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

Well, thank you, everybody, for joining us. Excited to have Max from Revvity here. We'll spend about 40 minutes on a fireside chat format. And yes, I'm Patrick Donnelly, the tools and diagnostics analyst here at Citi. So Max, I don't know if you want to give any opening remarks. Maybe we can just -- you guys obviously reported relatively recently. Earnings is somehow still going on for the group. You guys gave a pretty balanced '24 guide, 1Q starting a little slower as is the one in Life Sciences. Maybe you just want to talk about the expectations for the year, and then we can kind of dive into some of the specifics that you walked through.

Yes, sure. Thanks for having us, Patrick. I think as you look at -- obviously, just even starting with 2023, I think, obviously, it was a tough year, more challenging than what we had anticipated on the onset of the year. If you look at sort of the trends in what we noticed, really, it was kind of around the June timeframe where we saw that initial sort of slowdown, particularly from our pharma biotech customers. And then once everyone sort of came back from vacation, in the summer months in September was really where we saw an even more, I would say, incremental step down in sort of their purchasing behaviors. And then really as sort of the fourth quarter played out, it was sort of a consistent, I would say, cautionary tone throughout each of the months. We were maybe slightly better than what we had anticipated coming into the fourth quarter. But it wasn't necessarily any inflection points across those months. I would say it was relatively consistent. That's more or less how we really believe the demand environment is going to play out for that customer group here over the course of 2024. So from a guidance or outlook perspective, I don't think we're expecting some significant ramp-up. There's obviously some different quarter dynamics just with comps and other things. But I think from an overall perspective, our stance -- our outlook for '24 sort of embed a similar market environment than what we really experienced over the past 4 or 5 months.

Yes, sure. And I guess on that cautionary tone, it seems like we're seeing a few biotech deals a day seemingly. I know we chatted a little bit about it. How do you think about just that backdrop? Is it -- there's a little more confidence in the market with the window at least being temporarily open? Maybe just kind of refresh how you guys think about that biotech segment? And how quickly, if at all, we could see a turn with things at least seeming pretty positive on the capital markets?

Yes, for sure. I mean I guess if you really look at that, most of that is, I would say, pre-revenue biotech-type funding. If you look at that customer group for us, it's about 10% of our Life Sciences business from a customer group perspective. I would say, obviously, '23 was a very challenging year for that group, it was down sort of mid-20s percentage wise throughout the course of the year. So we've got easier comps dynamics, just for that customer group overall. And then when you add on top of that, some of the increased funding we've seen here in Q1, we do expect that customer group to perform better. Our portfolio is positioned well to take advantage of that. But I would just say, again, overall, we'll have to see how quickly that sort of additional funding translates to actual orders and purchasing. But obviously, if there's more biotech, that would be a challenge for us.

Yes. Yes. Makes sense. And then maybe we can start on the Life Sciences, and we'll jump into the Diagnostics. But the Life Science piece, you guys, among others, saw the instrument piece feel some pressure certainly. We've heard some maybe slightly positive tone in terms of data points on instruments from some of the peers. But -- and maybe you can just talk about the backdrop there, what the expectations are? And again, maybe what could turn things around a little bit on more of the capital side I guess? I know not the biggest piece, but in terms of the instrumentation side.

Yes, for sure. So if we look at our instrumentation on the Life Sciences side, it was down high single digits in 2023. We have similar expectations for the business in 2024 being about down high single digits. I think if you look at the different pieces of that portfolio, I wouldn't say there's one particular piece of our instrumentation business that's standing out from another. I would say that geographically, in '23, we still performed relatively well within China. It was still positive growth for us from an instrumentation standpoint for the full year. Obviously, as the stimulus kind of trailed off in Q4, that presented some headwinds. We're anticipating, I would say, a relatively similar demand environment globally for instrumentation in '24. Again, you have the comp dynamics between the first half and second half. But I think overall, we're expecting a relatively similar dynamic from -- that we had exiting the fourth quarter. And then I think if you look at just broadly what sort of the different inflection points be, generally, our order book is somewhere between a quarter or 2 in terms of lead time. So I think that's a trend. Again, we'll continue to monitor. But from an external standpoint, we are expecting really kind of similar demand levels we see in the past several months.

Yes. And when you look at your instrumentation portfolio, I mean, are there certain areas where you're seeing maybe more impact than others? Maybe just kind of talk through the portfolio and where you're seeing the most impact?

