Good afternoon, ladies and gentlemen and welcome to the Bio-Rad Second Quarter 2023 Earnings Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 3, 2023. I would now like to turn the conference over to Edward Chung, Head of Investor Relations. Please go ahead.

Good afternoon, everyone and thank you for joining us. Today, we will review the second quarter 2023 financial results and provide 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 and 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, goals 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 the call over to Ilan Daskal, our Chief Financial Officer.

Thank you, Ed. Good afternoon, everyone and thank you all for joining us. Before I begin the detailed second 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. So the second quarter of the year proved to be a continuation of trends from the first quarter of the year. We experienced ongoing strong demand for our clinical diagnostic products, contrasted by further softening of demand in the BioPharma segment of our Life Science business. The net result was a more modest growth of our overall core business than expected. On the operational front, we made meaningful progress in order backlog reduction. In Q2, we experienced a further decline in demand from our BioPharma customers, particularly for our process chromatography media, but also extending to other product lines. This resulted from a continuation of soft sales into emerging biotech companies, plus we also experienced headwinds from larger BioPharma. While some of this was already forecasted for the remainder of the year, Q2 revealed a significant delivery extension of existing orders for our process chromatography media beyond 2023. The softness is a result of customers reducing their inventory levels in bioprocessing and a tighter funding environment across BioPharma as indicated in Q1. Overall, we now anticipate a larger impact to our BioPharma business from the downturn than previously communicated. We do view the softness in process chromatography is transient, but do not anticipate broad-based recovery in 2023. In contrast, we remain positive on continued demand for Life Science products in academic markets. We saw strong and consistent demand from academia in all regions across the Life Science portfolio and experienced strong double-digit growth for ddPCR, despite the negative BioPharma macro trends. In particular, we are very pleased with the ongoing demand for our new QX600 Droplet Digital PCR System. During the quarter, we held our Droplet Digital PCR world event, which received excellent attendance and engagement reinforcing the long-term growth potential of our platform…

Great. Thank you, Andy. Now I would like to review the results of the second quarter. Net sales for the second quarter of 2023 were $681.1 million, which is a decline of 1.4% on a reported basis versus $691.1 million in Q2 of 2022 and a 0.3% decline on a currency-neutral basis. The second quarter year-over-year revenue decline was mainly the result of significantly lower COVID-related sales of about $0.4 million versus approximately $33 million in the same period last year. Core revenue, which excludes COVID-related sales, increased 4.6% on a currency-neutral basis. The second quarter revenue included $6 million of revenue from a onetime licensing fee as well as royalties of $500,000, both associated with a cross-license agreement related to digital PCR intellectual property. We currently estimate receiving ongoing royalties from this arrangement of about $500,000 per quarter. We incurred a onetime $2.3 million R&D expense related to this cross-license agreement, and we do not anticipate any royalty obligations on our end for the foreseeable future. On a geographic basis, we experienced currency-neutral year-over-year core revenue growth in all three regions. Sales of the Life Science Group in the second quarter of 2023 were $300.2 million compared to $322.4 million in Q2 of 2022, which is a decline of 6.9% on a reported basis and a 5.8% decline on a currency-neutral basis. Excluding COVID-related sales, the Life Science Group year-over-year currency-neutral core revenue growth was 4.5% and was primarily supported by strong growth in Droplet Digital PCR and qPCR products. As Andy alluded to earlier, our Q2 results were impacted by the previously highlighted soft demand within early-stage biotech companies as well as increased headwinds from larger BioPharma companies, who are delaying capital investments and reducing bioprocessing inventory. In addition, we experienced weaker demand from government accounts in China…

Thank you. [Operator Instructions] And your first question comes from Patrick Donnelly from Citi. Patrick, please go ahead.

Hi, guys. Thank you for taking the questions. Maybe to start on the process chrome piece. Can you just talk about, I guess, the softness you’re seeing? Is that just the purchasing is getting pushed out, just soft budgets on the BioPharma side. Maybe just kind of give a little more color as to what you’re seeing. And then, it appears you’re not assuming any improvement in the back half. I just want to confirm that. So yes, maybe just a bit more color on the process chrome side.

Hi, Patrick, this is Simon speaking. Yes. I think in the second half of the year, we’re seeing some shifts in purchasing patterns. There were some orders that we’ve already secured, which are getting pushed out. That’s the main aspect, and we’re seeing a general softness in demand that’s spilling through into the second half of the year here. We’re detecting some potential signals of improvement. But from our side, it’s really too early to call, and we’re not seeing that reflected in the opportunity for those at this time. But, as we’ve said earlier, we remain pretty optimistic that this is transient, and we’re going to see pickup hopefully at some stage in 2024.

