Good afternoon. Thank you for attending today's Bio-Rad Second Quarter 2022 Earnings Results Conference Call. My name is Hannah and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end [Operator Instructions].

I would now like to pass the conference over to our host Edward Chung, Head of Investor Relations. Please go ahead..

Thanks, operator. Good afternoon and thank you for joining us. Today we will review the second quarter 2022 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; Simon May, 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 in our 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 commentary 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 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 turn the call over to Ilan Daskal, Executive Vice President and Chief Financial Officer..

Thank you, Ed. Good afternoon and thank you all for joining us. Before I begin the detailed second quarter discussion, I would like to ask Andy Last, our Chief Operating Officer to provide an update on Bio-Rad's operations.

Andy?.

All right. Many thanks, Ilan. Good afternoon, everybody. So the second quarter of the year continued with a similar profile to the first quarter. Overall demand for both Life Science and Clinical Diagnostics continued to be strong and localized surges of COVID continued. China in particular drove higher-than-expected PCR instrument demand.

However, the stringent lockdown policies in China and the extended nature of the lockdown did have a negative impact on local sales on both sides of the business during the quarter. With the relaxation of the lockdown, we are now seeing improved conditions for the second half of the year.

The lockdown also had some further negative effect on the ongoing supply chain challenges we have all been experiencing. Our organization and operations continued to work efficiently during the second quarter. And despite sporadic localized upticks in COVID, our offices have remained open.

The expected level of improvement in supply chain constraints in Q2 did not fully materialize and the quarter was again challenging for supply of instruments against the backdrop of strong demand. As a result, our order backlog continued to build along with our inventory levels of raw materials and work-in-progress instruments.

With that said, we have found our orders to be sticky and our customers are being patient. During the quarter, we also experienced a continuation of elevated logistics and raw material costs.

Overall, we are putting significant effort into procuring required materials and remain optimistic around improvement in supply chain constraints towards the back half of this year.

With the ongoing Russian invasion of Ukraine and imposition of further sanctions on Russia, we did experience a modest decline in our Life Science business sales to Russia during the quarter, while sales of our Clinical Diagnostics products were largely unaffected. And we expect this dynamic to continue through at least the remainder of the year.

As a final comment, despite the challenges of COVID its impact in China in particular and the Russian war on Ukraine, our organization has continued to excel in managing the supply chain challenges and supporting the needs of our customers.

And we're very encouraged by the strong and consistent improvement in demand across our Life Science and Clinical Diagnostics businesses. So with that, I'll say thank you and 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 2022 were $691.1 million, which is a 3.5% decline on a reported basis versus $715.9 million in Q2 of 2021. The second quarter decline in revenue was mainly a result of lower COVID-related sales this year.

On a currency-neutral basis sales increased 0.5%. We estimate that COVID-related sales were about $33 million in the quarter and continued to reflect an elevated level in demand particularly in Asia as a result of the ongoing outbreaks in China.

Looking ahead, we continue to anticipate a significant tapering compared to the last two years and expect about $15 million of COVID-related sales in the back half of this year. Core year-over-year revenue, which excludes COVID-related sales increased 5.7% on a currency-neutral basis.

On a geographic basis, we experienced currency-neutral year-over-year core revenue growth in the Americas and Europe. Core revenue in Asia declined, which reflects the extended lockdowns in China that negatively impacted our diagnostics business during the quarter.

As Andy mentioned earlier, we continue to carry an elevated order backlog as a result of supply chain constraints and continued strong customer demand. We expect improvement relative to the first half of the year, although, we anticipate back orders to continue through the remainder of 2022.

Sales of the Life Science Group in the second quarter of 2022 were $322.4 million, compared to $334.2 million in Q2 of 2021, which is a 3.5% decline on a reported basis and a 0.5% increase on a currency-neutral basis.

Despite supply chain constraints having an impact on instrument placements the underlying Life Science year-over-year currency-neutral core revenue growth, which excludes COVID-related sales was 10.6%. The year-over-year growth was driven by process media, western blotting, Droplet Digital PCR and qPCR products.

