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

Okay. Welcome back, everybody, to the 2021 Stifel Healthcare Conference. This is the life sciences and diagnostics track. And we have PerkinElmer up with us next. With us from Perkin is CFO, Jamie Mock. Jamie, thanks for spending some time with us here today.

Good to be here, Dan. Thanks for having us.

Yes. My pleasure. For the folks that are on the webcast, don't forget you can ask a question through the chat function, if you would like to. I will keep an eye out for that.

Jamie, maybe just to start, we had the quarter a couple of weeks ago at this point. It was a nice beat relative to your expectations for the non-COVID business, 16% versus, I think, you were looking for 12%. Can you maybe just touch on some of the more salient elements of the quarter? And then also maybe the 4Q outlook. The 4Q outlook to me doesn't look heroic when you think about what you just did. So -- and we have gotten some questions on just what we should translate from 3Q to 4Q. So anything you could offer there, I think, would probably be a good place to start for folks.

Sure. Yes. I mean, look, I think the year has been strong thus far. Third quarter was great, both on the Diagnostics side. I think our non-COVID organic growth was 25% or something like that. DAS was up double digits as well. I would say all end markets have been pretty strong for us for the better part of the year here, Dan, as well as our backlog continues to grow dramatically. I think it's up 50% to 75% year-to-date. So as you look forward to the fourth quarter, there's nothing really to read into too much here. I mean we tried to put in a little bit of cushion for a couple of things. One is supply chain disruption. Logistics is part of that. Few components, namely chips, making sure, but the supply chain team has been doing a great job kind of mitigating that risk throughout the entire year here, but just in case. And then, COVID, as it pertains to our Diagnostics business, largely in Asia Pacific. So there are a couple of countries that have reduced some of their screening right now and mothers aren't going and getting tested, newborns aren't getting as tested. It's not to say that it's all gone away, but I'd say the utilization rate was down a little bit in October. So I felt like we just need to put in a little bit of cushion. We've continued to deliver every quarter this year. You mentioned the third quarter, we beat by 4 points. I think the second quarter, we beat by 10 points, actually, it's at high teens and hit 28%. In the first quarter, we hit 5 or 6 points as well. So I think we've got a track record of executing now, and I wanted to make sure that we do that. So -- but I'd just take away that overall, nothing really to see here in terms of end market weakness. It continues to be strong and our backlog's strong, but we felt like it was prudent to put in a little bit of cushion here.

Okay. And just on the supply chain stuff, I mean, that question was asked, as you can imagine, on every tools call this quarter. And it sounds like companies are doing a nice job managing it. You guys are no exception there. But where -- for those of us that are just trying to be paranoid in whatever ways we want to be, where are you spending the extra second, making sure that things look or are tracking the way that you want to?

Yes, 2 things really. One is try to get as many shipments out as early in the quarter as possible in case there's any disruption over the end of the year and the holiday season at that point. Most of our -- I think 99% of our transportation is air bound. So hopefully, that's good, but some preplanning and making sure that we get ahead of that is important, number one. And then I'd say the only real component that is a struggle right now is around chips, and we've diversified our supply base. I think we now have 4 or 5 vendors versus 1 or 2 historically. So that will show up in some instruments, specifically in analytical technologies. But we came into the quarter with a great backlog. We continue to diversify our supply base, but trying to get ahead of putting in as many orders as far out as possible, so go 2, 3 quarters out now, tries to moves you up in terms of the pecking order and from those vendors to make sure that you get the supply of chips. At time of that, I wouldn't say that there's any significant component out there that we're concerned about.

Okay. Okay. Maybe let's just move to the bigger picture. And if I think about the things that matter most to the outlook for PerkinElmer, M&A and what you've done recently, certainly figures to be on that list for sure. I think you've done 9 deals in the past 12-ish months. Can you kind of talk to the rationale for those acquisitions, how they all fit together and what the vision is for those? I'll dive into some of the individual pieces in a minute, but I'd love to just hear the overarching thought behind what it is that you're doing with these inorganic adds.

