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

Thanks, everyone, for being here. I'm Patrick Donnelly, the tools and diagnostics analyst here at Citi. We have Norman Schwartz and Andy last with us from Bio-Rad. Guys, thanks for being here.

Maybe Norman, we can start off. You guys just finished -- just finished the year, kind of gave your initial '24 guidance range. Maybe just talk about, I guess, the general backdrop, what you guys are seeing as we head into '24 here and just general expectations for trends as we work our way through the year, and we can certainly dive into some specifics.

Yes. I think that, interestingly enough, we expected '23 to be a year of normalization. And I think we're looking at '24 now the year of normalization. We had that kind of the meltdown of biotech that kind of hit us in '23. And I think we're actually looking for recovery in 2024, probably more of a second half of it than the first half of that, kind of driving the business for this year.

Yes. I guess when you look at that, we've obviously seen some signs of life maybe on the biotech funding environment, [ I feel ] when the activity picks up or [indiscernible]. But I guess, how quickly, could you see some of the impact from the capital markets window opening at least briefly, hopefully, for a little while. But when you talk about the biotech piece, how do you think about that customer market, just the appetite kind of come back and spend with it.

Yes. I think that -- do you want to take that one?

Yes. I mean I think we've been encouraged by the funding levels that our capital markets are injecting right now. That will take time. Probably go through balance sheets into deployment and programs, some amounts of hiring in all likelihood. And then with order flow into that pipeline, but it's hard to put an exact time frame on that, but probably a quarter last before I think we could see a really positive effect of that capital influx right now.

Yes, yes. That makes sense. And then maybe just kind of refresh us on what parts of the business are most sensitive to kind of that biotech piece and where you are baking in some level of improvement as the year goes in terms of profit portfolio.

Yes. I think what we called out is, of course, we have a kind of broad portfolio of products into biotech. But the one that we really called out is more the Droplet Digital PCR technologies as being one that's probably more affected by biotech than some of our other products, which are more broadly based.

Yes. And Digital PCR has been a focus for people for some time. Obviously, a big growth driver for you guys for years, slowed a little bit with the biotech piece. Can you just talk about, I guess, the customer base you're selling that into? Obviously, it's a pretty good base at this point in terms of revenue dollars. But, yes, maybe just talk about the customer set, where we are in the adoption and then I think after that, maybe we can talk a little bit about just competitive landscape.

Yes, I'll take that one, Patrick. So I mean, on the positive side, it's a very broad set of customers. We have, in particular, focused on the biotech and BioPharma segment simply because the technology fit is extremely high. It's really a capable platform for the novel therapeutics and new modalities. So the difficult questions they're trying to answer. So we've had some historical outsized growth there, I would say until last year. But beyond that, the platform fits right from traditional R&D, typical R&D, even through the manufacturing QC on the BioPharma biotech side and then in basic research for rare event detection. The platform fits exceedingly well in translational research and particularly on the oncology field. So the application suite and therefore, the market segment opportunities are actually continuing to expand as we see it. Now the big variable is the funding level and the recovery cycle in biotech and BioPharma.

Yes. And maybe just on the competitive environment, obviously, you've had other players come in. We've had some success. It still feels like the market is quite underpenetrated. But maybe just talk about the competitive landscape and how you guys view the product differentiation for your offering?

Yes. So the segment that we play in is the kind of what I call the mid- to high-end segment, primarily focused in BioPharma space. And if we look at our continuing win-loss ratios in those spaces and particularly for ddPCR seems to be fairly steady. Where the competition has come in, is in what I term the low end, more the academic market, and they've done pretty well in that market, really kind of open that up. And so I think for us, the idea, it kind of proves out the thesis that we have that there will be a low-end market for this technology. And of course, we're just about to introduce the Continuum product, which will directly address that market.

Yes, maybe a little bit in terms of Continuum and future product expansions. I know at the Analyst Day, it's a couple of years ago at this point, you kind of addressed the market and gave some pretty large numbers. The diagnostics market was one that was a little bit untapped but clearly some big potential. Maybe talk about, I guess, some of these new launches and how they could open up some of those pieces in the market that you haven't quite seen take off yet.

