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

Great. So perfect. Thank you, guys, for all attending here. My name is Tim Daley. I am the life science tools analyst here at Wells Fargo. We are very happy to have Bio-Rad here with us for a fireside chat. I am joined here by Norman Schwartz, the President and CEO; and Ilan Daskal, CFO. So with that, we'll kick it off. If we have a few minutes at the end, I might open up to the audience. They got a lot of stuff here. So if nobody's got anything, we'll just keep running through.

But so -- just, I guess, to kick things off, lots of month-to-month volatility across both geographies as well as end markets. So it would be great if you guys could just give us an update on how August demand trends came in? Do things sequentially on a month-to-month basis improve, get worse? Anything stand out in particular.

Obviously, a lot of things going on in our markets. I think that in my mind, we're still seeing some of the effects of COVID and kind of readjusting to a normalized world. I think and certainly in kind of headlines has been the kind of small biotech and some of the more exacerbated funding problems that those folks have had of recent. That compounded with the large biopharma, which we also supply and then kind of being in kind of a destocking, restocking mode kind of coming back to normal. That's been an effect. And then certainly all goings on in China. I think those are the 3 major factors that I see that are kind of continuing to affect the business and, of course, things go up and down on a monthly basis. Luckily, we don't report monthly. But so I think we're -- obviously, we'll get through it. I think that if you look at our markets in general, they are good, stable, long-term markets. I think that's really important to understand, both in the life science research area and in Diagnostics. So it's just kind of working through the ups and downs.

Okay. No, that's helpful. And I know that you guys wouldn't but we would love it if you reported monthly. But you guys have about 10% exposure to China. Yesterday, we had some of your peers and some interesting commentary kind of all some new themes, something new, I guess, was this anticorruption push within China. Just curious if you've gotten any feedback from boots on the ground operations over there, if there's any that's having a dynamic if you're hearing about it, if they're seeing it?

Yes, not too much effect for us so far. Obviously, it's a good thing if the government can really kind of squeeze some of the corruption out of the country, I think that would be great. Maybe squeeze some of the kind of the marginal distribution out of the system. I think that would be even better.

Yes. We described in the last earnings call on the Life Science side, we do see some headwinds as part of the funding environment, et cetera. For Diagnostics, we still see a nice kind of demand in terms of hospital demand for instruments. That was our kind of call out in the last earnings call. So it was encouraging kind of to see a continued kind of demand for Diagnostics.

That's helpful. And if we do think about Diagnostics demand, we had this kind of pent-up demand return to health care, if you will, seeing that in the Western markets and obviously, China, pretty meaningful, given the extent of the lockdowns there. How long do you think this kind of strength in China Diagnostics above trend last quarter as we work through that?

Well, I think that China has been building out a kind of a health care system. So from my perspective, I think it's a fairly sustainable situation and certainly coming out of COVID, I think that people are coming back, more elective surgeries, those kinds of things. So it's -- I think we're pretty much back to normal in the world. I think one of the pluses of COVID was that there is, I think, really an increased appreciation of the value of Diagnostics overall. And so I think that's good for the future.

Okay. Great. And just to, I guess, broaden the scope a bit away from immediate term to more of the guidance here. So if we were to think about the roughly 4.5% currency-neutral revenue guidance for fiscal year '23, where does China fit in that? Like what is the China assumption even if you could break it down in Diagnostics.

The assumption was, as I mentioned earlier, Life Science still facing some headwinds again, specifically when you think about the smaller biotechnology kind of funding environment. Diagnostics continues to do well in terms of the instrument kind of placement. And that was the assumption through the year. When we think about the funding environment, we think this is a 1- to 2-year cycle that will continue in terms of the headwinds. Even though that we do hear that the funding environment is getting better, I'm not sure that it does translate immediately into kind of environment that those smaller companies are spending everything that they are able to raise or at the same pace that they used to spend before. So that, again, is a 1- to 2-year kind of cycle. That's the way we think about it. When it comes to Diagnostics, the new instrument placement is actually encouraging for us also from a margin perspective despite the fact that it is a headwind to margin this year. We do anticipate the pull-through of reagents to start sometime next year, and that is obviously a tailwind to the margin.

