Ladies and gentlemen, thank you for standing by. I am Kyle, your PGI call operator. Welcome, and thank you for joining QIAGEN's Second Quarter 2022 Earnings Conference Call Webcast. [Operator Instructions]. At this time, I would like to introduce your host, John Gilardi, Vice President, Head of Corporate Communications and Investor Relations at QIAGEN. Please go ahead, sir.

So thank you very much, operator, and welcome to our call. The speakers today are Thierry Bernard, our Chief Executive Officer; and Roland Sackers, our Chief Financial Officer. Also joining us is Phoebe Loh from the Investor Relations team. Please note that this call is being webcast live and will be archived on the Investors section of our website at www.qiagen.com. Today, we will first have some remarks from Thierry and Roland and then move into the Q&A session. A presentation with details on our performance is available on the IR section of our website, along with the quarterly release. We will not be showing the slides during the call. Before we begin, let me cover as usual, our safe harbor statement. This conference call discussion and responses to your questions reflects the views of management as of today, July 28, 2022. We will be making statements and providing responses to your questions that state our intentions, beliefs, expectations or predictions of the future. These constitute forward-looking statements for the purpose of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements. For more information, please refer to our filings with the U.S. Securities and Exchange Commission, which are also available on our website. We will also be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. All references to EPS refer to diluted EPS. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release for the second quarter as well as in the presentation for this call that are both available on our website. I would like to now turn over the call to Thierry. Thierry, please unmute your line.

Yes. Thank you, John, and it would be even better, obviously, if I unmute the line. I'm sorry for that. Thank you, everyone, for joining, and welcome to our conference call today. We are very pleased to report that our teams worldwide delivered solid results in the second quarter of 2022. We have again exceeded our outlook driven by strong double-digit sales growth at constant exchange rates from our non-COVID portfolio. In line with our guidance, our 5 pillars of growth are making solid progress towards our 2022 goals. While the macro landscape continues to change and to present new challenges, we still have confidence in the robustness of our company and our strategy. Our teams have been very proactive in shoring up our business to withstand those challenges. At the onset of COVID, we began strengthening our supply and manufacturing infrastructure against various constraints. This has definitely helped us to prepare the company for the current environment of supply chain tightening and rising costs. We also began implementing alternative energy system late last year at our German site. This will give us flexibility from now on with energy sourcing away from natural gas. This foresight has served us very well, as you can see in our continued delivery of strong results. We have been able to remain commercially and operationally agile during those changing times. And now allow me to get to our key messages for today. First, as mentioned, we exceeded the outlook set for net sales growth and adjusted EPS for Q2 2022. Net sales for the second quarter of 2022 grew to $544 million at CER, a decline of 4% over the same period in 2021. This result was driven by 10% CER growth in sales of our non-COVID products. At the same time, sales for…

Thank you, Thierry. Hello, everyone, and thank you for joining this call to review our results for the second quarter and the upgraded outlook for '22. Let me begin by walking you through our sales and the results in more detail. For the second quarter, sales were USD 544 million at constant exchange rates. This was well ahead of the outlook we set for at least USD 510 million. The key driver was, again, better-than-expected performance in our non-COVID product groups, which grew 10% CER and represented over 80% of total sales. Also remember that we had called out in the past a genomic technology sale of USD 20 million in the second quarter of '21. Excluding this factor, non-COVID sales were up 15% CER. Sales of products used in COVID testing declined 39% CER in the second quarter of '22. And while this was better than our expectations, testing volumes dropped significantly across many regions. At actual rates, sales in the second quarter declined 9% over the same period in '21. This was due to above 5 points of currency headwinds from the U.S. dollar against the euro and other currencies. For the second quarter, consumables and related revenues declined 4% CER over the same period in '21. Although instrument sales were down 5% CER, this was against a very tough comparison due to COVID testing demand. We are still seeing good placement trends in key systems. In terms of sales among the 4 product groups, let's start with Sample technologies. This is about 1/3 of total sales. As we said on the last quarterly call, we expect more favorable trends in the non-COVID sales during the course of '22. That was the case in the second quarter with non-COVID sales, up 8% CER representing nearly 80% of total…

