Illumina, Inc. (ILMN) Earnings Call Transcript & Summary

Good morning. Thanks for joining us at Illumina's Second Annual Virtual ESG Investor Event. I am Sallilyn Schwartz, Vice President of Investor Relations. Before we get started, I need to provide a few cautionary notes on the slide displayed are important disclaimers for our business. Today, we may share information that could be considered forward-looking statements. You should refer to our SEC filings for a discussion of the risks and uncertainties that could cause results to differ materially from our current expectations. It is our intent that all forward-looking statements regarding our financial results and commercial activity made during today's discussion will be protected under the Private Securities Litigation Reform Act of 1995. The disclaimers on this slide also includes a statement reflecting the current full separate requirements related to our GRAIL business. . As a reminder, the European Commission has adopted an order requiring Illumina and GRAIL to be held and operated as distinct and separate entities during the pendency of legal matters related to the acquisition. We encourage you to review these disclaimers, and they will be included on the presentation on our website. Over the next hour, Francis deSouza, CEO; John Frank, Chief Public Affairs Officer; Aimee Hoyt, Chief People Officer; and Sharon Vidal, Head of ESG, will provide an overview of Illumina's ESG strategy and join us in a panel discussion. We will then open it up for Q&A. If you didn't submit a question in advance, feel free to drop 1 in the chat at any time during the event. I will now invite Sharon Vidal, our Head of ESG, to walk us through some key messages you can expect from today.

Thank you, Sally. To get us grounded, here are a few key themes we aim to bring to life today. First, we continue to respond to growing stakeholder expectations for ESG leadership with an emphasis on transparency, climate action and progressive human capital programs. Second, our ESG strategy centers on 5 pillars: access to genomics, empowering our communities, integrating environmental sustainability, nurturing our people and operating responsibly. Third, we are on track to meet our 2030 targets as we embed ESG in our strategic plan and annual corporate goals to create long-term shareholder value. Fourth, our annual CSR reporting is designed to proactively communicate our ESG programs, targets and progress. We are recognized as an industry leader for both our ESG disclosures and program. And lastly, we've made great progress since our inaugural ESG investor event last November. We are among the first companies in the world to achieve validated net zero emission targets approved by the Science Based Target initiative. We also recently launched our most sustainable sequencer yet, the NovaSeq X. So let's dive in. I am honored to introduce Francis deSouza, Illumina's CEO, and recently recognized as a most responsible CEO for leadership in ESG by 3BL at the brand's taking action form. Francis?