Okay. All right. That's helpful. And I just wanted to dig in that 1- to 2-year cycle comments here. Was that -- broadly, was that any geography? Was that biotech versus pharma? Just help us understand that 1- to 2-year cycle.

That is more with the biotech and the smaller kind of biotechnology companies. When it comes to pharma, specifically in the bioprocessing, we think about it more as a push out of -- it's associated with the destocking kind of environment. For next year, we hope that it would be kind of back to a normalized level. It's going to continue to fluctuate over the quarters. But we, on the other hand, don't anticipate pent-up demand either.

Okay. Got it. And this is something we've been -- I've been talking to investors a lot about is as we have this period of softness, obviously sets up easy comps. But if we think of multiyear stacked growth rates, let's isolate the process chrom business. Is that a -- should we basically kind of model stable multiyear stacks? Or are we in this period of time kind of dipping below and then returning to trend line? Just thinking about the rebound on the back end.

For process chrom specifically, right?

Yes, for process chrom.

Process chrom, I mean, we haven't changed our thinking in terms of the multiyear kind of growth. I mean, a nice double-digit kind of growth on a multiyear basis. Again, it will most likely continue to fluctuate as I mentioned earlier, but in terms of the multiyear trajectory, it's one of the verticals that we called out back at the Investor Day last year, and we have not changed our thinking in terms of the long-term growth for that vertical.

Okay. That's helpful. And so unchanged expectations for some of that. Again, let's dive into the other major growth vertical in Digital PCR. How is that going? Can you give us kind of a state of the union of the market? How do you guys think about it, competitive dynamics in the ultimate holy grail of clinical application.

Yes. So maybe kind of step back a few years when we started on this, we kind of thought that maybe a TAM of a couple of hundred million would be kind of a good number to shoot for. I think we've been very pleasantly surprised to see the growth in the applications and the breadth and depth of those applications over the years, all the way from tracking down pythons in the Everglades to being the kind of the tool of choice for cell and gene therapy. I think we've been, again, pleasantly surprised at the value of the technology to science. I guess, if I think about it, a little over 6,500 kind of peer-reviewed papers that kind of referencing ddPCR and I think that does portend well for the future. That's -- that does tell us that it's a value technology. And as you asked, what about future applications? Yes, we are looking at applications now in the diagnostics arena. Obviously, with the focus on oncology, they are potentially great applications in oncology, and we're starting out with NIPT as our kind of really our first target in Diagnostics, developing a kind of a near-term and a longer-term platform for that to women's health market.

Okay. Great. I'm taking kind of those 2, the growth vectors here and thinking about the updated 2025 guidance, kind of, I guess, what is assumed in there for the next 2 years for -- if you want to combine ddPCR and process chrom or break them apart and rest of business, if you will. How should we kind of bridge that?

Sure. So it's interesting. We're at that juncture that so many kind of inputs we have to embed into 2024 kind of assumption, right? And that's kind of what led us to kind of park the 2025 guidance kind of in a holding pattern until we get a little bit better visibility into 2024. But high level, for the most part, it does depend on the topline growth. If you recall, again from our Investor Day last year, the fall-through from the topline, especially associated with our underutilized manufacturing footprint, we benefit a lot in the bottom line when it comes to topline growth. So it does not change our thinking in terms of the growth drivers. We called out obviously ddPCR, we called out the process chrom, we called out the quality control. So the growth drivers on a multiyear kind of perspective did not change our thinking in terms of the long term. Specifically for the next 2 years, there is a lot that is going on, on a geographical basis, on the macro side, that hopefully in the next few months, we'll get a little bit better clarity how to think about 2024. And that will drive, obviously, the outcome for what does it mean for the goals for 2025.