Yes, it's been a busy year, I would say, and will continue to be a busy upcoming year. But the rationale was maybe a couple of things. One is we want to scale the company. So a couple of years ago, we were just under $3 billion of revenue. Last year, we were just under $4 billion of revenue. This year, we'll be close to $5 billion of revenue, and we want to continue to make an impact on the entire globe. And the second is we want to expand our capabilities and primarily in Life Sciences and Diagnostics, which is where all 9 of those acquisitions has been. So if you think about the Life Sciences side, we now have a $700 million reagents portfolio, BioLegend was a wonderful acquisition. Horizon has been a terrific acquisition. Nexcelom has been a terrific acquisition, trying to get in a little bit more into cell and gene therapy with a couple of those, SIRION as well. And then on the Diagnostics side, just trying to improve our menu. So Oxford Immunotec will be very helpful for that, pairs nicely with our EUROIMMUN business, as does IDS, which we spend a little bit of time on the earnings call explaining the rationale there. But expand the menu, expand the instrument types that we can serve. So can we serve small labs, medium labs, high throughput labs. And so that's kind of been the rationale, and we're excited by the capabilities they bring and the scale of the company now.

Yes. Well, that certainly makes sense. I mean what about from a synergies perspective, do you see there being certain parts of what you've acquired that are more amenable to just the workflows or the sales function, et cetera, to where you can reasonably think about there being some true synergies a year or 2 out at some point or another, once everything has kind of been tucked in and integrated?

Yes. I'd say -- there's really at least 3 big buckets of synergies that plays across most of these acquisitions. And we're already starting to see some now. One is the menu, so improving our menu. The second is automation. I think there's a lot of automation that can go into Horizon. We've invested substantially there to increase the throughput in horizon. Also in Oxford, Oxford has got a terrific value proposition but from a speed of processing perspective. I think we've been trying to shrink that testing time line from what was 40 to 50 hours to under 24 hours. And then I think you pair their capabilities and you've got a terrific platform. And then the third is just taking advantage of our geographic scale. So even Oxford, as an example, we've won some orders in the Middle East and Brazil, where PerkinElmer has had a little bit more presence there. So automation is big, additional menu is big, geographic expansion and trying to take advantage of -- we have over 6,000 sales and service people across the globe and 70% of our sales are outside the United States. So we bring a lot to smaller companies like Horizon, like Oxford, like Omni, SIRION, et cetera, and we can really expand their reach quicker, we believe. And it's already, I think, starting to take hold.

Yes. If I think about gene therapy, it certainly seems cell and gene therapy. It seems like by the time you're putting together the Horizon platform with the SIRION products and the Nexcelom products, there is a little bit of critical mass there. I mean, would you -- do you harbor ambitions of being like a cell and gene therapy that's -- are you in the conversation meaningfully in a couple of years' time? I guess that's the question is like how much of a player do you think you can be there?

Yes. I think we aspire to be a bigger player in cell and gene therapy. I think in general, moving from small molecule to large molecule was important to us. If you add up Horizon, SIRION and Nexcelom, even BioLegend playing in there a little bit as well. It's a sizable business, but it's still relatively small in the grand scheme of $4 billion or $5 billion. But I think they're growing fast, and I think they bring capabilities to each other. Nexcelom, as an example, terrific from a self-sorting and analysis perspective, cell imaging perspective. And that's right in our wheelhouse. We have a terrific life sciences sales force that sells not only reagents but also a lot of imaging and detection equipment. And that once we put it in and have some kind of ERP connection, makes it easier to quote, our sales force can sell that pretty easily. So it's a great fit. The other thing around Nexcelom is we want to build out their consumables and reagents. So it's a little bit small right now. But as you look to the higher-end instruments that we have in Nexcelom, they will require more consumables and reagents. So there's a lot to do. But broadly, cell and gene therapy, we agree. I mean, it's going to be a pretty fast-growing marketplace. I think we're becoming a bigger player in it and will be a big portion of our life sciences franchise.

