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.

Andy Last:

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 concentrated in instrument sales primarily reflecting constrained biopharma spending, whereas consumable and reagent sales were largely flat, both sequentially and year-over-year. During the second quarter, we launched two new important life science platforms, the ChemiDoc Imaging Systems which is getting strong interest from customers and our new cost-effective single cell sample prep solution that is in the early phase of product introduction. Our Droplet Digital PCR franchise was soft in Q2, against a tough prior year compare that included the receipt of a onetime technology license payment and reduction of back orders created due to supply change challenge from prior periods mainly for QX600. However, excluding the onetime impacts in the prior year, revenue for ddPCR declined a more modest mid-single-digits. On a positive note, ddPCR reagents and consumables grew low-single-digits year-over-year despite the constrained funding environment. We are seeing strong interest in our recently launched ddPCR assay kits targeted at the oncology and cell and gene therapy markets. And we continue to maintain strong win-loss ratios for our Digital PCR platform in our current market segments. Importantly, we continue to target a fourth quarter introduction of the QX continuum which will allow us to end to the low-end segment where others have been primarily focused. In addition, we recently entered into a purchase agreement for a novel cutting-edge platform utilizing our core droplet technology that enables high throughput discovery of novel antibodies and T cell receptors and complements our phage display library. This is a high-growth, high-value market segment and assuming successful completion of development, we anticipate introducing this platform in the next two to three years. Reflecting on the current macroeconomic and market conditions, we were pleased to see the positive trend for capital raises for the biotech and biopharma markets continuing into the second quarter. As Norman alluded to earlier, we have yet to see this funding translate into improved orders as customers appear to remain conservative on capital deployment. Likewise, market conditions in China remain soft for the Life Science business, although we remain hopeful of some improvement in the outlook towards the end of the year and into 2025. In the Academic segment, we are seeing a slight softening of the global funding environment after a long period of strong research support. In addition to the slightly lower-than-anticipated NIH budget for the year, key European markets remain a mixed bag with lower funding in Germany, offset by more modest improvements in funding outlooks in the U.K., France and other EU countries. For Asia, the challenging research funding environment in China continues, and funding in Japan remains constrained, reflecting a shrinking economy, while Korean government spending on life science research remains soft as part of the deficit reduction. With these factors in mind, we remain cautious on the magnitude and timing of the recovery in life science markets and now with respect to more measured improvements in the back half of the year. We continue to expect steady normalized growth for our clinical diagnostics business in 2024. Operationally, we continue our focus on cost and productivity initiatives that have provided offsets to the softer top line. And as we look toward eventual market recovery for our Life Science business, we believe that Bio-Rad remains poised for further margin expansion. Thank you, and I will now pass you to Roop to review the financial results.

Operator:

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

Roop Lakkaraju:

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.

Roop Lakkaraju:

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.

Andy Last:

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 Donnelly:

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.

Roop Lakkaraju:

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.

Andy Last:

Thanks, Patrick.

Daniel Leonard:

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?

Daniel Leonard:

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?

Daniel Leonard:

Thank you, Andy.

Tycho Peterson:

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?

Tycho Peterson:

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?

Tycho Peterson:

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.

Tycho Peterson:

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.

Tycho Peterson:

Understood. Thank you.

Operator:

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

Norman Schwartz:

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.

Norman Schwartz:

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.

Roop Lakkaraju:

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.

Operator:

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.

Operator:

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

Yong Chung:

Thanks, Bob. Good afternoon, everyone, and thank you for joining us. Today, we will review the first quarter of 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.

Operator:

[Operator Instructions] We go first this afternoon to Patrick Donnelly of Citi.

Andrew Last:

Patrick, it's Andy. So let me take that question. So first on Process Chromatography in the quarter, I mean, big -- a tough compare to 2023 for sure, I think the Core Life Science business kind of really met the expectations. So we did call out that I think for us, Process Chromatography is softer than we anticipated. And that kind of drove the delta for us. As we look forward to the rest of the year, at this point in time, we're considering the Process Chrome is going to be softer than originally anticipated. I just want to reiterate because it's a valid question. We're not seeing that we're losing customers. We're maintaining share. In fact, we still believe we are winning share as we called out in the script.

Patrick Donnelly:

Okay. So I guess when you think about maintaining a guide for the year overall, Process Chrome softened a bit. Are there offsets that came in better than you expected that are now -- you're thinking a little bit higher growth for the year? I'm just trying to figure out the balance here and the visibility into [ this? ]

Patrick Donnelly:

Okay. And then maybe just on ddPCR, how did that perform in the quarter? How are you seeing the competitive landscape there? How did things trend and expectations for the year on that front as well would be helpful.

Operator:

We go next now to Dan Leonard of UBS.

Andrew Last:

Yes. So thank you for the question. It's Andy again. So I think where we sit right now are really encouraged by the influx of capital into Biotech, Biopharma. That really is a prerequisite to second half [ x ] growth. It's not showed up in our order books as yet. And [ no ] the funnel is we're starting to have more positive sentiment and conversations within that segment. But it's not showed up yet a hard and fast orders.

Andrew Last:

Yes. I think I kind of answered that question as a carry on from my previous answer as it relates to biotech, biopharma. And I do think that we need to see the kind of encouraging signs turn into orders for the second half, which obviously will generate the ramp. Process Chromatography, we do view as being really a more challenging year overall due to destocking. But we see some good growth in our Clinical Diagnostics business. And we envisage that continuing throughout the year. So I think really just a reconfirmation of the comments that we made in the script and my earlier answer.

Roop Lakkaraju:

Yes, this is Roop. I'll take this to start. First of all, it did come in a little bit stronger, which we were very happy about. And part of it was expected just based on the cost actions we've taken and these sort of things, but also what played a part is the mix. And so that helps support a little bit of a stronger gross margin there. I think as we think about the rest of the year, and as Andy pointed out, we feel good about the overall view for the full year on the gross margin based on mix and quarter-to-quarter movement, we may see a slight movement in that gross margin. But overall, for the full year, we still feel very confident as it relates to how it fits in with our overall outlook for the year.

Jack Meehan:

First question is for Norman. I was just wondering if you could give a little bit more color on when we should expect updates in terms of the management hires for the new COO? And also the plan for the new Head of Diagnostics?

Jack Meehan:

Great. And then for Roop, first, welcome to Bio-Rad and I had a couple of questions for you. The first is, could you just talk about, like as you're new in the seat, how you went about sizing up the guidance for 2024? And second is, if you could just talk about the cadence you're expecting for margins starting from 9.7% to get to the full year target? Like how you feel like that phases throughout the year and how you got confidence in that?

Conor Noel McNamara:

Norman, just one for you. I appreciate the color on the management departures and how that -- the timing was a lot of it was personal related, but can you give us more color on how other nonmanagement employee retention has been? Has there been any fallout from some of these departures?

Conor Noel McNamara:

Okay. And then just the color you gave on some of these ddPCR partnerships those are great announcements. But can you just kind of talk about some of the revenue opportunity for Bio-Rad. And is that -- do you see additional equipment placements as a result of these there's consumable pull-through? What's kind of the expected ramp of any sales benefit for some of those announced partnerships?

Conor Noel McNamara:

Great. And I don't know if this is your last earnings call, but if so -- best of luck in retirement, and Roop, welcome to the team.

Operator:

[Operator Instructions]. And gentlemen, it appears we have no further questions this afternoon. Mr. Chung, I'd like to turn things back to you, sir, for any closing comments.

Operator:

Thank you, Mr. Chung. Ladies and gentlemen, we'll conclude the Bio-Rad first quarter earnings results call. Again, thanks so much for joining us, and we wish you all a great remainder of your day. Goodbye.

Edward Chung:

Thanks, Jenny. Good afternoon, everyone, and thank you for joining us. Today, we will review the fourth quarter and full year 2023 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 Simon May, President of the Life Science 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 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 will now turn over the call to Andy Last, our Executive Vice President and Chief Operating Officer, to provide an update on Bio-Rad’s global operations.

Norman Schwartz:

