Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2018 Bio-Rad Laboratories, Inc. earnings conference call. [Operator instructions] I would now like to introduce your host for today’s conference, Mr. Ron Hutton, Vice President and Treasurer.

Thank you. Before we begin the call, I would like to caution everyone that we will be making forward-looking statements about management’s goals, plans and expectations, our future financial performance and other matters. Because our actual results may differ materially from our plans and expectations, you should not place undue reliance on these forward-looking statements, and I encourage you to review our filings with the SEC, where we discuss, in detail, our risk factors in our business. The company does not intend to update any forward-looking statements made during the call today. Our remarks today will also include references to non-GAAP income and non-GAAP diluted income per share, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release. With that, I’d like to turn the call over to Christine Tsingos, Executive Vice President and Chief Financial Officer.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Today, we will review the fourth quarter and full year financial results for 2018, as well as provide some insight into our thinking for 2019. With me today are Norman Schwartz, our CEO; Annette Tumolo, President of our Life Science Group; and John Hertia, President of our Clinical Diagnostics Group. Today, we will review our results on a GAAP basis and then provide some commentary and insight to our results on a non-GAAP basis. Let’s start with the top line. Net sales for the fourth quarter of 2018 were $617.5 million, and as expected, slightly lower versus the same period last year record sales of $621.3 million. On a currency-neutral basis, sales increased 1.9% and higher than our guidance. During the quarter, we experienced good demand across many of our key product lines with particular strength noted in the Americas and Asia Pacific. Life science sales in the fourth quarter were $239.6 million, a slight increase on a reported basis when compared to last year and growth of 2.3% on a currency-neutral basis. It is important to note that this increase was on top of the 12% currency-neutral growth in the year-ago period. Much of the growth in the fourth quarter of this year was driven by continued strong demand for our Cell Biology, Western Blot and Digital PCR products, as well as higher-than-market growth for gene expression and antibody products. This growth was somewhat offset by the tough compare and expected decrease in our process media product line, as well as the expected reduction of sales of RainDance products. The combined decline in sales of RainDance and process media products totaled more than $8 million in the fourth quarter. On a geographic basis, life science experienced strong currency-neutral…

Okay. Thank you, Christine. So, I thought I’d take a few minutes to give you a little bit of sense of where we are today. A little bit echoing what Christine has already mentioned, but first on our results. As most of you know, we laid out some midterm targets at our investor day at the end of 2017. If I think about 2018, this was the first year of the plan and it’s certainly clear we’re making progress. Not only were we able to increase the trajectory of our sales growth, but we’re able to begin a steady return to our historical profit margins. I think strong demand for our products, especially in life science, as Christine mentioned, was a key driver coupled with good disciplined expense control. When I look back at the year, and especially if I look back at, say, 2017. 2017, which was when we lamented SAP in Europe, it did bring with it some challenges, challenges with customers. I think in 2018, we manage to regain that customer confidence, which was so important for us. And I think this also helped the results, from a sales perspective, allowing us to really spend more time on offense versus defense. As a measure of the progress we’ve realized over the past year in Europe, our net promoter scores, a measurement of customer satisfaction, have rebounded dramatically. As Christine mentioned, over the last several months or last 12 months, we’ve also seen good progress on our longer-term goal to realize savings from a consolidated supply chain organization. The creation of a global procurement function to get a supply cost and also rationalized warehousing and distribution in Europe allow us to realize some near-term margin improvement. We do expect to continue to make progress in 2019 on our…

[Operator instructions] Our first question comes from Brandon Couillard with Jefferies. Your line is open.

Thanks, good afternoon. Norman, Christine, appreciate all the detail in your prepared comments. If you look at 2019, could you help us with some of the bridge components, the puts and takes around the margin expansion that you anticipate? You would observe quite a number of headwinds from mix and inventory charges through most of 2018. Are those certainly behind you now, would you expect those to carry over to some extent into the first half of the year? And did I hear you right and that you expect another 10 million plus of incremental savings from supply chain benefits in 2019?

