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

All right. Good afternoon, everybody. I'm Doug Schenkel from Cowen's Life Science and Diagnostic Tools team. It's our pleasure to welcome Prahlad Singh, PKI's President and CEO, to our conference. For those of you who may be a bit new to the PerkinElmer story, just a little bit of background on Prahlad. He was elected President and Chief Executive Officer of PerkinElmer, I think that was in December of 2019. Prior to that, he was in important leadership positions within PerkinElmer going back to when he joined the company, I believe, in May 2014. It's been an interesting time for anybody to take over in a new role in leadership. You predated the pandemic by, maybe, weeks. And as I think we wrote as a title in our last note on PerkinElmer's last earnings call, you've really exemplified doing well by doing good with COVID-19 while using this as an opportunity to not just serve the community, but also to evolve the PerkinElmer portfolio, at least begin to evolve the PerkinElmer portfolio to be a higher growth, higher-margin business. So welcome, Prahlad. Thank you for taking the time. Before getting into some of our Q&A, I thought I would just turn it over to you to maybe make some opening remarks, and then we can just get into our discussion.

Sure, Doug. Thank you for the opportunity and your kind words. I still recall, that when I became COO of PerkinElmer in 2019 beginning, yours was the first conference that I went and spoke at a public forum. And what a tumultuous 26 months it has been.

Yes, yes.

Especially the last 14. But I think what I feel good about and feel confident in saying that, over the past 2 years, we've built a really strong foundation for the company, one, which is -- was instrumental in the success that we saw in 2020, dealing with the pandemic. But I think more importantly, it is pivotal in the way it will help transform the company over the long term. And I don't mean just on the 2023 goals that we have set, but the 5-, 10-year horizon. I think fundamentally, today, we are a much more focused organization that has figured out the recipe and formula of how to function in an agile manner, especially as you bring in different capabilities and competencies from different businesses that have been acquired in the recent past. And that really sets up well for a very exciting future. And we are in a much better position than we were even a year ago. And I think the thing that I would -- the metric that I would measure that in -- I'm very confident that we will be a much faster-growing company post-COVID than we were in the pre-COVID arena. I think that's one of the offshoots that we have learned. And in our case, we have not let that crisis go to waste. So I just wanted to say thank you for the opportunity and look forward to the Q&A.

That sounds good. And thank you for that, Prahlad. Yes, so I'm going to provide a framework, and my guess is we won't get through all of this. But amongst the things I'd like to talk about is just to spend a little bit of time, of course, on Perkin's response to COVID-19 and then really building off of what you just described, to just dig in a little bit more and think through how you take what you've done during the pandemic and durably change the business. Essentially, of this, what where are the opportunities to basically create durable growth? The second thing I'd like to do is really dig in a little bit on 2021 guidance a little bit and just make sure we understand kind of the puts and takes in some of the key assumptions. And then I would like, as you referenced, to talk a bit about the 2023 revenue and margin targets that you outlined earlier this year. Really at kind of the bottom of my list, I had capital deployment. I mean, it was definitely kind of last but not least. But given we just talked about really the evolution of the portfolio, maybe I will just start on capital deployment with one quick question. And again, just correct me if I'm misstating anything here, I don't want to mischaracterize anything. But earlier this year, I think you talked about the company having about $2.5 billion in incremental M&A capacity through 2023. So I think that's with Horizon and Oxford already done. That's -- or at least with that in mind, this is the incremental amount that you have in terms of dry powder. Would you be willing to just talk through, essentially, what criteria you are using for deploying this capital? Should we be thinking about more deals like Oxford and Horizon, which I'm sure you'd say, hey, yes, that's great, if we can find more of those. I mean, is that what you're trying to replicate? Or is there a broader framework that we should be contemplating as we think about what PerkinElmer might do next?

