Good afternoon. Thank you for attending the Bio-Rad First Quarter 2023 Earnings Conference Call. My name is Matt, and I'll be your moderator for today's call. All lines have been muted during the presentation portion of the call open for opportunities for question-and-answer session at the end. [Operator Instructions] I would now like to pass the conference over to our host, Ed Chung, Head of Investor Relations. Ed, please go ahead.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. Today, we will review the first quarter 2023 financial results and from an update on key business trends for Bio-Rad. With me on the call today are Norman Schwartz, our Chief Executive Officer; Ilan Daskal, Executive Vice President, Chief Financial Officer; Andy Last, Executive Vice President and Chief Operating Officer; Simon May, President of the Life Science Group; and Dara Wright, President of the Clinical Diagnostics Group. Before we begin our review, 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. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties. Our actual results may differ materially from these plans, goal 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 the risk factors in our business. The Company does not intend to update any forward-looking statements made during the call today. Finally, our remarks today will include references to non-GAAP financials, including net income and diluted earnings 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 will now turn call over to Ilan Daskal, our Executive Vice President and CFO.

Thank you, Ed. Good afternoon, and thank you all for joining us. Before I begin the detailed first quarter discussion, I would like to ask Andy Last, our Chief Operating Officer, to provide an update on Bio-Rad's global operations. Andy?

Thank you, Ilan. Good afternoon, everybody. The first quarter of 2023 was characterized by solid growth for our core business coupled with a significant reduction of COVID-related sales. However, we also experienced a number of market and operational challenges, which overall resulted in a lower-than-expected performance for the quarter. While demand generally across the portfolio was in line with our expectations, there was some softness in smaller biopharma companies where we have seen historically strong demand for our life science products. This correlates with funding constraints the industry started to experience in the first quarter. We also saw a lower quarter for our process chromatography products, primarily reflecting the softness due to the timing of orders. In addition, we saw a further tightening of sanctions, which impacted our business in Russia with a negative impact on sales in the quarter. And we now expect lower overall performance for the year in Russia, especially in our Life Science business. On the operational front, we did not make the expected pace of progress within our supply chain to address our order backlog. And as a result, backorder reduction was modest. Of the estimated $30 million we expected to recognize from elevated 2022 backorders, we achieved a reduction of approximately $5 million in the first quarter, and we expect a similar amount for the remaining three quarters of the year. This was in part driven by a slower-than-expected ramp-up of production in our new Singapore facility. This also contributed to higher-than-typical finished goods inventory as we made the transfer. Our backlog was also impacted by the shift in sales mix and by the placement of more clinical systems than expected at low margins. We also experienced cost inflation that was higher than our net price realization in the quarter. All of these factors…

Great. Thank you, Andy. Now I would like to review the results of the first quarter. Net sales for the first quarter of 2023 were $676.8 million, which is a 3.3% decline on a reported basis versus $700.1 million in Q1 of 2022. On a currency-neutral basis, the year-over-year revenue decline was 0.3%. The first quarter year-over-year revenue decline was mainly the result of significantly lower COVID-related sales of approximately $2.6 million versus $45 million in the first quarter of last year. Core revenue, which excludes COVID-related sales, increased 6.1% year-over-year on a currency-neutral basis. As Andy alluded to earlier, our Q1 results were impacted by increased sanctions in Russia, increased early-stage biotech companies pressures and continuing certain supply chain challenges, including those associated with our manufacturing lines transfer and ramp up in Asia. The production transition contributed to a continued elevated order backlog, mainly within the Diagnostics group. In addition, we continue to ramp capacity to accommodate the growing demand for the new QX600-ddPCR system. On a geographic basis, we experienced currency-neutral year-over-year core revenue growth in the Americas and Europe while core revenue modestly declined in Asia, primarily due to a tough compare for the process chromatography franchise related to a very large customer order in the year ago period. Sales of the Life Science Group in the first quarter of 2023 were $323.6 million compared to $347.2 million in Q1 of 2022, which is a decrease of 6.8% on a reported basis and a decline of 3.6% on a currency-neutral basis. The underlying Life Science year-over-year currency-neutral core revenue growth was 9.6% and was primarily driven by our qPCR products, Western loading and digital PCR. This growth was lower than we projected as a result of increased sanctions effective sales of certain products to Russia as well…

[Operator Instructions] The first question is from the line of Brandon Couillard with Jefferies. Your line is now open.

