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

Good morning, everyone. This is Rachel Vatnsdal from our life science tools and diagnostics team here at JPMorgan. It's my pleasure to introduce our next company, PerkinElmer. And as a reminder, if you have any questions, please submit them through the Q&A function on our conference website. And with that, I will turn it over to Prahlad.

Welcome, everyone. Thank you, JPMorgan, for the opportunity to provide an update on the progress we've been making on the transformation of the business. While in 2019 and 2020, we really started to transform the business internally. Looking back, I think 2021 will be marked as a year that we were able to really accelerate our shift into faster-growing markets, which will continue to benefit the company in the years to come. Before we start, please read the safe harbor statement and consult our website for additional disclosures regarding any forward-looking statements made today. You may have seen this slide before, but I think it's good to reflect on our mission, but we are a company that continues to define itself through advancing innovations and leading with science to solve for a better tomorrow and help contribute to a healthier world overall. And today, I'm incredibly proud to see what the business has become with more than 16,000 employees and an even brighter outlook in the years to come. Our guidance from November had us doing $4.9 billion in total revenue this year. Just this morning, we indicated we now expect to finish the year right around $5 billion even. Within this, now more than 75% of our revenues are recurring in nature and you can see our revenue is quite diverse geographically. We've had another remarkable year in 2021 with mid-teens nonorganic -- non-COVID organic growth and nearly $1.5 billion in total COVID revenues, which has led to more than 30% EPS growth this year. Today, I want to talk to you through the progress we've made on our new PerkinElmer transformation and give you a look at where we are headed in the future. First, I will provide an update on our portfolio transformation and how we are already beginning to capitalize on the plethora of synergy opportunities that are in front of us. Both from a commercial standpoint, but also increasingly from an innovation perspective as well. Then I will share an update on the progress we've been making on our internal operational excellence initiatives which I believe are really beginning to make a difference in our performance and how our people work. Finally, I'll close with an update on what we expect this progress to mean to our medium-term 2023 financial outlook, which I view only as a mile marker on the potential I think the company ultimately has. So let me first begin with sharing on how we have repositioned the company in faster-growing attractive end markets and how the commercial, operational and scientific synergies are starting to break out from some of our recent additions. In 2021, we continue to significantly scale in our faster-growing focus areas of life sciences and diagnostics, which now make up greater than 80% of our total revenues which is up significantly from just a few years ago. So let me first tell you about our diagnostics franchise. It was close to $3 billion in revenue last year, of which roughly half was non-COVID. This core diagnostics franchise has grown over the last several years from what was a relatively niche and specialized business of approximately $450 million in revenue to one that has nearly tripled in size with market-leading positions in a broader number of areas. Diagnostics has consistently been growing in the high single-digit range, which we expect to be sustainable going forward. We have continued to expand our breadth in infectious disease with the addition of Oxford and have increased our offerings within autoimmune testing with the addition of IDS. Aside from these external additions, we've also been focused on organically expanding our best-in-class offerings of both detection equipment and systems so we can provide solutions across the full spectrum of throughput. Finally, we are very focused on not just selling individual products but rather being able to offer complete end-to-end workflows to our customers, all the way through software on the back end. And we've continued to make good progress with this over the past year in several segments of our business, including in applied genomics, which I'll touch in a bit. Both Oxford and IDS provide near-term synergy opportunities to the diagnostics business. We continue to build out our capabilities in autoimmune testing with the addition of IDS' menu and systems focused on endocrinology and Oxford enters us into the fast-growing and important market of latent TB testing, which is the deadliest infectious disease in the world right now behind COVID. So with the businesses we've acquired in our diagnostics segment over the last year, we've taken a TAM to over $35 billion and added more than $150 million of annualized revenue which is growing mid-teens. With the addition of IDS and via several recent and upcoming new product introductions we have planned, you can see we are very focused on supporting our diagnostic customers across a wide spectrum of throughputs from higher-volume reference labs all the way down to community and near-patient settings. With this now more comprehensive portfolio, I feel as we move into 2022 and beyond, we will be in a great position to help our customers reach a wider spectrum of patients in identification of diseases in a broad range of settings. In addition to building a full portfolio of analyzers to support all types of lab customers, we are increasingly focused on being able to offer complete workflow solutions that run from sample prep through analysis and then report out data that can be analyzed on the back end, all while being fully digitally enabled