Good evening, and thank you for attending today's Bio-Rad Laboratories 2022 Earnings Results Conference Call. My name is Daniel, and I will be your moderator for today's call. [Operator Instructions]. I would now like to pass the conference over to our host, Edward Chung, Head of Investor Relations of Bio-Rad. Edward, please proceed.

Thanks, Daniel. Good afternoon, and thank you all for joining us. Today, we will review the third quarter 2022 financial results and provide an update on key business trends for Bio-Rad. On the call with me 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. Included in these forward-looking statements are 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 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 Executive Vice President and Chief Financial Officer.

Thank you, Ed. Good afternoon, and thank you all for joining us. 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 global operations. Andy?

Right. Thank you very much, Ilan. So as the world continued its must recovery from the pandemic, we experienced strong demand for both our Life Science and Clinical Diagnostic products, and our organization is broadly back to normal operations. We also had modestly higher-than-expected demand for COVID-related products, particularly in Asia Pacific. However, improvement in product supply in the quarter was slower to materialize than we expected which negatively impacted sales across several product lines, particularly early in the quarter, and we continue to carry a significant order backlog. As previously mentioned, the areas of challenge have been primarily electronic components for instruments. We did experience improved product supply as the quarter progressed, and we now see a positive improvement trend for product supply as we enter the fourth quarter. In addition, during the quarter, we experienced significantly elevated logistics costs and ongoing higher cost in raw materials. Inventory levels increased quarter-to-quarter, reflecting strength in demand and the order backlog as we focus on procuring the remaining key components. During the quarter, we launched our next-generation Droplet Digital PCR system QX600, which brings advanced 6 color-based multiplexing and application flexibility, especially in oncology and reproductive health to our customers. We are extremely pleased with the market response and have quickly built a strong order book. Also in Q3, we completed the acquisition of Curiosity Diagnostics and their PCR-1 system. This system provides a sample to answer, high multiplex and rapid diagnostic PCR system to facilitate our entry into the molecular disease testing market with a differentiated platform. Integration of this Warsaw, Poland-based company is progressing very smoothly. While relatively small, our business operations in Russia continued to be challenging as a result of increased sanctions and employee concerns over the military draft mandate. We expect sanctions to continue to impact operations for the near to medium term. Overall, we are very pleased with our performance in China, although the protracted Zero COVID policy had some extended effect on our Clinical and Life Science businesses in Q3, and we see the recovery to normal taking a little longer. In closing, as we enter Q4, our organization continues to focus on resolving the supply chain challenges, which importantly have already begun to ease reducing our backlog and meeting the high levels of demand we are experiencing from our customers. Thank you. And I’ll now pass you back to Ilan.

Thank you, Andy. Now I would like to review the results of the third quarter. Net sales for the third quarter of 2022 were $680.8 million, which is an 8.9% decline on a reported basis versus $747 million in Q3 of 2021. The third quarter decline in revenue was mainly a result of lower COVID related sales this year as well as the receipt of a onetime $32 million settlement for bank royalties from 10x in the year ago period. On a currency-neutral basis, revenue declined 4.1%. We estimate that COVID-related sales were $17 million in the quarter and continued to reflect an elevated level in demand, particularly in Asia as a result of the ongoing outbreaks in China. Year-over-year core revenue, which excludes COVID-related sales and the 10x $32 million settlement in the third quarter of 2021 increased 6.1% on a currency neutral basis. On a geographic basis, we experienced currency-neutral year-over-year core revenue growth in Europe and Asia. Core revenue in the Americas was largely flat as a result of the supply chain constraints that we have been experiencing in the past year. As Andy mentioned earlier, we continue to carry an elevated order backlog as a result of supply chain constraints and continued strong customer demand. We are now seeing higher production volumes and anticipate reductions of order backlog through the remainder of this year. Sales of the Life Science Group in the third quarter of 2022 were $317.9 million compared to $373.5 million in Q3 of 2021, which is a 14.9% decline on a reported basis and an 11% decline on a currency-neutral basis. Excluding last year's 10x settlement, the Life Science Group sales declined 6.9% on a reported basis and a 2.3% decline on a currency-neutral basis. Despite supply chain constraints, the underlying Life Science…

