update on key business trends for Bio-Rad 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'd like to caution everyone that we will be making forward-looking statements about management's goals, plans, 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 commentary, regarding the impact of the COVID 19 pandemic on Bio-Rad’s results, 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 duration of the COVID-19 pandemic is unknown.

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.

Finally, our remarks today will include references to non-GAAP net income and diluted earnings 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.

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

Thank you, Ed. 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. And also we want to officially welcome Edward Chung, he is our Head of Investor Relations.

Before I begin the details second 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. So I'd like to take a few minutes to review our current state of operations around the world. Overall Bio-Rad has adapted well to the working constraints that COVID has imposed upon us and we find ourselves able to respond and react well to everyday operational changes and demands.

We continue to make solid progress on our core strategies support of our customers in the safety of our employees.

With improvement in our end markets after significant downturn a year ago, we are responding well to increased demand, but as with other manufacturers in Life Sciences we are having to work hard to procure raw materials in some challenged areas such as plastics and electronic components as well as dealing with increased pressure on raw material costs.

We also continue to experience higher than typical logistics costs as indicated in our Q1 call. With emergence of the COVID 19 Delta variant, we are maintaining our work from home policies for the near term as we work on return to the workplace plans targeted for later this quarter and we continue to monitor the global pandemic situation carefully.

Given the fluidity, the delta variance has created. Employee safety remains a principal focus and we are pleased with our safety record and the growing vaccination status of our organization.

As we enter Q3, we expect the emergence of the delta variant will continue to create some challenges and we are maintaining vigilance and flexibility as a result. Overall, we expect to see continued improvement in our end markets through the second half of the year as our customers continue to adapt.

However, the new delta variant clearly introduces an element of uncertainty as we move forward. Thank you for your attention, and I'll pass it back to Ilan..

Thank you, Andy. Now I would like to review the results of the second quarter. Net sales for the second quarter of 2021, were $715.9 million, which is a 33.4% increase on a reported basis versus $536.9 million in Q2 of 2020. On a currency neutral basis, sales increased 27.5%.

On a geographic basis, we experienced currency-neutral growth across all three regions.

Sales of our core products in the second quarter of last year were negatively impacted by the pandemic and generally we are seeing a continued gradual capacity improvement at both academic and diagnostic labs, which we estimate between 90% and 95% of pre-COVID levels. We estimate that the COVID-19 related sales were about $68 million in the quarter.

Sales of the Life Science Group in the second quarter of 2021 were $334.2 million compared to $252.1 million in Q2 of 2020 which is a 32.6% increase on a reported basis and a 27.1% increase on a currency neutral basis.

The year-over-year sales growth in the second quarter was driven mainly by increases in western blotting, Droplet Digital PCR and qPCR products. We have seen strong growth in the biopharma market for our Droplet Digital PCR platform.

We are also seeing a healthy uptick for DD PCR in wastewater solutions, government funding towards public health labs is driving increased demand for our DD PCR products that offer automated solutions with high accuracy and sensitivity.

Process Media, which can fluctuate on a quarterly basis saw a year-over-year double-digit growth versus the same quarter last year. Excluding Process Media sales, the underlying Life Science business grew 29.1% on a currency-neutral basis versus Q2 of 2020.

On a geographic basis, Life Science, currency-neutral year-over-year sales grew across all regions. Before moving on, I would like to highlight the growth legal settlement we 10x Genomics announced earlier this week.

This settlement resolved the multi-year global litigation with 10x over outstanding issues in the field of single-cell and includes a global cross license agreement. In addition to past and future royalties Bio-Rad received broad freedom to operate in the single-cell market and maintain exclusivity to our micro well single-cell IT.

We estimate that the future royalty payments from this legal settlement could total $110 million to $140 million over the life of the agreement, which runs through the year 2030.

This includes payments of $32 million in the third quarter for back royalties owed to Bio-Rad for the period from November 2018 through December 2020 as well as for settlement fees and interest.

Sales of the Clinical Diagnostics Group in the second quarter were $380.2 million compared to $283.2 million in Q2 of 2020 which is a 34.3 % increase on a reported basis and a 28% increase on a currency-neutral basis. During the second quarter, the Diagnostics Group posted double-digit growth across all of its product lines.

The year-over-year growth was driven by a recovery of routine testing. Elective surgery recovery is still progressing, although at a slower pace. On a geographic basis, the Diagnostics Group currency-neutral year-over-year sales grew across all regions.

Our Diagnostics Group announced last month, the partnership with Celgene, which is a global leader in multiplex molecular diagnostics.

Bio-Rad will exclusively market the Celgene test in the U.S., pending regulatory approvals, Celgene diagnostic products of high-sensitivity and specificity and our optimized to work with Bio-Rad CFX Real-Time PCR systems. The reported gross margin for the second quarter of 2021 was 56.1% on a GAAP basis and compares to 54.6% in Q2 of 2020.