throughout the process. Let me share one example with Oxford, who has always had a best-in-class tuberculosis assay. Now we are taking this highly sensitive and accurate test and building a full workflow around it to optimize its throughput and turnaround time for our customers. We are doing this by leveraging our leading positions in automated liquid handling, sample prep and lab services to create and install a full workflow, which is now in the process of going around the world seeking regulatory approvals with an approval in the U.S. expected in a few months. Longer term, we see even more potential to leverage other pieces of the company with Oxford in the form of new content development from BioLegend as Oxford continues to work on new products or with the explorer workstation, which would bring in even higher levels of automation and throughput to Oxford's offerings. To summarize, our diagnostics franchise has consistently grown in the high single digits. When combined with our external investments, has led to a non-COVID business that has now nearly tripled in size versus 2015, while achieving greater breadth in attractive areas. I'm thrilled with what we've accomplished over the last several years in this business. And I think the additions we've added over the last year should have great potential to help continue this performance in the years to come. Now let's move to our Discovery & Analytical Solutions segment, where the growth profile is just as exciting as we continue to transform the portfolio with the expansion of our life sciences business. With the growth of Life Sciences, we've continued our acceleration across the entire segment given the investments we've been making, which is resulting in strong market share positions. To put it in perspective, on a pro forma basis, life sciences now accounts for 2/3 of our entire DAS business. As a result of this, as this business continues to transition and our recent acquisitions become part of our core, we expect our organic growth to continue to improve over the next few years and be in the high single-digit range as we get into 2023 and beyond. With the recent acquisitions to the life sciences portfolio, we have now built a best-in-class preclinical portfolio and a differentiated cell and gene therapy offering. We look to build on the strong foundation now that we have created and provide our customers end-to-end solutions that both address their current needs, and expand their capabilities of what's possible in the future to help bridge the chasm between research and clinic. Our strategic additions this past year have played a major role in strengthening our offerings in the preclinical arena with BioLegend and Horizon as well as expanded both our market presence and content portfolio in the highly attractive gene and protein arena. Specifically, the additions of Nexcelom and SIRION complement Horizon's cell line engineering expertise and provide the foundation for us to participate in the highly attractive cell and gene therapy market. With a broad portfolio now, we are uniquely positioned within the pharma development workflow to address our customers' challenges in speed, productivity and success rates. By leading with science and partnering with our customers, we are able to now provide total workflow solutions across every stage of the discovery process. For example, with the additions of BioLegend and Horizon, we now have the broadest preclinical offering on the market today. And more importantly, it has allowed us to really accelerate the pace of our internal innovation, which in turn, helps our customers with their development work. As shown in this slide, you can see how we are utilizing our internal capabilities to modulate genes and proteins using technology from Horizon and BioLegend, increasing not only the speed of our biomarker kit development but also the likelihood of success as we are no longer dependent upon outside suppliers for critical components. This results in us being able to get new novel solutions in our customers' hands faster, giving them improved productivity in all aspects of the discovery process. Similarly, we are also adopting a workflow approach as we build out our offerings in the high-growth area of cell and gene therapy. With our set of capabilities, we now can modulate another genes with Horizon, deliver this modified genetic content into cells with SIRION and then provide the appropriate QA/QC with Nexcelom. This is the differentiated workflow solution that I think is separating us in the minds of our customers. A proof point of this is some major global pharma companies such as Bristol Myers Squibb and bluebird bio are building their cell and gene therapy programs of our solution, effectively specking us in at the forefront of all the related therapeutics they may develop and bring to the market in the years to come. Our expansions in life sciences not only a key differentiator for those customers, but also is helping to bridge the gap from research to cure to diagnosis of the disease itself. This is where BioLegend plays such a pivotal role. By having its novel antibodies and proteins, these can be leveraged both in-house by us and the development of new preclinical kits as I previously mentioned, but also both internally and externally in diagnostics. So we can now help facilitate biomarker detection in the research space and using the exact same antibody translate this all the way to the diagnostics for that disease. This provides our customers greater flexibility and productivity and ultimately greater insight, a clinical insight of the disease. So in summary, we now expect our overall DAS segment to see its growth continue to accelerate and be consistently in the high single digits by '23 as the majority of this segment is now made up of life sciences, which is already growing in the double digits. For example, on a pro forma basis in 2021, our life