Good day, everyone, and welcome to today's Bio-Rad Second Quarter 2024 Earnings Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions]. Please note this call is being recorded. [Operator Instructions]. It is now my pleasure to turn the conference over to Head of Investor Relations, Edward Chung.

Thanks, operator. Good afternoon, everyone, and thank you for joining us. Today, we will review the second quarter 2024 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; Andy Last, Executive Vice President and Chief Operating Officer; and Roop Lakkaraju, Executive Vice President and Chief Financial Officer. Before we begin our review, I'd like to remind everyone that we will be making forward-looking statements about management's goals, plans and expectations, our future financial performance and other matters. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties. Our actual results may differ materially from these plans, goals and expectations. You should not place undue reliance on these forward-looking statements, and I encourage you to review our filings with the SEC where we discuss in detail the risk factors in our business. The company does not intend to update any forward-looking statements made during the call today. Finally, our remarks today will include references to non-GAAP financials, including net income and diluted earnings per share, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release. With that, I'll now turn the call over to our CEO, Norman Schwartz.

Thanks, Ed. Again, we appreciate your joining us on the call today. I guess I would say overall, despite a challenging market environment, we did have a solid quarter with revenue in line with expectations and margins actually ahead of expectations, driven by product mix, productivity gains and overall good cost management. I would say that while we have seen some positive signs with the improved biotech funding. We are continuing to see constraints in biotech, biopharma spending globally. As such, we do think it's prudent to revise our full-year 2024 financial outlook to better reflect what I think was a more modest pace of market recovery than originally predicted. Roop will cover this in greater detail as we review our updated 2024 financial guidance. During the quarter, we continue to make progress establishing the new leadership team. You've already met Roop, our new CFO, and have gotten a sense of his priorities as he comes up to speed, our new heads of life science and clinical diagnostics. I would say, have also hit the ground running and are working closely with CEO, Andy Last, to align on key initiatives. Lastly, here, we have made good progress on our search for a new Chief Operating Officer and have identified several finalist candidates. We do hope to share an update with you on this front in the coming weeks. We are continuing our corporate transformation path, more recently with efforts in supply chain and core process improvements, which are really starting to contribute to our margin expansion. We expect to build on this progress and when our life science business rebounds in future quarters, we anticipate we'll see further benefit here. On the capital deployment front, we've continued to be successful with share repurchases having bought back $100 million with the…

Thank you, Norman. Good afternoon, and thank you all for joining us. Second quarter of the year reflected a continuation of the same macroeconomic and market trends we have experienced with several quarters in the biotech and biopharma segments in China, alongside a generally improved market environment for our clinical diagnostic platforms. Our clinical diagnostics business continued to show steady growth in the quarter, delivering solid gains both sequentially and year-over-year. Growth was broad-based across the portfolio in all regions with solid performance in our immunohematology business when compared against the supply chain constraints we experienced in prior year. As we look toward the second half of this year, we are anticipating a continuation of normalized growth within our clinical diagnostics business. While it was in line with expectations, our Life Science Group sales declined double-digit year-over-year, reflecting ongoing low demand in biotech and biopharma and in China. However, sequentially, second quarter revenue for the Life Science Group improved mid-single-digits, and when excluding process chromatography sales, core life science grew sequentially mid-single digits in both biopharma and academic markets. Similar to the prior year, our process chromatography resins posted a year-over-year decline, reflecting the ongoing destocking trend across the industry. More importantly for us, this is the result of several very large customers who stopped up heavily during the prior years due to the critical importance of our products for specific key therapeutics. Outside of these key customers, we are starting to see a return to a normalized ordering pattern and are now looking to 2025 for a return to growth. We remain confident in the long-term outlook for this product area. Excluding process chromatography, our core Life Science business continued to stabilize, declining low double-digit compared to prior year and in line with our expectations. The declines were again…