Yes. So obviously, right, entering the Academic segment, it's the positioning of this platform is for rare event, high sensitivity, high precision. It's very relevant and for a lot of the basic research. And we do expect the real-time PCR platform users to reach our -- beyond their current price point a bit. So -- and so that is a significant piece of the strategy, adoption within the clinical diagnostics fields and a real-time PCR is a very powerful platform and diagnostics, molecular diagnostics. So our view on it is it's got to be differentiated application-driven where high value, where the performance attributes make a difference. And so we're looking at women's reproductive health, rare events, rare -- you see some companies working on like [ Geneoscopy ] on such things as the colorectal cancer testing, where they want precision and sensitivity and they've got a more challenging sample to deal with, organ transplant monitoring and which for rejection. And then over time, the development of -- because we've introduced BioPlex capabilities with multiple colors, the development of more complex panels in the oncology field. And so we see real potential over time in oncology and diagnostics. So total market opportunity, we see over time with the right product offerings, our sales segmentation can run to billions.

Yes. And with Continuum, maybe just talk about the rollout and the expectations we should kind of be looking at for that?

Yes. So that will roll out around midyear. And we certainly expect some uptake throughout the third and fourth quarters. Will it be a needle mover for the year? Probably not. But I think it's an important launch for us, and we should start to make traction with that.

Okay. And I guess when you think about the Digital PCR recovery path, is it just fully contingent when you look at it, I guess, one of the factors you mentioned biotech funding, just bound to come back. But when you look at the trajectory, obviously, those years of really, really strong growth. We don't know the exact growth numbers, but they were good. How do you think about what catalyzes that recovery if you could call out some sense for me?

Yes. I mean the funding cycles in biotech and BioPharma are important to that, but also slows entry into the academic segment. And academic funding broadly seems good but we've been a bit above the price point that they've typically been looking for. And so we're launching this -- the benchtop kind of easy-to-use offering but with the same performance profile that you get from the other instrument offerings. So -- but I'd say that strong growth -- strong double digit growth trajectory, to get back to that on a sustainable basis would require biotech, BioPharma to come back to more normal spending attitude.

Okay. And then another growth area that slowed a little bit in Life Sciences is the process chrom. Before we get into kind of specifics on the stocking, things like that, maybe just talk about, I guess, you're offering a lot of -- investors sometimes ask, what do these guys actually do in process chromatography, where do they fit versus other players in life science. Maybe just talk a little bit about the portfolio and what you guys offer, in the process chrom set.

Yes. It's interesting. When you look at process chromatography, when you look at the kind of the whole process, I mean, there are lots and lots of steps in the process of purification, more purification, more purification. And when you get down to the end, that's where we are in these kind of what we call polishing steps of the purification process. So probably typically a little lower in terms of absolute volumes because you've gone from gallons to liters. But that's where we play. That's our specialty.

Yes. And you guys have faced some -- along with everyone else, obviously, some of the stocking impact. Maybe just kind of talk through where are we? What are you hearing from customers and just the level of visibility here?

Yes. So I'd say typically, when we would enter a year, we probably had 70% to 80% visibility to the pipeline or order book, not the case, now ending last year coming into this year, [ softer ] looking. And so as we look at this year, we still see this is a recovery year for us. There are indications that some of our customers are kind of getting towards the end of their kind of inventory cleansing cycles. But then we've got at least 2 other pretty sizable customers that will take the full year to get back to normal inventory. So for us, overall, this is still transition on the revenue generated out of process chrom. On the positive side, and this has often been asked, we've not ceded any market share. We think we're improving our market position. But we've got another full year of inventory flux through to work -- work through.

Okay. So on those 2, I guess, process chrom and Digital PCR, it sounds like process chrom muted for the entire year and the Digital PCR maybe a little bit of a recovery? Is that correct?

Yes, I would say that's a good characterization. Process chrom will still be lumpy just by its nature and the size of our business relative to others. We're more concentrated and we were talking with other folks earlier today. And we currently view that '25 and beyond will be much more in line with what the industry has been seeing in that part of the market historically.