Okay. Thank you, Andy. So, first, I’d like to review the results of the fourth quarter and the full year. So net sales for the fourth quarter of 2023 were $681.2 million. It’s a 6.7% decline on a reported basis versus $730.3 million in Q4 of 2022 and a 7.7% decline on a currency-neutral basis. Similar to the prior quarter, the fourth quarter year-over-year revenue decline was primarily the result of ongoing weaknesses in the biotech and biopharma end markets, again, primarily impacting sales of our Life Science segment products. In addition, we continue to experience weak demand for Life Science products in China. I think both as a result of the macroeconomic environment, as well as to some extent, the local made-in-China initiatives. COVID-related sales in the prior year were $13.4 million and immaterial in the fourth quarter of 2023. Therefore, core revenue, which excludes COVID-related sales, decreased 6.0% currency-neutral. And then on a geographic basis, currency-neutral revenue decreased year-over-year in the Americas and Europe and was relatively flat in Asia. The sales of the Life Science Group in the fourth quarter of 2023 were $291.1 million, compared to $359.7 million in Q4 of 2022, which is a 19.1% decline on a reported basis and 19.9% on a currency-neutral basis. Excluding COVID-related sales, the Life Science year-over-year currency-neutral core revenue experienced a broad-based decline of approximately 17%. In addition to the challenging biotech, biopharma end markets and soft macroeconomic conditions in China during the quarter, ddPCR and qPCR sales faced difficult compares due to the backorder burn down and other factors Andy mentioned in the year-ago period. And when excluding process chromatography sales, the underlying Life Science business decreased 22.1% on a currency-neutral basis versus Q4 of 2022. And finally, the Life Science Group revenue excluding process chromatography and COVID-related sales decreased 18.7% currency-neutral. On a geographic basis, Life Science year-over-year core revenue decreased across all three regions. Conversely, we saw broad-based growth for the Clinical Diagnostics Group, fourth quarter sales of the Clinical Diagnostics Group were $389 million, compared to $369.6 million in Q4 of 2022. This represents a growth of 5.3% on a reported basis and 4.2% growth on a currency-neutral basis. And then core Clinical Diagnostics year-over-year revenue, which excludes COVID-related sales increased 4.3%. The Clinical Diagnostic Group benefited from particular strength in diabetes product sales, as well as from the reduction of elevated backorders. On a geographic basis, the Diagnostics Group revenue is primarily driven by strong growth in Asia. For the company, Q4 reported gross margin was 53.8% on a GAAP basis and compares to 54.4% in the fourth quarter of 2022. The year-over-year gross margin decline was due to a number of factors including lower manufacturing volume, the impacts of inflation and inventory reserves. Amortization related to prior acquisitions recorded in cost of goods was $4.5 million, as compared to $4.4 million in Q4 of 2022. SG&A expenses for the fourth quarter of 2023 were $207.1 million or 30.4% of sales, compared to $212.2 million or 29.1% in Q4 of 2022. The lower SG&A in the quarter was mainly due to lower employee-related expenses, partially offset by a weaker dollar and a facility lease impairment. And total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.2 million versus $1.7 million in Q4 of 2022. Research and development expense in the fourth quarter was $63.9 million or 9.4% of sales, compared to $66.2 million or 9.1% of sales in Q4 of 2022. The lower expense levels reflect both lower employee-related and project expenses. Fourth quarter operating income was $95.3 million or 14% of sales, compared to $118.7 million or 16.2% of sales in Q4 of 2022. And looking below the operating line, the change in fair market value of equity security holdings, which are substantially related to Bio-Rad’s ownership of Sartorius AG shares added $324.3 million of income to the reported results. During the quarter, interest and other income resulted in net other income of $8.8 million, compared to net other expense of $6.1 million last year, primarily driven by increased interest income from investments. Effective tax rate for the fourth quarter of 2023 was 18.4%, compared to 24.2% for the same period in 2022. Tax rates for both years were driven by unrealized gains in equity securities and the lower rate in 2023 was primarily a result of changes in the geographical mix of earnings. Fourth quarter reported net income was $349.7 million or $12.14 diluted earnings per share, compared to net income of $827.7 million or diluted earnings per share of $27.78 in Q4 of 2022. This change from last year is again largely related to changes in the valuation of Sartorius holdings. So moving on to the non-GAAP results. On a non-GAAP basis, we have excluded certain atypical and unique items that impacted both gross and operating margins, as well as other income. These items are detailed in the reconciliation table in the press release. So looking at the non-GAAP results for the fourth quarter, in cost of goods, we have excluded $4.5 million of amortization of purchased intangibles and a small restructuring benefit. These exclusions move the gross margin for the fourth quarter of 2023 to a non-GAAP gross margin of 54.4% versus 54.9% in Q4 of 2022. Non-GAAP SG&A in the fourth quarter of 2023 was 29.8% versus 28.5% in Q4 of 2022. In SG&A, on a non-GAAP basis, we have excluded amortization of purchased intangibles of $1.2 million and in vitro diagnostics registration fee in Europe for previously proved products of $8 -- of $1.8 million and $851,000 of restructuring-related expenses. Non-GAAP R&D expense in the fourth quarter of 2023 was 9.1%, basically the same as 2022. In R&D on a non-GAAP basis, we have excluded $1.3 million in the restructuring expenses and $400,000 in acquisition-related costs. And the cumulated -- in the cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 14% on a GAAP basis to 15.5% on a non-GAAP basis. And this non-GAAP operating margin compares to a non-GAAP operating margin of 17.4% in Q4 of 2022. We’ve also excluded certain items below the operating line, which are the increase in the value of Sartorius equity holdings and a loan receivable of $324.3 million and a $965,000 loss on venture investments. The non-GAAP effective tax rate for the fourth quarter of 2023 was 22.4%, compared to 28.1% for the same period in 2022. The lower tax rate in 2023 was primarily driven by the geographical mix of earnings and a release of reserves related to resolution of certain tax positions. And finally, non-GAAP net income for the fourth quarter of 2023 was $89.3 million or $3.10 diluted earnings per share, compared to $98.5 million or diluted earnings per share of $3.31 in Q4 of 2022. So now, for the full year results. Net sales for the full year of 2023 were $2,671 million, which is a 4.7% decline on a reported basis, as compared to $2,802 million in 2022. On a currency-neutral basis, full year of 2023, net sales decreased 4.1%. COVID-related sales for the full year were about $4 million, compared to $109 million in 2023 -- 2022. So that core year-over-year revenue, which excludes COVID-related sales, decreased 0.4% or effectively flat on a currency-neutral basis. Now, looking at full year sales results by segment, sales of the Life Science Group for 2023 were $1,178 million, a year-over-year decline of 12% on a currency-neutral basis. When excluding COVID-related sales, Life Science year-over-year currency-neutral core revenue declined 4.9%. The majority of the year-over-year decline was driven by process chromatography, qPCR products and Western blot. On a geographic basis, Life Science currency-neutral full year core revenue, which as a reminder, excludes COVID sales, declined in Asia and Europe while the Americas posted modest growth. Sales of the Clinical Diagnostic products for 2023 were $1,489 million, which represents a 3.2% growth on a currency-neutral basis. When excluding COVID-related sales, the Clinical Diagnostics year-over-year currency-neutral core revenue growth was 3.4% and was driven by diabetes, quality control and blood typing products, partially offset by a decline in infectious disease products. On a geographic basis, Clinical Diagnostics currency-neutral full year core revenue growth grew across all three regions. Overall, company full year non-GAAP gross margin was 54.2%, compared to 56.6% in 2022. The year-over-year margin decline was driven mainly by product mix, lower COVID sales, inventory reserves and lower fixed cost leverage. Full-year non-GAAP SG&A expense was $814.6 million or 30.5% of sales, compared to $805.4 million or 28.7% of sales in 2022. The higher SG&A was related to SAP implementation in Asia, legal fees, a lease impairment and higher discretionary spend, partially offset by lower employee-related costs. Full year non-GAAP R&D was $254.8 million or 9.5% of sales versus $256.7 million or 9.2% of sales in 2022. And full year non-GAAP operating income was 14.2%, compared to 18.7% in 2022, which reflects the effects of revenue decline, shifts in mix and lower fixed cost absorption. And lastly, the non-GAAP effective tax rate for the full year of 2023 was 22.3%, consistent with our guidance range and compared to 22% in 2022. So moving on to the balance sheet. Total cash and short-term investments at the end of 2023 was $1,613 million, compared to $1,796 million at the end of 2022 and $1,765 million at the end of the third quarter of 2023. The change in cash and short-term investments from the third quarter of 2023 was primarily due to share repurchases, working capital and the timing of tax payments. Yesterday, just to mention, we concluded a new $200 million credit agreement maturing in -- now in February of 2029, which provides additional liquidity and enhances Bio-Rad’s financial flexibility. And this new credit line replaces a prior $200 million facility that was maturing in April of this year. Inventory at the end of Q4 increased slightly to $780.5 million from $775.8 million in the prior quarter and was primarily due to a higher level of finished goods. As we move on from the supply chain challenges of the past two years, we continue to anticipate inventory decreasing to more normal levels over the next six quarters to eight quarters. For the fourth quarter of 2023, net cash generated from operating activities was $81 million, which compares to $79.7 million in Q4 of 2022. This increase mainly reflects changes in working capital offset by the timing of tax payments. For the full year of 2023, net cash generated from operations was $374.9 million versus $194.4 million in 2022. This increase mainly reflects changes in working capital. During the fourth quarter, we purchased 659,000 shares of our stock for a total cost of $200 million or an average purchase price of approximately $303 per share, as we continue to be optimistic with our buyback program. Probably useful to note, we still have nearly $280 million available for share repurchases under the current board-authorized program. And further, just so you understand, full year share buybacks totaled 1,268,000 shares for approximately $429 million. Again, that’s for the year. As a comparison, we purchased about 479,000 shares of our stock for $216 million in 2022. Adjusted EBITDA for the fourth quarter of 2023 was $136.8 million or 20.1% of sales and adjusted EBITDA in the fourth quarter of 2022 was 21.4%. Full year adjusted EBITDA, including the Sartorius dividend was $535.9 million or about 20.1%, compared to 23.8% in 2022. Net capital expenditures for the fourth quarter of 2023 were $42.1 million and full year CapEx spend was $156.5 million. And finally, depreciation and amortization for the fourth quarter was $37.2 million and $145.9 million for the full year. So, moving on to the non-GAAP guidance for 2024. So, as Andy alluded to earlier, we do see 2024 as a recovery transition year, so with higher levels of uncertainty than usual for our Life Science business and a steady growth outlook for Diagnostics. Given the operating expense headwinds and muted revenue growth, I think, it’s fair to say that margin expansion will be difficult this year. Keep in mind that employee-related expenses impacting our P&L represent somewhere between a 250-basis-point to 300-basis-point headwind that we need to overcome in 2024 and we have continuing geopolitical issues, especially as it relates to China and Russia. However, we remain -- we -- as we remain focused on improving our cost structure, we’re well-positioned for operating margin leverage and as revenue growth returns. Again, I think, 2024 is certainly very different to a normal year. This year, revenue is expected to be a bit more back-end loaded than usual based on the anticipated recovery in biotech and biopharma. Consequently, we do expect soft gross -- growth and operating margins in the first half of the year, particularly in the first quarter, with improvements in the second half kind of in line with the market recovery and revenue normalization. So with all that as a kind of a preamble, here’s how we see the year rolling out. We’re guiding a currency-neutral revenue growth in 2024 to be between 1% and 2.5% overall. The Life Science Group, year over year of currency-neutral revenue growth is expected to be between zero percent and 2%. And for the Diagnostics Group, we estimate currency-neutral revenue growth to be between 2.5 and 3%. With the backdrop of working through elevated backorders in the last year, we realized a little over 1% from price improvement at the corporate level, which was below inflationary trends to our overall cost. We are targeting to achieve a similar level of price realization this year, mainly through the Life Science Group. We’d also like to call out the sale of a non-core contract manufacturing business in December that was part of a prior acquisition. This business is reported under other operations, contributed revenue of $3 million to $4 million annually, but had really a material -- an immaterial impact on our overall financial results. Full year non-GAAP gross margin is projected to be between 54% and 54.5%, with steady improvement anticipated throughout the year. Gross margin for the first half of the year is expected to be below the full year range, with the second half anticipated gross margin recovery driven by improved sales volume. Full year non-GAAP operating margin is projected to be between 13.5% and 14%. We estimate the non-GAAP full year tax rate to be between 22% and 23%, and CapEx is projected to be approximately $160 million to $180 million as we continue to invest in our infrastructure to support our multiyear growth strategy. And finally, full year non-GAAP EBITDA excluding the Sartorius dividend is expected to be between 18.5% and 19%. And when we include the recently announced reduced Sartorius dividend, the adjusted EBITDA is expected to be between 19% and 19.5%. So in concluding today’s prepared remarks, just a few comments about on Bio-Rad’s ongoing corporate transformation and key accomplishments, maybe a little bit as a baseline for 2024. I would say in spite of all the macro variables, we feel we have a good realistic outlook for 2024. We’re clear of the pandemic. We’ve resolved our supply chain constraints. We successfully transitioned key diagnostics platforms to our Singapore manufacturing facility. We completed our global SAP implementation. And I think most important, we continue to make progress on our journey of transformation. In addition, as Andy mentioned, we have a number of exciting products in our pipeline to help us drive 2024 as we look forward to our Life Science markets recovering later in the year. Certainly looking back over the last four years, I think, it’s important to note that our underlying business has grown at a currency-neutral compound rate of 4.6%, including, I might mention Life Science, which has grown at over 8%. Overall, I think we feel good that we’re making solid progress and I do think we have a lot to look forward to.

Operator:

Yes. Thank you. [Operator Instructions] Your first question is from Patrick Donnelly from Citi. Please ask your question.

Norman Schwartz:

Yeah. I think it really has the most to do with the sales volumes. We get a lot of leverage from the sales and I think we should see the margins ramp with sales.

Norman Schwartz:

Yeah. We’re really making good progress and candidly we’re hoping to have a new CFO on Board by the next earnings call.

Norman Schwartz:

Yeah. Yeah. I’d say, near-term, it’s -- it seems to be a kind of a tough market, not many signs of immediate recovery and a little bit of uncertainty I think as to when we will see that. I think that the good old days of double-digit growth in China are, I don’t see that in the foreseeable future. For a life science business, I think we’ve seen the impact of -- combined impact of the in China for China, anti-corruption, and in general, a kind of a tough funding environment affecting the business. For Diagnostics, I think, they -- we’re continuing to see steady growth, but we do continually also continue to kind of carefully monitor the situation with these value-based pricing tenders, wondering if that may spread to some of our platforms or some of our more specialty products from the kind of higher volume products that have seen that in the short-term.

Operator:

Thank you. Your next question is from Jack Meehan from Nephron Research. Please ask your question.

Simon May:

Yeah. This is Simon. I think we’re really largely through the backlog burn down compares as we head into 2024. I think the short answer is the slate’s pretty clean now. We’ve obviously got a bunch of other macro conditions impacting the business as we referred to in the script and the H1 versus H2 contrast. But as we’re sitting here today, we don’t see backlog burn down as an issue going forward.

Jack Meehan:

Got it. Okay. And then I was curious how process chrom played out in the quarter versus your expectations. I know you talked about starting the year with lower backlog there. Were there some larger than expected shipments in the quarter?

Jack Meehan:

Great. Okay. And then last one just was curious for any color on kind of below the line items within the guide for this year, just anything you would call out there. I think Sartorius announced their dividend for the year, just any color on that would be helpful.

Jack Meehan:

Okay. Thank you.

Dan Leonard:

Thank you very much. I had another question about phasing for 2024. You mentioned that the year will be more back-end loaded. Could you elaborate on that? How much more back-end loaded than typical?

Dan Leonard:

Much wider than the 2-point spread typically?

Norman Schwartz:

Yes.

Dan Leonard:

Appreciate that. And can you share what are your growth assumptions for process chromatography, Droplet Digital PCR and comment on whether a couple of these new product launches you talked about the Continuum and the ddSEQ, whether they’ll be launched in time to contribute to the year?

Dan Leonard:

That’s helpful. Thank you.

Conor McNamara:

Hey, guys. Thanks for taking the questions. Just on ddPCR, can you talk about the growth in the quarter or the negative growth on equipment versus consumables, obviously, you had a tough comp on equipment placements last year. But is there -- was there any consumable growth and how should we think about kind of the consumables a percentage of total ddPCR from here and where does it go?

Conor McNamara:

Okay. Great. And then on capital deployment, obviously, you’ve still got some room on buybacks. Is buyback still the priority or is there anything on M&A that you’ve seen the opportunities open up or should we just think primarily about buybacks for 2024?

Conor McNamara:

All right. Thanks for that.

Operator:

Thank you. There are no further questions at this time. I will now hand the call back to Edward Chung for the closing remarks.

Operator:

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.

Edward Chung:

Good afternoon, everyone. Thank you for joining us. Today, we will review the third quarter 2023 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; 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. 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 these reconciliations of the non-GAAP financial measures to comparable GAAP results contained in our earnings release. With that, I will now turn the call over to Andy Last, our Executive Vice President and Chief Operating Officer, to provide an update on Bio-Rad’s global operations.