I'll appreciate all of the detail you've just walked you there like an unpack. I'll just start with '23 guidance rest on the top line. Can you help us bridge the components and the puts and takes between Russia weakness early-stage biopharma lower process media demand? And secondarily, what gives you the confidence in terms of the separation on the top line?

Brandon, it's Andy, actually. So maybe I'll just walk through the answer to that. And you did capture the big levers in [Technical Difficulty] once out of Russia, which has had a meaningful impact. Biopharma softness, which did have some impact, particularly in the kind of, let's call it, emerging biopharma companies and the financial access to capital in Q1, which flowed through to broad demand, broader kind of slowdown in demand for our Life Science products. The process chrome story s not so much an emerging biopharma story as much as I think we've finally now just seen some of the effect of the overall inventory rebalancing that has been going on in the industry, and we had not been seeing that previously. I'd say the last two points to highlight on the revenue bridge would be a slower pace of back order reduction, which -- and I don't think we're seeing we're able to capture everything that we initially estimated. And related to our gene expression business, just generally a softer demand that is being experienced this year against the very significant installed base that we had previously put out there over the last two or three years.

Okay. Maybe in terms of the '25 targets, I mean, just generally, conceptually, why update those now, especially given what seems to be all the operational challenges based in the quarter and macro variables that you discussed on the call? Number two, can you share what the implied targets would be in terms of revenue dollars in '25? And if my math is right, would that just kind of 8% organic CAGR in the next three years, to get there?

Yes, Brandon, thanks for the question. So first of all, we are updating the 2025 based on our latest view and in light of the changing environment that we are experiencing. Obviously, as Andy mentioned just now, the entire kind of biotechnology sector and the funding and that was one of the growth drivers that we called out during the Investor Day, and we see headwind there. The overall inflationary kind of cost that we today believe is here to stay. I mean I'm not sure that it is transitory, and that was not taken into account when we presented during the Investor Day. So we are layering on what does that mean for the next two to three years. And this, we do believe that an update to the 2025 target model in order to set the expectation. With that said, it doesn't change our thinking in terms of the overall transformation that we are working on and everything that we still plan to achieve and all the kind of new instruments that are in the pipeline and the development. And so that doesn't change our thinking. It's more kind of, I would argue, macro-driven, and we have to kind of communicate accordingly. In terms of the growth, yes, I mean, so your math is correct, it's about -- on a core basis, it's about 8%. And that's the update. If you think about the currency neutral basis, it's about is $3.4 billion for 2025 on a currency-neutral basis.

Got it. Last one for Simon. Your closest competitor in digital PCR earlier today talked about a market CAGR the next three years in the 30% to 40% range. I want to see if that's consistent with your view in terms of how you would assess the market and if you view the opportunity on the growth outlook differently for your business?

There's definitely emerging competition in digital PCR without doubt. And we observed that very closely, and we take it very seriously. And as we said before, I think it really is also helping to significantly expand the market opportunity in ddPCR. And when we hear the commentary and the disclosures from our competitors and we kind of overlay that with the growth trajectory that we see in our own business. We think it's pretty consistent overall, and we think it's playing out the way that we thought it would. And then when we think about our overall position today, we talked about how the demand for the QX600 platform and customer acceptance is really fantastic. So we're feeling good about that. And in the biopharma segment, notwithstanding some of the market softness that we're seeing at the present side, we've got a very strong position there. We think the market's ultimately got very long legs. And I think we've got quite a nice moat around that business. We've got a really formidable of high-performance assays. And we know in this segment that performance really, really matters. And our QX One platform is really best-in-class in terms of throughput and automation. And then as was mentioned earlier, we've already got the QX Continuum platform that's in development, and I can tell you that program is running quite nicely. So when we think about the overall dynamics here, I don't think anything has fundamentally changed since we discussed this at Investor Day.

The next question is from the line of Patrick Donnelly with Citi. Your line is now open.

Maybe a similar main questions. On the process chrome side, it sounds like you saw a pretty good slowdown in the quarter. Andy, I think you called out timing as an impact, but obviously, the guidance coming down pretty significantly for the year. How much do you think timing versus change in demand? What are you seeing in the market? And what's the ability to execute in the backdrop of, again, if the demand is holding up? Is it just an execution issue? Maybe just kind of give us a little more color there.

