Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Bio-Rad Third Quarter 2023 Financial Results Conference Call and Webcast. [Operator Instructions] And please be advised that today’s call is being recorded on Thursday, October 26, 2023. I would now like to turn the conference over to Edward Chung. Head of Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining us. Today, we will review the third 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’d 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 these reconciliations of the non-GAAP financial measures to comparable GAAP results contained in our earnings release. With that, I will now turn the call over to Andy Last, our Executive Vice President and Chief Operating Officer, to provide an update on Bio-Rad’s global operations.

Many thanks, Ed, and good afternoon to everybody, and thank you for joining us. Well, the third quarter of the year fell below our expectations. The ongoing challenges within the biopharma segment and economic constraints in China continued to drive lower Life Sciences performance in the quarter. Clinical Diagnostics sales were weaker than we forecasted impacted mainly by the softer China market conditions. We still anticipate a strong year-over-year growth with Clinical Diagnostics Group in the fourth quarter. We continue to successfully maintain focus on tight cost control and on the supply chain front, we experienced modest constraints in supply for our clinical business, which impacted Q3 sales. Backlog remains on track to meet our year-end expectations. In Q3, we experienced further reduced demand from biopharma customers for our process chromatography resins and from both biopharma and smaller biotech customers for our Life Science research projects -- products. The continued tight spending environment in this segment constrained core ddPCR sales, which were roughly flat from the year ago period. Academic and government sales for Life Sciences was strong in the Americas, but showed declines in APAC driven down by China economic and policy constraints. EMEA academic sales were roughly flat, reflecting a soft funding environment in Germany, offset by stronger performance in the other European countries. While ddPCR sales within the quarter were softer than expected as a result of biopharma spending, we remain very positive on the long-term growth outlook for the platform. During the quarter, we were encouraged by several noteworthy announcements involving ddPCR. On the clinical testing front, our QX ONE platform has been selected for SMA testing for all newborns in Hong Kong. And here in the U.S., Geneoscopy announced they have published the results of their pivotal CRC-PREVENT clinical trial, reporting the highest sensitivity for…

Thank you, Andy. Now, I would like to review the results of the third quarter. Net sales for the third quarter of 2023 were $632.1 million, which is a decline of 7.1% on a reported basis versus $680.8 million in Q3 of 2022 and a 7.9% decline on a currency-neutral basis. The third quarter year-over-year revenue decline was primarily the result of ongoing weakness in the biopharma end markets, impacting the sales of our Life Science tools and bioprocessing products. In addition, we experienced weaker demand in China as a result of the macroeconomic environment as well as the local made in China initiatives. COVID-related sales in Q3 were $300,000 versus about $17.2 million in Q3 last year. Core revenue, which excludes COVID-related sales decreased 5.5% on a currency-neutral basis. On a geographic basis, currency-neutral year-over-year core revenue decreased in Asia and Europe, partially offset by increased sales in the Americas. Sales of the Life Science Group in the third quarter of 2023 were $263.5 million compared to $317.9 million in Q3 of 2022, which is a decline of 17.1% on a reported basis and a 17.8% decline on a currency-neutral basis. Excluding COVID-related sales, the Life Science Group year-over-year currency-neutral core revenue decreased 13.7% and was primarily driven by lower sales of qPCR, process chromatography, western blotting products and about flat year-over-year ddPCR revenue. Excluding process chromatography sales, the underlying Life Science business decreased 16.7% on a currency-neutral basis versus Q3 of 2022. The Life Science Group revenue, excluding process chromatography and COVID-related sales decreased 11.6% on a currency-neutral basis. On a geographic basis, Life Science year-over-year core revenue decreased in Asia and Europe, partially offset by modest increased sales in the Americas. Sales of the Clinical Diagnostics Group in the third quarter were $368.1 million compared to $361.9…

Thank you, Ilan. So, I guess, I just wanted to take a minute here to really to recognize Ilan and his contributions over the last several years. As part of our transformation, Ilan has been a very valued member of the team, kind of working to improve financial planning and reporting processes as well as to enhance the Company’s external profile with the financial community. I think we all very much appreciate his guidance and contributions which do position us well for our continuing transformation. As you might imagine, we have initiated a search for his successor. And in the meantime, we have a strong, capable team who can manage very well in the interim. So, maybe while I have the floor, maybe a closing comment about this year. Certainly, it’s not unfolded the way we or many of our peers first envisioned it. Coming out of the pandemic, I think it has been challenging to predict the pace of recovery or market normalization, really all exacerbated by inflation we’ve not seen in 20 years, geopolitical events and, of course, the biopharma disruption. If I think about it a little bit, I think what we can be confident of is that our markets are buoyant and I feel the outlook is positive. There could always be a few more bumps in the road in the near term, but I do feel the Company really is well positioned to navigate what might come our way. And just maybe to reemphasize a point that Andy made, longer term, our strategy and vision for the future really has not changed. With that, operator, I think we’ll open the line up to questions.