Great. And then maybe on the Life Science piece specifically, we'll get to Clinical, obviously, in a little bit. Just the China outlook. Obviously, it's a tale of 2 different tales there between those 2. But I guess Life Sciences in China, how are you thinking about the backdrop there and just expectations as we work our way through '24.

Yes. Well, I think you have to look at -- start with looking a little bit at the macro situation there. It's a little bit of a tough environment. We get a lot of things going on domestically there. High unemployment, real estate valuation issues. I think there's still kind of a recovery cycle there in China. I guess, my view of the outlook is, it's going to be kind of slow going for Life Science there for some period of time.

And is the exposure there any different? Is it similar where Digital PCR and process chrom are kind of what slowed over there? Maybe just talk about kind of the backdrop of the portfolio there.

I think it's more overall slowing in China is my view.

Yes, it's definitely slowed overall for the Life Science side of the business, but that has included Digital PCR and process chrom. We did -- we do have business there for both platforms. And so funding on the biotech, BioPharma side in China, it's pretty tight right now. And I don't think it's experiencing the same influx that's going on right now in the U.S.

Yes. Okay. Yes, maybe we can flip to Clinical for a bit. Maybe just kind of talk about what's happening there, again, obviously, quite different trends than the Life Science piece. You can start broadly and then jump in products and geographies.

Yes, I think that in Diagnostics, it's pretty much return to norm. Obviously, with COVID, there was tremendous disruption in kind of the testing cycle for more routine testing. And that's pretty much stabilized, even to China. So yes, that's -- yes, that's all smoothed out.

Yes. Maybe on China, what are you guys seeing there? Obviously you get asked all the time on things like VBP. Because I'm sure you do anticorruption and things like that. So where do you stand on some of the onetime shocks and then just a general sense for China this year in Diagnostics.

Yes. VBP has not really hit us in the same way as the big platform plays, clinical chemistry or immunoassay providers, where they've had to come in to kind of bake off bids to win a region. So we've not been involved in those. We're watching it closely. And then the anticorruption side did kind of it paused last year. We're kind of more indirect for us, but it certainly did slow things down. It seems to a class incentive right now. But if there's more double down on those things, of course, it will impact business flow. But at the moment, it's less but anticorruption is much more the VBP threat. And at the moment, since we're more specialized and more niche, we're kind of on the periphery to that.

Okay. And I guess in Clinical, there was a little bit of a transition from some of the European facilities to Singapore, inventory, a little bit of inventory build. Where are we on that front? How do you think about that transition as we work our way forward here?

Yes, I think the transition has actually been very successful, completely out of those 2 plants in France and really well embedded in our Singapore facility. I think we're starting to see the advantages of the labor arbitrage and the productivity in Singapore to those platforms. I think that going forward, we still got opportunities as we localize the componentry for those instruments, that will take a while because these are regulated platforms. But we still got some pretty decent opportunity there.

Yes. I guess this seems like a first step. But I guess how do you think about just that facility footprint as you look forward. Obviously, there's a lot of opportunities across the organization. But where would you put kind of this facility consolidation shifting to lower-cost manufacturing. How big of an opportunity is that? And how do you see it playing out? Is it within a near term, midterm, longer-term.

Yes, I'll take that one, Patrick. I still think there's opportunity there without getting into too many specifics for perhaps obvious reasons. But I do think there's opportunity. We've got quite a number of facilities around the globe. It's not as simple as just saying we're going to put that and that together, obviously, because of that -- it's a broad portfolio and there's some very specialized manufacturing, it's easier on the instrument front. So we do have some initiatives that we're working through. I think they're measured in years not months, of course. So I think over the coming years, there's certainly opportunity for more improvement on the supply chain front.

Yes. Okay. And then maybe on the kind of the Clinical customers. I think as you get kind of that more consumable benefit, obviously, that's a good tailwind for margins as well. How are you thinking about just the consumable instrument split inside the clinical business and how that fares throughout this year?