Ilan Daskal:

Thank you, Andy. Now, I would like to review the results of the third quarter. Net sales for the third quarter of 2023 were $632.1 million, which is a decline of 7.1% on a reported basis versus $680.8 million in Q3 of 2022 and a 7.9% decline on a currency-neutral basis. The third quarter year-over-year revenue decline was primarily the result of ongoing weakness in the biopharma end markets, impacting the sales of our Life Science tools and bioprocessing products. In addition, we experienced weaker demand in China as a result of the macroeconomic environment as well as the local made in China initiatives. COVID-related sales in Q3 were $300,000 versus about $17.2 million in Q3 last year. Core revenue, which excludes COVID-related sales decreased 5.5% on a currency-neutral basis. On a geographic basis, currency-neutral year-over-year core revenue decreased in Asia and Europe, partially offset by increased sales in the Americas. Sales of the Life Science Group in the third quarter of 2023 were $263.5 million compared to $317.9 million in Q3 of 2022, which is a decline of 17.1% on a reported basis and a 17.8% decline on a currency-neutral basis. Excluding COVID-related sales, the Life Science Group year-over-year currency-neutral core revenue decreased 13.7% and was primarily driven by lower sales of qPCR, process chromatography, western blotting products and about flat year-over-year ddPCR revenue. Excluding process chromatography sales, the underlying Life Science business decreased 16.7% on a currency-neutral basis versus Q3 of 2022. The Life Science Group revenue, excluding process chromatography and COVID-related sales decreased 11.6% on a currency-neutral basis. On a geographic basis, Life Science year-over-year core revenue decreased in Asia and Europe, partially offset by modest increased sales in the Americas. Sales of the Clinical Diagnostics Group in the third quarter were $368.1 million compared to $361.9 million in Q3 of 2022 or growth of 1.7% on a reported basis and a 1% growth on a currency-neutral basis. Core Clinical Diagnostics year-over-year revenue, which excludes COVID-related sales increased 1.4% on a currency-neutral basis. Growth of the Clinical Diagnostics Group was primarily driven by blood typing and diabetes products as well as growth from our quality controls portfolio. On a geographic basis, the Diagnostics group posted currency-neutral year-over-year core revenue growth in the Americas and Europe, partially offset by the decline in Asia. The reported gross margin for the third quarter of 2023 was 53.1% on a GAAP basis and compares to 54.7% in Q3 of 2022. The year-over-year gross margin decline was mainly due to unfavorable product mix, lower manufacturing volumes, higher material costs and inventory reserves and was partially offset by improved logistics costs. Amortization related to prior acquisitions recorded in cost of goods sold was $4.5 million compared to $4.4 million in Q3 of 2022. Third quarter operating expenses benefited from our cost-cutting initiatives as well as a contingent consideration benefit of $18.9 million from last year’s acquisition of Curiosity Diagnostics. SG&A expenses for Q3 of 2023 were $201.2 million or 31.8% of sales compared to $211.1 million or 31% in Q3 of 2022. The lower SG&A in the quarter included $4.1 million in contingent consideration benefit, as I mentioned earlier, as well as lower employee-related expenses. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.6 million versus $1.8 million in Q3 of 2022. Research and development expense in the third quarter was $43.5 million or 6.9% of sales compared to $66.8 million or 9.8% of sales in Q3 of 2022. The significantly lower R&D expenses recorded in the third quarter included $14.8 million in contingent consideration benefit that I mentioned earlier as well as lower project and employee-related expenses. Q3 operating income was $90.9 million or 14.4% of sales compared to $94.6 million or 13.9% of sales in Q3 of 2022. Looking below the operating line, the change in fair market value of equity security holdings which are substantially related to Bio-Rad’s ownership of Sartorius AG shares, added $36.4 million of income to the reported results. During the quarter, interest and other income resulted in net other income of $9.7 million compared to net other expense of $13 million last year, primarily driven by increased interest income from investments. The effective tax rate for the third quarter of 2023 was 22.5% compared to 21.5% in Q3 of last year. The effective tax rate this quarter was primarily affected by an unrealized gain in equity securities and the tax rate reported in Q3 of 2022 was primarily affected by an unrealized loss in equity securities. Reported net income for the third quarter was $106.3 million or $3.64 diluted earnings per share compared to a loss of $162.8 million or $5.48 diluted loss per share in Q3 of 2022. This change from last year is largely related to changes in the valuation of the Sartorius holdings. Moving on to the non-GAAP results. Looking at the results on a non-GAAP basis, we have excluded certain atypical and unique items which impacted both the gross and operating margins as well as other income. These items are detailed in the reconciliation table in the press release. Looking at the non-GAAP results for the third quarter. In cost of goods sold, we have excluded $4.5 million of amortization of purchased intangibles and a small restructuring expense. These exclusions moved the gross margin from 53.1% for the third quarter of 2023 to a non-GAAP gross margin of 53.9% versus 55.6% in Q3 of 2022. Non-GAAP SG&A in the third quarter of 2023 was 31.7% versus 30% in Q3 of 2022. In SG&A, on a non-GAAP basis, we have excluded $4.1 million of an acquisition related to the contingent consideration benefit mentioned earlier and in vitro diagnostic registration fee in Europe for previously approved products of $1.9 million, amortization of purchased intangibles of $1.6 million, and $1.3 million of restructuring-related expenses. Non-GAAP R&D in the third quarter of 2023 was 9.2% versus 9.7% in Q3 of 2022. In R&D, on a non-GAAP basis, we have excluded $14.8 million of an acquisition related to the contingent consideration benefit mentioned earlier and a small restructuring benefit. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 14.4% on a GAAP basis to 12.9% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin of 15.8% in Q3 of 2022. We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity securities and loan receivable holdings of $36.4 million, $2.5 million gain from the release of an escrow for an acquisition and about a $700,000 loss associated with venture investments. The non-GAAP effective tax rate for the third quarter of 2023 was 23.9% compared to 21.7% for the same period in 2022. The higher rate in 2023 was driven by geographical mix of earnings and reduced compensation-related deductions. We continue to estimate the full year non-GAAP tax rate to be between 22% and 23%. And finally, non-GAAP net income for the third quarter of 2023 was $68.1 million or $2.33 diluted earnings per share compared to $79.2 million or diluted earnings per share of $2.64 in Q3 of 2022. Moving on to the balance sheet. During the third quarter, we purchased 58,478 shares of our stock at an average share price of $364.61 for a total cost of $21.3 million. We still have nearly $480 million remaining in our Board authorized share repurchase program and plan to continue with our opportunistic approach to buybacks as part of our capital allocation strategy. Total cash and short-term investments at the end of Q3 was $1,765 million compared to $1,728 million at the end of Q2 of 2023. The increase in cash and short-term investments from the second quarter was primarily due to changes in working capital. Inventory at the end of Q3 was $775.8 million, which is slightly lower than the inventory in the prior quarter. For the third quarter of 2023, net cash generated from operating activities was $97.7 million, which compares to $11 million in Q3 of 2022. This increase mainly reflects changes in working capital and income tax payments. The adjusted EBITDA for the third quarter of 2023 was $112.7 million or 17.8% of sales. The adjusted EBITDA in Q3 of 2022 was $135.7 million or 19.9% of sales. Net capital expenditures for the third quarter of 2023 were $44 million, and depreciation and amortization for the third quarter was $37.3 million. Moving on to the non-GAAP guidance. Given the current market environment, we are revising our 2023 financial outlook as follows. We now expect about a 3.5% currency-neutral year-over-year revenue decline in 2023 versus a growth of about 80 basis points previously. For the full year, we estimate currency neutral year-over-year revenue growth, excluding COVID-related sales to be between 0 and 50 basis points versus about 4.5% in our prior guidance. Of the 400 to 450 basis points core revenue guide down, 50 basis points are related to the third quarter revenue shortfall of which approximately 200 basis points is related to weakness in biopharma and remaining 50 basis points related to lower Clinical Diagnostics sales. The remaining 150 to 200 basis points reduction is attributed to reduce process chromatography and other biopharma demand as well as continued softness in China. For the Life Science Group, we expect about a 12% currency-neutral revenue decline for 2023. And when excluding COVID-related sales, the Life Science Group currency-neutral revenue decline is projected to be between 4% and 5%. Excluding COVID and process chromatography related sales, Life Science Group revenue is expected to decline between 2% and 3%. For the Diagnostics group, while we remain encouraged with the overall demand we are now guiding core revenue growth to be about 4.5% versus 5.5% previously. Full year non-GAAP gross margin is now projected to be about 54% versus about 54.5% previously, reflecting our updated expectation of shift in product mix and volume. We now project full year non-GAAP operating margin to be about 14.5% versus approximately 16% in our prior guidance as we continue to carefully manage discretionary expenses. And full year adjusted EBITDA margin is expected to be between 20% and 20.5%. We versus about 21.5% in our prior guidance. And now I’ll turn the call over to Norman for a few remarks. Norman?

Operator:

And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Brandon Couillard from Jefferies.

Andy Last:

Could you just say the very last piece again, Brandon? I didn’t catch your very last few words.

Andy Last:

Okay. Look, I think that we came out of 2022 with really good trajectory. And the effects that some companies had seen, particularly in bioprocessing, were not showing up for us. And that -- I think that’s something that we communicated at the end of the first quarter that that was a surprise. And it took a while within 2023 for those effects to really roll out into our funnel and start to experience the deferred orders being pushed out. But then the other factor that no one anticipated and which was meaningful for us was the Silicon Valley Bank collapse and the knock-on effects of that, which really impacted the spending profile of the smaller biotech companies, and we had significant trajectory in the smaller biotechs for, in particular, our Droplet Digital PCR platform, which also had some halo effect around it. So I think it took a couple of quarters for those effects to really materialize for us because our profile is a little different to some of the other players. So, that’s how I view it. And then, of course, since then, spending has not improved. The order pushouts have continued and it’s very difficult to gauge the true inflection point right now. And I think that’s probably a message is coming across broadly from other players in the category as well.

Brandon Couillard:

Okay. Ilan, I think the revised guide implies 4Q revenue steps up to about $700 million, I believe. 4Q is usually seasonally very strong for Bio-Rad, but this isn’t a normal environment either. So how derisked is that revenue outlook? What are some of the variables that can swing that target up or down as you’re keeping in mind?

Ilan Daskal:

And Brandon, I will add to the inputs that Andy just mentioned. Generally speaking, we have not deviated from our approach of kind of coming up with the realistic what we see in front of us in terms of the forecast and the guidance. So I don’t know that we are underestimating or overestimating our projections. And definitely, the fourth quarter this time around is an unusual circumstance in addition to the macroeconomic kind of environment to end this kind of inputs maybe the China environment today. I mean, I think it’s going to continue well into the end of the year. So, the smaller biotechnology companies environment in terms of the funding environment are not expected to improve in our mind through the end of this year. So, I agree with you, historically, traditionally, the fourth quarter used to be a stronger seasonality kind of quarter for us. That is not the case this time around.

Andy Last:

Yes, Brandon, thanks. First, can I just say I’m really sad to see Ilan move on. And you’re right, we have worked extremely closely. He and I are in each other’s offices virtually every day. So, it’s been a really good journey. I want to thank Ilan for that personally on the call. But my point of view right now is we started this transition. It’s not finished. And the focus really is on the transformation of the Company and executing against the strategy framework, which I firmly believe has the potential to increase operating performance for the Company moving forward.

Patrick Donnelly:

Maybe another one on the 4Q ramp, but on the margin side, a pretty meaningful step-up from whether it’s sequential or the rest of the -- prior part of the year. Can you just talk about the moving pieces to get to that implied margin? I think it’s 16.5%, 17% type margin in 4Q, yes, just a path to get there and get people comfortable that that’s a realistic number.

Andy Last:

I may only add we’re still focused on keeping our operating cost structure as tight as possible. So, the volume and mix will have a decent flow-through in the fourth quarter operating margin.

Andy Last:

Okay. So, the policies, I mean, are clearly impacting both Life Science and the Diagnostics side of the business. And they have -- they’re made in China for China. There’s the anticorruption, there’s volume-based pricing, and then you layer on top of that recession. And the government, I think, that is generally struggling to find the right way to stimulate the market. You can add in an extra effect of capital markets soft for biopharma, which was a focus for us for expansion and growth of our -- those pieces of our portfolio. They all have varying impacts to both sides of the business. And it’s just been a really tough ride through China, and there’s just no current clear reason to think that it’s going to improve in Q4. And on the Clinical side, it just created a softer pull for our products in China in the quarter. And we still have had a little bit of backlog on our Clinical business as we called out, which by the end of this year, we should be roughly where we expect to be, we may finish with a very slightly elevated backlog on clinical products at the end of the year, but we’re pretty much on track relatively speaking for that.

Dara Wright:

What was the question?

Dara Wright:

Sure. It’s starting to impact how we navigate tender requirements. So I think how that’s translating to reality is things are a little bit slower as we’re navigating how best to position for new deal considerations. But value-based pricing, it has historically been applied to other sectors, but in a couple of provinces we’re starting to see it reach into IBD. [Ph] So I think right now, it’s just sort of impacting sort of forward-looking risk. And then as Andy said, we’re still working through some supply chain fulfillment challenges in backlog, which we’re weighted a bit towards that region as well. And we’re working through that and have line of sight for a really solid Q4 landing.