sciences revenue would have made up 2/3 of the DAS segment and grew mid-teens. So this on its own provides at least 6% to 7% organic growth in DAS. Then you add expected growth from food and applied and you get to a high single-digit rate and possibly beyond. Our confidence in this trajectory for organic growth in our DAS segment is so strong because as you can see, it's already happening today on a pro forma perspective. So if you remember from our last Analyst Day in June, we laid out our 5 strategic imperatives, one of which was portfolio transformation, which I've touched upon over the last several minutes. So we have a lot going on with all of our objectives. But today, I'm going to focus on our acquisition integrations and our ESG priorities. So looking at acquisitions. We've now completed 9 acquisitions in the last year, the integration transformation office that was set up more than a year ago for this needless to say, has been very busy but I feel has been collaborating and executing extremely well. I think it's important to recall that while the pace of M&A has stepped up, we have a differentiated no one size fits all approach to integration, which I think has been really working well for us. Our unique approach to M&A is a key factor in really attracting the founder-led businesses we've added. And I think it is what will make their respective integrations successful in the coming year. Our recent additions have been performing very well with greater than 20% pro forma revenue growth in 2021 overall. But I'm just as excited about what we are learning from them from an innovation perspective. As I've reviewed on our third quarter earnings call, we held a company-wide innovation summit in mid-November at BioLegend headquarters while scientists from across PKI came together to collaborate, strategize and just get to know one another. From the weeks of work leading up to this event and the several days itself in person, it was a fantastic meeting and we came away with more than 40 different near-, mid- and longer-term projects to go after in each of the 3 specific areas we focused on, including life sciences discovery, cell and gene therapy and diagnostics. So while we are very excited about all the commercial synergies we've laid out and expect, I can tell you, I'm even more excited coming out of the summit on the potential scientific synergies that I think will come to fruition across the company in the coming years. As we laid out at our recent Analyst Meeting, you can see here our key initial ESG-related goals, which I think we are already making very good progress on. The 2 I'm most excited about so far are our initial progress as it relates to diversity and infusion and the favorable feedback we received in our recent company-wide employee engagement survey. While pleased with our initial performance here, I'm also cognizant that our ESG journey is a marathon and not a sprint. As I've been highlighting so far this morning, I think we've been making tremendous progress over the last 24 months, both operationally and strategically, which has been great. But what does all this translate to and ultimately mean? A year ago at this conference, we first gave you our financial outlook for the company out to '23, which included achieving at least $4 billion of total revenue and greater than $6.50 of EPS. Six months ago at our Analyst Meeting, we updated this outlook by increasing our organic growth assumptions given our strong start to '21, and we removed future M&A being needed to achieve these goals. So I'm excited to report here today that we are once again increasing our medium-term outlook for the second time in just the last 6 months due to all the fantastic progress we've been making with our internal execution and also a superior capital deployment. So first, we now expect at least $4.5 billion of total revenue by 2023, up $500 million from our outlook just 6 months ago. This is driven by the stronger-than-expected organic growth in '21 and our successful closing of the BioLegend deal. While we had previously assumed 5% to 7% core organic growth with our recent additions becoming part of our core over the next 12 months, when we look at '23 now, we expect to be able to deliver total company organic growth of 7% to 9% and excluding all COVID contributions. So as I've been suggesting, I expect us to be a high single-digit organically growing business in the near future. A year ago, when we first gave our 2023 outlook, we indicated we expected the business to be able to hit 23% operating margins. Now with the internal performance we've achieved over the last year and the portfolio transformation that has taken place, I'm happy to report that we now expect at least 26% total company operating margins in 2023 with good opportunity for additional growth in the years to come. This all translates into us not expecting greater than $7 of EPS in 2023, up from the $6.50 we reiterated as recently as 6 months ago. Within this, we continue to expect to use our cash flow to delever back to below 3x by mid-next year. Now this outlook does not take into account the potential benefit from any future M&A. So overall, I'm really pleased with the performance of all 16,000 of my colleagues and what we've been able to achieve over the last year. Their efforts are what allows us to have such confidence in our ability to achieve these updated targets next year. Now looking out beyond next year, I now think we are on a path to be a consistent high single-digit organic growth company that can expand its operating margins by at least 50 to 75 basis points per year. This should translate into double-digit EPS growth annually without the benefit of any future expected capital deployment. In summary, I'm extremely proud of what this company has achieved so far, but more importantly, where I think we are headed. Thank you. And with that, Rachel, over to you for questions.