Thank you, Sharon. Hello, and thank you all for joining us today. At Illumina, our mission is to improve human health by unlocking the power of the genome. Making genomics useful and accessible for all is our purpose and our promise to our customers who work toward new discoveries every day and to the lives they touch. Our mission guides everything we do, from our business decisions to our ESG efforts. We seek to deepen our impact on human health by championing patients, our people, our communities and the planet. Next April, Illumina is going to celebrate our 25th anniversary. For those of you that are new to our story, let me start with a little bit about who we are. We innovate at the intersection of biology, technology and health. And we're reimagining what's possible in the genome era. Our sequencers enable researchers in academic, government and commercial settings to comprehensively understand the genome, and how it translates into health and disease. Our technologies empower health care providers to leverage those genomic insights in clinical care for cancer rare genetic and infectious disease, providing patients with diagnoses and groundbreaking therapies. Our technologies are also increasingly offering a critical tool for climate action, agrigenomics and research in biodiversity create an opportunity for Illumina to be an impactful part of solutions for a more sustainable future. Environmental, social and governance or ESG is a construct that is central to the way we operate. Environmental and social responsibility is core to Illumina's business. We at Illumina will keep innovating and improving health. And by incorporating ESG into our business, we will solidify our path to deliver long-term performance and value creation. To support our long-term value creation mindset and ESG oversight, we have an active, independent and diverse Board. This strong governance supports our strategic management of material ESG issues. To operationalize our ESG strategy and support the integration of ESG themes into our business, we've also established an ESG Executive Steering Committee. The Board and our executive leadership have created an ESG governance structure that facilitates accountability, transparency and continuous improvement. They meet quarterly, and the group is now chaired by our new Chief Public Affairs Officer, John Frank. Currently, select ESG targets are included in annual corporate goals and influence executive compensation through the management performance scorecard. Our strategy and our reporting approach align to international frameworks and reflect our commitment to transparency and accountability. We are signatories to the UN Global Compact, the UN Women Empowerment principles and the business ambition for 1.5 degrees. Our ESG focus areas linked to the United Nations Sustainable Development Goals, or SDGs. We support all 17 goals, and have identified 8 that we can most uniquely influence, and are the most material to Illumina. The concepts of health, education, reduced inequalities and innovation have always been core to who we are as a company. As we've evolved our program our investor community has provided feedback. Our first report use the Global Reporting Initiative, or GRI, framework. You ask for us to align with additional well-recognized frame including SASB, TCFD, and Net Zero, and we listened. You asked for expanded diversity in our demographic data, and we listened. With the launch of our last ESG report we also built an ESG reporting hub, linked from our Investor Relations page. And this year, we continued our stakeholder connection points and performed an update on our materiality assessment. After 3 years of ESG reporting, we revisited our materiality assessment to validate the most material ESG issues. The results indicated that we remain attuned to where we can make the most impact for our business and stakeholders. Our current CSR focus areas remain relevant, and still reflective of the most material topics for Illumina and confirm appropriate prioritization of existing efforts. All these inputs led to the creation and confirmation of our ESG priorities to create a unique and purpose-driven impact, accelerate access to genomics, empower our communities, integrate environmental sustainability, nurture our people, operate responsibly. We will explore each of these in closer detail. Accelerating access to genomics is our signature pillar and provides the most unique Illumina lens. We believe genomics should be available to the many, not just the rich or lucky. We're driving innovation and affordability to democratize genomics and increase the diversity of genomics data. Today, it's glaringly imbalanced. Genomic data is the blueprint for everything from identifying new diseases to developing precision drugs. The data sets must be equitable. Currently, 87% of individuals included in genomic studies of disease risk are of European ancestry, only 2% of genomic data is from African individuals. But 17% of the world's population is African. We will continue to develop technology that provides unprecedented access to the genome with more data, processing power, more efficiency and greater affordability. We will also partner to remove barriers of access, educate the health care community, seek expanded reimbursement coverage and invest in genomic start-ups to broaden the ecosystem. On the point of technology, at our recent Illumina Genomics Forum, we introduced our most powerful and most sustainable sequencer ever, the NovaSeq X Series. Powered by the new exleap SBS chemistry, NovaSeq X provides massive improvements in all key aspects throughput, scale, accuracy, simplicity, efficiency, cost and we do it more sustainably than ever. We will dive into the sustainability in a few minutes. But since 2001, the cost of DNA sequencing has dropped from a $100 million per human genome to now capable of achieving $200 per genome on the NovaSeq X. This reduced cost is key to providing more access. Part of our employee value proposition is our strong commitment to giving back to our communities with programs like skills-based volunteering, paid volunteer time off, volunteer rewards and donation matches, we make it easy for employees to get involved. Give back and connect with our mission and their own core values. To create the diverse STEM workforce of the future, we prioritize programs that create equitable access to STEM education and genomic literacy. Talent is everywhere, but opportunity is not. We create intersections between our internal diversity work and our