Process media which can fluctuate on a quarterly basis saw strong year-over-year double-digit growth versus the same quarter last year. We are pleased with the continued momentum from our process media business and believe that the recently introduced pre-packed CHT columns should enhance our position in this segment.

Excluding process media sales, the underlying Life Science business declined 4.5% on a currency-neutral basis versus Q2 of 2021 due to lower COVID-related sales. When also excluding COVID-related sales, revenue growth was 6% on a currency-neutral basis.

On a geographic basis, Life Science experienced currency-neutral year-over-year core revenue growth across all three regions. Sales of the Clinical Diagnostics Group in the second quarter were $367.8 million, compared to $380.2 million in Q2 of 2021, which is a 3.3% decline on a reported basis and growth of 0.7% on a currency-neutral basis.

Core Clinical Diagnostics year-over-year revenue growth, which excludes COVID-related sales increased 2.1% on a currency-neutral basis. The diagnostics group currency-neutral year-over-year sales increase was driven by blood-typing, quality control and clinical immunology.

And as I mentioned earlier, supply chain constraints had an impact on instrument placements. We have seen both recovery and increasing global demand for blood typing products, as elective surgeries resume to pre-pandemic levels and hospitals seek to expand capacity.

Specifically, we are benefiting from new account expansion in the Middle East and Africa from meaningful new tender wins. On a geographic basis, the diagnostics group year-over-year currency-neutral core revenue grew in the Americas and Europe and declined in Asia.

The reported gross margin for the second quarter of 2022 was 57.3% on a GAAP basis, and compares to 56.1% in Q2 of 2021. The year-over-year gross margin improvement benefited from the stronger US dollar, product mix and continued operational efficiencies, which was partially offset by elevated logistics costs.

Amortization related to prior acquisitions recorded in cost of goods sold was $4.5 million, as compared to $4.6 million in Q2 of 2021. SG&A expenses for Q2 of 2022 were $208.7 million, or 30.2% of sales compared to $213.4 million, or 29.8% in Q2 of 2021.

The year-over-year SG&A expenses decreased, mainly due to the stronger dollar and normalized employee-related expenses, but was partially offset by higher discretionary spend. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.8 million versus $2.4 million in Q2 of 2021.

Research and development expense in Q2 was $67 million, or 9.7% of sales compared to $63.4 million or 8.9% of sales in Q2 of 2021. The year-over-year, R&D expenses increased mainly due to project expense. Q2 operating income was $120.2 million, or 17.4% of sales compared to $124.8 million or 17.4% in Q2 of 2021.

Looking below the operating line the change in fair market value of equity securities holdings which are substantially related to Bio-Rad's ownership of Sartorius AG shares negatively impacted the reported results by $1.338 billion.

During the quarter interest and other income resulted in net other expense of $4.9 million compared to net other income of $1.3 million last year.

Q2 2022 included $10.7 million of interest expense related to the $1.2 billion senior notes issued earlier this year, partially offset by $5 million of interest income as well as an escrow release of $1.4 million, related to the sale of the informatics business back in 2020.

The effective tax rate for the second quarter of 2022 was 24.2% compared to 21% for the same period in 2021. The effective tax rate reported in Q2 of 2022 was primarily affected by the unrealized loss in equity securities and the tax rate reported in Q2 of 2021, was primarily affected by an unrealized gain in equity securities.

Reported net loss for the second quarter was $927.2 million and the diluted loss per share was $31.12 compared to $914.1 million of net income or $30.32 per share in Q2 of 2021. This decrease from last year is largely 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. Looking at the non-GAAP results for the second quarter.

In cost of goods sold, we have excluded $4.5 million of amortization of purchased intangibles. This exclusion moved the gross margin for the second quarter of 2022 to a non-GAAP gross margin of 57.9% versus 56.9% in Q2 of 2021. Non-GAAP SG&A in the second quarter of 2022 was 29.4% versus 29.2% in Q2 of 2021.

In SG&A, on a non-GAAP basis, we have excluded an in vitro diagnostic registration fee in Europe for previously approved products of $2.5 million, amortization of purchased intangibles of $1.8 million, legal-related expenses of $900,000 and a small restructuring-related expense.