Okay. That's helpful. And you mentioned the next few months, hopefully getting more clarity. This is something I've been kind of asking every company. What are you thinking about on year-end budget flush dynamics, be it pharma, academic, just what's embedded in the outlook? And when do we truly get visibility into it happening or not or budgets are getting cut? When do those conversations happen and what's your visibility into those conversations?

So we really don't expect a budget flush this year. I think people are being fairly conservative in their spending. And so I don't expect people to go wild before the end of the year. And I think people are going to probably be a little bit conservative next year. I think as we look at like NIH funding, it's projected to go up. That's the good news relative to what we were hearing a few months ago, but it will be fairly modest. So I think that is a kind of a bellwether for next year. I think that's one. The Horizon program in Europe is still ongoing, still funds being invested there from that program. And I think, of course, I think China, in particular, is still bit of a wildcard.

We still anticipate though the fourth quarter to be stronger seasonality for us, the fourth quarter in most years is a stronger quarter relative to the second and third quarter. But obviously, it doesn't change the dynamic that Norman mentioned, but we do anticipate it to be a stronger quarter.

Okay. And thinking about instruments for consumables. Is there any kind of historical rule of thumb, what percent of your instrument revenue delivers in the fourth quarter?

So let me address that on kind of a macro basis rather than a quarter-to-quarter basis. I think especially this third and fourth quarter are a little bit of an anomaly in that we're kind of working down back order. And so probably a little heavier instrument mix especially on the Diagnostics side now. But overall, if we think about kind of the mix of what I call consumables versus hardware, for our 2 businesses, it's roughly a 70-30 mix with 70% being the kind of recurring revenue in some form and 30% being kind of less recurring.

Okay. I appreciate that. And I wanted to dive into margins here, always topic of debate or upside potential in your guys' margin profile versus peers. I know you've talked about leveraging the fixed capacity that's already installed, fixed overhead already in place. Recently, you've been maybe more open to doing a larger deal to facilitate that utilization increasing. Just could you update us on the M&A pipeline? I know you guys have talked to a bit larger than in the past. Things are maybe cheap. Just any update there on that side of capital allocation?

Yes, a lot of directions you could take that. But I think that the way we've looked at it is, over the last several years, we've been kind of spending a lot of time and effort internally kind of doing a big reset, kind of functionalizing the organization, getting some critical tools in like a global ERP system to be able to scale the business. So we've gotten ourselves pretty well through that, and now I think are increasingly comfortable with doing something larger that we feel we could very successfully integrate into the system that we have with the people that we have. And so there is a little more of an appetite to look at something a little larger because we've been doing in the past few years a lot of these very small tuck-ins. The question is always the right opportunity and the right fit. We're always looking for something that's very complementary to what we already do as opposed to something kind of way off the grid for us. And we've always got a few things we're looking at. So we'll see.

And I would also call out in terms of valuations, the smaller tuck-ins are still expensive. I mean, they have not adjusted to the current environment yet. Obviously, the larger, especially the public companies or kind of, let's call it, automatically are adjusted to the new environment. So it's kind of more realistic valuations. In terms of financing, we have a very strong balance sheet. We will try to use as much cash as we can, obviously, since we do believe that our share is underappreciated. So we will try to minimize kind of the usage of equity.

Okay. Yes. And that is something I kind of wanted to get through next is the valuation itself. This is a big debate. Structurally, if you can clean up the numbers a bit, the multiple becomes a lot more interesting than what just screams on Bloomberg or FactSet. So how should you -- or how do you think internally about valuation and how your own exercise of building out a valuation of the company on a clean basis, if you will?

