Bio-Rad Laboratories, Inc. (BIO) Earnings Call Transcript & Summary

All right. We'll go ahead and get started. Good afternoon, everybody. Welcome to the Jefferies 2023 Global Healthcare Conference. Before we get started, I hope everyone has had a productive 2 days if you've learned something from our fireside chats or some of your one-on-one meetings. I do hope when you do get back to your offices, we'd appreciate your support, definitely in the II poll. It means more than you know. Very happy to have Bio-Rad with us at the conference again this year. Norman, CEO, Chairman, Norman Schwartz, is going to share an update on the business. We also have CFO, Ilan Daskal, here. And I will flip it over to you, Norman.

Okay. Great. Thanks, Brandon, and certainly, thanks for having us. I wanted to take a few minutes today to refresh everybody on -- really refresh on Bio-Rad and what we've accomplished over the last few years, and then to share our continuing aspirations for '23 and beyond. Certainly, before we begin, caution everybody we'll be making forward-looking statements. And as you know, these forward-looking statements and non-GAAP measures carry with them inherent risks. So for those of you who may be new to the story, we do have a rich history and a strong culture, but I think more important, we're -- we continue to be well positioned for the future. And certainly, building on this strong foundation, with 70 years of continuous progress, we are today approaching the $3 billion sales milestone. We do continue our reputation as an innovator. Currently, we're investing about 9% of every sales dollar in new products, new technology. And finally, important for us, we're vertically integrated. It's a business model with competencies all the way from product development all the way through to manufacturing, sales, distribution really allows us to operate seamlessly as a company. So 2 core segments: Life Science and Clinical Diagnostics. And somehow, I've -- I think I may have gone too far? No? Okay. Okay. Well, we'll cover this one first. It really is useful to remind ourselves here that we serve more than 150,000 customers, no single customer accounting for more than 2% of our sales. And these customers spanned several subsegments, you can see on this chart, all the way from life science research all the way through diagnostic to some applied markets. And then geographically, truly worldwide, more than 50% of our sales outside the U.S. or the Americas. And over a long period of time, we do see this evolving into -- basically into thirds, altogether gives us a very diversified revenue model. Okay. So between the 2 core markets, Life Science and Diagnostics, we have this broad diversified product base, more than 8,000 products, a variety of technologies. We have established a strong presence in a number of markets on which we continue to build. And today, I would say over 80% of our sales are derived from products in which we have what we think is a leading market position. So just to point out a few key areas of focus across our broad portfolio, first, in Life Science. Top of the list here is Droplet Digital PCR. We are now extending, aggressively extending our portfolio, really to make ddPCR more accessible to a broader range of customers and a broader range of applications. It is also a market that continues to expand at a rapid rate. And so I think we're well positioned here to contribute. Second on this is biopharma, biopharma production, where we have experienced excellent growth over the past few years. And we should continue to see opportunity here as a result of pharma's focus on, really on biologically derived medicines. And then in Cell Biology, we've assembled over the last several years what we believe to be a strong portfolio of technology assets and products, which we can continue to build on, antibodies, dyes, flow cytometry and other products for the study of cells. Most recently, we've also added single-cell technology to address this fast-growing interest in looking at the characteristics of each individual cell rather than looking at the average of a population. So in Diagnostics, here, we're building on a solid base, and we see kind of, again, 3 growth pillars for Diagnostics. First is this continued focus on extending our core diagnostics market position with high-value applications. We have a diverse portfolio and good potential to expand our market reach, both deeper and wider. Maybe one good example is our BioPlex 2200 immunoassay platform. Its multiplex capabilities make it really highly valued, a highly valued technology for complex disease analysis in growing clinical areas. The second is to expand our quality control franchise, including reagents and supporting informatics solutions, where the need to assure accuracy of diagnostic results is really, really important. Here, the market continues to grow. We're investing to increase the depth and breadth of our efforts. And third is the idea of entering the molecular diagnostics market, leveraging current positions we have of technology, innovation and commercial strengths. So I thought I'd just dive a little bit deeper in some of these. First, this area Droplet Digital PCR. And I would say, ultimately, we continue to be excited about this because our customers are