Reported gross margin in Q2 of 2020 included an $8 million customs duty charge and excluding that charge, the Q2 gross margin further improved this quarter as a result of our productivity and efficiency initiatives. However as mentioned, we currently see increased pressure on raw material costs and higher logistics costs.

Amortization related to prior acquisitions recorded in cost of goods sold was $4.6 million and compares to $5 million in Q2 of 2020. SG&A expenses for Q2 of 2021 were $213.4 million or 29.8% of sales compared to $189.3 million or 35% in Q2 of 2020. Increases in SG&A expense was mainly the result of employee-related performance compensation expense.

Total amortization expense related to acquisitions recorded in SG&A for the quarter was $2.4 million versus $2.3 million in Q2 of 2020. Research and development expense in Q2 was $63.4 million or 8.9% of sales compared to $52 million or 9.7% of sales in Q2 of 2020.

Q2 operating income was $124.8 million or 17.4% of sales compared to $51.7 million or 9.6% of sales in Q2 of 2020. Looking below the operating line, the change in fair market value of equity securities holdings added $1.013 billion 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 income of $1.3 million primarily due to foreign exchange and compares to $10.7 million of income last year. Q2 of 2020 includes an $8.9 million dividend from Sartorius which was declared in June and was paid in July.

In 2021, the Sartorius dividend was declared in the first quarter. The effective tax rate for the second quarter of 2021 was 21% compared to 22.4% for the same period in 2020. The tax rate for both periods was driven by the large unrealized gain in equity securities.

In addition, the second quarter of 2021 effective tax rate was lower also due to a less of statute of limitations of certain tax reserves. Reported net income for the second quarter was $914.1 million and diluted earnings per share were $30.32. This is a decrease from last year and this related to changes in valuation of the Sartorius Holding.

Moving on to the non-GAAP results, looking at the results on a non-GAAP basis, we have excluded certain our typical 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 second quarter in cost of goods sold. We have excluded $4.6 million of amortization of purchased intangibles and $1.2 million of restructuring-related expenses. These exclusions moved the gross margin for the second quarter of 2021 to a non-GAAP gross margin of 56.9% versus 55.5% in Q2 of 2020.

Non-GAAP SG&A in the second quarter of 2021 was 29.2% versus 33.9% in Q2 of 2020. In SG&A on a non-GAAP basis, we have excluded amortization of purchased intangibles of $2.4 million legal related expenses of $8.8 million and restructuring and acquisition-related benefits of $7 million.

Non-GAAP R&D expense in the second quarter of 2021 was 9.1% versus 9.8% in Q2 of 2020. In R&D on a non-GAAP basis, we have excluded $2.1 million of restructuring benefits. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 17.4% on a GAAP basis to 18.5% on a non-GAAP basis.

These non-GAAP operating margins compares to a non-GAAP operating margin in Q2 of 2020 of 11.8%. We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity holdings of $1.013 billion and the $1.8 million loss associated with venture investments.

The non-GAAP effective tax rate for the second quarter of 2021 was 21.5% compared to 23.8% for the same period in 2020. The lower rate in 2021 was driven by the geographic mix of earnings.

And finally, non-GAAP net income for the second quarter of 2021 was $106.6 million or $3.54 diluted earnings per share, compared to $48.3 million or $1.61 per share in Q2 of 2020. Moving on to the balance sheet, total cash and short-term investments at the end of Q2 were $1.167 billion compared to $1.025 billion at the end of Q1 of 2021.

During the second quarter, we did not purchase any shares of our stock. For the second quarter of 2021, net cash generated from operating activities was $154.6 million, which compares to $92.1 million in Q2 of 2020. This increase mainly reflects higher operating profits. The adjusted EBITDA for the second quarter of 2021 was 22.3% of sales.

The adjusted EBITDA in Q2 of 2020 was 18.6% and excluding the Sartorius dividend was 16.9%. Net capital expenditures for the second quarter of 2021 were $23.4 million and depreciation and amortization for the second quarter was $33.7 million.

Moving on to the guidance Andy previously alluded to continued uncertainties surrounding the pandemic, which could create some challenges and we look, sorry. As we look to the better half of this year.

That being said, with customers continuing to adapt in this environment, we assume a gradual return to pre-pandemic activity and a more normalized business mix during the second half of 2021. We are now guiding non-GAAP, currency neutral revenue growth to be between 10% and 10.5% for 2021 versus our prior guidance of 5% to 6%.

This updated outlook assumes the full year COVID-related sales to be between $200 million and $210 million of which approximately $40 million to $50 million are projected for the second half of 2021. Excluding COVID-related sales, the non-GAAP year-over-year currency-neutral sales growth in the second half is expected to be between 13% and 14%.