Yes. I mean, timing is always a challenge for that business, and I'm sure you guys -- you know that well. But -- and in Q1, in particular, the tough compare to prior year for us. So we -- that really wasn't a great surprise from that point of view. Looking forward, I think we are just starting to experience some of the kind of -- we're calling it inventory rebalancing and just a more prudent or conservative approach from the end market as we go forward. And we feel it's prudent to reflect that in the way we're thinking about our guidance this year. Underlying all of that, though, is still extremely solid and consistent demand for the process chrome business. The new products we've introduced have been exceedingly well received, and we're starting to see uptake and traction on those. So our go-forward thesis on process chrome is [Technical Difficulty] we're finally seeing some of the effect that I think others have been calling out for a while. We're finally seeing a little bit of that flow through to our business now.

Okay. That's helpful. And Ilan, maybe on the margin side, I think you called out some maybe more aggressive expense management. As you think about first half to second half ramp on the margins, can you just talk about what levers you guys are pulling the visibility into hitting those numbers and got a pretty good step up from first half to the second?

Yes. Thank you, Patrick. I appreciate the question. So we have several initiatives that are in flight, and it's part of our kind of plan already. We anticipate that we will be able to realize it in the second half, and it will roll over also into next year. And these are obviously multiple initiatives that we are pretty confident that we will be able to achieve its part of the guidance. Obviously, it's baked in. And obviously, the goal there is to mitigate the softness that we guided for on the top line as well as some aspect of the gross margin. And I think that we have a very good plan to achieve it, and it's mainly focused on the second half of this year.

Okay. And then maybe on the long-term guide, Life Science came down, I think, 150 bps. When you think about that change to the growth build in terms of the algorithm you guys have behind the scenes there. What -- I guess, what segments were the biggest step down? I mean the digital PCR changed at all? Was it process chrome? If you can just help us think about what softened in that algorithm is I think when you guys gave a guide, we can get a ton of building blocks. So just trying to figure out what areas maybe it was all of them, but just if you could help us out there, it would be helpful.

Yes, Patrick, let me take a shot at this question. I think what we determined is that the biopharma softness is contributing to life science growth at a slower pace. It's kind of the simplest way to think about it. And with the kind of shake up that's gone on a little bit in the emerging smaller biotech companies, where we've had meaningful business and very strong growth. And just it's that effect flowing through over the next couple of years. And I wouldn't think of it as anything more than that at this point in time. Just to reiterate that the fundamental pillars in the Life Science business on process chromatography and Droplet Digital PCR and then related products very solid. So we're, I think, prudently putting forward that we see a slower growth as a result.

I think as well, Russia wasn't part of the initial calculus. So now it is. It's not a massive impact, but it does make a dense and that flows through to the projection as well.

The next question is from the line of Dan Leonard with Credit Suisse. Your line is now open.

I think Brandon asked this question, but I'm not sure I caught the answer. The revised guidance still assumes a meaningful sales acceleration in 2H. The fourth quarter comp is tough, macro is not getting better. So what are you looking at to support that second half ramp?

Yes. So, we do see a slightly lower growth projection from the Life Science business, which I think we just reflected in the commentary, which is some partially offset by and improved performance in the clinical business in the second half. We're seeing actually fairly robust demand for our clinical systems that we expect to continue. So you've got a little bit of a mix shift playing out there on -- across the two business groups, which will further help support the second half performance has a small mix impact on margin, which we're also reflecting because of the differential between the two business groups.

Yes, Dan. I will add to that also that from there, obviously, it flows throughout the P&L. On the gross margin, we expect it to improve as the year progresses as well as we have a list of initiatives that are in flight and some of the scheduled to start that will benefit the second half.

We've got one final factor, which is the burn down of backlog in the second half. And so we have much better line of sight to the phasing of that in the second half, and that will also contribute to the second half growth and QX600 on the Life Science side is it's a very robust pipeline.

Yes. So on the QX600, yes, exactly, Andy. I mean, it's about the manufacturing kind of volume that we plan to have a much higher volume in the second half than in the first half. And that's obviously a nice contribution, not only about the top line, but it's above average margin that flows through.

Okay. And then my follow-up question, Andy, you commented on softer demand for gene expression against a significant installed base. Why isn't that a multiyear problem?

Well, I think as we move forward, it is an element. I think it's a good point you're making there, and it's an element that is factored into the Life Science forward-looking view on the '25 trajectory, right? And it is a factor that is hard to really quantify in the market after you placed all these instruments over the last two-plus years, three years. So it's a good call out, and it's a fair point, but it is considered in our '25 reguide for Life Science.

