Revvity, Inc. (RVTY) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Jefferies 2020 Virtual Global Healthcare Conference. I'm Brandon Couillard, senior life science tools and diagnostics analyst here at the firm. Very happy to have PerkinElmer joining us in this virtual setting again this year. And on behalf of the company, CFO, Mr. Jamey Mock; also on the line, Head of IR, Bryan Kipp. Jamey, Bryan, thanks for being here.

Thanks for having us, Brandon.

Maybe just to kick off, Jamey, on the topic and focus, just to start off at a high level. Clearly, very fluid situation as it relates to COVID-19, but curious if you could just set the table for us and provide a bit of a brief state of the union of where you guys are today in terms of the various offerings that PerkinElmer is sort of bringing to bear sort of between real-time PCR, antibody testing, and where, across the board, the main areas where you're participating.

Sure. Well, first, thanks to everyone who dialed in and for your interest in PerkinElmer. I hope you are all safe and well during these difficult times. With regards to the state of PKI, we couldn't be prouder of our organization. Our teams have been working nonstop, and I'd say, with intense passion since the start of this pandemic. And I believe we are demonstrating real-time that we can innovate and deliver solutions to customers with more rapid speed. In terms of our offering amongst other applications, I'd say, we can put together a pretty complete workflow in terms of testing. Those include our automated liquid handling stations, our RNA extraction instruments and kits, our PCR diagnostics kits, as you said, and our antibody solutions. And generally, I'd say, the order trends continue to be very strong. But most importantly, we're proud to be able to join the place by so many companies to help stop this pandemic.

Maybe, Jamey, if you could maybe set the expectations just in terms of where do you stand as far as manufacturing capacity, particularly on the serology test side, to things that contribute the vast majority of the incremental revenue tailwinds that you anticipated in the second quarter. Where is production capacity today? Where is that going? And is that primarily that demand coming all in the U.S.? And to what extent have you begun commercializing it in a material way outside the U.S.?

Sure. Yes, I think capacity is less of a focus for us today. It was more of a bottleneck, let's say, 4-plus weeks ago but less so today, and we don't really see any major supply constraints. We continue to scale our RNA extraction capacity to support future demand. We're seeing a lot of demand in that neighborhood. A good example of our ability to ramp up is our Cisbio acquisition. It's helping with some of the magnetic beads production there. So we're able to meet some good amount of demand there. Our PCR kit manufacturing is highly flexible. We should be able to double our capacity, if needed. However, it has been a delicate balance. We don't want to overmanufacture because of the stability and storage requirements for PCR kits. So we're managing our future manufacturing there based on weekly order trends and tracking. In terms of antibody testing, we have the capacity to manufacture over 10 million kits per month. And at some point, I think the demand might require that level, but it's a little less so today. I think that will happen more in the back half of the virus progression when epidemiology studies and population studies will happen. It's certainly ramping and has been a good driver of our overall sales, but it's overall balanced between serology and PCR testing and RNA extraction.

Any color you can share with us just in terms of trying to parse out whether the vast majority of that initial demand for your COVID-19 testing products is in the U.S.? Or is it more balanced? Where is the concentration and why?

Yes, it's more balanced. I would say it's probably 50-ish percent in Europe, 50-ish percent in the Americas branded on the serology side. As you know, EUROIMMUN is a German company that has a lot of relationships in Europe. So we continue to see robust demand there. But we've also been able to crack into a lot of large reference labs in the United States. So it's very balanced between those 2 regions.

Yes, I think Prahlad really emphasized the quality and performance of your serology tests, certainly on the first quarter call, and the different approach you've sort of taken around the tests. Any color you can share with us just in terms of where you see ASPs shaking out for serology now that you've got a little more time in the field?

Yes. I mean I wouldn't share anything different than I've shared in the past, that it's in the single-digit range here. We are pretty confident that we have a good high-quality assay that identifies the spike proteins, and we think that -- early reports suggest that, that has a neutralization effect. So yes, pricing is still relatively early. I think serology will be around for quite some time for us.

Got you. Okay. Jamey, I think -- just to step back maybe from COVID-19, I think last month marked your second anniversary in this seat at PerkinElmer. What are some of the biggest changes operationally that you've seen or within the portfolio since you've joined the company, I think, in May 2018?

Yes. I mean, to put it simply, Brandon, we are really trying to integrate our company to leverage the full scale of our capabilities quite efficiently. And as you know, last year, we embarked on organizational realignment to kind of tear down the silos between DAS and Diagnostics, to really leverage our capabilities more fulsome and to have more complete solutions for our customers. Additionally, we think there is a lot of efficiency to be gained operationally as we stitch our processes together. I'd say the output of all this should lead to faster innovation, improved customer experience and better operational execution inside of PerkinElmer. So that's really what we're focused on right now.