Simon May:

I think again, it’s a compounding issues that we’ve already touched on here. So we’ve obviously got a fairly significant qPCR, Digital PCR footprint in biopharma. And again, the slowdown in early biotechs. We’ve seen a continuation of layoffs and project deferrals. That’s impacted the business. We’ve got the COVID compare. We’ve got all the challenges in China that we’ve already talked about. And I think on top of everything else, there’s kind of a club of systems out there in the market that were placed in the pandemic, and there’s a bit of free capacity out there. So, you roll all of these things together. Again, we refreshed our qPCR platform over the last couple of years. And again, the feedback that we get from out in the field is really positive in terms of how these products are being received in the market, but this compounding of market conditions right now is what’s adding up to a tough environment.

Operator:

Your next question comes from the line of Jack Meehan from Nephron.

Ilan Daskal:

I think, Jack -- this is Ilan Daskal. The way to think about it, I think we saw it throughout the quarter, but it accelerated towards the end of the quarter. So, the pace was kind of decline was stronger towards the end of the quarter. But throughout the quarter, it started to get weaker and weaker, but definitely, it accelerated towards the end.

Norman Schwartz:

Well, I think certainly, in terms of the fourth quarter guide, we look very carefully at kind of the order book and the funnel, the sales funnel, kind of accumulating as much data as we can to get the best assessment of where we think we’ll land for the year. When I think about bumps in the road, I think about the -- I think there were a lot of people that kind of thought the pandemic is over and everything will be back to normal next week. And I think we’re seeing a continuation of that with some of this kind of biopharma meltdown and the readjustments that are being made in some of these programs. It just -- I think we just have to be careful about calling the end and saying, it’s always possible that there’s something else that might bubble up.

Ilan Daskal:

So usually, what you see -- it was a minor kind of step-up, Jack. Usually, on the fourth quarter, we see a much higher kind of step-up in SG&A which this time around, actually more of the initiatives that we have been working on will kick in on the -- in the fourth quarter. So, we don’t anticipate the traditional step up in the fourth quarter. For the third quarter, it wasn’t that material.

Tim Daley:

So first on the process chromatography business. So I think you were previously expecting down mid single to high single decline. With the update today, I’m getting to 13% down or so for the year. But even with that that implies a pretty significant step up in the fourth quarter. I think almost like 80% sequential dollar increase from 3Q to 4Q. So first off, are these numbers that I’m kind of getting to in the right ballpark? And then secondly, can you help us understand the visibility, confidence that you have to kind of get that big sequential step-up, especially given the commentary around a slower or lower than typical seasonality for this year-end?

Tim Daley:

All right. Got it. That’s helpful. And then, Andy, can you -- the supply chain impacts weighing on the third quarter Diagnostics revenues. Can you just provide some details on like what is that, how big the impact was in the quarter? And if you expect those delayed revenues to be fully recuperated in fourth quarter?

Tim Daley:

And then final one here for Norman. With the ‘23 guidance now 400 basis points lower, that midterm CAGR for 2025, the guidance updated in May now has an incremental 100 basis points or so steeper, I guess, headwinds in front of it. So, given the current environment, how are you evaluating the 2025 target? Or is this something that maybe will wait until a new CFO is in the seat to put their own fingerprints on, if you will?

Norman Schwartz:

I think that covers it pretty well.

Conor McNamara:

Just without getting into 2024 guidance, just how should we think about 2024 in general? And just which headwinds that you called out in this quarter likely to persist in 2024 and which are likely to end by the end of this year?

Conor McNamara:

Okay. Great. And just following up to Patrick’s question about PCR. Can you just talk about ddPCR, specifically because that slowdown was worse than any of your other business units. So how do we -- can you give investors some framework to think about how that -- how we can get comfort that that’s definitely a market environment and not competitive pressure because there have been some competitors out there making some noise. So we just want to make sure that you still feel good about your market position there in ddPCR?

Conor McNamara:

And just a quick follow-up on pricing. And I guess this is across everything in Life Sciences. What’s the pricing environment like? And how should we think about that going forward?

Simon May:

We’ve seen a mix impact there with process chrom as well.

Conor McNamara:

Okay. And just a final question. This for Norm. Just given the recent selloff in the space and specifically in your stock, how does that change your acquisition strategy, if at all? And would you still consider issuing equity to pursue an acquisition target in this environment?

Operator:

There are no further questions at this time. I would like to turn it back to Edward Chung for further remarks.

Operator:

Thank you. And ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.

Edward Chung:

Good afternoon, everyone and thank you for joining us. Today, we will review the second quarter 2023 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; 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 would 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. 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 will now turn the call over to Ilan Daskal, our Chief Financial Officer.

Andy Last:

Thank you, Ilan. Good afternoon, everybody. So the second quarter of the year proved to be a continuation of trends from the first quarter of the year. We experienced ongoing strong demand for our clinical diagnostic products, contrasted by further softening of demand in the BioPharma segment of our Life Science business. The net result was a more modest growth of our overall core business than expected. On the operational front, we made meaningful progress in order backlog reduction. In Q2, we experienced a further decline in demand from our BioPharma customers, particularly for our process chromatography media, but also extending to other product lines. This resulted from a continuation of soft sales into emerging biotech companies, plus we also experienced headwinds from larger BioPharma. While some of this was already forecasted for the remainder of the year, Q2 revealed a significant delivery extension of existing orders for our process chromatography media beyond 2023. The softness is a result of customers reducing their inventory levels in bioprocessing and a tighter funding environment across BioPharma as indicated in Q1. Overall, we now anticipate a larger impact to our BioPharma business from the downturn than previously communicated. We do view the softness in process chromatography is transient, but do not anticipate broad-based recovery in 2023. In contrast, we remain positive on continued demand for Life Science products in academic markets. We saw strong and consistent demand from academia in all regions across the Life Science portfolio and experienced strong double-digit growth for ddPCR, despite the negative BioPharma macro trends. In particular, we are very pleased with the ongoing demand for our new QX600 Droplet Digital PCR System. During the quarter, we held our Droplet Digital PCR world event, which received excellent attendance and engagement reinforcing the long-term growth potential of our platform in this product area. We also know that demand broadly from the China Life Science segment continued to be weak, and the expected second half recovery is now in question against the backdrop of a slow economic recovery. During the quarter, we also completed a cross licensing and royalty agreement with QIAGEN related to digital PCR intellectual property. Overall, despite the BioPharma downturn, our core Life Science business grew mid-single digit. During the quarter, we achieved our Life Science backlog reduction targets and do not foresee product supply being a major constraint for the second half of the year. We were pleased to see continued demand recovery for our Clinical Diagnostics business, in particular, across Asia Pacific, led by solid performance in China, although we continue to monitor the China macro environment. We saw strong growth in our diabetes franchise and solid growth in our immunohematology and quality controls businesses. During the quarter, we launched the IH-500 next instrument, which includes updated software, enhancing the functionality of the system, along with increased security from potential cyberattacks. This platform update increases the competitiveness of our transfusion medicine portfolio. Overall product supply increased through the quarter, as our new Singapore facility continued to ramp up. We now have improved line of sight to reducing our backlog for the Diagnostics business grew by year-end and continue to focus on expanding capacity. In closing, we continue to be encouraged with the demand of our Clinical Diagnostics business with the increased placement of diagnostic systems supporting future growth and reagent pull-through. In addition, we continue to focus on the solid progress we have made in reducing our back orders. The Diagnostics business performance, however, is not offsetting the continued negative trend to the Life Science group this year, specifically for BioPharma accounts. Building on our environmental, social and governance priorities, we recently published our 2022 corporate sustainability report, which highlights the progress we’ve made in multiple areas, and reflects our commitment to society and to our stakeholders. So at this point, I’d like to close and pass you back to Ilan.

Operator:

Thank you. [Operator Instructions] And your first question comes from Patrick Donnelly from Citi. Patrick, please go ahead.

Simon May:

Hi, Patrick, this is Simon speaking. Yes. I think in the second half of the year, we’re seeing some shifts in purchasing patterns. There were some orders that we’ve already secured, which are getting pushed out. That’s the main aspect, and we’re seeing a general softness in demand that’s spilling through into the second half of the year here. We’re detecting some potential signals of improvement. But from our side, it’s really too early to call, and we’re not seeing that reflected in the opportunity for those at this time. But, as we’ve said earlier, we remain pretty optimistic that this is transient, and we’re going to see pickup hopefully at some stage in 2024.

Andy Last:

Yes. Patrick, Andy here. So I think for H1, I think our story is fairly consistent and a lot of softness in Life Science, which include the BioPharma component segment of that piece of the business. Diagnostics is relatively good for us in the first half, but we are certainly cautious about the second half given the macro economic situation in China, and that’s true for both Life Science and the Diagnostics side from our point of view right now.

Ilan Daskal:

Yes. Thank you, Patrick. This is Ilan. So there are a few aspects to call out first on the margin. Some aspects are transitory. Some are related to the inflationary environment overall. For example, material is still kind of elevated in terms of the overall cost, and it’s higher than last year. The product mix was definitely a headwind in terms of the mix between our Life Science group and the Diagnostics as well as within our Diagnostics Group with more instruments, which should be a benefit thinking more into 2024. And there are other kind of more of elevated one-time as the reserve, etcetera. On the other hand, we continue with a very, very disciplined approach in terms of the overall operating expenses. So you can see that the fall through to the operating income is much smaller than the impact on the gross margin, and that will continue to be the approach. But again, as I said, it’s kind of a mixed bag of kind of expected to impact – indeed impact this time around, some are more transitory, some – we will have to wait to see how the inflationary environment will continue to shape up.

Ilan Daskal:

Sure.

Brandon Couillard:

Thanks. Good afternoon. A lot of, if I just look at your pie chart the BioPharma is only 17% of your mix. Could you give us the outlook for that group is in total or you expect that BioPharma to do in ‘23, and how it compares to your prior view? And Simon, a question for you, is any of that weakness spilling over to ddPCR at all or do you see pretty consistent demand, budgets are there for those instruments given how differentiated it is?

Brandon Couillard:

Okay. And then, I guess, Ilan, any color you can share with us in terms of the phasing for revenue growth and margins between 3Q and 4Q? You got a tougher comp in the fourth quarter. I mean just in terms of the margins, I know that’s obviously kind of the peak margin quarter of the year given the higher volumes. Any more color you can share on how we should think about the phase in 3Q and 4Q?

Brandon Couillard:

Okay. And then just in terms of inventory levels, I mean I am just surprised they continue to climb to this degree. I mean is this the peak level in 2Q, and we should expect them to come down sequentially from here? Just help us understand like when that you expect to peak out and that’s supposed to…?

Brandon Couillard:

Okay. Thanks.

Operator:

Your next question comes from Tim Daley from Wells Fargo. Tim, please go ahead.

Ilan Daskal:

Yes, Tim, this is Ilan. I will start and then maybe Andy and Simon can chime in. But generally speaking, first of all, we are not yet guiding for ‘24. We generally not necessarily expecting a pent-up demand in process chromatography in 2024. We see it more as transitory and push-outs of orders. And these are kind of – think about it like a permanent kind of push-outs. So, it’s not that 2024, we expect process chromatography to be elevated due to a pent-up demand. I don’t know, Andy if had...

Tim Daley:

Alright. Got it. And then second one, I know we have touched on China a bit, but China diagnostics was a nice tailwind this quarter. I know you took some of that out of the guide. But just could you help us understand on how much of that was maybe reopening tailwinds versus underlying growth? And now what the full China growth expectations are for the year within diagnostics?

Tim Daley:

Alright. Perfect. Thank you.

Operator:

Your next question comes from Jack Meehan from Nephron Research. Jack, please go ahead.

Andy Last:

Yes. So, I will answer the first half, Jack. It went well. And both plants – we are now past the foreclose shutdowns in France, 100% focused now on the ramping of production in Singapore. It’s going well. We did make progress in the quarter on the diagnostics backlog. But as we have indicated before, it’s going to take the full year. We feel good about achieving that right now. And I think we communicated here some further inventory – our backlog, sorry, a burn down in the coming quarters. So, after the early difficulties, I believe we are on track now. So, as it relates to gross margin, do you want to comment on that?

Jack Meehan:

Great. Okay. And then there has been a lot discussed about kind of some of the issues you are seeing in BioPharma at the moment. I was just curious like this might be a difficult question to answer here in early August, but what you think is the likelihood of some of these issues extending through the first half of 2024. What are you hearing from customers?

Jack Meehan:

That’s fair. Last question for Norman, the new repurchase authorization, that’s a nice kind of endorsement of maybe the value you see in Bio-Rad shares now. I was curious what your latest thinking is on the Sartorius stake. Just given, where Bio-Rad stock is trading, I am curious, would you ever consider monetizing a piece of this just to buy more of your own shares? Talk about kind of the commitment to that. Thanks.

Jack Meehan:

Okay. Thank you.

Operator:

Your next question comes from Conor McNamara from RBC Capital. Conor, please go ahead.

