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

Thanks for joining us. I'm Tom Peterson, I'm an associate on our Life Sciences and Diagnostics team here at Baird. We're really excited to have Revvity presenting today. And representing the company, we have SVP of Investor Relations, ESG and Risk Management, Steve Willoughby. Steve, thanks for joining us.

Yes. Thanks for having me.

So before we begin, just a quick reminder to refer to Baird's website and our published research to go over important disclosures about what we're discussing today. In terms of our agenda, I think Steve is going to maybe give just a quick overview, a couple of slides, and then we'll hop right into Q&A from there.

Sure. Is that up here? All right. I'll just stand real quick.

Sure.

So for those of you who are not familiar with Revvity, it's a company that's undergone a significant transformation over the last few years, formerly known as PerkinElmer. It's a business that -- we've done about 11 acquisitions in the last 3 or 4 years. We ended up divesting 30% of our company to a private equity firm, including the PerkinElmer brand name. And then a little over a year ago, rebranded as Revvity. So let me tell you a little bit about it here. So just under $3 billion in revenue last year, fairly evenly split between Life Sciences and Diagnostics. But what we do within Life Sciences and Diagnostics is a little bit different than many other publicly traded companies you might be familiar with, and I'll get into that. Today, about 80% of our revenue is reoccurring in nature, with the remaining 20% being instrumentation. And you can see a fairly diverse geographic dispersion of revenue. So in Life Sciences, again, about half the business, what we are focused on in Life Sciences is preclinical. And so helping pharma companies, academia invent and then develop new drugs and compounds. We do that with leading products in things like antibodies, preclinical imaging, high-content screening and a unique instrumentation portfolio, and then a leading preclinical software business. The Life Science business has operating margins in the mid-30s. On the Diagnostics side, about $1.5 billion in revenue last year. Again, a little bit unique compared to other publicly traded companies you might be familiar with. The largest categories here that we play in are in specialty diagnostics, so things like autoimmune, allergy, latent tuberculosis, areas within diagnostics that have, we believe, inherently higher underlying market growth rates that we also have leading market positions in. We're also the market leader globally in reproductive health testing, particularly newborn screening. And then we also have a -- we're a player in what we call applied genomics, which is sequencing and PCR sample prep. This differentiation of our products and our business, we believe, should lead to some differentiated financial performance as well. You can see 2/3 of our business are comprised of specialty reagents and consumables in Life Sciences, specialty diagnostic assays and our unique software business. This 2/3 of our revenue, we expect to grow 9% to 11% in our current LRP. This leads the overall company, we believe, should have organic growth that is 200 basis points above normal underlying market growth rates. So in a normal environment, our industries grow approximately 4% to 6%. We expect our top line growth to be in the 6% to 8% range. We have tremendous margin expansion potential. And so with 6% to 8% organic growth, we expect to be able to deliver 75 basis points of margin expansion, leading to double-digit EPS growth before any capital deployment. So with that, Tom, I think we can probably open up the Q&A.

Great. Thanks, Steve, for that overview. Very helpful. Following the 2Q results, you narrowed the revenue guide for the year, talking about 2% organic growth for 2024. It feels like the tools group, overall, is seeing some stability in end markets here as we get into the middle part of the year. Is that how you would characterize things? And at a high level, what's allowing you to outgrow the peer group in '24?

Yes. I mean, it's interesting, because I think both this year as well as last year, last year, we did 2% organic growth. As you mentioned, this year, our current guidance is for 2% organic growth, not the 6% to 8% that we expect over the long term. But 2% has been better than most all peers out there, both last year and this year. And I think it comes down to the uniqueness of our portfolio. We like to say how we are not immune to various market pressures, but we are more insulated. And so whether it's within pharma biotech, where, as you well know, the industry has been under pressure for, let's say, 1.5 years now, we're impacted. But I would say we're -- because of the nature of our products and how innovative and unique they are, we're not being impacted to the same degree that maybe some others are. On the flip side, on our Diagnostics business, our Diagnostics business is not overly macro sensitive. It's been -- it's had some headwinds as it relates to China lockdowns, which, I would say, are hopefully a once-in-a-lifetime experience. But outside of that, the underlying drivers to the growth within our Diagnostics business are -- we don't believe should be materially impacted by varying economic conditions.

Great. That's helpful. And maybe getting into sort of the back half outlook in the guide. Your guidance assumes a return to growth in the third quarter and then an acceleration to high single digits or better, kind of, in the fourth quarter. And I know there's some comp dynamics going on. So can you kind of walk through some of the timing dynamics between 3Q and 4Q? And what gives you confidence in kind of getting to that high single-digit number in the back half?