Great. Thank you. So to kick us off, a few questions in here over e-mail on the new updated 2023 outlook. So first off, the 2023 outlook assumes 7% to 9% organic growth versus standard mid-single-digit market growth. So can you just talk about your confidence in your ability to grow above the market long term? And then going off that, you completed a number of acquisitions in the last 18 months. So how much of that outlook assumes successful integration of the recent acquisitions you've completed?

Yes. I think as I pointed out during the presentation, Rachel, if you look at the portfolio that we have, that has radically transformed. When you look at the diagnostics and the life sciences side, they now account for 80% of our revenue. So naturally as we go into 2023, and these become part of our core, the business becomes a high single-digit grower. So the portfolio transformation itself results into it. In addition to that, we continue to be in end markets now, which are highly growing. For example, in the diagnostic side and the life sciences side provide. So combination of the end markets where we play a role in now and with the portfolio transformation that we have put forth, we feel very confident of this being a high single-digit grower.

Sorry about that. So going off of that, for the $500 million revenue increase in outlook for 2023, can you just break out for us how much comes from BioLegend versus other acquisitions against the core organic base business?

Yes. I think BioLegend accounts for about $380 million to $400 million of that in 2022. And that, again, will consistently be a -- it's a double-digit organic growth company. So that accounts for a lot of that. But again, the way we are now positioning 2023 accounts for all these becoming a part of our core. So naturally, the combination of all these acquisitions that we have made over the past 12 to 14 months makes this a double-digit growing -- high single-digit organic grower.

Got it. So sticking now on the long-term outlook, so you reiterated the long-term guidance of 50 to 75 basis points of margin expansion per year. So can you just talk about your assumptions in that guidance? And is there an opportunity to grow beyond the 50 to 75 bps of the annual gross margin and operating expansion just given the higher margin assets you recently acquired?

Yes, absolutely. I think as earlier, we pointed out, we were at 23%. With the addition of the acquisitions, naturally, this goes to 26%. And these accounts for some of the initial commercial synergies that we've talked about. But as we bring -- and let me give you an example of EUROIMMUN. When EUROIMMUN initially came into the company, it was growing at -- operating margins were closer to what our operating margins were in the 18% to 19%. But over the years as we've integrated these businesses and as we've started realizing these synergies, we see 100 to 200 basis point of operating margin increments that we see from them. And we expect the same to come from the acquisitions. Let me give you an example of the 3 that we have made outside of BioLegend, right? IDS, Oxford and Horizon. Now these are high-revenue growth companies, but if you know these are publicly listed companies, so you know that they were close to breakeven. So they provide us also a significant leeway and leverage to continue to grow their operating margins. And that helps us go beyond 26% and at least have consistent 50 to 75 basis points of incremental operating margin year-over-year.

Got it. Now if we could shift over to some supply chain logistic questions. So you included a bit of conservatism in your guide last quarter despite being able to successfully navigate through any supply constraints that you saw during 3Q. So can you talk about how supply chain panned out during 4Q? And what you're seeing in the first 1.5 weeks of 2022 here? And then going off of that, can you just talk about your confidence in your ability to mitigate any supply chain impacts for the upcoming year?