Thanks, Ilan. I thought it would be useful to take a few minutes to address the recent rumors of a potential transaction with one of our peers. So while I'm not going to comment on the speculation. I do think it would be helpful to reinforce our thinking around capital deployment in general. Our primary focus, as we stated a number of times, is investing in the organic growth strategy, most recently communicated at our Investor Day in the first quarter of this year. In this regard, we have solid R&D investment levels in the 9% to 10% range. And we are also investing to improve our channel reach and capabilities to allow us to grow in our key targeted markets. Additionally, we have multiple initiatives in process focused on building our systems and operational capabilities to support this growth. The next area of investment for us is, of course, inorganic opportunities, acquiring new products or technologies to further our strategy and at the end of the day, make us more valuable to our customers. Over the last several years, these have been smaller or medium-sized acquisitions, which over time have contributed to about 1/3 of our growth, if you look back. In all cases, we've given careful consideration to the strategic, financial and operational fit. It's clear that we've made a lot of operational progress in recent years. And we now feel we could acquire and absorb a larger and more transformational opportunity, if it met our strategic and financial metrics. And the third capital deployment avenue for us is buying back our own shares. Even though we did not buy anything back in this last quarter, we have been active here over the last few years. And today, we have about $300 million authorized by the board for this purpose. I think the point is that we see all 3 of these as important elements of an overall capital allocation strategy. So that really concludes our prepared remarks today, and we'll now open up the line to take your questions. Daniel?

[Operator Instructions]. The first question comes from Patrick Donnelly of Citi.

Norman, maybe I can just follow up on the capital allocation commentary there, helpful perspective. I appreciate that. Maybe just given kind of that three-pronged approach, we can dive in a little bit in terms of the larger deals, I guess, you've always kind of framed those as opportunistic, few and far between I guess, how do you see the pipeline currently? And then would you -- how do you think about the Sartorius stake in terms of using that for a deal versus the strategic value of it holding it as we kind of look at the landscape here?

Yes. So I don't think the landscape has changed markedly in the last several months, it's still about the same. As we've always said, they're few and far between. And -- but we do consider -- we do continue to look at what might be possible. Certainly, when we think of all of that, we still see Sartorius as very strategic -- and as you know, there's still 5 or 6 years left on the trust. So we've got a little bit of time to wait on that.

And I guess when you think about a deal in terms of -- if you didn't use Sartorius, you went after a large acquisition. I know you said in the past, you would be willing to use some equity, I guess, here kind of below $400. Is there more of a kind of lack of interest in kind of issuing a lot of equity with shares at this valuation? How do you think about that piece?

Well, I think it certainly depends on what the opportunity is, and I think we have to look at it holistically. We've got obviously, three elements that we can think about. We've got cash on the balance sheet. We've got debt capacity. And then I would say we are comfortable with some economic dilution using equity. But obviously, we're going to be careful and prudent with all of that.

Okay. That's helpful. So moving on from the capital allocation side. Ilan, maybe on the kind of near term here, just looking at the gross margin piece, can you just talk about, I guess, the headwinds you saw there? It seems like logistics, some raw materials. Can you just talk about, I guess, the visibility into the improvement there for, obviously, you adjusted the guidance a little bit. But just maybe the moving pieces there and how we should think about that as we get into 4Q and then even into '23.

Sure. Thank you, Patrick. I appreciate the question. Yes, so when we look at the third quarter, definitely logistics was a headwind and with our normalized kind of level of spend, but it was kind of interrelated somewhat also to the supply chain constraints. So there were still constraints in terms of specifically electronic components, as Andy mentioned in the prepared remarks. And there was also some mix within kind of the revenue itself. On a positive note, our manufacturing cost in terms of the FX was a little bit of a tailwind in terms of the overall cost there. As Andy mentioned earlier, we see an improvement, and we -- our guidance also bakes in a nice improvement in terms of the overall supply chain. And we do see an increased volume that is being manufactured constantly and incrementally. So that also will benefit the logistics cost overall. And we are very encouraged because the overall order backlog is still nice, although it's going down, but customers are still holding up. Logistics cost part of it, for example, was expedited shipments because customers do come first for us. So obviously, when it comes to the fourth quarter, we can see that the order backlog is still a nice size, although it's going down with the higher volume that we are able to manufacture.