Non-GAAP R&D expense in the second quarter of 2022 was 9.7% versus 9.1% in Q2 of 2021. In R&D, on a non-GAAP basis, we have excluded a small restructuring benefit. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 17.4% on a GAAP basis to 18.8% on a non-GAAP basis.

This non-GAAP operating margin compares to a non-GAAP operating margin of 18.5% in Q2 of 2021.

We have also excluded certain items below the operating line, which are the decrease in value of the Sartorius equity securities and loan receivable holdings of $1.338 billion, a $1.6 million loss associated with venture investments and $1.4 million gain from the escrow release related to the 2020 informatics business sale.

The non-GAAP effective tax rate for the second quarter of 2022 was 19% compared to 21.5% for the same period in 2021. The lower rate in 2022 was driven by the geographical mix of earnings, as well as benefit associated with preferential tax rates related to export sales.

And finally non-GAAP net income for the second quarter of 2022 was $101.4 million or $3.38 diluted earnings per share, compared to $106.6 million or $3.64 per share in Q2 of 2021. Moving on to the balance sheet. Total cash and short-term investments at the end of Q2 were $1.973 billion compared to $2.079 billion at the end of Q1 of 2022.

Inventory at the end of Q2 reached $657.1 million from $605.5 million in the prior quarter. The increase was the result of the ongoing supply chain constraints. For the second quarter of 2022, net cash generated from operating activities was $50.2 million, which compares to $154.6 million in Q2 of 2021.

The lower quarterly operating cash flow, mainly reflects changes in working capital. During the second quarter, we purchased 255,000 shares of our stock for a total cost of $125 million. Last week, the Board authorized an additional $200 million for share repurchase on top of our existing program.

In other ways, we now have approximately $298 million available for potential buybacks. The adjusted EBITDA for the second quarter of 2022 was 22.6% of sales. The adjusted EBITDA in Q2 of 2021 was 22.3%. Net capital expenditures for the second quarter of 2022 were $14.2 million and depreciation and amortization for the second quarter was $32.6 million.

Moving on to the non-GAAP guidance. Based on the stronger-than-anticipated COVID sales contribution in the first half of this year, we now assume full year COVID-related sales of about $93 million of which approximately $15 million are projected for the second half of 2022.

We now anticipate full year currency neutral revenue growth to be at the high end of our guidance of 1% to 2%.

Core revenue growth, which excludes COVID-related sale is now expected to be at the lower end of our prior guidance range of 8.5% to 9.5% on a currency neutral basis as we continue to balance between the ongoing strong customer demand and supply chain constraints.

We achieved 6% currency neutral revenue growth in the first half of the year and expect it to approach 11% for the second half of this year versus the second half of 2021. This represents about 9% growth in the second half of 2022 over the first half of 2022.

We are maintaining the full year gross margin projection to be approximately 57.5%, operating income margin at about 19% and adjusted EBITDA to be between 24% and 24.3%. That concludes our prepared remarks, and we will now open the line to take your questions.

Operator?.

Certainly. [Operator Instructions] The first question is from the line of Brandon Couillard with Jefferies. Please proceed..

Hi, guys. This is Matt [ph] on for Brandon. Thanks for taking my questions. Ilan appreciate all the color on the updated guidance.

Could you just break out what you're expecting now for the full year between the two segments on a core growth basis excluding COVID? And then in terms of the step-up you've talked about in the back half of kind of plus 11% from the plus 6% in the first half, can you just talk about level of visibility and confidence you guys have in that acceleration in the back half of the year here?.

Sure. So I'll start with the first part. We generally maintain the overall guidance for both of the business groups similar to what we provided earlier in the year. Specifically in the second quarter, we saw some softness in the diagnostics business specifically in China.

But again generally we are maintaining the guidance for each of the business groups for the full year. I don't know Andy if you want to add….

No I think that's right. I've got nothing to add now at this time..

Okay. And then maybe Andy sticking with you on the supply chain. You talked about kind of continuing some level of the challenges in the back half of the year.

Can you just talk about on a relative basis do you expect it to ease versus what we saw here in the first half, the level you expect it to get better in the back half and some maybe initiatives you guys are taking to handle that maybe worse for a longer type scenario?.