Obviously, it should and it does deserve the traditional multiples. And today, obviously, it is, in our opinion, grossly underappreciated. When you start to think kind of what potentially the factors are, one factor could be that the Sartorius investment, there is some leakage when it gets to our balance sheet. Obviously, the accounting rechanged back in 2018 and it's a little bit more challenging for some investors, how to back out the valuation. And is the leakage on the Bio-Rad side or on the Sartorius side? I mean, it depends who you ask and how you think about it. But that's one aspect that is out there. I think the second aspect is associated with our multiyear kind of growth and transformation. I think that we are still in the mid-innings in achieving all the goals that we did set to ourselves. And we have done and achieved a lot in the last several years. But I think some investors are waiting to see kind of the next phase of the growth and improvement. So I would call out those two as probably the major kind of aspects that we think about when we look at kind of the overall valuation.

Okay. Great. As we're thinking about Sartorius stake's been built over a long period of time, obviously, you guys have done and executed in line with expectations your multiyear programs, the 3 phases so far. So if we think about the longer-term next phase of the company, I get this question a lot on succession planning, any kind of update on this front, Norman, just given it is pretty topical?

Yes. So I mean I think that -- I think I've still got some energy in a few years. But if I would happen to get hit by a bus, I think that we've got certainly good internal candidates. And obviously, the board would have to kind of meet and kind of figure that out and look at probably internal and potentially external candidates to fill the role. But we've got a really good management team in place overall. So we feel pretty good about that -- where we are.

That's helpful. And just thinking about some of the, I guess, hotter topics outside of the headwinds, thinking about the tailwinds here, lots of buzz around spatial proteomics, academic government end market is very strong here. How are you guys participating in these markets? Ambitions there? General update side?

Yes. So obviously, we're -- we probably invest a little more than most of our peers in R&D. So trying to drive that innovation as much as we can. There are just so many things going on in our markets. We really are in the golden age of biology. And so there are lots of things to do, lots of things to look at. I think for us, it's picking those targets carefully, picking the ones that we think have good long-term potential and where we think we can really contribute to advancing the science. I think that's how we look at it. Things like spatial are, obviously, it's kind of an interesting growing area. Some other single cell analysis in addition to the kind of the things that we're doing with ddPCR. So, yes, lots of potential. I mean, I think the trick for us is really keeping that focus, making those kind of -- making choices. Not getting too distracted by too many things, too many shiny objects.

Yes. Okay. And then just stepping back a bit on academic government. Obviously, there was packages in China in '22, packages in Europe in '22 as well. You called out Horizons. How long does -- providers, for example, how long does that continue to be a tailwind, like when does that when money run out as it relates to the products that you guys are getting purchase through that, the dollars or the zeros if you want.

Yes. I don't know exactly what the remaining bucket of funds is in that Horizon program. It was a pretty long-term program that was set up and fairly large as I remember. So I think it certainly is kind of a multiyear kind of a tailwind for us and it should be in Europe. And as we mentioned earlier, it looks like kind of a good start for next year with the NIH budget relative to where it could have been. I think the other kind of funding institutions like Howard Hughes in the U.S. and other institutes in Europe and other places are -- continue to be also supportive of research. And while the kind of the short-term, near-term funding for biotech has been slower, I think there are kind of good signs of life. I was here in Boston yesterday and visited a number of biotech -- early-stage biotech companies, and they're really encouraged and kind of working hard to bring things to market.

All right. Great. If anybody has anything in the audience. Don't be shy, otherwise, any more questions here. All right. Great. So just diving a little bit back into China and the stimulus there. We've seen the property stimulus come out in the last week. People always talk about how China is -- the government funds everything, so indirectly, directly, third derivative, what have you. Is there -- do you see any impact from that, just a shoring up of non-life science, non-healthcare realms? Or do we need direct stimulates to kind of turn that market around?

I guess my sense is that well, the federal government offers up these stimulus packages to the local provinces. These stimulus packages are typically in the form of loans. And I think the local provinces seem to be kind of have too many loans already. And so it seems like, while there was a lot of excitement 6 or 9 months ago about this big stimulus package, I don't think it's had very much effect. I don't think there's been a big uptake.

