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

Good morning. Welcome to the 42nd Annual Cowen Healthcare Conference. I'm Max Masucci, one of our three life science and diagnostic tools analyst here at Cowen. We're excited to have PerkinElmer at the conference again this year. And from Perkin, we have Jamey Mock, CFO. So thanks, Jamey, for spending some time here with us today.

Thanks for having us, Max. Good to see you.

Yes, absolutely. All right. Let's start with a question that is pretty standard across the board for most of our chats. The past fiscal year around 44% of revenues came from America, 31% from Europe, 25% from Asia, 19% of last year's revenues were generated from your diagnostics business in Europe. So just given the dynamics in Ukraine, Eastern Europe, it's worth checking in on your exposure from a customer type perspective, supply chain perspective? And if there's anything we should take into consideration?

Sure. Thanks, Max. So first, it's a tragedy what's happening in Ukraine. We do not have any employees or facilities in neither Russia nor Ukraine. But we do have employees in the surrounding countries that are being affected and see the firsthand damages of war. So our thoughts and prayers go out to anybody involved who are affected by this no matter where you are across the globe and let's hope this comes to a quick end to this crisis. So as it pertains to Russia and Ukraine, as I mentioned, no facilities, no employees. We have a very minimal amount of revenue there, of which, most of that is diagnostic-related and the largest share being reproductive health. So we don't think there'll be too much impact from a revenue standpoint from -- it's very manageable. We have very minimal supply chain there. As I mentioned, no facilities, a very limited amount of buy, so not too disruptive. We don't transact in the ruble. So of course, that could have an impact from a purchasing power perspective, but otherwise, not a lot of exposure and not a lot of direct exposure. As it pertains to just Europe broadly for PerkinElmer, it's very similar to the rest of the complexion of the company. So on a non-COVID basis, the numbers you quoted in 2021 had a lot of COVID revenues in there, Max. But if you look at on a non-COVID basis and you look at Europe, we're about 40% diagnostics, 40% life sciences and 20% applied and food. The largest portion of our diagnostics business being EUROIMMUN in Europe. And then if you look from a footprint perspective, we have a lot of footprint across all of Europe. Our two largest facilities are in Finland with our reproductive health business in Turku, as well as Germany for our EUROIMMUN business. So overall, there hasn't been much disruption yet, and we've been able to manage through it, but that kind of gives you a painful landscape of what's going on over there.

Yes. So it doesn't sound like there is any ripple effects that would cause you to revisit the guidance?

No. I mean, I think as it pertains to Russia and Ukraine is very minimal. And so nothing to relook at our guidance. I think if something were to happen much more broadly and there was a pan-European conflict, that's obviously more difficult to predict. But at this point, obviously, nothing to relook the guidance. And I would say, just in general, if this started really last year, and we've been dealing with a lot of disruption for what seems like many, many years now. And our teams have been able to manage through it quite well, number one. And number two, I think the composition of our portfolio has really changed as well. So it's much less cyclical in nature, and therefore, we should be able to manage through any kind of conflict, no matter what it is. Obviously, this is not a great one. So in general, nothing to relook from a guidance perspective at this point?

That's good to hear. I mean, while we're still on the topic, at least adjacently, I'll ask another question. If you do think about that evolving product mix in your -- the different business segments, you have exposure to in 2022 and how that compares to when you were entering 2021. And you take into account by a legend. How do you think about the pacing of gross margins? Just -- a lot of acquisitions last year? There are some benefits to bringing BioLegend's reagents in-house. It would just be great to walk through the puts and takes on the gross margin guidance?

Yes. I mean, if you -- I'd say two things, really. The first is, you mentioned some of our acquisitions. But I think almost all of our acquisitions have a very high gross margin profile. So BioLegend was one, Oxford Immunotec was another, Horizon has very high gross margins. So the complexion of our company from a gross margin perspective has changed through the acquisitions of our 8 or 9 different recent ones. The second is we've been doing a lot on the gross margin line from a productivity perspective. So if you think about it, in general, margins, particularly on gross margin should change: one, due to higher volume growth and a lot of these businesses are growing faster and they're at higher gross margins; two is the mix; and three is what we're doing from a productivity perspective. And largely, that affects the DAS business. So we've spent a lot of time in our Analytical Technologies business and our Services business to really change gross margin. So coming in to the year, we knew gross margins would continue to expand ex-COVID. COVID obviously had a very interesting dynamic on our gross margin line. But we've known that for several years now and are well on our way of continuing to expand gross margins here.

