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

Okay. Welcome everybody. We are on the Life Sciences track of the Stifel Healthcare Conference here. I am here with Maxwell Krakowiak, CFO of PerkinElmer. Max, thanks for joining us here today.

Thanks for having me Dan.

Yes. For sure. You took the job 4 months ago as far as the CFO, but you have been at the company for about 4 years if I am getting that right. I'd like to just sort of ask how it's going.

-It's going good. It's been a lot of fun so far. We got a couple of things going on a little bit, but it's busy, but it's been good.

Okay. Great. Well, one of those things going on is this divestiture that PerkinElmer is undertaking right now. Can you maybe just start with why is that the right move right now for PerkinElmer?

Yes So I think -- first off, I think it's good for both businesses. And it really comes down to their different business models in different end markets. And by separating into 2 new businesses, we allow for one, just greater focus operationally and doing what the business needs to do. And then second, giving more appropriate capital allocation for both businesses. And then obviously, I think we're left with in terms of life sciences and diagnostics are the end markets we want to be in. And it's a business model that we prefer in terms of high recurring revenue.

Okay. And so once the transaction is completed, you'll be left with about $2 billion in diagnostics revenue roughly, I believe, and then a little over $1.5 billion on the Life Sciences side.

Yes. And so the -- just a clarification. So the $2 billion in diagnostics includes the COVID revenue that we had this year. So I think as you go into sort of the base of next year, it's going to be roughly $1.5 billion on both the Diagnostics and Life Sciences side.

Okay. One question I had. I mean it's not the most straightforward divestiture in the world and that it's a bit entangled. You have to remove some things that are parts of other businesses. Are there things that you think are being removed, that have benefited from being next to some of those other things. And so should we think about a bit of a dyssynergy at all in the portfolio once that takes place.

Yes. I mean I think we like to say we're removing an organ. But yes, they are heavily entangled. I think when -- let's maybe break it down in a couple of different areas. So one on the product side. We only have one product that actually overlaps between the 2 businesses. So from a product standpoint, there's really almost no overlap. And then if you talk about it from a people perspective, most of the individual performers, a sales rep, a service tech are dedicated to each business. So in that sense, there's not a tremendous amount of overlap. There's a little bit more at the manager level. So if we have somebody who's running a country for us today, they will oversee sort of both teams. So that's one, I would say, just on a management layer perspective you need to break down. And then, obviously, our back office supports both sides. So it's just a matter of separating the teams there. And lastly, you've got systems and facilities that obviously are shared between both businesses, and we'll have to separate there and do some TSAs and stuff like that. But I wouldn't say it's anything that's new or particular to this divestiture. It's all things that have been done in the past, and it's just a matter of separating them and getting through it.

Okay. For those of us that are going to watch this happen, what is the time line that we should sort of use to say, okay, it feels like everything that's going to be separated has been properly separated and these relationships that exist have kind of been characterized properly.

Yes, I think it will take time. I would say, over the first year, we should be mostly through it. I mean it will be a little bit into years 2 and year 3, but I would say the majority of it will be able to get through in the first 12, 18 months.

Maybe just to start with the portfolio itself. On the Life Sciences side, there are some nice platforms there, imaging, automation, et cetera. Content screening has always been an area that you guys have been well represented in. Can you just talk to the keys to market penetration and market expansion there and what you think you'll drive forward with that part of the portfolio?