Thank you, Roland, and we would like now to share with you all a few key points of progress in our portfolios. In Sample technology first, the new QIAxcel Connect system was launched in the second quarter. After QIAcube Connect and EZ2, this is part of the ongoing program to upgrade our automated sample preparation instruments. This launch of the QIAxcel builds on over 4,000 QIAxcel system already on the market being used for DNA and RNA quality analysis in both PCR and NGS workflows. The updated system offers higher sensitivity and a new level of connectivity. Much like all their instruments in the QIAGEN automation portfolio, it connects to the QIAsphere app, which allows real-time remote monitoring of the instrument. Second, in Diagnostic Solutions, we already mentioned the QIAstat-Dx Rise. But let me tell you why this is such a great addition to our portfolio. The QIAstat-Dx Rise is the only platform on the market, offering automatic loading and unloading of samples. That means hands-off sample preparation and processing. It employs 8 analytical modules and is the only system with the flexibility to allow the modules to be removed and used individually. So this is truly something unique in the industry for high-volume syndromic testing. As a reminder, we have a solid offering of 3 key CE-IVD test on QIAstat, respiratory, gastrointestinal and meningitis panels. In terms of menu in the U.S., we offer the respiratory panel and the respiratory for place. The GI panel was submitted to the FDA on time at the end of 2021. Discussions remain ongoing with the agency. However, it is probable the approval will come after the end of the year. At the beginning of the call, I mentioned the new CE-IVD assay for HSV quantification on NeuMoDx. This brings the menu to…

Ladies and gentlemen, we apologize for the pause in the presentation. Please remain online. We'll be hearing music until the presentation resume.

Thank you, Thierry, and again, technology. I would like to provide some additional perspective on the upgraded outlook for the full year '22 and also for the third quarter. We have increased our full year sales outlook to now reach at least USD 2.2 billion at constant exchange rates. This is an increase for the prior year -- prior outlook for at least USD 2.2 billion. We are affirming our expectations for double-digit CER growth in the non-COVID product groups after the 12% CER performance in the first half of the year. This includes a reestimation of our target for the 5 pillars of growth. We are also maintaining our conservative view on COVID testing demand. We continue to expect a decline in COVID sales from the '21 level of USD 704 million. In the first half of '22, we already generated USD 336 million of sales at CER and this is a significant amount of the COVID sales expected for the full year. The new outlook also reflects our updated views on the current inflation and macroeconomic trends. As Thierry mentioned, we are taking actions to mitigate the impact in terms of our supply chains and energy needs. On that point, our natural gas needs in Germany are going to be covered by another energy sources as of August. And while natural gas is used to heat our buildings, we don't need it for production. Our full year outlook has already taken into consideration the impact of about 1% of sales coming from Russia, the Ukraine and Belarus. We had suspended our business in Russia after the invasion of Ukraine. In terms of profitability, we now expect adjusted EPS of at least $2.30 at CER as compared to the prior outlook for at least $2.14 CER. This takes into consideration our plans to step up investments into our 5 pillars of growth in terms of R&D expenses and sales and marketing. We have also considered that costs are rising due to the inflationary trends for '22. At the same time, we continue with our disciplined view on operating expenses and have also implemented product prices increases in July on a country-by-country basis. The progress in our business, however, is increasingly impacted by adverse currency movements against the U.S. dollar. Based on exchange rates as of July '22, currency movements against the dollar are now expected to create an adverse impact of about 5 percentage points on net sales and about $0.10 to $0.11 per share on adjusted EPS for full year '22. For the third quarter, we have set a floor for both net sales and adjusted EPS. This calls for sales to reach at least USD 510 million CER and adjusted diluted EPS of at least $0.48 at CER. We also expect difficult currency headwinds in the third quarter. This means an adverse impact of about 6 percentage points on sales and about $0.02 to $0.03 on adjusted EPS. I would like to now hand back to Thierry.

