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

[Audio Gap] So I'm Dan Brennan, [Audio Gap] Prahlad Singh, President and CEO of Revvity. So Prahlad, welcome.

Thank you.

And thanks for coming. Listen, I will check my e-mail a couple of times throughout if any of you want to pose any questions. I'll see if I can weave those in. We have a list and a little over 30 minutes to tackle it.

So maybe I thought just to kick it off, obviously, the long-term guide. You guys just took it down from 10% to 6% to 8%. You've got 75 to 100 basis points of EBIT expansion. You kind of tweaked that down to 75 basis points, still very attractive double-digit earnings growth. Maybe just give us a sense of what drove that, maybe what -- kind of what changed in the end markets, maybe management philosophy? And how do you think about that new guide in the context of leaving some cushion on both sides?

Good morning, Dan. Great question to kick this off with, and thank you for having us and giving us the opportunity to come and share our story. Now I think to your question around the [ LRPV ] came out. As we had mentioned during the 3Q earnings call, we wanted to take time and then sort of reassess where we were given the market conditions. And I think if you go back and look over the past few years, the market obviously has seen its ups and downs, both. And for us, it was a very good point to calibrate and reflect as to how -- what is our guidance philosophy. And I think there were 2 or 3 things that stood out for us. One is we wanted to sort of tie our growth rate based on market growth. And we know we have -- we know we have a differentiated portfolio, but we did realize that when we first came out with our midrange plan at that point, it was -- the market was in a very different conditions. Everything was growing double digits. And in hindsight, that was not normal, but neither was 2023. So you have to think of it from a perspective of what is the long-range cycle that is reflective of what market growth is. And given the differentiated portfolio, we felt very comfortable that we would be at least 200 bps above market growth. And the other aspect also is we didn't want to sort of have a time period, a defined time period, but rather have an earnings philosophy around our long-term planning that is over a period of time. So I think those were the 2, 3 factors that made us go back and reflect what we had come out with earlier. And the experience of the last few years sort of gave us more confidence in giving out a growth rate for the long term, which we felt very comfortable with given the differentiated portfolio that we have now.

And we'll dig into the different businesses as we go through the Q&A. But maybe just one more follow-up there. When you think about really high level and you have a lot of subsegments, you give a lot of color and transparency on your business, when -- if you zoom out, were there 2 or 3 areas that when you first set the guide to where it is today, when you think about the end markets, that kind of changed the most? Was it a geography? Was it a customer? Just any color on that front?

I don't think the end markets per se changed, but I think our -- again, if I were to go back and look at where we were in 2022 and we first came out with the guidance in 2021, the market was in a very different stage. Pharma/biotech was spending very differently. And I think there was a lot of COVID and -- COVID-dollar influx, which was coming into the marketplace. And I think that has been calibrated and especially after what we saw in 2023. So I think if there was one swing factor, it was the behavior of pharma/biotech versus what it was during the core years.

Got it. So when you think about '24, obviously, you just printed and gave your guidance, but how would you characterize key priorities for this year for Revvity?

Yes, I think there were 2 or 3 that comes -- jumps off to mind. One, obviously, is control the controllables, right? I know we are in a tough market situation, but I think from an expense management perspective, in terms of what we have said, what our guidance for the last few years and what cost-cutting measures we are taking to ensure that we execute appropriately on that. The second aspect for us really is we continue to bring in the -- integrate the companies that we've acquired. We acquired nearly a dozen companies over the past 20, 30 months now. So continue to integrate those. While we were plucking the low-hanging fruit, now we are getting deeper into what is our selling, marketing, operational synergies that come out of the acquisitions. That's also a priority for us. And third is capital deployment. I think we've talked about from an external perspective, what we are doing around our debt, et cetera, but also internally, investments around e-commerce, GMP capabilities that takes priority for us this year. So I would say those are the 3 things that we are putting our attention on.

Got it. And then when we think about the guide this year, both you and your peers are largely calling for kind of a muted recovery just given, I presume the state of end markets here, but your guide is actually above many peers. I think you're calling for growing 200 basis points above market or 1% to 3% organic. So it'd be great just to understand some of the puts and takes that went in when you think about the guide, what are some of the factors that could take it to the high end or to the low end of the range?