From the pharma biotech customer group in particular? So if you look at our Life Sciences business, again, the 3 main pieces of it, you have the reagents, which is the predominant, more than 50% of Life Sciences business. Instrumentation is about 30% of the overall portfolio, and then you've got the remaining pieces is our software business. When you look at where we've sort of had or seen some of the impact, I would say, specifically around the instrumentation that's heavily tied into their CapEx budgets, I think from that standpoint, we've already kind of addressed some of the market dynamics there. I would say on the reagent side, again, if you look at the trends that we experienced through '23, it wasn't really into or that September time period where we really noticed sort of a step change in the customer behavior. Our reagents business is predicated on, I would say, consistent research activity levels. And what we've really noticed in September is there was a lot more noise from our large part pharma customer groups around site relocations, pausing of certain projects. And so from that standpoint, it's been a little bit choppier really since September. I would say the Q4 demand was relatively consistent. So for our reagents business, that is sort of a lead indicator for us. We need to see a little bit more of a stabilized environment in terms of lab activity, but the business continued to perform well overall. Mid-single-digit positive growth in '23. We're expecting a similar output for 2024. And then if you look on the software side of things, '23 we had foreshadowed before the year even started sort of agnostic to the market. It was going to be a tough year for that business, just given the timing of some of their contract renewals. That dynamic flips in 2024. We have strong visibility into that business. So our software business will actually go from declining high single digits in '23 to growing high single digits in '24.

Yes. Maybe we can kind of hit there on the software piece. Can you just talk about kind of the mix? You mentioned the contract renewals. There's also some of the business going out and get new contracts. Can you just talk about kind of that split and then you kind of hit on you feel good about the visibility. Maybe just talk about the visibility in each of those. And obviously, the recurring piece is going to be easier. But in terms of going out and maybe getting some new contracts that have been in there as well.

Yes. So maybe just even to step back more rather to talk about our overall Signals business. I think it's probably one of the more underappreciated aspects of our portfolio. Again, now it's part of the transformation. It's a bigger piece of the pie. So we are trying to be able to highlight it more and spend more time discussing it. That business is about $200 million in revenue. I would say, historically, over the past 4 or 5 years, it's grown in sort of a mid-teens CAGR. So it's a business that is going to continue to grow in the Q2, especially as we start continuing innovating and launching new software releases. If you look at that business, though, there's a couple of different dynamics that play out with software. One is that from a revenue recognition standpoint, it depends whether you're selling on-prem and SaaS, that causes a lot of volatility. That's what we saw play out in '23. If you look at the underlying growth of our software business in '23, it actually grew high single digits. It's just a revenue recognition standpoint in terms of, again, when your contracts coming up for renewal, is it an on-prem solution or is it a SaaS offering that you're selling. So we feel really good about that business. As we look into '24, about 85% of it, I would say, is strong visibility and more or less known either from a renewal standpoint or it's just a SaaS waterfall or backlog. So from that standpoint, we have a high degree of confidence, particularly around the renewals, given that we generally have a upper 90s percent goal. So from that standpoint, it is more or less, I would say, a high degree of confidence. There's generally about 10% to 15% of go get in terms of new deals. I would say for '24, we probably have less than that assumed in our guidance right now as the new deals have been more challenging just given the current funding environment. But on a normal year, it's generally about 10% to 15% of their growth targets is new deals.

And I guess with those go gets, I mean, is it just kind of the pharma budget? How do you think about what backdrop you need to kind of see that come back a little bit? And what are those purchasing decisions look like in terms of conversations?

Yes. I mean again, it depends on whether they're buying a SaaS offering from us or if they're buying on-prem. If it's an on-prem solution, that's sort of the customer is more of a CapEx decision. That's going to be heavily tied to sort of their CapEx budget. If it's a SaaS, it's a little bit more easier from that standpoint, from a budgetary standpoint. It's operating expense for them and certainly not going to have a material of an impact. So from that standpoint, I think it really does depend on what we're selling. And I think what we've seen from customers is on the larger purchases, similar to the instrumentation side, they're a little bit more cautious right now. And so that's what we factored in for our guidance for '24. Obviously, if that comes back stronger, that's going to be additional tailwind for our software business. But on a foundational level, I think our software business, we remain incredibly excited about the future.

Yes. And yes, we'll spend more time on margins in a little bit. But just in terms of the software piece, how do you think about the margin profile there? Typically, when you think software, you think pretty high margins. How should we think about particularly the impact of the decline last year and some growth this year.

