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

Yes, I'll take the last one. I think we feel good about our competitive positioning overall. We've got a number of product areas within diagnostics broadly, and we've got a very broad portfolio that sits in leadership positions in those. Now unfortunately, some of those are niche areas and, therefore, not high-growth areas. If I put those aside and really focus on a couple of the things that you mentioned, quality controls, I mean, we are a market leader in quality controls. We've indicated that we see that as a mid-single-digit growth opportunity for us. We continue to feel that, that is still the case. And part of what we are taking a look at is how do we take some of our R&D dollars and migrate them into right-to-win areas like quality controls, whereby we can support maybe an even stronger growth rate on a longer-term basis. I think from an overall market standpoint, quality controls is a marketplace that is somewhat fragmented and, therefore, it gives us an opportunity for potential further market share gains over time. And that's an area of focus for us, both from an R&D return perspective, but also then that can support top line growth. In terms of blood typing products, that's another area where we've got a strong position, especially in certain regional areas. That, again, is an area of focus, as an example, in the Middle East, that has been a strong contributor to our historical Middle East growth that we've seen there. I think as that returns to stabilization, like we talked about earlier in our discussion, that is a potential opportunity for further growth there. And so those 2 areas are anchoring points for us. And then I think as we continue to evaluate the broader portfolio and product refresh and opportunities to drive innovation there is how do we drive diagnostics growth rates beyond where we've been historically towards more market growth rates in diagnostics.

Great. Maybe a question on AI. Where does Bio-Rad fit in this discussion around AI winners and losers? Are you doing things across the organization to ensure that you're not missing out on this?

Yes. So that's -- I'll start with maybe the latter piece. We are utilizing AI across the enterprise, every functional area is utilizing AI capabilities in terms of driving or accelerating outcomes or driving productivity. As an example, in the second quarter call, we talked about how our software development organization is using AI to accelerate code development. That's been a significant area of improvement in terms of cycle time. But every functional area is using it. I mean, in finance, we're automating AP processing as well as other areas in terms of account reconciliation. Commercial is identifying opportunities there. So every part of the enterprise is driving it. And the focus isn't strictly about using the AI. It's about driving outcomes in measurable ways, such that it either drives productivity improvements or accelerates or improves decision-making in terms of what we can do. As we think about the product areas, AI, we are contemplating in both from a diagnostic standpoint as well as a life science tool standpoint. And as we think about next-generation instruments, both automation and AI are a critical set of components within that to ensure that our products are creating value for our customers and that we have market competitiveness from that standpoint. And so I think in terms of winners and losers, there's a lot to be written about winners and losers from an AI standpoint, but I think the one central theme is companies must incorporate AI capability, both in terms of their products, but also then how they're utilizing it within their enterprise to drive value.

Perfect. You touched on this a little bit. You talked about quality controls, reallocating R&D dollars to help accelerate growth. Can you maybe speak to -- I mean, I think you've talked about this also in the past more broadly about just doing this across Bio-Rad. But can you just kind of explain maybe how Bio-Rad maybe used to operate and how this is different areas where we could expect to see investment like quality controls and other things that you're doing internally to help accelerate growth across the portfolio?