Sure. I think the assumption and then what we've seen since September is stability in the market. So I think that sort of gives us a cautiously optimistic sense that, that stability has continued in the marketplace. But I think our assumption going in has been that the market will go down low single digits, and we'll be at least a couple of hundred basis points above market growth. Plus also for us, uniquely, we have 2 things that don't repeat in 2024 that we've talked about, the omics side of the business and the software renewals. So that is unique to us to some extent. Plus, we also have our growth drivers around immunodiagnostics, as we've seen that continues to do well. So that's what gives us sort of the confidence, and those are the puts and takes that we see in the market. The biggest swing factor, again, is pharma/biotech and what the behavior of the buying pattern of the customers are there.

And then you're -- for 1Q and then we'll dig into some of the businesses. So for 1Q, your guide is down mid-single. I think you guys cited comps. I know you don't historically give like sub-segment numbers quarter-by-quarter, but can you unpack it a little bit in the down mid-single, like what's the biggest driver of that down mid-single? And any commentary on as we sit here, March 2 -- or excuse me, March 4, sorry, kind of how things are going?

Obviously, I can't talk about intra-quarter guidance. But I think if you were to look at it, and we've talked about this earlier, is the pressures around Life Sciences instruments and applied genomics is one that will continue, and we've seen that over the last quarter. I think our immunodiagnostics business will continue to do better than market. And so those are sort of some of the puts and takes, I would say, and Life Sciences reagents will be neutral to down a bit.

Then maybe before we jump into the Diagnostics segment, just kind of zooming out on China, we did a breakfast this morning and one of our Washington Research Group execs, they've been really focused on this BIOSECURE bill and kind of what it can mean, and they think the government needs business. So I'm just wondering from a super high level for China, which is a really big important geography for you even more so than some of your competitors. I don't know how do you think what the government is doing with this first BIOSECURE bill and focusing on some of the key genomic technologies where they want to prevent certain customers in the U.S. from buying those. Our team thinks that could lead to tariffs and restricting access to some of the key technologies that maybe you sell. So how do you think like your -- the business in China is not necessarily doing today, but do you think this is a worry for investors about something that could kind of get worse over the next 3 to 5 years and really be disruptive?

Yes. I mean, and again, China, as you said, is an important market for us, but it is also where we have a very differentiated [ portfolio ] versus our peer groups. As you recall, and we've said this, everybody grew decline double digits, if not [Technical Difficulty] higher last year, and we grew mid-single digits in China. But that has been a year's of work as to ensuring that we have the appropriate portfolio in the marketplace for us. 17% of our revenue comes from China, 10% is in Diagnostics, 7% is in Life Sciences. And then 10% in Diagnostics, you've got newborn screening, and you've got an immunodiagnostics business. So I [indiscernible] that if you just look at the BIOSECURE bill, these are -- this is like bread and butter that is there. So it's not sort of something that impacts it. On the Life Sciences side, 7% of our revenue comes from China. More than 60% now that is reagent, which is a regular run rate business. So again, it's not something where we are giving out high technology in the Life Sciences side either, where you would sort of have an impact from the bigger picture.

Got it. Okay. So maybe kind of moving into the businesses. Just you mentioned immunodiagnostics. It's been really a workhorse in Diagnostics growing above the kind of corporate average. I think you've talked about low double-digit maybe profile. Just give us some color on the confidence and visibility of -- to kind of grow with that maybe 9% to 11% rate. I know this year like we're modeling kind of high single-digit growth, a little below that this year, just given the comp from '23. But just maybe unpack that business a little bit and how we think about it as we look into '24.