Sure. Yes, we are facing easier comparisons as the year progresses, particularly in the back half of the year. As we move through the back half of the year and into the fourth quarter, there's a couple of different things going on. So in the third quarter, our current guidance is for low single-digit positive growth, which then implies 9% to 10% organic growth in the fourth quarter. That step up quarter-over-quarter, half of that is very company-specific. And so there is an aspect within our newborn screening business, particularly in China, where there's been even more significant pressure on births in China over the last 6 to 9 months than there have been for the last 5 years. Births have been declining quite significantly in China, but they took an even further step down following, basically, the fallout from the pandemic. We expect that to turn around here in the back half of the year, and we expect our newborn business in China to return to growth in the fourth quarter, helping drive that improvement in the fourth quarter. The other aspect is our software business. So within Life Sciences, we have a fairly unique preclinical software business that -- it's a fantastic business. And we're looking for this business to grow in the low double digits for the year overall. Based on the way some revenue recognition accounting works, there could be just some lumpiness in organic growth where the underlying business is actually extremely consistent. And based on the timing of when some contracts are renewing, that business which grew high teens in the second quarter, we expect to be down low single digits in the third quarter, improve back to over 20% growth in the fourth quarter. And so that will also drive a portion of it. And then, I would say, in our instruments businesses, we're expecting normal seasonality this year. And so, as you might recall, this time through the end of the year last year was not normal. And there was significant pressure going on post-Labor Day last year. And we do not anticipate that same level of cutbacks and activity reductions and head count reductions from pharma customers to reoccur again this year.

Got it. That's really helpful. And then maybe just quickly on margins in the back half. 2Q margins were better than expected. I guess, what gives you confidence in the op margin improvement through the back half of the year? And how much are cost control measures and other synergies as a result of the portfolio transformation starting to play out more deliberately in the business?

Sure. I think this is actually a great example of how strong the execution has been at our company over the last few years. The top line has obviously been challenged for us and for the industry. And even with our organic growth maybe being a few hundred basis points better than most others, again, it's somewhat outside of our control when the whole industry is under pressure. Those things that are more in our control, I would say, we're executing extremely well on. So for example, margins, cash flow, et cetera. And so you saw here, even in the second quarter, the margins coming better than expected. And we actually took up our operating margin guidance for the year, now expecting 28% to 28.5% operating margins, which would be up year-over-year despite only 2% organic growth. And so we're doing a very good job of managing expenses. I would say, we're also seeing a larger benefit come through from a number of our different integration and synergy activities and the host of operational initiatives we have going on in the company. Again, as I mentioned in my preview or overview, we did 11 acquisitions in 2 years. Then we sold 30% of the company. There's a lot of things that we can still go after from an operational standpoint. So things like footprint consolidation, in-sourcing, vendor consolidation, freight lane optimization. We've recently rolled out a brand-new -- built-from-the-ground-up e-commerce system. And so I think it's -- those actions that are fully in our control is what's helping drive the margin expansion here, even when the top line is pressured.

Yes. Okay. That's really helpful. Maybe getting into some business specifics, we'll start on the Life Sciences side of the house. I wanted to get into reagents visibility, in particular. 2Q, I think, ex licensing comps, was maybe a little bit lighter than expected, attributed to pharma consolidations, head count reductions, as you mentioned. So I guess, what's your level of visibility here, specifically, and your level of confidence that kind of 2Q was perhaps [ peak cut ] in terms of those consolidations and head count reductions?

Sure. Yes. I mean, to your point, yes. Our Life Science reagents, about a $750 million business on an annualized basis, was down modestly in the second quarter, a little bit worse than we had anticipated. We have -- we continue to see some unexpected activity reductions from pharma biotech customers, things like whether it's head count reductions, project cuts, site consolidations, et cetera. I would say, since around this time last year, the severity and the frequency of those unplanned actions from customers are decreasing and becoming less frequent. But they weren't -- they didn't end in the second quarter. We obviously were more than able to offset that with the strength in other businesses, even strength in some of our other Life Science businesses, such as software, such as life science instruments. So we are assuming that, on an overall dollars basis, it's fairly flat throughout the remainder of the year, just like it was 1Q to 2Q. So we're not really assuming any uptick in reagent demand. We're expecting it to remain fairly flat, which, if you think about what these products are, they are -- while they're highly specialized and highly innovative, they're also based off of underlying lab activity. And so we've adjusted our outlook for the back half of the year to account for this as well.