Thank you, Andy, and good afternoon, I'd like to start with a review of the second quarter 2024 results. Net sales were $638 million, which included approximately 1% currency headwind and represents a 6.3% decline on a reportable basis versus $681 million in Q2 of '23. On a currency-neutral basis, the year-over-year revenue decline was 5.4%. As Andy mentioned, this was the result of ongoing weakness in key life science end markets, somewhat offset by continued growth with the Clinical Diagnostics Group. Sales of the Life Science Group were approximately $251 million compared to $300 million in Q2 of '23, which is a decrease of 16.5% on a reported basis and a decline of 15.9% on a currency-neutral basis. The year-over-year decline impacted most product and geographic areas. Excluding process chromatography sales, which can fluctuate quarter-to-quarter, core Life Science Group revenue decreased 11.6% on a currency-neutral basis. Sales of the Clinical Diagnostics Group were $388 million compared to $380 million in Q2 of '23, which is an increase of 2.1% on a reported basis and 3.2% on a currency-neutral basis. Growth of the Clinical Diagnostics group was primarily driven by increased demand for quality controls and blood typing products. On a geographic basis, currency-neutral year-over-year revenue for the Diagnostics group posted growth across all three regions. For the company, Q2 reported GAAP gross margin was 55.6% as compared to 53.2% in the second quarter of '23. The increase in gross margin was primarily driven by cost control initiatives, product mix and lower logistics costs, partially offset by lower sales volume and continued higher material prices for constrained or strategic materials. Note that 90% of the improvement was driven by cost controls, product mix and logistics. SG&A expenses for Q2 '24 were $195 million or 30.5% of sales compared to $208…

Thank you. [Operator Instructions]. And we will take our first question from Patrick Donnelly with Citi.

Hey guys. Thank you for taking the questions. Maybe to start on the margin side. Obviously, a pretty nice performance in 2Q, but then, Roop, you just touched on to the cut for the year. Can you just talk about, I guess, what drove the strength in 2Q? And then, obviously, again, just that second half expectation margin down quite a bit there. Maybe just talk through the moving pieces as we work our way through the year and out of 2Q here?

Yes, certainly, Patrick, good to talk to you. So first of all, maybe just to start, I think just to remember, we are taking the overall gross margin up from a guide -- from where we were on the guide perspective based on the performance. And so even in the second half of the year, we expect stronger gross margin than what we had originally guided. Q2 is kind of strength in the gross margin, specifically is associated with mix. But the other part of it is really sustained improvements based on our cost initiatives and efficiency improvements and things like logistics costs that we've been very proactively managing. So those are the things that really helped Q2. And as we looked at these initiatives, the magnitude and timing can be a bit variable, and so we saw it flow through in the second quarter. We do expect that to sustain into the second half of the year and beyond. With that said, as we look at kind of the revenue and what we expect to flow through our factories, we anticipate more under absorption in the factories. And so we've been a bit conservative in giving kind of what that margin outlook is in the second half, while still taking up the overall range of the margin for the year.

Yes. And then -- and just the op margins as well? Just maybe talk through those with the SG&A line?

Yes, of course. Op margins, when I look at the actions we've taken on a proactive cost management and just efficiencies, productivity that we're driving throughout the different areas of OpEx, that's taking hold as well. I think part of the headwind on the OpEx, which then affects the op margin is just the fact that sales are coming down from where we originally expected. And therefore, the cost leverage -- cost structure leverage isn't as strong yet even though we've got the gross margins improving. So that's simply flow through, and we've been very proactive in terms of that headcount management through the year. I think one thing to keep in mind is from an operating expense standpoint, we've been very prudent in how we looked at headcount management and cost management. We'll see a little bit of uptick in the second half of the year just because of some of the projects and other things that we want to drive execution on it in the second half.

Okay. That's helpful. And then maybe just on process chrome. It seems like, obviously, some of the stocking lingering here and obviously, it seems like that's a big part of the Life Science decline for the year. Can you guys just talk about what you're seeing there? It seems like, again, you're taking out any sort of recovery for this year. But just what you need to see to kind of believe in a recovery there and visibility and just -- is it different geographies? I know it seems like it's concentrated to a few customers, but maybe just pull the card back a little bit on that piece?

Hey, Patrick, it's Andy. Yes, I'll take that one. Yes, I think, look, the story here is a mixed bag. There are some positives. We're seeing a number of projects that we're engaged in improving in the first half and actually low-double digit improvement. So that's a positive trend line. But those small projects in early phase are not material revenue contributors in the first year. The kind of pullback on our overall guidance on process chromatography is very much the same story as Q1. It's just a more acute understanding of the magnitude of destocking that a small handful of very large customers have to go through. And they've got multiple manufacturing facilities, and it's been that struggle of getting full line of sight to all their sources of inventory. And so we're just being very prudent in our view on process chrome for the rest of this year, and we expect to see recovery in '25.

Patrick, this is Roop. Maybe just to build on one part is the geo piece. And based on the customers that Andy spoke of, it's in various geos. So it's not concentrated in any one geo.

Okay. And then maybe just one last quick one. Just on the digital PCR side, obviously, always a focus for investors. Are you seeing anything different in that market, both competitively and just on the demand side? It would be helpful. Thank you guys.