Yes, that's great. So you're redeploying a fair amount of the, call it, excess COVID cash towards higher growing, more attractive gross margins. So as those contributions become more meaningful, maybe we could probably see that show up on the gross margin line. And so I'm going to skip down just a bit and we'll just go to the core legacy ex-Biolegend business. Discovery & Analytical Solutions, very solid, 30% reported growth in Q4, which included 9% organic growth, roughly 22% contribution from M&A. If we look across the key end markets, life sciences, food, Industrial/Environmental, which product lines are really seeing the best momentum heading in early 2022 in terms of adoption demand? And then is there a specific end market or product line that you think is worth calling out as becoming a real meaningful contributor in 2021 from a revenue perspective?

Sure, yes. So a lot of work has gone into reconstructing the DAS business over the last few years. You mentioned a few things. So first, I'd say our Life Sciences business has completely changed with the additions of BioLegend and Nexcelom and SIRION and some of the other acquisitions. I'm sure we'll get into it. And Life Sciences, which has always been a great preclinical research business now has gotten into much more large molecules. It now comprises over 65% of the DAS business, which years ago was probably 40% to 45% of the DAS business. So it's a very different complexion. And I would say even excluding those acquisitions over the last 3 years has grown on average at 6%. So we've really changed the growth profile of our Life Sciences business. And then when you factor in those acquisitions, we believe it will be growing much faster than 6%. And so that's number one. Number two, on the analytical side and food side, we've spent a lot of time trying to change the cadence of our NPIs and our new product introductions. And I think that's been going very well. Last year, Analytical Technologies grew 15%, albeit on a relatively easier comp, but it also ended with a very large backlog. So I think that's proving that it's working over time, and I think we're coming out with, again, another steady cadence of products. In general, in DAS, though, Max, I wouldn't say it's a one product platform. It's now over $2 billion in revenue, 65% life sciences. We're really trying to go with a more workflow approach. So having instruments, reagents, consumables, services and software. I think we do that best in life sciences. You add our informatics business to that, our OneSource enterprise business to that. I've already talked about some of the acquisitions. We always had great imaging and detection and reagents. So I think we're talking to customers in a very different way, and I think that's also spilling over into a different applied markets as well. So yes, the DAS business has been reconstructed here, and I think it's performing very well.

Yes. That's great. And like you said, there's a wider variety, a diverse range of platform forms rising contributions from consumables. So sticking with a similar question, just in terms of granularity. If we exclude the COVID testing and look at your diagnostics business, you've made a number of acquisitions. You have exposure to reproductive health, immunoDx, applied genomics. So I would love to hear across those three end markets. If there are any instruments that are seeing accelerated pace of demand or ramping consumables, where we should be keeping our focus in 2022?

Sounds great. Yes. So first, just maybe start by going back a little over a year, and we talked about how we think each of these end markets will grow. And really, as we head into 2022, it's no different. I'll mention some of the key products within here. But our reproductive health franchise, we think, can grow 5% to 10%, that's up from probably low single digits historically, maybe 3% to 5%. And that's mostly due to Vanadis, which is the #1 platform in our reproductive health business that I think will fundamentally change the growth trajectory of our reproductive health franchise. And we're encouraged by the start of 2022 and a lot of what's gone on over the last 2 years and what we've done to improve the platform, get our sales and service reps ready in the field more and get ready for many more installations that we think are actually already started here. And so Vanadis is what to look out for within reproductive. I think applied genomics has been an incredible we put out over 2,000 instruments. COVID has really changed the brand recognition of our applied genomics business I'd say we've been hard at work at many NPIs underneath that business as well, many different type of sample types that we're trying to go through are put in there. And it's really an end-to-end kind of workflow before any type of testing takes place. And so we've got a lot going in there, but not any particular one that I would call out. And then on the immunodiagnostics business, I'd probably mention a couple, but within EUROIMMUN, we talked about Excentis, that won't be a large revenue driver to 2022, probably more so to 2023, but it's really important as part of our chemiluminescence rollout for the EUROIMMUN product lines. And then within Oxford Immunotec we're really launching a lot more in terms of automation. So they've always had a very strong test. Part of the thesis when combining with PerkinElmer was to add our automation capabilities to them, add our service folks and the ability to install automation out there, and it is boding quite well. We've had some installations in some parts of Japan as well as Europe. But I think automation will really help improve the value proposition of the Oxford Immunotec test and building it out into a full workflow. So those are just a few of those areas. And I should say just to kind of round out some of the growth drivers. So we've always thought immunodiagnostics can grow 10%. EUROIMMUN makes up the lion's share of that, and that has grown. We've always said, can continue to grow 12% plus. Oxford Immunotec was in the mid-teens and continues to be in the mid-teens. And then our applied genomics business is probably the biggest wildcard. So due to all the installed base that we put out there, there's been tremendous demand even on the non-COVID side, I think we said last year, it grew over 50% non-COVID. And so what happens with those instruments and workflow, it's really a CBD thing into 2022, but we've assumed that it kind of scales back into the 4% to 6% mid-single digit range, which is what we have as a long-term goal.