community work. We've also made significant progress in sustainability since our last ESG investor event. Last year, we shared our 2030 commitments. This year, we're sharing commitments in action with increased renewable electricity, net-zero verification, sustainable products and sustainability community investments. At the end of 2021, 59% of our electricity was from renewables, and we are on track to exceed that this year. Last year, we shifted our San Diego facilities to renewable electricity. And this year, we successfully converted our Madison site. And we have set bold ambitious targets on climate action. Since we last met, we became one of the first companies in the world and the first genomics company to obtain approval and independent validation on our net zero targets. We reported on emissions in our value chain or Scope 3 for the first time last year, and found 87% of our emission inventory sitting in our value chain. We knew that we would have to go beyond our facility walls to make a meaningful impact. And with the integration of design for environment principles, we are addressing both the products currently on the market, and those in development. NovaSeq X is the first of these major leaps forward. It is not an incremental improvement in packaging or waste or weight, it's a transformational innovation. We intentionally focused on improving the sustainability of our platform, and we reinvented everything. Every single piece of technology, from chemistry to engineering. We heard the feedback from our customers on packaging waste, and we took action. We saw the data on the impact of cold chain on emissions across our value chain, and we took action. Customers came to us in tears when they learned about these improvements and the impact this will have. We invested more money and more scientific firepower into the development of exleap SBS than had ever been done before in our industry. We created new reagents to enable ambient shipping, including our first lyophilized or freeze-dried reagents. Exleap SBS is the first SBS chemistry that can be shipped over a wide range of temperatures, minus 20 degrees centigrade to 50 degrees centigrade. No dry ice shipments are required. Our cartridges have more recyclable plastics. And the buffer cartridge is made of bioplastics, a biopolymer from sugarcane. The result is ambient ship, no dry ice and a 90% reduction in packaging weight and waste. These enhancements to make our products more sustainable are important, not only to our customers but to the whole genomics ecosystem and to the planet. In addition to creating more sustainable products, our technologies are being leveraged for sustainability application for a healthier planet. Through our Illumina agricultural greater good grant program, the most recent recipient is applying genomics to Yam's. Yam's feed over 300 million people worldwide. Pioneering genomics researchers like Dr. Anjana Bhattacharyya are working to protect their resilience. Dr. Bhattacharrya work will help millions of farmers produce more heat and disease-resistant varieties. These technologies have the potential end food and security for hundreds of millions more people worldwide. Similarly, our technology is being applied in research for conservation of biodiversity and natural capital. Our partnership with the Minderoo Foundation in Australia will leverage the power of genomics to accelerate scientific understanding of marine ecosystems and help conserve marine biodiversity. Only 1% of the known species of marine vertebrate genomes have ever been sequenced. The goal is to build a reference library of fish genomes. And to support this effort, we put a NextSeq on a research vote. Our employees are as passionate about how we do the work as they are about what we do. We are deeply committed to creating a workplace centered on innovation and care. We value the unique talents of the individual and bring forward the best of the collective, to deliver on Illumina's mission at global scale. By focusing on inclusion, investing in our people and enabling a culture of care, we magnify the value of that collaboration, and build community. Last year, our U.S. workforce included 50% minority representation. And we have seen a 6% increase in minority representation in the Director and above executive leadership roles over the last 3 years. Our DEI program is anchored in the philosophy of practice. We invite everyone to start where they are, and continue to work appreciating that there's always more to learn. Investing and developing our people is the catalyst for how we achieve success as individuals, as teams and as an organization. Regardless of work arrangements or location, opportunities exist for continuous learning and growth. Every day, our technology is being used to improve human health, enabling advancements that were not possible just a few years ago. It seems only fitting that our employees access these new technologies to help better inform in their healthcare decisions like workplace genomics, reproductive health programs and cancer testing. We create a culture of care, offering a world-class portfolio of benefits and wellness programs. And we extend these benefits to employees, spouses, domestic partners and dependents. The macro labor trends require us to continue to evolve and thrive. We will continue to attract and retain employees with clear connections to our purpose-driven strategy, diversity and inclusion is a brand promise and embedded across all functions of the business. Meaningful, inclusive and equitable benefits. The last ESG focus area is operate responsibly. Doing the right thing is core to who we are. Our role as a genomics pioneer brings the responsibility to enable innovation for good, ensuring that the technology we create and the data we collect are used safely, ethically and responsibly. As our business and genomics continue to evolve, we strive to set the highest standards for ethical use of our technology as well as the security and privacy of data. We are honored to have our work recognized, and we are committed to continuing to push our ESG efforts forward. We're dedicated to making a positive impact on humanity, not just through our technology and solutions, but also through our actions. As we look to the future, we view our CSR program through the lens of continuous improvement and innovation. We will continue to strive to be the best employer, the best environmental steward and the best corporate citizens we can possibly be. I will now invite Sally to kick off our panel discussion.