And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Brandon Couillard from Jefferies.

I am sure this is another question for Andy or Ilan, but the magnitude of the guidance reset in Life Sciences, relative to where you started the year, is the most dramatic of any of your peers by far. Why does there seem to be such an inability to accurately forecast the business and demand trends? And how do we assess whether this is, in fact, a market dynamic as opposed to potential share losses?

Could you just say the very last piece again, Brandon? I didn’t catch your very last few words.

How do we assess whether this is, in fact, a market dynamic versus potential share losses in Life Science?

Okay. Look, I think that we came out of 2022 with really good trajectory. And the effects that some companies had seen, particularly in bioprocessing, were not showing up for us. And that -- I think that’s something that we communicated at the end of the first quarter that that was a surprise. And it took a while within 2023 for those effects to really roll out into our funnel and start to experience the deferred orders being pushed out. But then the other factor that no one anticipated and which was meaningful for us was the Silicon Valley Bank collapse and the knock-on effects of that, which really impacted the spending profile of the smaller biotech companies, and we had significant trajectory in the smaller biotechs for, in particular, our Droplet Digital PCR platform, which also had some halo effect around it. So I think it took a couple of quarters for those effects to really materialize for us because our profile is a little different to some of the other players. So, that’s how I view it. And then, of course, since then, spending has not improved. The order pushouts have continued and it’s very difficult to gauge the true inflection point right now. And I think that’s probably a message is coming across broadly from other players in the category as well.

This is Simon. Maybe I’ll just add to that as well because as we look at our funnels and we look at our win-loss ratios across the portfolio, whether you’re talking about western blot or gene expression or digital PCR or our bioprocess business, we really don’t see any significant shifts there. I mean, obviously, the conditions in China in biopharma have really deteriorated. But the feedback that we consistently get from the field is that there’s still a high level of interest in the products, the products that we’ve launched to be really well received. And again, the funnel dynamics in terms of win-loss ratios are not seeing any significant shifts. So, we really do believe that this is a bunch of transient effects that are compounding and it’s making for a very difficult year but I don’t think there are any macro shifts in our competitive positioning in Life Sciences.

Okay. Ilan, I think the revised guide implies 4Q revenue steps up to about $700 million, I believe. 4Q is usually seasonally very strong for Bio-Rad, but this isn’t a normal environment either. So how derisked is that revenue outlook? What are some of the variables that can swing that target up or down as you’re keeping in mind?

So it’s Andy. The variables that might swing that, I think they’re the same that we’re -- the variables would really be the same that we’re experiencing, just a little bit more acute, if China gets definitively worse than the trajectory it’s on, for example, that that would -- academia really pulled back some spending, that could have an effect. We’re not expecting a Q4 budget flush this year. That’s not in our thinking. If that materializes, that’s good news, but we’re not planning on that. Other than that, I don’t think we see anything that may be meaningful that we could predict.

And Brandon, I will add to the inputs that Andy just mentioned. Generally speaking, we have not deviated from our approach of kind of coming up with the realistic what we see in front of us in terms of the forecast and the guidance. So I don’t know that we are underestimating or overestimating our projections. And definitely, the fourth quarter this time around is an unusual circumstance in addition to the macroeconomic kind of environment to end this kind of inputs maybe the China environment today. I mean, I think it’s going to continue well into the end of the year. So, the smaller biotechnology companies environment in terms of the funding environment are not expected to improve in our mind through the end of this year. So, I agree with you, historically, traditionally, the fourth quarter used to be a stronger seasonality kind of quarter for us. That is not the case this time around.

Okay. Last one, and then I’ll jump back in the queue. Andy, given you and Ilan started at Bio-Rad around the same time, you’ve worked very closely together. You’ve both been instrumental to Bio-Rad’s transformation last four years or so. In light of his departure, I think investors would like to know, are you happy with the operational direction of the Company? Are you adequately incentivized to stay the course, or do you have an eye to retirement anytime soon?