Okay. What about BioLegend? I get asked a lot how that business competes against Bio-Techne and Abcam. Can you talk a little bit about the competitive positioning there? Does the growth outlook differ if you look at antibodies and the other reagents business that's sort of embedded in that portfolio, how does the growth forecast sort of -- how do you get to the growth forecast if you take apart some of the things that are in the -- that are sitting in the portfolio itself?

So we're really excited about BioLegend. We're heading out there today actually. We mentioned it on the earnings call that we've got a large innovation summit that will take place over the course of the next 3 days here that brings together all of the original PerkinElmer capabilities as well as product management and leadership from some of our acquisitions. So Peter will be there from Oxford, Jean from Nexcelom, et cetera. So they'll all be there, and we're quite excited about it. BioLegend wins on 3 things. One is low cost. They have terrific yield and they're relentless about making sure that they have no waste in the factory, it's a really high-quality facility. They have terrific quality. So the quality of the product is wonderful, and then they have great service. And so I think they've always been known to be a terrific player. In terms of growth, I mean, yes, they started in flow cytometry, which is still a good market for them and has been growing double digits. But then they add to that. So I'm not a scientist, but I mean, the key is they go and work, and it's not really a sales force, it's more like an application specialists. A lot of these -- the sales team has PhDs and their immunologists and they go work with the customer to say, okay, what's the target we're going after? What's the right antibody? And obviously, your question was around what's the routine antibody sales versus the next? But then they add a lot more value. They add a dye, they add a floor, they had an oligo, they make it more specialized and more value-added. I think they have a list of over 30,000 products. They come out with another -- over 100 products per month and they go through that. So it will be interesting to see if this innovation summit, they've studied all the capabilities we bring across the PerkinElmer portfolio to say, okay, where is the next biggest value add? What are the next biggest markets that we should look at? And so we're excited about it, but they've already had a track record of doing that, and now we just add a lot more capabilities to that.

Okay. That deal was expected to be $0.30 accretive in the first year and $0.50 to the second year. The question has been asked, accretive to what? Because the outlook -- the earnings outlook that you gave at the time of the deal is different than it is now. So how should we think about that $0.30 and $0.50 as we push into 2022?

It's a great backhanded way of asking for a 2022 guide and a 2023 guide. But look, we've given the revenue outlook for BioLegend in terms of being $380 million in 2022. We've said that it's 45% to 50% adjusted operating profit. Our interest expense have come down, although the interest costs that we got on this deal was terrific. It was 1.3% all-in, so pretty cheap relatively speaking. Yes, I mean, there was a fundamental baseline assumption for how much the rest of PerkinElmer would make. And obviously, if that number goes up, I think shareholders will be excited by that. But obviously, with a greater share count, then it's a little bit more dilutive on those extra earnings. But we want the PerkinElmer base to also grow more. And if that takes down the $0.30 to $0.28, but PerkinElmer makes a lot more money at the end of the day, I think shareholders will be pleased.

You're better off for it. Okay. Okay. Maybe on EUROIMMUN, the pitch on EUROIMMUN several years ago and even today, but certainly several years ago was, look, we've got no U.S. penetration here so a little bit of progress will go a long way. It felt like the last time we were doing some calls and just talking to you about it, that in order to really penetrate the U.S. opportunity, that there might be some automation needs and throughput needs and just general scale up of that platform that would really help your cause. Is that the case? And how -- if it is, how far along with what you think you need to do, do you feel like you are there? And ultimately, that just leads to this question of, do you feel like this is a 15% to 20% growing business going forward once we emerge from the COVID up and downs? What should the natural growth rate of this asset be just given like we said, there is some pretty greenfield opportunity that you have in front of us in the U.S. anyways?