Yes. I mean, I think the assumptions are correct around how to model it this year just given how big 2023 was for you. But again, then if you just take a step back and look at the immunodiagnostics business, and I've said this many times even in the developed world, this is still in its, I would say, infancy, maybe not in its nascency. The call point tends to be you go to first year PCP, then you might go to a specialist and then you might go to an endocrinologist and eventually, you end up at an autoimmune specialist. So even in the developed markets, the call points are still there and the autoimmune business continues to grow very well. And then in China, in India, in Brazil and some of the emerging markets, it's still far away. So that's why sort of it gives us the confidence, plus the portfolio that we have in immunodiagnostics, especially is much more differentiated. And in China, one of our opportunities is that how do you stay ahead of the grain, whether it's with VBP or any one of these aspects. We are always going to have pricing pressure. But how do you stay ahead of the game by having technology, which is going to be something which is much more differentiated than what the local competition can bring in. And that has been a success story in immunodiagnostics for the past 7 years, and we hope to continue that for the next decade.

That was my next question, immunodiagnostics in China competitive landscape. So you kind of touched upon it. But I guess on the tendering process, maybe just comment there, it doesn't sound like it's going to be a big deal. But just speak on the competitive landscape in China and the work that we've done in the past and haven't done it recently was that it's really your menu and the ability to bring new tests out and get pricing, which is very differentiated for you? So just what can you speak to for investors who -- China is a long way away, and it's hard to diligence. What's the kind of durability strength of that business in China?

I think you have the answer to the question in your question. I think having a menu, which is differentiated enough, which is something that is a need and an ask, and it's an unmet need in the marketplace. You're always going to have pricing pressure, as I said, you're always going to have mid-single to high single-digit pricing pressure, but that is going to be a piece of the portfolio where competition is able to come in. The question is how do you stay a step ahead in the game? How do you have a portfolio that is something that is a need of the market rather than something that you want to push through. And that's been a differentiating factor.

Okay. Maybe just on reproductive health, it was down kind of slightly in '23, and we've got flattish growth this year. But just when we think about the ability to get back to something better, whether it be low single, low single plus, like what are the drivers to get you back up? Is that possible this year? Or just kind of unpack that business a little bit for us?

It's a great question. I think if you look at it and if you actually peel a layer of the onion on the reproductive health business, actually, our newborn screening business has done really well. It's grown mid-single digits last year. And that is primarily in the face of declining birth rates, especially if you look at China, where you've had double-digit declines in birth rate. And we've continued to be able to do that because of the new tests that we have brought. I've talked about SMA, DMD in some markets, where you have [indiscernible] a need. And now with the RUSP panel having MPS-II, which is on approval, and hopefully, DMD gets through it. So we've tried to, again, have a very healthy NPI pipeline on newborn screening. And the pressure for the overall reproductive health business is because of the omics side of the business, where we had some pharma partnerships, which didn't renew last year, and which is one of the corrective factors that we will see this year, as I've talked about.

And like even maybe just as an adjunct to that, like when you think about that business, yes, I think a lot of investors think of it is like you guys are a leader in newborn and then you have this pharma thing tucked in there. Is that the right spot for that business? I mean, would it help to break that out separately, so it doesn't get clouded under like what the reproductive -- what the core newborn screening business is? Or just maybe any color on that pharma piece?

No, I think it's a good question. The reason it is, is because a lot of the pharma partnerships are around rare diseases. So it's a very good conduit to have them together because the omics side of the business is essentially a sandbox, which is -- DMD is a classic example. The test was developed, the assay was developed there. And then once you have the assay, you [indiscernible] it and then it moves to the IVD side of the business. So -- and also from a customer's perspective, our pharma partners are looking for how -- especially around the rare diseases, how do you be a partner of them all the way from discovery to clinical and eventually post clinical providing them the support in identifying patients through the services side of the business, following them up for efficacy. So it is a good fit. I mean in the longer term, we might have to assess, are there some pieces of it, which we parse out? So it makes -- but it's going to go from here to there somewhere. But overall, at the [ liberty ] perspective, it doesn't really make that much of a difference.

All right. And maybe one more. Just -- so is the [ form of ] weakness, was it more just given what's going on in the pharma end markets? Was it a comp issue? Or just anything related to IRA? Just maybe a little bit more color on kind of what drove the weakness and kind of what have you baked in for '24?

Is this specific to omics or is it overall?

Yes, yes. No, omics.

I think it was primarily just CapEx spending, where they were just refraining from signing more multiyear contracts until they see what was happening.

