BIO-RAD LABORATORIES, INC. Q2 FY2024 earnings call

• Overall, despite a challenging market, the quarter was solid with revenue in line with expectations and margins ahead of expectations due to product mix, productivity gains, and cost management.
• Progress in establishing new leadership team, including new CFO, heads of life science and clinical diagnostics. Search for new COO ongoing.
• Continued corporate transformation in supply chain and core process improvements contributing to margin expansion.
• Share repurchases: $100 million in Q2 and $96 million in July, with Board authorizing an additional $500 million.
• Clinical Diagnostics Group showed steady growth, while Life Science Group sales declined due to weak biotech/biopharma and China markets, but sequential improvement was seen excluding process chromatography.
• Launched new life science platforms, and ddPCR franchise had softness but reagents and consumables grew, with interest in new assay kits.

For the second quarter of 2024, net sales were $638 million, a 6.3% decline from $681 million in Q2 2023. The Life Science Group had sales of $251 million in Q2 2024, a 16.5% decrease from $300 million in Q2 2023. Excluding process chromatography sales, core Life Science Group revenue decreased 11.6% on a currency-neutral basis. The Clinical Diagnostics Group had sales of $388 million in Q2 2024, a 2.1% increase from $380 million in Q2 2023. On a currency-neutral basis, the Clinical Diagnostics Group grew 3.2%.

• Revised full-year 2024 currency-neutral revenue decline: 2.5%-4% vs prior 1%-2.5%.
• Life Science Group expected 10%-12% currency-neutral revenue decline; excluding process chromatography, full-year decline ~4%.
• Clinical Diagnostics Group guided currency-neutral revenue growth 3%-3.5%.
• Full-year non-GAAP gross margin projected 54.5%-55%, operating margin 12%-13%, adjusted EBITDA margin 18%-19%.
• Anticipated onetime in-process R&D charge of approximately $30 million likely in Q3 or end of 2024.

• Challenging market environment with biotech/biopharma spending constraints globally.
• Softness in Life Science market in China and other regions.
• Inventory levels which are considered bloated and need improvement for better cash flow.
• Competitive landscape affecting performance relative to peers.

Q: Maybe to start on the margin side. Obviously, a pretty nice performance in 2Q, but then, Roop, you just touched on to the cut for the year. Can you just talk about, I guess, what drove the strength in 2Q? And then, obviously, again, just that second half expectation margin down quite a bit there?

A: Yes, certainly, Patrick, good to talk to you. So first of all, maybe just to start, I think just to remember, we are taking the overall gross margin up from a guide -- from where we were on the guide perspective based on the performance. And so even in the second half of the year, we expect stronger gross margin than what we had originally guided. Q2 is kind of strength in the gross margin, specifically is associated with mix. But the other part of it is really sustained improvements based on our cost initiatives and efficiency improvements and things like logistics costs that we've been very proactively managing. So those are the things that really helped Q2. And as we looked at these initiatives, the magnitude and timing can be a bit variable, and so we saw it flow through in the second quarter. We do expect that to sustain into the second half of the year and beyond. With that said, as we look at kind of the revenue and what we expect to flow through our factories, we anticipate more under absorption in the factories. And so we've been a bit conservative in giving kind of what that margin outlook is in the second half, while still taking up the overall range of the margin for the year.

Q: Hey guys. Thank you for taking the questions. Maybe to start on the margin side. Obviously, a pretty nice performance in 2Q, but then, Roop, you just touched on to the cut for the year. Can you just talk about, I guess, what drove the strength in 2Q? And then, obviously, again, just that second half expectation margin down quite a bit there?

A: Yes, certainly, Patrick, good to talk to you. So first of all, maybe just to start, I think just to remember, we are taking the overall gross margin up from a guide -- from where we were on the guide perspective based on the performance. And so even in the second half of the year, we expect stronger gross margin than what we had originally guided. Q2 is kind of strength in the gross margin, specifically is associated with mix. But the other part of it is really sustained improvements based on our cost initiatives and efficiency improvements and things like logistics costs that we've been very proactively managing. So those are the things that really helped Q2. And as we looked at these initiatives, the magnitude and timing can be a bit variable, and so we saw it flow through in the second quarter. We do expect that to sustain into the second half of the year and beyond. With that said, as we look at kind of the revenue and what we expect to flow through our factories, we anticipate more under absorption in the factories. And so we've been a bit conservative in giving kind of what that margin outlook is in the second half, while still taking up the overall range of the margin for the year.