Andy Last:

Thanks Conor, Andy here. So yes, we were very pleased with the performance in the quarter despite the challenges of softness in the BioPharma segment. The new instrument is going very well for us. We cleared out, all our production challenges in the quarter. No constraints moving forward. We have grown that franchise quite meaningfully in that segment, over the last few years. So our strategy for growing there has been very successful. We feel very positive about the forward-looking potential and BioPharma is a point of weakness in the middle of it. Competitively, I don’t think anything has really changed, certainly not within the last quarter. And that’s all baked into our thinking at this point in time.

Simon May:

This is Simon. I can talk to that. I think it’s a bit of a spread. We are seeing a good number of customers who were upgrading from existing systems. I would say we have actually been pleasantly surprised that the uptake that we are seeing in BioPharma, where that multiplexing capability gives those customers a significant productivity advantage. And then, the third area where we are seeing uptake is in oncology research and clinical development, where again, the multiplexing in the sensitive to the system really serves that need very well. So, it’s kind of broad-based.

Simon May:

In very approximate terms, we are still there. And I think over time, we still expect that to weight increasingly towards consumables. And I think we are seeing that trend to play out.

Ilan Daskal:

Yes. This is Ilan. So, as a percent of sales, we expect the second half, at least, to be slightly lower than that. On a dollar basis, maybe slightly higher, but we try to continue to be very disciplined in terms of the expenses overall.

Ilan Daskal:

Thank you.

Brandon Couillard:

Sorry. Just to clarify, are you saying OpEx in the second half up or down compared to the first half?

Brandon Couillard:

Okay. That makes sense. A follow-up question for Simon, I am just curious the QIAGEN digital PCR cross licensing deal. What do you get out of it? Why I guess strike that deal with them?

Brandon Couillard:

I will leave it there. Thank you.

Edward Chung:

Thank you for joining our call today. We will be participating at the Wells Fargo Healthcare Conference in Boston, next month. As always, we appreciate your interest, and we look forward to connecting soon. Thanks.

Ed Chung:

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. Today, we will review the first quarter 2023 financial results and from an update on key business trends for Bio-Rad. With me on the call today are Norman Schwartz, our Chief Executive Officer; Ilan Daskal, Executive Vice President, 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 would 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. Our actual results may differ materially from these plans, goal 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 will now turn call over to Ilan Daskal, our Executive Vice President and CFO.

Andy Last:

Thank you, Ilan. Good afternoon, everybody. The first quarter of 2023 was characterized by solid growth for our core business coupled with a significant reduction of COVID-related sales. However, we also experienced a number of market and operational challenges, which overall resulted in a lower-than-expected performance for the quarter. While demand generally across the portfolio was in line with our expectations, there was some softness in smaller biopharma companies where we have seen historically strong demand for our life science products. This correlates with funding constraints the industry started to experience in the first quarter. We also saw a lower quarter for our process chromatography products, primarily reflecting the softness due to the timing of orders. In addition, we saw a further tightening of sanctions, which impacted our business in Russia with a negative impact on sales in the quarter. And we now expect lower overall performance for the year in Russia, especially in our Life Science business. On the operational front, we did not make the expected pace of progress within our supply chain to address our order backlog. And as a result, backorder reduction was modest. Of the estimated $30 million we expected to recognize from elevated 2022 backorders, we achieved a reduction of approximately $5 million in the first quarter, and we expect a similar amount for the remaining three quarters of the year. This was in part driven by a slower-than-expected ramp-up of production in our new Singapore facility. This also contributed to higher-than-typical finished goods inventory as we made the transfer. Our backlog was also impacted by the shift in sales mix and by the placement of more clinical systems than expected at low margins. We also experienced cost inflation that was higher than our net price realization in the quarter. All of these factors affected gross margins for the quarter. We saw an increase in demand for our clinical business globally as the impact of COVID finally receded. In addition, demand for our newly launched ddPCR platform, QX600, and continued a strong trend line from Q4 2022. And our pipeline is robust and growing, and we are seeing strong uptake in biopharma, translational research and oncology. The market launch of QX Continuum, our more affordable digital PCR product remains on track for year-end. And we launched a few weeks ago the new PTC Tempo product line our next generation of PCR thermal cycles. We completed development and early access of our ddPCR microsatellite instability kit and we'll be launching later this quarter. This assay kit includes an automated analysis package and enables clinical researchers to assess microsatellite instability status across multiple cancers and is part of our expanding oncology assay menu for Droplet Digital PCR. Overall, we were pleased with the over 6% currency-neutral core sales growth for the first quarter despite the year-over-year decline in COVID sales. In particular, we are very encouraged by the high demand in our Clinical Diagnostics business as we expand our installed base, providing a solid foundation for increased reagent pull-through and continued long-term growth. Looking forward to the remainder of this year, we expect strong demand for our clinical systems to continue, and we also expect continued double-digit demand for our Life Science business. We see strong growth for our process chromatography business, although this is now forecasted to be slightly lower than initial estimations. On the supply chain front, we are expecting to clear our extended Life Science backlog by the end of the second quarter and our clinical backlog by the end of the year. In addition, as we progress through the remainder of the year, we expect production to continue to ramp up in Singapore as well as expansion of capacity for the QRX600 ddPCR system as initial demand in Q1 exceeded our ability to fulfill. And with that, I will say thank you and pass you back to Ilan.

Operator:

[Operator Instructions] The first question is from the line of Brandon Couillard with Jefferies. Your line is now open.

Andy Last:

Brandon, it's Andy, actually. So maybe I'll just walk through the answer to that. And you did capture the big levers in [Technical Difficulty] once out of Russia, which has had a meaningful impact. Biopharma softness, which did have some impact, particularly in the kind of, let's call it, emerging biopharma companies and the financial access to capital in Q1, which flowed through to broad demand, broader kind of slowdown in demand for our Life Science products. The process chrome story s not so much an emerging biopharma story as much as I think we've finally now just seen some of the effect of the overall inventory rebalancing that has been going on in the industry, and we had not been seeing that previously. I'd say the last two points to highlight on the revenue bridge would be a slower pace of back order reduction, which -- and I don't think we're seeing we're able to capture everything that we initially estimated. And related to our gene expression business, just generally a softer demand that is being experienced this year against the very significant installed base that we had previously put out there over the last two or three years.

Ilan Daskal:

Yes, Brandon, thanks for the question. So first of all, we are updating the 2025 based on our latest view and in light of the changing environment that we are experiencing. Obviously, as Andy mentioned just now, the entire kind of biotechnology sector and the funding and that was one of the growth drivers that we called out during the Investor Day, and we see headwind there. The overall inflationary kind of cost that we today believe is here to stay. I mean I'm not sure that it is transitory, and that was not taken into account when we presented during the Investor Day. So we are layering on what does that mean for the next two to three years. And this, we do believe that an update to the 2025 target model in order to set the expectation. With that said, it doesn't change our thinking in terms of the overall transformation that we are working on and everything that we still plan to achieve and all the kind of new instruments that are in the pipeline and the development. And so that doesn't change our thinking. It's more kind of, I would argue, macro-driven, and we have to kind of communicate accordingly. In terms of the growth, yes, I mean, so your math is correct, it's about -- on a core basis, it's about 8%. And that's the update. If you think about the currency neutral basis, it's about is $3.4 billion for 2025 on a currency-neutral basis.

Simon May:

There's definitely emerging competition in digital PCR without doubt. And we observed that very closely, and we take it very seriously. And as we said before, I think it really is also helping to significantly expand the market opportunity in ddPCR. And when we hear the commentary and the disclosures from our competitors and we kind of overlay that with the growth trajectory that we see in our own business. We think it's pretty consistent overall, and we think it's playing out the way that we thought it would. And then when we think about our overall position today, we talked about how the demand for the QX600 platform and customer acceptance is really fantastic. So we're feeling good about that. And in the biopharma segment, notwithstanding some of the market softness that we're seeing at the present side, we've got a very strong position there. We think the market's ultimately got very long legs. And I think we've got quite a nice moat around that business. We've got a really formidable of high-performance assays. And we know in this segment that performance really, really matters. And our QX One platform is really best-in-class in terms of throughput and automation. And then as was mentioned earlier, we've already got the QX Continuum platform that's in development, and I can tell you that program is running quite nicely. So when we think about the overall dynamics here, I don't think anything has fundamentally changed since we discussed this at Investor Day.

Patrick Donnelly:

Maybe a similar main questions. On the process chrome side, it sounds like you saw a pretty good slowdown in the quarter. Andy, I think you called out timing as an impact, but obviously, the guidance coming down pretty significantly for the year. How much do you think timing versus change in demand? What are you seeing in the market? And what's the ability to execute in the backdrop of, again, if the demand is holding up? Is it just an execution issue? Maybe just kind of give us a little more color there.

Patrick Donnelly:

Okay. That's helpful. And Ilan, maybe on the margin side, I think you called out some maybe more aggressive expense management. As you think about first half to second half ramp on the margins, can you just talk about what levers you guys are pulling the visibility into hitting those numbers and got a pretty good step up from first half to the second?

Patrick Donnelly:

Okay. And then maybe on the long-term guide, Life Science came down, I think, 150 bps. When you think about that change to the growth build in terms of the algorithm you guys have behind the scenes there. What -- I guess, what segments were the biggest step down? I mean the digital PCR changed at all? Was it process chrome? If you can just help us think about what softened in that algorithm is I think when you guys gave a guide, we can get a ton of building blocks. So just trying to figure out what areas maybe it was all of them, but just if you could help us out there, it would be helpful.

Simon May:

I think as well, Russia wasn't part of the initial calculus. So now it is. It's not a massive impact, but it does make a dense and that flows through to the projection as well.

Daniel Leonard:

I think Brandon asked this question, but I'm not sure I caught the answer. The revised guidance still assumes a meaningful sales acceleration in 2H. The fourth quarter comp is tough, macro is not getting better. So what are you looking at to support that second half ramp?

Ilan Daskal:

Yes, Dan. I will add to that also that from there, obviously, it flows throughout the P&L. On the gross margin, we expect it to improve as the year progresses as well as we have a list of initiatives that are in flight and some of the scheduled to start that will benefit the second half.

Ilan Daskal:

Yes. So on the QX600, yes, exactly, Andy. I mean, it's about the manufacturing kind of volume that we plan to have a much higher volume in the second half than in the first half. And that's obviously a nice contribution, not only about the top line, but it's above average margin that flows through.

Andy Last:

Well, I think as we move forward, it is an element. I think it's a good point you're making there, and it's an element that is factored into the Life Science forward-looking view on the '25 trajectory, right? And it is a factor that is hard to really quantify in the market after you placed all these instruments over the last two-plus years, three years. So it's a good call out, and it's a fair point, but it is considered in our '25 reguide for Life Science.

Jack Meehan:

First question is on the Russian sanctions. Can you just quantify for us the impact that's now embedded in your forecast? And when did it start? And when -- just I guess one more annualize.

Jack Meehan:

Got it. And then in the Diagnostics business, so it sounded like regionally, you did well in Asia I was just curious if you could comment on what you're seeing here in the U.S. and in Europe. I think I heard largely flat. We've been hearing about better volumes from a lot of the services providers. So just -- just how is that playing through in your U.S. and Europe business?

Dara Wright:

Yes. This is Dara here. Ilan can you hear me okay?

Dara Wright:

Great. So demand is strong in all regions, elevated a bit in Asia Pacific as a consequence of China opening back up with the COVID restrictions lifted in Q1, the actual sales were sort of biased towards Asia Pacific in Q1, so the revenue was bias there, but demand and backlog is similarly sort of higher than historically in EMEA and Americas. So bodes well as we burn down that backlog, placing instruments globally, in which increases our installed base.

Norman Schwartz:

Yes. So the funnel remains about the same. Obviously, when you think about kind of valuations coming in, it's a little stickier on the way down. So that's a dynamic that I think we're aware of. But again, we've got a couple of things in the hopper, and we continue to see it as a viable option for cash deployment as we go forward to add to the business.

Brandon Couillard:

Just to push back on your answer to Patrick's question, I think -- I mean the biopharma exposure you have is only 15%. You're talking about a sliver of that overall market. First I want to make sure I understand that right. And then what's embedded in your outlook for that earlier stage biotech customer base? Could you quantify it in terms of sizing, but also kind of what you're expecting in terms of growth from that market?

Simon May:

I'll just maybe add that about 1/3 of our Life Science revenue is contributed from biopharma, but we're pretty overweight in the smaller and emerging biotech companies, whether you're talking about process chromatography, we've talked about this previously, how our resins really play in these emerging biologic therapeutics. And also in our Life Science portfolio, generally, we see the halo effects in the emerging biotechs, more so than big pharma, which tend to be locked up in really large contracts.

Ilan Daskal:

Yes. So we try to compare it kind of apples to apples. And back in the Investor Day, we said that it included about $19 million of dividend. And that's what we assume now to be consistent.