Okay. That's helpful. And then just one last one just on the 4Q guide. Even with you guys kind of bring in the noncore -- or sorry, non-COVID down slightly, it's still implying a pretty healthy uptick there in 4Q, I think, into the teens even in terms of that growth. So is that just all the supply chain easing and kind of working through that backlog. Can you just frame, I guess, the visibility into the supply chain easing? Is it something you're already seeing? And then how much of that backlog can you kind of work down, convert in 4Q to kind of hit some of those numbers?

Yes. Patrick, it's Andy. So yes, I think we mentioned in the script that we're already seeing it easing. We were more constrained at the beginning of the quarter than as we came out of the quarter and now entering into Q4, we see our production improving. So I think that's our expectation right now is we will meaningfully work down a significant piece of our backlog as we get to the end of the year. We still expect to have some backlog as we move into the first quarter of next year. But -- we do expect improvement, and we do have the visibility on the production at this point in time.

Our next question comes from Patrick Donnelly -- my apologies. But the next question comes from Brandon Couillard of Jefferies.

Maybe a question for Simon. You did mention ddPCR is one of the standout growth drivers-- in the press release. Curious if you see any deceleration of growth in that category? Was there perhaps some customers waiting for the QX600 launch? And if you can just talk about the types of customers or markets that, that platform will open up would be helpful.

Yes. Thanks for the question, Brandon. We definitely had a few customers, I'd say, waiting for the launch of QX600. I'd say the quarter overall was a bit of a mixed bag for the franchise. We've heard already on the call that the supply chain challenges was a headwind in the third quarter and particularly with instrument platforms. And I think in ddPCR, we felt that a little more prominently than some of the other product lines. At the same time, as we've heard already, demand remains strong across multiple application segments, and we're very happy with the launch of the QX600 and the initial pipeline that we're building and seeing for that. So, I think in the quarter as a whole, the puts and saves kind of net out across multiple market segments. And as we enter Q4, we're sensitively confident of a rebound.

Got you. And then maybe one for Ilan. In terms of -- just back on the gross margins in the third quarter, any way to quantify the logistics and freight and other items in terms of the year-over-year impact on gross margins in the quarter?

Sure. Logistics was by far the highest kind of headwind. And the offset was somewhat the foreign exchange benefit throughout the global manufacturing footprint costs. And mix was probably the third kind of thing. But in terms of order of logistics was first.

Got you. And you could share with what that pricing realization was in the third quarter, and you mentioned some of that has been the capture is not quite what you put through in terms of the list price increases. Should we expect that to step up materially in the fourth quarter into the magnitude?

Yes, this is Andy. So we have a modest price realization through year-to-date, but clearly not sufficient to overcome all of the inflationary costs here especially since we have quite a backlog and below that backlog is being carried for a while now. So kind of pre price increases. And so as our backlog unwinds, we do expect to capture more of what we've put into our price increases. And so we're hopeful that Q4 will see some improvement as we roll in through the quarter.

Lastly, just on the Curiosity Diagnostics acquisition in the quarter. Is there any revenue associated with that business? If not, you can talk about commercial time lines and maybe just competitive differentiation of the multiplex platform versus others that are on the market?

