Good afternoon, ladies and gentlemen and welcome to the Third Quarter 2021 Bio-Rad Laboratories, Inc. Financial Results Conference Call. My name is Lydia and I'm your operator today. [Operator Instructions] I would now like to turn the conference call over to your host, Mr. Edward Chung, Head of Investor Relations. Please go ahead, Edward.

Thank you, Lydia. Good afternoon and thank you all for joining us today. We will review the third quarter 2021 financial results and provide an update on key business trends for Bio-Rad. With me on the phone 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; Annette Tumolo, 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 exceptions -- 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. Included in these forward-looking statements are a commentary regarding the impact of the COVID-19 pandemic on Bio-Rad's results and operations and steps Bio-Rad is taking in response to the pandemic. Our actual results may differ materially from these plans and expectations and the impact and duration of the COVID-19 pandemic is unknown. 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 net income and diluted earnings per share which are our 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 now turn over the call to Ilan Daskal, our Executive Vice President and Chief Financial Officer.

Thank you, Ed. Good afternoon. Thank you all for joining us and we hope that you and your families are well and staying healthy during these challenging times. Before I begin the detailed third quarter discussion, I would like to ask Andy Last, our Chief Operating Officer, to provide an update on Bio-Rad's operations in light of the current pandemic-related environment that we are experiencing globally. Andy?

Thank you, Ilan. So good afternoon, everybody. To start with, I'd like to take a moment to thank Annette Tumolo, our President of the Life Science Group for nearly 33 years of service at Bio-Rad as she plans to retire at the end of this year. Annette's efforts and leadership have contributed to significant growth for the Life Science Group and Bio-Rad and the company has started a search for a successor and we will provide an update in the coming months. Now, I'd like to take a few minutes to review our current state of operations around the world. We're now entering the seventh consecutive quarter of operating within the COVID pandemic and so I shall make my comments brief as we have now established an operating cadence with embedded employee safety practices. Our end markets continued to show improvement during Q3, with demand pickup in both life science and diagnostic markets in all regions. The supply chain constraints highlighted in our Q2 call, however, have persisted in particular, for supply and cost of plastic raw materials, electronic components and higher logistics costs. To date, we have been able to balance supply and demand through careful management. However, we see this supply constraint trends continuing through year-end and into 2022 and thus increasing the challenge of adequately meeting customer demand. As a result of the COVID-19 Delta variant, we recently pushed out our return to the workplace date for the U.S. into early November. During Q3, we introduced a mandatory vaccination requirement for all employees in the U.S. and are extremely pleased with the results of this decision. We are believing -- we believe we are maintaining our commitment to a safe workplace for all our employees. As we enter Q4, we expect COVID-related demand for our products to be sequentially lower. And overall, we believe the majority of our end markets are approaching close to normal operations, although we recognize that COVID will continue to create dynamic market challenges. So at this point, I'll turn it back to Ilan. Thank you.

Thank you, Andy. Now I would like to review the results of the third quarter. Net sales for the third quarter of 2021 were $747 million which is a 15.4% increase on a reported basis versus the $647.3 million in Q3 of 2020. On a currency-neutral basis, sales increased 13.8%. The third quarter sales include a $32 million settlement for back royalties from 10x. Excluding the back royalties, the Q3 year-over-year currency-neutral revenue growth was 9%. On a geographic basis, we experienced strong currency-neutral growth in the Americas and in Asia, while growth in Europe declined slightly due to a tough year-over-year compare of COVID-related sales. We estimate that COVID-19-related sales were about $57 million in the quarter as we continue to benefit from spikes in demand in geographies where new outbreaks have occurred. Sales of the Life Science Group in the third quarter of 2021 were $373.5 million compared to $324 million in Q3 of 2020 which is a 15.3% increase on a reported basis and a 13.9% increase on a currency-neutral basis. Excluding the $32 million settlement for back royalties, the underlying Life Science business grew 4.1% on a currency-neutral basis versus Q3 of 2020. The year-over-year sales growth in the third quarter was driven mainly by increases in Droplet Digital PCR products and excluding COVID-related sales, our core qPCR business also experienced nice growth driven by strong uptake of our newer generation CFX Opus platform. Process Media which can fluctuate on a quarterly basis, saw strong year-over-year double-digit growth versus the same quarter last year. Excluding Process Media sales and the $32 million settlement for back royalties, the underlying Life Science business declined 2% on a currency-neutral basis versus Q3 of 2020 due to lower COVID-related sales. When also excluding COVID-related sales, Life Science year-over-year currency-neutral revenue…

[Operator Instructions] Our first question today comes from Patrick Donnelly of Citi. Our next question comes from Dan Leonard of Wells Fargo. Dan your line is open.

Hi, thank you. So hoping, first, you could elaborate further on the margin guidance in the fourth quarter. It looks like operating margins are stepping down to 15%?

Sure, Dan. Actually, operating margin, we are guiding to a higher one. And if you bake it into the fourth quarter, I think it's also slightly higher. Are you comparing it year-over-year, sequential quarter versus prior -- the guidance? I'm trying just to gauge a little bit more versus which guidance are you comparing it to?

