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

Perfect. Hi. Good afternoon, everyone. This is Rachel Vatnsdal from the life science tools and diagnostics team here at JPMorgan. I am joined on stage by Revvity and Prahlad, the CEO. So as is typical, this is going to be a 40-minute session. It will be roughly 20 minutes of a presentation followed by 20 minutes of Q&A. For any of you in the audience have questions, feel free to ping me. With that, I will pass it off to Prahlad.

Good morning, everyone, and thank you, Rachel, for inviting us again to share our exciting story. And I also want to sort of commend you and your colleagues for being able to pull this off flawlessly year-over-year. Before I begin, I wanted to invite your attention to our safe harbor statement and encourage you to visit the Investors section on our website, revvity.com for any forward-looking statements and additional disclosures that are made here today. For those of you who might not have been following us or our story might be wondering who Revvity is. Well, it's a new company. It's 8 months old and it was born as a result of divestiture of 1/3 of our legacy analytical instrumentation and enterprise services business. Along with it, we divested our legacy PerkinElmer brand name, which essentially gave us an opportunity to create a new identity, brand and corporate culture, which was more akin to who we are as a company and what we are going to look like in the future. And that has been our singular focus as we have transitioned into Revvity, which is how do we stand side by side as a scientific partner to our customers and help revolutionize life by solving some of the most complex diseases and challenges that medicine faces today. Over the next 15, 20 minutes, I'll try to give you a deeper dive into what Revvity is if you may ask that. It is essentially nearly a $3 billion annual revenue company focused on the high-growth end markets of Life Sciences and Diagnostics. In those markets, we focus around specialized areas, which I will delve deeper into today. 80% of our revenue is recurring in nature and 20% of it is from high-value differentiated instrumentation platform, which not only acts as a bedrock of innovation for us, but also is a strong pull-through -- acts as a strong pull-through for the consumables side of our business. Breaking down the 2 businesses, starting with the end market of Life Sciences. If you look at this slide, for those of you who are following analyzing or investing in life sciences companies, this is not very similar to what you might be used to seeing. This differentiation is intentional. Our focus is on preclinical research and development. We do not sell commodity products that are used in routine lab care. Our focus is around providing technology capabilities and tools to our customers that help accelerate and make it more efficient the process of drug discovery and bringing it to the clinic. Similarly, if you look at our Diagnostics business, it's about $1.4 billion in annual revenue. Again, this is not similar to one of the large diagnostic companies that you might be used to seeing. Our focus is around differentiated, around solving and identifying complex diagnostics diseases, whether it's in newborn screening, prenatal latent tuberculosis, autoimmune, allergy and next-generation sequencing sample prep, where we are focused on solving some of the more complex issues and identifying diseases and providing insights very early in the phase. So as we look at the chasm between research and diagnostics, our focus is how do you reduce that chasm gap as medicine gets more and more personalized. So our journey begins early on with the researcher and our customer by providing them technology that they can use to develop their drug and bring it into the clinic. And then we have an opportunity also to partner with our customers by leveraging our lab infrastructure around the world to identify the patient population who might be the right ones for those drug candidates. And eventually, we also use our in-house technology then to develop diagnostics or companion diagnostics, not just for identification of diseases, but also for testing the efficacy and for follow-up. So as you can see, we try and be a partner to our customers through the journey of drug development and into the clinic. What you did not hear me say is that we are a partner for our customers in the clinical trials or as they manufacture drugs. That's not where we play. Like our focus is more around the innovation and discovery phase of it. And maybe I'll take an example and walk you through as to how does this work in reality and in practice. Our BioLegend scientists work side-by-side with researchers as an example, to use or develop an antibody, which becomes a building block for a drug candidate. Then this drug candidate goes through the animal model testing phase for testing its efficacy using our recently refurbished preclinical in vivo imaging platform and associated consumables. The efficacy of this drug and the activity and reactivity of it to various targets is then tested using a high-content screening platform. And then right before it goes into humans and clinical trials. We use our cell counting and cell imaging platform to assess the efficacy of these drug candidates. Once this moves into the clinic, we can then work with our customers in leveraging our lab infrastructure in every continent on the Asian, European and American continents to identify patients who might be best suited and who are the best and ideal candidates for testing these drugs. Similarly, we might be using the same antibody from BioLegend or a similar antibody and developer diagnostics that can then work as a companion diagnostic for that drug candidate to be used for testing the efficacy and for further follow-up. So as you can see, what I've tried to lay out is how we partner our customer throughout the journey of drug development as it goes from early discovery all the way into human clinical trials. So the question is then, how does this differentiation that I have talked about actually result in a differentiated financial performance. And that is focused for us around 3 pillars. One is the approach that we use working with our customers, which I talked -- touched briefly upon. The second is around products. We have to have an innovative portfolio, and I'll talk a bit about it and some examples around that, that helps foster that. And the third really is the positioning. How do we position our portfolio and the transformation that we have gone through to help in a financially differentiated performance. Starting with our customers. I talked about the fact that we -- they are a partner in the journey. But the beginning stage of it is the technology that they use. And we try to provide them cutting-edge technology which they can license and once they have brought that in-house, they use the capabilities and tools that we provide for developing that drug candidate. One example of that was what we announced publicly in the middle of last year with a very important customer of ours, wherein we licensed our Pin-point base editing technology for some disease areas where they are using for their internal drug development process. Similarly, we are now moving beyond providing preclinical research antibodies to developing GMP-grade antibodies, cytokines and other consumables that our customers might need. But essentially, our focus is on how do we provide streamlined workflows for our customers so that it makes their jobs easier, i.e., more efficient, more productive at a lower cost. That is where we are working with our customers. From a product perspective, for those of you who have been following us, might obviously be aware of the portfolio transformation that we've gone through. We post divestment of 1/3 of our business. We don't have any chromatography equipment. You