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

Thanks, everyone, for joining us. My name is Mike Ryskin on the Bank of America Life Science Tools and Diagnostics team. And joining us for our next session, I'm excited to be hosting Max Krakowiak, CFO of Revvity. Max, thanks so much for coming.

Yes, thanks for having us.

We'll run this as-usual fireside chat. But to kick things off, Max, maybe we'll just start with recent results. You reported 1Q just a few weeks ago. Can you briefly highlight the key points that you want investors to take away from, sort of how the quarter developed versus expectations? Any updated views?

Yes. So I'd say the first quarter was a really solid start to the year. We came in slightly better across the board on growth, margins, as well as our cash performance, which was really strong in the first quarter. I'd say the market overall, probably not much change really from our expectations. I think it continues to be a challenging market, but it at least has stabilized over the past couple of quarters. I'd say the other thing that was encouraging in the first quarter was really continued progress on our strategic initiatives. It was a big cycle for us in terms of innovation launches. We also made meaningful progress on some of our integration and margin initiatives. And so I'd say for the first quarter, really strong start to the year and puts us on a good pace for what we want to do for the full year.

Okay. And then maybe taking a quick step back, it's been a little over a year since the transition from legacy PerkinElmer into Revvity. Over the last 12 months, as you look back, what are you most proud of? And where do you still see some room for improvement and for continued evolution?

Yes, for sure. So I think -- I probably wouldn't even just call it 12 months. It's really been a couple of years of extreme transformation, whether it was acquiring close to a dozen different companies, managing the COVID dynamic, as well as going through and ultimately then divesting 1/3 of our portfolio, and then ultimately completing the rebranding to Revvity. I think when you put all of those factors together, in addition to be able to sort of deliver on our financial commitments in a tough market, it's really a testament to our execution. I think that's probably one of the things that maybe I feel is most underappreciated, is our ability to execute that amount of transformation in such a short time, while managing a difficult market. And so I think that's probably been the most impressive or what I'm most proud of, is our ability to execute. I think when you look long term, that's really where there's more opportunity for us to continue executing really on our strategic initiatives, and I think some of the margin upside we have as an overall company, which I'm sure we'll get into later today.

Okay. And you touched on underappreciated, so you stole my closing question, but I'll come back to that anyway. If you look at some of the near-term events we've seen in end markets, there's been a lot of turbulence, a lot of volatility in a lot of key tools markets. So looking back at that transition from Perkin into Revvity, how has that positioned you better to weather the storm in a way?

Yes. I mean I think it's a combination of things, right? If you go back to the time we announced the divestiture, there were a couple of key points that we highlighted that really is going to improve our company outlook going forward. I think one is just on the overall growth profile. I think we're in more attractive end markets with more of a competitive portfolio with sort of top-ranking competitive positions. I think our margin profile has also significantly improved. I mean I think if you look back to 2019 when we were the combined company, we were 21% operating margin. Last year, we finished at 28%. That's a meaningful improvement over a couple year period. And then I also think, if you look at cash, our business now is much more working capital less intensive than when we were the combined company. And so that should really help us from a cash flow generation standpoint as well.

Okay. Next, I want to dive into some of those select end markets, just sort of get a State of the Union update from you. So starting with pharma. You flagged some improving conversations with pharma and biotech towards the end of 1Q. At a high level, would you say that stayed constructive through April and May as you enter 2Q? And sort of, how do you see that evolving through the rest of the year?

Yes. So I think at the time of earnings, we did mention that, at least in March and April, the conversations were getting more constructive as I think budgets were finalized a bit later this year. It was closer kind of in the February time frame versus normally it's December of the previous year. So it was a little bit later than normal. Led to a little bit slower start of the year. But the conversations definitely picked up in March and April. I would say from an overall order placement perspective, I wouldn't say there was maybe too much change. It's been relatively stable, I would say, since probably September of last year. So we're encouraged that the conversations are picking up. But right now, our guidance for the full year is not assuming any sort of market recovery. We're anticipating it to kind of stay as is. So the conversations are encouraging, but we're going to wait and see it ultimately translate to orders.

And when you talk about that early start to February -- to January, February, I mean that's pretty consistent, we're hearing that across the board, what do you think is driving that? I mean what's changed? Is it just a matter of a month or 2 slipping? Or is there anything structural or temporarily different about pharma this year?

