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

Hello and good morning, everybody. I'm Derik De Bruin, the Bank of America, Life Sciences and Diagnostics tools analyst. Thank you for joining us today at our Global Healthcare Conference. With us today is a conversation with PerkinElmer. With us is Prahlad Singh, the President and CEO; and also[ Bryan Kipp from IR is joining. Gentlemen, welcome.

Thank you, Derik.

Thank you. Thanks for doing this. Appreciate it. A lot going on. So before we sort of dive into the endless COVID questions, which I've got a lot from investors here -- and by the way, if anyone's listening, please go ahead and send me a semi -- questions either on the Veracast link. Or if you're listening outside, go ahead and chat or e-mail.

But before again, Prahlad, I just want to ask a big picture question on PerkinElmer. I've covered the company since the early 2000s back when it's a much different company, and I guess one of the legacies of that long history that some investors find the company difficult to understand. I guess in your summary, what is PerkinElmer today and the competitive strengths? And what's the best way for investors to approach the story? Because I often get asked for teach-ins and to say what is PerkinElmer good at and where does the company excel in.

Thanks, Derik. Honestly, a confession, it's refreshing to start a conversation with a non-COVID question given that it gets outside attention today. But there are a lot of things beyond COVID that we have worked on aiming at better positioning the company for the future. I mean as you said, right? Over the -- it has -- it definitely has been -- if you were to look at it, a difficult company to understand. But I think what we've done over the past, I would say a few years and specifically if I take over the past decade, we have moved away from being a holding company model to a more focused operating model, and we started aligning our businesses with a clear long-term strategic goal that is aligned behind 4 pillars that I'll just walk through in a short form, right? One, we've tried to align and focus our portfolio more towards attractive end markets where we have a right to win, much more heavily weighted towards diagnostics and life sciences. We've shifted our product mix towards more recurring revenue streams in reagents, services, software and consumables, which now make up about 2/3 of our revenue. And we've diversified and strengthened our geographic presence to take advantage of emerging market opportunities, which now make up, and Bryan, correct me if I'm wrong, more than 45% -- close to 45% of our portfolio. And we've increased our M&A activity to rapidly shift our portfolio, leveraging our balance sheet in addition to our internal resources. So a lot has changed. And the question comes up, well, what does that mean? How do you quantify that? Well, we've doubled our revenue, we've tripled our operating profits, and we've almost quadrupled our earnings per share. So as we have shifted our focus for investors, our intent is to continue to educate the external community on our portfolio, our competitive positioning in a near- and long-term strategy. So this is a lot of work, which is on our part also that we continue to hone our communications and maintain our current level of transparency that we've embarked on.

Great. So thanks for that. I mean it's certainly -- I mean the changes in the business are phenomenal given where you started and back when I covered the company when you were still making disposable flashlights, flash camera lights and then you have the aircraft [indiscernible] business? I mean it's a much different business today. So let's set the stage for the rest of the conversation. Can you give us a brief overview of the second quarter results? And sort of how that sets you up for the rest of the year?

Yes. I mean we delivered a strong second quarter with, I think, 13% organic growth. We had a 57% adjusted EPS growth and over 200% adjusted free cash flow growth. COVID-related products obviously contributed close to $200 million in RNA extraction, PCR kits and serology, all contributing greater than $50 million. And the non-COVID portfolio in the second quarter in a decline in the mid-teens are 14% with the DAS segment being down 10%, and non-COVID diagnostics declined nearly 20%. So -- and we did -- I guess the way I would put that it is that the third quarter, as we've indicated, will be better than the second quarter in both on the non-COVID side, specifically, we continue to see good trends as the quarter has progressed now with the caveat that the third month of every quarter is an outsized contributor to our overall results.

Great. So let's talk about the third quarter. Your -- you've given your outlook in July was for 8% to 22% reported and 7% to 21% organic revenue growth. I guess given the massive upside from COVID-related testing one of your competitors reported last week, how are you feeling about this view now? I mean is demand for COVID still strong?