Thank you for the overview, Francis. I would now like to invite Aimee Hoyt, our Chief People Officer; John Frank, our Chief Public Affairs Officer; and Sharon Vidal, our Head of ESG, to join. We will get started with a few questions that came in through the registration platform in advance of today's event. If you didn't submit a question in advance, feel free to drop your questions in the chat, and we will save some time at the end. Welcome, panel. I'd like to direct this first question to John. John, we received a question about the change in reporting structure for the ESG function. Could you tell us why we moved the ESG function from residing in finance and reporting to the CFO, deciding in your newly developed public affairs and reporting to you as the Chief Public Affairs Officer?

At Illumina, this year, we created a new department focused on public affairs. It was a natural fit to bring together our teams working on government affairs, corporate social responsibility, privacy, ethics and patient advocacy. After years of my career at Microsoft, most recently starting the UN affairs group there. I greatly appreciate the intersection of government affairs, U.N. sustainable development goals and ESG and create good synergies together. At -- our CSR projects will continue to work closely with finance investors and risk management, and all those relationships remain strong, and our functions will continue to work very closely together. And we expect that collaboration to only increase as the various mandatory recording proposals out there advance.

Thanks, John. Sharon, Francis talked about the science-based targets verifications. Why did Illumina choose to pursue this approach? .

Sure. Well, not all net-zero commitments are the same. And as a science-based company, we wanted to ground our environmental targets in a Science Based framework. And we wanted to have a plan that would take us from commitment into measurable actions and support making changes in how we do business on an enterprise level. We chose to create a climate transition plan that was time bound with quantitative targets based on the best climate science recommendations available. The other reason, and almost as important as the actual plan was, we were equally invested in the commitment to be transparent and to signal to all our stakeholders where we were starting, where we plan to go and then how we thought we would get there. The Science Based Target initiative, or SBTI, is a partnership between CDP the UN Global Compact, the World Resources Institute and the Worldwide Fund for nature. It is the credible source for net-zero equipments and emission reductions in the science is effort. We saw our external approval of climate transition plans as a way that demonstrate to our external stakeholders that we had a credible and accountable set of targets to help guide our company towards that 1.5-degree scenario. .

Francis, you covered a little bit about the promise of genomics related to climate change. I remember that you mentioned something about paddle during your keynote at the Illumina genomics forum. Could you share an example about how genomics could have a direct impact on reducing emissions?

Absolutely. Genomics can have a direct impact on reducing emissions. A study demonstrated that a 5% projected reduction in methane emissions using genomic-guided selection in capital. CRISPR gene editing technology is already starting to bolster the natural ability of plants and soil microbes to both capture and store atmospheric carbon. Carbon dioxide [indiscernible] will play an increasingly important role in reducing the global impact from climate change and potentially reversing its course. So genomics plays an important role in making all of this happen.

That's amazing. Amy, let's shift to another topic, human capital. We received multiple questions about macro labor trends that have been impacting organizations. Can you share what Illumina's experience has been?

Yes. Thanks, Sally. There is no doubt that there is a tight labor supply and more competition than ever. This is especially true in the tech talent, notably in data science and software -- The experiences from the pandemic have heightened employee expectations on agency, voice, flexibility and growth opportunities. We're also seeing the labor markets reshaping with both hybrid work and remote work, creating opportunities for employees to seek higher mobility without leaving their geographic location. Beyond flexible work, employees are expecting their experience to be tailored to their needs, whether that is work-life balance, physical, mental or care for their families. There is no longer 1 singular way of working with the totality of the touch points that we now call a workforce. People want to have an impact on the work that they do. in the groups that they serve. To address these trends, we have focused on our efforts in recruiting, retention and highlighting our approach to flexible work, inclusive benefits, wellness, ESG efforts as well as developing a robust intern program and early career pipeline. Development and investment in our people is an everyday activity. It is employee-led, guided by their manager and enabled by enterprise collaboration tools.

Sharon, I saw that you wanted to jump in on that topic. Did you have something that you wanted to add?

Yes. I think that Amy touched on a great theme that was seen related to the job speakers and expectations of working where they can have an impact. I think one of the most interesting trends that we saw reported this year was the Edelman Trust Barometer, And that indicated trust has shifted to employers ahead of what's historically been trust placed in NGOs, governments or media. The role of a corporation is changing in how they're engaging in social impact and corporate citizenship. And it speaks to the growing expectations, and similar reports that have come from Deloitte and others that millennials and Gen Z job seekers, they are making job choices to join purpose-driven. And I think this is an area that Illumina can shine, and it's a great business case for having a strong ESG program.