I don't think we're seeing any real shift competitively that we've not already been seeing. Within the mix of life science overall, digital PCR instrumentation was the major factor again. Consumables were actually held up pretty well. And we -- and sequentially, quarter-to-quarter, we saw improvement. In fact, we saw quarter-to-quarter improvement broadly. It's really the -- in the case of digital PCR, it's a pretty tough compare in Q2 of last year, the call-out in the script of the onetime licensing fee and some of the kind of supply chain challenges that we actually managed to overcome in Q2 of prior year. So and as for the competitive situation, look, with maintaining our win rates in the segments we're focused in. And we feel very positive about the long-term outlook for digital PCR still.

Yes. And I think the -- this is Roop. I would just add, we are going to see second half strength in DD PCR over the first half. So when we think about that, we're pleased with kind of as it's coming back.

Great. Thank you guys.

Thanks, Patrick.

Thank you. And we will take our next question from Dan Leonard with UBS.

Thank you and good evening. At a high level, with the current guidance, do you think you've framed the operating environment appropriately? Or are there any areas where you're trying to be conservative or any further areas where you're speculating on improvement that you don't yet have visibility on?

Hey, Dan, this is Roop. Maybe I'll start. In terms of spectrum, I think we framed it well in terms of what we're seeing and across the different areas. Obviously, from a Life Science Group, the process chrome is the area that, as Andy spoke up, we're seeing the greatest headwind, if you will. And that really -- our position with these customers is very strong in terms of the end therapeutics that they support. Those are market leading therapeutics. And so we feel very good about that and it can't be displaced. It's just a matter of that destocking that's occurring there. As we just talked about DD PCR, we're seeing positive signals and expect that to grow. Clinical Diagnostics has been positive throughout the year, and we expect it to have some normalized growth rate as we continue. The margin is the one area that I framed, which is maybe a little bit more conservative, but part of this is mix being a contributor to our positivity so far. It's hard to predict mix exactly. And so we're mindful of that. And then as I mentioned, the under-absorption, beyond that, and I think we haven't touched on China and maybe in the questions. But China is the one variable that's an open question. The new stimulus that's been introduced. It's interesting, but I'm not sure it will have that much of an impact. So we're again mindful of that. So I think we're trying to be very prudent in our view of what to layout for folks to expect in the second half, recognizing the markets are still dynamic and especially in a couple of the areas that we're playing in. And China is probably the one that's most variable for maybe not just us, but others as well.

Understood. And thank you for elaborating on all those assumptions. Just a quick follow-up. I know the single cell product has been a very high visibility R&D efforts at Bio-Rad for a couple of years now. You launched it in June. Hopeful that you could give any color on your go-to-market strategy or how to think -- we should think about framing that uptake?

Yes. Dan, it's Andy. Thanks for the question. And look, I think we're consistent in where we think the value proposition for the product offering set, which is equal performance to the market leading solution, better value and a better workflow. And we think the long-term growth opportunity for single cell is solid. It's a sizable market. We expect it to continue to grow. I think the obvious acquisition of Fluent by Illumina is just kind of a testament to that. And I think that's going to kind of put more emphasis on value for the end market. We believe we've got a very well-positioned product with probably the best workflow of all the platforms. In terms of go-to-market, we've got a specialist focus in our early months of introduction to establish product performance and credibility out there with kind of key core labs and sensors. So that's the way we're approaching it as our platform value and we're kind of thinking about the work we'll do in the second half this year. We don't anticipate material revenue contribution that would change our outlook this year. But it's about building for next year.

Thank you, Andy.

Thank you. And we will take our next question from Tycho Peterson with Jefferies.

Hey, good afternoon. Maybe you look at Life Sciences and backing out chrome, you're still down kind of 4% in the year. Most of your peers are flat. Can you maybe just talk a little bit about why that might be the case?

Yes. I think we've got an element of mix that's playing into our disadvantage here, Tycho, amongst others and with the biopharma and digital PCR component. Maybe also a little bit with our qPCR business, since it was the beneficiary of a massive uplift in the COVID period. And we're still seeing some relative softness on recovery in qPCR instrumentation. So I think we've got that mix that's a little bit against us relative to others. And the other -- depending on other folks on the reagent instrumentation mix where reagents are holding up better this year overall. And I'd say the last piece that I would call out, which we should not forget is Q2 was a pretty tough compare for us. We had the onetime license fee. We actually -- despite the market we're starting to pull back really by the end of Q1 last year, we actually were doing a fair bit of supply chain recovery during Q2. So I'll compare was a bit elevated to pass other focus as well.