Sure. So Rachel, I mean, as you pointed out, right, we had some level of conservatism, and we had -- when we guided for 4Q, we had put some of that into consideration. Now the impact on the supply chain pressures that we saw was more than that. So even though we exceeded our guidance of 8% by -- and we reported out 10% this morning, I think the impact was higher than that, and it came from 2 fronts. One from the supply chain pressures that we saw, which was more than at least 2 points to what we have reported out. But also towards the end of the fourth quarter, there were some lockdown impacts in China, which impacted the autoimmune testing business and around reproductive health in countries such as Philippines, Vietnam, very productive has started seeing some -- it has some impact. So I would say if the impact of the supply chain and the lockdowns were not in place, we would have at least 2 to 3 basis points more of organic growth in the fourth quarter. Now the good news is that all of our end markets continue to be very strong. Our backlog is the highest it has been in the history of our company. And it's fair and especially if you look at applied markets and food, it's nearly double than what it was last year. So the end markets are very strong. Our backlog is very strong. And I would say that if you look at our 4Q, it probably got impacted at least, I would say, more than 2 points just from the impact of the supply chain and the lockdowns.

Got it. That's helpful. So sticking with some of your comments on China there. So non-COVID organic growth was greater than 20% during 3Q. You mentioned that the region was impacted by some lockdowns during 4Q. So can you just talk about what you're seeing from an underlying demand perspective in China? Do you expect those lockdowns in China to impact 1Q as well? And then really, how should we think about normalized growth in that region?

So let me start by talking about China for us. It continues to be a great growth market for us, and we had greater than 30% growth in China, if you recall, in China, DX in 3Q. And I believe that despite some of the lockdowns 4Q was again solid. And obviously, the lockdowns had some minimal -- some impact in 4Q. Over the past decade, again, if you recall, we built a very strong local presence there with local brands that account for most of our sales there, both on the EUROIMMUN side and legacy PerkinElmer side. Most of our reproductive health products, for example, now in China are locally manufactured and put it -- and similarly on the EUROIMMUN side, I think as I mentioned in my previous conversations or at the earnings call in 3Q, we expect also the -- most of our products going into China will be from China.

Got it. Going off that, we have a question in on e-mail here. So you just mentioned some of the local manufacturing that you have in China. And it sounds like the China volume-based tenders are spreading out to other provinces. So can you just talk about what you're seeing from volume-based tenders in China? Some peers are saying that they're seeing pricing pressures of up to 30% in those regions.

Yes. Again, if you look at the product portfolio that we have, both around reproductive health and autoimmune testing, to date, we have not seen any impact on that, and we feel we are very well positioned with the technology and the product portfolio we have in that market. But I think it's not that it will not have some impact. There will be some impact that will occur down the road. We've just not seen that. But I think the counter to that also is that as there is volume-based pricing, the volume is going -- volumes are going to increase. So the share -- natural share that grows will also continue to increase. So we are making sure that we have local brands. We have local manufacturing. We have local R&D there. And right now, we are not seeing impact, but we are prepared to deal with it when it will come in the future.

Helpful. Now shifting into some of the end markets. So for industrials, can you just talk about what you're seeing for industrial and environmental market by region? And then how would you characterize the cyclicality of your industrial exposure? And are there any measures that you can take to reduce that cyclicality?

Yes. I think, Rachel, if you recall from the presentation that I made, more than 80% of our revenue now comes from diagnostics and life sciences. Industrial makes up a very small portion of our total portfolio. So the portfolio transformation that we have put in place, fortunately for us, makes us very resilient to cyclical economic impacts that have because of this. So I would say, what? Industrial is probably high single digits of our portfolio. And even within the portfolio where we play a role, semi, et cetera, markets where we have a stronger position, for example, with our NexION portfolio, they have continued to do well. So we haven't seen that much of an impact from industrial. And I think if anything, the impact and influence of that on our portfolio will continue to weigh in over the next several quarters and years.

Great. And then we just had a question come in over e-mail, going back to the supply chain impact. So can you just talk about your thoughts around the supply chain. Could it impact even going into 2023? For example, do you think the 2% to 3% of headwinds could repeat itself?

Yes. I don't know if I can predict what the supply chain impact will be on 2023. I can tell you about 2022. I think in the first half of the year, I think as I -- my peers -- and you've heard from even from our peers, there is going to be some impact of that. And it's from 2 aspects of it: one lockdowns that you are seeing because of Omicron and then the infections going up and down; and the second is the pressures around the supply chain. But I think we've put the right processes in place, like most of our peers, to ensure that whether it's supply chain pressures or logistics or redundancy that we have to put into our systems are appropriately positioned so that we can deal with it in the short term. I do not see this as a longer-term issue or impact that will have on the industry in general.