Yes. So I mean, even if you just step back more broad, I mean, our Life Sciences margins last year were mid- to upper 30s percent from an operating margin standpoint. So that business overall has a very strong margin profile. Our software business is accretive to our overall Life Sciences, so that can give you a little bit of a direction in terms of its margin profile. I think the other piece then, too, is if you have decline in that business, yes, it's going to be a headwind from a mix perspective for sure. I would also say that the margin profile of our software business is one of its biggest differentiator. If you look at it in context of some of the peers, most of them are closer to breakeven. And so from that standpoint, we've got, I would say, a really mature business, at least from a margin profile perspective.

Yes. Okay. And then maybe we can shift over to the reagents piece, like you said, it softened a little bit late last year. Maybe just talk through the outlook there, what you're seeing maybe even on the competitive side. There's obviously been some changes broadly on kind of the proteins, reagents, antibody side. So yes, maybe just kind of talk about that business and expectations as we go forward here.

Yes. So again, in '23, our reagents business on the Life Sciences side finished in a positive mid-single-digit range. I think the expectations for '24 is a similar assumption from a demand environment perspective. I would say if you step back and kind of look more broadly though in our overall reagents portfolio, the fastest piece of the portfolio continues to be the performance of the BioLegend product line. I think as you look at BioLegend, it's a little bit different, I would say, than the legacy gravity reagents portfolio in the sense that it has a much higher academic and government revenue exposure standpoint. So that continued to be really, really strong growth. I would say the one area of the reagent portfolio that really stood out was the performance in academic and government with BioLegend. That's really kind of their DNA, right? They're at the cutting edge of technology and science. They work very closely with the key opinion leaders across the academic and government research sites. And so I think that will be an area that continues to grow ahead of our overall reagents portfolio. Other than that, though, I would say it's across the rest of the portfolio and really geographically, it's relatively consistent demand.

Yes. And you touched on the academic and government, we certainly get a lot of questions about this year, everything from continued resolution to some of the different geographies. How are you feeling broadly on the academic government spend? To your point, it held in really well last year across the industry. What's the outlook? Have you seen any pause in terms of that customer base?

But from a pause standpoint, I would say probably not. But again, if you boil it back up to our overall academic and government exposure, we are a little bit different, I would say, than the broader peer set in that we actually have a majority of them almost coming from the BioLegend reagents. And so from us, from a CapEx standpoint, with the academic and government, it's a much smaller exposure for us overall. They did have easier comps in '23. You had the energy crisis in Europe that made 2022 challenging. So there were definitely some comp dynamics that played out in 2023. I think as we look at 2024, I would expect -- our guidance assumes more of a muted sort of growth on the instrumentation side. We think -- obviously, right now, I think funding will be, I think, relatively consistent year-over-year from that standpoint. And then obviously, we're going to have, I think, stronger growth in the reagent side of biologic.

Yes. Okay. Yes. Maybe on biologics, obviously, that was a big deal a few years ago, I guess, at this point. Maybe just talk about the trends you're expecting when you bought it, it seemed like the whole market was growing pretty healthy in the double digits. So a little bit certainly, some peers slowed quite a bit. You guys held it actually a little bit better. Talk about why you guys were able to outgrow seemingly the market and some peers and how you're feeling about that business going forward?

Yes. Again, I think a lot of it is due to the BioLegend team and the biologic performance. Again, I think where the BioLegend team really differentiates themselves is with their -- really their customer service as well as their product portfolio. But from a customer service perspective, I mean, again, I already mentioned a little bit that they are really sort of viewed as the best partners for the key opinion views. And so they're sitting at the research sites at the bench stop with the researchers. But then also from a next-day delivery standpoint, more than 90% of their shipments are next-day delivery. And we've got, I think, a really strong customer set that they are very closely tied in with. I think that's really their biggest differentiator from that standpoint. And so I think the rest of the portfolio, though, I think we'll continue to see solid performance, but again, it really comes back to the performance of the BioLegend.

Yes. And with BioLegend, have you seen -- do you guys think there's any share shift going on with the last couple of years, let's say?

I would say in pockets for sure. I think we are probably taking share really on the content development side. Obviously, as you mentioned, there have been some recent acquisitions. We think that's probably a net positive for us, just given that there will be naturally some business disruption any time you're going through an acquisition. So I think, if anything, that might be a little bit of a short-term benefit for us. Longer-term, I think, again, BioLegend positions itself very differently than some of the peer sets. I think they're not trying to be the catalog of every single antibody across all scientists. I think they are very focused on specific areas of science where we can really have a differentiated product and outcome for our customers.