For sure. So I think in terms of the platform perspective, I would say we're the market leader in preclinical research. I think you highlighted some of our key platforms across in vivo imaging, high content screening. We do have lab automation in there as well. We're now with the Nexcelom portfolio, we have cell counting in there -- and so from that standpoint, we like the market. We think that has strong growth and it has for the past couple of years. So we think just from a market growth perspective, it will continue to grow. In terms of why we should maybe grow above market, which I think is what you were getting to I would say. It is couple of dynamics that play for us. One is we do have, I would say, continuous innovation on the actual platform. So in the past, I think, 3 years, we've refreshed all of our major platforms across the Life Sciences space. I would say the second dynamic is, we have a really strong reagents franchise. And so as you think about the innovation that we are doing in partnership with our customers who are looking to bring new drugs and therapeutics into market that reagents portfolio and the speed at which we innovate in it allows the customers in us to go on the journey at the same time. And so I think that enables part of the growth as to why we've maybe been above market. Look, and then I'd say, lastly, we continue to explore commercial partnerships and do other small tuck-in acquisitions. So another one we did this year was Sonova, which is actually an ultrasound platform that we've now added to the workflow -- and so just, I think, continuous partnerships and things like that nature is another reason for growth.

Okay. The life sciences portfolio overall is, I believe, on track for double digits this year. So it's a bit of a difficult comp, but you do have some of the inorganic assets rolling into organic. I think that should help. Where is the confidence overall in the things that you're mentioning on the existing portfolio and then some of the new stuff that comes into organic when it comes to getting to a teens level growth in fiscal '23.

Yes, maybe just one clarification. So when we say 10% organic growth for next year. The assumption is low double digits from Life Sciences and high single-digit from Diagnostics, and that blend will get you to the 10%. And so to your point, though, Life Sciences over the past 3 years through the pandemic, has grown on sort of a mid-teens CAGR. And so for us to hit low double digits. We think we're pretty confident in that assertion. And then, yes, the acquisitions will continue to roll into it. And look, I'd still say we're in the early innings in terms of actually seeing all the commercial benefits and synergies from these acquisitions and the main ones being Nexcelom, SIRION, Horizon, BioLegend. There are still a lot of really exciting things we're doing from a portfolio standpoint that I don't think we started to see and bear the fruits of. And BioLegend obviously a big part of that. Go ahead.

No, sorry, I didn't mean to cut you off. But you did point out -- you're hitting on a couple of the assets that were acquired over the course of the pandemic or something close, which makes it difficult sometimes to parse out what the true trajectory of these businesses is. Are there -- is there anything that you're learning about some of those acquired assets, either positive or negative as we sort of exit COVID and understand more what the run rate level of business is there?

Yes, I'd say so maybe if we stick specifically within like the Life Sciences side of it. I think, again, we're still really in the early innings of what our potential is from a commercial synergy standpoint. And I think the performance of those businesses, if you look on it in terms of pro forma for this year, those businesses in the Life Sciences side are already growing double digits. So -- and they have been -- and were pre-acquisition. So from that standpoint, I think we're very confident in the performance of them. And again, I think we're just scratching the surface of what's possible.

Okay. Okay. Let me maybe switch to the Diagnostic side. China is a focus on the Diagnostics side. It has been for everybody, certainly for you guys. Can you talk a little bit about what you see the trajectory in China being? And then as it relates to next year, how much China improvement is needed in order for you to reach the goal on the Diagnostics side for growth?

So maybe I'll start with the overall diagnostics picture to start with. So I think in the third quarter, Diagnostics, I think did mid-single digits overall, and that was with significant impact from the lockdowns in China. If you exclude the impact from the lockdowns, our Diagnostics business in the third quarter grew low-double digits. And so as we think about the Diagnostics portfolio next year. As I mentioned, we only have the high single-digit assumption in there to get us through our 10% overall organic growth. So it's not like we need a massive rebound in China to go and get that number. And so I think as we double click into China, obviously, it's been pressured this year from a lockdown perspective. As we look into next year, we don't have a crystal ball. I think our assumption going into it is that the first half is still probably a little bit rocky with the lockdown, still, particularly in Q1. But as we look into the second half, we do anticipate getting that back to, I would say, back to a normal run rate, which pre-pandemic that business was growing low-double digits.