Sure. And I think that the way I would look at it is the past is a very good predictor of what the future is going to look like, in our case, especially as we look at our capital deployment. Outside of the baseline criteria around ROIC and IRR and the financial metrics that you would expect any acquisition to return, the 2 most important things for us is a strategic bunch of it. And I think we've put a lot of emphasis on that, if you just look at whether it's Tulip, EUROIMMUN, Cisbio, now Oxford and Horizon. They just fit in our sweet spot, and we put a lot of effort in it. So I think as you look forward, I would love to do a large deal, but there are few and far between. And especially ones that do not have the COVID tailwind premium attached to it. But the good news is that the pipeline is quite rich, both in the private side and in the public side. But our focus is really to find the ones that meet our strategic fit and culture fit. The benefit that we are getting, both with Oxford and Horizon, is that they have sort of expanded our presence in new arena, with Oxford, obviously, in infectious diseases, it continues to add what we have, and that opens up new avenues for us to look at that portfolio. Whereas with Horizon, especially in gene and cell therapy, it's in an arena, a research arena, which is going to have significant investment tailwinds over the next several years. Acquisition of Horizon opens avenues for us to look at subsequent acquisitions where we could add assets to that portfolio. So that's the way I would think of both in the life sciences and diagnostics side.

Yes, that's helpful. And it makes sense. I guess in terms of timing, and by this, I mean, I know you're not going to say, hey, next week, we're doing something. But just at a higher level, if we think about the readiness of your infrastructure -- I mean, you have a lot going on. I mean, you're still in the midst of reacting and serving in the pandemic. You're increasing investment in some core organic growth areas, and you're in the midst of integrating or about to integrate some recent deals. So I mean at this point, should we think, okay, PKI, I don't want to say, needs to catch its breath, because that would be putting it the wrong way, given how much you have going on. But in terms of taking on more, is it more likely than not that it would be -- or maybe put differently, would you prefer to have a little bit of time to basically just execute on everything I described before layering in another variable in the form of another deal?

Yes. So obviously, we've thought of this in a very deliberate and diligent manner as to how we stagger these acquisitions. So if you look at the 2 that we have done, one is on the life sciences side of the business and one is on the diagnostic side of the business. And so they have been staggered in a manner that we can absorb and digest them as they come through the pipeline. The one thing we have done back is we have, in the beginning of this year, build a function which we are calling the integration transformation office. So there is a command and control center around which we are investing a good amount of resources that will allow us to use that ITO office, to ensure that there are the right processes, right tools, right structure, to integrate these businesses in a seamless manner as they come in. Now one of the other unique things that we have is, unlike large companies, we integrate right. We don't integrate heavy or we don't integrate light. If you look at Cisbio, it is fully integrated. If you look at Tulip, it's pretty hands-off. [indiscernible] It's somewhere in the middle. So that's the way we've been trying to track this.

And that flexibility probably puts you in a position where from the outside, it may look like you got a lot that you're juggling right now. But if the right deal presents itself, the infrastructure is in place to gobble that up even if it's in 2021, is that fair?

I'd like to call ourselves a $3.8 billion startup company.

Yes.

And that's the mindset and culture that we are trying to inculcate into the organization. So I would expect us to do at least a couple of deals this year, hopefully.

Just a couple. Okay. All right. Super helpful. Let's pivot back to COVID-19. It's something we would all like to escape talking about, but I think we're going to be talking about it for a while, unfortunately. So 2021 COVID-19 revenue, I think what you've embedded into guidance is that you expect it to be at least flattish relative to 2020, which I think equates to about $1 billion in revenue. And I think you're expecting about half of that in the first quarter. Based on how you've talked about COVID in the past, you don't have a crystal ball any better than anybody else does. And you've been very clear in acknowledging that. But it does seem like, with that in mind, and the reason I put it that way is, it seems like your guidance philosophy for the year is to acknowledge you have pretty good visibility on Q1, put a lot of emphasis on that. And then let's see where the world's going after Q1. Is that kind of the logic? I mean, maybe there's a better way of putting it, but that $1 billion for the year, you probably feel really good about Q1. And then for the balance of the year, you probably feel good about it, but that's where the error bars get wider, but presumably are more skewed to the upside.

Yes. I think you've laid it out pretty well. So what I'm going to say is probably going to just reiterate and confirm what you said, right? We you have a very good line of sight to Q1, but as we look quarter-by-quarter, there is -- it continues to get hazier and hazier. What we have in our assumption is that there will be a significant de acceleration in demand in the second half of the year, and Q2 probably will be lower than Q1. So that's sort of the assumption and the thinking. Now obviously, as you said, there are a lot of variables. Once the lockdowns open up in Europe specifically, is there a spike in infections, the impact of the rapid antigen test that we recently launched, right? So, there are a lot of variables. But given where we were in January, when we forecasted, we feel very good about Q1. And the first 2 months of the year have validated that assumption.