So our peer obviously had the opportunity of having an Analyst Day and was able to provide. So I can't give you an update to our previous issued guidance for 3Q today. However, I'm happy to discuss some of the trends. And again, reminding you that the third quarter tends to be a big contributor to our results. In terms of the COVID side, Derik, a demand for our extraction and PCR solutions has been strong. And as a result, I think in the first 2 months, we are tracking to the higher end of the range that we have provided. But more importantly, on the non-COVID portfolio, as you pointed out, we had guided negative 14% to negative 7% in the third quarter. The assumption in the negative 14% assumed similar trends as the second quarter and embedded in it was a cushion in case of a second wave during the quarter, akin to what we saw in Beijing in the middle of June. Fortunately, we have yet to see a second wave headwind in the quarter. So we are tracking well in that part of the portfolio as well.

Great. And can you remind us just on the mix of the COVID reagents versus instruments versus your LDT diagnostics?

I don't know if you have that.

No. So Derik, we don't -- haven't provided that. And the reason why is it's noisy, right? And so we've tried to get the data points that are pertinent. And you'll see in the PowerPoint presentation for the second quarter, overall mix is skewing towards recurring revenue streams because of the COVID contributions. It's fair to assume that, that is a mix shift driver of us trending towards more reoccurring. But underlying that, the chemagic 360 again, handling another instrument demand associated with COVID, has been robust. But the problem is, is not all of it's CapEx, some could be reagent rental. And so it creates a little bit more of a noisy dynamic if we try to tease that out. So we haven't given that, but it's fair to say both are doing well and both are robust, but we've given the kind of installed anecdotes to help alleviate some of those questions, which is chemagic 360 we placed more in the first half of 2020 than we did in the prior 5 years. That's just one anecdote.

Got it. And I guess how many LDT tests are you currently producing? And how are you -- are you continuing to ramp capacity? And how is that demand trending?

Yes. I mean maybe an above -- one way to look at it is for specific numbers, right? Our mix has been obviously heavily skewed towards recurring revenue. From -- we've got 2 EUA PCR -- EUA-approved PCR kits. We've got several, I think, at least 4 CE Mark PCR kits. And from -- most of our focus early on in this COVID -- during this COVID pandemic, Derik, was gone in fortifying our supply chain and logistics to ensure that we are able to reach quickly in region for region and have the highest quality products that would be available. And just to give you an example, I don't know if you saw, the FDA released their first 55 PCR kits that they have tested and working on much shows up right at the top to the highest sensitivity. So I would say that the number of tests are several, and there are many more to come. And the idea really is the way we are looking at it is looking at it and attacking it from a direct testing, auxiliary testing and also looking for immune responses that, that will become important as this thing progresses.

Right. I mean that's a great segue on the fact that, so far, the traditional serology testing has been anemic, I think, across the industry. And I mean you actually did a really good job on your Q1 call by tempering expectations on the serology market. I mean you called it out and said that you felt it was going to be that way. I guess how do you sort of see that market evolving? And also, I mean you talked about launching a new point-of-care, an ELISA-based antigen method for COVID. Can you sort of talk about that? And how should we think about your point-of-care offerings versus what's currently being on the offering from Abbott and Roche?

Yes. So let me start by saying that I think PCR is going to remain the gold standard for the foreseeable future, right? In terms of -- let's start with serology, right? And the demand declined pretty precipitously in June. As there was growing debate around, not just the diagnostic utility, but also the timing, what phase of the infection do you do the serology test. But there have been recent publications that support the durability of antibodies after a patient recovers, but there still remain a lot of question mark, and this has impacted its clinical demand. I think serology testing will see a resurgence as therapies are launched and as epidemiology studies gain scale. So I remain cautiously optimistic. And in terms of your second question, Derik, around our pipeline. The way I look at it, right, again, we are looking at how can we bring testing, a direct testing process that is high sense and high spec, how do we do -- look at indirect methodologies, serology being one of them and then how do you look at immune responses whether it's T-cell response, a cellular immuno T-cell immunity response, et cetera. So we are attacking at it from all 3 different aspects of it. And I think over the next several weeks or months, I would say we will be hopefully having approvals for several tests, is the way I would put it.