Yes. I mean I'll talk about the U.S. in more detail in a second. But I think we acquired EUROIMMUN end of 2017, and it was roughly a $300 million business and this year, it will be over a $500 million business. So it continues to do terrific. And we've always said long term, think of it as a 12% plus grower. So it sure certainly has been able to achieve 15% to 20%, and I'm sure some years, it will to do that. But we basically penciled in 12% long term and are quite pleased by that. They have a lot to do. Obviously, COVID, they spend a lot of time on COVID, understanding serology tests, quantitative tests. They have their own PCR tests and have done extremely well. But I think there's more to do on the menu. I mean, they play in 5 areas: immunofluorescent, molecular, ELISA, blot, chemiluminescence. And that's probably the biggest one that we need to expand on. But there are menu -- pieces of the menu growth in each one of those 5 areas that we will continue to grow, number one. Number 2 is we wanted to get into larger labs, which is a little bit more of the U.S. market, to the crux of your question here. So the random access chemiluminescent big Excentis instrument, which is almost done here, was a little bit delayed due to COVID for the right reasons. But as soon as we build out the menu, which will probably take most of 2022, the instrument will be ready early, but we'll build out the menu. And chemiluminescence, I think, will be extremely strong in the high throughput labs in the U.S. But then you add IDS. IDS has its own chemiluminescent capabilities and they can hit some of the small and medium throughput lab. I think their installed base is over 500 to 1,000 sites out there. And so you add their hormone menu, you add autoimmune, allergy, infectious disease from EUROIMMUN. There's just a ton of things going on. So I wouldn't say that 12% is predicated only on North America. Certainly, that will be a nice driver of it. But I think there's a lot more to do on the menu side, on the instrument side, on the commercial execution side and continuing to grow that out. And so we're quite excited about the long-term prospects for EUROIMMUN to keep growing.

Yes. Let me just push you a little bit on that. I mean I remember when the deal was done, one of the things that everybody sort of liked was the fact that if you look at the last, however many years it had been, 5 years or so, there hasn't been a year where it had grown less than 15%. So if the U.S. opportunity is so open and you are successful with the things that you think you're going to do, why would growth drop down to 12%? Is it really just the bigger revenue base?

No, I don't -- no. I mean I think there's a chance that it's going to grow at 15% to 20%. But I think the long term, we just want to make sure we put out a number that we believe is a number that they can consistently hit and that's how we arrived at 12%. North America market, it will take a little bit of time to penetrate. And I think we'll have to prove that the way EUROIMMUN always proves it. We don't need much like BioLegend is a high-quality operation with a wonderful sensitive menu, terrific automation. I think the labs in the U.S. have picked up on that already during COVID, bought a lot of different instruments because they thought it was the right quality and speed from a performance standpoint. So certainly, the U.S. could be -- I don't know what the numbers are today, $50 million, $60 million, $70 million, whatever it is. That could grow substantially, but it's going to take a little bit of time to penetrate those markets, build out the assays, get them FDA approved as well. So it's not going to happen over night. So there will be years though that certainly, 15% to 20% will happen. I just think broadly and for the long term, a long-term company that grows 12%, we're quite excited about. Add the fact that they've continued to expand margins over time. So when we acquired them, I think they were 19% to 20%. Put COVID aside for a second here. Even the underlying floor has grown 100 basis points per year. And we believe that, that should be north of 30%, and they still have years to go to get there. So we're excited about the opportunity here.

Yes. Okay. Maybe on the DAS side, it's picked up here quite nicely. It feels like that's driven largely by some success on the Life Sciences side. What items do you feel like -- I mean, we talked about a little bit of it in the M&A discussion. But going forward, where would you point us to the key drivers on the Life Sciences side? And then can you comment on some of the sort of the applied businesses, food, cannabis, et cetera, where things have been a little bit choppy in the past. What is the outlook for some of those at this point?