Independent of sort of those potential actions or future actions, would you expect that, upon normalization, that, that kind of reagent run rate would more quickly return to "normal"?

I think it's yes. I mean, we -- it's a fairly short cycle business. So for the vast majority of our orders and our revenue in the reagent business, we are delivering next day, not shipping next day. We are delivering next day, which is actually a competitive advantage for us. And so we're recognizing revenue on those orders fairly quickly. And so when activity does come back, I would expect us to be able to see that pretty quickly.

Yes. That's great. Maybe on that competitive positioning end point, we've seen some moves in the competitive landscape with Danaher and Abcam. How are you thinking about Revvity's competitive positioning? Have you seen any changes? And how do you view the portfolio going forward given the industry movement?

Sure. So obviously, you're referring to the antibody business. So antibodies within the BioLegend acquisition, which we did 3 years ago, largest acquisition in company history, antibodies are a little over half of our $750 million reagent portfolio. From a competitive perspective, I wouldn't say anything has meaningfully changed. I would say BioLegend is a business that has consistently been able to take share in the industry, and we don't view anything changing competitively that would disrupt that.

Yes. Maybe talking on reagents in China. I think reagents grew in China in the first half.

They did.

So what are you hearing from customers there? Where are you starting to see pockets of underlying activity, improvements in recovery, given the challenges we've seen in China over the last 12 months, at least?

I think this is another great example of how the differentiation of our portfolio. If you even go back to last year, in 2023, our Life Science business grew in the mid-single digits in China. I don't know of another company in this industry that grew in China, let alone in the mid-single digits. And I think it comes down to that -- the nature of our products. People are buying our antibodies, our specialized reagents because they are novel, they have a high degree of innovation, and they allow the customers to do something new or different. Our products are not used to run a lab. Our products are not used to turn the lights on. You're buying our products to do something new from a scientific perspective. And so it has a different demand profile than consumables, just generally speaking. And I think that's allowed demand to hold up better than maybe in some other areas that have been impacted, to a greater degree, by budgetary cuts, stimulus being cut, et cetera. I think the other thing to understand, too, is China is 17% of our revenue, 7% of that is Life Sciences, but over half of that is consumables. And so it's just it's -- I may have mentioned this already, we're not immune, but we are more insulated.

Yes. That's a good point. And on those mix, I was going to flip over to instrumentation in China, specifically. You noted on the 2Q call, you saw some signs of customers perhaps delaying or extending those purchasing decisions, just given the stimulus timing. So I guess, any updates on this trend? And are you still expecting kind of more of a constrained environment in the back half until we get more concrete stimulus funding?

For the time being, we are. I think what we saw in the second quarter and the latter half of the second quarter was stimulus in China continuing to work its way through the various levels of government approvals and getting closer to coming to fruition, but not that -- yet there. And so I think as they got closer, more customers decided to hold off on finalizing that purchase to see if they would benefit from stimulus. And so I think for the time being, until stimulus is fully flowing, instruments will continue to be a little bit more pressured in China. However, in the second quarter, our life science instruments were down -- for the whole company, were down low teens, which was in line with our expectations. And that is with China being worse than what we had expected, which means that our life science instruments outside of China were better than anticipated, particularly in the U.S. And so that's a promising sign that things are starting to hopefully heal and start to normalize.

Got it. And maybe just, one, are you -- what's baked into the guide for the back half on instrumentation overall for the portfolio? Are you kind of assuming a normal budget flush for the year? And what should we be thinking about from a growth perspective for the back half?

Yes. We are assuming more normal seasonality, which, I would say is, in our view, different than a budget flush. There have been years in the past where there have been significant budget flushes, where there was meaningfully underspending in the first part of the year, pent-up demand, and that came and flushed through. We're not assuming that to happen. We are assuming normal seasonality, though, which, for us, there is a step-up in instrumentation.

Yes. Okay. Maybe just given the developments on BIOSECURE and the passage in the House, can you just remind us what are your current thoughts on sort of potential impact in China? How are you thinking about just your competitive positioning overall? And obviously, we have ways to see if there's any finalization, but are you noticing any trends in -- different customer behavior ahead of any potential impacts from that bill?