Sure. No absolutely. We do expect it to ease in the second half relative to the first half, which has been challenging obviously. You did note that we mentioned we increased inventory during Q2, a lot of work in progress just sitting waiting on some instruments; sitting waiting on a small handful of components.

So when they come in we're staged to improve our sales pacing in the second half. We don't anticipate supply constraints going away completely by the end of the year but we certainly do expect them to ease as we move forward.

And in terms of actions we're taking, I mean, we continue to put a lot of emphasis internally on the procurement side of the organization and being flexible on manufacturing lines as components become available and we expect to continue to do that through the second half..

Great. And then last one more of a housekeeping one for you Ilan. On the tax rate it's come in below 20% here two quarters in a row. I think the initial guide was in the 22% to 23% range for the year. Is that still the right range, or any updated thinking on what we should pencil in for the tax rate for the year now? Thanks..

Yeah. It's still generally speaking the right range. Obviously on a quarterly basis, the geographical mix of earnings does weigh in. We did get. And we'll continue probably later in the year get some benefit from the export sales which does benefit a little bit the rates. But overall, yes, we are maintaining it..

Super, thank you..

Thank you..

Thank you. The next question is from the line of Patrick Donnelly with Citi. Please proceed..

Hi guys. Thanks for taking my questions. Ilan, maybe one on the Life Science business, you talked about kind of the backlog continuing to build order growth healthy supply chain seems to be holding you back a little bit there.

Can you just talk about I guess the demand environment, maybe if you're willing to quantify the backlog relative to what it was at the start of the year what the order growth is? Maybe some metrics just to help us kind of think about what you guys are seeing and what you could deliver I guess in a normalized supply chain environment because again putting up good numbers.

It feels like it could be better if the supply chain was normal. So I'm just trying to flesh that out a little bit..

Hi. Patrick, its Simon here, I'll take that one. In terms of the backlog we're not going to hang numbers on that. I think we provided some commentary earlier in the conversation here. I'd say that demand across the board in Life Science continues to be healthy as we're seeing recovery in the core markets.

And we've got a couple of business areas that we've called out as growth pillars previously where we continue to see really strong demand. And I think in consumables and assays, we've seen really robust demand in a couple of areas of business. And that's been moderated to some degree by the supply chain challenges that we've already spoken about here.

I think as we enter the second half of the year, I'd echo Andy's comments on, how we're thinking about improvement in supply chain. But the underlying demand remains strong. And we've got a healthy backlog..

Okay. And then, Andy on the supply chain side, I know last time we chatted you kind of mentioned that you had a lot of work-in-progress inventory with waiting on one or two inputs chip here or there.

Is that still the case? Is it kind of just waiting on some of those things to ease? And again, maybe just visibility and what that inventory looks like now relative to kind of what you saw last quarter where right now it's building up a little bit on you guys with things almost finished and just waiting on one or two things?.

Yeah. I mean, I think that the profile is the same. A lot of work in progress waiting on sometimes just one component, our inventory levels increased about $50 million quarter-over-quarter so Q2 over Q1 and we had a lift in Q1 too versus Q4. So you can see that we're really staged as we get relief by procuring the right component to ship.

So our shipping profiles during the quarters are quite different as well as you might expect. I think that will just continue, but with improvement in the second half versus the first half..

Yeah and Patrick maybe, I'll add to that also..

Okay..

Obviously, Andy mentioned earlier, that the order level is healthy and continues to grow. And the elevated inventory level actually will be fulfilled once we are able to procure a few more components. So generally, we are encouraged. We don't see any risk to that inventory.

And actually we are really encouraged by the order backlog that we see out there..

Yeah. And just to add on the order backlog and I'm sure it's kind of common across a number of players in the industry right now. It's very sticky. We feel really good about our customer relationships. We do not see a lot of attrition against our orders. So we've got pretty good sense about what's going on there..

Okay. No that's good to know on the inventory side as well where these things are kind of ready to go the orders are there and just waiting on one or two things [indiscernible] you guys will be able to see a nice inflection there. And maybe last one Ilan just on the cost side. You guys obviously put in some pretty significant restructuring activities.