Great. And before I ask a general question about the duration testing, I want to talk a little bit about your recent announcement with the state of California. I think Perkin has clearly been a leader in newborn screen. The company has labs over the U.S., but it really hadn't occurred to me that the company would leverage this into COVID testing as per your recent deal with the state of California. Can you give us a little bit more -- can I get a little bit more color on your -- how this transaction came about and the terms? And I guess is this something you take into other states?

Yes. Well, it's probably also an indication of what a unique time we are living in and how these circumstances lead you to different relationships, right?

Right.

California have a strong multi-decade relationship. Because of this relationship, they engaged us about our ability to support the expansion of COVID testing in the state. Every time for -- as an example, there is a newborn assay that is approved on the RUS Panel and the state of California wants to bring it in, we partner with them. And we bring that test, we put a lab in lab, run it until they are up and running and then hand it over and leave. So this was not something new for us, right? Just so happens that we are in a unique position to help during this crisis, but it is definitely not our intention to democratize this model or become a clinical testing provider in the post-COVID world. The announcement of California obviously has naturally piqued the interest of other states and government, and our position has been the same. We are committed to help address acute customer needs given these unique times. However, again, to restate, no intentions to expand into the reference lab industry.

Great. And so then it goes on the question of -- the big thing that we're getting is everybody wants to know how long the COVID tailwind testing is going to persist. I guess how do you see the COVID market unfolding for PerkinElmer in terms of both your demand and competitive positioning? And with that last comment, it sort of segues into the question of I guess, what are the opportunities to be on COVID for the company to expand your global diagnostic footprint given you've certainly garnered a lot of press and you're certainly talking to a lot more people than you had in the past?

Yes. And there is certainly a lot of opportunities for us to increase our global footprint, right? I mean we were not really a player in the molecular diagnostic industry a year ago. But I mean just fast forward, today, we are one of the largest providers of COVID testing solutions across the globe, right? Responding quickly with high-quality solutions for our customers is clearly expanding our brand recognition, especially in the molecular diagnostic industry. And I think as you pointed out, right, we've sold as many RNA extraction equipment with chemagic 360, automated liquid handling, DNA RNA extraction in the first half of '20 as we did over the last 5 years combined. So that gives us a very impressive installed base and footprint, but this also affords us new opportunities on the other side of COVID. So we -- our thought process is to stay -- remain focused on the acute needs of our customers and launch new solutions as they seek to repurpose the COVID workflows in a post-COVID world so there will be -- our intent is to continue to add more ammunition and more fuel so our customers can now leverage what they have learned. Just to give you an example from our extraction capability that it's got easier workflow, higher extraction at a lower cost. Now how can they leverage that across their other molecular needs is where we are working, and we'll continue to work with them.

And the question on duration. I mean what are you -- I mean I know it's hard to predict even from quarter-to-quarter what the demand is going to be, but how are you sort of thinking about the duration of testing unfolding? And this sort of then segues into like what -- how are you thinking about bringing your employees back to work, what sort of testing you're doing and general long-term implications of this? I mean how long do you think this sort of like tailwind is going to last?