excited, whether they're realizing the kind of the power of absolute quantification of target analysis or achieving a kind of a new level of sensitivity when screening for early disease. We have been instrumental in establishing ddPCR as a technology, and we are working to expand our reach and segmentation of the market with a series of targeted platforms for research and biopharma, which you can see here, including QX ONE, which is targeted primarily at biopharma production and industrial scale settings with its throughput and automated capabilities. And then the QX600, recently introduced, really sets a new standard for multiplexed rare event detection. And then the QX Continuum. This is really a kind of a lower-end system, really I would say kind of a new market segment for us, maybe overlapping a little bit with high-end qPCR. And we're particularly excited about the launch of this system in the coming months, really continuing to broaden this portfolio. And parallel with that and very important is this focus on assay development, menu extension, user experience. One recent example is there is the, what we call MSI kit or microsatellite instability. It's a new kit for translational and clinical research markets that we're launching actually this month. And this assay uniquely positions our customers to implement what we think of as a liquid biopsy strategy, improving on the current tissue-based approach. So another growth area for us in Life Science is this kind of area of process chromatography. And these are materials for separating and purifying biologics at a production scale. We've become well known in the industry for our ceramic hydroxyapatite used extensively in the -- what we think of is the later polishing steps in production. And as part of our growth strategy, we've been investing in innovation such as our newer Nuvia mixed-mode resins, which help customers to consolidate purification steps and actually kind of move us farther back in the production process. We've also introduced recently prepacked columns, which offer customers convenience across a range of product scales. And of course, we're working with customers on application development. Third area here, and this is a little more on the Diagnostics side and a key focus, is entering this large fast-growing molecular diagnostics market. And it really is a two-pronged strategy. First, it's leveraging our industry-leading position in digital PCR to develop really high-value clinical assays in large and growing markets, such as reproductive health, infectious disease and transplant monitoring. We have a number of exciting opportunities to introduce novel assays here to replace kind of costly and cumbersome next-generation sequencing and other low sensitivity methods. Second, we recently acquired what we think of as a platform in development, PCR|ONE, will allow us to enter the syndromic testing market with really an innovative, rapid sample-to-answer value proposition. So I trust from these, you can see that we've got a wealth of opportunities. So over the last several years, we have been working on transforming the company, globalizing operations, investing in systems and the tools allow us to really to scale the business, all with an eye towards being more productive and efficient in the competitive world in which we live. We have seen substantial improvement in operations, in our financial results since we began this journey. But as we transition to the third phase, we do feel there's still more opportunity across both segments of our business. Last year, we conducted an Investor Day, in which we mapped out a path to accelerated growth and profitability. And this success is driven by kind of focused investments in new products, technologies to enhance revenue growth coupled with our continuous efforts to improve our operational efficiency. Our current vision is to move revenue growth to 8% over the next few years and to generate this improved operating performance with a target of 26% EBITDA margin by 2025, an expected improvement of over 200 basis points over the next 2 to 3 years. And so finally, being a company dominated by science and one with a culturally diverse workforce, attention to environmental and social issues really does come naturally to us. But with investors increasingly evaluating ES&G initiatives and goals when making their investment decisions, I thought I'd -- it'd be useful to share our 2030 goals with you. As you can see, we've got work to do to achieve our goals for 2030 and are certainly active on a variety of fronts. If I look at this list, for example, we completed a large solar project in our Hercules campus last year and actually recently completed another one in Europe. Diversity and inclusion. We have dedicated resources pursuing a number of initiatives, things we're doing on the packaging front. And I would say all of these efforts are starting to be recognized by the various rating agencies where our scores are increasing as we better communicate these initiatives. And in fact, last month, the MSCI, which is a focus of many investors, upgraded Bio-Rad to a BBB rating. So overall, I think we feel good about the progress that we've made to date. Excited about the opportunities going forward, and appreciate the opportunity. So thank you.