Okay. That’s helpful. And then maybe in China, you’re certainly not alone seeing some headwinds over there. I mean it sounds like it’s hitting both the Life Science side and then the macro, maybe some cautiousness on the Diagnostics. Can you just talk about, I guess, are you seeing it hit both now? Is the Diagnostics a little more kind of forward caution just because what you’re seeing on the economic side, the Life Science side. And then, maybe just expectations in the back half. I know there is a part of the cut, what is China going to look like in 2H?

Yes. Patrick, Andy here. So I think for H1, I think our story is fairly consistent and a lot of softness in Life Science, which include the BioPharma component segment of that piece of the business. Diagnostics is relatively good for us in the first half, but we are certainly cautious about the second half given the macro economic situation in China, and that’s true for both Life Science and the Diagnostics side from our point of view right now.

Okay. That’s fair. And then maybe last one, just on the margin side. Can you just talk about – it sounds like the gross margins are getting a little bit impacted by some inventory and material costs. What you guys could do to maybe insulate the bottom line a little bit, I’m sure you take some cost actions. Maybe just give us a bit of color on what you guys are doing and how projectable that is into next year in terms of just how we should think about the base case on the margins? Thank you.

Yes. Thank you, Patrick. This is Ilan. So there are a few aspects to call out first on the margin. Some aspects are transitory. Some are related to the inflationary environment overall. For example, material is still kind of elevated in terms of the overall cost, and it’s higher than last year. The product mix was definitely a headwind in terms of the mix between our Life Science group and the Diagnostics as well as within our Diagnostics Group with more instruments, which should be a benefit thinking more into 2024. And there are other kind of more of elevated one-time as the reserve, etcetera. On the other hand, we continue with a very, very disciplined approach in terms of the overall operating expenses. So you can see that the fall through to the operating income is much smaller than the impact on the gross margin, and that will continue to be the approach. But again, as I said, it’s kind of a mixed bag of kind of expected to impact – indeed impact this time around, some are more transitory, some – we will have to wait to see how the inflationary environment will continue to shape up.

Understood. Thanks a lot.

Sure.

Your next question comes from Brandon Couillard from Jefferies. Brandon, please go ahead.

Thanks. Good afternoon. A lot of, if I just look at your pie chart the BioPharma is only 17% of your mix. Could you give us the outlook for that group is in total or you expect that BioPharma to do in ‘23, and how it compares to your prior view? And Simon, a question for you, is any of that weakness spilling over to ddPCR at all or do you see pretty consistent demand, budgets are there for those instruments given how differentiated it is?

Yes, Brandon, this is Simon. I think in our BioPharma business, we’ve obviously got a chunk that process chromatography and I think we’ve already provided commentary there. I think what 2023 is concerned, it’s certainly too soon to call any signs of recovery. And again, we will see what 2024 brings. Definitely spills over into our digital PCR business. We’ve got a strong footprint and presence in emerging BioPharma and digital PCR. We had a very strong quarter, notwithstanding that in the second quarter with robust double-digit growth and with the introduction of QX600 and the way that our customers are responding very positively to the advanced multiplexing capabilities there. That’s kind of offsetting the softness that we are seeing in BioPharma. But we are definitely seeing that impact outside of process chrome, but it tends to be a different kind of impact, which is more related to VCP funding with smaller emerging biotechs.

Okay. And then, I guess, Ilan, any color you can share with us in terms of the phasing for revenue growth and margins between 3Q and 4Q? You got a tougher comp in the fourth quarter. I mean just in terms of the margins, I know that’s obviously kind of the peak margin quarter of the year given the higher volumes. Any more color you can share on how we should think about the phase in 3Q and 4Q?

Sure. Generally, Brandon, as you know, the fourth quarter tends to be a stronger quarter for us. I mean generally, we think about the third quarter and fourth quarter to be stronger, but definitely, the fourth quarter, as usual seasonality is stronger there than even the third quarter. In terms of the gross margin, it’s more again benefiting the fourth quarter from the fall through. So, it’s a slight benefit, but it’s not a huge difference, since we did guide for about for 54.5% in the second half. So – and when it comes to the operating expenses, we will continue, as I mentioned earlier, with a very disciplined approach in terms of the expenses. We expect it to be lower on a percent basis of sales, on a dollar basis, potentially slightly higher, but it’s a very, very disciplined approach.