don't hear us talking about LCs, GCs, mass specs, UV-Vis thermal all of that is not part of our portfolio anymore. Our focus is around high-value differentiated technology, which our customers must have. And our focus is how do we bring that innovative differentiation into our portfolio early in the phase. One example of this is the recently launched Quantum GX3 micro CT platform this imaging platform for ex vivo and in vivo imaging provides the maximum sensitivity that helps our researchers get further insights into the disease profile much earlier. Another example I'll give you is on the diagnostic side of the portfolio. Obviously, our work around newborn screening is well known. But we recently launched an Eonis Q platform which is nothing like the automated random access large platforms that you would see in labs, but it is a fully integrated workflow that provides the consumables, instruments software for complex rare diseases like spinal muscular atrophy and SCID, which was recently launched in Europe, as I said or the example around our Revvity Signals portfolio, which you will find in every pharma preclinical discovery lab. It is used for analysis and research, and it is not related or integrated with any particular instrument. So it is ubiquitous in the lab and these portfolio capabilities allow us to be differentiated with our customers. So the question really comes that how do you position this portfolio. We've obviously done a lot. We've acquired more on a dozen company over the past 24-plus months, which has given us an opportunity, and this has been a diligent effort on our part is how do we build a portfolio that allows for a differentiated financial performance and allows for a profitability profile, which is different and attractive. One way to think of it is if you just look at our immunodiagnostic reagent, life sciences reagents and software. This is the highest growth part of our business, which is growing to grow double digits and provides an incremental profit margin. So the natural growth of this business is a natural margin expansion opportunities that it provides even before we start picking on the low-hanging fruits around cost and synergy opportunistics. This is, again, built on a platform of an instrumentation portfolio, both on the Life Sciences and Applied Genomics side, which delivers strong cash flow and more importantly, also has strong organic growth. And as I mentioned earlier, it also continues to be a bedrock for pulling through more and more consumables which is on the top side -- on the top side of the chart. And all of this is also any opportunities that we have around our strategic partnerships drives additional upside to the underlying market growth that we have mentioned. Maybe one example from a regional perspective to illustrate this, right? China obviously had a tough year last year from a market environment, not just for us but also for our peers. 17% of our revenue comes from China, but one fact that is overlooked is how differentiated our portfolio is in China. And maybe this example will give a deeper insight into that. 10% of that 17% is on the diagnostic side of the portfolio where with autoimmune and allergy, we continue to see growth. 7% of it is on the Life Sciences side. Even in a tough -- because of the tough market environment, as instrumentation saw pressure last year in China. Now more than 50% of the Life Sciences side of our revenue is coming from reagents. So it's not that we were not impacted or are totally immune to challenging market conditions, but in 2023, we grew mid-single digits in China. None of our peers are very -- maybe 1 or 2 of our peers can talk about growth and not declines or significant declines in China. So I think China for us is an example that shows that how our differentiated portfolio allows you to have a differentiated performance in a region. So looking ahead, while we'll talk about the 2024 numbers during our earnings call on February 1, I do want to sort of take a step back and talk about facts that we want to focus on our attention on in terms of strategic areas. Look, we've done a lot as a company some say too much. But we've gone through a portfolio transformation, which I would bet you will be hard-pressed to find a company that has gone through the level of transformation that we've had from a portfolio perspective in that short period of a time. But really, we are just scratching the surface in terms of the opportunity all of this provides. We've done a dozen plus acquisitions in less than 21 months. And our #1 driver for growth is going to be the cross-company innovation. We are still just plucking on early fruits as we bring these acquisitions together and the technological synergies that these provides as we put the portfolio together. I talked about the number of acquisitions, but we cannot lose sight of the fact that off the bat post divestiture, Revvity was delivering 28% margins in the high 20s and close to 30%. And again, this is without us having delved very deep into the cost synergy opportunities that are there in front of us, both from a top line revenue synergies and from a cost perspective. On the third pillar, where we will continue to keep our focus on is around investment, both organic and inorganic. We'll continue to deploy capital diligently. We've got $700 million of debt due in the second half of the year, which we expect to pay. On the organic side, I talked about the GMP capability that we are building. E-commerce is another platform. We just launched the MVP of our e-commerce platform in December of this year. Now imagine with all the acquisitions that we have done, some of them are delivering 50% of the revenue from an e-commerce platform and some of them are at 3% to 5% putting all of this on an integrated e-commerce platform, which we will fully launch at the end of the first quarter or early second quarter, will give us a tremendous opportunity to bring our full product portfolio on a singular e-commerce platform. And not only does it give the obvious OpEx synergies that would come with it over a period of time but also near-term, the revenue synergies that it brings with giving you clear insight to our customers of our full capability and tools that we are able to bring. And the last aspect that I'll touch upon on the investment side is we'll continue to be opportunistic and diligent around our share buyback, like we were in 2023. So what does all this mean? As we look at our longer-term profile, at the end of the 3Q, when we did our call on 1st or 2nd of November. We had talked about the fact that we'll take the next few weeks to analyze our longer-term profile. In hindsight, when we gave out our medium-term outlook post divestiture Life Sciences was growing double digits from 2022. And this was during the COVID phase, and the market spending was in an exuberance phase. And that now in hindsight, we realized it was not normal. But neither was 2023, the steep decline that we saw in 2023 was not normal either. I'm very confident that the market is going to turn around and get back to what is a more normal phase of growth, which we expect to be in the 4% to 6%. And given the differentiated portfolio that I have laid out to you, hopefully, we feel very confident of being at least 200 bps above that market in terms of growth, which we also expect to give at least 75 bps of operating margin expansion, as I laid out to you, which should result in double-digit EPS growth. So hopefully, that gives you a sense of who we are as a company and what Revvity is all about. Yes, we are in clinical diagnostics. Yes, we are in Life Sciences and Research. But in the markets that we play, we remain differentiated, and that is why we feel strongly confident that we will deliver differentiated financial performance in the years to come. Thank you for your time, and I look forward to the Q&A session. Thank you, Rachel.