Q: Hey, good afternoon. Maybe you look at Life Sciences and backing out chrome, you're still down kind of 4% in the year. Most of your peers are flat. Can you maybe just talk a little bit about why that might be the case?

A: Yes. I think we've got an element of mix that's playing into our disadvantage here, Tycho, amongst others and with the biopharma and digital PCR component. Maybe also a little bit with our qPCR business, since it was the beneficiary of a massive uplift in the COVID period. And we're still seeing some relative softness on recovery in qPCR instrumentation. So I think we've got that mix that's a little bit against us relative to others. And the other -- depending on other folks on the reagent instrumentation mix where reagents are holding up better this year overall. And I'd say the last piece that I would call out, which we should not forget is Q2 was a pretty tough compare for us. We had the onetime license fee. We actually -- despite the market we're starting to pull back really by the end of Q1 last year, we actually were doing a fair bit of supply chain recovery during Q2. So I'll compare was a bit elevated to pass other focus as well.

Q: Thank you. Good afternoon. At a high level, with the current guidance, do you think you've framed the operating environment appropriately? Or are there any areas where you're trying to be conservative or any further areas where you're speculating on improvement that you don't yet have visibility on?

A: Hey, Dan, this is Roop. Maybe I'll start. In terms of spectrum, I think we framed it well in terms of what we're seeing and across the different areas. Obviously, from a Life Science Group, the process chrome is the area that, as Andy spoke up, we're seeing the greatest headwind, if you will. And that really -- our position with these customers is very strong in terms of the end therapeutics that they support. Those are market leading therapeutics. And so we feel very good about that and it can't be displaced. It's just a matter of that destocking that's occurring there. As we just talked about DD PCR, we're seeing positive signals and expect that to grow. Clinical Diagnostics has been positive throughout the year, and we expect it to have some normalized growth rate as we continue. The margin is the one area that I framed, which is maybe a little bit more conservative, but part of this is mix being a contributor to our positivity so far. It's hard to predict mix exactly. And so we're mindful of that. And then as I mentioned, the under-absorption, beyond that, and I think we haven't touched on China and maybe in the questions. But China is the one variable that's an open question. The new stimulus that's been introduced. It's interesting, but I'm not sure it will have that much of an impact. So we're again mindful of that. So I think we're trying to be very prudent in our view of what to layout for folks to expect in the second half, recognizing the markets are still dynamic and especially in a couple of the areas that we're playing in. And China is probably the one that's most variable for maybe not just us, but others as well.

Q: Hey, good afternoon. Maybe you look at Life Sciences and backing out chrome, you're still down kind of 4% in the year. Most of your peers are flat. Can you maybe just talk a little bit about why that might be the case?

A: Yes. I think we've got an element of mix that's playing into our disadvantage here, Tycho, amongst others and with the biopharma and digital PCR component. Maybe also a little bit with our qPCR business, since it was the beneficiary of a massive uplift in the COVID period. And we're still seeing some relative softness on recovery in qPCR instrumentation. So I think we've got that mix that's a little bit against us relative to others. And the other -- depending on other folks on the reagent instrumentation mix where reagents are holding up better this year overall. And I'd say the last piece that I would call out, which we should not forget is Q2 was a pretty tough compare for us. We had the onetime license fee. We actually -- despite the market we're starting to pull back really by the end of Q1 last year, we actually were doing a fair bit of supply chain recovery during Q2. So I'll compare was a bit elevated to pass other focus as well.

Q: Thank you. Good afternoon. On the relative inventory levels, I just kind of do some very basic benchmarking. It does look a bit bloated. Like if I look at inventory as a percentage of sales, maybe is one metric back in 2019 before the pandemic, it was around 24%. Today kind of annualized at over 30%. So maybe just it would be great to hear your thoughts like ability to start drawing this down to generate some cash? Are there any hurdles to doing that?

A: Yes. Great point on that. You're spot on bloated. We haven't necessarily used that word, but we do think it's [indiscernible]. But I guess you pick your word. With all that said, we've got inventory. And some of it, quite honestly, has been purposeful because of the market, right? It's -- we needed to procure strategic materials to ensure continuity of supply. With that said, if I separate that out, we've got focused initiatives in terms of inventory reduction. Part of it is just operationally how we manage the sales and operations kind of alignment and there's improvements that are being made there. And we expect over time that that inventory will come down. And I'll say it more from an inventory turn standpoint, our inventory turns will improve, obviously, with revenue growth, you may see additional inventory on the balance sheet. But from an overall turns perspective, where we are today is unacceptable, and we're focused on improving that turns, which obviously will then drive stronger operating and free cash flow.