Got it. So some strong performance in the non-COVID and COVID opportunities since you announced the BioLegend acquisition. A few quarterly beats, I think at the time of the past -- in the Q3 earnings call, we still weren't fully -- we hadn't fully understood the impact that Omicron might have. You're considering $25 million in terminal revenues, but we could see a decent number here in Q1. So I think your original expectation is that it would take 18 to 24 months to delever when you made the BioLegend acquisition. Just curious, given how the past 7 months have played out, if you have an updated view on that target?

No updates. I mean, I appreciate that. We have had a successful end of 2021, and I think it will be a good start to 2022 as well. What I would say is we're probably even more confident in the 18- to 24-month time frame. We right now already, I think we ended last year at 2.2x net-debt-to-EBITDA. So we remain low based upon the high profitability that we have. But we're also generating a lot of cash. I think we generated over 100% free cash flow conversion last year. So to your point, yes, there's a lot of positive momentum in our ability to deleverage, and we're even more confident in the ability to hit those time lines.

Yes, with the Diagnostics business, you've got DAS, you've got BioLegend. It's -- there are several areas where you could probably bolt on additional assets. But we're in a very interesting market environment right now. So I would be curious to hear how you're viewing capital deployment as it relates to M&A? And still fragmented markets, at least in biomanufacturing where you might be able to add some additional capabilities. But would love to get your latest view on appetite for M&A in today's market environment?

Yes. I think we always been -- even absent today's market environment, I think we knew 2022 was an additional year of integration really. We really love the portfolio we have. We have a lot of things we need to go execute on. We are focused on delevering and even though our leverage right now is good. But we've been saying it will go up an uptick as our profitability comes down a little bit here. So this year has always been about integration. I mean we're always looking, though, Max, in understanding what's out there and understanding which assets, and we always have a game board and probably wouldn't let something that we find extremely critical path. But for the most part, right now, we are very much about delevering as well as integrating all these assets, and there's much to do on that front, and we're excited about it in 2022.

Makes sense. All right. Let's move to BioLegend. I think what's really unique is that the revenue -- BioLegend revenues are nearly 100% recurring in nature. Very strong market position in flow cytometry reagents. But for those, who might be a bit newer to the BioLegend story. Can you just speak to the key products that are driving the estimated $380 million in revenues during 2022 and maybe hit on any products outside of flow cytometry reagents that are starting to gain traction?

Sure, yes. So BioLegend is a fantastic business. And the way they win -- and I'll go through some of the products that they make, but it's largely because they have a high-quality database and library of the antibodies. They add terrific conjugates in many different types of forms to it to make higher value proposition for those antibodies. They have terrific service, and they basically deliver with all the products within 24 hours. And they have a very low cost. So they've spent years and years and they continue to do so to make sure that they drive down the cost of producing antibodies and have the highest yields in the industry. And so therefore, they have a very low cost base, and therefore, have very nice gross margins on top of that even with lower prices. So that's how they win. They started within flow cytometry. So it probably makes up close to 70% of their revenue of the company. I think they're the #2 leading provider out there. We're the #2 provider out there. And the market probably grows anywhere in the kind of 8% to 10% to 12% range, and they've consistently grown 15% plus. And that's because they take share because of that value proposition that I mentioned in terms of being low cost, high quality, high service levels, et cetera. They expanded into new areas now, which now makes up roughly 30% of the portfolio, things like proteogenomics or recombinant proteins or ELISA and immunoassays. Proteogenomics is an exciting space. It's growing -- by far the market leader they grow probably 50% plus per year, sometimes albeit on a small base of 2x that. And so they've expanded into these other areas, but it's still based upon the same value proposition, which is terrific antibody library, add something that the scientists need, the research needs, whether it's a floor or an oligo or whatever it might be, have terrific service levels for them and have it at a very low cost. And so they really embed themselves into research and academic labs and that's been very successful.

