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

All right. Great. Thank you, everyone, for joining us today. We're very excited to have PerkinElmer here, presenting. Here representing the company, we have Stephen Willoughby, Vice President of Investor Relations. Before we begin, just a reminder to refer to the website, the Baird website or our published research for important disclosures about what we're being discussed today. As far as the agenda, Steve's going to give a quick overview of the company, and then we will jump into Q&A. [Operator Instructions] So with that, Steve, thanks so much for joining us, and I will hand it over to you.

Great. Thanks, Catherine. Thanks for having me. Let me just pull up my slides here real quick. Hopefully, this goes okay. Let's see. Let me know if you can see everything okay. Let's see. Can you see the slides okay?

I've got them.

Okay. So, yes, like, as Catherine mentioned, let's see if I can change the slides now. That's the next question. Here we go. So first, I just want to turn your attention to our safe harbor. I encourage you to look that through as well as head over to our Investor website for any further disclosures as well. But for those of you who are not familiar with PerkinElmer, we are approximately a little under $4 billion in revenue company last year. This year, we're guiding to just under $4.6 billion in revenue. That revenue is fairly evenly split between our 2 segments: Diagnostics and Discovery & Analytical Solutions. Over the last 5 years, we have increased our exposure to the life science and diagnostics markets. Life sciences and diagnostics now make up close to 80% of total company revenue. We're highly reoccurring revenue in nature. About 75% of our revenue now comes from consumables and informatics and service. We're also very geographically diverse. We've increased our global presence over the last number of years. And as you can see in the bottom right-hand corner, over the last few years, we've been fairly acquisitive in terms of M&A, including our currently pending acquisition of BioLegend. We will have deployed about close to $9 billion in total on M&A. I won't spend too much time here, but -- as it's backwards-looking. But we've had a very strong performance over the last 5 and 10 years from both the top and bottom line. Obviously, la ittle bit here in the near term, some positive tailwinds from COVID as well. But even excluding those, still very strong top and bottom line results, which I'm hopeful can continue, if not further improve or accelerate into the future. Touching a little bit more on some of the acquisitions. As I mentioned, we've been fairly busy over the last 12 to 18, 24 months. All of these acquisitions on the left-hand side are new to the company within the last 18 months or so. And I think they really provide 2 things. They're both complementary as well as into some new markets. And so for some examples there, the Oxford Immunotec deal brings us into T cell testing and tuberculosis testing, complementary to some of our other infectious disease testing. Similar to the Immunodiagnostic acquisition. On the other side of the business, in the DAS segment, and within Life Sciences, we've done acquisitions of Horizon, Nexcelom and SIRION. And the BioLegend acquisition, which I'm sure we'll talk about more, is still currently pending, but we really have built out quite a presence within life sciences, life science reagents as well as some cell and gene therapy end markets. Now as it relates to BioLegend, I would just touch on it briefly. This is a $5.25 billion acquisition that we announced back in late July. We expect to close the deal before the end of the calendar year. BioLegend is -- by way of quick background, is an innovator and manufacturer of antibodies and conjugated antibodies and reagents. We expect this business to generate about $380 million in total revenue next year. We expect it to grow at least in the mid-teens over the longer term. And it's 100% recurring in nature. So it will take our reoccurring mix of business up slightly. And obviously, given the growth rate rates and margin profile of the business, should be a very nice addition to our business. And I think it's very interesting in that, while we don't play in antibodies today, we use antibodies throughout our DAS, Life Science and Diagnostic businesses, so very complementary. And Catherine, I'm happy to answer any questions you have on it. And the final thing I'd leave you with for PerkinElmer, it's sort of what we believe the company can look like longer term. We've laid out some very specific medium-term targets, which we talked about on our Analyst Day back in late June. The longer term sort of beyond 2023, we believe that the company pre BioLegend or excluding BioLegend, should be able to grow in the mid- to high single digits organically, have solid margin expansion of 50 to 75 basis points, which should deliver double-digit earnings growth. And I think the addition of BioLegend and the revenue synergies we expect from that and the growth and top line we expect from that should just be additive or accretive to these longer-term targets. So with that, I will try and figure out how to close out of my screen-share. Let's see if I can do it successfully and turn it back over. Stop-share.

All right. Great. Thanks, Steve.

Okay. Sure.

That was a great, great overview. I guess, for questions. First, I just wanted to start with some on COVID testing before diving into areas of the core business. Just given the rise -- recent rise in cases, we've seen an uptick in COVID testing. And based on trends, it looks like COVID testing might actually end up somewhere close to what we saw in the second quarter, and you guys have guided to a 50% sequential decline on the product side. So does that seem reasonable to you? And can you talk to any trends that you're seeing across your products that are sold in the COVID testing applications?