Thank you, Roland. And before we go to the Q&A session, let me provide you with a quick summary and leave you with some, obviously, key takeaway messages. First, of course, COVID-related product did better than expected in Q2 while still experiencing a drop in demand compared to the year ago period. But first and foremost, what is very key is that we exceeded our outlook this quarter driven by a very strong performance from our non-COVID product groups. And we keep the same message. This is where the focus of the company is. Second, our teams continue to execute on advancing our portfolio with the launch of instrument upgrades and menu expansion in our growth drivers perfectly on plan. And as a last point, we have increased our 2022 outlook for sales and EPS after a very strong first half of the year. We are reaffirming our commitment for double-digit growth of our non-COVID portfolio in 2022, and we continue to take a conservative view on demand for COVID testing in the second half of 2022. QIAGEN is delivering on the goals we have set for this year, moving ahead from a position of strength and determined to create greater value from a truly differentiated portfolio with significant growth potential. As our teams stay focused on executing quarter after quarter, we are working to ensure the strength of our company and us in a dynamic and changing microenvironment. We continue to leverage our strategy anchored by focus and balance, focus on attractive market opportunities and our 5 pillars of growth and balance among customers in life science and molecular diagnostics as well as among the various regions of the world. With that, thanks a lot for your attention. And I'd like to hand back to John and the operator for the Q&A session. Thank you.

[Operator Instructions]. The first question comes from Daniel Wendorff of ODDO BHF.

And I'd like to better understand the dynamics of non-COVID related sales, what we have seen so far in Q1 and Q2. Maybe you can talk a bit about how important here are catch-up effects is the increased installed basis during the pandemic a key driver? Or is there just a continuous -- a general continuous trend to increase R&D spending. So I really like to better understand the dynamics here.

Thanks, Daniel. I think the main part of my answer here is it's basically a combination of different factors. First of all, you know that many parts of our portfolio are purely a menu play. Those are systems, for example, QIAstat or NeuMoDx that have been obviously benefiting from tailwinds with COVID because they have seen a very good increase of the placement, but they were not limited to be installed in a laboratory just to run COVID test. And we always highlighted that year after year, we will continue to increase the menu available for those platforms, and therefore, increase their potential for growth. This is why you have seen the extension of the menu on QIAstat beyond respiratory to GI and recently, meningitis in Europe. This is why we highlighted today also the launch of a new assay for NeuMoDx complementing already 15 assays -- 14 assays in Europe and therefore, being. And so this is the first movement obviously of favoring the growth. Second, if you remember, we had also a strong quarter of placement in Q1. Those systems, obviously, are now going to generate also consumption of menu in COVID for some of them, but also around the non-COVID menu. Third, there are some part of our portfolio that are very little or not at all impacted by COVID and that clearly benefit from a return to quasi normal of investment and activities in labs. The best system, obviously, or the best example is QIAcuity. Digital PCR has never been launched for COVID. Obviously, we took advantage of COVID to launch a specific COVID application with wastewater testing. But now the installed base that we are creating for the last year in the half is fully at play to receive, obviously, consumption of menu in the…

We take our next question from Dan Brennan of Cowen.

Dan, are you there? We don't hear you. Okay. Operator, let's move on to the next person.

We move to the next question, Patrick Donnelly with Citi.

Great. Can you guys hear me, okay?

Very well.

Okay. Good. Maybe just on focusing on the PCR side. It looked like the base PCR performance was really strong even if you back out COVID and digital PCR. Can you just talk about what you're seeing there? Maybe start with base PCR and then obviously, digital PCR, you touched on QIAcuity. You're getting into biopharma a bit, but maybe base PCR and then digital PCR as well, just the performance in the quarter? And then I have a quick follow-up.