Got it. Okay. So maybe last piece in Diagnostics, applied genomics, that was down high single in '23. It was kind of well below initial plans, and we've modeled that down kind of low double digit this year. Here as well, I think you've talked about pharma spending. You've talked about elective procedure volumes. Just there's a lot of different workflows and applications in this segment. Maybe just kind of point to what are the key things that drive this business, a little color on your competitive positioning?

Yes. I think if you look at applied genomics, despite what you said, what we've said for this year, over a 3- to 5-year cycle, it will still be growing mid-single digits. During the COVID years, that business grew 40%, 50% and some ridiculous numbers for 2, 3 years. And obviously, you're seeing a calibration of that. And I think it will at least take 2024 for it to get back to a more, what is a normal cycle of mid-single-digit growth for that market because essentially, what you're looking at a liquid handling platform, extraction of DNA, RNA, primers and reagents and assays that go from sample to detection, whatever the detection modality is.

And your competitive positioning, obviously, the robotics side, probably a leader. How do you compete in the other parts of the applied genomics business and kind of what are you seeing there?

I think that's where we just need to be much more innovative, honestly. And it's not just from us. If you look at some of the global competitors, if you were at SLAS, you saw some of the competition coming out from other markets. It's not just about how low can your cost go, but what are unique features and specs that you can bring into your portfolio because the more robotics that there is now and more remote robotics, I mean those days are gone where you have an automated platform, but means you still stand there and watch it versus when you can truly be remotely in a position where you can run an experiment, how do you set up a protocol which doesn't take a week or 2 to get validated. These are sort of innovative features that you bring into it. And now the whole automation, machine learning, AI, how do you make it ubiquitous, that's sort of the strategy that one needs to look at for that portfolio.

Okay. So maybe just toggling over to Life Sciences. So here, reagents have tended to grow above the corporate average, BioLegend kind of is a core part of that business. It does seem that maybe reagents felt a little bit of pressure here in a tough macro over the past few quarters. Just any color on the kind of the underlying trends, whether you want to start with BioLegend or just go to the broader non-BioLegend reagents and kind of what you're seeing from the end market dynamics there?

Well, I think we did see some pressure, but I think our reagent business still did pretty well last year. If you look at it compared to our peers, it still did pretty well. I think you see some consolidation because of what happened in the third quarter last year that saw some pressure and in some budgetary constraints that you see. But I think it's a very healthy portfolio. If you look at BioLegend, as an example, right, half of it is antibodies, but the other half of it is getting more and more into proteogenomics, single-cell, areas of growth that you are seeing in the marketplace. And as we've talked about BioLegend as an example, it's got unique features in terms of next-day delivery, service, cost. These features really help them differentiate from the marketplace. And that's the sustaining ability of that acquisition, which we could not be happier with.

So we model kind of mid-single-digit growth for BioLegend. It's -- I think it's 15% of revenue. So it's a key business growth driver. You just mentioned a few of the different [indiscernible] features. Can you step back a little bit and zoom out. I mean, are those the key aspects, obviously, from a performance basis. I'm sure that has to be on par, if not better than peers. Just kind of how do you think about why BioLegend wins and kind of it's kind of mid-single-digit growth the right area for that business?

Yes. I mean I think if you look at it from a whole Life Sciences reagent business, BioLegend is close to 50% of that. But I think the unique features that I talked about from there is speed, service and quality. But more importantly, I think their uniqueness is that their commercial teams tend to be very highly qualified, and they work side by side. I mean, if you go down here in Harvard, you can't differentiate which one is the BioLegend representative and who is the Harvard technologist on the lab bench. So the work starts very early in the process. And then it is all based on an e-commerce platform. Once you have set up what is needed, you just go [indiscernible] and from a buying perspective, the buying process is much faster and much more efficient than what you have on the traditional side of the business, and hence, our investment in the e-commerce capabilities. Now imagine if you could do that for our whole Life Sciences reagents business, where you could have the same fast throughput that BioLegend is able to do. So it's not just the innovativeness that they have been able to bring in the portfolio, but it's also how did they do business. Their commercial effectiveness is really unique, given how close they are to the customer.