Yes. I mean, normally, I guess we think of that as being here kind of -- if I think about the instrument component, the reagent component, it's -- I think about it typically as being about a 70-30 split. Instruments 30, reagent 70. Yes, certainly, we placed -- caught a lot of platforms this last year. So we should see some increased benefit from that this year in terms of reagent pull-through. That's our expectation, absolutely.

Yes. Just maybe we can look at the guidance for a little bit. You kind of gave a little bit of a softer 1Q outlook as did a lot of peers, and then you have a pretty good ramp. Maybe on the revenue side first. Is it -- again, obviously, you talked a little bit about ddPCR, how much underlying improvement are you assuming versus comp dynamics? How do you guys think about just the setup for '24 in terms of revenue and then we'll get to margins.

Yes. I think everyone benefits from the comp dynamics. So -- and you're right, just to reaffirm soft Q1 on Life Science. Just to set a baseline, clinical diagnostics through the year is just going to be a much more typical and more stabilized environment. So we've got that foundation. And then academic and Life Science is, let's call it, 2/3 of the business roughly and a much more stable environment, funding seems generally okay. The real shift in the shape of the year is driven by the biotech, BioPharma recovery. And yes, and certainly, it's a second half bias and building through the tail end of the year and that volume curve drives other elements to the P&L, right? As we track through on gross margin, mix effect, volume effect. We're keeping a really tight handle on SG&A, on our operating expense side, making sure we're kind of in line with revenue as it comes back. We'll continue to just keep a close eye on that.

Yes. Yes, maybe on the margins, I mean, as probably one of the bigger questions we got on the back of the report is just that margin ramp as you work your way through the year off of 1Q. Can you just talk a little bit about, I guess, the moving pieces there, the visibility into margin sequence. I'm sure some of it's volume. But yes, maybe just kind of that build as we work our way through the year on the margins to be...

Yes. Volume definitely is a key component. The mix also. Life Science business is above corporate average and Clinical just below. So the mix effect will be meaningful as we progress through the year. And I think that's probably the larger effect overall on the shape of margins. Operating expenses this year, we've had to jump by with some big step-ups, and we couldn't fully offset them. I think we did actually pretty well on a good offset there. But I think that what you'll see is the shape will be driven by the volume ramp and mix of Life Science through the year.

Yes. I guess on the cost side, you guys obviously always had, always been viewed as having a pretty good opportunity to bring down that cost structure, have some nice margins going forward. I guess, how aggressive can you be in the near term to maybe offset some of the softness. Andy you touched on the SG&A piece. Just how do you think about just that expense control near term? And then we can talk a little bit about the out years, but I guess near term, how tight can you guys be there?

Yes. I think we've got a pretty good handle on it at this point in time. And it's a lot. The biggest cost driver is head count. I think we're managing it fairly well. You've got the step-up beginning Q2 on merit. That comes in. Q1 starts with a step-up because of incentive comp true-up year-to-year. So you've got those kind of operating expense line dynamics to take care of. But I think we've got a really good line of sight to our cost center structure and the drivers in it. And I think we've got good headcount discipline in place right now. And that really is the biggest driver of overall operating expense.

Yes. And I guess when you think about the out years, you guys obviously had the [ LRP ], kind of adjusted it a little bit. How do you think about that margin opportunity? Is it still as compelling as we kind of all thought a few years ago, which is just is really attractive, big growth, cost basis is going to keep coming down. How do you think about the big levers over the next few years on the margin side, particularly, obviously, volume is going to matter a lot. But just in terms of the infrastructure you guys have in the P&L.

Yes. I think we still see that there's plenty of room. Obviously, with the pandemic, I think we think about that moving out a little bit, but I think the same thesis as we've had all along. I think that obviously, we want to wait and see how this year unfolds before we think about reguiding for the future, but -- which I think the basic thesis is still very much intact.

And I guess, a natural segue to ask about, you guys don't have a CFO at the moment, how is that search going? What's the right timing to think about potential person get named?

Yes. It's actually going really well. And you should expect to see something fairly soon.

Okay. I think on the call, we are just kind of suggesting before the next quarterly call if someone replaces like...