Yes. Thank you, Patrick. I mean, digital PCR first, if you may, I mean, we are still, let's be also very clear in an infant launch after all. I mean this solution has been launched 1.5 years by QIAGEN. Obviously, more than 1,000 systems in 1.5 years in that difficult environment proves the quality of our solution and the fact that the market answers very well. But -- so here, we are -- in our plan, we are executing in what we basically proposed to you at the time of the launch is that once installed, those system needs to go as soon as possible into increased consumption to reach routine consumption. And the play now is to offer our laboratories more and more application. And this is why going to the biopharma development is extremely important for us because it's one of the most active market, obviously, for digital PCR. And so this is why we see both that nice increase of installed base and nice increase on consumption. At the same time, for digital PCR, it's also worth saying that -- you have seen the very important decision by the CDC in the U.S. to choose digital PCR to test for wastewater testing when related to COVID. It's an important win for this technology, and therefore, an important win for QIAGEN as well. On the more classical, I would say, PCR, we see obviously a sharp decline of COVID sales, but the non-COVID application are growing very substantially at double digits and more than double digit. And this is showing what, that many labs are coming back to a more normal pattern of consumption and they are back into their pre-COVID situation. And this is what we always said basically that there would be a point where investment will go back once again in academia, in research, but also in clinical into, let's say, non-COVID application. This is what we are seeing at the moment. And this is what is explaining our comeback on growth for this application.

We take our next question from Dan Brennan of Cowen.

Great. Thanks. Can you hear me?

Yes.

Great. Sorry about that. So in the last recession in '08 or '09, you guys held up exceptionally well. And I know, Thierry, you talked about it in your prepared remarks in terms of I guess, seeing some impacts or potentially seeing some impacts. I'm just wondering with the revised guide, have you assumed anything for impact this year? And when we look ahead to '23 is double-digit growth, ex-COVID still reasonable given the durability of your portfolio? Or if not, kind of how do we think about potential macro risks?

Well, I think we can take this -- both of us Roland and I, and I will appreciate Roland also to give his opinion. We both said in the presentation today that the current forecast for 2022, the full year forecast is completely factoring some visible trend obviously, the situation with the war in Ukraine and the geopolitical tension. So for example, as we communicated, we have suspended our operation in Russia, Russia and Ukraine, and therefore, all this is completely factored. Current trends regarding inflation, current trends regarding tensions on the supply chains are completely factored. But we also insist on 2 things, QIAGEN is a company with pricing power, and we are really very, very granular every year on passing price increase. We do it normally in a normal environment in December and January of every year. This year, we have decided, given the specific inflationary environment to do it twice. So we are passing a second price increase in June and July. And we are already, by the way, preparing the next wave, which would be for the next December and January. This is also factored in our forecast. Obviously, we need to be very clear. We have some customers that have purely annual contract with fixed cost or basically already contracted CPI increase. So the price increase never covers the entirety, obviously, of the revenues or of the portfolio. But any time we can and when it's accepted by customers, we are passing this year a second pricing. We have not factored any improvement in the supply chain constraint. But as we have explained today, perhaps our industry and in particularly QIAGEN, we are slightly more prepared than the rest of the world in those supply chain constraints. Why? Because for us, if you remember, Dan,…

We take our next question from Falko Friedrichs of Deutsche Bank.

My question is actually on the Sample tech business. Could you elaborate a little bit on the reasons for the very strong performance in the non-core business in Q2. Within Sample profit seems to be high single digits. So what was driving this higher growth over what you just mentioned your ambition is going forward for this business?

Thank you, Falko. And I think it's the translation of what we keep explaining for the last 2 years that RNA testing, which was basically behind the COVID numbers of Sample tech for QIAGEN has always been a rather limited part of our portfolio. Around 25% of Sample tech for us the real part of the portfolio is the DNA testing. And we said that when little by little, COVID would recede, we would see labs coming back to pre-COVID consumption of DNA testing. And they come back to the leading brand and the leading portfolio of solution on the market, which is QIAGEN. Obviously, also, because since Sample tech is one of our pillars of growth, we pay obviously a very granular attention in our commercial deployment and commercial strategy. So we are systematically basically visiting all our installed base to make sure that we can basically bring them back to a normal level of consumption. Let's not forget as well that we have continuously upgraded our range of automation, as we said today, Falko, once again. Remember, starting 2 years ago, we launched QIAcube Connect. Last year, we launched EZ2. This year now, we are going to -- we are launching QIAxcel. And we always said that there will be also in the coming 2 years, a new version of QIAsymphony. So this also is helping customers to move also together with us with better connected, higher throughput also system, and this is pushing our consumption, obviously, of Sample tech non-COVID.