Our products really follow the science. And so whether it's an antibody that it's being used to be part of building a new drug or some of the screening reagents or in-vivo imaging reagents that are being used to analyze a new compounder drug, where that science is being done geographically, it doesn't matter, I would say. Whether it's being done in China or outside of China, our products really follow the science, I would say. And so I also think that there's not a lot of local market competition for what we do on the Life Sciences side as well because of the innovative nature of it. If you compare and contrast that to maybe some of the things that we divested, there might have been more local market competition for some of those products, where that's just not the case in what we do. If there are redundant supply chains that are set up outside of China, that, in theory, could potentially be an opportunity for us if more systems or people or consumables need to be used.

Got it. That's helpful. Let's maybe zone in on emerging biotech. If you could just, one, remind us kind of where the exposure is across the portfolio, how you define that. But also, we've seen good improvements in biotech financings here in calendar '24. I guess, what's your level of insight in terms of when that funding starts to flow through and your level of visibility into order and activity improvements for those customers?

Sure. So we look at it as and we define it as pre-revenue pharma biotech. And those pre-revenue pharma customers represent 5% of our total company revenue, which equates to about 10% of our Life Science business, which equates to about 15% of our pharma biotech exposure. And so when you think about, as I mentioned, we are very focused in preclinical R&D. Preclinical does not necessarily mean pre-revenue. And so 85% of our pharma biotech revenue comes from medium and large-sized customers. The Pfizers of the world are doing a lot more preclinical R&D than these small companies. And so we have been impacted by some of the capital constraints, but it's 5% of revenue. I would say, our revenue from those small customers has been down double digits since the beginning of 2023, which continued into the second quarter here, but I would say that the declines are shrinking. We're still seeing declines, but not as severe as what we had been seeing throughout 2023. In terms of how long it takes to flow through, I think a key question will be how much of that biotech funding is spent on preclinical R&D versus clinical trials. And I think a rule of thumb is typically about 30% or so of pharma R&D dollars is spent preclinically, 70% is spent clinically in clinical trials. And so I think it's a question that remains to be seen of where this increased funding actually ends up and ends up going.

Great. You talked about software a little bit in terms of the timing dynamics in the back half, another strong quarter in 2Q, kind of independent of some of the quarter-to-quarter lumpiness. I wondered if you could zone in on sort of where you're seeing the most success here in terms of new products. Can you parse out the mix between net customer retentions, new business wins, SaaS conversions, those things?

Yes. So our software business is -- it's a fantastic business. It's a business that, in our LRP, we expected to grow 9% to 11%. Historically, it's done a little bit better than that, very profitable business. The growth algorithm for our software business is a number of things, I would say. It's -- one, it's increased penetration in existing accounts as accounts come up and contracts come up for renewal, expanding that contract, adding more seats, turning on more modules, coming out with new products. And so earlier this year, we came out with two new software offerings that expand our capabilities a little bit further downstream into clinical trials and CROs, which is an area that we have not historically played in. So that's a true market expansion. I would also say is that, today, of our roughly $200 million in software revenue, about 1/3 is converted to SaaS, 2/3 remains on-premise licenses. And as we bring more of our modules and offerings into the cloud, it will allow us to better target medium and smaller-sized customers, which we really haven't gone after tremendously in the past. And so that's something that will be another nice growth driver as we move forward as we have more of our products available on a SaaS offering.

Got it. Let's flip over to Diagnostics. Immunodiagnostics continues to see impressive demand here. The LRP kind of assumes 9% to 11%. Can you talk about some of the menu and geographic expansion opportunities that are still ahead of this business before we get into China? I know EUROIMMUN initially was underpenetrated in the U.S., so maybe we can start there.

Sure. Yes. So immunodiagnostics, half our Diagnostics portfolio. As you mentioned, we expect it to grow 9% to 11%. Year-to-date, it's grown 10% against mid-teens comps. So it's putting up a very good performance, I would say. I think a key thing to understand about our immunodiagnostics business, the vast majority of it is -- the largest piece of it is autoimmune. And the autoimmune market for diagnostic testing is different than other areas that are more routine. It's different than general respiratory or general infectious disease. It has a higher underlying market growth rate. Autoimmune testing is still a very underdiagnosed area of diagnostic testing. And so as it gains greater adoption, that inherently drives a faster level of market growth. It's one of the primary reasons we got into this business 6 or 7 years ago is because of that potential. I would say, in addition to that higher level of underlying market growth, we've done a really good job of new products. And coming out with highly sensitive, highly specialized assays in both existing markets to expand the menu, but also in, what I would consider, adjacent markets that are maybe just other areas of underdiagnosed specialty diagnostics. And then as you have mentioned, another key growth driver for us, which is probably a little bit different than other diagnostic businesses, you might look at it from an investor perspective is, historically, this business has been dramatically underpenetrated in the U.S. So the U.S. is the major growth market for us. When we acquired EUROIMMUN in 2017, 5% of its revenue came in the U.S. Today, that's 15%. It should be 35% or 40% based on normal geographic dispersions for diagnostic testing. And so while our overall autoimmune business has been growing in the low double digits over the last 5, 6, 7 years, obviously, for the U.S. to go from 5% to 15%, it means the U.S. have been putting up even more significant growth, which we don't see ending. We are still in the fairly early innings of getting our full menu FDA-approved, which we will continue to do over the next couple of years.