Perfect. So first up, just on the 4Q numbers. That came in a little better than expected, really at the high end of the outlook. So can you talk about what specifically drove that outperformance? You were anticipating low double-digit declines in Life Sciences and low single-digit declines in diagnostics. So by segment, can you talk about some of the 4Q trends that you saw in 4Q there?

Yes. I would say that on the 4Q numbers that we released this morning, I think we were slight -- I wouldn't say that there was anything that was spectacular, but I think in all the end markets that you talked about, we were slightly better than what we expected to be and the way we expected it to play out. I think particularly the only thing I will say is that America showed a bit more resiliency. We did not see any year-end budget flush or anything to that effect, which I would point out to say, and that was the causative factor. But I would say we probably were slightly better than what we saw and strong execution in what we need it to do.

Okay. That's helpful. And then just on the new LRP in that 6% to 8% growth rate. First, can you kind of talk about how did you arrive at 4% to 6% being the underlying market growth rate? And then what does your 6% to 8% really assume for Life Sciences versus Diagnostics and kind of compare and contrast that to the prior LRP?

Yes. Sure. I think what you've got to go back and look and learn from what you've seen in the market play out, right? As I said, what we saw in the 2022, 2022 was not normal and neither was last year. So when you look at a historical performance over a period of years, you see in the markets that we play. Historically, that market has grown 4% to 6%. And -- so that is sort of what we lay out as the platform for what that looks like. In terms of -- what was the second part of your question, Rachel?

Just around the Life Sciences versus Diagnostics assumptions in there? And then how does that kind of compare to the prior guide?

Yes. So initially, when we had, I think Life Sciences, we had growing in low double and Diagnostics, we had growing in high single -- and right now, just as we calibrate this, we expect Life Sciences to grow high single and Diagnostics to grow mid- to high single. So sort of that's the framework to think of.