Well, the plug for the full year guide. I think you said 19.5% for the full year and given the non-GAAP results through the first three quarters, we're coming up with an implied 15% in Q4 to get to 19.5% and that compares lower than previous quarters, either year-on-year or sequentially.

Yes. So we did indicate slightly higher operating expenses in terms of the fourth quarter sequentially. And that's seasonality, some of the discretionary expenses that are back and some of employee-related expenses that are also sequentially higher. That's correct, then yes.

Okay. And then, just a follow-up. Can you offer an update on the progress you're making against the restructuring initiatives you announced back in February? Are you seeing any cost savings from those efforts? Or is that more of a 2022 event?

Yes. Dan, it's Andy here. So to parse the question first, progress is going very well. I would say we're on track with our expectations. So thinking of contributions to operating performance, it really is a delayed effect. The majority of that performance enhancement coming in 2023. Some will materialize in '22 more to the latter half of the year. But everything is on track against our expectations right now.

Thank you.

Thank you. Patrick Donnelly of Citi has re-registered the question.

Can you hear me all right now?

Yes, we can. Thank you.

Okay, great. Sorry about that. Maybe, Ilan, just touching on the supply and demand issues you guys kind of called out you and Andy, can you just talk through a little more detail maybe where you're seeing the pressures, whether it's business line or particular segments? And then again, it sounds like you're expecting it to persist through '22. Maybe just talk through what you guys are doing to address it, how we can expect that impact to play out over the next couple of quarters?

Yes, Patrick, this is Andy. So look, it's fairly broad and the challenge, we sell complex products. So you only need one component to be missing in the supply chain to impact you. So I don't think we're experiencing anything that's different to the rest of the industry or even beyond our sector just globally. And it is very hard to determine when this will tail off. So prudently, we're expecting it to transition into 2022 as well. But it can be as simple as an on-off switch to full integrated boards and plastics various products. So that's the issue we're facing. What are we doing? We are working extremely hard. The team on supply chain and procurement is really working our supply partners. And to date, we've been doing very well. But there are constraints and I think we view it as prudent to call them out because at some point, they start to impact your ability to meet customers in a timely way.

Right, sure. And along with the revenue potential disruption, obviously, increased costs could come along with it as well, Ilan. Maybe just talk about, are you guys expecting a margin impact from this? Are you seeing increased costs from this inflation, whatever it might be? Can you just talk about the input costs, if you're seeing any impact there?

Yes. Thank you, Patrick. I mean there are components and some areas that we do see pockets of price increase. Obviously, we baked in everything into the guidance. We'll have to continue and see kind of how long does it last and what does it mean, obviously, moving forward. But so far, we were able also kind of to balance it off with some of our productivity initiatives that we have internally. So yes, we did bake some of it into our guidance.

Okay. And then maybe one for Annette. It sounds like this is her last call, so congrats on the retirement. But maybe on ddPCR, it sounds like biopharma is pretty strong. Can you just talk about the impact of QX ONE there? What you're seeing in terms of the demand? How durable do you think this is? Obviously, the wastewater picked up around COVID but just how that segment is going and the expectations kind of going forward in terms of the growth profile.

Sure. Thanks, Patrick. Well, we have maintained the strong double-digit growth that we were seeing before the pandemic, throughout it. And we continue to believe that there is a sustainability to the level of growth that we're seeing in our entire Droplet Digital PCR portfolio. We certainly have penetrated the biopharma market across from discovery into QC and manufacturing with all of our platforms, the QX ONE playing out more strongly in the QC in the manufacturing segment. And we have a really strong demand and great pipeline moving forward. So we're very, very optimistic across the entire product line.

Very helpful. Maybe one quick last one for Norm, just on the capital deployment side, can you just update us on your appetite for larger deals? Any change to the strategic component of Sartorius or how you're thinking about Sartorius going forward, Norm?

Yes. So obviously, we still think of Sartorius as a very strategic asset for us. I think we feel good about the fact that we successfully closed the Dropworks acquisition this last quarter and we continue to have kind of a portfolio of opportunities that we're exploring going forward. So it's a pretty busy time.

All right, thank you very much.

The next question comes from Jack Meehan of Nephron Research. Jack please proceed with your question.

Thank you, good afternoon. My first question was on the diagnostics market in China. There's been a lot of focus on centralized purchasing initiatives in the region. I was curious what you might be seeing on the ground? How broad that might be? And just how you think Bio-Rad's business is positioned there on the diagnostics side?

Jack, I will let Dara answer this question.

Yes. Yes. So I think in general, kind of despite the ongoing sort of trend in the China market related to China for China and localization and other implications, we don't really see much impact there just given our mix and where we participate. It certainly is a trend we will continue to monitor, to inform both our manufacturing and supply chain strategies. But at this point, we don't see any negative impact from those macro level trends.

Great. And then when the -- I guess, stick with diagnostics. The recovery looked pretty good in the quarter. Maybe just comment though, do you think Delta had any impact on the business during the quarter in terms of utilization? Obviously, you ended up in a good spot but what did you see throughout August and September?