Okay. Capital deployment question, why not do a bigger buyback here? You've got peers buying $5 billion at 30x earnings. You guys are 5x extra carriers. Why don't do something more meaningful than the $500 million you just added to the repo?

Well, that's just -- that's the incremental authorization, I guess, and we're just mindful. I mean, those balance sheets that you referenced, Tycho, are large balance sheets. So that's one thing to keep in mind. With that said, we did close to $200 million through the Q2 period and through the blackout period, which we hadn't done. So I think our actions speak to our perspective that we're undervalued. The $500 million in incremental authorization, I think it's a strong message from the Board and us. And when you consider where our balance sheet is, that's a very reasonable percentage of our cash.

And then are you committing to kind of prioritizing that over M&A? I mean that's the other side of it. Your peers are saying multiples are still too high.

Yes. I guess, I'll start and maybe Norman, if you'd like to add. Prioritization, I think, listen, part of it is the technical aspect of the share repurchase and where intrinsic values are, and that's more of a technical answer. And so I wouldn't say we're necessarily prioritizing, but we're mindful and at the same time, M&A the right deals have to come. And as you mentioned, valuations have to be appropriate for the right technologies and they have to contribute to our product roadmap and strategy. And so timing is an important part of that. So we look at both as opportunities to drive long-term shareholder value creation.

And then maybe last one on digital PCR. Just with the continuum launch coming, any risks ahead of the launch, freezing the market? It's been delayed a couple of times.

Yes, nothing outside of the normal risks that go with new product introduction and then all those final steps you go through. We're still targeting an initial entry in Q4. Really, it's about staging for next year, Tycho. Nothing more to add at this point, I don't think.

Understood. Thank you.

Thank you.

Thank you. [Operator Instructions] And we will take our next question from Jack Meehan with Nephron Research.

Thank you. Good afternoon. Norman, I wanted to ask you about the COO search. It sounds like there's still a few folks in the mix there. As you look at the group, is CEO potential still a high criteria? And I guess, how do you think about that relative to some internal candidates you might have in terms of succession planning?

Yes. I think as we said before, part of this -- part of evaluating the candidates has been a CEO of succession, and that's still part of the -- that's still a critical part of the mix.

Okay. And then I also wanted to ask your latest thoughts on the Sartorius stake and just thoughts around potentially monetizing that to fund buyback or near-term M&A, if something presented itself? Just what's your latest thinking on kind of the strategic role of that state?

Yes. I mean it's -- we still do see it. It's a monetizable asset. I think that the question is what's the future with your team not extending its contract, certainly, his tenure has been really good for us. And it's been really good for the company. And our investment has done really well. And I think, candidly, it's given us a much more valuable monetizable asset. But I guess at the end of the day, he's stepping down doesn't really impact our kind of overall views.

Got it. Okay. And then I did have one cash flow question, Roop. On the relative inventory levels, I just kind of do some very basic benchmarking. It does look a bit bloated. Like if I look at inventory as a percentage of sales, maybe is one metric back in 2019 before the pandemic, it was around 24%. Today kind of annualized at over 30%. So maybe just it would be great to hear your thoughts like ability to start drawing this down to generate some cash? Are there any hurdles to doing that? Thanks.

Yes. Great point on that. You're spot on bloated. We haven't necessarily used that word, but we do think it's [indiscernible]. But I guess you pick your word. With all that said, we've got inventory. And some of it, quite honestly, has been purposeful because of the market, right? It's -- we needed to procure strategic materials to ensure continuity of supply. With that said, if I separate that out, we've got focused initiatives in terms of inventory reduction. Part of it is just operationally how we manage the sales and operations kind of alignment and there's improvements that are being made there. And we expect over time that that inventory will come down. And I'll say it more from an inventory turn standpoint, our inventory turns will improve, obviously, with revenue growth, you may see additional inventory on the balance sheet. But from an overall turns perspective, where we are today is unacceptable, and we're focused on improving that turns, which obviously will then drive stronger operating and free cash flow.

Great. Thank you.

Thank you. And it appears that we have no further questions at this time. I will now turn the program back to our presenters for any additional or closing remarks.

Thank you for joining today's call. We will be at the Wells Fargo Healthcare Conference in Boston in early September and hope to catch up with some of you in-person. And as always, we appreciate your interest, and we look forward to connecting soon. Take care.

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.