Ladies and gentlemen, thank you for standing by, and welcome to the Bio-Rad Laboratories' Third Quarter Earnings Call. [Operator Instructions]. I'd now like to hand the conference over to your speaker today, Mr. Ron Hutton, Vice President and Treasurer. Please go ahead.

Thank you, Liz. Good afternoon, and thank you for joining us. Today, we will review the third quarter financial results for 2019. With me on the call today are Norman Schwartz, our CEO; Ilan Daskal, Executive Vice President and Chief Financial Officer; Andy Last, Executive Vice President and Chief Operating Officer; Annette Tumolo, President of the Life Science Group; and John Hertia, President of the Clinical Diagnostics Group. Before we begin our review, I would like to caution everybody 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 these 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 the 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 net 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. I'd like to turn the call now over to Ilan Daskal. Ilan?

Thank you, Ron. Good afternoon, and thank you all for joining us. We will review the results on a GAAP basis as well as commentary on a non-GAAP basis. Net sales for the third quarter of 2019 were $560.6 million, which is an increase of 2.8% on a reported basis versus $545.1 million in Q3 of 2018. On a currency-neutral basis, sales increased 4.5%. During the quarter, we experienced good demand across many of our key product areas and growth in all 3 regions. When comparing to the third quarter of last year, remember that Q3 of 2018 included about $6 million of sales that customers pulled into the second quarter of 2018, substantially all of it related to our Diagnostics business. If we adjust the easy compare of the sales that customers pulled in last year from Q3 to Q2, we estimate that the year-over-year currency-neutral sales growth for Q3 of 2019 was about 3.4%. Sales of the Life Science group in the third quarter of 2019 were $215.7 million compared to $206.6 million in Q3 of 2018, which is an increase of 4.5% on a reported basis and 5.7% increase on a currency-neutral basis. Much of the year-over-year growth in the third quarter was driven by double-digit growth in Droplet Digital PCR and in Food Safety as well as good demand within gene expression and western blotting product lines. Process media, which can fluctuate on a quarterly basis, had a slight year-over-year growth. Excluding process media sales, the Life Science business grew about 5.8% year-over-year on a currency-neutral basis. On a geographic basis, Life Science currency-neutral year-over-year sales grew across all 3 regions. Our Droplet Digital PCR platform continues to have good momentum, and we are scheduled to introduce next month the QX ONE, which is a fully…

[Operator Instructions]. Our first question comes from the line of Brandon Couillard with Jefferies.

Maybe for Ilan. I generally think about Bio-Rad as being the least macro-sensitive business in my coverage universe. Can you sort of elaborate on the parts of the Diagnostics business that you'd perceive as being a little more macro sensitive, perhaps in some instrumentation placements? And then on diabetes pricing that you mentioned in the script, is that a competitive dynamic? And what regions is it mostly concentrated in? If 1 or 2?

Brandon, this is John Hertia, I'll take that. I'd say that the overall macro diagnostics market in Europe is pretty soft. It's not just a function of our product line, but it's just -- in general, if you look at many of the market reports out there, and that's certainly reflected. We did see some growth in EMEA in the quarter. We're mindful about the fact that this was an easy compare to last year. We do look to continue a modest growth trend from EMEA. But as Ilan mentioned, we're watchful of the geopolitical instability and how that might impact our business in the Middle East. With respect to diabetes, we have been continuing to see price pressure over the quarters. That's certainly affected our business, and I'd say across most regions. But I'd also say that some of the decline this year was related to timing, which sometimes happens with shipments in our diabetes business.

And one for Annette. On the QX ONE launch, could you help us just sort of understand the mix of the current backlog between upgrades and new users? Do you expect that system to sort of open up accounts who would adopt it sort of given the workflow and plexing advantages? And can you sort of speak to sort of the traction of the system in the clinical markets right now?

Sure. This system was really designed primarily for BioPharma customers, and we know that we have current BioPharma customers who are interested in adopting the new system as well. But there are customers who have been waiting for this system because of the workflow and the multiplexing capability. I'm not sure if that answered all of your questions, Brandon.

Oh, I think so. Okay. And then maybe -- I'm not sure if Andy's here. Maybe Ilan, you could speak to -- now that you've sort of been in the business for about 6 months, where do you see some of the best opportunities for cost outs? And any specifics -- specific actions you would expect to take kind of over the next 12 months would be helpful.

If you want to?

I can certainly add. I mean SG&A -- I think Ilan called it out in the script. This is Andy, I'm sorry. SG&A continues to be a focus area for us, and we'll continue to work to reduce that as a percent of sales. Operating efficiencies broadly a gain though well -- we're not working to the release 2020 guidance yet or any expectations around that, but -- and SG&A is the primary focus for us.

[Operator Instructions]. Our next question comes from the line of Jack Meehan with Barclays.

I wanted to continue on with the QX ONE launch and just get a sense for the initial game plan. Is there a menu that you're looking to launch that with? What are some of the key assays that you're planning to roll out over the next year or 2?

That's a great question. So we made sure that this platform was 100% compatible with our current platform and assays. So we have thousands of RUO assays that are available for people to buy today and they can buy them tomorrow for the QX ONE. In addition, we'll be rolling out 4 color versions of those assays, so they could increase their multiplexing in one well with validated assays. Over time, we will likely move this platform into the IVD market, and that's when we'll have regulated menu developed.