Yes. Maybe in China, specifically, immunodiagnostics, somewhere around 3/4 of China Diagnostics revenue. What's your go-to-market strategy in China? Have there been any changes to that approach? And just given the competitive dynamics there, how would you frame EUROIMMUN's positioning in China, specifically?

Sure. I would say, first, EUROIMMUN has been in China for a very long time. And the question comes up a lot about VBP or value-based pricing. And this is an area that has not impacted us. And I think it's -- one of the reasons for that is because of the specialty nature of what we do. If you think about autoimmune testing, you're somewhat trying to find a needle in a haystack with a patient. And if you know anybody, if your friend or family member has ever had an autoimmune condition, many times, you have to go through rounds and rounds and rounds of testing over months, if not, sometimes, even over years to figure out what is wrong with these people. And you need a test that works. And you need a test that's very sensitive. And so it's one of the key reasons why we are the market leader globally is because we have very highly sensitive, very good products. And I would say that's the same thing in China as well.

Got it. Well, a lot more we could talk on Diagnostics, but with a couple of minutes left, I wanted to talk on capital allocation. On the 2Q call, you highlighted plans to accelerate share repurchases moving forward. Do you think this is more of just a short-term option? Are there any shifts towards your longer-term capital allocation focus? And just maybe your high-level thoughts on M&A given the portfolio transformation over the last couple of years.

Sure. Yes. Obviously, in our prepared remarks on the 2Q call, we talked more about capital deployment and about share repurchases and how we plan to be more aggressive with share buybacks. If you look back historically, the vast majority of our capital deployment has gone towards M&A. And we, in the past, as PerkinElmer, I would say, we needed to do M&A to transition and transform the portfolio. We've now done that. And the business that Revvity is today, we really, really like, and have a very bright future. And we believe it's one that I think you will see over the coming years, we're a business that's going to have industry-leading financial metrics. And with where our stock is today, I think that should have -- buying back some more stock here should have a very good return for shareholders in the future. I think it also signals -- we've also done a very good job with cash flow. Year-to-date, I think over maybe the last 3 quarters, we've had over 100% free cash flow conversion to adjusted net income. And so we've got a very healthy balance sheet as well that we can go look to opportunistically deploy here.

Yes, you've got an upcoming debt repayment here in the third quarter...

I think it's like this week.

This week, yes, yes. But any thoughts on sort of the portfolio as it sits today? And any kind of high-level gaps that you would look at?

There are things that are certainly strategically interesting to us. It has been -- while we were very busy with M&A for a period of time, it's now been 3 years since we've done an acquisition. And it's not like we haven't continued to remain very active in discussions and evaluations. I think for M&A, you also -- particularly for a financial profile of a business like we now have, you need the math to make sense. And while there are things that are strategically interesting to us, as you know, cost of capital has gone up, valuations really haven't come down. And so we'll take our time, and I think buying back our own stock right now is a good investment as well.

Great. Well, with about 30 seconds left, you've got the LRP up there on the slides that you issued in January of this year. You've got an upcoming Investor Day in November. So any initial items that we should be thinking about that you're particularly excited to share with the investment community maybe outside of the financial metrics that you presented thus far?

Yes. I mean Revvity is a company that's been around for 4 quarters now in its current form. And so I think we need to continue to do a good job of further educating investors on who we are, what makes us different, why that differentiation, we believe, should lead to differentiated financial performance. I think if you get the opportunity, hopefully, you can come, Tom, out in San Diego. Investors will be able to see our BioLegend campus for the first time. It's a fantastic facility. It was just built a few months ago or a few years ago. And so I think that will be another big highlight in addition to investor education, and then there'll be some other things we've got in the works as well.

Great. Well, we're looking forward to it. We'll leave it there since we're out of time. Steve, thanks so much for joining us.

Thank you.