Yes. I mean, I think R&D vitality is really important. As we've talked about explicitly. We spend a decent percentage of our revenue in R&D investment. We haven't had the level of return that we desire from a historical standpoint. We've made significant changes in terms of life cycle management, product portfolio analysis and R&D deployment in terms of prioritizing the dollars we spend in an effective way, which drives product vitality. And think about that is how does that contribute to consistent top line revenue growth, right? And that is a central element of our overall value creation -- long-term value creation thesis, if you will. And so as we think about -- you gave the example of quality controls as an example, we've shifted dollars from other areas where we've deprioritized or not spent any longer and move that money into quality controls because we do have a right to win there. And we believe longer term, that can help support stronger end market growth and consistent top line growth. Another example is we've completed an acquisition of Stella last year, which is a digital PCR instruments company. That got concluded in -- at the end of June of last year '25. One of the things with Stella, they didn't have as broad an assay library as we have within Bio-Rad. We've got over 400,000 assays for to support our digital PCR instruments. It's the broadest library of anyone in the marketplace. But the value proposition of the Stella instruments would be enhanced by having our assay portfolio, be able to support those instruments, the QX-700 instruments. And so one of the things we did is we moved R&D dollars towards that migration of the assays onto the Stella platform. We originally wanted to try and get that complete by the end of '26. But as we looked at the market opportunities, and we talked about our instrument growth on a year-over-year basis. Part of that is because we were able to report 99% of the assays over by the end of Q1 of this year, right? And so well ahead of schedule. And so this is a way that we're reprioritizing R&D dollars, but also then measuring outcomes towards results that are going to show up in our numbers. And so these are just a couple of examples. And as we go through our portfolio evaluation, we're looking at it through that lens of where is it going to drive the greatest product vitality and return and how do we help support top line growth and margin expansion over time.

Great. Speaking of margin expansion, you guys have -- you announced a restructuring program, $30 million to $35 million of savings over 18 months. You -- I think you've talked about getting back to mid-teens. And I guess, maybe talk about the path from here to there. And then any reason -- like where do you see the biggest areas for cost and efficiency opportunities? And then longer term, I mean, I think mid-teens is still kind of below the peer set. Is there any reason why this business can't do 20% plus longer term?

Yes. I appreciate the question. And margin expansion is a conversation point that we get on a consistent basis, not surprisingly, right? And when we look at Bio-Rad's historical performance, it hasn't approached that mid-teens level. And so -- but the mid-teens is not the destination. It's a point on the journey. And as you pointed out, Evan, when we look at the broader opportunity, we think getting to that 20% operating margin on a long-term basis is what we need to drive towards. And the mid-teens number is more of an intermediate kind of stop along the way. Now to your question of, well, how do you get there? It's multifaceted. Number one, when we look at our historical top line performance, we've been somewhere around, let's call it, 1.5% to 2% annual growth rate. How do we get that to be at a higher number? How do we get that towards market growth rates? We can have a discussion, I'm sure all day long. -- about what's market growth, but somewhere between 2% to 4% or someone wants to pick 3% to 5%, great. Whatever that is, how do we get consistently into that realm. That is something we've not done and how do we do that organically, obviously, right, to help support that margin expansion. That's one aspect of it. And within there, then you've got price opportunities and these sort of things. When we look at COGS, it's another area of opportunity for us. We've got a mix of diagnostics. Diagnostics is about 61% of our revenue, 39% is tools. So that needs to be contemplated in terms of what gross margin targets can be -- can look like. But irrespective of what we say that is, there's opportunity in terms of both rationalization of our footprint and how do we get the greatest return for the capacity we have in place. Logistics improvements, procurement leverage are all areas of opportunity for us. And then, of course, how we operate within the factory as we continue to deploy lean methodology within our factories and how does that drive efficiency. So all of that from a COGS standpoint gives us gross margin expansion opportunities beyond where we are today. Then when you think about the OpEx area and rationalization of that, that has further opportunity. We've done some recent restructurings, one in February of '25 and then another one that we just announced here in Q2 of '26. Those have been focused on various functional areas. As an example, in the '25 restructuring, there was quite a bit around R&D rationalization areas like finance, et cetera. And as we think about this most recent restructuring, there is an area of focus around some distribution center rationalization, commercial rationalization and then areas like IT. And so we're being systematic in terms of how we go through each of these areas and thinking about it in supporting improved areas such that we can drive towards that mid-teens operating margin. All of these areas are going to contribute as we move forward.

Great. Sartorius stake comes up a lot. Maybe I read into it a little bit maybe too much, but it did sound like, I mean, you said monetizable at the right time and price. Seemed like a subtle change versus prior messaging, maybe not. But maybe just generally talk about how the Board's view on this has evolved. And maybe like you've talked about how there are ways to prevent tax or manage the tax leakage. Like what kind of structures could be put in place to maximize the value here?