Yes. I mean, definitely, 2020, I think COVID testing is definitely there to stay in 2021. I think beyond that, my crystal ball continues to get hazy, but it's not going away in 2021, I would say. In terms of what we are doing, Derik, I mean it's a very interesting question. I think the 3 things that we've learned about ourselves from COVID, right, one is our speed and agility if anybody were to tell me that sitting here in September, we would have had 2 EUA -- overall, if I combine 3 EUA approvals, 9, 10 CE Marks, several other government and regulatory approvals, manufacturing capability in all parts of the world for our products and being able to do that all in a matter of weeks, not months. I would have said, you guys are taking something. So speed and agility. Our own speed and agility has surprised me. Remote and digital, I think the level of productivity that we have seen with working remotely and the ability to leverage digital capability on the commercial side, not just the internal side, I think it's here to stay. And the third one, as I pointed out earlier, right, being able to fortify our supply chain and logistics capability to deal with such situations, again, is a big plus. So filtering it down to what we are doing from our employee-based perspective, obviously, the labs and manufacturing ones are in full force with the appropriate safety precautions. But outside of that, if somebody doesn't need to be in a brick-and-mortar building, we don't -- we are actively encouraging them not to be. That's the way I would look at it. If you don't need to be, you are doing a much better job being doing whatever you're doing from wherever you are. And I think that will be there to stay. That doesn't take away that human interaction is important, and it will be there. But I think the level of importance that was given to it was a bit exaggerated in the past, and that's going to subdue.

Yes. Well, certainly, for those of us in the financial community, I mean we can -- once we sort of get all the technology figured out, we can sort of manage this a lot easier than a lot of people on the factory floors, obviously. So I actually want to turn away from COVID now and talk about the rest of your business. So you did note that you're -- in diagnostics, you declined 20% organically in the second quarter. Can you speak a little bit about what's happening at EUROIMMUN, newborn screening and genomics outside of COVID? And I also want to get an update on the Vanadis platform. We've had some really interesting positive feedback from some calls we've done with MFNs recently.

Yes. I mean, let me start with Vanadis. Again, the customer feedback has been very good. Vanadis installation, new installations, unfortunately, are still getting delayed due to COVID-related shutdowns, but the interest in the pipeline is strong. It's just that we cannot get an engineer to fly from either Sweden or Stockholm to Japan or Thailand or Vietnam or anywhere. You just cannot go. If you recall what we have said in the past, we have taken out the complexity of the product from our customer and put it in the box. So it's -- it does require in-person presence to install and train and get it up and running over a few weeks. So that's basically the -- I would say, the challenge with Vanadis. But mid to longer term, Derik, it's something that we are very confident in and see that it will have a lot of traction for our growth. And especially with the new ACOG announcement, right, that's especially positive and it calls out, if you recall the employees, and that's where Vanadis excels. In terms of the question around non-COVID diagnostics, right, I think newborn screening, it's coming back up in China. Maternal and fetal health is still lagging a bit behind. And honestly, I remain hopeful that we will see a resurgence in birth rates in 2021, which has been lacking and been anemic over the past few years. But if there's one positive outcome that will come out of COVID, I hope is that there'll be a whole lot more babies born in 2021.

Hopefully... yes.

On the EUROIMMUN side, right, I think while they've done well with serology and PCR, immune, autoimmune disorders, testing on that while the rate of incidence of it continues to increase, as I've said earlier, right? It tends to be an elective test. It's not life-threatening, so people are still avoiding to go to testing labs in -- I'll give you -- in my own family, my wife delayed going for her thyroid test until last week, and this was something that was needed like 7, 8 weeks ago overdue. So people are avoiding testing that and -- but hopefully, slowly, it recovers back.

Yes. Well, and I'm going to my rheumatologist today after having delayed from April to go there. So yes, the same thing in that sense. So can we turn a little bit to the DAS business in -- it, was down 10% organically in the second quarter. That was on par with most of your peers. And can we do like a World Win global segment tour and how the business is tracking here in mid-September versus your July earnings call. So can you give us a sense of U.S., Europe and China, APAC and how those geographies are trending on the analytical instruments side?

Sure. Happy to provide some context. But again, I'll remind because Bryan is glaring at me, but I'm not updating any previously guided -- previously provided guidance. And please remember, third month is an important one for us, right?