So thanks for your question, Brandon. So, I’ll start with the latter. Yes, I think you did hear that right. And with each year, we start to get a cumulative impact of progress we’ve made on the logistics front in terms of these warehouses. But also, looking more efficiently in our shipping methods and things like that, we gain more leverage on our procurement side. And then over time, probably beyond the 2020-time frame, we’ll continue to look at our manufacturing footprint, and that could add to more savings there as well. And then to the other question, yes, I think some of the transition woes that have translated into cost for us during 2017 and certainly during 2018 as well, I believe those are mostly behind us now and don’t anticipate those following us into 2019, at least certainly not to the extent that we’ve been experiencing over the last 18-plus months. And finally, the – as we look to the margin expansion going forward, you asked about mix, that’s the one thing where you can’t really say it’s ahead of us or behind us. What happens with mix and pricing in any given quarter really is harder to predict in the short term and can be up or down in any particular quarter. Over the long term, we continue to launch new products, which help the margins. We continue to push for a higher consumable mix, which would help the margins. But I can’t really say oh, it’s something that’s behind us or in front of us. It’s just kind of the fact of doing business.

And this might be a question better for John Hertia, but could you just speak to your level of confidence that diagnostics can return to growth in EMEA in next year? And is that a function of demand, maybe some of the new products or actual pricing environment getting somewhat more favorable?

A combination of things. I think Christine mentioned some of the transition woes. I think diagnostics was particularly hit hard in 2017 and 2018 with some of the ERP transition, we do believe that’s behind us. There was some softness in the market and I think that’s been improving. And there was some lumpiness with distributors that I think are behind us too. I think that, in combination with, again, U.S. traction for the blood typing products has been incredibly strong. We got IH-24 FDA approved. We submitted in Q4 for IH-500 approval to the FDA and we’re anticipating that in 2019. I think a combination of those two bodes well for 2019.

A question for Annette on the ddPCR business. Could you quantify the size of the market opportunity for BCR-ABL tests? What are your next plans following that first FDA clearance? And now that you have the first FDA approval for the female indication, how quickly can you – do you think you can – we can see this technology kind of move into the solid tumor space?

Well, Brandon, I think you know, we’re focused on liquid biopsy. So, this is our first test and it’s really the first important step in building our oncology menu and also moving toward having a system that people can develop, lab-developed tests on as well. So as far as – there is a market uptake, so we don’t expect immediately really large results from the BCR-ABL test because it’s got to be validated in everybody’s labs. But we expect really a big follow-on for people adopting the platform putting their own content on it while we develop our own oncology menu.

And last one for Norman. I understand that the CFO search is a little bit earlier stage, but could you give us a little bit more specifics about exactly where you stand with the COO search? And when you might expect to have someone onboard that you could announce publicly?

Yes, we’ve identified several very good candidates, and we’re working very hard to get that filled as soon as we can.

Super. Thanks so much.

Our next question comes from Patrick Donnelly with Goldman Sachs. Your line is now open.

Great. Thanks, guys. Christine, maybe just on the gross margins, nice to see those bounce back. Now that we’re a couple of quarters removed from the initial region rental system placements that kind of diluted gross margins a bit. How much are using some of those higher-margin consumables start to flow through and positively impact margins? And then to the level you are able to break it out, how much of an inflection there are you calling for next year?

So just to clear, the inflection in that particular part of the gross margin?

Yes, just the consumable pull – yes, the consumable pull through on those?

Sure. So, I think as you are referring to some of the headwinds that we faced, particularly with bringing the blood Typing IH-1000 into the U.S, we have had higher placements than we originally anticipated. But it’s not like those placements happened several quarters ago and now it’s just all consumable. We continue to have really good placements of new instruments. And so, what will happen, Patrick, over time, all of those instruments will be producing a consumable stream and that’ll build to a sizable enough bullets of revenue, if you will, to absorb what is always kind of start-up cost when you’re placing new instruments. These costs are a little higher with bringing this to the U.S. and we’ve experienced with other products in other geographies. So, I think, for us, it’s really about – the next few quarters, I think, we’ll continue to feel a little bit of it. Although, with each passing quarter it becomes less of an impact. And that’s why we mentioned the margins kind of building toward the end of the year. In terms of the overall mix between instruments and consumables, we have a very high consumable mix today and we continue to try and drive that higher each year. But quarter-to-quarter, it’s always difficult to predict.

Okay, thanks. And then on the capital allocation side, very encouraging to see the repurchases get started in the quarter with the $50 million. How should we be thinking about the cadence of repurchase activity going forward? And then how are you guys balancing preference for that versus M&A, et cetera?

Sure. So, I think, given our balance sheet profile, our cash flow profile and our anticipated – and even increasing that further, we continue to believe that we have the capability to have capital allocation along multiple lines. Our number one preference continues to be acquisition, both on the tuck-in side and always looking for something more transformational. But with that being said, I think our capital capacity will allow us to continue the buyback program as well, while we are continuing to pursue acquisitions.