Sure. Yes. I think it's important to note that our COVID business is a little different than others in that it's really split between our labs business and what we call sort of our product business. And so as a reminder, our labs business involves lab in the state of California and in the U.K. And then our core product revenue is selling extraction kits, liquid handling, PCR tests, et cetera. What I can tell you is that on the core product side, yes, things have not fallen off as much as we had expected a few months ago. As you can see, with testing in the U.S. and the Delta wave as well as in Europe and in other parts of Asia, testing has picked up. And our core COVID product revenue business is fairly geographically diverse. And so yes, things are -- on the core product side, trending better than what we would have expected a few months ago.

Great. And can you just, on those labs that you just mentioned, remind us the duration and contract parameters of both the U.K. and California labs? How are volumes trending there? And have there been recent conversations on potential long-term testing services outside of COVID for those labs?

Sure. Yes. So the U.K. lab is the smaller of the 2. That contract, we have publicly announced it's been extended through the end of March of next year. We'll see where it goes from there. But between the 2, it's a smaller lab in totality, so smaller overall potential impact. As it relates to the California lab, what we have assumed in our guidance is that, that contract runs through October, which is what it currently does. We continue to have conversations with the state of California, I presume, probably on a daily basis. I don't think that's necessarily a new thing. Presumably, we talk with California probably daily since that contract started. But as of right now, there's nothing new to report. So we'll see. I know we have good dialogue with them. But in our 2021 guidance, we've assumed that, that runs through in October. So -- but we'll see. We're optimistic. The other thing I would say to that, Catherine, too, is the test in volumes coming out of the state of California has meaningfully picked up over the last several weeks as well compared to where they were before. And the other thing, too, with the state of California is, at the beginning of July, in collaboration with the state, we did restructure that contract to bring the capacity that's made available down back to the original 40,000 tests per day, so that's also assumed within our current guidance.

Yes. Okay. Got it. And in your multiyear outlook, you've talked about $100 million plus of durable COVID product revenue. What is that $100 million made up of from a product perspective? And do you still think that, that is another, right, long-term number?

Sure. So the -- we have significantly increased the installed base of several different types of equipment within our extraction equipment with our chemagic 360, our liquid handling with our JANUS systems. And so that $100 million that we've assumed, basically, post this year in our guidance is the utilization of our massively increased installed base for things other than COVID. And so if their COVID testing is durable beyond this year, which maybe with the Delta wave, maybe that's more likely now, but if there is, that testing will, in theory, be incremental to what we've assumed in our guidance. And so it's more so just a repurposing of that equipment for testing other than COVID.

Okay. Got it. And you have a flu, COVID, RSV multiplex test that's available in Europe. Do you think that you can get an EUA for that application in time for flu season in the U.S.? And how do you expect a mix shift between multiplex versus COVID only?

It's interesting, in Europe, we haven't seen significant demand for the flu combo test as of yet. It's available, as you mentioned, but that really hasn't seen a significant demand from customers. So we'll see, as we get further into the flu season, what that shakes out to be. But so far, it's been fairly minimal. In the U.S., I know that we have continued to have dialogue with the FDA and respond to questions they have. We'll see how quickly that, that ultimately comes to fruition, if it's -- but I'm optimistic that we get that resolved and get that authorized. But as of right now, nothing to report there yet either for the U.S.

Okay. And when we're talking about durable COVID testing revenue, you talked about utilization of this massively expanded installed base. So a lot of other diagnostic players have also massively expanded their installed base. So how do you successfully convert these new customers to really permanent Perkin customers?

So pre-COVID, and this is something I didn't necessarily appreciate as much as I maybe should have when I was on the sell side. For those of you who don't know, I just joined the company a few months ago after covering the company for 12 years on the sell side. And the applied genomics business for PerkinElmer was relatively small in both absolute terms and on relative terms. And I think what COVID has caused is not only a significant increase in the installed base of equipment probably [ with that ], and everybody has seen a significant increase in the installed base of their equipment. I would probably argue that our installed base, on a relative basis, has increased more because it was small to begin with. The other thing that's interesting is we've always thought we had very high-quality products within our applied genomics business. Now customers know that as well. And so I think the one thing that has really benefited us is getting those products, the equipment and the kits and consumables in our customers' hands, getting them experienced. And you know what, hey, these are really good. I think one great example of that is on our chemagic 360 kits, like the high-binding affinity of those kits allowed us to be the first ones to really demonstrate that you can use saliva as a sample medium for COVID. Because our kits are able to pull so much material out of the sample, you can use saliva. So we'll see, obviously, but I'm also personally starting to think like -- I know in the past, we talked about post COVID, what does COVID really look like longer term? I think that's still to be determined, too, and maybe is evolving as well. But so I think that's -- the short answer is much larger installed base, more experience. We have great products, and I think customers like them.