Prahlad, I don't know if you want to touch this one, but I'll ask it anyway. Like, I mean, there's been a couple of companies that are focused on diagnostic in the space, diagnostics for COVID, that over the last few weeks, indicated they had seen peak demand. Right before our discussion, I was catching up with the CEO of Danaher, and he said demand has held up at levels consistent with what they saw in Q4. Anything you'd be willing to share in terms of how things are trending for PerkinElmer right now?

I think, again, I think Q1, we feel very good about. I think as we look forward, longer term, order trend is going down. And that's because testing is going down, right?

Yes, yes.

It's just, just is for the world to see what's happening. And there is no, I would say, secret in that, right? But I think the variables, as I pointed out, is something that are still unknown. And we just have to see what happens when the lockdowns open up in Europe. And in our case, the impact of an antigen test, how that plays out, which obviously is not factored into our assumptions.

If I can just actually make sure I get someone to understand some of the assumptions, right? And again, if this is too granular, just say, let's move on. But you mentioned the rapid tests. So if we think about your recently launched rapid antigen tests, QuantiVac, some other new products that you're in the process of launching. In the -- kind of keeping in mind what we just described in terms of how we think about the balance of the year, presumably, you don't have a lot, if anything in guidance for those products just because they're new. Is that right?

Yes. That's a fair assumption, yes.

Okay. And then on the rapid antigen tests, the clinical studies that are out there have demonstrated greater than 97% sensitivity and 100% specificity in symptomatic and asymptomatic patients. The antigen testing has as a category, not been as strong, I don't mean for PerkinElmer, I mean, across the industry, so there's been issues with that category because of the performance of those assays. Do you have some hope that the performance metrics you've outlined that are associated with your product could actually change the role of antigen testing? Again, I don't think that's in guidance, but how do you think about that in terms of separate from guidance, the role that this new product could play relative to others?

Doug, let me talk a bit from a technological innovation piece more than a financial perspective, right? I mean if you just even dial back 4 quarters, we were not the first ones to come out with the RT-PCR test, but we were the ones with the most sensitive one. And we didn't say that, the FDA said that. And as I have said, right, I have held coming out with a rapid antigen test for 2, 3 quarters now. Because I wanted it to meet our internal quality threshold. I was very hesitant to come -- I mean, we could have come out with a rapid antigen test in the middle of the year with...

Another me, too, right? Yes, yes.

But it didn't meet our own. I mean -- if you are doing good, you've got to walk the talk. And for me, coming out with an antigen test which would release a lot of false negatives out in the -- is not -- was not an option that I want to do. Hence, we waited till we got to a point where we are really comfortable with symptomatic, asymptomatic, nasal, nasal pharyngeal, 90% sent and it's 100% [ set ]. It feels damn good to release that test.

So wouldn't have rolled it out if you didn't think it was better, hope is that it plays a bigger part as a solution for testing than what we've seen more broadly with antigen testing. And then, again, not a whole lot in guidance for it right now.

Yes. So guidance one, you're right. I think the way I look at it now is you bifurcate RT-PCR and rapid antigen. I think RT-PCR or rapid antigen has much longer legs. Especially if you could get approval around doing the testing in non-health care professional presence.

Yes. Opening up stadiums, schools, flights, things like that.

It just opens up avenues that have got longer sustainability for several quarters. And then that's where we are sort of putting our efforts.

Okay. A couple more in this category. The U.K. lab and then the Valencia, California. I think the U.K. lab contract expires, or at least was scheduled to expire at the end of March. I know guidance has nothing in there for an extension. Is there a possibility of an extension there?