Okay. Yes. Then maybe on Life Sciences specific in China, maybe just talk about what you're seeing. Again, we had an instrument player this week come out and say it was actually a little better than they expected. I haven't heard that about China in a long time. So what do you guys see in there? What are the expectations specifically in Life Science? Well, obviously get to the Diagnostics in a little bit. But yes, on the Life Sciences side. Instrumentation, how you thinking about China?

Yes. I mean I heard the same comment. I think it might have been better than expectations, but I think the numbers overall are still painting a very challenging picture from a Life Sciences perspective in China. I think the couple of dynamics that really play off for us here is, one, again, majority of our Life Sciences revenue in China now is on the reagent side. So we are less indexed from an instrumentation standpoint. I think if you really think about the broader growth that's happened in China, specifically on the Life Sciences side, it has been tied to stimulus. I mean that is just has been a natural funding mechanism in the China market. It's kind of the first time we've really seen it completely pulled out from a funding perspective. And so I think that's more or less our assumption in '24 is that the stimulus remains relatively muted in China. And so we'll see how that plays out. But that's really been a change. And it can't be a permanent change. They're going to need to continue to put that stimulus back in if they really want to, I would say, accomplish their goals from a health care and life sciences perspective. So we think it's a temporary thing, but I think '24, you'll continue to see really more of a muted funding environment from a life science perspective in China.

Are you guys thinking about maybe just parse out, should reagents come back first, instrumentation? How do you think about just the China market in terms of what that recovery path could look like? In -- to your point, it doesn't sound like much recovery this year is baked then, but just as we work our way through the year, what we should be looking for over there?

Yes. I think whether it's within China or outside of China, our reagents portfolio is sort of our best leading indicator, at least, I would say, of a more stabilized lab activity. I think the instrumentation generally tends to follow that. So again, we'll see what happens from a funding perspective and with the stimulus. But again, right now, we're not really assuming some huge return from a perspective.

Yes. Okay. Maybe a good time to transition to the Diagnostics business, China, always topical with diagnostics. Obviously, some volatility last year with some of the shutdowns. But what are you guys seeing there? And just the expectations in the DX business in China, obviously, a big piece, the immunodiagnostics part. So yes, maybe just kind of talk a little bit about that.

Yes. So. Again, if you look at our overall China exposure, 17% of total company revenues. 10% of that 17% is on the Diagnostics side. And then even within that, the biggest piece is our immunodiagnostics business, which is the autoimmune allergy and TB testing. 2022 was a really challenging year for that business. You had the COVID lockdowns. '23, we had mentioned that we would expect the sort of return to normal volumes that happened at the end of the second quarter. That played out as anticipated. We continue to see more normalized volumes throughout the second half of the year. And so we think that trend is going to continue in '24. Our assumption on immunodiagnostics side in China, it's mid-single-digit growth in 2024. That mid-single-digit growth, though, does have about a 500 basis point headwind from our legacy immunodiagnostics product lines, where we've changed our go-to-market strategy, tying it into a question we get all the time is around what are you guys seeing from a [ BBP ] perspective? I think we've been pretty consistent in saying about 10% of our immunodiagnostics business in China had been impacted by BBP. That's the legacy piece of the portfolio that we've changed our go-to-market strategy. So we are now leveraging an indirect channel. It's going to be better from us from a profitability standpoint, but we will have a little bit of a hit from a growth perspective. And really, the big difference there is that piece of the portfolio, I would say, was much more commoditized immunodiagnostics testing, so things like infectious disease, STDs, et cetera. It was a much easier part of the portfolio for the hospitals to put in BBP. There's more local players, it's less differentiated science and technology. The rest of our portfolio, there's still a gap between the local competitors and what we are offering from an autoimmune and allergy perspective and even though TB. So -- we don't think that, that's going to be coming an immediate focus from a BBP perspective. Again, it's just -- it's -- there's differences between our technology and the local players, and it's also a much smaller piece of the overall hospital's budget. So it's just lower in the total pull from a BBP perspective.

Okay. So on that shift to direct to indirect, we've got a few questions I'd love to just spend a little time on. So it's essentially some of the less profitable revenue you have over there, a little bit of a change in strategy, take the near-term headwind, increase profitability. Is that the general idea? Keep going to be a more attractive stuff a little closer to you guys?

Yes, exactly. So I think really the benefit that you get from an economical standpoint is, one, you don't need to be paying a direct sales force anymore. Obviously, you have the trade-off with the ASP you get by selling through a distributor. Then the other piece is just shutting down any R&D related to the portfolio as well and just sort of recognizing that it's not an area that to be investing in. So that's really where you get the economical benefit. And then obviously, again, the ASP is what's driving it down from a growth perspective.