Sure. Thanks, Brandon. This is Dara. So the platform is pre-commercial, so it's a technology acquisition. So there's still quite a bit of work to do to complete the assay development pipeline and clinical trials. It will be going into regulated markets. So we don't anticipate any contribute material contribution next year. I think it will be sort of beyond the 2023 time line as we roll through that development investment. So at a high level, it's a rapid multiples sample-to-answer PCR platform and we'll be targeting initially syndromic infectious disease applications. There are quite a number of features inherent in their approach that are differentiated versus other offerings. And we also think it will help us extend into additional market segments not currently served by the existing syndromic test platforms today. So look forward about -- looking forward to sharing more about that as time marches on in 2023.

The next question comes from Dan Leonard of Credit Suisse.

I have a couple. The first one on the supply chain challenges. Are they influencing at all your win rate in Digital PCR or any other market categories, but do you feel like you're still winning your entitlement and just absorbing the products in backlog?

I think we would say that we're mostly absorbing this in backlog, it's hard to claim that there's not a few months here and there. I think there are, inevitably, especially on the more commoditized product areas. But the size of our backlog has built through the year, and now we're working it down. So we've been very supported by basically customer loyalty to our product offerings. And so that's contributes a little bit to our elevated logistics costs in Q3 as we were really expediting shipments to them so a lot more in Q3 if this product did come off the production line. So yes, that's essentially, I think, how we see it right now.

Understood. And then just a couple of follow-up on capital deployment. Ilan, does that uncertainty that Bio-Rad might be deemed an investment company under the Investment Company Act I guess 2 questions. Has that been resolved? And then secondly, if it hasn't, does that have any impact on your ability to finance an acquisition?

Thanks for the question. So we have never perceived ourselves as an investment company. So -- and this is still the case. And this is not any showstopper for any potential acquisition or any target or any aspect of the capital allocation, whether it's our debt or issuance of capital or equity that is blocking us from pursuing any opportunity.

And possibly, you can comment on why you didn't repurchase any shares in the quarter?

We are trying to be as much as we can opportunistic coupled with the overall capital allocation thinking. And as you can see, the market is not growing maybe in the right direction, but definitely, we have still about $300 million debt on the plan and we'll continue to pursue the same kind of approach. And historically, if you recall, we had similar situations that market was down, and we were not in the market. And usually, when we step in, we step in with large larger chunks and in specific quarters. So -- we will just continue to pursue the same opportunistic approach that we adopted in the past.

The next question comes from Jack Meehan of Nephron Research.

Wanted to start on capital allocation. Norman, just given the talk of a large deal, one of the top questions I've gotten from investors is succession planning at Bio-Rad. I personally really enjoy working with you. So I hope it's not soon, but is there any color you can just share with the investment community on long-term leadership plan for Bio-Rad? And if you were to do a deal that led to a much larger organization? Just how would you structure a leadership team to manage that?

Yes. Well, okay. So first, I think I've still got a few more years in me. So that's the #1. We do work on succession planning internally and have, I think, some good ideas around that. I think that in terms of structuring something, I think it really depends largely on what it is. And we have to kind of evaluate how it fits, how it needs to be managed over the last several years. Of course, we've evolved into this kind of more what would I call it, a more functional organization. And that's allowed us to do a number of things and make a lot of progress. And again, I think it's time and situation dependent. Would we stay with that organization? Would we move to another kind of organization? Again, I think it's really all facts and circumstances.

Got it. And then on the business, Ilan or Andy, can you talk about like when you look at the backlog, just median time to deliver versus a normal period? Or is there a way to quantify how much larger sales would have been in the quarter if the supply chain issues didn't persist. I just look at the inventory, and we're talking about tens of millions of dollars bill,just any level of context would be helpful.

Yes, it's a tough one to answer. It's predominantly interim platforms, as we've indicated, electronic components and in some cases, an average is really meaningless in this regard because there's a very broad range of time associated with some of those backlogs and for particular customers. So it can be 6 weeks, it can be a few -- several months. And as the years progress that, that has built and we've built inventory, as you can see, reflective of our demand waiting on those final components, which procurement is spending a lot of time on chasing. And I don't think it's probably appropriate to put forth what Q3 might have been because that's probably not the right kind of metric to be focused on because we're rolling into Q4 at this point in time.