Ed Chung:

Thank you for joining today's call. We will be at the RBC Capital Markets Global Healthcare Conference in New York later this month and also in New York, the Jefferies Healthcare Conference in June. As always, we appreciate your interest, and we look forward to connecting soon. Thanks.

Edward Chung:

Thanks, Tia. Good afternoon, everyone, and thank you for joining us today. Today, we will review the fourth quarter and full year 2022 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; 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 would 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 it is difficult to predict the full extent of potential impact the pandemic could have in the future. 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 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 Ilan Daskal, our CFO.

Andrew Last:

Okay. Many thanks, Ilan. Good afternoon, everybody. As we enter Q4, we continued our focus on improving our supply chain situation. During the quarter some supply chain component constraints still persisted for a number of instruments, but overall were less problematic, and our primary focus was on production to meet demand. As a result, we made solid progress on reducing our backlog in the quarter. However, there was a resulting impact on product sales mix. And as expected, we still exited Q4 with an elevated backlog position for both our Life Science and Clinical Diagnostic businesses. Inventory levels remains high as we continue to source components to support demand, our manufacturing transition to Singapore, backlog reduction and better secure supply continuity through the coming year. While still high logistics costs showed improvements in Q4, although higher cost of materials continued to persist from purchases earlier in the year. Despite the product supply challenges experienced throughout 2022, we have been extremely pleased with the level of customer support and willingness to work through our backlog with us. As anticipated during the quarter, the global effects of COVID on our business continued to diminish, and in particular COVID-related sales were roughly in line with our expectations. Overall operations within Bio-Rad were back to normal with the exception of China, where changing government policy from their previous zero-tolerance policy led to a large increase in infection rates impacting a significant percentage of the country and our employees. This also had a negative effect impact on demand from our routine diagnostic tests in China. The fourth quarter also displayed continued strong demand trends across our portfolio and, in particular, we were very pleased with strong placements for the recently launched QX600 Droplet Digital PCR platform. Initial adopters include customers at the cutting edge of oncology research and testing such as Biodesix, a diagnostics company, which is developing a minimum risk residual disease test from Memorial Sloan Kettering Cancer Center on the platform. Also of note, during the fourth quarter, we entered into an exclusive licensing agreement with NuProbe to accelerate the development of next generation highly multiplex digital PCR assays for oncology applications. As we enter 2023, we have now developed a strong pipeline across multiple customer segments for the QX600. And in conjunction with our portfolio of many thousands of assays, we expect to see continued strong growth of our Droplet Digital PCR portfolio in 2023. Q4 sales of our process chromatography franchise also displayed strong double-digit growth and we are pleased with the continued performance of this business and adoption of the recently launched pre-packed columns as well as increasing interest in our [new BR resins] [ph] for new biological therapeutics and vaccines. Looking to our 2023 overall demand remains strong, and we continue to drive disciplined execution of our strategy. While we still have some challenges in supply chain, our primary activity is now on scaling production to reduce our instrument backlog and meet growing demand, particularly in the clinical diagnostics business. And we anticipate backlog will be normalized in the second half of the year. Also in the back half of the year, we are planning for the introduction of 2 new platforms from our development pipeline, the QX Continuum, and our second generation single-cell platform. The Continuum represents a next generation Droplet Digital PCR system with an integrated workflow that’s designed to be cost effective. Our single-cell application targets the large single-cell multiomics market. With the COVID pandemic largely behind us, we do not anticipate any meaningful COVID-related sales in 2023. In addition, we continue to monitor the Russia and Ukraine war situation and potential for further sanctions and downside. Thank you for your attention. And I will now pass you back to Ilan.

Norman Schwartz:

So, thank you, Ilan, I guess, I would say that after 3 pandemic influenced years, it is really encouraging to see signs of returning to a – what I think of as a more normalized business environment. As you might imagine, everybody here is really looking forward to putting the challenges of the last few years behind us. And, I guess, I would add that the muscle building and improvements that we made as a result during this time, I think, we’ll continue to be valuable for us going forward. So I think about the macro view a little bit even though China and Russia, as Andy mentioned earlier, continue to be a little bit challenged, it would appear that most of our markets around the world, we’ll be strong in 2023 really supported by a kind of a solid funding environment around our targeted market. I think, overall, we are certainly pleased with the progress that we’re making on our strategic initiatives. And, I think, it’s fair to say we have a robust pipeline of products and development to support our ambitions going forward. So, we’re continuing and also to evaluate opportunities to add to our portfolio in organically, so a lot to look forward to.

Operator:

We will now begin the Q&A session. [Operator Instructions] The first question comes from the line of Patrick Donnelly with Citi. Please proceed.

Andrew Last:

Yeah. Hi, Patrick. Thanks for the question. Andy here. So as we look at 2023 revenue overall, let me just break it down between the 2 business areas. So, overall, I would say the strategic drivers of revenue growth remain consistent with our digital PCR platform, process chrom continued growth in that platform area. And we’re also going to benefit from new PCR products that were launched during the past year, and we’ve got some more coming during 2023. I think, our focus on biopharma penetration, where we’re largely underrepresented still is also a very significant driver, as we look to our growth in Life Science. And as a backdrop, we see Life Science funding broadly being positive, and in all regions of the world. And so that’s our general story on Life Science as I look to the clinical business. Really, it’s a continued growth of quality controls, continued share gains in immunohematology business. We’ve had some recent wins there, and we’ve got a growing demand pipeline. I would say also continued growth in Asia Pac and, in particular, kind of recovery in China more in the second half of 2023. Backlog reduction will be a feature in more the first half of the year. And, I think, it was mentioned in our script that Clinical has probably got the larger of the backlog challenge as we enter 2023. But we have really clear line of sight now. Q4 was still a bit challenging for us. And growth will kind of improve through the year for the business overall. So, I think that that’s pretty much a wrap-up of how we’re looking at 2023.

Andrew Last:

Yeah, as we’ve mentioned before, the ability to overcome the supply chain constraints in the Life Science is much easier than the Clinical side of the business, and that did persist for us through Q4. And then, Q4 in China with the change in government policy that reflects, that kind of basis represented both supply chain challenge as well as some demand drop off. So China didn’t really perform quite as expected for us in Q4. As we go into Q1 really our focus is on production, the improvement in volume on our instrument platforms to meet the backlog burned down and growing demand. And so, it’s less a component issue for us now on the clinical business, it is much more ramping the volume of production as we go. And when we believe that’s the first half phenomena for us.

Ilan Daskal:

Sure. Thank you, Patrick. I appreciate the question. So, if you look at the challenges that we experienced in 2022, and we think about 2023, specifically around supply chain constraints, and the impact on elevated cost of raw materials, specifically in higher logistics costs. So as Andy mentioned earlier, we believe it’s going to continue to improve. And that’s part of our thinking in terms of if you think about the gross margin, the improvement of gross margin throughout 2023, specifically in the second half of it. And then when you think about the other internal initiatives that we have in terms of productivity and efficiencies in terms of the restructuring that we completed, and move to Singapore, that is in the final phases of additional manufacturing footprint. So all these initiatives, we’ll also contribute towards the achievement of the 2025 goals. And that’s kind of what gives us the confidence level that the challenges that we went through in 2022 or more transitory will continue to somewhat – to some extent into 2023. But it does not change your thinking about the 2025 model, and the targets that we laid out back in the Investor Day. And, obviously, that comes from the top-line kind of growth drivers that in terms of that you’re aware of.

Operator:

Thank you. The next question comes from the line of Dan Leonard with Credit Suisse. Please proceed.

Andrew Last:

Yeah, thanks, Dan. They’re not a material contributor in 2023. This is really staging our 2024 revenue ambitions there. So that introductions to the market, but no material contribution.

Andrew Last:

Yeah, happy to do so. The plant is up and running in Singapore across all the product lines. We’re very pleased with the plant coming up to speed. I would say that the other key consideration here is that we still have our French plants operating. And that is – wasn’t our initial plant at this point in time, but we’ve kept them open because of the backorder reduction challenges that we have. And so we’re keeping our plants open through the first half to the end of Q2. And then, we’ll finally close those plants and continue to grow capacity in the Singapore facilities. So at this point, all has moved well, we’ve just had some kind of small diversions, I would say in the past year.

Ilan Daskal:

So, generally speaking, Dan, first of all, in 2023, we plan to have a lower inventory level than 2022, just as the target we set ourselves. Some of the procurement [of the protrudes] [ph] raw material was done for instruments that in components that will last longer than the next 4 quarters. And on purpose, we wanted to have some elevated level of raw material. And I do not see any risk of any write-offs for those, since these are all for instrument buildup. So that was kind of part of our thinking in terms of kind of the long-term plan, that’s the reason that it will take probably 8 quarters to normalize. As you can imagine, despite the fact that component availability became kind of audited ease in terms of availability, but it’s not yet back to kind of a normalized level. And we still have some challenges there. And maybe, Andy, do you want to…

Dan Leonard:

Got it. Thank you.

Operator:

Thank you. The next question comes from the line of Brandon Couillard with Jefferies. Please proceed.

Andrew Last:

Brad, so it’s Andy here, you broke up a little bit at the end there, so sorry. But, I mean, we have a fairly diligent process for building our plans for the year, bottoms up by region by portfolio or carrier. But the macro trends for us seem pretty robust on a fully global basis. Portfolio areas of growth that we’ve highlighted before, very consistently performing, I think, 2022 didn’t quite – we didn’t quite reach our initial growth expectations, fully realized growth expectations. So you’ve got a little bit of a comp benefit there too, a little bit of benefit coming through from some elevated backorder that we’re taking into 2023. So when we look at growth aspirations, which portions of the portfolio we expect to continue to grow, we’ve got new product contribution, both from products launched within 2022 and some new ones in particular areas of the portfolio. This year, we feel we’ve got a good growth trajectory for the business going forward.

Simon May:

Yeah, this is Simon. As we think about the digital PCR business overall, I’ll say we’re pretty pleased with the growth trajectory that we saw throughout 2022. We’re pleased with the new product introductions, and compound that with the burn down that we’ve started to see in the order backlog. We feel good that we’ve got some momentum as we come into 2023. And we talked previously about the market dynamics, yeah, there’s emerging competition and we see it as a double-edged sword. It’s expanding the addressable opportunity, but it’s also something that we take very seriously. And, as some of the earlier comments have mentioned, we’re excited about the QX600 launch and the initial uptake that we’re seeing with that. And when you blend the capabilities of that platform with the assay capabilities we’ve secured access to with NuProbe. We believe we’re going to be able to access segments of the market in a way that we weren’t always able to do when we can be best-in-class in terms of performance. So we think we’ve got a lot of momentum, and we also continue to feel very good about the mix between instruments and consumables as we head into 2023. And we see a lot of data points out in the market as well. And I think from our viewpoint, that’s just really corroborated how good we felt about the performance in 2022, and how particularly bullish we are coming into 2023.

Simon May:

I wouldn’t think about any of those as being material in 2023, I think we’re going to have a pretty significant emphasis on assay development around new probe in 2023. I mean, we’ve already got a lot of oncology content in the digital PCR franchise. It generates a lot of revenue for us already. And, I think, that’s going to be a meaningful extension over time from 2024 onwards. Similarly, with the Cytek agreement that you mentioned, we’ve got best-in-class performing dies there with StarBright. And in addition to pushing direct portfolio, we’re certainly wide open to partnerships there and within the partnership with Cytek is going to serve as well over time, but again, not meaningful in 2023.

Ilan Daskal:

So Brandon, it’s – on average kind of the gross margin benefits. So it’s not anything higher or lower. It’s blended average for the gross margin. And it is a onetime for the fourth quarter between $5 million and 10 million, as I mentioned.

Ilan Daskal:

Thank you, Brandon.

Jack Meehan:

Thank you. Good afternoon. I wanted to start with M&A for Norman, just based on what you’re seeing now. And if you look out for 2023, do you think tuck-in deals are more or less likely than something more transformative? And either for you or Ilan, just latest thoughts on balance sheet and willingness for using equity as part of a deal?

Ilan Daskal:

And, Jack, with it in terms of the mix between equity and debt. Our preference is again to try and maximize the debt capacity. And maybe even you can call it a little bit stretching it, if historically were discussing around 3x of gross leverage, we’ll try to be even above that so long that we maintain our investment grade level. And that can provide us kind of a nice size opportunity – to target a nice size opportunity.

Ilan Daskal:

Yes. So, Jeff, maybe one comment from my side, maybe that is also related to the fact that it will take us about 8 quarters and 4 quarters to normalize that inventory level, since we did procure on purpose in certain components longer-term kind of capacity. And probably that explains the reason for the higher elevated and the kind of normalization and capturing kind of the order backlog, or elevated order backlog during 2023.

Ilan Daskal:

It’s a good question, Jack. I mean, some of the challenges, obviously, from 2022, we’ll continue in part of 2023. So that is still a headwind, when you think about the higher cost of materials that we have to flush through the inventory cycle. And that has an impact on gross margin, obviously, and it’s a fall through to the operating margin. I think that’s kind of the main item that we have to kind of work through during 2023. And that’s again the reason that we do believe that it’s still transitory and that’s exactly the basis for our thinking in terms of still confirming the 2025 target model, because by that time, we believe that those issues will no longer be there.