I think there were some initiatives to drive a higher frequency of electronic ordering. What sort of lift do you see in customer ordering if they are ordering electronically? And if they're not, are they, is it a fax, how are they ordering traditionally?

Yes. I mean it's -- I forget the exact statistics off the top of my head. But electronic ordering it'd be in the ballpark 15% to 20% of the revenue might be electronic ordering and whether that's the exact number, it doesn't matter because there's a long way to go. And to your point, it either comes in through e-mail. I don't know about fax, but e-mail more so. And -- or a call with an order as well. So yes, I mean there's been a lot of work done on their platform from an e-commerce perspective, and I think there's a lot more room to grow here as well. And that's certainly one of the things that -- but again, I think that just adds to -- I mean, they don't really have salespeople, they have immunologists that are -- have PhDs that work with their customers, really understand the problem they're trying to solve. And then have a terrific quality, whether it's great turnaround time from a speed-to-delivery perspective or easy-to-order, which is what you're bringing up or great informatics. They've been working on a great informatics platform for their customers as well. So it's really the full suite that really improves the value proposition with our customers to make it very sticky and e-commerce is one of the things that they've also been working on.

I asked the question because of fax experience with Exact Sciences in Cologuard. And if you can believe it, a large portion of those tests are ordered via fax, but they saw a 70% increase or so for the same customer when they did shift to electronic ordering. So it's one of the reasons why I asked.

We're seeing a shift too.

Yes. That's great. That's great. So today, most of the products BioLegend is selling are used for research use only, RUO purposes. There's some exciting innovation around some GMP-grade products, might open up the spigot for opportunities in clinical markets, in IVD markets, which are much larger than the RUO markets. So you had a team huddle at the BioLegend headquarters back in November. Coming out of those meetings, were there any specific products or applications that you expect to pursue more aggressively in 2022 and beyond from the BioLegend angle?

The answer is yes. I don't think we want to exactly say what we're going after here. But yes, I mean, to your point, just to maybe elaborate on it a little bit. So we had 75 to 100 employees there -- leaders there, I should say, some from many of the recent acquisitions of Oxford and Nexcelom and BioLegend, obviously. It was on BioLegend campus. SIRION, Horizon and a lot of legacy PerkinElmer folks as well. And I think everybody was really amazed by the amount of capabilities we now have under one roof of PerkinElmer. And I think we broke up into three tracks, life sciences, diagnostics, cell and gene therapy, each of which had over 40 to 50 ideas. And then we narrowed those down to the top 3 to 5 trying to balance some short-term wins, but also some long-term bigger swings that we're allocating some capital to and by capital, I mean, in the form of research and development. So there are some relatively big markets that we're going after and some things that we can just do better even within our own life sciences reagent space, where we didn't have custom antibodies to be able to service and we get a lot of requests to do so. And now that we have the menu, we can easily go uptick our growth there. But yes, I mean, I think the real news was that there was a ton of exciting opportunities and the capabilities -- and I think the realization from all of our leaders, both in the diagnostics and life sciences space of what we have now really opens the doors to many different exciting areas that we can tackle here.

That's great. I'm going to pry a little bit. selling gene therapy, it's one area that you've called out in recent earnings calls, updates. But if you look at the field of advanced therapies, that would also include complex biologic drugs like monoclonal antibodies. So if you look at BioLegend and also how BioLegend is positioned alongside SIRION, some of the other acquisitions you've made. What sort of momentum or synergy do you have building in the opportunity to support the field of next-gen advanced therapeutics?