Yes. And Jack, what I can say, I can confirm that it was definitely much higher than the order backlog that rolled over from last year to this year, so at the end of last year. Another indication that you can look at is the higher inventory level that's now we carry in the balance sheet. And the incremental, a lot of it is in raw materials. So when it translates into revenue, so you get kind of an order of magnitude there of the kind of the opportunity, you can call it.

Got it. And then just the last one. Ilan, you mentioned the Russia business. I forgot if it was your Andy. Can you just remind us the size of the business for Bio-Rad and how that's performed this year? Is there a risk that you might be borrowed from selling to the country? Just how do you manage that?

Yes. I mean we have a team focused on deciphering and executing against this myriad of sanctions that come at us. More of the business in Russia for us is Clinical and Life Science. It's between 1% to 2% of sales. It fluctuates a bit on a typical year, and it is down a bit this year, as you might expect, more so on the Life Science side than on the Clinical side. And we literally have a team that's focused on just interpreting every single sanction and whether it impacts us or not and can we load this truck as expected or not. And it's not getting better, and it's difficult to know what it really will look like by the end of this year and moving into next year.

There are currently no additional questions registered at this time. [Operator Instructions]. We have a follow-up question from Brandon Couillard of Jefferies.

Ilan, since you quantified the interest income in the third quarter and then as we look at kind of $2 billion of cash on the balance sheet and move up in rates, you just talk about your cash, your capital allocation? And what would be a reasonable interest income rate to assume on that cash position out into next year?

Sure. Thank you, Brandon. Obviously, when we raised the last the bond with probably a great timing. Today, the [indiscernible] treasury is above the coupon that we pay. It takes time to catch up. Specifically, if you think about the bonds, it was about $11 million of an expense for the quarter, and this specific quarter was about $8 million of interest income, but it continues to catch up as we will continue to roll the investments. So it should get within the next 1 to 2 quarters, assuming that these interest rates will continue to be out there, at least into kind of parity between the 2 could also be kind of moving into a gain there.

We have another follow-up question from Jack Meehan of Nephron Research.

So a couple of more business questions. Process media, I'm not sure if I missed in the script, but just can you give a magnitude of the growth in the quarter and on top of discussion this earnings season has been stocking dynamics with customers. Just are you seeing any of that? Just any color on inventory trends of customers would be helpful.

Yes. This is Simon. We saw high single-digit growth in process chromatography in the quarter, and we've been very conscious of the commentary elsewhere on stocking patterns. In our franchise, we haven't really been subject to supply chain challenges, and we've been able to assure our customers that will be delivering in a promised fashion. So we really haven't seen any noticeable change in ordering pattern or stocking from our customers, but we continue to watch it very closely, of course.

Great. And then on the diagnostics side, the 2 businesses that weren't called out, diabetes and autoimmune. Can you just talk about how they performed in the quarter if they declined, like what might have been contributing to that?

Yes. The main sort of headwinds there were just supply chain-related instrument placements. Those are both closed systems, consumables across the board continue to post good growth. It was really our impact of inability to fulfill instruments.

Got it. And then last one is on the China region in Diagnostics. I know it sounds like in the past, you've managed through the lockdown recently, but just talk about how the region performed any impact.

Sure. Very similar to sort of the conversation that we had last quarter in that there are 2 dynamics. The most material one is the larger supply constraint dynamic given the inability to fulfill instrumentation into China. And then the second was the periodic lockdowns, which have an impact on routine testing as well as an impact on logistics flow, just getting materials into the region. At a high level, though, demand remains strong. And if we look at sort of the core clinical testing growth, it is demand is very much in line with pre-pandemic levels. The challenges really are these sort of circuit breaker events that just make the flow less than smooth over the last few quarters as well as the supply constrained headwinds that we're working through.

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

Yes. Thank you for joining today's call. We will be participating at the upcoming Crédit Suisse 31st Annual Healthcare Conference in Rancho Palos Verdes, California, in November, and hope to see some of you there. And as always, we appreciate your interest, and we look forward to connecting soon.

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