So I know that was, obviously, as you can imagine, it was one of the questions in the several one-on-ones this morning. And at that time, we still haven't heard confirmation. But again, just for the facts, as you pointed out, we have nothing in our guidance post Q1 around the U.K. labs. We have 2 labs in the U.K.: one in our Wales and one in Charnwood, right? The U.K. government did come out that they would keep some of the labs, consolidate some of the labs and close down some of the labs. So our belief is that the Wales lab is going to continue to run beyond Q1 and that has a capacity to do up to 20,000 tests per day. And our belief is that the Charnwood lab will probably be closed. Now in both these cases, the U.K. government has acquired the equipment, they have purchased it. So there will be them going to some other labs, which they are consolidating and the revenue stream coming in from them, it's just not the lab itself.

Understood. And then -- that's helpful. And then again, not in guidance, but could -- these instruments are still going to get used, and there's the potential for at least partial renewal. Okay. And then on Valencia, last week you issued a press release on the accreditation process for the Valencia lab. Could you just provide some context on this development? And then, keeping in mind I think at last update, you were running about 100,000 to 150,000 tests per week there. I think -- or at least, I think that was how it was going in the early part of Q1. Is that -- is it kind of essentially holding serve at those levels?

So let me break it down into 2 pieces, one around the PR, right? Our intent of getting the public release out was to just, in a spirit of transparency, we wanted to get it out there. The lab was opened on the third of November, on 8 weeks' time, and it was ramped up in 8 weeks' time from empty room to a lab that was up and running. The inspection happened on 8th of December, some deficiencies were pointed out at that point. But the report was not in our hand until 17th of February. Meanwhile, between 10th of December and 17th of February, we had provided responses to those deficiencies. But the report actually came out based on the deficiencies and not our full submission. Because we were responding to a report which we hadn't received. But just given the action in California and given the fact that everything is in the public domain, we wanted to [ make sure ] that we put it out there. We feel very comfortable and confident about addressing that most of those deficiencies have already been addressed. And in mid-March, I think the final report will come up. So that one we feel very good about. Around the capacity, we have a build-up to 100,000 capacity in February. The way the lab is running, as you pointed out 100,000 to 150,000 tests per week in Q1 is what we had in our guidance for Q1. So it's running per guidance. Now the question really is in Q2, what happens? As reopening efforts start taking place around schools and airports and testing happening there. Given that we have symptomatic and asymptomatic EUA approval, would that come there, or would that move to rapid antigen testing or what would happen? That is still TBD, and we are in discussions with the states.

Okay. That is helpful. And then maybe trying to use this as a segue to the 2023 financial targets. I think embedded in those assumptions is you're -- embedded in those targets is your assumption that $100 million of COVID-19 product revenue is durable. And I think you've tied that to, I think it's about $1,750, actually a little bit more than that, new instruments that you placed over the last year related to COVID. Could you just talk a little bit about the strategy of making sure these instruments keep getting used? And how you could -- if you end up being higher or lower than your target, what's going to dictate that?

Sure. So the way we look at it is we expect $100 million of COVID-durable revenue, and most of it is underpinned around our extraction portfolio. I mean the one thing that chemagen and the chemagic portfolio provided our customers, clinicians and researchers, is the ability to rapidly transform the way respiratory molecular diagnostics can be done with various sample types. The benefit of automation, the benefit of high extraction yields that the chemagic portfolio gave rapidly transformed the use of saliva for testing. And I think that our customer -- the stickiness of that is going up. That's not going to go away. So that's essentially underpinning that, that instrument and that installed base is going to be -- continue to leverage for DNA and RNA expansion, irrespective of what the molecular assay is for. Now all of that then comes as upside. Will it be used for NGS? Will it be used for other molecular testing? Would we have more flow and respiratory assays in our portfolio from a molecular assay perspective that we would bring to fore, newer acquisitions that we continue to make. So those of -- so the $100 million is baseline. Everything else, we would look at sort of upside from that.

Yes. And that might be an area where, between organic investment and some bolt-ons that I don't know how you account for it, whether it's post-COVID, durable revenue or not, but there's ways to drive upside to that strategically with internal and external product development, I would think.

It's very true. I mean, that's what we wanted to establish, the floor. Everything else would be upside.