These represents between 4.5% and 5.5% growth in the second half of 2021 over the first half of 2021. Full year non-GAAP gross margin is now projected to be between 57% and 57.5%.

Full year non-GAAP operating margin is forecasted to be about 19%, which assumes higher operating expenses in the second half of 2021 versus the first half as we are anticipating continued gradual return to more normal activity levels. This guidance excludes any benefit related to the settlement we 10x Genomics.

Our updated annual non-GAAP effective tax rate for 2021 is projected to be between 23% and 24%. Full year adjusted EBITDA margin is forecasted to be between 23% and 23.5%. That concludes our prepared remarks and we will now open the line to take your questions.

Operator?.

[Operator Instructions] Your first question comes from the line of Patrick Donnelly from Citi. Your line is open..

Thanks guys, maybe to start on the margin, Ilan I mean, really strong performance nice to see kind of flow through to the raise in the back half.

Can you just talk through, I guess the levers you're seeing how much of it is just the high margin COVID stuff coming through versus I know a lot of the restructuring is going to be out years, but just in terms of some of the cost initiatives you have going, just kind of wondering the moving pieces on the margin side, what levers you guys are pulling there?.

Hey good afternoon Patrick thanks for the question. Yes when you think about the margin and let's start with the gross margin.

We do see already, a lot of benefit from the various initiatives that we had pretty around the efficiencies and productivity and that was definitely part of the results for this quarter and will continue to be part of, you know the guidance in the second half of the year. There were some headwinds – associated with our FX et cetera.

But for the most part the benefit is associated with the ongoing initiatives around productivity and initiative. Similarly, we continue to see follow through not only from the higher guidance on the top line, and obviously you know improved utilization in the second half, but continued also benefit from those efficiencies and productivity..

Are you still yes go ahead….?.

Sorry and then, then you have the mix impact for the COVID versus first half versus second half obviously the drop-off of the COVID-related sales to about $40 million to $50 million in the second half, does create kind of some level of headwind to the overall margins..

And are you seeing anything in terms of the offset in terms of input costs or supply chain issues and given that comment versus peers.

Just wondering what you guys are seeing on that front?.

Do you want to take it Andy?.

Well, I mean I don't think we're breaking it out but we are certainly experiencing and absorbing the some higher costs coming through from logistics and the rest is really some modest raw material increases and then you know just challenges in procurement..

And freight..

And freight yes..

Right, okay and then maybe one for Annette on a single-cell side it's great to see the litigation will be over for you guys with Cell C. I know you guys had previously talked I think about seeing some products maybe rollout potentially later this year. Is that still the plan and again, it feels like the 10x stuff clears the deck for you guys.

So I just wanted to get an update on that front in terms of timing and expectations?.

Yes Annette if you're on the, if you're able to respond..

Sure, so we are – we acquired Cell C and their technology was pretty early stage, and I will admit that we were slowed down a little bit by COVID and getting all the staff on board for the investment we want to make in R&D. That said, we're making really good progress and we expect product to start rolling out in early 2022..

Okay, that's helpful. And one quick last one for Norm, just on the balance sheet capital allocation.

Any changes in terms of your thoughts on Sartorius or large M&A I know you guys are always looking would love just an update in terms of what the pipeline looks like, and your desire there?.

Yes I mean, I guess I would say we continue to evaluate a robust number of what I call, both tuck-in and technology opportunities and candidly to look for something more transformational. So we continue to work on all of that..

Understood, thank you, guys..

Thank you, Pat..

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

Hey, thanks, good afternoon. Ilan so you took up the core growth guidance for the year by 400 basis points, of which the COVID revenues only account for 100 bps of that.

Can you just talk about what areas of the business you're seeing the most upside in? And could you share sort of an updated view on the two segments, what you're penciling in for the full year in terms of organic growth between Life Sciences and QX?.

Sure, Andy, do you want to start..

Sure, so I think the uptick that we are forecasting Brandon is fairly broad-based. Clearly, the core business is coming back on both academic and in the institutional side as well as the industrial side, which has been more robust in the background.

Anyhow clinical is coming back nicely across all the regions, maybe with the exception of elective surgeries, which still seem to be lagging a little bit behind the more routine testing and that's broad-based as well. So as we look to the second half, it's really across all of our product lines in both market segments in all regions.

So I think that's the summary version of our second half..

Yes Brandon, I will add also that also when we compare it to the 2019 kind of results on a two-year stack overall for Bio-Rad it represent over 10% for the two years stack growth..

Right, right..

Yes..

Guys there is a follow-up on that, I mean any color you can share with Ilan in terms of the phasing of revenues and margins between 3Q and 4Q. I mean 4Q is typically your highest revenue quarter and as a result give us profitable seasonally.

Any just color you are able to share we sort of update model for the back half?.