Yes. Let me -- I'll drill down on DAS in a second. But just big picture, we believe we're moving to be a high single-digit organic growth company. And we've talked about it in 3 pieces to date. But by 2023, it will all be one piece. And let me just speak about those pieces briefly. Sit in because I will get to your DAS question. So the core, we said, can grow 5% to 7%. And we said in there, DAS gas can grow mid-single digits and Diagnostics can grow high-single digits. So that's piece number one. The first 8 acquisitions before BioLegend would also grow low teens to mid-double digits. And so that adds probably almost a point of growth to the overall company. And then BioLegend itself can grow mid-teens plus. And so you add all that up, and we think by 2023, when they're all kind of in the normalized base year, we're 7% to 9% kind of high single-digit growth. We think we're 26% adjusted operating profit and room for expansion to grow 50 to 70 basis points -- 75 basis points beyond that. Digging more into DAS around your question. So Life Sciences does make up more than 60% of DAS now -- DAS revenue. And we've said that, that could be 6% historically. Obviously, the acquisitions will affect that overall, haven't calculated exactly what that will be. But that continues to do well and has continued to outperform that 6% in the core this entire year, really the last couple of years. Analytical probably makes up the next 1/3 of that portfolio. And really, that's all been about an organic growth strategy, largely in spectroscopy, a little bit in chrome, but really getting a better at NPI cadence. And we've come out with some great products. The ICP triple quad is doing terrific. I would say, overall, back in that mid-single digits outlook, we wanted analytical or applied to just grow 2% to 4%. And historically, it had not done that. I would say, over the course of the last 2 years, it's kind of in the 1% to 2% range. So it's not quite there yet. I think chrome is a little early. We'll come out with some chrome products in the near future here. So our hope is that we can get that to 2% to 4% over the coming years. We do have some nice NPIs that we're excited about. And then food. Food, there's a couple of -- 3 pieces of that. There's food quality, there's food safety and then there's cannabis. And we wanted that to grow 6%. I think that definitely has a chance to grow 6%, if not better. It's a $200 million business for us and cannabis by itself could give you $5 million to $10 million of incremental growth for a year. And we see the cannabis market is starting to pick up again here over the last 2 quarters, and we're excited about the value proposition we bring there. Food safety has been terrific. Our Meizheng acquisition has rebounded extremely well this year. Food quality has been a little bit slower, our Perten business, our Delta business. So -- but overall, do I think 6% into it is possible? Absolutely. It could be far better than that. Overall, if you take DAS, Life Sciences will be strong, 6% plus shouldn't be a problem, and that's 60% of the portfolio. Food, 6% shouldn't be a problem, that's 10% to 15% of the portfolio . And then analytical, we got to get to the 2% to 4% range and then you're squarely in the mid-single digits here.

Yes. So said another way, if I'm just trying to put a confidence level around DAS being 5%, 6% plus, I can get there without assuming that all of those applied businesses that we mentioned, that are subject to -- cannabis is a weird market. Food has drought situations come into play. I don't need all of that to be working in concert and full bore in order to get to mid-singles for DAS. You can have some natural balances there. And the Life Sciences side of the business can kind of carry the load.

Yes, I mean, absolutely. I mean with the new acquisitions, too, we believe that really re-rates DAS to high single digits. That's like for the whole company numbers, right? So mid-single digits without analytical and food, for sure.

Okay. Okay. You touched on margin expansion there for a brief second there. And I think the new Perkin, as you called it in the deck, is sort of like a 50 to 75 bps a year expander. Can you just maybe expand a little bit on the gross margin versus expenses discussion within that overall margin expansion plan or outlook?

Yes. Probably, I'll just break it down into 2 areas, kind of the legacy PerkinElmer Company and then all the acquisitions as well. Maybe I'll start with the acquisitions because it's relatively easy. Oxford, Horizon, many of these new acquisitions, BioLegend, they all come in at very high gross margins, BioLegend is 70%. Oxford's above that. So as those grow faster then the gross margin line will uptick over time. And we knew some of these acquisitions would have to grow into their operating expenses. So Oxford and Horizon are a good example of that. They were breakeven businesses, small loss-making. But you knew if they were going to grow mid-teens, they would get into a higher profitability. So gross margin will -- the mix related to our acquisitions will certainly improve or elevate the overall gross margin profile of the company. On the core side of PerkinElmer, a lot of it comes on the DAS side, and there's been a lot of efforts that we've been undertaking here, largely in the analytical technologies, a complete redesign of a lot of the products, better procurement, site rationalization, some things we're doing around transportation and logistics as well. A lot around our services portfolio and optimizing the use of our service tech engineers. So I think gross margin, particularly in DAS through those areas and efforts, will continue to expand, and we're excited about that. Also, DAS has also -- well, also has its own recurring revenue mix. Life Sciences, growing faster, informatics, growing faster, et cetera. And then on the Diagnostics side, it's largely been EUROIMMUN. So EUROIMMUN, I mentioned has been expanding 100 basis points a year. That's -- I don't know the exact split, but a lot of that is through the gross margin line and some of that's through just going into operating expenses as well. So I think there's room to grow on the gross margin side of core PerkinElmer as well as through the acquisitions. The overall mix change will just significantly increase our gross margin profile here.