I think it's -- some of the things that Prahlad has talked about make a lot of sense in terms of cross-pollinating technologies and expertise in a more coherent way kind of across the company. Just curious like what were the sort of inhibitors to that historically, in terms of how you go-to-market or how you approached R&D, that you're fundamentally doing differently now to really get more out of the organization on the same dollar of investment?

Yes. I think it's more cultural. I'd say that's into our vision, and it's a pretty exciting time to be at PerkinElmer. So I focused on faster innovation, improved customer experience, better operational execution. So let me tell you how we're doing that culturally is our plan and all these we're focused on. First, from a collaboration standpoint, he really expects our leaders to generate ideas together, work cross functionally, solve problems, look at solutions for our end markets. Second, I'd say, is challenging the status quo around innovation. Why can't we be faster? I think COVID is proving that. So we're trying to capture that momentum and understand how we, in the future, can create solutions in a more rapid manner. How does this solve customer workflow needs as opposed to just creating an instrument? How are we going to make it easier for our customers to conduct business from a complete solution standpoint? And then I'd say operational discipline. We're improving on forecasting systems, prioritize program management, either that's on a cost-out perspective or information technology or MPIs. So I'd say the multipart brand and the way we're trying to carry on the silos is a cultural basis. It's trying to make sure we collaborate more. We're focused on what matters. We are faster from an innovation standpoint, and that's really been a focus to try to improve and maximize our capabilities.

Do you have any tangible examples of a cross-pollination ideas or between Diagnostics and DAS? I mean, historically, they have been 2 very different customer bases, somewhat different technologies and product offerings. But to the extent to try to understand the synergies that might exist, do you have some tangible examples, be it in terms of product development and maybe the point [indiscernible]...

Yes. I think more and more, we're seeing opportunities to blend our DAS and Diagnostic capabilities in all our end markets. Some examples, I mentioned one already related to COVID, so our EUROIMMUN business creates RNA extraction kits out of Germany. And as we were trying to ramp production there, we utilized our Cisbio acquisition, which is on the DAS side of the business, to help with the magnetic bead production. Our informatics platform, which is also in DAS, it's helping with the virus progression. In food, we're using immunodiagnostics automation and instrumentation to create platforms to test for toxins. In applied genomics, we see those technologies across food and life sciences. I think we're just scratching the surface on how all of our core competencies around instrumentation and automation, reagents, services, informatics, it's going to really touch all of our end markets. And before, Brandon, those were really siloed in each of our businesses. So we have each of those competencies throughout Diagnostics. We have each of those competencies across DAS. Merging those together and really being more end market-focused and utilizing the capabilities underneath those is really what we foresee moving forward here. And I think there's plenty of examples out there.

That's helpful. We'll just make a plug for anyone that's on the webcast or on the line, you feel free to shoot me an e-mail or submit your question in the online portal. If you have any questions, I'll do my best to try to work those in, in the time that we have. Maybe, Jamey, if we just sort of step back a little bit. You sort of described the cyclicality of the Perkin portfolio today, in general. How much -- what percentage would you say is somewhat GDP tethered? And I'd like to dig into the DAS mix, if you can, and just remind us where the different buckets are between life sciences generally, can you size the food, environmental and industrial pieces for me?

Yes. I mean, as you know, we've spent a ton of time transforming the portfolio. And I'd say, even during this COVID disruption, we're spending even more time looking at our strategy and our end markets and trying to hone those. But to answer your question, I'd say, a little under 20% of our portfolio is now for lesser GDPs, largely our exposure to industrial and environmental. So that answers that. I think you wanted to know the DAS breakdown next, is that right?

Yes. Yes, that's right.

Yes. The DAS, that makes up about 60% of PerkinElmer's revenue; Diagnostics, 40%. Within that, life science is 55-ish percent, pharma makes up 48% to 49% of that and applied -- or active and government makes up the other 6% to 7%. And then we have applied broadly, that makes up the other 45%. Industrial is almost half that. Food is probably 12%, 13% and environmental is 10% or 11%. More than.

That's it. Okay. If we look at your second quarter guidance. You anticipate that we're down about 1% organically in the first quarter. For 2Q, you pointed organic down -- or up flat to down 15%, which assumes that COVID tailwinds are about an 8% to 15% benefit, good guy. Can you kind of unpack that a bit for us and sort of what drives you to the higher end or the lower end of that range? And what kind of the variables we should thinking -- keep in mind?