We move to the next question from Casey Woodring of JPMorgan.

Just wanted to go through the business regionally. So I was wondering what drove strength in China? How much of that was COVID versus the base business there? And then, can you talk towards what you're seeing in Europe? It seems like results were mixed between countries there. So was that simply due to some COVID headwinds between countries? Or is there something else going on? And then specifically on the U.K. side, did you see any slowdown from academic customers related to the noise around the EU pulling the region's Horizon academic funding.

So first on to China. You remember when we communicated after Q1 results, we explained that we took very proactive measures on China regarding the potential lockdown. And we saw it come in as early as the first part of Q1, and therefore, we decided to basically deliver our commercial partners with more product than usual so that they could supply even if, obviously, shipping to China would become more difficult. So that's #1. It's not driven by COVID because you remember we have 2 activities in China. We have the purely classical QIAGEN product, and we have also a second brand. The QIAGEN product in China are not benefiting from COVID, why? Because no foreign products on COVID is accepted in China or is registered in China. So our growth in the classical QIAGEN solution is fully non-COVID. Of course, with our second brand, which, as Roland described, is a purely manufactured product locally. We also benefit also anytime there is a surge of demand for COVID. So that's for China. For Europe, as you said yourself, it's simply a very diversified pictures of the situation between countries. You know that Europe is a Mosaic. So when you see, for example, Germany, Spain and the Netherlands, we still double-digit CER growth trend in our Q2. We had, let's say, slower sales in France, Switzerland and the United Kingdom. United Kingdom is far too early for us to see a decline in investment into academia or research labs. On the contrary, we still believe that the budget allocated to the national center of research is still healthy. I think it's rather just sequentially 1 quarter. It's too early to say if it's a trend. Europe, every quarter shows a diversified pictures. I would say 2 things to conclude. First of all, there are some countries, obviously, where we also benefit for what has started in the second half of Q2, which is obviously strong demands on COVID. The strong demand of COVID goes either to antigen testing. It's not obviously a case and play, but let's be clear, also go to our PCR portfolio. But Europe, despite COVID is also a perfect translation of QIAGEN strategy with most of our instrument, which is the menu play. And it's very interesting, as Roland said in his part to see that, for example, the ratio between COVID and non-COVID in Europe of consumption of assays on NeuMoDx is still very much impacted by COVID, obviously in Europe, but has decreased in favor on the non-COVID portfolio already in Q2. And this is very encouraging because this is exactly where we want to drive our installed base.

We take our next question from Hugo Solvet with BNP Paribas.

I have a few on supply chain, Thierry, which you alluded to. Can you maybe remind us what business or product is mostly impacted by supply chain issue at the moment? And if you see that spreading to other parts of the business? Or is it contained or getting better? On the single-digit growth of the non-COVID Life Science business, which you mentioned in the press release, any differences in regional dynamics or client dynamics here that we should be aware of? Are you seeing any weakening of weak biotech funding environment starting to come through? And on NeuMoDx and on the sequential slowdown, could you maybe share with us some data point on the pull-through for the COVID and the non-COVID tests?

So thanks, Hugo. On the supply chain, again, I'm going to stress that while we said that no company is immune to the tension, I think that we are prepared because we are working hard on that for the last 2 years. And I believe that I wouldn't say we are completely protected, but we have it under control. Which are the parts that are the most affected? It's a mix of different products. There are some raw materials. There are some, for example, also specific papers for labeling components of instruments, such as, for example, electronic led boards. But overall, basically, we can manage. It doesn't create pure back orders in our companies, but we are for some products in allocation. It's better than pure back order. We are working on that. We have significantly also increased the level and granularity of communication to our people in the field and also our customers to make sure that they are fully informed of the situation. There is nothing more than the customers not knowing what's the situation of him order. But perhaps Roland, you want to add something also on the supply chain solution situation, I'm sorry.