Great. And before we move on to what you've done on the M&A front, we do have a question that came in via e-mail and it says there was recently a volume-based procurement tender process in the China province of Anhui for clear reagents. Given your high exposure of China revenue coming from diagnostics, what if any impact do you expect this to have on the business, either from a pricing or volume perspective, and our local players being favored over multinationals in the bid selection? And there's a follow-up that says it seems these tenders and the VBP in China often starts at a provincial level, but then ends up playing out on a national level. Do you expect this to occur nationally? And if so, how should we think about potential exposure in this for you?

That's a long e-mail. I am somewhat familiar at a high level with what the client is asking as it relates to volume-based pricing in Anhui. What I can tell you there's a couple of things. One, I think in China, whether it's in this particular example or otherwise, the value proposition you have in China is -- it's important globally, but it's extremely important in China. And having a local presence is extremely important in China. And so for this specific example at Anhui, I don't think we're impacted at all or even close to what we do for a living. But to their point, like, these things could expand over time. And so I think it's very important to understand that value proposition. So let me give you some examples of how we are positioned in China. First, we have over 2,000 employees in China. We've got multiple manufacturing plants in China. We have multiple R&D facilities in China. We have local brands with local manufacturing in China. We've acquired a number of Chinese diagnostic companies, Haoyuan Biotech, SYM-BIO. On a food -- food testing business, Meizheng. We have local brands or some of our other businesses in China that headquartered outside of China. So in addition to that, with diagnostics, unlike -- I remember when I was on the sell side, you and I probably wrote about generic drugs when it went through supply-based pricing. With diagnostics, there's pretty big and expensive equipment involved as well. And so I think there will be a little bit more stickiness. The other thing, too, is, let's -- if there is pricing pressure, ultimately, like we'll see, obviously, I think it's all hypothetical at this point. But given our local presence, our strong value prop, our local brands, I think we're pretty well positioned to capitalize, not only in terms of greater testing volumes overall, but also our ability to gain share. So I'm not saying that there isn't going to be an impact. I think it's obviously way too early to determine that, but I think we're very well positioned. Does that answer everything? I don't know.

Yes. I think so. Good.

Okay.

So moving to kind of M&A and strategic priorities. Thanks to COVID testing last year, you generated 3 years' worth of free cash flow, and you're on track to do that again this year. You started to put that cash to work through acquisitions to help transform the company, largely focused on cell and gene therapy and applications and then now the recently announced BioLegend acquisition. So we'll get into the financial outlook a bit later, but how do you view the PerkinElmer emerging from COVID versus the 2019 PerkinElmer from the kind of a mix and strategy perspective?

Sure. Again, going back to my past experience, like, when I was on the sell side, I thought I knew the company pretty well. But very quickly, I learned that there was still a lot more to learn about it once I joined. And the company started going through a transformation internally a few years ago. Jamey, our CFO, has been with the company for a little over 3 years now. Prahlad has been with the company for, I don't know, 6 or 7 years, but he's been the CEO for the last 2 or 3. And a lot of things started changing internally that I didn't appreciate when I was on the sell side, whether that's from a cultural perspective, a commercial perspective. We outlined at our analyst meeting operational excellence initiatives that we're focusing on. And those are -- I mean, there's meat to those. And it's -- those are also things that don't change immediately. They take time. And so I think those things were in process pre-COVID. I think that they accelerated tremendously because of COVID, and I think that acceleration can keep going. So it's one of those where the business was starting to move, but, really, COVID helped accelerate a lot of that. And hopefully, I can help communicate that to everybody now, too. Because it's -- I understand it to a much greater degree than I did previously myself.

And you've made a lot of acquisitions in the cell and gene therapy space. How much of your life science revenue is now focused on those applications? And how do those different assets all fit together?