Okay. That's helpful. And then just in terms of the margin and EPS assumptions within the new long-term guide. So the 75 basis points of margin expansion, double-digit EPS growth your prior long-term assumptions, really call it for 75 to 100 bps and then 13% to 15% adjusted EPS growth. So obviously, lower revenue growth impacts some of these. But can you walk us through how should we be thinking about the operating leverage in the business over the long-term? And does that margin expansion number really benefit from some of the cost actions that you've talked about implementing in the next year or so?

Yes. So some of that, obviously, we've sort of accounted for that as we've laid out the numbers. Look, I mean, obviously, if the market growth is going to be higher and the organic growth is going to be higher. The margin expansion is going to be more accretive and incremental. And if it's -- consequently, if it's going to be lower, it's going to be lower. But I think given the way we've thought through the only difference between what we had laid out to now is the lower market growth number.

Okay. That's helpful. And then just on China, given surprise asking a China question here. Just given how pressured that market has really been, could you just talk about your confidence in the long-term in China given we've seen VBP, local competition, anticorruption and just many of these lingering questions as we head into 2024. So what's your conviction in underlying demand in China? And then what growth rate are you assuming in China an updated LRP?

Yes. And Rachel, this is, I think, one thing that I've been trying to shout from the rooftops, our portfolio is different. Our portfolio is different in China and other markets. And I think the results should speak for itself. We grew mid-single digits in China, as I said. And then I think that is a concerted effort. We expect China to grow for us in line with the long-range plan that we have laid out. And that is just based on the fact that whether you look at immunodiagnostics in that market, our Life Sciences reagent portfolio, software, all of that is sort of account for the growth rate. if you take one example of VBP that you mentioned, right? I mean we -- it's not that we've not been feeling, seeing pricing pressure. We've seen mid-single-digit price declines year-over-year. But our focus really is how do we bring the differentiated tests into that market where we don't have that much competition, and there is a necessity to have that product in the marketplace. That is strategically how we had tried to manage China. And this has gone for the last decade since I've joined the company, and we did that on the Diagnostics side earlier on, and now we are doing it for the company.

Great. That's helpful. Then I wanted to ask about some of these pharma biotech trends that you've seen in 3Q, you noted that the weakness in pharma biotech continued to really worsen throughout the quarter. So now that you've kind of gotten through the end of 4Q, can you talk about how it played out relative to your expectations? Did you see any type of budget flush-type dynamics? Were there more site consolidations? And again, is there anything structurally that's really shifted within those pharma and biotech customers for Revvity.

Yes, Rachel, I mean as I mentioned, at the end of -- on the 3Q call, when the customers came back post the summer vacation, there was this -- as we saw a sudden drop, not just us in the whole industry saw it. But I think -- and if it comes back to what was the cause for it. I don't think there is one point or one pinpoint or one silver bullet you can point that, that was what caused it. I think it was a range of issues. One of them is obviously the impact -- the federal impact around interest rates, cost of capital. And I think that did play in -- that does play a role. But I think the #1 factor also goes back to the fact that customers, pharma biotech, clinical labs had done a significant amount of purchase over the past 2, 3 years. During the COVID period, the purchases that were done needed to get calibrated. And I think that was one of the bigger driving factors, which is what we saw in 2023 and likely will play out in 2024, too.

Perfect. That's helpful. Speaking of 2024, I wanted to talk about that initial framework that you had provided during your last earnings call, really pointing towards revenue growth in line with 2023 around, let's call it, 2%. So can you kind of walk us through the core drivers behind this potential growth assumption of the framework of where we could land on 2024? And then what could be some of the swing factors that would get you to the high end or the low end of that theoretical range of outcomes?

So I would love to do provide more specifics around the 4 -- during our 4Q call at the end of the month, but I will address a couple of things. I think as you pointed out, one of the likely scenarios is to 2% scenario. And essentially, in that scenario, we expect it to largely play out and taper out into the second half of the year when we start seeing recovery. I think in terms of the swing factor, the one that could really move the needle Rachel would be the pharma biotech spending. And I think that's the one I would sort of keep an eye out on.

Okay. That's helpful. I appreciate we'll get full guidance in a few weeks here. But maybe just on pacing quickly. We've heard from many of your peers in the sector that it's obviously going to be a more back half-weighted year. But can you spend a minute just talking about how you could see that reflection in kind of the pace of recovery playing out in 2024.

I would wait till the end of 4 -- till the end of the month, just 4 weeks, Rachel.

Fair enough. I had to try. Maybe just Shifting over to Life Sciences segment on life science instrumentation, that declined high single digits during 3Q. And you noted that you expected double-digit declines in 4Q with really no sequential volume improvement. So -- can you talk about how did 4Q play out relative to your expectations? Did you see any of those budget flush dynamics? And then how does that set you up for '24?