Yes. Similar to prior quarters, it's really sort of region-specific and how certain kind of health care systems are able to balance the mix of routine health care delivery and diagnostic testing versus dealing with an increased burden from COVID-related cases. In North America, really operating sort of to pre-pandemic levels, almost 100%. In Europe, we see a little bit of an impact to elective surgeries as was articulated in the opening comments from Ilan. So that's really the only area where we're a little bit behind pre-COVID levels. But overall, I would say, the health care systems are learning how to sort of operate in this new normal of delivering routine care and accommodating sort of acute spikes in COVID-related care.

Great. And then my final question, I want to turn to the Life Science business. So I think I caught, Ilan, in your comments, 22% growth, ex-COVID, ex-Process Media, so by my math, that's compounding in the double digits. A lot of your peers are more like mid- to high single digits is kind of what we've been seeing. Not sure if it's all ddPCR but just maybe broadly how you're feeling about the funding environment? And also, are there any other products that really have been standing out?

Sure. Annette, do you want to address the question? Or...

Sure. Well, we've seen really good recovery in our base business and even when we compare it to 2019. Throughout the course of the year, we've seen really strong performance from our protein quantitation business. Certainly, process is driving a lot of the growth there as well but digital PCR continues to be a very important growth driver for the Life Science group. And I'm not sure if I answered...

Congrats Annette on the retirement. Yes, that's helpful.

Thank you.

[Operator Instructions] Our next question comes from Brandon Couillard of Jefferies. Brandon your line is open.

Hey thanks, good afternoon. Annette, I want to echo best wishes in your future retirement as well. And a follow-up question on the ddPCR business, a couple of things. Any chance you could give us a sense of the mix today where it stands between capital equipment and recurring consumables? And any comments just kind of on the competitive landscape? We've seen some new introductions out there from a couple of other companies. Just curious what impact those might be having, if at all.

Sure. Sure. Well, we have essentially closed systems. So we get really, really good pull-through on all the systems that we sell. And I think last I looked, it was almost 50-50. So really good balance between the consumable pull-through and the platform sales. We're certainly aware of new entrants into the market. We know that Thermo recently launched a new low throughput digital PCR system. And we occasionally see these new products in the field. But frankly, we continue to win sales based on our differentiated value proposition and superior performance. And I think we feel pretty confident in our strategy and the current product offering that we have. I think, if anything, the new competition just really validates the utility of this digital PCR application in the bigger PCR market. So we're feeling pretty good about where we are.

As a follow-up to that, I'd be curious if you could just elaborate a little bit more on the Dropworks business. Can you share the revenue base with us, kind of the margin profile, a sense of growth over the last couple of years? And I'd also be curious if you could kind of touch on exactly why this platform is particularly suited for the low-end market, more basic research and diagnostics, whereas the QX ONE maybe isn't the right tool for that type of customer?

Sure. the QX ONE was really developed for the biopharma market, where high throughput and automation was really -- and very high performance were really the key drivers. I think when we want to address a broader saving qPCR markets with digital products, we certainly were looking for integrated workflows and that's something that we have with the Dropworks platform and the design and -- of this platform is well suited for cost-sensitive segments, the low end of the digital PCR market. And certainly, we think we can disrupt some of the higher end of the qPCR market with this product as well.

Okay. Maybe Ilan, any financials you can kind of share with us in terms of the revenue base or margin profile? Is it profitable or not? Any numbers on that business?

Yes, we usually, Brandon, don't break down that level of details within each of the business groups.

Yes.

Okay. May be I'll follow up then, just a clarification, Ilan. The core growth for the year of 12% to 13%, does that include the $32 million of back royalties from 10x? Just want to be sure.

No, that does not include that $32 million of 10x. It does not.

Got you. Okay. And then lastly, if you sort of think about '22 and granted, not expecting you sort of give guidance at this point but just a sense of how we should sort of think about the profitability trend next year as your ability to manage the P&L as the COVID revenues likely come down next year? And would it be relevant to think about the fourth quarter as kind of a good baseline in that context where most of the COVID revenues have kind of washed out next year?

Yes, it's a great question, Brandon. Obviously, generally, at this point, we are not yet prepared for -- to comment on the full 2022. But if you think about kind of -- regarding our initial thinking, we do believe that for us, COVID-related sales will continue to go down. And if you think about the guidance this quarter, it implies already in the fourth quarter, a range of about $20 million to $25 million for the COVID-related sales and we believe it will continue to go down. We'll have to balance the different inputs, the supply chain constraints, the longevity and what is it going to and how is it going to impact in our thinking about 2022. The material cost, there are different aspects that we still need to kind of compile and see what does it mean for the overall guidance. In terms of the core top line, we continue to believe that we have really good kind of base to think about kind of the next level in terms of the 2022. We -- if you think about it, we continue to be in the path to achieve our 2023 target model that we communicated back in December. That's our current thinking.

[Operator Instructions] We have no further questions in the queue. So I'll hand back to the team to close.

Thank you, Lydia. Thank you, everyone, for joining today's call. We appreciate your interest and we look forward to connecting soon. Thank you.

This concludes today's call. Thank you for joining us. You may now disconnect your lines.