Yes. Yes. So as you mentioned, we said that the COVID tailwinds would be about plus 8% to plus 15% or $55 million to $110 million of COVID revenue. At times, we said it was split 50-50 between serology and molecular testing, both RNA extraction instruments and kits and PCR testing. And as we stated on our 1Q call, we were very confident in the range. We have the order trends through April. And I'd say the order trends continue. So we're pretty confident that we're well within that range, if not to the higher end, and we've seen consistent demand. I think the fact that we pull together the full workflow is resonating well with our customers. Many need liquid handling solutions, RNA extraction instruments and kits, which leads you to PCR testing. So that's been extremely robust. I'd say serology, initially, has been very robust. We mentioned earlier that we thought we would need to get 10 million tests per month from a capacity standpoint, we're there. But again, I don't think we're -- I don't think the need for serology is yet at 10 million tests per month. I think it's somewhere a little less than that. So overall, it's still pretty balanced from a 50-50 standpoint there, but full products and both workflows are resonating with our customers.

Just to clarify, as far as your commentary about the second quarter, were you referring to the high-end of the COVID-related tailwinds or...

Yes. That's right. Yes. I was just talking about the COVID tailwinds there. That's right.

Got you. All right. Let's see here. The -- I think one of the things you -- in terms of guidance, you pointed to flattish core growth in China, APAC. Can you sort of talk about potential for upside there? And how you're seeing the recovery play out? And when do you expect, I guess, China to whatever normal is, but return to a normal growth level?

Yes. I mean, China, as you know, was down over 30% for us in the first quarter, and we are definitely seeing signs of recovery through the first 8 weeks of this quarter. We mentioned flattish. We always have a large turn in the second quarter, that is we always have a large third month. So this still remains to be seen if it's exactly flattish, but certainly we've seen significant signs of recovery here. I think we're expecting more of the third quarter to be returning to the "norm.” So we expect the second half, again, assuming that there's no second outbreak here late in the fall or something. But I think, overall, for China, we would say that the second half should be pretty strong; second quarter, kind of flattish; and the first quarter, down 30%. That should take you overall to flattish for the year in China. That's what we're hoping for here. Within the end markets there, I'd say, life sciences and food is -- continued to hang in pretty well. That's really had some optimism. I'd say the improvement on the immunodiagnostics brands, the reproductive health brands, the applied businesses is still where it's not as bad in the second quarter as it was in the first quarter. We're definitely seeing signs of recovery here, but that's still going to be a little bit of pressure in the second quarter. And then we expect that to kind of normalize starting in the second half here.

Got you. Okay. The -- in terms of the EUROIMMUN business or just the Diagnostics business in China, specifically, have you started to see kind of a normalization in routine testing or hospital activity? I think EUROIMMUN relatively impacted by kind of shutdown and folks staying away from hospital. How is that market specifically for EUROIMMUN, which is pretty good part of that business.

Yes. I mean, as you know, EUROIMMUN, particularly in China, has been growing kind of mid-teens consistently for years, and it was down probably 40% in the first quarter due to everybody avoiding the hospital as you suggested. So it is not yet back to that normal level, but certainly, we are seeing positive signs in getting there. I think the commentary I just had around China also reflects EUROIMMUN specifically. So whether it's exactly flattish in the second quarter or not remains to be seen. So that's 4 or 5 weeks in our quarter left here. But certainly, we've seen positive signs of testing resuming, and it should not be down nearly the levels that it was in the first quarter. And then again, I think starting in July, we anticipate that things will return to the "more normal level", which for us was mid-teens. And again, I'd say overall, autoimmune diseases and issues don't go away. So whether it's pent-up, when it comes through, the hypersensitivity to those characteristics are not going to go away. So at some point, that -- I don't think this is lost demand at some point, that should come back. How quickly, how comfortable people are remains to be seen, but we've got a lot of positive signs that ,we're heading in the right direction.

What do you think the underlying growth rate is for the autoimmune diagnostics market or the incidence rate for that part of business?

In China, I'd say 10-plus percent. I mean, we have historically seen mid-teens growth there. We're seeing prevalence increasing over 10%, specifically for China, say overall for EUROIMMUN only. We've consistently said that we think we can grow 12%, and we don't see anything out there that would prevent that. In fact, I think COVID -- again, nobody likes a pandemic, and we certainly don't, we're trying to fight that battle. But I think COVID really helped EUROIMMUN brand. I think people understand that they lead with science. They've got highly specific assays. You see it a lot in the Americas. I think we've announced there are many, many references out to announce their partnership with us. And as know, EUROIMMUN had a very small presence in the Americas just 2 years ago, relatively speaking, still does. We think that market can be quite large, and we're increasing our brand, and we're -- during this time period, and we're pretty excited about that.