Yes, Brandon, thanks. First, can I just say I’m really sad to see Ilan move on. And you’re right, we have worked extremely closely. He and I are in each other’s offices virtually every day. So, it’s been a really good journey. I want to thank Ilan for that personally on the call. But my point of view right now is we started this transition. It’s not finished. And the focus really is on the transformation of the Company and executing against the strategy framework, which I firmly believe has the potential to increase operating performance for the Company moving forward.

Your next question comes from the line of Patrick Donnelly from Citi.

Maybe another one on the 4Q ramp, but on the margin side, a pretty meaningful step-up from whether it’s sequential or the rest of the -- prior part of the year. Can you just talk about the moving pieces to get to that implied margin? I think it’s 16.5%, 17% type margin in 4Q, yes, just a path to get there and get people comfortable that that’s a realistic number.

Sure. Hey Patrick, this is Ilan. I’ll start and Andy can chime in. But obviously, on the top line, we baked in kind of the updated mix with the software Life Science. And overall, I mean, on the operating expenses, we plan to continue some of those initiatives that we have been working on. And already in the third quarter, you can see that the operating expenses came in lower on a dollar basis. So, we continue to work on additional initiatives going into the fourth quarter. And again, overall, for the bottom line, I mean, we feel it is a realistic projection here.

I may only add we’re still focused on keeping our operating cost structure as tight as possible. So, the volume and mix will have a decent flow-through in the fourth quarter operating margin.

Okay. And then maybe on China, if you could just talk about that market, a little bit surprising to see the diagnostics piece softer as well. Can you just talk about what you’re seeing? Is it various policies over there that’s impacting things? It would be helpful just to get a little more discussion there.

Okay. So, the policies, I mean, are clearly impacting both Life Science and the Diagnostics side of the business. And they have -- they’re made in China for China. There’s the anticorruption, there’s volume-based pricing, and then you layer on top of that recession. And the government, I think, that is generally struggling to find the right way to stimulate the market. You can add in an extra effect of capital markets soft for biopharma, which was a focus for us for expansion and growth of our -- those pieces of our portfolio. They all have varying impacts to both sides of the business. And it’s just been a really tough ride through China, and there’s just no current clear reason to think that it’s going to improve in Q4. And on the Clinical side, it just created a softer pull for our products in China in the quarter. And we still have had a little bit of backlog on our Clinical business as we called out, which by the end of this year, we should be roughly where we expect to be, we may finish with a very slightly elevated backlog on clinical products at the end of the year, but we’re pretty much on track relatively speaking for that.

Okay. On the diagnostics side, is it more the instrumentation? Obviously, the VBP stuff comes up quite often with all diagnostic players. Are you guys seeing anything on that front yet?

What was the question?

The volume-based pricing. Sorry, we were just having difficulty here. Dara, do you want to comment on VBP?

Sure. It’s starting to impact how we navigate tender requirements. So I think how that’s translating to reality is things are a little bit slower as we’re navigating how best to position for new deal considerations. But value-based pricing, it has historically been applied to other sectors, but in a couple of provinces we’re starting to see it reach into IBD. [Ph] So I think right now, it’s just sort of impacting sort of forward-looking risk. And then as Andy said, we’re still working through some supply chain fulfillment challenges in backlog, which we’re weighted a bit towards that region as well. And we’re working through that and have line of sight for a really solid Q4 landing.

Okay. And maybe last one, just on the PCR side. You guys called out, I think, qPCR weakness, it seemed like ddPCR step down as well. Can you just talk about what you’re seeing in that market? Is it just a broader slowdown? Is it specific pockets there would be helpful.

I think again, it’s a compounding issues that we’ve already touched on here. So we’ve obviously got a fairly significant qPCR, Digital PCR footprint in biopharma. And again, the slowdown in early biotechs. We’ve seen a continuation of layoffs and project deferrals. That’s impacted the business. We’ve got the COVID compare. We’ve got all the challenges in China that we’ve already talked about. And I think on top of everything else, there’s kind of a club of systems out there in the market that were placed in the pandemic, and there’s a bit of free capacity out there. So, you roll all of these things together. Again, we refreshed our qPCR platform over the last couple of years. And again, the feedback that we get from out in the field is really positive in terms of how these products are being received in the market, but this compounding of market conditions right now is what’s adding up to a tough environment.

May I just add one extra comment. You look for the silver lining on occasion. And the customer demand in that -- in small biotech biopharma, the desire to take in Digital PCR, in particular, remain very strong. What we’re actually experiencing is just the deferral of when they’re going to make the purchase because they’re constrained on kind of cash expenditure and some other changes going on structurally on the program focus. So the demand side remains very encouraging.