Yes. And then the [ VBT ] point, certainly get a lot of questions there around you and other folks as well. Is it -- do you feel like you fully have it encompassed? Are there more -- is there potential for more legs? Or is it, hey, we fully understand this? We've got the impact, and it's not in the rear view, but it is what it is at this point. Are there more legs of this to come?

Yes. I don't know if they'll ever could on hope one would sort of VBT or the impact. I think it's always going to kind of constantly be evaluating the situation at hand, right? And I think the things that we mostly look out for again is what is the local competition doing, right? If the local competition gets stronger, then it's going to push you more towards putting more in China and starting to strategically think about what alternative approaches we're going to take from a go-to-market strategy. But again, we'll continue to monitor it. It's just not something that we're seeing on the near-term horizon in terms of impact of immunodiagnostics portfolio.

Yes. And is the guidance for this year in China, is it more kind of starting flat and then increasing? What's the right way to think about -- and in the Diagnostics piece specifically, what the guide contemplates over in China on the Diagnostics side?

Yes. So again, for the full year, right now, we're anticipating positive low single digits growth for 2024. I think it will be relatively consistent on the Diagnostics side. Again, that has -- if you look at overall China DX again, if it's positive low single digits for the full year, that has that 300 basis point headwind from the change in go-to-market strategy. So ex that, you sort of mid-single digits, and that mid-single digit is broken down by your immunodiagnostics business growing higher than that. And then you still have the challenges from a reproductive health standpoint just with what you're seeing with birth rates. I mean, that has continued to be a challenge now for multiple years. At some point, you have to think that it's got to inflect and start bouncing back at least into holding the line from a birth rate perspective which would obviously be a tailwind for us, but that continues to be a challenge and we factor that into the guidance for '24.

Yes. Okay. And maybe on the reproductive health business, it's another one where we get questions and I know we chat a little bit about some of these revenue one-on-one. I think people look at the birth rate and say, "All right, they can't grow reproductive health, right?" The birth rates are there. But you guys also have this test expansion story geographically. Maybe just talk about what the growth drivers are in that business outside of the birth rates, which are obviously particularly at the most?

Yes. I think if you step back and look over the past 4 or 5 years or so, birth rates have been declining globally sort of down mid-single digits on average each year. If you then look at sort of our newborn screening business though, we continue to kind of grow mid-single digits, which is quite a wide spread if you think about it in terms of what the market is versus what we're growing. And really, the 2 big levers are both menu expansion and geographic expansion. Menu expansion probably being the bigger piece of those 2. But we continue to make good progress geographically. And so I think for us, those will continue to be the growth areas. I think there's tons of opportunity still in both of them. And so I think we anticipate to be able to continue sort of outgrowing versus what the underlying growth trends will be. And hopefully, we get into an environment where birth rates are being positive globally, which would just need further tailwinds for us.

Okay. Got you. And maybe on the geographic expansion point, staying in Diagnostics, I know when you guys did some of the past acquisitions on the ImmunoDX side, they're pretty heavily China based, right? The idea was, okay, we can expand this over, certainly big infrastructure in the U.S. Where are we on some of that expansion? And where can that go as we set forward?

Yes. So I think if you -- again, if you look at our Diagnostics business, the one area where we are most underpenetrated in the U.S. is the immunodiagnostics business. And I think if you look over the past couple of years, the growth rate in the U.S. especially from immunodiagnostics standpoint has been high teens. And so for us, I think we anticipate that to continue to be an area for focus for us as a company. The big thing that we need to really get across the finish line is around the regulatory approvals. And so as we continue to get more of our menu approved from an FDA perspective, it's just going to provide further ability for us to further penetrate that market. I think overlook for the next 5 years or so, we want to see our U.S. exposure closer to what I would consider sort of the market exposure with the U.S., where 45% of that market on immunodiagnostics is in the U.S.

Okay. And then maybe on the Omics business, that's come up a little bit more recently. Can you just talk about, I guess, what you saw there late last year and then maybe a little bit on the expectations for '24 in that piece?