Okay. And then any insights based on history of when a new package will come? Or if -- I've heard someone yesterday was talking about maybe October or maybe in the Chinese New Year or kind of those breakpoints, if you will, or catalyst points of when the decision could be made to deploy some capital into the life science for health care sector?

Specifically for China?

For China. Yes.

Yes. I really think it's going to depend on what the form of that stimulus is. I think it's too early to tell what the effect might be.

If we call it 6 to 9 months ago, they announced kind of the grant. These were not really grants. And our team, I mean, immediately said we don't have high hope. These are traditional loans. In reality was that it wasn't really utilized. I mean, so again, it depends what is the form and shape and how do they balance it with these anticorruption kind of approach and so it's kind of contradicting one another, so in a way. So we'll have to wait and see a few months. But generally speaking, it seems like on a macro level in China, there is a lot that is going on top of it, the real estate environment, the youth unemployment, inflationary kind of environment. So it feels like this is kind of a few years of a fix. It's not like a specific program that will fix everything. So we'll have to wait and see. It's going to be an interesting one. China is still the second largest economy in the world.

Okay. No, that's enough China for now. I'm sure you guys are ready to speak a bit this day. So moving to Western pharma biotech. So, Norman, you mentioned that you're kind of working through some backlog of instruments right now. Are we in this period where effectively we're kind of just normalizing a trend in terms of pharma demand for spending, the whole spending case, whatever you want to describe it as, are we kind of just normalizing on tough comps or ordering trends or are we truly in a slump right now?

I guess my view is we're still -- we're normalizing. I think if you look at BioPharma over the years and kind of what's in Phase II, Phase III clinical trials, it's still an extremely strong pipeline. And so I think it's still a very good place to invest for the future. I mean, for us, we're still kind of somewhat under-penetrated relative to some of our peers, and we haven't taken our foot off the gas there in terms of continued investment. So but we feel pretty good about that market.

Okay. Great. And the last few minutes here. I just want to dig a bit deeper on the M&A front and the existing capacity. Is there again, clearly, it would be post revenue deal if you're really trying to, I guess, fill capacity? Is it Life Sciences side, Diagnostics side? I know that there's regulatory dynamics. It's harder to make some products in a diagnostic facility. Just could you help us understand like what would be, broadly, like a good fit to increase utilization quickly? Any rough markets or again, as high level as you want as well as granular as you want?

Yes. It's pretty broad-based. It's across Life Science and Diagnostics. In the Life Science area. It's probably kind of more looking at growth. In the Diagnostics area, it's probably more about kind of very sustainable cash flow in terms of kind of typical drivers. And it's basically what is complementary to what we do now? What can we drive through our sales forces? Are there opportunities where we can kind of in-source manufacturing and leverage our manufacturing footprint? Or again leveraging our global distribution. So it's a combination of all kinds of things.

Got it. All right. No, that's helpful. And just thinking about the new Singapore site speaking of facilities. How is that ramp going? What should we expect out of that?

Yes. It's actually gone pretty well. We've made that transition of the -- I mean we've had the Singapore site for many years but we made a kind of a strategic move to expand that site and move some of our French manufacturing operations to Singapore that I think that transition has gone very well. Obviously, these things always take a little longer than you expect. But generally, it's been pretty good. I think that we still have to kind of work down some of the duplicate inventory that we had from that. And so and I think we're starting to get the benefit of the labor arbitrage there. And I think for the future, we've got opportunities to get kind of component arbitrage from locally sourcing. So, I think...

The 2 sites in France are completely closed already. So that's a done deal. In Singapore, we have enabled more capacity than we need today, which is good. I mean that's for future growth. In addition to the labor arbitrage that Norman mentioned, also the logistics is much lower in terms of shipments and within Asia. So, so far, it's trending as we projected.

All right. Perfect. Right on time here. So again, thank you, Ilan. Thank you, Norman. Appreciate it. Thank you, everybody, for attending here. I hope everybody has a good productive rest of the day.

Thanks for having us.

Of course.