Yes, obviously as you mentioned, Brandon the fourth quarter seasonally usually is higher, but this year is a little bit, kind of unpredictable the first half was a very, very good first half. Generally speaking, there is some benefit always from the fall through to the utilization and the gross margin, when you have a higher top line.

So it's a gradual improvement on the bottom line as well as the gross margin, but again it will depend how the top-line will shape up..

That's okay, One for Annette on the DD PCR business you just talk about what you see is kind of the top three drivers of growth right now in terms of end markets or applications and any color you can share between how the mix of demand has evolved between the QX ONE and the legacy platform about a year into that launch now?.

Sure, we are seeing really strong demand in pharma and biopharma for the QX ONE System, because it was really frankly developed for that market segment. So really strong growth it's adding a lot of incremental growth to the business in the QX ONE. But we also have strong demand for our QX 200 systems.

The wastewater surveillance market is evolving and we're now seeing more up-take in EMEA it started in the U.S., we don't expect that to slowdown. And we still sell an awful lot of QX 200 systems into pharma and biopharma as well.

So really strong and our academic market has always been strong and it's a good mix across all three segments of platforms and the consumables that go along with it..

Your next question is coming from the line of Dan Leonard from Wells Fargo. Your line is open..

Thank you. So I was hoping maybe you could elaborate further on the demand drivers in your Life Sciences business even excluding COVID. If you look at the two year stack compared to 2019, the growth rates are double-digits in Life Science and that is not the trajectory we're used to seeing from that business.

So any further color you could offer on the big demand drivers?.

Annette, do you want to take that one..

Sure, sure we're definitely seeing strong recovery. So that's part of what's behind it like you're right our growth. If you look at growth over 2019 pre-COVID is really strong. It's a strong funding environment, one of the benefits may be of the pandemic is that government certainly in the U.S.

and to some extent the EU have really scored a lot of funding into translational medicine, infectious disease, vaccine development, and we have a broad product portfolio that speaks to customer need across all of that. So we think that's really driving a lot of the growth and we're optimistic about the environment moving forward..

So that touches a bit of my next question as you think that this is sustainable or is it something you worry about it is it challenging comparison as we roll into 2022?.

So Dan, we cannot comment today on the 2022 number generally speaking, I mean, let's say we can’t guide for that..

Ilan a couple of quick clarifications on the royalty settlement.

First off, did you say you're going to not include any royalties from 10x Genomics in your P&L your non-GAAP was out?.

So no, I'm not sure that I'm going to non-GAAP, but it was not included in our guidance that I provided..

Okay and is that $110 million plus number is that a net number.

Net of the royalties, you might owe them or is that what they'll owe you potentially between now in 2030?.

So net of, what are you referring to Dan exactly sorry..

So it was across license agreement right, so presumably there is some chance you pay them some money, they pay you some money is the $110 million, a net number or is it a gross number?.

So Dan these are the amounts that we anticipate to receive from 10x..

From 10x, okay. Thank you..

Sure..

Your next question is from the line of Jack Meehan from Nephron Research. Your line is open..

Thank you, good afternoon. I was wondering if you could give a little bit more color on the duration of the COVID revenue that you see. So you have $40 million to $50 million in the back half of the year. Just as you kind of look at the tail here.

Do you have any view as to what might carry on beyond 2021, how much is, there some portion that seems more durable, do you like wastewater in there?.

So there is the potential for wastewater to be more durable again that very much depends on the funding environment. But as you know the majority of our revenues were driven by instrumentation and we do view that market is becoming very saturated in terms of capacity right now.

We do have some test revenue, but it's very small in relation to the instruments and to our peer set. So we currently see COVID tailing off to a relatively small number by the end of this year and then we'll see what 2022 brings in our guidance for next year, when we get there..

And this is the second consecutive quarter you've called out western blotting as an area of strength within Life Sciences. I was wondering if there is anything specific that's been driving that demand or if you just think it's more, kind of funding in general that's been supportive..

I think it's more a general funding trend and it's kind of a staple in labs. So we view it as labs are getting up and running and just kind of doing the routine kind of characterization work that they typically do and they dry up during COVID now the labs are coming back and it's broad based, broad based return..

Great and then maybe just on the diagnostics side was just curious, you called out the elective procedures, but if you look about kind of the product family is within clinical diagnostics.

Do you think any are taking longer to come back, then you might have expected or could have some lingering impact as you exit the year?.

Dara do you want to answer the question..

Sure. No, just that one really I mean blood typing is a product family that associated with elective surgeries.

So that's the area that's most impacted when the hospital systems get overwhelmed by COVID cases, but all other areas of routine testing, diabetes quality controls et cetera are all in line with what Ilan said right around 95% to pre-COVID levels so, really good recovery across the core and across all regions..

[Operator Instructions] I’m not showing any other questions. As of this moment, I would like to turn the conference back to the management..

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

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