Sure. I think there's 2 ways to look at it. I think there is sort of the direct and the indirect way. I mean direct, we've acquired some businesses that play into cell and gene therapy directly. I mean, Horizon Discovery with their edited cell lines. SIRION, which closed a few weeks ago, they -- what they do for a living is they develop and innovate novel vector -- viral vectors, which are used for drug delivery in the majority of cell and gene therapy drugs. So even Nexcelom, a little bit in the QA/QC side, in addition to some cellular analysis. So those are a direct play within cell and gene therapy. I don't know if we've never quantified the total exposure to our revenue from that. Because the other thing is -- the other areas within our life science business sell into cell and gene therapy, but also in other areas. So whether it's our imaging and detection or AlphaLISA and HTRF reagents, Nexcelom, BioLegend once that deal closes, will all sell into cell and gene therapy customers and development in addition to other areas. So it's sort of like we have both direct plays as well as sort of indirect or secondary plays, too.

Yes. And moving on to the recently announced BioLegend acquisition. What attracted you to BioLegend? How do you feel it fits next to the rest of your portfolio? And what additional capabilities does it add to your business?

Yes. So BioLegend is a phenomenal business. Personally, I couldn't be more excited. I know everyone else is very excited to get this deal closed and get going. BioLegend, they develop and manufacture innovative antibodies and reagents. Antibodies are used throughout science. They're used throughout our life science and DAS businesses. They're used in basically all of our diagnostic businesses. And so they're somewhat ubiquitous. And so -- and they are used, very commonly, in biologics and large molecule research. And so BioLegend is a business that has, over the last 19 or 20 years, started from scratch, and we expect it to generate $380 million in revenue next year with very favorable margin profile and be able to grow mid-teens or more, excluding any revenue synergies over the longer term. And so I think that, while we don't play in the antibody market today, we buy antibodies and use antibodies, but it's very complementary to some of our other businesses. Did you ask sort of why BioLegend -- why PerkinElmer, too? I mean, because I think it's -- that's a very important piece is I think BioLegend teaming up with PerkinElmer, I think it's going to fit very well. And we've laid out these revenue synergy targets $100 million by year 5. But that really is just -- it doesn't include any of the potential collaboration opportunities. And I can tell you, in speaking with the BioLegend folks when I was out there in San Diego at their facility, they're extremely excited to get to work and start working with colleagues in Horizon Discovery or Cisbio, et cetera, and some of those collaborations. So it's a great business, and I can't wait to take people out there and show it to everybody.

Yes. Great. Just given the -- this is -- that was a big acquisition for you and given the expected jump in leverage, how does your M&A strategy shift over the medium term? And do you expect to deploy most of your free cash flow into deleveraging? Could we still see some bolt-ons from you? How do you think that will look over the next 12 to 18 months?

Yes. So we just did a fairly large bond offering last week to fund the deal. And I think with that, leverage being added, we will continue to pay our nominal dividend. I think we will continue to offset equity dilution via repurchases, nothing significant. Maybe there could be a tiny -- a small tuck-in deal or 2, but nothing overly meaningful. And I think the primary focus for free cash -- excess free cash flow is deleveraging. And we've laid out a target of deleveraging back under 3x within 18 to 24 months of closing the deal. I think we would all be very excited if we could do that faster. But we're going to be focusing on deleveraging over the next year or 2.

Yes. Okay. And if I shift to kind of your medium-term financial outlook. At your Analyst Day, you gave an outlook for 5% to 7% core organic growth over the next couple of years. And you also spoke to an improved commercial execution strategy, adding 100 basis points in 2023 and beyond. What are some of those areas of execution that you're targeting longer term?

Yes. So yes, like you said, we expect sort of 5% to 7% in existing business and then some of the initiatives we're taking, we think should be accretive to that. In addition to some of the M&A we've done that's faster-growing, BioLegend, which is faster-growing, et cetera, which we can talk about. The drivers to sort of the commercial excellence or execution are kind of really threefold. One, today, we are underpenetrated from an e-commerce perspective for a business that gets 75% of its revenue for reoccurring revenue. Obviously, that's informatics and service are in there. But for a business that has a large portion of consumables and reagents, we are underpenetrated in e-commerce. And I think that the acquisitions of, not only Horizon, but also BioLegend, we have great e-commerce platforms. We can work to leverage and expand our presence within e-commerce. I think outside of that, we have a new commercial office who is really focusing on a key account strategy. So we can really better target those larger customers and offer them, in a consolidated way, our full portfolio of products. And so I think that also. And then we continue to look at outside -- strategic partnerships with outside companies. And so we've had some examples of those, and I know we continue to look for those as well. So those 3, I think, alone, we outlined at the analyst meeting a few months ago, we think can add 100 basis points of growth longer term. Then you layer in the acquisitions we've done leading up to BioLegend, which are -- there's 7 or 8 of them. It's I think we've announced 4 acquisitions just since I started, 3 of which we've closed on, so it's been busy. And then you had BioLegend on top of that.