Okay. And then maybe just last one for me. It was nice to hear you guys reaffirm the 2020 EBITDA target, can you just talk through the confidence level hitting that number, now that 2018 is done, you guys showed nice progress, maybe came in a little lower than you were expecting when the guidance was initially provided? And then just the key levers over the two years to get there? Any change in your thoughts as to where the expansions coming from, gross margins versus OpEx as to when you initially gave it to now?

Yes. That’s a pretty good question. I think overall, the answer is probably not much change in our thoughts. It is not as accessible as maybe we thought it was initially, but still very doable. And when you think back to our investor day presentation, Patrick, you probably remember the chart when we outlined the $600 million – 600 basis point improvement, if you will, and about 150 of that was expected to come from the gross margin and another 75 to 100 down the R&D side and really the vast majority was in SG&A. And I think we’ll still kind of see that balance that in SG&A is where we can gain quite a bit of traction. And we continue to be focused on that. And that has proved very beneficial in 2018 while the gross margin came under pressure. But I still think we stand behind that 150-basis point opportunity in the gross margin as well.

Okay, very helpful. Thanks Christine, and congrats on the retirement.

Our next question comes from Dan Leonard with Deutsche Bank. Your line is open.

Thank you. So first a question on the tax rate. Christine, when do you think that you’ll be able to gain a more material reduction in your tax rate?

Yes, great question. I share a little of your frustration. We still anticipate the tax rate coming down over time to the mid-20s. And who knows where we might be able to take it longer term from there. In the short run, Dan, when you think about our profile in Europe, where we’ve had all of these challenges, both in terms of the additional expenses and other charges, the restructuring we’re doing, et cetera, all of that, obviously, has led to dampening the profitability in Europe and, therefore, we’re not gaining that benefit from our new European headquarter structures as we’d hoped. But I think that’s more situational than systemic. And maybe our benefit of moving the tax rate down to the mid-20s is delayed a little. But I think the opportunity for us still exist. And as we look to 27% to 28% for 2019, and we’ll continue to work to improve that, not just through the European profile, but also through other tax planning measures that we’re evaluating.

Okay, thank you. And then a couple of questions on diagnostics. First one, how are you thinking about the impact of reimbursement pressure on your customers in the U.S. market? Do you feel like you’ve got that factored into guidance for 2019?

Yes, I mean, we’ve seen – I mean, our customers have seen some impact. We’ve had some residual trickled down, but not so much in 2018. And I think our forecast in 2019 reflects sort of the reality of the reimbursement rates in the U.S.

Okay. And then finally, John, can you bring us up to speed, just given the goodwill writedown on DiaMed. Can you bring us up to speed, what has happened outside the U.S. in the blood typing market? And how that’s changed or differed from your initial outlook?

Well, let’s see, the Asia part of it, I’d say, our performance in Asia has gone very well. The price pressure that came with maybe a conversion of a largely manual and semi-automated market to highly automated market, affected the gross margins for us. And I would say, pretty much everybody, industry, that didn’t exist in 2007 and 2008, that’s gone through a transformation since then. And probably, the largest part of it has just been the reality of some slowness and the realities of the European market. I think it’s been – DiaMed was largely a European-based company, it’s largest to expansion. Potential was both in North America and in Asia and it took us for a lot of technical and intellectual property reasons while to get there. We are now making good progress in both. But I think that reality of the distance between where we started in 2007 and how fast we thought we could get to the U.S. market and make penetration in Asia was a large part of it, and then there’s conversion from largely a sort of a manual semi-automated market to a very highly automated market, similar to clinical chemistry and immunochemistry, I think, affected the business overall.

Yes, I think the other big change is the dynamics of the U.S. market over that time period in the pricing. Back when we acquired DiaMed, the pricing in the U.S. market was almost double that of Europe and now we’ve seen it pretty much come down and equalize throughout the world.

Interesting color. Thank you

Our next question was from Jack Meehan with Barclays. Your line is now open.

Thanks, and congrats on the progress you guys have been showing. Let me keep going on diagnostics business. Maybe one of the areas you called was the autoimmune business. So, was wondering if you could give us what your outlook for that business is in 2019? Whether there is any new menu you expect to add during the year? And then have there been any changes in the competitive environment with companies like your EUROIMMUN entering U.S?