Okay. And then just in terms of inventory levels, I mean I am just surprised they continue to climb to this degree. I mean is this the peak level in 2Q, and we should expect them to come down sequentially from here? Just help us understand like when that you expect to peak out and that’s supposed to…?

I am sorry, Brandon, this is Andy here. Yes, I mean I think we are near the top of this inventory where that’s been going on, which as we reported before, is a result of the diagnostics manufacture movement from France to Singapore. And then, the lead time required on purchase of raw material through the finished product. And then, with the lifeline downturn, that clearly was not expected anywhere close to this level of magnitude, that kind of – we got to catch up with that. So, I think that we are largely ahead of this. At this point in time, we will be looking towards normalization of inventory as we move forward.

Okay. Thanks.

Thank you, Brandon.

Your next question comes from Tim Daley from Wells Fargo. Tim, please go ahead.

Thanks very much. So, I think that you said that transient, at least one from today’s call describing the BioPharma headwinds, but then also said not recovering until 2024. So, descriptions around the process chromatography cut seemed to be a lot of timing rather than demand destruction or loss. Just curious about, as we progress forward and then thinking about the contribution in ‘24 perhaps chromatography maybe above normal growth levels or the kind of expected levels? And then just additional comments on the [Technical Difficulty] targets here, given lower base sales, I guess grow off of?

Yes, Tim, this is Ilan. I will start and then maybe Andy and Simon can chime in. But generally speaking, first of all, we are not yet guiding for ‘24. We generally not necessarily expecting a pent-up demand in process chromatography in 2024. We see it more as transitory and push-outs of orders. And these are kind of – think about it like a permanent kind of push-outs. So, it’s not that 2024, we expect process chromatography to be elevated due to a pent-up demand. I don’t know, Andy if had...

Well, and I think there is an element in the question there about funnel, and I think this really is – this isn’t a change in the shape of our market share or our expectations over the long-term. This is – orders that we are expecting that have been pushed out. So, in that regards, this is a transitory shift timing. I think is the word you used in. That’s the way we look at it. What we are unclear on, and so I am taking a position on right now is when that timing is fully resolved.

Alright. Got it. And then second one, I know we have touched on China a bit, but China diagnostics was a nice tailwind this quarter. I know you took some of that out of the guide. But just could you help us understand on how much of that was maybe reopening tailwinds versus underlying growth? And now what the full China growth expectations are for the year within diagnostics?

I think it has to do more with the current macro environment that we are – we continue to monitor for the remainder of the year. I don’t know that it’s necessarily a leg of the reopening necessarily, as it is more kind of being more cautious that the environment will not change drastically. I mean overall, diagnostics is expected to achieve 5.5% year-over-year growth, which is a really nice growth for them and China performed so far really well for us. But again, with everything that we hear, it will be – we have to continue to monitor the second half specifically.

Alright. Perfect. Thank you.

Thank you, Tim.

Your next question comes from Jack Meehan from Nephron Research. Jack, please go ahead.

Thank you. Good afternoon. Andy, I was wondering or maybe for Ilan as well, just the transition to the new manufacturing in Singapore. Just operationally, how did that go during the quarter? And can you talk about how that might contribute to your thinking around margins in the second half of the year?

Yes. So, I will answer the first half, Jack. It went well. And both plants – we are now past the foreclose shutdowns in France, 100% focused now on the ramping of production in Singapore. It’s going well. We did make progress in the quarter on the diagnostics backlog. But as we have indicated before, it’s going to take the full year. We feel good about achieving that right now. And I think we communicated here some further inventory – our backlog, sorry, a burn down in the coming quarters. So, after the early difficulties, I believe we are on track now. So, as it relates to gross margin, do you want to comment on that?

Sure. So Jack, obviously, the heavy lifting, as Andy mentioned, is behind us. We continue to ramp. I mean a lot of it has been achieved. And so, we continue to realize kind of more benefit. The two European sites are closed. And it will be – we will have a slightly additional kind of benefit also going probably into next year, once it will be fully ramped up. That’s where we are right now.

Great. Okay. And then there has been a lot discussed about kind of some of the issues you are seeing in BioPharma at the moment. I was just curious like this might be a difficult question to answer here in early August, but what you think is the likelihood of some of these issues extending through the first half of 2024. What are you hearing from customers?