Speaking of trends, Francis, we have a question as it pertains to access and the role of genomics in surveillance, pandemic preparedness and your hopes on preventing future outbreaks from the coming pandemic.

Yes, that's an important and very timely topic. We can prevent the next outbreak from becoming another global pandemic. If, for example, we had stopped the COVID pandemic in the first 100 days, we could have saved over 98% of the lives that were lost. We have it within our grasp. There'll always be new emerging pathogens, but we'll be able to come out with vaccines and therapies earlier. And what really matters is our ability to identify and control the spread of pathogens, effective global surveillance backed by collaboration and adoption can create a world that never sees another pandemic.

John, as a genomics' pioneer, it brings with it the responsibility to enable innovation for good. ensuring that we have technology we create and the data that we're collecting are used safely and ethically and responsibly. Could you share a little bit about the ethical use of genomics and the controls that we have in place?

Certainly, we at Illumina are steadfast in our commitment that genomic technologies should only be used to benefit humanity. And we will only work with partners that further this mission. Our human rights policies and our customer agreements outline our expectations regarding the ethical use of our technology and the steps we can take in the event of a possible violation. Illumina's core customer base is comprised of research, academic and healthcare institutions. We have oversight and accountability processes to monitor and enforce these commitments, with the aim to prevent sales that could result in the misuse or human rights concerns before they have. We're committed to investigating reports of potential product misuse, and we will not hesitate to see sales to business partners of an ethics or human rights concerns confirmed. We care deeply and these commitments are very important to us.

Thank you. Sharon, of all the sustainability initiatives this past year, which one was the standout for you?

Well, sugarcane plastic on our buffer cartridge is pretty cool, but I would definitely say ambient ship, not only because of the emission reduction and the packaging reductions, but because of the direct impact this will have on Eliminating the need for dry ice for that last mile shipment, we'll remove barriers of access to some regions of the world. At our recent customer event, I had a scientist from Africa share that ambient ship is a game-changer for their lab. And another customer from a smaller lab in Israel said that the combination of the lower per genome cost, and the money that they're going to save in import fees of dry ice is going to enable them to purchase their own sequencer rather than to outsource.

John, back to you. We have talked a lot about the E and the S. But let's shift to the G, for governance. We've received a question asking if we've considered adding ESG to any of the Board committees in addition to the [full board].

I think it's clear that's emerging consensus that Boards of Directors of a public company should be taking a greater role in overseeing the company's ESG programs and disclosures. There does remain variations on how boards have chosen to approach their oversight. Currently, we have a full board oversight model with various themes under the ESG umbrella captured by different committees. So for example, Luna's Compensation Committee currently oversees and provides input to management on diversity and inclusion matters and the audit committee oversees cybersecurity but we are continuing to evaluate and discuss the opportunities for supplemental ESG oversight with a specific committee, and we'll move that forward very soon.

Aimee, we have time for one more question before to the live Q&A. Could you tell us about Illumina's employee resource groups, or ERGs, and the growth that we've seen as an element of the diversity, equity and inclusion program here?

Yes. Thanks, Sally. ERGs are incredibly exciting, not only in the growth in the number of participants, but also the expanded global reach. The ERG philosophy is focused on educating our teams about the value of difference, the power of diversity and to drive innovative problem solving for our business. Each ERG is focused on professional development and education. They take on annual business impact projects and social impact projects. This past year, we've seen some great outputs. Our B grade Black employee ERG, posted a strawberry DNA extraction workshop at underserved community in the elementary schools. In our iPride, ERG conducted a project, updating customer-facing databases to expand accepted pronouns. And our Shades DRG supported our diverse supplier team with data management. We are particularly excited about our ERG program because we see these as early career leaders as our future leaders of the company. So programs like this support our approach that learning and development can happen in all we do and take place in our daily work and is outside the traditional classroom model.

That's great. All right. Let's move to some of the additional questions that have come in during the event. Let's go to some additional questions that have come in during the event. Amy, I'm going to go back to you first. There are several pay transparency regulations that have been circulating in California, New York, Washington, even the EU, I believe, and they're addressing that pay transparency. What's Illumina's response to the recent legislation?