Okay. So just not to beat the point too much, but just to sort of crystallize what you're saying, the assumption around your growth rate for Diagnostics in '23. Is that the first half of the year in China could be choppy, but that if the second half of the year looks okay, you're still on track for what it is that you're setting out to do exactly? Okay. Great. Maybe on EUROIMMUN, when the folks that ran the business before you and Prahlad bought that business, U.S. penetration was almost nowhere. And so the pitch -- one of the parts of the pitch anyways was U.S. penetration going a little bit better than where it was today, would be meaningful for growth. Can you kind of catch us up on where you are with U.S. penetration and whether you think there are things in the portfolio that are needed in order to further that.

Sure. So I think when we first acquired EUROIMMUN, I think they were like 5% -- the U.S. was like 5% of their total revenue. I think as we look at it today, it's about 15%. So it has seen meaningful expansion -- that business in the U.S. particularly has grown, I would say, 20%, 30% on average since acquisition. So we've continued to see really strong performance there. I would say as we look to the next couple of years, what's really going to be the difference, I would say, is the innovation of the EUROIMMUN team. I mean it's one of the main reasons why we bought them. And they continue to come out with new assays and you go through and get the FDA clearance and add it to the workflow. I think we're still building out the customer base that we have in the U.S. And then lastly, there are still some, I think some platforms that are going to be coming out in the next couple of years for EUROIMMUN like Accentis that are going to be extremely exciting, particularly in the U.S. market.

Yes. Is the U.S. market one that needs a level of automation that you haven't seen in other regions? Or is it really just a matter of -- because I think that was part of the plan, the year after it was acquired -- is let's see what we can do in order to ease the workflow a little bit, and for some of these bigger labs, allow them to do higher sample volumes. Is that still part of what you think at the company level? Or is it more about just the menu build-out itself?

I think it's probably a combination of both. I think no matter whether in the U.S. or you're in Europe or you're in APAC, everybody wants lab automation, whether it's a large lab, small lab, et cetera. So I think that trend will continue. But I do think, look at the menu expansion and what you're actually offering from a test perspective is still critical to the growth story as well.

Okay. Okay. Maybe on reproductive health, high single-digit growth this past quarter, I'm not going to ask you for a deep dive on the new spinal muscular atrophy product that I saw the press release on. But I do think menu expansion there has been an important part of the growth strategy. So -- and an important part of why you're growing now at a pretty decent clip. Can you just talk a little bit about whether that continues to be the case? Is the Asia region one where menu additions are still viewed as something that's going to be an important part of the growth strategy?

Yes. So I think if you just take a step back and look at our whole reproductive portfolio, there's obviously the dynamic of birth rates, right? And I think for the most part, birth rates are still in somewhat of a declining state. There are some pockets of growth, but for the most part, I would say it's declining. And so how we continue to grow our reproductive health business is really in 3 different ways. The first is menu expansion. And when we say menu expansion, that's coming out with new tests that we are able to offer as a company. And I think SMA is a perfect one, as; we're now the first FDA-cleared company to have that in the U.S. So that is an exciting thing for us. I'd say the second dynamic is actually going in expanding the test that you offer to a specific state. So for instance, today, Maryland [indiscernible], let's just say, 10 diseases. And next year, you're going to work with them to test for 12. And so that's another reason for growth. And then I think the last one is geographic expansion, where there are still territories today that don't do whole scale testing of their newborns. And that's really resonating in different new territories in India or whether it be new territories in the South Pacific and Asia. So those are kind of the 3 pillars of growth that we're really focused on from a reproductive health standpoint.

Okay. And then maybe on the Vanadis side, I know Vanadis is not something that you try to parse out specifically at least as it terms as it relates to revenues from that business. But do you think 2023 is a year where you start to see a little bit more incremental contribution. When that business was acquired, it did have a pretty attractive proposition to it, but the NIPT space is well established on the sequencing side. So I'd love to just hear without getting too deep into areas that maybe you're not looking to talk about. What is the outlook for that product and contributions to growth? And then I guess the follow-on there would be, do you see the potential for cannibalization inside your own reproductive health business if Vanadis were actually to sort of achieve its destiny there?