I think there's a lot of variables that the pharma companies are trying to go through and manage, whether it be geopolitical or other political policies in the United States. So I think for them, they're trying to evaluate all the factors, what's their future pipeline look like, of therapies coming to market. I think there was just maybe a lot more factors this year than normal. And so for them, I think it was really trying to make sure that they've got the right budget set for the full year. And so they took an extra couple of months to make sure that they've kind of got the right projects lined up that sort of fits the financial profile and capital deployment initiatives they have.

Okay. And talking about those budgets, as they become finalized and as those conversations improved March, April and you go through the year, could you give us a little bit of a sense of like the time line, the lag between budgets and orders and revenues, just sort of like how that works through the funnel?

Yes. I wouldn't say we're anticipating anything like abnormal, right? I think once you finalize your budget, you kind of have your purchasing pattern for over the course of the year. So I wouldn't say it's like we have to wait a couple of months for them to do placements. I mean they have activity going on in the second quarter. Those projects have been greenlight and they're going to start placing orders for that. So I don't know if I'd really correlate to any sort of lag or any sort of time line. But again, I think we're encouraged that the conversations are much more concretized at this point in time and we've got clear line of sight to what projects they do have funded for this year.

Okay. All right. That's helpful. Maybe shifting to academic and government. Have you noted any change in the last couple of months? You've had updates from the NIH, same thing, you've got some geopolitical risk here, both in the U.S. and abroad. So just walk us through your exposure to A&G and sort of how that's trended the last couple of months?

Yes. So I think from an academic and government perspective, most of our exposure to that market is reagents. I think that might be a little bit different than some of the others within the space. Almost 75%, 80% of our overall academic and government exposure is through our Life Sciences reagents business. If you look at that performance in the first quarter, it grew positive mid-single digits. It's also one of the bigger markets for our BioLegend business. So BioLegend for us, it's about 50% of our overall reagents business and then 50% of that is through the academic and government channels. So obviously, the positive mid-single-digit growth, I think, was fueled by our BioLegend portfolio. I think one of the opportunities for us is to leverage that BioLegend channel for our legacy reagents. So for our legacy reagents, only about 20%, 25% of that goes through the academic and government channels. So I think for us, that's an additional opportunity to pull through more of our legacy reagents portfolio through the academic and government customers. So that will be a focus for us. And I think as we look out through the rest of the year, we expect our reagents business to perform well. I think on the instruments side, it's facing tough comps from a year ago. I think everyone posted pretty strong instrument growth in academic and government in 2023. So I think that will be more muted this year. But the benefit for us is most of our exposure is actually on the reagent side.

Okay. Maybe let's move on to China. You've got a pretty unique business mix over there. I mean you've got unique business everywhere, but especially in China. China stimulus, there's been a lot of news about that in the last month or 2. Are you seeing any incremental developments there? And sort of how would you expect that to benefit your business over time?

Yes, for sure. So just a reminder too, our China business is about 17% of our total company revenue, 10% of that being Diagnostics, 7% on the Life Sciences side. And for Diagnostics, particularly the biggest chunk of that is our immunodiagnostics business, which is mostly our autoimmune and allergy testing. And then on the Life Sciences side, we've got about a split of 55% of it is reagents and 45% is instrumentation. That's a newer dynamic for us where the reagents are finally a larger piece of our overall China exposure, which for us is a good thing. And so I think that unique mix for us going forward over the next couple of years will continue to prove out to be differentiated for our Life Sciences reagents and our immunodiagnostics portfolio. I think if you look at last year, we grew mid-single digits in China. I don't think there are many others across the space who had any growth in China for last year. So I think we expect that to be a continued differentiator for us. On stimulus, I think there's been, obviously, a lot of discussions over the past couple of months on the stimulus program. That's obviously a good thing for us. I would say where it is right now is our discussions with our customers are much more active and pretty specific in terms of what they are looking for and what they believe they'll get funding for. I think what everyone is waiting is for the final shoe to drop on the funding actually happening, right? Because I think you have to go through multiple layers of funding approval. I think it's both provinces and at the central government level. And so we'll continue to monitor that. Our best guess right now is you'll really probably start seeing orders coming through, assuming the funding happens, probably later in the year, if not into early 2025. So we'll continue to monitor it. And we don't have anything baked into our guidance this year in terms of tailwinds from the China stimulus, so if that were to happen earlier, that would be potential upside for us.

And do you see longer term China sort of returning to that historic growth, or maybe not even quite the historic growth rate, but historically, it's been very accretive to total company growth. You talked about mid-single digits in '23, yes, that's better than peers, but still not what it used to be. Will China to bounce back whether it's in a year or 2 or 3?