Ilan Daskal:

Thank you, Jack.

Edward Chung:

Thank you for joining today’s call. We will be at the Citi Conference in early March and hope to see some of you there. And as always, we appreciate your interest, and we look forward to connecting soon.

Edward Chung:

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.

Andrew Last:

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.

Norman Schwartz:

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?

Patrick Donnelly:

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?

Patrick Donnelly:

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?

Patrick Donnelly:

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.

Patrick Donnelly:

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?

Operator:

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

Simon May:

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.

Ilan Daskal:

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.

Andrew Last:

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.

Dara Wright:

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.

Daniel Leonard:

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?

Daniel Leonard:

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?

Daniel Leonard:

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

Operator:

The next question comes from Jack Meehan of Nephron Research.

Norman Schwartz:

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.

Andrew Last:

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.

Jack Meehan:

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?

Operator:

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

Ilan Daskal:

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.

Jack Meehan:

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.

Jack Meehan:

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?

Jack Meehan:

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.

Operator:

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.

Operator:

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

Edward Chung:

Thanks, operator. Good afternoon and thank you for joining us. Today we will review the second quarter 2022 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; Simon May, 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 in our 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 turn the call over to Ilan Daskal, Executive Vice President and Chief Financial Officer.

Andy Last:

All right. Many thanks, Ilan. Good afternoon, everybody. So the second quarter of the year continued with a similar profile to the first quarter. Overall demand for both Life Science and Clinical Diagnostics continued to be strong and localized surges of COVID continued. China in particular drove higher-than-expected PCR instrument demand. However, the stringent lockdown policies in China and the extended nature of the lockdown did have a negative impact on local sales on both sides of the business during the quarter. With the relaxation of the lockdown, we are now seeing improved conditions for the second half of the year. The lockdown also had some further negative effect on the ongoing supply chain challenges we have all been experiencing. Our organization and operations continued to work efficiently during the second quarter. And despite sporadic localized upticks in COVID, our offices have remained open. The expected level of improvement in supply chain constraints in Q2 did not fully materialize and the quarter was again challenging for supply of instruments against the backdrop of strong demand. As a result, our order backlog continued to build along with our inventory levels of raw materials and work-in-progress instruments. With that said, we have found our orders to be sticky and our customers are being patient. During the quarter, we also experienced a continuation of elevated logistics and raw material costs. Overall, we are putting significant effort into procuring required materials and remain optimistic around improvement in supply chain constraints towards the back half of this year. With the ongoing Russian invasion of Ukraine and imposition of further sanctions on Russia, we did experience a modest decline in our Life Science business sales to Russia during the quarter, while sales of our Clinical Diagnostics products were largely unaffected. And we expect this dynamic to continue through at least the remainder of the year. As a final comment, despite the challenges of COVID its impact in China in particular and the Russian war on Ukraine, our organization has continued to excel in managing the supply chain challenges and supporting the needs of our customers. And we're very encouraged by the strong and consistent improvement in demand across our Life Science and Clinical Diagnostics businesses. So with that, I'll say thank you and pass it back to Ilan.

Operator:

Certainly. [Operator Instructions] The first question is from the line of Brandon Couillard with Jefferies. Please proceed.

Ilan Daskal:

Sure. So I'll start with the first part. We generally maintain the overall guidance for both of the business groups similar to what we provided earlier in the year. Specifically in the second quarter, we saw some softness in the diagnostics business specifically in China. But again generally we are maintaining the guidance for each of the business groups for the full year. I don't know Andy if you want to add…

Unidentified Analyst:

Okay. And then maybe Andy sticking with you on the supply chain. You talked about kind of continuing some level of the challenges in the back half of the year. Can you just talk about on a relative basis do you expect it to ease versus what we saw here in the first half, the level you expect it to get better in the back half and some maybe initiatives you guys are taking to handle that maybe worse for a longer type scenario?

Unidentified Analyst:

Great. And then last one more of a housekeeping one for you Ilan. On the tax rate it's come in below 20% here two quarters in a row. I think the initial guide was in the 22% to 23% range for the year. Is that still the right range, or any updated thinking on what we should pencil in for the tax rate for the year now? Thanks.

Unidentified Analyst:

Super, thank you.

Operator:

Thank you. The next question is from the line of Patrick Donnelly with Citi. Please proceed.

Simon May:

Hi. Patrick, its Simon here, I'll take that one. In terms of the backlog we're not going to hang numbers on that. I think we provided some commentary earlier in the conversation here. I'd say that demand across the board in Life Science continues to be healthy as we're seeing recovery in the core markets. And we've got a couple of business areas that we've called out as growth pillars previously where we continue to see really strong demand. And I think in consumables and assays, we've seen really robust demand in a couple of areas of business. And that's been moderated to some degree by the supply chain challenges that we've already spoken about here. I think as we enter the second half of the year, I'd echo Andy's comments on, how we're thinking about improvement in supply chain. But the underlying demand remains strong. And we've got a healthy backlog.

Andy Last:

Yeah. I mean, I think that the profile is the same. A lot of work in progress waiting on sometimes just one component, our inventory levels increased about $50 million quarter-over-quarter so Q2 over Q1 and we had a lift in Q1 too versus Q4. So you can see that we're really staged as we get relief by procuring the right component to ship. So our shipping profiles during the quarters are quite different as well as you might expect. I think that will just continue, but with improvement in the second half versus the first half.

Patrick Donnelly:

Okay.

Andy Last:

Yeah. And just to add on the order backlog and I'm sure it's kind of common across a number of players in the industry right now. It's very sticky. We feel really good about our customer relationships. We do not see a lot of attrition against our orders. So we've got pretty good sense about what's going on there.

Ilan Daskal:

Sure. Yes, thanks Patrick for the question. So, first I'll start with the restructuring itself and the activities associated with the restructuring are all on track in terms of the activities both in Europe as well as in Asia. And we're starting to ramp some of that activity already in Asia. And in addition even if you look already in this quarter's results part of the gross margin, improvement year-over-year is associated with improved efficiency and productivity that we are seeing. Another piece there was obviously benefiting from foreign exchange ratio. And there were some elevated -- on the other hand elevated logistics cost. But definitely the efficiency and productivity did contribute to some of that benefit year-over-year on the gross margin. So again everything is in line and is baked into our full year guidance and no delays there.

Ilan Daskal:

Thank you.

Jack Meehan:

Thanks. Good afternoon. I wanted to continue on the supply chain theme. I guess my first question is back in the fourth quarter you talked about I think $30 million of sales that were impacted. I was just curious if you've caught up on any of that year-to-date? And is it possible to quantify what impact -- or what the sales would have been if you didn't have these shortages here in the second quarter?

Jack Meehan:

And the component shortages that you talk about, is it still predominantly semiconductor chips or has it broadened to anything else?

Jack Meehan:

And the product families that are impacted it's predominantly ddPCR, or what other products would that hurt?

Jack Meehan:

Okay. Thanks for humoring those questions. I did have a couple of other ones. Just China is it possible that -- so that's the one region that declined this quarter. Just talk about the rate of the decline in the diagnostics business. Like what would the segment have done if not for the lockdowns?

Dara Wright:

Sure. Yes, I don't think that we're going to sort of articulate what the growth kind of would have been if we hadn't had the lockdown, but it was a material impact. The lockdown was for most of the quarter and compounded by sort of logistics challenges and the China lockdown was a bit of a one-two punch. So, we're going to need to catch up from that in the back half of the year. I mean similar to the instrument supply constraints, demand is strong. It's just fulfillment challenges, frankly. I don't know Andy, if there's anything you want to add specifically about China, other than it was a real impact broadly in Q2.

Jack Meehan:

Okay. Last question, for me. Is there any color you can give on, pricing in the quarter or the year just how that's trending? Do you feel like -- have you been more active in trying to manage that in this inflationary environment?

Jack Meehan:

Super. Thank you, guys

Operator:

Thank you. There are no additional questions running at this time. So I will turn the call over to Ed Chung, for closing remarks.

Operator:

That concludes today's call. Thank you for your participation. You may now disconnect your lines.

Ed Chung:

Thanks, Hannah. Good afternoon, and thank you all for joining us. Today we will review the first quarter 2022 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; Simon May, 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 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 Chief Financial Officer, Ilan Daskal.

Andy Last:

Many thanks, Ilan. So the first quarter of this year represented an interesting shift in the dynamics of our business. Overall, our markets have recovered to close to pre-pandemic levels of demand, as the macro incidence rates of COVID and COVID testing has declined. However, significant more localized surges, especially in China, drove higher-than-anticipated PCR instrument demand during the quarter. The surge in China and subsequent major city lockdowns in the country are of course now creating increased uncertainty around logistics and near-term demand, which if protracted could adversely impact Q2 sales. Overall, we still expect that our COVID-related sales will continue to ramp down quickly compared to the last two years. In addition, during Q1, the Russian invasion of Ukraine resulted in a position of significant sanctions and actions towards Russia. While these sanctions did not cause a material impact to Q1 revenues, we will closely monitor this dynamic situation going forward. Operationally, we have now opened up our offices for a broad return to the workplace and are seeing a positive uptick in business-related travel for customers and business meetings. To date, we have continued to maintain a very high internal safety rate for our employees. The overhang of the pandemic's effects on the supply chain, however, remains significant. And we experienced ongoing difficulty in securing raw materials, especially electronic components, as well as higher logistics costs. We do not see this easing until the second half of the year and continue to carry an order backlog, primarily on instruments as a result. In closing, while we continue to experience supply chain challenges, we are very pleased with our organization's ability to continually adjust to the changing demands of the COVID pandemic and other major macro factors impacting us. So at this point, I'll say thank you and pass it back to Ilan.

Operator:

Certainly. [Operator Instructions] The first question is from the line of Patrick Donnelly with Citi. Please proceed.

Andrew Last:

So, Patrick I think -- this is Andy. I'll take that one. In Q1, we had good performance from digital PCR again and also process chrom was particularly strong in Q1. When we look through to the full year -- now we did have supply chain constraints in Q1. But when we look through to the full year we see good visibility to those constraints kind of easing off by the middle of the year for the Life Science business. And so that's the basis of the slight shift in guidance on the Life Science business.

Ilan Daskal:

Sure. Thank you, Patrick. Appreciate the question. I'll start maybe with the gross margin. There were several moving parts obviously starting the quarter. But as the quarter progressed, there were areas that we knew in advance for example the product mix with the COVID, kind of, subsiding which is a little bit of a headwind to margin. There were others that were some tailwind. Logistics is still a headwind. With elevated freight that's another component that was definitely out there. We saw some of the discretionary expenses that are starting to come back as well as service costs that we are -- kind of, within the customers' premises and servicing customers. And that's kind of -- when you think about it year-over-year, definitely, we see a difference there. And the last point that I'll call out here there was some headwind, specifically this quarter, which is associated with our ramp in our Singapore facility with some of the transitioning from our European kind of closure. And these are costs that we did expense and is part of the gross margin and so it's kind of a duplication of cost for this quarter that we saw.

Simon May:

Yes, I'd say overall we were pretty pleased with the performance in the quarter. Some of the supply chain challenges that we've experienced led through to a moderate degree, but demand for ddPCR products overall remains pretty strong and I'd say we've got a pretty bullish outlook on the full year.

Ilan Daskal:

Yes. Thanks Patrick. Appreciate the question. There are a few aspects here. First, we obviously will continue to be opportunistic in the approach. And similar to the past, once we feel comfortable, we won't be shy to step in with larger amounts of the buyback. With that said, we continue to balance it with the other capital allocation kind of matrixes in terms of potential inorganic activities and we need to prioritize and to balance between all the other aspects. And that will continue to be kind of the driver for us in terms of determining the right timing to step in, in terms of the buyback.

Ilan Daskal:

Sure. Thank you.

Brandon Couillard:

Hey. Thanks for the question. Ilan, in terms of the slightly lower diagnostics outlook for the year, is that all tied to the China lockdowns? And I think you mentioned anticipation of some impact in 2Q. Are you able to quantify that?

Brandon Couillard:

Maybe just sticking with that. I think it might be helpful, if you're able to just quantify the percent of the China business that is diagnostics in general. If you're able to quantify the number.

Brandon Couillard:

Okay. Then maybe one for Simon, in Process Media. Do you think you're gaining share in that market? And are you having better success winning earlier-stage programs? And would you expect the Process Media strength to continue through the second half of the year? It feels like you might be lapping some pretty tough comps ahead.

Brandon Couillard:

Okay. And then, lastly for Ilan. SG&A, non-GAAP number was down like $30 million sequentially. Can you just elaborate on the bridge there? And how should we think about the OpEx phasing, as we move through the balance of the year?

Brandon Couillard:

Okay. Maybe I’ll check my amount. All right. Thanks.