Yes. I think for us now to be honest, I don't think there's any specific product to mention, but I do think if we had all impacted, it comes mainly by logistic hiccups because, as you know, shipping things around this day is difficult, in particular also out of China. But we think we are well prepared because clearly, with all the volatility we were facing over the last 18 months because of COVID, we were actually obviously ramping up inventories quite significantly. You can see it also in our balance sheet. So I do think that having this larger inventory levels so far served us quite well to have this more or less temporary issues becoming never an issue which were affecting QIAGEN customers so far.

Thanks, Roland. And to your second part of the question, Hugo. So first, you wanted to understand a bit the non-COVID basically situation for life science? And is that something that we can highlight? Yes, indeed, we see stronger trends at the moment in the U.S. As I shared with you, if you remember at the end of Q1, academia, especially in Europe, was rather soft in Q1 and has evolved a bit more favorably as we were progressing into Q2. So it's coming back. It's still a bit softer than in the U.S. but it's coming back. So it's encouraging. Let's see what is happening with the summer, obviously, starting in Europe. We don't see clearly, at the moment, a real impact at least on our activities on basically decreasing funding for biotechs or for so-called some research activities. We believe that the level of funding for public research and public academia is still rather healthy. And we don't see a drop for us of interest in our collaboration, especially with biotech companies. For NeuMoDx, I would just leave you with one numbers. I always disclosed to the market in the previous months that it was fair to say that NeuMoDx between Europe and the U.S. and even more in the U.S., as you know, because we don't have the which of the menu that we have in Europe. The 2021 results for NeuMoDx were driven by COVID at probably 80% to 85% of the total consumption. I'm happy to see that in Q2 in Europe, obviously, because this is where we have the menu, that ratio of COVID on the menu for -- on the menu consumption for NeuMoDx is lower than 65% to 70%. It depends on the country. So we see now that the system is installed, laboratories are starting to pick up our blood-borne viruses or our sexually transmitted diseases. Obviously, we need to continue to push that, but this is encouraging.

We take our last question from Matt Sykes with Goldman Sachs.

Thierry, maybe a high-level question for you. Just given the sustainable growth you've seen in non-COVID of double digits and what you're calling for in '23 and the level of investment you've been putting into your 5 pillars of growth, how are you thinking about the growth versus margin trade-off as you want to spend to fuel that growth at the same time, want to protect margins. Do you feel that there is a necessary trade-off? Or can you balance the 2 as we move into '23? Just would love to get your thoughts in terms of strategy for that.

I think Roland also could chime in. Also, I would say that I don't see it as a trade-off, I see it as a management duty. Obviously, we are perfectly aware that we want to -- if we want to optimize the potential of our 5 pillars of growth, we need to continue to invest -- heavily invest in R&D there. And this is explaining also some of the evolution, as we have explained, of our gross margin recently, which is below 68%. As you have seen, we have clearly given an explanation around that. We will continue to invest. I'm still thinking in 2 broad dimension that this company has a potential while those -- when those investments will start to pay off, obviously, to come back in a more normalized gross margin situation for QIAGEN between 68% and 70%. And I believe that we have definitely the potential to be very close to 30% operating margin, but without forgetting that we are still in an investment mode for part of our portfolio. That's how it's not necessarily a trade-off, it's a question of careful management of our priorities. But I'm sure that Roland also has a point here.

Matt, yes, I would agree that we -- QIAGEN, clearly, has a premium gross margin as well, in particular premium operating margins in the overall industry. So I would say, given the growth rate we are delivering, in particular, now more or less in 2.5 years on the non-COVID side, I do think there is clearly also we want to believe that we are able to match the balance between both quite nicely. It's quite sure that growth is important to overall the industry, in particular also to QIAGEN. But again, I would say we have I think a track record of very strong margins within QIAGEN.

Okay. With that, I'd like to end the call here. Thank you very much for your participation. As you know, please reach out to Phoebe or me. If you have any questions or comments or follow-up topics, we'd be glad to discuss them with you. Thank you.

Ladies and gentlemen, this concludes the conference call. Thank you for joining, and have a pleasant day. Goodbye.