Yes. I think for us, again, in China, I think our portfolio mix is quite different than some of the others in the group. I think for us, it will continue to be a market that -- we grow above the market in China. I think it's a little bit kind of TBD on what that ultimate growth rate looks like for China. Will it maybe be as robust as it was the past decade or so? I don't know. My guess would probably be not. But I still think we -- because of our portfolio, we're going to continue to have above-market growth performance in China.

Okay. And then specific policies, things like VBP, I mean, could you walk us through the impact there? And just is there any more policy risk like that?

Yes. So I think from a VBP perspective, the one piece of our portfolio in China that did get impacted was a legacy infectious disease portfolio. We announced this year that we had made a go-to-market change for that portfolio. So instead of having a direct sales force, we went indirect. It's better for us from a profitability standpoint. It will be a little bit of a headwind for organic growth for us this year. It's about 500 basis points for our immunodiagnostics business in China. But I'd say that's really the only piece of the portfolio that has been impacted by it. I think when you look at the rest of our portfolio around autoimmune and allergy, it hasn't been impacted. Our guess is that it's not going to be pulled into scope of VBP. That business over the past couple of years has faced about a 5% price decline per year. So even if it were to get pulled into scope of VBP, we don't think it would be as massive of a pricing impact, I think, as you generally see when a VBP program does get rolled out. So we'll continue to monitor it, but our assumption right now is that VBP is not going to be a focus for that autoimmune and allergy business.

Okay. That's really helpful. Okay. So next, I want to run through really fast some specific business line questions and segments. So first, in the Life Sciences business. You touched on this briefly earlier. Consumables versus instrumentation in the core group, a little bit of a bifurcation or separation in the first quarter. How are they going to fare through the rest of the year? And sort of do you see them coming close together as you exit the year?

Yes. So maybe I'll just take a minute, break down the whole Life Sciences business for us this year. So Life Sciences for us, we expect to be flattish to low single digits growth for the full year. If you look at the 3 different pieces, let's start first with our software business. So our software business grew in the high single digits in the first quarter. We expect it to be high single digits for the full year. There might be some quarterly volatility just due to the contract timing and renewal cycle. But we're pretty confident that that business is going to be able to deliver a strong year here in 2024. I think then if you move to the instruments business, so for us, our instruments business fared better than expected in the first quarter. We are anticipating it'd be down mid-20s. I think it finished around mid-teens, so it was an improvement from our expectations. If you look at the full year, we're anticipating that business to be down mid- to high single digits. I think if you look at that on sort of a 5-year CAGR basis sort of through the cycle, that would put it more or less in line with what we've come out and mentioned our target growth rate for the LRP is. And so I think we're -- we feel like we're in a good position with that portfolio, and remain competitive in the market. I think if you look at our reagents business, again, this is the biggest piece of our Life Sciences portfolio, about 50% of the revenues. For the full year, we expect it to grow positive mid-single digits. As I mentioned, the first couple of months this year was a slower start than anticipated. So it was down high single digits in the first quarter. But we do, based on the conversations and budgets we've seen now for March and April, we do anticipate that business returning to growth over the remainder of the year. And so I think, again, even on that business, I think it's a differentiator for us, and that will prove out through 2024.

Okay. And following up on that reagents business, you talked about how BioLegend is a key part of that. You had a couple of changes in the competitive landscape there. You had Danaher acquiring Abcam. You had, I mean, Techne posted some pretty strong results in the first quarter. I tend to think of those 2 as the closest comps for BioLegend. Any change in market dynamics over the last 3 to 6 months?

For BioLegend specifically? No. I think we haven't really seen too much change in terms of the Abcam move to Danaher yet. I know it's still early. I think we've probably outperformed Abcam over the past couple of years in relation to the BioLegend portfolio. And we think that's really the testament to our differentiation there around customer service, but then also delivery times to our customers. Almost 95-plus percent of BioLegend reagents are shipped within 24 hours of the order being placed. I don't think many across the industry can match that sort of delivery times. So I think that will kind of continue to play out. Maybe just the other point you mentioned too on the Bio-Techne side, I think if you look in the discrete year, their growth rate was stronger in the first quarter. But I think when you look at it on a multiyear basis, BioLegend has performed better than Techne's portfolio.

Okay. Let's move to applied genomics. I think you talked about expecting some sequential improvements there as we go through the year. Business has been a little bit choppy the last couple of quarters. Just sort of what are you seeing that's driving that view? Is it a function of comps? Anything in the underlying end market?