I hope it's official before the next quarterly call. So I don't have to read the script.

You did a good job. That's helpful. And then, I guess, another question that comes up a lot, obviously, Sartorius piece. Maybe just give your latest in terms of how you think about it, you've been committed to it for a long time. But yes, just your latest thinking, level of commitment there. Could you use it for other things? Is there ways to monetize it? Or is it just kind of -- it is what it is until the trust dissolves.

No. I think that there are a lot of pieces to that puzzle, obviously. It does continue to be a very strategic asset for us. Just a question of finding alignment on being able to actually do the transaction but in the meantime, it does represent really good dry powder for us and gives us a tremendous amount of optionality to do something else if something else came along.

Yes. I guess on that point, I mean, how do you think about the landscape currently. I know you guys tone shifted a little bit. There was talks of larger deals and MOEs for a little bit. And then I think it was actually this time last year, we were sitting up here you guys are shifting towards, how we want to look at a little more midsize, $1 billion to $3 billion, $1 billion to $4 billion, whatever it was $1 billion. Where are you landing currently? I know the deals are always hard to predict and hasn't been particularly active across the space. But what's your guys perspective and appetite?

Yes. I think we're still exactly in that same place. I think the difference is this year, it seems like valuations may have come in a little bit. And there may be some more opportunities this year relative to last year.

Okay. But still in that more midsized range.

Yes. Yes.

And I guess what would be the trigger or the baseline for Sartorius to come into the mix in terms of using that for whether it's an acquisition or some sort of strategic -- how do you think about just the...

Yes, I think it would have to be something obviously on a much larger size that we came across in order to do something with that. We've got plenty of dry powder ex the Sartorius stakes. So not a problem for us in terms of the cash we have on the balance sheet and our ability to lever up a little bit.

Yes. Yes. And I guess on the cash on the balance sheet point, deals are always a consideration and then the share repurchases you guys have been far more active in recent years than you were historically. I think you timed the market relatively well last quarter as well. So I guess it wasn't just an alarm thing. So I guess, how do you think about the appetite for repurchases, stocks are pretty attractive from our perspective...

Yes, I think we're going to continue to be opportunistic. It's part of our capital allocation strategy. And every quarter, we're kind of weighing that off against the inorganic opportunities and the investments in the business. But yes, it's going to continue to be a part of the mix.

Okay. Yes. And I guess on the organic investment opportunity, how do you think about the product pipeline? We talked a little bit about things like Continuum and ddPCR. At times, you've talked about single cell as well. So maybe you can highlight a few products we should keep an eye on over the next 12, 18 months, and maybe some updates on some of those growth or your potential spots?

Yes. Obviously, we invest reasonably sized chunk of our sales into R&D. So we've got Continuum coming out this year. We have a second half contribution. We are launching our single cell play this year, which is a combination of the technology capabilities we acquired with Celsee with droplet -- core Droplet capabilities that's coming into the market for secondary impact as well, second half of the year. We're doing a refresh on our Western block next-generation imaging system this year. So on the Life Science side, those are the kind of, I'd say, major platform introductions, lots of other, I call them smaller product, line extension, introductions, assays, and such like. Clinical side, there's no major platform introductions. We are launching what we call IH-500 next in the U.S. We did it ex U.S. last year, coming into the U.S. market this year. It's just better capabilities for the immunohematology customers. And looking forward, we continue to invest in expansion of Droplet Digital PCR, improving our process chrom offerings, moving Digital PCR into the clinical side of the business, expanding our quality controls franchise, which is a very nice and consistently growing business globally. And we're investing in the PCR one point-of-care or near to patients, fast turnaround multiplex molecular infectious disease platform. And that's a few years out from now. So we've actually got honestly more opportunities for R&D than we can actually chase. So I think we're in a pretty enviable position there. It's about execution and focusing and getting these products into the marketplace.

Yes. And to your point on the R&D, I mean is it -- I think you touched on it a little bit, but is the idea to keep R&D as a percentage of sales kind of around here?