Yes. Regarding Sartorius, we've tried to be much more articulate about it over the course of the last couple of years. Very specifically, I think from a historical standpoint, some of what we've said is, it's strategic, it'd be interesting to acquire it, et cetera. Well, the bottom line is we can't afford Sartorius. So let's take the acquiring Sartorius off the table, which leads us to -- if you can't acquire it, it is a valuable asset. We've been lucky because it's been a tremendous investment. It's continued to strengthen and has the opportunity to grow in value over time from where it is today. And with all that said, we've got enough from a focus from a Bio-Rad standpoint, on our plate in terms of value creation of just making improvements in Bio-Rad for all the things we just talked about. And so in the meantime, allows Sartorius to potentially grow in value as they execute their strategy and becomes a greater assets or more valuable asset from an optionality standpoint, if there was a strategic purpose that presented itself, whereby we want to utilize that stake in some way from a monetization standpoint. In terms of the tax efficiency of that, I'll -- from a cash flow standpoint, it's going to be dependent on the transaction that we might use if we were to use that Sartorius stake. And so I'm not sure that there's much more to say. But other than to reinforce, we're going to seek to be as tax efficient as possible in the event that we were to utilize that Sartorius stake. And so that would be a focus. From a P&L perspective, we've got a deferred tax liability where we accrued to the statutory rate of low 22%, 21%. And that sits on our balance sheet, and we continue to mark-to-market that on a quarter-to-quarter basis. But we'll seek to be as tax efficient as possible in the event that there's a case that's brought forward to support.

Right. I guess, Elliott, you guys -- you talked about it on the call. I mean it sounds like you actually have received them pretty well. I mean you've been very receptive to them. But maybe discuss how has those discussions been? And in terms of what's come out of those discussions, what have you guys agreed are the highest priority value-creation opportunities that you think that need to be addressed?

Yes. I mean one of the things, and Norman commented on our last earnings call very explicitly within his closing remarks, One, we've been engaged with [indiscernible], we've had conversations, just like we have with all of our investors. And I think it's important to reiterate, they're an investor. And at the end of the day, as we've helped talk to all of our investors about the initiatives we have, and this work has started. I've been here for a little bit more than 2 years. This work started soon after I got here in terms of how we need to drive improvement, where we would drive. And it's not just me. It's -- we've got a new executive team along with Norman that is focused on these improvements. And so really, as we've done with all investors, we've sat down and helped people understand here are the things we're trying to do, and here's the focus that we have on a long-term basis. I think that has created a strong alignment overall, not just with Elliott, but investors in general because -- and at the end of the day, we believe all of us collectively that, that's going to result in strong shareholder value creation. And that is a central focus for us as a company through that top line growth and margin expansion and cash flow improvement.

Great. I've got about 2 minutes here. Maybe 1 just on -- you just mentioned the C-suite, a lot of new faces. CEO succession comes up a lot. I think that also was brought up on the last call. Talk about where that kind of stands potential for maybe an expansion of the Board or maybe some changes there, if that's viewed as necessary?

Yes. So on CEO succession, I mean, we talked about actually both those topics on the last earnings call. One was from a CEO succession standpoint. Norman was explicit. It's a Board decision in terms of CEO succession and it's a Board process that's driven. And we're going to evaluate internal and external candidates as part of that succession process. And what's important to reinforce there is the skill set of that CEO has to support the ability to execute someone of Bio-Rad's mid-cap public company, global tools and diagnostics market capabilities. It's got to be a CEO that can execute in that environment and has the experience to actually help drive the execution of our strategy towards that shareholder value creation that we talked about. And so that is a focus. From a Board refresh standpoint, the Board continuously evaluate skill sets around the table and is an important process, not just for any public company. and Bio-Rad is no different in that way. As we think about Board refresh, some of it may be retirement, some of it is simply added capabilities. That we might seek to put in addition to our current slate of Board members. And so that's an ongoing process that over time will help drive that refresh or additional Board constituency.

Excellent. I mean we've got 5 seconds left. So I think we'll just leave it there.

Very good. Thanks, Evan. Appreciate it.

All right.