Jack Meehan:

Thank you. Good afternoon. Ilan, to start, I was wondering if you could give some color around what your expectations are for core growth by segment in the second quarter.

Jack Meehan:

Okay. And then on the COVID front has your target for the full year changed at all? And within China, you talked about some additional instrument demand. Are you exposed on the consumables side to any of the mass testing which is going on?

Jack Meehan:

Correct. Yes.

Jack Meehan:

Sure. Yes. Just the target for the full year has that changed at all related to the COVID contribution?

Ilan Daskal:

Yes. Jack I mean we originally thought about most of the amount to be more on the first half of the year. We currently don't have a better visibility that we feel comfortable to change that number.

Ilan Daskal:

So first of all, we baked it into our forecast already in the beginning of the year. We do not assume that it's going to go back to pre-pandemic level. That was not part of our guidance. But it's above the 50% level that it was during the pandemic. So it's 50% from the pre-pandemic and above the pandemic itself.

Norman Schwartz:

Yes. Maybe I'll take that. Yes. I mean obviously, we continue to be interested in inorganic growth as well as the organic growth, which is actually going pretty well. On the M&A side we do have several things that we're looking at. And as we said I mean obviously, we do have an appetite for doing something larger. But obviously, those are few and far between. So we'll have to wait and see. In the meantime, we're just doing a number of – yes we are continuing to pursue a number of kind of tuck-in opportunities.

Ed Chung:

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

Edward Chung:

Thanks, Anna. Good afternoon, and thank you all for joining us. Today, we will review the fourth quarter and full year 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; Simon May, 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 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.

Andrew Last:

Right. Many thanks, Ilan. So as an opening comment, I would like to once again recognize the tremendous contributions, resilience and responsiveness of all of our employees around the world as we closed out a second challenging year of the pandemic. As we enter 2021, we continue to maintain our focus on the 3 key areas we previously highlighted. The ongoing safety of our employees, continuing manufacturing operations to ensure product supply and support of our customers; and making sure we continue to advance our core strategies. During Q4, we continued to experience solid recovery in most of our key global markets as well as an uptick in demand for COVID-related products driven by the explosive spread of the new Omicron variant. As indicated in Q3, we also experienced a growing increase in supply chain challenges driven by the inconsistency of supply for key components, particularly electronic components and plastics. We also saw some logistics challenges at year-end. The organization responded well to this situation, although it did result in an inability to fulfill all our orders in Q4. In addition, for the first time, we saw a greater impact to Omicron on our workforce, although we believe our mandatory vaccination program in the United States helped us to avoid the worst of this situation. Overall, despite these challenges, we finished the year strongly and are very encouraged by the progress and growth we delivered in 2021. And as we enter 2022, we continue to spend considerable effort on sourcing components and balancing our efforts to meet growing customer demand and expect that this situation will persist through Q1 and well into Q2. As a result of the COVID-19 Omicron variant, we also extended our work-from-home policy until March 15, at which point we will reassess the situation. While we experienced an uptick in demand for our COVID products in Q4 as Omicron spread, we still expect COVID-related demand for our products to be sequentially lower in 2022. We see that the majority of our end markets are well served and testing capacity -- with testing capacity. However, the nature of the COVID pandemic may well generate pockets of unexpected demand as hotspots of disease break out across our global markets. Broadly, our end markets have now adapted well to operating in the pandemic environment, and core product demand is generally recovered to close to normal levels. So thank you for your attention, and I'll pass it back to Ilan.

Operator:

[Operator Instructions]. The first question is from the line of Brandon Couillard with Jefferies.

Andrew Last:

So Brandon, actually, this is Andy. Yes, I think the guidance reflects basically the execution of the core strategies that we've been pursuing for the Life Science business, the growth drivers in biopharma, the ongoing growth in our digital PCR business, process Chrome, et cetera. So it's -- certainly, it's an improvement in growth rate. As to the component supply, so we're seeing a challenge in -- certainly in the first quarter, and we see that extending a bit into the second quarter. But we do see line of sight to the end of those supply constraints. And all being well, we'll see a good acceleration in the second half. So I would say -- the performance is driven by the execution of our core strategies, which are playing out nicely in our various end markets.

Brandon Couillard:

Okay. And maybe just on that, Ilan, any kind of color you can kind of share with us sort of how we should think about top line growth for the first half versus second half? I mean first half maybe low singles and then in the back half, north of the top end of the range for the full year? Any kind of...

Brandon Couillard:

Okay. Got you. And then in terms of the margin outlook, I mean, the 19% operating margin for the year, quite a bit better than we expected. Are you able to quantify the impact of the lower COVID revenues compared to what you're sort of anticipating for base business margin expansion? And secondly, are you -- do you expect to capture any benefit from the European restructuring in the second half at all?

Brandon Couillard:

Great. And Andrew can you give us a sense kind of what you're embedding for net pricing for the year?

Brandon Couillard:

Yes, just around -- yes, net pricing for the full year. And I think you said most of that...

Operator:

The next question is from the line of Patrick Donnelly with Citi.

Andrew Last:

Yes. So, the supply constraints for the first part of your question, there is a little bit of randomness to it. We have a very large portfolio, as you know, and they're mostly electronic components of different forms. It can be as simple as a power supply, but a lot of it is chip related, which is a broad global problem right now. And it's just very inconsistent and you believe you're going to get a certain component, and then it doesn't arrive. And you have to scramble. So, it's very challenging. The organization is doing extremely well to cope with it. As we look into Q1 and through Q1 to Q2, we do feel we're kind of in the thick of it, and then we see Q2 will be kind of supply catching up with demand. And that's our current line of sight. We're generally getting signs that the component supply will come back, more completely in Q2. So that's why we're guiding second half. And it is a major acceleration. The big challenge, of course, is to retain the orders through that period. And in some parts of the portfolio, we can definitely do that. In other areas, it's much harder. And we've considered that in our guidance.

Andrew Last:

Yes. Look, we remain very, very confident about the growth potential of digital -- Droplet Digital PCR had another good year. Another good year is anticipated in our guidance, strong double digit. And I would say our strategy and focus areas remain consistent, strong biopharma performance and just general end market adoption as they better and better understand the value proposition of high sensitivity, but easy-to-use digital PCR. So, there's nothing to suggest a slowdown in our view right now.

Andrew Last:

Yes. We'll elaborate more and talk maybe a bit more about the product portfolio that we're working on for the future.

Ilan Daskal:

Yes. So Patrick, obviously, we were and still are in a quiet period, so we were not able to trade, but we'll definitely continue to be opportunistic. We have about $223 million in our plan, and we will find the right timing to step in. As similar to the past, if -- we won't hesitate to be a receiving case, we find those opportunities.

Operator:

The next question is from the line of Dan Leonard with Wells Fargo.

Ilan Daskal:

In terms of the -- it's probably a combination of top line growth mix that we do benefit from the overall mix fall through to the gross margin. And the various initiatives, I mean the restructuring that we communicated early last year, there are additional initiatives that are ongoing in our kind of operations in other areas. So it's probably throughout kind of the different line items of the P&L that gets us there.

Ilan Daskal:

So then we do plan to provide an update on that in the Investor Day. I mean we're going to elaborate and you'll see the analysis there. I don't know, Andy, today you...

Ilan Daskal:

Stay tuned for -- that's definitely something that we plan to discuss during the Investor Day.

Andrew Last:

I think our outlook in China is consistent with recent history. We're largely underpenetrated in China. So where -- so for us, we see China, in particular, and the whole Asia Pac region as an upside opportunity as we penetrate those markets and in particular, biopharma. And we're investing in the region. So we're investing in our channels. So for us, it's a growth driver.

Jack Meehan:

I wanted to go back just to clarify on the supply chain impact. Just is it possible to give a little bit more granularity on which products were impacted or break out that $30 million impact by division? And when do you expect the $20 million to hit? Do you expect that to come back more later in 2022?

Jack Meehan:

Okay. And then another question on digital PCR. So I was hoping you could just give a mark-to-market. What is the mix of this business now between recurring and capital if you look at the sales in 2021? And on the capital side, I was curious just with the introduction of QX ONE a couple of years ago and then some of the innovation you're working on now, just the expectations for how has the capital piece been growing?

Jack Meehan:

And the capital piece, how have the new launches been going?

Jack Meehan:

Okay. Great. And then I had 1 on Sartorius. So just looking at the balance sheet. So the stake came down to $14.4 billion in the quarter. So just was hoping you could help me with the math because Sartorius' share price actually was up almost 10% in the fourth quarter. I know it's come in to start the year, but just -- help just better understand why the value actually came down sequentially.

Jack Meehan:

Okay. And last question. I think earlier today, Sartorius talked about a higher dividend rate to start the year. Just was hoping you could quantify what that means for Bio-Rad and what I should be penciling in here in the first quarter.

Operator:

There are no additional questions leading in queue at this time. So I will pass the call back to Ed Chung for any closing remarks.

Operator:

That concludes today's Bio-Rad Laboratories Q4 and full year financial results conference call. Thank you for your participation. You may now disconnect your lines.

Edward Chung:

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.

Andrew Last:

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.

Operator:

[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.

Ilan Daskal:

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?

Ilan Daskal:

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.

Andrew Last:

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.

Operator:

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

Ilan Daskal:

Yes, we can. Thank you.

Andrew Last:

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.

Ilan Daskal:

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.

Annette Tumolo:

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.

Norman Schwartz:

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.

Operator:

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

Ilan Daskal:

Jack, I will let Dara answer this question.

Jack Meehan:

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?

Jack Meehan:

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?

Annette Tumolo:

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...

Annette Tumolo:

Thank you.

Brandon Couillard:

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.

Brandon Couillard:

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?

Brandon Couillard:

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?

Annette Tumolo:

Yes.

Ilan Daskal:

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

Ilan Daskal:

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.

Ilan Daskal:

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

Edward Chung:

Thank you, Joanna. Good afternoon and thank you all for joining us. Today, we will review the second 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'd like to caution everyone that we will be making forward-looking statements about management's goals, plans, 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, 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.

Andrew Last:

Thank you, Ilan. So I'd like to take a few minutes to review our current state of operations around the world. Overall Bio-Rad has adapted well to the working constraints that COVID has imposed upon us and we find ourselves able to respond and react well to everyday operational changes and demands. We continue to make solid progress on our core strategies support of our customers in the safety of our employees. With improvement in our end markets after significant downturn a year ago, we are responding well to increased demand, but as with other manufacturers in Life Sciences we are having to work hard to procure raw materials in some challenged areas such as plastics and electronic components as well as dealing with increased pressure on raw material costs. We also continue to experience higher than typical logistics costs as indicated in our Q1 call. With emergence of the COVID 19 Delta variant, we are maintaining our work from home policies for the near term as we work on return to the workplace plans targeted for later this quarter and we continue to monitor the global pandemic situation carefully. Given the fluidity, the delta variance has created. Employee safety remains a principal focus and we are pleased with our safety record and the growing vaccination status of our organization. As we enter Q3, we expect the emergence of the delta variant will continue to create some challenges and we are maintaining vigilance and flexibility as a result. Overall, we expect to see continued improvement in our end markets through the second half of the year as our customers continue to adapt. However, the new delta variant clearly introduces an element of uncertainty as we move forward. Thank you for your attention, and I'll pass it back to Ilan.

Operator:

[Operator Instructions] Your first question comes from the line of Patrick Donnelly from Citi. Your line is open.

Ilan Daskal:

Hey good afternoon Patrick thanks for the question. Yes when you think about the margin and let's start with the gross margin. We do see already, a lot of benefit from the various initiatives that we had pretty around the efficiencies and productivity and that was definitely part of the results for this quarter and will continue to be part of, you know the guidance in the second half of the year. There were some headwinds – associated with our FX et cetera. But for the most part the benefit is associated with the ongoing initiatives around productivity and initiative. Similarly, we continue to see follow through not only from the higher guidance on the top line, and obviously you know improved utilization in the second half, but continued also benefit from those efficiencies and productivity.

Ilan Daskal:

Sorry and then, then you have the mix impact for the COVID versus first half versus second half obviously the drop-off of the COVID-related sales to about $40 million to $50 million in the second half, does create kind of some level of headwind to the overall margins.

Ilan Daskal:

Do you want to take it Andy?

Ilan Daskal:

And freight.

Patrick Donnelly:

Right, okay and then maybe one for Annette on a single-cell side it's great to see the litigation will be over for you guys with Cell C. I know you guys had previously talked I think about seeing some products maybe rollout potentially later this year. Is that still the plan and again, it feels like the 10x stuff clears the deck for you guys. So I just wanted to get an update on that front in terms of timing and expectations?

Annette Tumolo:

Sure, so we are – we acquired Cell C and their technology was pretty early stage, and I will admit that we were slowed down a little bit by COVID and getting all the staff on board for the investment we want to make in R&D. That said, we're making really good progress and we expect product to start rolling out in early 2022.