Great. Thanks for that update, Norm. Listen, based on our call activity, which has been extensive, yes, I would say investors are increasingly both unhappy and confounded by, Norman, your, number one, obsession with acquiring Sartorius; number two, mixed messaging around succession planning; number three, somewhat of an unclear vision around exactly what you want Bio-Rad to be in the future; and then four, I would say, a perceived general lack of commitment to maximizing shareholder value. Are they wrong? Does it bother you that the stock trades at 6x EBITDA? And how would you respond to some of those concerns?

That's one big question. Yes, we're concerned. It is obviously very frustrating that people don't recognize the value that we're bringing, both to our customers and to the market. It does seem like we've got a bit of this kind of overhang from Sartorius that tends to cloud the picture a little bit. And we're obviously looking for ways to try to better manage that.

Given you can't even touch it for another 5 years, why even spend any time thinking about the myriad scenarios by which you could pursue that acquisition. And near term, does that influence how you are allocating capital today?

No. I mean when you think about that position and when you think about the cost of that position, it has a very small cost on our balance sheet, fundamentally a very small cost, even though it gets marked-to-market these days. And it is an asset that we -- if we find something more strategic, we can certainly have the -- we certainly have the ability to monetize that position if need be.

All right, maybe I'll leave that there and shift gears. Digital PCR is critical to the growth algorithm of the company. It's been a source of strength for Bio-Rad for some period of time. Your #2 competitor is out here talking about how they're winning every single RFP that comes up for them. Aside from supply chain headwinds last year, is demand slowing for this platform? And what inning would you say we're in for digital PCR in terms of its growth curve?

We do feel we're still in kind of the early innings of this. If you look at the technology, it started out with kind of a midrange platform, then it's worked its way to kind of a higher-end platform and a kind of a higher multiplex platform. The area that we don't play today is in the low end, which is where one of our competitors is making a lot of hay. We do have this -- the QX Continuum in development. We do expect that out by the end of the year, and we feel it will be a very competitive platform in really a different segment of that market that we are playing today.

When will -- I guess, ddPCR, is it today? And if not, when might it begin cannibalizing your legacy qPCR business?

Well, certainly, when we introduce the continuum, there is an expectation that it will start to kind of eat into the high-end qPCR business. But I think it's still a very good move for us. We're not particularly concerned about that. There's always going to be room for both of those technologies, if you want to call it that, going forward.

Is it fair to think about that given the enhanced performance of the Continuum and the performance of the box that, that would still be accretive cannibalizing your legacy business? I mean...

That's the plan. Yes. Yes.

Maybe a better question for Ilan. You sort of help us understand the puts and takes behind the second half, the guidance for the -- implied for the second half of the year, both in terms of, number one, what supports the growth acceleration from, let's call it, 7% in the first half to 10% in the second half? And number two, the margin expansion relative to the first half as well, which seems pretty steep just looking at the numbers.

Sure. Absolutely. Thanks, Brandon. So first starting with the top line. The challenges that we faced earlier in the year, in the first half of the year associated mainly with the supply chain constraints, associated with our manufacturing transition from Europe to Singapore, as well as of some of the manufacturing footprint domestically here in the U.S. will serve as a tailwind with higher volumes that we will be able to manufacture and work out the order backlog. So that's one driver that will help the second half of the year. In addition, regarding the process chromatography that has its own dynamic in terms of the fluctuation, and we do project a higher year-over-year growth in the second half of the year relative to the first half. If you recall, last year, it is a tough compare, specifically in the first quarter. However, the second half of the year, we do anticipate a much higher growth. Overall, for the full year for process chrom, we anticipate double-digit growth. I mean so that's another driver. When it comes to the margins, so we are embarking on a few additional initiatives, incremental initiatives to those that we already -- we started last year and are in flight. And mainly, they are focus on the SG&A, and we anticipate that in the second half of the year we will see already some benefit that is an outcome of these initiatives, and that will drive the bottom line expansion.

How should we think about just OpEx dollars in the second half versus the first half? And where are those cost savings coming out of? Is it R&D? Is it headcount? Is it just discretionary spend? What is it?

It's across the board. There are multiple initiatives mainly focused on the SG&A, and it's a variety of cost cutting in different areas, in different regions. And if you think about the SG&A or the OpEx in general, on a dollar basis, it still might be slightly higher, but way lower than the original implied guidance that we provided in the beginning of the year.

Okay. Could we get an update on where you stand as far as the manufacturing facility relocation to Singapore? Have you shut down the second France site? And what about the -- what happened in the first quarter was -- seemed to surprise you, was so anticipated?

Sure. So first of all, there were 2 sites out of France that were -- that we moved to Singapore. One of the 2 sites was already closed in March. The second one is expected to be closed this quarter, before the end of this month. So in terms of that transition from the European side, that's kind of -- that was completed basically. In Singapore, the challenge was more associated with volume ramp. We are shipping out of Singapore. The production is there. It's about training, hiring and finding the right talent and assessing that we do have the right talent, and we definitely don't want to compromise in terms of the quality of the product. So it's just a slower ramp in volume than we anticipated or planned for originally, but it keeps improving all the time. The other aspect was similarly, one of the locations domestically here that is manufacturing our QX600. Also it's about volume ramp and similar about hiring the right talent, and it continues to make a lot of progress.

Lastly, great to see you closed out the rest of the $200 million share repurchase authorization earlier this week. Should we expect you to re-up that in the next, say, month or so at the next Board meeting? And is the Board more willing today to deploy capital toward the buyback maybe than it has historically?

So we have -- we are planning to request the Board to up this -- or to refill the plan. The next Board meeting is scheduled for next month. It will be a good conversation in terms of the size of the updated plan, but we do plan to reengage and to continue to have it as part of the overall capital allocation as of next quarter.

Very good. Well, I have to leave it there. We're out of time. Ilan, Norman, great to see you. Thanks for being here.

Thank you.

Thank you.

Thank you, everybody.