Yes. I would say, versus 12 months ago, it's radically different. If you take BioLegend, and I'll talk about all the capabilities of each of these, but BioLegend, Nexcelom, SIRION and Horizon in particular, -- we've now added $0.5 billion of differentiated capabilities within cell and gene therapy and other markets, but you mentioned cell and gene therapies, so complex biologics. And so let's talk about those. So I mean BioLegend really opens up the cellular response and when you're looking at some kind of therapeutic candidate, what is going on, and I talked about BioLegend already and what they can do from a technology perspective. SIRION has leading-edge viral vector technologies from a delivery mechanism perspective. Nexcelom looks at everything that was involved around cell analysis, whether it's viability, counting, quality, et cetera. And then Horizon really fundamentally researches what is the right gene to edit and what is the response of that edit. And so we really now have a very different set of capabilities that we are talking to customers about and frankly, customers are coming to us with. What problem can we solve because we really are much more differentiated in this space now with much more scale with $0.5 billion behind those four businesses alone. On top of the fact that we've always had a wonderful imaging and detection business with a lot of reagents, more on the phenotypic side. You combine all the -- and some NGS capabilities that we have within the companies as well. You've really got a differentiated platform here to help solve complex biologic questions and understand better therapeutics and candidates that are out there. So we're pretty excited about the opportunity here.

Yes. There's still a lot of bottlenecks, whether it's viral vectors, plasmids that are not likely to resolve in the near term. So I think getting exposure in that area is fantastic. All right. So maybe let's wrap up here. One of the things that we're seeing in life sciences across the board is scarcity value, rising wages. So I'd love to hear what you've taken into account for your 2022 outlook as it relates to wage inflation, scarcity value, talent acquisition, retention? Things of that sort.

Yes. No, it certainly is, Max. And I would say, I mean, we've been baked in higher effects on compensation into our planning for 2022. But I think bigger picture, we've been under a fundamental cultural shift within the company over the last couple of years and really trying to make sure that the value proposition for our employees is very different. So compensation is certainly one of them, but we've been talking a lot more about personal and career and development growth. We've been talking about the company mission. We've been talking about the fundamental way that we collaborate differently. So although compensation does matter in terms of overall retention, it's one component of many. And I think bigger picture, I think we've been really trying to change the focus here on the company. And I think that's resonating well. I think it resonated well with our engagement survey responses. I think it's been resonating well with our attrition rates as we compare to the life sciences sector in particular. But yes, to answer your question, yes, we put in some additional effects on compensation in our 2022 planning. But we've been working on a lot more than that to -- for the ability to retain talent and attract talent actually.

Yes. Makes sense -- all right. I'll wrap up here with a bigger picture question. I think the response to the opportunity that's presented itself with the pandemic has been fantastic. You've made some moves. You've acquired some companies. If you look at the expected pace of contributions from some of these recent deals, the differences in margins compared to the core business, and we look out, say, let's call it, 3, 4, 5 years in the future. Is there anything that you would like the investment community to take into consideration when they're comparing the Perkin of the next 3 to 5 years to the pre-pandemic Perkin?

Thanks, Max, for that question. Yes. Yes. I mean financially, I'll answer as well, but I think probably three things, I would say. A lot has really gone into transforming the company. You mentioned, Max, what we've done from a portfolio composition perspective, but -- and obviously, that is forefront in investors' minds in terms of which acquisitions we've got. But we've done a lot from an innovation perspective, a commercial excellence perspective and operational excellence perspective, and I just mentioned talent and culture as well. So I think we've done a lot to transform the company. I think number two, it obviously is a different growth rate that we believe versus years ago at PerkinElmer. And we said this year, you'll see -- start to see some of the fruits of that with our guide of 6% to 8%, and on a pro forma basis, that's more like a high single-digit guide, just like we've been talking about the years to come, come 2023, we can be high single digits. Margin, there's still some substantial margin opportunity. So I think the financials will take care of themselves, and we think there's long-term margin opportunity as well. We've said in the past 50 to 75 basis points after we hit 26% in 2023. So I think the financials would take care of themselves. But it's really the cultural change on top of that, too. I think we've brought in a lot of new talent. The acquisitions have brought in tremendous talent that actually add a ton to our company overall. And so we're really excited about where it's going. And I think financially, obviously, there'll be some fruit to that. But I think the impact that we will make on Life Sciences and Diagnostics, in particular, moving forward, I think, will be vast.

Great to hear. Well, let's get together in Boston soon. Really appreciate a great discussion. I appreciate it. I'll see you soon.

That would be great. Nice to see you, Max. We'll probably get together.

Thanks. See you.