Got it. Is there any color you can give on the economics of the platform? And is there -- and also, maybe just the size of the current installed base? And how many of those you expect to move on to the new system?

Well, I can say that we have spoken with quite a few current customers who intend to continue to use their old platform and add this platform into their workflow, and we have also spoken to quite a few new customers as well who don't have our platform yet. This is a higher-end platform than the QX200. So you get a lot more flexibility and ease of use and workflow flexibility, and you'll have to pay a little bit more for the platform.

Great. Keep it going, Annette. Maybe are there any updates you can provide in terms of some of the new product development in single cell using the droplet technology?

What I can tell you is we have several active programs. We just launched a new product for epigenomics in single cell. It's our ATAC-Seq product that is generating a lot of interest with our customers, and our collaborators are generating a lot of really great data using that kit. And we're working on next-generation systems for a single-cell RNA-Seq as well.

Great. And one final one, and I'll hop back in the queue. Just the results are about as in line with my numbers as you can get on the revenue line. So I have to follow-up on Brandon's question related to diabetes. That was really the only delta I see. John, you mentioned some -- there could have been some timing related to that? Is it possible to quantify how much may have moved into the fourth quarter?

Not really.

We have a follow-up question from the line of Brandon Couillard with Jefferies.

Maybe one for you, John. One of the other diagnostics players in the space alluded to some material change in the macro environment in China, specifically for diagnostics. Just curious if you've seen any changes in the landscape there.

Well, we do -- from a diagnostics perspective, we continue to see significant growth in Asia. But I guess I'd turn it over to Andy to talk about maybe China in general for the company. And then if you have any follow-up questions after that.

So with respect to China, more specifically, we've been encouraged by our year-to-date performance. We remain optimistic for Q4. I think like everybody else, we'd also put out the caveat that we're closely watching the geopolitical situation and impact of tariffs, which have been, so far, modest in our exposure. But we keep an eye on that for the long term and any changes. So we're cautiously optimistic as we look forward in China.

Okay. And then maybe one follow-up for Annette. Would love to get an update on the cell analysis portfolio. And specifically, any interest you're seeing in the ZE5 Cell imager?

Well, I think we're seeing good demand in our flow analysis products. And with respect to the ZE5, we see a lot of traction in pharma and BioPharma due to the particular feature set and value proposition it offers those customers.

Right. Maybe one for Norman, just to round out here. Cash continues to build pretty substantially on the balance sheet. The buyback is relatively immaterial in the third quarter. Just give us a sense of perhaps why the buyback doesn't seem to be a higher priority? And kind of your current view on the M&A pipeline and whether or not you might be any closer to finding something attractive out there.

So Brandon, I'm [indiscernible].

Yes. It's always...

Go ahead, Norman.

Yes. Yes. I've got that. I think that it's always a balance. You've got opportunities that you're looking at. And so you -- it's -- we try to keep the cash for those. But nevertheless, we did get in the market and did buy back some shares during the quarter. So again, it's a balance between saving it for the right acquisition and the buyback. So we're trying to manage it the best we can.

We have a follow-up question from the line of Jack Meehan with Barclays.

Maybe just to start on the process-risen business, so I know that was up modestly year-over-year. I think previously, you're assuming some modest levels of growth back half over back half. But is that still the implied assumption through the fourth quarter?

So, Jack. Yes, thanks for the question. The answer -- the short answer is yes. I mean we still project the incremental growth to be this year. So obviously, most of the growth we projected in Q4.

Okay. And then the gross margin of 56% was really strong, 250 bps year-over-year. Was there anything to call out in terms of some of the efficiency initiatives or mix of consumable versus instrument, which might have helped that progression in the quarter?

Yes. Great question. Thanks, Jack. There is, obviously, the mix with more consumables in this quarter relative to Q3 of 2018. That was definitely one major component there. And two other items that I would highlight will be the lower inventory reserves and the lower logistics cost. These are two items that we called out last year at the same time. And these are definitely items that in assay areas that we improved, and that contributed to the incremental gross margin this quarter.

Great. And maybe, Andy, I know you mentioned you weren't giving 2020 guidance at this point. But at the last Analyst Day in November of 2017, you had the 20% target. Just given the progression you've had the last few years and the trajectory year-to-date, I mean does that still feel pretty doable?

Yes. I think we're optimistic about exiting 2020. And I've stated -- with our stated targets in hand, I think at this point to say we can't achieve that.

Great. And maybe just a final one on the income statement, the tax rate came in a little bit below my forecast, but it still feels like there's a lot of opportunity to keep pushing that down over time. Ilan, is there a number you have in mind? Like is this good 25.5% number to use on a go-forward basis?

So, Jack. Yes, thank you. For this year, we project a 27% rate. Overall, it depends on the geographic mix. That's one main item that does impact the overall non-GAAP rate. And long term, we may get to the mid-20s, but I'm not -- I mean I'm not ready right now to kind of forecast 2020, and I'll provide an update on the next call. But for this year, it's still at the 27% level.

I'm showing no further questions in queue at this time, so that will conclude today's question-and-answer session. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.