Your next question comes from the line of Jack Meehan from Nephron.

So just wanted to talk about how the quarter played out here. So revenue was about 8% below the Street. Can you just talk about kind of the pacing of the quarter. Was most of the pressure you saw in September? And is it possible, are there any orders that slipped into 4Q for any reason?

I think, Jack -- this is Ilan Daskal. The way to think about it, I think we saw it throughout the quarter, but it accelerated towards the end of the quarter. So, the pace was kind of decline was stronger towards the end of the quarter. But throughout the quarter, it started to get weaker and weaker, but definitely, it accelerated towards the end.

Okay. And Norman, I know you mentioned in your comments, there’s potential for maybe a couple more bumps in the road along the way. I think there’s a debate amongst tools investors around further through the cutting cycle, or could there be kind of new risks ahead because of some of the changes in the funding environment for customers? Just curious like -- maybe like what you’re seeing through October? Do you -- I guess, like kind of what was the thinking that went behind the fourth quarter guide that you’ve built here?

Well, I think certainly, in terms of the fourth quarter guide, we look very carefully at kind of the order book and the funnel, the sales funnel, kind of accumulating as much data as we can to get the best assessment of where we think we’ll land for the year. When I think about bumps in the road, I think about the -- I think there were a lot of people that kind of thought the pandemic is over and everything will be back to normal next week. And I think we’re seeing a continuation of that with some of this kind of biopharma meltdown and the readjustments that are being made in some of these programs. It just -- I think we just have to be careful about calling the end and saying, it’s always possible that there’s something else that might bubble up.

Understood. Okay. And then on the income statement, you previously talked about kind of OpEx reductions. I was looking at the SG&A line kind of on a non-GAAP basis, it actually increased a little bit sequentially, and that was despite kind of revenue declining sequentially. So, I was just wondering if you could talk about what happened in SG&A in the quarter. And like is there room to like pull more cost out given the lower top line?

So usually, what you see -- it was a minor kind of step-up, Jack. Usually, on the fourth quarter, we see a much higher kind of step-up in SG&A which this time around, actually more of the initiatives that we have been working on will kick in on the -- in the fourth quarter. So, we don’t anticipate the traditional step up in the fourth quarter. For the third quarter, it wasn’t that material.

Your next question comes from the line of Tim Daley from Wells Fargo.

So first on the process chromatography business. So I think you were previously expecting down mid single to high single decline. With the update today, I’m getting to 13% down or so for the year. But even with that that implies a pretty significant step up in the fourth quarter. I think almost like 80% sequential dollar increase from 3Q to 4Q. So first off, are these numbers that I’m kind of getting to in the right ballpark? And then secondly, can you help us understand the visibility, confidence that you have to kind of get that big sequential step-up, especially given the commentary around a slower or lower than typical seasonality for this year-end?

Yes, I think maybe it’s kind of some of the math might be a little off there. I think the process chrom overall it’s going to end up at a lower number, in kind of the guidance implication there. And it’s kind of like mid-teens. And so, I don’t think we’re seeing a meaningful step-up in process chrom in Q4. But yes, I think that’s really probably just a bit of math there, it’s slightly higher.

All right. Got it. That’s helpful. And then, Andy, can you -- the supply chain impacts weighing on the third quarter Diagnostics revenues. Can you just provide some details on like what is that, how big the impact was in the quarter? And if you expect those delayed revenues to be fully recuperated in fourth quarter?

Yes. So essentially, we -- obviously, we’ve been communicating our supply chain challenge on the clinical side because various impacts of COVID plus we moved our plants from France to Singapore. We’re catching up quickly, but it’s sometimes difficult to get the pacing of that right. So, if you get a bit of delay, you also get a bit of pull-through, consumable pull-through delay as well. And so that factored a bit into our Q3. But we are looking at a pretty strong Q4, and we have good line of sight now. Our plant in Singapore is really cranking. We’ve done a lot of work leading out the workflows there. And so, we’re going to get the benefit of that in Q4 and also get some pull-through effect. So Q3 just ended up being softer as a result overall.

And then final one here for Norman. With the ‘23 guidance now 400 basis points lower, that midterm CAGR for 2025, the guidance updated in May now has an incremental 100 basis points or so steeper, I guess, headwinds in front of it. So, given the current environment, how are you evaluating the 2025 target? Or is this something that maybe will wait until a new CFO is in the seat to put their own fingerprints on, if you will?