Helpful. Going back to some of the end market exposures. So food has had its fair share of ups and downs in the past few years, but it's really started to normalize. You guys grew mid-single digits in 3Q and even double digits in 2Q. So could you just talk about how that segment is performing? How do you think you're competitively positioned in applied markets? And where do you think is the greatest opportunity for Perkin and where you see the greatest pressure?

Yes. I think as you pointed out, Rachel, with food, we had our challenges earlier and we've done the turnaround, and we've started seeing the benefit of that coming through. And as I pointed out earlier in my comments that food, along with applied had some one of the largest backlogs that we have now in our portfolio. And just to give you a couple of examples, we start seeing cannabis coming around. Meizheng in China is doing extremely well. So the portfolio has started turning around, and we've started seeing the impact of all the measures, corrective measures that we have put in place.

Got it. And then shifting now to some Diagnostics questions. So the pandemic has rapidly expanded your installed base. So can you walk us through on how you're capitalizing that opportunity and driving utilization long term?

Absolutely. I think just to take most of the expansion that we have seen or at least the customer base that we have been working on, COVID is still ramping. So their focus is still quite a lot in COVID. But we've started seeing the benefit of it. Let me give you a couple of examples, right? As we saw with the explorer workstation was one example that I wanted to give you. In some of the markets, where customers were using our portfolio of JANUS or chemagic 360s, when we started bringing in the automation component of it, we started seeing the benefit of how having a smooth workflow of our portfolio was helpful. And that customer base has started to expand the use of our products in that marketplace. So I would say it hasn't necessarily -- we've started seeing that the long-term contracts that have started coming out of it, but the opportunity of increased awareness using different parts of our product portfolio because of now having an installed base where they have seen the benefits of what we brought to the portfolio. And the offering that we bring in with additional new products and assays, we started see the impact of it. But I think it will take more time as COVID wanes away and customers start seeing the use of that product for other indications. I'm going give you a couple of examples, say, for example, of how you're leveraging that customer base now for Oxford.

Helpful. And now shifting to a few operating model and capital planning questions. So could you just talk about which business segment do you think there is the greatest opportunity for margin expansion? So in Diagnostics or Discovery & Analytical solutions.

So as you've seen from a margin expansion perspective on DAS, I think there are 2 ways to think of it, right? As we bring in these acquisitions, the synergy opportunities of it will continue to see -- will see benefit of margin expansion as they come into and become part of our portfolio. But I think as both I and Jamey have talked about, the operational measures that we have put into place, right, whether it's around operational execution around what we do with our SKUs that we'll start seeing benefit of it. But the natural fact is that as our portfolio changes, and the volume of what we bring to the table is now more around life sciences and diagnostics, we start seeing the benefit of that.

Perfect. And last question here in the final minute or 2. So Perkin, you guys closed on BioLegend recently and a number of your peers including Thermo and Danaher continue to roll out assets as well. So what will enable Perkin to win in competitive situations for M&A? And then what types of assets are you going after?

Yes. Great question, Rachel. And I think if you just go back and look at what we've done so far, more than 75% of our acquisitions over the last decade have been founder-CEO companies and most of them are still working for the business and are part of the PerkinElmer family. And I think this is a testament to our strategy that what we offer to the successful entrepreneurs, who are looking to take their businesses to the next level that our competitors just don't provide. Build a great -- you build a great business, how can we help you make it grow faster, better, stronger while leveraging our capabilities but not destroying your culture of who you are. That is the mantra that we bring into place. And that is what has made the acquisition successful, whether it's a Tulip or EUROIMMUN. Now let me give you an example of BioLegend. It was an extremely competitive process, but I think as soon as Jean and I really got to know one another, our vision, his vision and how we hope to bring this all together, it just really made a lot of sense for both parties. Even I think Peter at Oxford, for example, he highlighted that. You take the example of Peter Li and Jean Qiu at Nexcelom, they would tell you the same things. So I guess everyone can be competitive as it relates to price, but what's truly the best home and the best strategic fit for the business is what founder owners are most keen on. And I think that's where we turn out to be the best fit for these acquisitions.

Great. Well, thank you so much for the answers. That's all we have time for today. So thanks again for the time.

Thank you, Rachel.