Yes, that was -- actually my next question was just that, I think back to about the time you announced the deal, EUROIMMUN had basically no business in the U.S. It was a tiny part. Now here you are as the main supplier to the 2 largest reference labs in the country of serology testing. So I think if we just look at the EUROIMMUN business in the U.S., can't you -- could you share with us like any installed base numbers? And I guess, just longer term, how big do you think the U.S. market could be for EUROIMMUN in, say, 3 to 5 years relative to, I guess, China or Europe?

Yes. I shy away from the installed base because I don't think it's a reflection of the capabilities that EUROIMMUN has. I mean EUROIMMUN assays can be put on to many other instruments. So -- but in terms of the market size, we think it's quite large. And as I mentioned, I think the brand in the U.S., particularly, has undoubtedly been building during this time period. I think it was critical for us, Brandon, is to develop, and we are, and we're close to releasing it at high-throughput, random access, chemiluminescent system. It's vital for EUROIMMUN in the U.S. You talked about large reference labs. That's what they want. That's what they need. We think we'll launch it sometime late this year. But then we have to put all their assets that are currently ELISA-based and change then to chemiluminescent, so that will be a 12- to 24-month time period. So we'll start to get some instruments out late this year, and then over time, try to build out many in the U.S. And I think in the high hundreds of millions, if not $1 billion marketplace for us, to which right now, we have single-digit share.

Got you. Okay. Maybe if we could just shift gears quickly in the time I have left. Jamey, Perkins made quite a lot of progress on margin expansion, still some runway to go. What are the main drivers this year? And how should we think about just the rate of margin expansion in the next 2 or 3 years and some of the primary areas that you're focused on?

Yes. I mean, this year, specifically, it's a huge anomaly. We are selling more Diagnostic product that comes at a very different gross margin rate. And therefore -- and we're selling less historical instruments in applied market that has a much lower gross margin. So we're seeing a lot of mix difference there. On top of that, when it comes to operating expenditures, even if we wanted to, there is -- you just can't spend sometimes, I mean, if you think about travel. That's just not -- even we spend more on a lot of third-party services and what not. So this year is a real anomaly from a margin standpoint, and I expect pretty strong margins. But that said, I think the fundamental levers that we've been focused on are no different. I think that the mix change in our portfolio will continue to occur over time, both DAS versus Diagnostics, Diagnostics being higher and growing faster. And even within DAS is different. If you look at some of the recent acquisitions, Cisbio and Meizheng, those are very profitable. Those are growing well, we believe, in the near-term and even the long-term opportunity, so those are attractive markets at higher-margin rate. You take out informatics. Informatics is still growing quite nicely. It's highly profitable. So even within the DAS business, I'd say there's a -- you've got volumes that -- TBD for anybody's outlook out in the global economy. But overall, I think we're hanging in there quite well. And then you talked about programming, right? I think there's 3 or 4 programs that we are putting on across the company that I think are significant, particularly gross margin improvements. I think EUROIMMUN, we've talked about in the past, that should be able to grow 5 to 10 points over time. This is going to happen over 1 year or 2 years and maybe now in 3 years. But we see significant runway there that will help overall PerkinElmer. I think the DAS instrument side, particularly on the analytical technology side, has a lot of room to grow. I think we can work on our site footprint. I think we can work on product configurations. I think we can work on the design of our product, whether we are overbuilding it, are we getting the right share cost analysis, but that's going to be years. It's not measured in quarters, that's going to be a long-term margin opportunity for us. And I think it will last. I think we've got a lot of opportunity there. And then the third area is services. Services is probably core to our franchise. And as mentioned before, we've implemented ServiceMax, and there's just a lot of opportunities that the team sees to expand margin there. So I think we've got a long runway here. Obviously, a mix on the volume side, but also from the program side, that got a lot of good things going on. And then the finally, what I'd say is, I think this environment has opened our eyes to a digital world. I think the travel will obviously ramp back up, but I'm not sure if people will get used to it. I think people are enjoying collaborating digitally with our customers. We've had more webinars than we ever had during this time period. And even internally, we've invested in teams, just like everybody else has, and what not. And I think people are operating quite efficiently from home. So I think we've got better tracking our overall expenses. We know where we want to spend. We're going to be targeted with our investments. So I'm quite encouraged by the margin profile and opportunity in our businesses.

I hope you don't mind jumping on an airplane to come to our conference in New York next year.

At some point, I hope we'll get to do that.

I'll welcome you back. All right. With that, we're out of time. We'll leave it there. Thanks, Jamey, Bryan, for joining us. Appreciate it.

Okay. Thank you, Brandon. Take care, everyone.