For sure. I mean I think this is another part of our portfolio that's maybe not fully understood, but it is an area of extreme excitement for us as an overall company where we're trying to go in terms of really creating that bridge between the life sciences and diagnostics needs of our customers. And so if you look at that business, it's split about 50-50 between backup reproductive health testing, which is where that business sort of started out. And 50% is really more of these pharma partnerships. We're really working with them in terms of screening patients for what they want to do from a clinical trial standpoint, helping them out with sort of testing rare disease assays and companion diagnostics for the therapeutics. And what we really saw play out in '23 was we had a lot of contracts under completion with our pharma customers. We had new projects sort of laid out. But those new projects got put kind of a little bit on the sideline just given the tougher funding environment. So those projects aren't -- haven't been lost to competitors. They haven't sort of died out. It's just been given that they have more upfront capital requirements, it's something that the customers have just been a little bit more, I would say, cautious in terms of starting those engagements. So once that funding environment improves, those projects we remain excited about. It's just right now in our guidance, we're anticipating that those new contracts more or less don't get started in 2024. If they do, there will be further upside to our guidance.

Okay. And I guess, what's the visibility look like in that? I mean, is it -- is there a few months visibility in terms of when things could turn? What's the right way to think about just the leading indicators on the Omics piece?

Yes. I think it's -- again, it's just tied, I would say, more broadly to the spending patterns of the pharma biotech customers from that standpoint of it is a little bit more CapEx type funding for them with the big initial sort of upfront payments. So I don't know that there's like multiple months of it. Again, most of these contracts are more or less known. The scope of the projects is known. So once those -- I would say the budgets get a little bit more freed up from a customer perspective, it would be more or less, I would say, relatively quick turnaround in terms of launching those engagements.

Okay. Got you.

Just to clarify though, it doesn't mean the revenue necessarily happens, right? These are much larger projects. You have to complete the milestone and able to -- to be able to recognize the revenue. But in terms of actually signing the contract and starting it. It's not like that would be a long lead time.

Okay. I think on the last call, you guys talked a little bit about this e-commerce opportunity. It's kind of gotten off its -- off the runway in the U.S. I think Europe is next. Maybe just talk about what you guys are doing there? Is that going to be a potential margin benefit? What's the customer reaction? We'll be curious to hear a little bit about that.

Yes. So I'd say overall, from an e-commerce perspective, we are incredibly excited that we are able to launch about 4 or 5 months ahead of schedule in the U.S. in the fourth quarter. For Europe and rest of the world, that will be sort of coming online end of the first quarter, early second quarter here, again, which is 4 to 5 months ahead of schedule. So -- we're incredibly excited about the opportunity. As we step back and look, I think BioLegend, for instance, has more than 50% of its portfolio sold through e-com. If you look at the rest of the sort of revenue portfolio, it's less than 10%. And so obviously, the customers have a purchasing pattern where they have no issue going through the e-commerce channel. I think it fits more naturally to our actual business and what we are selling. And so there is an immense amount of opportunity to drive more e-commerce channels through the rest of our portfolio. And as we look at the benefit, I think the first benefit for us is really more of the revenue synergies, getting increased share of wallet with our customers, pushing more of the auto renewals from a purchasing standpoint. And so that will probably be the first real benefit we see. I think in terms of the other synergies from more of a cost standpoint, I think it will be probably a little bit longer of a lead time in terms of when we start seeing those benefits, but they will be there. It's just we'll probably want to see more of that volume move over the channel and then we can sort of start optimizing.

Got you. Yes. And maybe on the cost side, margins are always a big focus for investors with you guys. For this year, kind of talking more flattish at that 28% number, maybe just talk about the moving pieces as you think about this year. Again, I think it feels like you guys have had this nice margin opportunity. There's been obviously some headwinds in the industry that held you back. But how do you think about this year? And then we can get into the LRP maybe after that. But maybe just talk about the '24 setup of margins.

For sure. So I mean, I think, one, I think we are incredibly excited about where we are from the margin profile perspective. I know, it's not what we had anticipated coming into the year 2023. When we look at 28%, it's still in, obviously, the upper quartile of the overall peer group. And if you look back at where we were in 2019, we were a 21% operating margin company. So 21% to 28% over the handful of 4 years is no small change. And so we're excited about the starting position we have. I think as we look at '24, yes, we are anticipating flat margins. Again, a 2% growth. Growth is higher than 2%, that obviously would be tailwinds from a margin perspective with the leverage we can drive. But we've taken a lot of action, I would say, in '23 to ensure that we would have to get 28%. We kind of accelerated some of the stranded cost actions from the divestiture in order to maintain those -- that 28%. And what you're seeing play out in '24 is really the benefit of the annualized cost actions we've taken in '23. But then you also have some of the variable comp that is going to come back from '23 that was compressed. So those 2 are kind of offsetting each other. And so '24, I think again, our assumption is that the operating margin will more or less flat year-over-year.