Your next question is from the line of Jack Meehan with Nephron Research. Your line is now open.

First question is on the Russian sanctions. Can you just quantify for us the impact that's now embedded in your forecast? And when did it start? And when -- just I guess one more annualize.

Yes. Thank you, Jack. I appreciate the question. Historically, we called out that Russia was between 1% and 2% of revenue on an annual basis. Obviously, the sanctions kept accumulating. And when we started the year, we still had a nice pipeline. And I would say that about 1/3 of our projection -- more than 1/3 of the projection for this year was impacted by incremental sanctions that we had to revise it this quarter. These are not the prior sanctions. These are incremental sanctions that prevent us from shipping more than 1/3 of our projected or prior projection for this year.

Got it. And then in the Diagnostics business, so it sounded like regionally, you did well in Asia I was just curious if you could comment on what you're seeing here in the U.S. and in Europe. I think I heard largely flat. We've been hearing about better volumes from a lot of the services providers. So just -- just how is that playing through in your U.S. and Europe business?

Yes. I believe we have Dara, she remotely. So Dara, I'm not sure were you able to hear the question.

Yes. This is Dara here. Ilan can you hear me okay?

Yes. Thank you.

Great. So demand is strong in all regions, elevated a bit in Asia Pacific as a consequence of China opening back up with the COVID restrictions lifted in Q1, the actual sales were sort of biased towards Asia Pacific in Q1, so the revenue was bias there, but demand and backlog is similarly sort of higher than historically in EMEA and Americas. So bodes well as we burn down that backlog, placing instruments globally, in which increases our installed base.

Great. Then one final one for Norman. We're in this macro environment, which is evolving a little bit. Your business should be, I think, more defensive when it's all said and done. Just was curious how kind of the evolving landscape might change your philosophy, if at all, when it comes to M&A and what you're seeing in the funnel?

Yes. So the funnel remains about the same. Obviously, when you think about kind of valuations coming in, it's a little stickier on the way down. So that's a dynamic that I think we're aware of. But again, we've got a couple of things in the hopper, and we continue to see it as a viable option for cash deployment as we go forward to add to the business.

The next question is a follow-up from Brandon Couillard. Your line is now open.

Just to push back on your answer to Patrick's question, I think -- I mean the biopharma exposure you have is only 15%. You're talking about a sliver of that overall market. First I want to make sure I understand that right. And then what's embedded in your outlook for that earlier stage biotech customer base? Could you quantify it in terms of sizing, but also kind of what you're expecting in terms of growth from that market?

Yes, Brandon, I mean, I don't think we've quantified or segmented our sales within the biopharma segment overall. We've done particularly well in emerging biotech, especially because the cell and gene therapy-based therapeutic development there and those companies, but the -- so that's more of a broader life science product impact. The process chrome is obviously for the much more mid and large sites biopharma companies. And there, I think we're just literally subject to the macros that have been going on across the industry, which we had not seen before, and it started to show up a bit for us this year. So we've moderated our growth expectations this year, although they're still good, healthy double-digit growth for the bioprocessing side of the business.

I'll just maybe add that about 1/3 of our Life Science revenue is contributed from biopharma, but we're pretty overweight in the smaller and emerging biotech companies, whether you're talking about process chromatography, we've talked about this previously, how our resins really play in these emerging biologic therapeutics. And also in our Life Science portfolio, generally, we see the halo effects in the emerging biotechs, more so than big pharma, which tend to be locked up in really large contracts.

Okay. Last one for Ilan, can you just to make sure the definitions, I understand correctly, your 25% EBITDA margin target, that includes the Sartorius dividend, I just want to make sure and how much is that in contemplated? Is it the $34 million this year or the ones the size of the dividend last year at the Analyst Day, which is much different?

Yes. So we try to compare it kind of apples to apples. And back in the Investor Day, we said that it included about $19 million of dividend. And that's what we assume now to be consistent.

There are no additional questions waiting at this time. So I'll pass the conference back to the management team for any closing remarks.

Thank you for joining today's call. We will be at the RBC Capital Markets Global Healthcare Conference in New York later this month and also in New York, the Jefferies Healthcare Conference in June. As always, we appreciate your interest, and we look forward to connecting soon. Thanks.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.