So what is that addressable market growth for BioLegend? And are you gaining share? Are you growing with the market?

I think we probably, I would say, in the last year, it was tough to tell just given the market conditions, how do you put a pen -- how do you put a pulse on that. But I would say that if you go back, and I think it was -- I don't know, I'm going to get the year wrong, but 10, 15 years ago, BioLegend was, what, 5% of the market. And now it's #1 position -- I would say, a tie for #1 position in the marketplace. So that's the uniqueness and you see that market growth continuing.

So moving on to instruments. Obviously, they've been feeling the brunt of the pressure, and we'll hear today from a lot of players kind of how they're thinking about it. I think we model down in the mid-20s in Q1 with some improvement as we go through the year due to comps. But I think we've got down high single digits for this year. First, is that -- do you think that's a reasonable way to think about it? And then, b, can you kind of unpack between your different subsegments there? Are they all being kind of painted with this brush? Or are there certain segments that are doing a lot better or worse?

Yes. I think that's pretty close in terms of the assumption that we would use. I think again, I would go back to how I started the conversation, Dan. What we are looking for is stability in the marketplace. And I think I would say, since September, we've started to see stability. We are not sort of [indiscernible] jumping for joy, but at least we are not seeing continued decline, which is an important aspect to keep in mind. And if that stability continues, that's what we have assumed in our guidance for the year. Now if the market turns around in the second half of the year, significantly more than that, then obviously, that's all upside that you would assume. I am optimistic, given what we have seen in the trend over the past, I would say, since September.

So when you think about in China, if we were to unpack instrument business in China, next China, just how much of the -- like, I guess, could you speak to instruments in China, maybe is the right way to ask in Life Sciences, like are they a lot worse than what the overall interim business is doing?

Yes, I would say that it's -- when I say stability for our instruments portfolio, it's across, I would say, the same thing. Keep in mind, China grew for us mid-single digits last year. So obviously, our instruments did better. It did much better in the first half of the year, given that there was still some of the stimulus funding there rather than the second half of the year. But again, I would say the stability remark would be the same for them, too.

And have you guys assumed any of the stimulus in China comes back?

No, no. If any -- if it does, then that would be upside to what we have in our guidance.

Yes, Agilent just talked about in their fiscal first quarter call that China improved. I think it was still down 9%, but they said it was like better than they expected, and they kind of -- it wasn't one thing they pointed to, but anyway, I guess, just maybe just walk us back through a little bit like has China whether on life -- I mean, may be saying in Life Sciences, I [ figured ] in your fourth quarter, was there any like intra-quarter improvement or just maybe how did China trend for you guys?

I would again say for the year, if you look at it, China grew for us mid-single digits. And again, I'll go back to the comment that I made around, we continue to see the stability in the marketplace and hopefully that continues.

So you recently rolled out the Signals Clinical to support analytics through clinical trials, excuse me. Just talk about the TAM in your software business, like what does this mean? And can you frame kind of how you expect this to contribute to revenue, maybe not this year, but as we look out?

Yes. And I'm glad you asked that question because software is really one of our hidden treasures, which doesn't get the attention that it deserves. And simply because if you just look at the business as such, it's close to a couple of hundred million dollars business, which continues to grow very well. Obviously, last year, they had the renewal aspects, which we pointed out at the beginning of the year, which we won't have this year. But it's no different than on the software side versus what we've talked about on the Life Sciences reagent side, where we primarily focused on preclinical research and discovery, and now the opportunity with the GMP investments that we have made is to move more and more towards the -- down the value chain into the clinical side of the business. And Signals Clinical software suite that was launched was again a prime example of how we are moving down from preclinical research and discovery, where they have a very strong market position to into the clinical arena, where it's a very dispersed workflow right now, literally, some of the CROs and Excel spreadsheets back, which have to be collated. And I think the clinical suite is one step that we are now going forward in the direction of how do we help our customers collate, collaborate and analyze the information that comes from the trials.

I mean clinical markets are a lot bigger than the preclinical markets now.

Absolutely. Absolutely.