Yes. So maybe to address that second one first. Look, I think there's always there will be some amount of cannibalization as people determine whether or not they want to go to NIPT. So I think that will be there. Now we're not going to discuss like the materiality of that, we're going to stick to more of the overall reproductive health growth store, and I think Vanadis is a part of that as well. And if you look at the performance of Vanadis, actually this year, it's had significant growth year-over-year. And so we've been encouraged by the performance in 2022. It's not -- I wouldn't say, it's at the material level for the overall company, but it's material to the reproductive health business. And I think that will be the same story that we see in '23. Obviously, the nifty situation in the U.S. is a little bit murky right now. I mean, I know what's going on with California in junction there. But look, I think, overall, we continue to be pleased with the performance of Vanadis and expect it to be, I would say, meaningful contribution to the reproductive health business in '23.

Okay. And then maybe on the Applied Business, mid-single digits, excluding COVID in 3Q, I believe. Not to put you on the spot and have you remember all these numbers, but I think that's what came out of the quarter. It's a tough question to answer, but is that a reasonable growth rate to expect going forward for Applied?

You're talking about Applied Genomics?

Yes, Applied Genomics, what did I say?

You said Applied, but we have 2 [indiscernible] which confuse folks all the time, come we had the old Applied market.

Stuff is going away versus the stuff is staying. Applied Genomics.

Applied Genomics, yes. So mid-single digits, that is right for the third quarter. I think that is probably the right growth rate that we see long term. I think if you look at it pre-pandemic, that's what the business performed at. And then through the past 3 years of the pandemic, we actually grew on, I think, like a mid-teens CAGR in Applied Genomics. I think that was a combination of what we came out with our COVID portfolio, but also, I think we did steal share on the Applied Genomics side. And so we're encouraged by our new installed base. I think we anticipate reagent and service growth to continue to be strong. Instruments, I think, is a little bit more dicey, right? Obviously, the market has been flooded a little bit here through the pandemic. So a little bit more cautious on that. But I think in terms of the reagents and services variable... [indiscernible]

Okay. So the point is on the sample prep side, you think your position in COVID and the way you were able to serve those customers, gave you a foothold that should be sticky and allows you to kind of see follow-through on that business as we enter a more normalized time.

Exactly.

Okay. Great. Let's move to the margins, probably something you're not disappointed to move to, I would imagine. The divestiture associated -- the cost associated with the divestiture is something that I've gotten questions on the last couple of quarters, really, since the summer when the deal was announced. There is a stranded cost element, I believe, to what we're talking about here. Can you just kind of characterize that? And then talk about kind of a similar question to what I asked before in just items of the time line, when you feel like you will have fully allocated what is going to be tied up in sort of -- I don't know if you want to call it temporary, but stranded elements of the business that kind of just need to move away from each other over time.

Yes. So I think from a Margins perspective. I think we've been pretty consistent that the first 12 months post deal closure, we will be a 30% operating margin company. And in that 30% assumption, there is an assumption on stranded cost. And the way is to really think about stranded cost is similar to what I was mentioning earlier in the discussion where it's the sort of these shared resources, shared systems that today it was split between the 2 businesses and then you're going to kind of have that extra cost you're going to have to carry for the first couple of years. And so what we've generally uses as a framework for the stranded cost, it's about 1% to 2% of revenue. So it will be a $3 billion company, and you can do the math from there. But that's included in the 30%. And I think the way to think about our "burndown" or how we grow into those costs, is really how we guided the margin expansion targets over the next couple of years, which is 75 to 100 basis points. And so that is sort of the driving force over the next couple of years of that margin expansion is us growing into those stranded costs.

Okay. How much of that margin expansion comes from the gross margin side? And the reason I ask because some of the things that are being divested were areas where process improvement and productivity can help the margin cause there? If that's going away, does it change the mix and the way in which that 75 to 100 basis points will emerge.