Yes. Yes. Maybe in terms of some of the cost restructuring, I know you guys are, like you said, you're active kind of insulating the margins from some of these headwinds. Maybe just talk a little bit about what you guys have done on the restructuring side and how we think about those benefits once we do get growth back, what the incrementals could look like on the other side, the costs come back? Or are you in a little bit of a leaner place here?

Yes. I would say probably more of the latter in terms from a -- just being a leaner overall structure. Again, I think if you went back and heard some of the commentary we said at the time of the announcement of the divestiture, we had talked about the fact that, yes, there is going to be some stranded cost. But given our sort of growth rate assumptions, it's going to be easier for us to sort of grow into them. I think what you've seen now play out is a tougher market environment. We had to be more aggressive on, I think, taking out some of that stranded cost, but I don't think it's something that we need to then go back and add right back in once the market returns. I think we've got ourselves to a leaner position. And as we look over the longer-term, we still remain incredibly excited about our margin opportunity. I think our goal is still to get to the mid sort of 30s operating margin perspective. A lot of that is just volume leverage with the portfolio of the business that we have. And so we continue to remain excited there. And it's just longer-term projects, right? I think if you look at some of the integrations and some of the stuff we're doing with the acquisitions, when you are talking about freight line optimization, consolidating manufacturing sites, looking at vendor consolidation, in-sourcing, right, between our Life Sciences and Diagnostics business. Those things just take time. They're not something that's going to happen over a 2- or 3-month period. But we remain, I would say, very optimistic about the opportunity in front of us from a margin perspective.

Yes. And I guess when you think about '24, just the pacing, you mentioned things like incentive comp coming back that present a little headwind early and then maybe some of the cost restructuring pick up. How do you think about the 1Q cadence on the margins and then working your way through the year?

Yes. So the first quarter will be below, I'd say, our full year average. Usually, the second and third quarter are more directly in line from an operating margin perspective with our full year. And then the fourth quarter, you usually have the largest margin quarter. I would say the dynamic there is really volume driven more than anything else. I think if you look at it from an operating expense perspective, it's relatively consistent throughout the course of the year. And really, what you're seeing is the volume leverage from a revenue standpoint, which is going to improve our gross margin, great, but then also the leverage you're getting from an operating expense perspective. So that's really, I would say, what's driving the margin cadence throughout the course of the year.

Okay. Yes. And then maybe quickly on the LRP. I mean you guys reset it at -- in January. Maybe we could stick on the margin. I think you're talking about 75-plus bps. How do we think about -- does that get rolling off of kind of this 28% into next year? Do you see maybe more opportunity near-term? What's the right way to think about just that 75 bps going forward on the margin front and the confidence level as well?

Yes. So yes, to your initial question on is that 75 bps then launching off where we finished in '24, I would say, yes, that is the correct assumption. I would say, if you look at the breakdown of the 75 basis points, it's really about 1/3 from gross margin and then 2/3 from operating leverage. On the gross margin side, I would say the dynamics playing out there is, one, from a pricing perspective. We do anticipate to get at least 100 basis points of price per year. And then the second dynamic is really leveraging a lot of the operational initiatives that I talked to on the gross margin side to be able to offset anything we're seeing from an inflationary standpoint. And then if you look at the OpEx leverage, R&D as a percent of revenue for us is high single digit. I think you're going to continue to see that trend going forward. We recognize, again, that we want to be on the cutting edge of technology and science that requires investment and really where you're going to see the operating expense leverage is on the SG&A. And so that's what's really driving sort of the benefit from an OpEx perspective.

Yes. And then on the growth rate, I think you guys are talking a couple of hundred bps above the market growth rate. One of the key -- obviously, we talked through a bunch of it, but what are the key drivers you look at to see that will get you back there. And when do you think the market growth rate gets back to normal here.