Okay. On the investment side, within the businesses that you've just acquired, which one or ones does it feel like has the most sort of, I don't know, like call option home run potential in that when you look at what you can do or what you should do. It feels like a couple of extra million bucks or tens of million bucks in investment here really has the potential to change the growth trajectory quite a bit? Are there a few that stick out in that respect?

Yes. I mean, first of all, BioLegend is obviously, on its own, a substantial acquisition, such a high-quality business that itself, it doesn't need a ton of investment. I just think if we really maximize the capabilities of the company, it can continue to be a absolute home run and really move the needle from a growth rate perspective. So that's all. Horizon and SIRION and cell and gene therapy, back to one of your earliest questions here, that could really be a needle mover. Horizon was, I don't know, publicly $70 million in revenue a few years ago or something like that, $75 million. And I think through the automation we're putting through there, there's a lot to do from a cell line engineering perspective, bioprocessing perspective, that you call it an option. It is an option. It really could be a dramatic game changer. The research reagents and the screening portfolio will be stable and strong. But those 2 areas, cell line engineering, bioprocessing, it is a bit of an option that could become quite dramatic for the company. And then you add SIRION into that in what they're doing from a AAV and trying to get into cell and gene therapy, you win some licenses there. And if those drugs take off or those therapies tick off, that could be quite dramatic from a growth perspective.

Okay. That's helpful. Maybe going in the other direction, are there any things in the portfolio that you still think could be pruned or that are noncore? And so strategically the next 5 years for Perkin maybe includes those less than it had in the past?

Yes. I mean I would say probably the short answer is yes. But we -- going back to my earlier comments, I mean, we wanted to scale the company, we still do. And we want to become a bigger player, and make a bigger impact on the world, make a bigger impact for our customers. Certainly, now that we're a $5 billion company, I think that affords us a little bit more right to look at some of the non -- less core assets. But all of them have a value proposition and a value creation story to them. And some are more organic, some are more inorganic, and we're excited about the ability to drive value creation with all of them. But yes, I would say, given the size of the company now, we probably have a little bit more flexibility to take a look at divestitures as well.

Okay. Now I'll go back to M&A and reference the comment that you kind of started with, which is that I think something to be effective. You -- it will be another exciting year coming up or something to that effect. Should we look for more deal activity out of you guys? And how does that jive with a debt-to-leverage ratio that you're thinking about over the next year or 2? I think you're shooting for 3x over the next 1.5 years, 2 years, correct?

Correct. I would say not in 2022. 2022, we believe, is a -- 2021 has been to some degree as well, but it is the year of integration. And we've got some -- a lot of work to do. The teams are already hard at it, and this trip will also help accelerate that as well. But I wouldn't expect us to be very acquisitive in the year 2022. If we continue to perform, though, that 18 to 24 months, we feel very good about already. And based upon which things could happen around COVID, we could achieve the delever quite quickly. So maybe 2023, we're back in the marketplace in terms of acquisitions. But there's no doubt that we will continue to scale the years ahead, but probably 2022 is not that year. I think we want to get all these acquisitions very well integrated. There's a lot to do from a technology perspective, commercial perspective, G&A perspective. And I think that's what we'll do for the next 12 months there.

Okay. Okay. Good stuff. We're at the end of the session here. So always a pleasure talking to you. If I don't see you or talk to you beforehand, enjoy the Thanksgiving holiday.

Thanks, Dan, you too. Thanks for having us.

Yes. You bet.

Yes.