I think it is. I think you'd like to notch it down if you could, but there's just too many compelling opportunities. I think what we really want to do is change the shape of the top line as a result of the investment. One other thing to keep in mind on our R&D spend is we are not as active in M&A, right, as other companies. And so we tend to spend a bit more on the organic side, and it's a broad portfolio. So some portion of that goes to retaining competitiveness in some of the, let's call it, more traditional product areas.

Yes. So I guess in the outer years, kind of the old algorithm, how are you thinking about the margin? Is it gross margin, SG&A? What's kind of the general split you guys are thinking about in terms of driving some of the expansion as we go forward.

In terms of the key metrics on SG&A?

Yes. Yes.

Yes. We got down to about 28.5%, 29% of sales where we had some sales peaks. And I think that kind of demonstrates that we can achieve it, to get the right growth rates in some of the product areas. So I think that's reasonable to target to move that over the coming years. Gross margin now has suffered a bit from volume, mix and inflation. And inflation is not going back at the moment, right? It's kind of still with us. So -- but we were achieving 56%, 57%gross margin. We have a target trying to get back there over the coming years through cost control, supply chain improvement, mix and volume.

Okay. And then maybe just circling back on the M&A landscape. Do you guys have a preference, Norman from Life Science, Diagnostics? Is there a certain verticals where you feel like -- and maybe that makes more sense inorganically that you feel underserved then?

So we're actually kind of indifferent. I mean, there are opportunities in really in both segments of the business. In the Life Science segment, I would say something in the funding, something more in Cell Biology area would be interesting. But of course, there are opportunities to kind of bulk up our protein side and our DNA side as well. So yes, lots of opportunities there on the diagnostic side. Yes, it could be a new vertical or it could be kind of working up something we're currently doing. We've done a couple of that. We've done this PCR|ONE in the molecular area, and we've got the ddPCR opportunities going. Maybe there's something more we could do that in that -- in the molecular area in ddPCR, in diagnostics. So yes, lots of potential opportunities.

Yes. And would you guys be interested in kind of getting more towards kind of like the -- to your point, the molecular diagnostics [ point of care ] type world? Is that kind of in your realm? Or do you feel like that's maybe a little bit...

Well, generally the point of care is a pretty broad definition. I think point of care for us that's laboratory based, where we can leverage our kind of global direct distribution system, would be those kinds of opportunities would fit. And something that's like point of care home, we don't really have a good chance.

Sure. Sure. That makes sense. And just 1 or 2 minutes left here. Just on, I guess, kind of finishing on the margin ramp, I guess, in terms of just the confidence level on that, starting at lower level on 1Q, I guess what do you think of as the key drivers to hit that? And then when you think about the overall guide, what are the maybe 1 or 2 things that could get you to the upside and 1 or 2 risks that you would highlight, think about the overall guidance [ search ]...

I'll take it. I don't think I've got a huge amount to add to that, which we've already said. I think it is volume and mix driven. I think we've got a good line of sight to the budget from a cost control point of view. We're going to be a little bit, let's call it, flexible on cost, meaning if revenue ramp is ahead, we'll maybe invest a bit more. If it's not, we won't. And what's the biggest kind of like thing that would change the outcome for the year is really the biotech BioPharma recovery. I think -- when I -- I think we've got -- the other areas, diagnostics, which is more than half of the revenue base is -- and that's pretty predictable. China is a bit of a wildcard for overall. The wildcards are the macros. I think it's what we can see and control. I think we feel pretty good about.

And maybe just quickly, just the pricing environment, how you think about this year or what's layered into?

I don't think it's quite as easy to take prices say it was the last 2 years and particularly last year inflation was being rampant and we weren't able to fully offset inflation for -- at least we weren't. So this year, we're targeting a similar price impact realization that we did last year. We think we can do that. Of course, keep in mind that's more realization in Life Science and is on the Diagnostics side. And so I think the customers have got moderating tolerance for price this year.

That's fair. I think we just went over. So thank you guys so much for being here. Appreciate it.

Okay. Thanks, for having us.

Thanks, Patrick.

Cheers.

Cheers.

Appreciate it.

Thanks.