And it’s – Jack, this is John. It’s largely a function of the BioPlex business. So, I’d say systems placement in that business has been very strong. 2018 was another record year for system placements. The growth this year has come a lot from autoimmune, but also from some of our recent tests in syphilis and HIV and Vitamin D. So we’re seeing good growth year. We are planning some new assay introductions in 2019, we filed them with the FDA, and we’re not in a position to announce which ones they’re at this point. But I think you’ll see some menu expansion in the first and second quarter of 2019. And I’d say, the outlook overall for that business, both in the U.S. and outside the U.S. is strong.

Great. And then maybe just conversely, I know one of the headwinds has been in the blood virus business for a while, I’m curious what the outlook – how that’s been performing? What the outlook is? Do you think there’s a point where that can start to stabilize? Or is that still further out on horizon?

It’s still declining. It’s not at the trajectory. It was just declining in 2017, it was pretty steep then, it slowed. Some of the business is just historical microplate and that’s an older product later in its life cycle. We’re looking at a lot of new areas in microbiology. It’s an area that is sort of right for transition. Those won’t hit in 2019, but I think as we start getting into 2020 and 2021, you’ll begin to see a little bit of a trajectory change.

Great. And then maybe just last one was – just want to make sure I have the numbers right. Christine, I think I heard you say on the life science side, an $8 million headwind, was that right collectively between process media and RainDance? And can you break those out, the size, please?

In 2018.

Yes, in the fourth quarter.

Okay, how much – what was the size of each?

About half and half.

Okay. Thanks for the color.

Our next question comes from Mitchell Petersen with Barclays. Your line is now open.

Thank you. Yes, I was hoping you could provide an update just on your new product initiatives, specifically in Droplet Digital? And just talk a little bit more about those applications, whether there is anything coming in single cell or any of the other applications there? Thanks.

Okay. So, I think we’ve talked a little bit about our next-generation platform where we’re integrating the full workflow inside of one instrument, and we are on track to get that product released and available for sales by the fourth quarter of this year. We’re all looking forward to that. We are working on next-generation single-cell products. We are about to launch a new application in single cell called ATAC-Seq. And so, we’ve got a couple of new products coming out in 2019, one in the first half of the year and hopefully one toward the end of the year or early in 2020. So, we have an intense focus in that area as well. And I think I mentioned that with the CE-IVD-marked platform and now the FDA cleared platform for BCR-ABL, we’re looking to expand our oncology menu as well for solid tumor via liquid biopsy.

Got it. And then maybe similarly, I was hoping you could provide an update on the litigation with Tenax. I’ve been most curious about the current trial, the one that’s in posttrial motions. And then if you were awarded an injunction, I guess, what would the strategy be to take advantage of that opportunity and fill in the gap in the market?

So, I’m just going to say, I’m going to channel my inner General Counsel here. We can’t really talk about ongoing litigation. So, I can’t really say much except what you’ve seen in press releases.

Okay, fair enough.

And we have a follow-up question from Brandon Couillard with Jefferies. Your line is now open.

Thanks. Christine, just a clarification on 2019. Any chance you could quantify the RainDance revenue headwind? And then, John, I believe you exited the QuickStep HLA market in the U.S, is that a material number to perhaps call out as a drag on diagnostics?

So the – Brandon, the headwind for RainDance is about $9 million.

Largely from the exit of our Myriad business.

Yes, yes. But the anticipated decline 2019 versus 2018 is about $9 million.

That’s correct.

And what was the second half?

Yes, Brandon, can you repeat the second question on blood typing?

Yes, the second part, you discontinued the QuickStep HLA product in the donor screening market, just curious if that’s a headwind worth calling out?

No, not at all. It is very small.

Okay. And then, Christine, just on the balance sheet, you clearly made some good progress on the working capital front. Should we expect that to continue into 2019? And you think there’s a chance that inventories can continue to come down on an absolute basis?

That’s certainly a focus that we have for 2019.

So, I think – yes, I think we’re anticipating some incremental working capital improvement. I don’t know that we get the big step function, as we did this year. But certainly, continued improvement there. And as Norman mentioned, there is a very sizable focus on inventory this year.

Very good. Thank you.

At this time, I’m showing no further questions. I’d like to turn the call back over to Christine...

Kyla, can you pull one more time, please?

[Operator instructions] I’m not showing any questions.

Okay. All right. Great. Well, thank you, everyone, for joining us today on the call. And we really appreciate your interest and support as we close 2018 and look forward to 2019. And hopefully, we’ll be seeing you soon. Thanks. Bye-bye.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may disconnect. Everyone, have a great day.