Yes, I think you're going back to when we came out with the 26% operating margin target and most of it was in some -- a good chunk of it was in gross margin. And that was really tied to the business that we're actually divesting. So if you remember, go back, it was all about services and things we do on that nature, really related to the business that we're divesting. I think when you look at the 75 to 100 bps for the new company, that's going to be mostly, I would say, through operating expenses leverage versus on the gross margin side. The gross margin for the new company will be sort of low to mid-60s. And so from that standpoint, we will continue to get some productivity and pricing. But the majority of that operating margin expansion will be through operating expenses, which gets back to us growing into the stranded costs.

Okay. And you bring up a good point on just the 30% and that being a 12-month goal and not necessarily a fiscal '23 goal. So I guess the way that we should be thinking about it are mindful of is the deal close impacts where 23 margins will fall. So if you were to be at the later end of 1Q with a close and then presumably 2023 margins wouldn't necessarily be 30%. Am I thinking about that right?

Spot on.

Okay. Where do you think some of the targeted investments that you make once you're a more streamlined company come in? I mean I think that's part of the pitch too, is right? You'll be more focused, there'll be less businesses that are clamoring for some resources. Do you have a hit list, so to speak, in terms of areas that once you are more focused, you'd like to dig in a little harder on the investment side?

For sure. Look, I think the benefit is now that we just get to put it into Life Sciences and Diagnostics. I don't know that we necessarily favor one more than the other. I think we've been pretty consistent in messaging that our CapEx is going to probably increase for us here as we have some additional capital to deploy. And I think the one that we've really been commonly talking about is the desire for a stronger e-commerce platform. And as you think about the new business model, we'll have high reoccurring business, a lot of reagent sales, kits, et cetera, is sort of the perfect product offering to have in an e-commerce platform. We haven't really made the investment there, just given the fact that it didn't fit the whole old PerkinElmer. And so now that we're a little bit more streamlined and focused. I think that's probably one area that we will definitely invest in going forward.

Okay. What about pricing? Is pricing something that you think you -- are you seeing decent pricing on the instrumentation portfolio, and how would pricing compare in 2023 once the mix is different to 2022 and what you've been able to do so far?

Yes. So I think from a pricing perspective, we've actually seen really good progress this year. If you go back to when I first joined PerkinElmer like 3 or 4 years ago, pricing was not a muscle that we had as a company, just full transparency on that. And so I think that's something that we've shown the ability to execute on now as we put more attention and focus to it. And I think where we have the most pricing portfolio or pricing power in the portfolio is really on the Life Sciences side. Diagnostics side still say we're probably in a little bit early innings of what we're doing there, but we're encouraged, I think, by what's possible for us in the next couple of years. And then I think in terms of just specific commentary. I think this year, we did 75 bps in Q1, 150 in Q2. And I think Q3, it was more than 200 basis points. So we've continued to see a nice step up. And I think as you look out to next year, I think the absolute floor for us from a pricing perspective is at least 100 bps.

Okay. 100 bps realized in 2023.

Yes.

Okay. Maybe just thinking about the portfolio and where it goes from here, I mean, you'll be removing some things, but it also sounds like you're not uninterested in adding going forward as well. So what is the M&A thought from here? Where, when you look at the portfolio and once you have the new business, do you think you might be -- where might there be candidates for adds?

Yes. So I think, first and foremost, we have to close the deal. I think that is still a heavy operational lift that we need to get done here in the first quarter of next year. We're still on track to do so, but it does require a lot of time and attention, and we need to make sure that it gets done appropriately. And then as you sort of think about the war chest and when we maybe deploy some capital, so we'll get about roughly a little less than $2 billion in after-tax proceeds. Then we do have about $1.3 billion of debt that's coming due over the course of the next little 20, 22 months or something like that. And so we'll have to pay that back. But then you've got the free cash flow generation over the next couple of years. So I'd say over the next 2 or 3 years, we'll have more than $2 billion of unencumbered capital to deploy. The exact timing of that, it always takes two to tango. So we'll continue our normal strategy, I would say, on the M&A side. But I don't know if it will be immediate, but we've definitely got assets both in the pipeline on Life Sciences and Diagnostics side that we're monitoring.