So Tim, this is Ilan, I will chime in and then Norman probably will have some additional color. But already in the prior quarter, we communicated that the 2025 targets from our perspective is kind of in a holding pattern. We would like to get more insight and visibility going into 2024 in order to shape our thinking about the 2025 targets. So probably in the next kind of earnings call, early next year, when we have the 2024 kind of guidance in front of us, the 2025 numbers, we’ll know how to think about it and to see what is the reason impact and what magnitude, et cetera.

I think that covers it pretty well.

Your next question comes from the line of Conor McNamara from RBC Capital.

Just without getting into 2024 guidance, just how should we think about 2024 in general? And just which headwinds that you called out in this quarter likely to persist in 2024 and which are likely to end by the end of this year?

Hey Conor, this is Ilan. So I can start with obviously various aspects that are associated with the macroeconomic, I’m not sure personally that China will recover like in a few weeks. So that may take a little bit longer. The funding environment, which is obviously indirectly linked to the treasury yield is here to stay. The inflationary environment is here to stay for a while. So, there does and probably will continue for a while to have some impact on the smaller biotechnology companies funding, and the way they think about the pace of their spend. So these are definitely areas that we want to kind of think about it -- to think about and then not to mention the geopolitical everywhere now that is getting kind of -- to probably a new level that we have not experienced before. So, there are multiple fronts there that -- and when you think about Europe, I mean, overall, for us, Europe, generally speaking, is doing okay for us. But when you think about the macroeconomic, Germany is probably already in a recession. So, it’s going to be interesting. I mean specifically that domestically, we’re going into an election year domestically. So, we’ll have to wait and see how everything will shape up. But it doesn’t have to do anything with our own kind of organic initiatives, products, new products, the end markets that are not disappearing, they’re not going anywhere. So it’s only -- from my perspective, only a timing issue.

Okay. Great. And just following up to Patrick’s question about PCR. Can you just talk about ddPCR, specifically because that slowdown was worse than any of your other business units. So how do we -- can you give investors some framework to think about how that -- how we can get comfort that that’s definitely a market environment and not competitive pressure because there have been some competitors out there making some noise. So we just want to make sure that you still feel good about your market position there in ddPCR?

I still think we feel good about the position. I mean, we’ve made no secret of the fact that the competitive landscape is intensified. And as we reflect on Q3, I think as we called out in the scripts, we had a couple of really notable wins there that we think are going to help continue to position us well for the future. I think what we really saw in Q3, again, is an exacerbation of these biopharma impacts. We have put secular strength in the early biotech sector. And I think what we saw in Q3 was a cumulative impact of these deferred projects and layoffs in the continuing extremely tight budget environment. Once again, we’re seeing a lot of interest in the products, but the money is just not flowing. We continue to see healthy adoption and really strong acceptance of our QX600 platform. So, as we look to the future, if we all believe that these impacts in biopharma transient and when we emerge from it, we think we’re going to be in a really strong position. And then, of course, we’ve got competitors who are playing more in the lower end segments, and we plan to enter there with the QX Continuum platform in 2024. So for sure, the competitive pressure is intensifying, but I think we’ve got compelling responses and where we’ve got leading positions in these segments will continue to do well as and when these markets recover.

And just a quick follow-up on pricing. And I guess this is across everything in Life Sciences. What’s the pricing environment like? And how should we think about that going forward?

Yes. I think that the environment is still inflationary. As you probably appreciate, on the clinical side, tender-driven business, you can only take very modest and periodic price increases. And we do that when we get that opportunity. On Life Science, there is still inflationary effect and we will still look to try and take modest price increases as we move forward to help offset our inflationary pressures that we’re receiving. And we expect to do -- we’ve done that this year. We expect to do that next year. And I think in the quarter, we probably got just over 1 point of price, 1.5 points of price on a net basis and think that that should at least be a floor.

We’ve seen a mix impact there with process chrom as well.

Yes.

Okay. And just a final question. This for Norm. Just given the recent selloff in the space and specifically in your stock, how does that change your acquisition strategy, if at all? And would you still consider issuing equity to pursue an acquisition target in this environment?

So I think that kind of in light of the recent stock dislocation, I think we will very much consider continuing our share repurchases as part of our capital allocation strategy and obviously, at this point, not such a good currency for M&A. I think, in fact, while we do continue to kind of look at opportunities, I think it’s probably fair to say that more of our focus over the next several quarters will be centered around kind of navigating our markets and our continued operational transformation.

There are no further questions at this time. I would like to turn it back to Edward Chung for further remarks.

Thank you for joining today’s call. As always, we appreciate your interest, and we look forward to connecting soon. Thanks, operator.

Thank you. And ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.