This is Simon. I think the simple answer is it’s too soon to say. I think we have kind of covered this two times or three times already. We are not seeing signs of material recovery in our funnels in the second half of the year. There is some commentary around some shifts in the funding environment, but that’s very early. It’s going to take time for that to trickle through to the comp phase. And quite simply, we just think it’s too soon to call 2024.

That’s fair. Last question for Norman, the new repurchase authorization, that’s a nice kind of endorsement of maybe the value you see in Bio-Rad shares now. I was curious what your latest thinking is on the Sartorius stake. Just given, where Bio-Rad stock is trading, I am curious, would you ever consider monetizing a piece of this just to buy more of your own shares? Talk about kind of the commitment to that. Thanks.

Well, certainly, we have got plenty of cash on our balance sheet at the moment. That shouldn’t be an issue, certainly in the near-term. Obviously, we continue to see Sartorius as a strategic for us. And with respect to repurchase, we certainly continue to view that our valuation is low relative to peers. And so as we go forward, kind of looking at kind of when we repurchase kind of balance between, obviously, different uses of cash, and yes, different priorities. But it’s nice to have that new authorization in place and give us the opportunity to opportunistically buyback from time-to-time.

Okay. Thank you.

Thank you, Jack.

Your next question comes from Conor McNamara from RBC Capital. Conor, please go ahead.

Hi. Good afternoon. Thanks for taking my questions guys. Just can you talk more about the ddPCR, the strong double-digit growth you saw? Is there any more competitive pressure in the market there? And is there any pent-up demand and manufacturing issues on ddPCRs along on the diagnostics side?

Thanks Conor, Andy here. So yes, we were very pleased with the performance in the quarter despite the challenges of softness in the BioPharma segment. The new instrument is going very well for us. We cleared out, all our production challenges in the quarter. No constraints moving forward. We have grown that franchise quite meaningfully in that segment, over the last few years. So our strategy for growing there has been very successful. We feel very positive about the forward-looking potential and BioPharma is a point of weakness in the middle of it. Competitively, I don’t think anything has really changed, certainly not within the last quarter. And that’s all baked into our thinking at this point in time.

Great. Thanks for that. And just as a follow-up, if you look at the success of that product, how much of those sales are going into either new markets or new customers versus upgrading current PCR customers? I don’t know if you have that data available?

This is Simon. I can talk to that. I think it’s a bit of a spread. We are seeing a good number of customers who were upgrading from existing systems. I would say we have actually been pleasantly surprised that the uptake that we are seeing in BioPharma, where that multiplexing capability gives those customers a significant productivity advantage. And then, the third area where we are seeing uptake is in oncology research and clinical development, where again, the multiplexing in the sensitive to the system really serves that need very well. So, it’s kind of broad-based.

Got it. Thanks. And just final on ddPCR, can you remind us the consumable pull-through with these placements? Are you still kind of at that 50-50 equipment versus consumables on ddPCR? And how – what’s the tail there as far as when that should accelerate on the consumables side?

In very approximate terms, we are still there. And I think over time, we still expect that to weight increasingly towards consumables. And I think we are seeing that trend to play out.

Great. Thank you for that. And last question for me is on the OpEx side, you were down sequentially on total operating expenses. How should we think about that cadence for the rest of the year, and then going into going into next year? Is this a good run rate from Q2, or is there anything that’s abnormal in Q2?

Yes. This is Ilan. So, as a percent of sales, we expect the second half, at least, to be slightly lower than that. On a dollar basis, maybe slightly higher, but we try to continue to be very disciplined in terms of the expenses overall.

Got it. Thanks guys. Appreciate it.

Thank you.

We have a follow-up question from Brandon Couillard from Jefferies. Brandon, please go ahead.

Sorry. Just to clarify, are you saying OpEx in the second half up or down compared to the first half?

So, as a percent of sales, it’s going to be slightly lower. On a dollar basis, potentially slightly higher, but not meaningfully higher.

Okay. That makes sense. A follow-up question for Simon, I am just curious the QIAGEN digital PCR cross licensing deal. What do you get out of it? Why I guess strike that deal with them?

Don’t really answer that Brandon, in terms of the deal confidential. I think we have already said what we are going to say about it in the script here. I think we are pretty happy with the terms, and that’s about where we have to leave it because of the confidentiality provisions we have got around it.

I will leave it there. Thank you.

Okay. There are no further questions at this time. I will now turn it back to Edward Chung for closing remarks.

Thank you for joining our call today. We will be participating at the Wells Fargo Healthcare Conference in Boston, next month. As always, we appreciate your interest, and we look forward to connecting soon. Thanks.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.