Okay. Thoughts on leverage and where that may go or could go for the right asset?

I think our commitment is to stay investment grade. Obviously, we could -- might have a little bit of a flex here in the short term as long as we can pay that down quickly, but we're definitely committed to remaining investment grade.

Got it. And then on the branding side, I mean you're going to change the name of the company. And so that will obviously carry with it some brand differences going forward. How much of what you'll do will remain under or how much of the portfolio that you'll have will remain under the PerkinElmer brand or some of the existing, I guess you call it legacy brands that you have?

Yes. I think that's still really TBD. We're still kind of going through the process of the rebranding. Obviously, we have very strong product brands, EUROIMMUN, BioLegend, et cetera. So that's part of the overall equation we need to solve for in the branding strategy, but it's still TBD right now.

Okay. Maybe just levels of disclosure on the new business. I mean one of the questions that I get is how are we going to model this thing and what will we be able to track? How do you intend -- or do you have a plan intact now for reporting the segments, giving clarity on businesses, et cetera? I mean how should we think about what a model might look like for '23 or '24.

Yes. So I think in terms of go forward. I think all that is still kind of TBD and how we're going to talk about it, both from a profitability standpoint, but then also how we're going to break down the revenue as we become sort of the new company. So I think that's a little bit TBD. In terms of the historicals when we do release the K here early next year, you will have historical P&L financials for the legacy Life Sciences and Diagnostics business. The one caveat I'd put with that is that again, due to [ disc ops ] accounting rules, the Life Sciences piece or the legacy DAS piece that you'll see there. We'll still have some nuances with it, just what you're required to do from an accounting standpoint, but you at least have clean breakdown revenue historically for both businesses.

Okay. Will we understand instrument growth, reagents growth, informatics growth going forward?

I think that gets a little bit back to the revenue piece. I was mentioning. It's a little TBD on how we actually want to talk about both the Life Sciences and Diagnostics company and the growth going forward. I think that -- I think you're referring back to the page we put out at the time of the deal. I was really just to bring a little bit more clarity, too, of just what's going to be left over from a product standpoint.

Okay. Maybe a question on culture because I've come to realize that culture is much more important than I thought than it was when I first started. And certainly, coming out of COVID, that seems to be the case because COVID was such a difficult period. You guys are transforming the company. Can you talk a little bit about how the employee base feels about PerkinElmer and some of the things that might be different culturally now versus 2 years ago, 4 years ago, 5 years ago.

Yes, I think that's a good question. So maybe the way I would think about it is. One, there's a lot going on for everybody in the company right now just with the divestiture. But I think the overall sentiment of our employees is actually really positive. I think, again, regardless of which company they are going to, I think everyone kind of believes in the strategy and the vision for it. So everyone is kind of on board with the overall mission. And then I'd say, look, I think Prahlad and the rest of the leadership team, we've really started to push on maybe 2 things across everybody in the organization from a cultural standpoint. One, I think it's alignment around a common mission or a goal. I think that has been, since Prahlad taken over, he's been very clear on what the strategic vision and goals of the company is and rallying everyone behind that. And then I'd say the second big cultural thing is really empowerment and accountability. So empowering folks to do their job to continuously grow as individuals, but then holding each other accountable to doing your part of the overall PKI team. I think those are 2 things that we've really tried to push from a cultural standpoint.

Makes total sense. Good mission to have. And I think it's a good place to finish. So Max I'll just say thanks a bunch for joining us. Have a happy Thanksgiving if I'll see you before that.

I appreciate you too Dan.