I think we can all have our debates -- so when we get back to the normalized growth rate here, obviously, I don't think we're anticipating that to be here in 2024. But I think if you look more broadly at sort of the LRP algorithm, I think at JPM, we intentionally really try to lay it out in sort of 3 different buckets, right? I think the first bucket around sort of our faster-growing areas of our business around reagents, our immunodiagnostics business and our software business. We think those are inherently faster underlying market growth rates, particularly if you look at the immunodiagnostic side, those are end markets that are growing in the high single digits. We anticipate just what some of our geographic expansion we talked about into the U.S., that would really help us sort of accelerate above market growth rate. On the reagent side, I've talked about our differentiated portfolio, particularly as it relates to BioLegend. And then on the software side, I think for us, again, our software business this isn't something that's tied in necessarily to our instrumentation. This is separate from our instrumentation. This is really the ERP for the scientists across all the large pharma accounts. And so from that perspective, we continue to come out with new products and expand our reach in our large pharma accounts as well as reaching new customer groups. So from that standpoint, we expect those 3 businesses on average to kind of grow 9% to 11%. That's 60% of our business that's already more or less giving us sort of a floor of 6% growth. And then you look at the other 2 components we broke out from an instrumentation perspective roughly 1/4 of our portfolio across Life Sciences and our applied genomics business. We anticipate them to grow sort of 3% to 5%. I think there's years where it's going to grow above that, and there's years where it might be a tougher environment like we're seeing now where it's going to be less than that. But on average, we think 3% to 5% is sort of where we paid that long-term. And then the last piece is reproductive health. Again, about 15% of our portfolio. We've penciled in sort of 2% to 4%, and that 2% to 4%, again, we're not anticipating some huge rebound from a birth rate perspective. I think we're anticipating at least similar to what we've seen over the past 4 or 5 years here. So if that birth rate ends up being stronger globally, that would just be additional tailwinds to us from an individual year.

Yes. Okay. And I think we only have a couple minutes left, maybe some quick hitters. Just in terms of the guidance, I know you guys -- we've talked a lot about it, just you really want to kind of set this bar where you could execute on not being kind of the old PerkinElmer. I guess when you think about the guidance pose for this year, when you look at the 1Q, it was a little bit lighter, again, as it was everyone in tools, do you have more visibility into 1Q and maybe layered in more conservatism versus the full year? How do you think about just that near-term versus the full year guidance and levels of conservatism layered in?

Yes. I don't know if there's different layers of conservatism as we think about sort of the near-term versus long-term for the full year here. I would say that from our standpoint, again, our underlying assumption is that the demand environment, particularly around our pharma biotech customers remains similar to what we saw in the fourth quarter. And I think there's some gravity-specific tailwinds that happened throughout the course of the year, particularly as it relates to our software business, and we talked about the visibility there. But I would say more broadly, I don't think there's really different layers of conservatism. I think what you're just seeing play out between the fourth quarter and the first quarter as we're probably being a little bit more cognizant that our immunodiagnostics business grew in the mid- to high teens. And so from a comp standpoint, there's a little bit of comp dynamics there. And I think we're just being prudent and we're looking at it on a multiple year basis. But I wouldn't say there's different layers of conservatism.

And I guess when you think about the guide, I'm sure you play around with upside, downside leverage, what would be, if you can call it 1 or 2 things that can go right for you this year and drive some upside. What would that be?

Well, I think one, if the market environment does get dramatically better. Again, that's not really factored into our guidance on a pharma biotech perspective, so that would provide additional tailwinds. And then I think it was maybe the second piece I called out around immunodiagnostics. I think we're again looking at it on a multiyear sort of stack basis and putting it closer in line to our LRP. But if it continues to be really another strong year from our immunodiagnostics business standpoint, that would be, I would think, tailwinds for us from a guidance perspective.

Yes. And maybe last one, just quickly, capital allocation. You guys have done a lot of portfolio transformation over the last 5 years, I guess. Where do you stand now? What's the appetite for M&A? What's one of the priorities there?

Yes. So I would say more broadly from a capital deployment comment. I don't think you're going to see really a shift in our underlying philosophy. I think what you've seen play out over the past 18 months. One is that we've had a lot of short-term debt that has come due. So we retired about $500 million in Q3 of '23. And then in Q3 of this year, we've got another $700 million that's coming due. That's already been fully matched with the treasuries. So from that perspective, we've more or less taken care of our short-term debt. Our long-term debt is -- goes out on average to 2031, the 100% fixed costs at like 2.5% interest rate. So from that standpoint, I don't think we need to do anything else from a debt perspective. And it will really then come down to M&A being priority #1. I think priority #2 is going to be an increase in inorganic investments. We've talked about some of the things we're doing around e-commerce, the GMP and other areas of innovation and automation. And the third area is share buybacks. I think you've seen us in '23 do roughly $400 million of share buybacks. The largest we've really ever done as a company. I think that will remain third on the [indiscernible]. We'll continue to monitor and see what happens within the market. And that's how I would think about the order of priority page.

All right. Great. Max, thanks so much. Appreciate it.