So it was actually maybe related to that, this question was on the list. What percent of your pharma business is like the emerging biotech, since I think the feedback we've already gotten at this conference from a lot of investors is people are gravitating towards funding, biotech funding getting better. I think there's a lot of excitement on what that can mean. Just -- I mean have you guys quantified like your pre-commercial biotech versus your kind of commercial biotech?

Yes. I think we did that. And if that 5% of our numbers of our total revenue is -- I always have to look at them before I give up the number. But it has to -- 5% is to be pharma biotech.

Got it. Okay. So we have a few minutes left here. What have we got now? Actually almost out of time. Yes, so 5 minutes left. Maybe just moving over to margins and pricing. Pricing, I think, was -- I think you guys talked about 150 basis points of pricing in '23. You talked about at least 100 basis points going forward. Just what's the pricing strategy? I think we've heard from some companies like they're able to kind of sustain even better pricing coming out of COVID, it's sticking. Just how do we think about pricing benefits for revenue?

Yes. I think we've said what our assumption is going forward. But if you look at the businesses and the diagnostic side of the business, while it might have some pricing uplift in some markets, the China piece sort of balances that out in terms of the pricing pressure that we see there. Most of the pricing uplift that we see from the Life Sciences reagent side of the business, and that's where you would naturally expect it to come through given the differentiation in the portfolio and given the capabilities that I talked about earlier during our conversation.

Okay. So you're expecting the whole margins flat this year despite low single-digit growth. So that's pretty good, I think. Just maybe how are you kind of managing the investment in the business versus delivering to the bottom line? And as we think going forward, you talked about 75 basis points, is that -- like would that be possible in '25, given maybe the restraints you're putting on the business this year? Just any color on kind of margins?

Yes. I mean think of it this way, Dan. Just coming out of the blocks post the divestment, we were at 28% margin, which I think is really good and it puts us right off the band in the top quartile of our peer sector. But I think the opportunities that we've got, as we've talked about, whether it's around standard costs, around the e-commerce ability -- capabilities that we are bringing in footprint rationalization that we have now that we have divested gross margin opportunities. So there are just many baskets that we have to go in and plug. And I think that gives us a great deal of confidence that this -- why this should not be a business operating in the 30s in a few years, I would say, because these are all things that are within our control, and it's a matter of execution.

So that's pretty good. So maybe cap allocation, you discussed at the beginning, the integration side. What about on the external side, kind of how are you thinking about acquisitions versus buybacks and kind of debt pay down? And what kind of size deals could Revvity undertake? Just any color on your strategy there?

Yes. I think we'll continue to be acquisitive, and we are -- we continue to have conversations in the marketplace. And we haven't yet found something that has both the financial and the strategic aspects aligned on all the [ startups ] aligned. And when it is, you'll hear about that from us. It's -- we've never been shy of being acquisitive. But I think we've got a debt paydown that comes due in February, which -- in September, which we've allocated in U.S. treasuries. And we'll continue to be opportunistic around share buyback. I think that's one of our most attractive investments that we would make is share buyback. So that continues to be front and center along with those other 2 aspects, which I talked about.

So maybe last question here since we're out of time. So what's the message you want to leave investors with, what's the one message on Revvity?

I think learning about the company and seeing how differentiated our portfolio is today versus what it was post divestiture. Revvity is a company that has got a very compelling and differentiated portfolio, both on the Life Sciences and the Diagnostics side. But I think the bigger nuance is that now how we are able to connect the Life Sciences and Diagnostics side of the business, where we are part of the journey of pharma/biotech from licensing technologies to them, providing them the tools and capabilities to use that technology, developing companion diagnostics as they go through the disease development process and then using our service capabilities globally to identify patients, follow them up for efficacy and follow-ups. So for us, the opportunity is now how we are a part of the whole journey from discovery to commercialization for our commercial and pharma/biotech customers. So that is sort of a portfolio which is very differentiated than anything that you will see out there in the industry.

Great. Well, with that, we're out of time. So thanks a lot. Thanks for being with us today.

Thank you all.

Excellent. Thank you, Prahlad.