It feels like they should start to take hold as we work our way through the back half of the year. Can you just kind of update us where you are on that transition, when we should see some of those cost benefits start to show up on the margin side? It feels like a nice lever for you guys to pull..

Sure. Yes, thanks Patrick for the question. So, first I'll start with the restructuring itself and the activities associated with the restructuring are all on track in terms of the activities both in Europe as well as in Asia. And we're starting to ramp some of that activity already in Asia.

And in addition even if you look already in this quarter's results part of the gross margin, improvement year-over-year is associated with improved efficiency and productivity that we are seeing. Another piece there was obviously benefiting from foreign exchange ratio. And there were some elevated -- on the other hand elevated logistics cost.

But definitely the efficiency and productivity did contribute to some of that benefit year-over-year on the gross margin. So again everything is in line and is baked into our full year guidance and no delays there..

Great. Thank you guys..

Thank you..

Thank you. Our last question is from the line of Jack Meehan with Nephron Research. Please proceed..

Thanks. Good afternoon. I wanted to continue on the supply chain theme. I guess my first question is back in the fourth quarter you talked about I think $30 million of sales that were impacted.

I was just curious if you've caught up on any of that year-to-date? And is it possible to quantify what impact -- or what the sales would have been if you didn't have these shortages here in the second quarter?.

Yes we're not going as far as to actually put the numbers out there at this point I'm afraid Jack. But yes, you are right, we had a backlog at the end of Q4. We didn't anticipate we would recapture all of that backlog in the following quarter. But since then our backlog has increased reflecting the supply constraints.

You could look at it as a healthy backlog and strong order pipeline is another way to consider it. But we're selling based on supply chain constraints right now..

And the component shortages that you talk about, is it still predominantly semiconductor chips or has it broadened to anything else?.

No it's mostly electronic components. And it can be as simple as one chip here and there as you get some [indiscernible] a bearing or -- some unanticipated component. But it is mostly electronic components and chips are the biggest--.

And the product families that are impacted it's predominantly ddPCR, or what other products would that hurt?.

Yes all instruments. It's across our instrument lines whether they're clinical or life science. And we have a fairly broad portfolio of instrumentation as you know. So we see it across a large number of different product areas. And our ability to supply those just fluctuates based on getting that -- those components in..

Okay. Thanks for humoring those questions. I did have a couple of other ones. Just China is it possible that -- so that's the one region that declined this quarter. Just talk about the rate of the decline in the diagnostics business.

Like what would the segment have done if not for the lockdowns?.

I think we have Dara on the line and I know she's probably got a few comments, she can make around that..

Sure. Yes, I don't think that we're going to sort of articulate what the growth kind of would have been if we hadn't had the lockdown, but it was a material impact. The lockdown was for most of the quarter and compounded by sort of logistics challenges and the China lockdown was a bit of a one-two punch.

So, we're going to need to catch up from that in the back half of the year. I mean similar to the instrument supply constraints, demand is strong. It's just fulfillment challenges, frankly. I don't know Andy, if there's anything you want to add specifically about China, other than it was a real impact broadly in Q2..

No, I think that profiles it well without getting into specific details on the numbers..

Okay. Last question, for me.

Is there any color you can give on, pricing in the quarter or the year just how that's trending? Do you feel like -- have you been more active in trying to manage that in this inflationary environment?.

Yes, very good question. And yes, we have. We did roll out price increases averaging 4% to 5% mostly across the Life Science business in the first half. We've started to see some realization of those price increases now. It is largely offsetting the inflation, with the cost inflation we're experiencing on logistics and raw materials.

We're assessing further price increases before the end of the year. We would like to try and take a bit more price in the second half, if we feel we can. And -- but overall, we are looking to offset the inflationary costs that are coming at us..

Super. Thank you, guys.

Thank you. .

Thank you. There are no additional questions running at this time. So I will turn the call over to Ed Chung, for closing remarks..

Thanks, everyone for joining today's call. We appreciate your interest and we look forward to connecting soon. Thanks..

That concludes today's call. Thank you for your participation. You may now disconnect your lines..