So let's stick with the 2023 financial targets. You talked about delivering durable 5% to 7% core revenue growth. And I think you said diagnostics should grow high single digits. DAS should grow mid-single digits in this construct. Those are very nice, robust growth rates. And I give you credit for putting a target out there right now because you probably didn't need to. So it's helpful to have that now and it shows confidence. At the same time, you were growing at those levels in 2019 and 2020 before the pandemic, at least on an aggregate basis. You're in the process -- or you've added Horizon and Oxford, and you are investing in growth opportunistically as a function of, essentially, the windfall that is associated with the pandemic. As we think about that 5% to 7% target, again, I give you credit for putting it out there. But given what all the things that you've been driving in this business, would you be a little bit disappointed if you're not at the high end of that range versus the low end of the range?

I -- Doug, my philosophy is to put a number out there that is attached with the high-quality of fundings around organic growth, EPS and free cash flow. You've been one of those who have been pointing us to the [indiscernible] what we should do, right?

You put that nicely. You could have said I've been a pain about it, but anyway, go on.

Actually so, rightfully so. The intent is to put a number out there that I'm confident of meeting and beating, and providing high-quality earnings on all of those 3 pillars. And that's the intent. Should we be able to beat that? Absolutely. And I think we -- our intent is that do we have the right team, infrastructure, organization, culture and execution priorities. And that's where we are confident about, right? The financials are a natural offshoot, and we should definitely feel very good about what we put out there. So I think that's the way I would think it through.

Helpful. And then on the margin targets, you've talked about at least 23% operating margin in 2023. What are the -- how should we think about the components? I mean, obviously, there's going to be error bars around everything because you got some time to get there. But are there building blocks or a construct that you could share in terms of how you get it from where you are today in a 20 -- or from where we were almost pre pandemic to how do we get to 23% in 2023?

So just to be sure that I say that, that for me, 23 is a midpoint, it's not the end goal, right? It's just putting a time on a date, right? It's a static thing that we want to get to 23% by '23. It rhymes well. It feels good. We put it out.

And it's not peak. The point is that it's -- you feel confident with that number, but that's not peak margin.

That's not peak -- I think there are lots of levers that we have and Jimmy's pointed some of these out in the past in excruciating detail around what we are doing around gross margin, around our SKUs, around our AR -- on all of the items above gross margin and also below gross margin, leveraging our R&D capabilities, leveraging our SG&A as we bring in these acquisitions. It feels -- we feel very comfortable again in meeting and beating that number.

And then -- I mean, again, not to harp on it too much, but I mean, the mix will help you at the gross margin line. I mean, at some point, is it also that there's -- you're going to keep investing in growth operationally. But at some point, that normalizes at a lower growth rate and a lower percentage of sales, is that the basic way to think about it?

Yes. And naturally, as we continue to change the mix of our portfolio towards more life sciences and diagnostics, that's one of the levers that plays an important role in it.

We only have a minute left, so I'm just looking at my 2021 guidance questions, what we didn't cover and trying to prioritize. I think one thing that's popped up in our discussions a lot has been China. And China revenue actually declined mid-teens in Q4. Most of your peers reported strong growth there. You guys have done fantastically well, certainly throughout your tenure and over the last several years in China. I think the biggest delta relative to peers was probably your exposure to China diagnostics with EUROIMMUN. Were trends for non-diagnostic businesses in China a little bit little bit stronger? Is that kind of a thing that may have got lost in the mix with that number?

Yes. So longer term, we expect China to return to double digits.

Yes. Yes.

But I think near term, we have started seeing very encouraging trends. We have 2 months under our belt, and we feel very good with the way things are coming back and the uptick that we are seeing on the non-COVID diagnostics side. Obviously, the core business, the non diagnostic core applied full, they have been seeing, again, we started the year with a strong backlog and that trend has continued to the first 2 months of the year. So we feel very good around the near-term turnaround, not just on the non-COVID diagnostics, but also on the core side of the business.

Okay. Yes, that's really helpful. Yes. I mean, it just seems like it's a couple of things inflecting at different points, but ultimately, you're getting up back to that double-digit growth level.

Right. Absolutely. It's -- the first 2 months have only increased our confidence in what we have laid out for the year.

Okay. All right. Unfortunately, I think we're out of time. We did get through a lot of this, but of course, there's always more exciting things to talk about with you, but we'll save that for another day. This has been really helpful. We appreciate you taking the time.

Great. Thank you, Doug. Talk to you soon.