Yes. So if we think of 5% to 7% as base organic growth, 100 basis points from BioLegend, and then 100 basis points from that commercial execution initiatives, should we think about Perkin being a 7% to 9% organic grower in 2023 and beyond? And what could some risks to that outlook be?

Yes. So I mean the short answer is, yes. I think we should be in a position to be able to grow in the high single digits. We talked about, at the Analyst Meeting, again, this would be pre-BioLegend that beyond 2023, we should -- we believe that because of operational excellence initiatives and our commercial initiatives as well as the contribution from some of the acquisitions we've done over the last 12 to 18 months, that we should go from sort of 5% to 7% into the mid-single digits to high single-digit range beyond 2023. Then you add in BioLegend and its expected size and growth that we expect it to add, essentially, another 100 basis points. And so yes, I think that the company should be set up to be able to grow in that high single-digit range with a pretty attractive margin profile with the potential for margins to continue to expand as well in -- within the next couple of years here.

Yes. And on the margin side, I think your target -- 2023 target with BioLegend is now 26% for the operating margin. Where could that number go beyond 2023? And what are some of the levers for margin expansion from there?

Sure. So I mean, as we laid out at the Analyst meeting, we initially started 23% operating margins in the sort of ex BioLegend business. And we talked about 50 to 75 basis points of margin going forward beyond that. I don't think that, that really changes all that much with the addition of BioLegend. While BioLegend, obviously, will have -- has much higher margins than the existing corporate average for PerkinElmer, I think we should still be able to expand margins 50, 75 basis points for the total company longer term. I think there's still a long way to go both in the BioLegend business, them collaborating with PerkinElmer and then all the initiatives we laid out at the analyst meeting for the existing business. So I don't think that really changes all that much, except we have this initial step-up in margins because of BioLegend's impact.

Okay. You also introduced some new ESG goals and long-term ESG targets. How has the evolution of the ESG space informed your strategic decisions, customer behavior and market growth opportunities?

Yes. I mean, from an ESG perspective, I think, first of all, what we do for a living is inherently impacted, at least from an environmental standpoint, just in what we do and what we offer on the day-to-day business. I think some of the intentional initiatives we've begun to undertake. As you mentioned, we have laid out targets, for the first time, at our Analyst Meeting in late June. I think some of those targets, we can talk about the environmental aspects. I think some of the social and governance aspects can have a real meaningful impact on our actual business performance as well. When I think of things, like, in this environment that we live in today, focusing on attrition and having goals on -- I talked about it earlier, like culture. The change in culture is real, and I see it. And I think lots of others within the company see it and feel it. And so I think that focus should help with attrition. I think increase in our representation of female leadership will have a positive contribution on the overall business. And then one of the things we're also working on is monitoring and evaluating overall employee satisfaction scores. And so I think those are things that can have an outright impact on the business while still being ESG-focused. Another investment tidbit for you, from a commercial perspective is it's not overly material at all today, but we're starting our feedback from customers who also have a focus on ESG-type initiatives, who are proactively asking for products to be made in a way that satisfy their goals as well. And we're finding that at least some or many instances, are willing to pay for that value-added -- those capabilities and performance as well. So you'll see where that goes. It's not much today, but kind of interesting for the future going forward.

Yes. I think we only have about a minute left. So maybe we talked about the rise in COVID impact on testing, but have you seen any disruptions in your core business from the recent case trends?

Yes. Obviously, like I said, I think the testing volumes on the product side have not fallen off as much as we would have expected a couple of months ago. I think I have experienced this personally, I don't know if you have, but I think we're starting to learn how to live with COVID and go about in our daily lives, whether that's kids going -- my kids going to school or us going to work or people going back to labs. I think you're still seeing labs -- people -- lab activity continuing to pick up. And so I think we're starting to learn with it -- live with it. We'll see how the month of September goes from a non-COVID perspective, but I think through the first 2 months of the quarter, we're in pretty good shape. So with that, with the COVID trends that we're seeing, I think we're doing pretty well.

All right. Great. Well, I think we are out of time. Steve, thanks so much for joining us.

Thanks, Catherine. Really appreciate it. Have a good one.

And for those of you continuing on in the conference, up next, we have Owens & Minor, Inspire Medical, Metabolon and ImmunoCell. So have a great rest of the conference.