PerkinElmer, Inc. (NYSE:PKI) Q1 2023 Earnings Call Transcript May 11, 2023

PerkinElmer, Inc. misses on earnings expectations. Reported EPS is $1.01 EPS, expectations were $1.06.

Operator: Hello, and welcome to the Q1 2023 Revvity Inc. Earnings Conference Call. My name is Alex, and I’ll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Steve Willoughby, SVP of Investor Relations. Please go ahead.

Steve Willoughby: Thank you, operator. Good morning, everyone, and welcome to Revvity’s first quarter 2023 earnings conference call. On the call with me today are Prahlad Singh, our President and Chief Executive Officer; and Max Krakowiak, our Senior Vice President and Chief Financial Officer. Before we begin, I’d like to remind everyone of the Safe Harbor statements that we’ve outlined in our press release issued earlier this morning and also those in our SEC filings. Statements or comments made on this call may be forward-looking statements, which may include but are not necessarily limited to financial projections or other statements of the company’s plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties.

The company’s actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. Any forward-looking statements made today represent our views as of today. We disclaim any obligation to update these forward-looking statements in the future, even if our estimates change. So you should not rely on any of today’s forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release.

To the extent we use non-GAAP measures during the call that are not reconciled to GAAP, we will provide reconciliations promptly. I’ll now turn it over to our President and Chief Executive Officer, Prahlad Singh. Prahlad?

Prahlad Singh: Thanks Steve, and good morning, everyone. It is great to be speaking to all of you for the first time as Revvity. We are here in Dallas today as we are hosting a global gathering of employees to officially launch the new company and brand this week. Our objective is to not only familiarize and engage our employees with the new brand but also to organize and collaborate in person for the first time as a collective group since before the pandemic. The past few months have been incredibly busy as we have officially closed the latest chapter of our transformation. As you likely saw earlier this week, we launched Revvity as our new brand after receiving shareholder approval to change our company’s name in late April.

To change the name and brand identity for a public company with a roughly $3 billion in revenue and over 11,000 employees is a significant undertaking, but one that I am confident in our ability to execute well and I couldn’t be more excited for what the future of Revvity holds. This follows the successful completion of the divestiture of our analytical and enterprise solutions business in mid-March which was also quite the undertaking in and of itself. To give you some quick perspective of the process it entailed, we have to successfully transfer 96 separate facilities, create approximately 40 new legal entities, sign, convey or separate roughly 2,000 different contracts and change the employer for over 5,500 people. Needless to say, it requires substantial effort by many and I am proud that we completed this successfully and on time.

At its core, the vision for revenue is founded on the belief that what is believed to be impossible, can instead serve as our inspiration to help customers make new, breakthrough scientific discoveries. Revvity is about being a leader in helping revolutionary science at an accelerated speed to improve people’s lives everywhere. As you know, challenging limits and re-imagining the impossible are key to advancing science, but being able to do so rapidly whether in the R&D lab or in the clinic can have a profound impact on the development of a new drug or the next treatment for a patient. Not only will these elements be key to our success, but we will also further build solutions and technologies that cross over between our life sciences and our diagnostics businesses.

We are increasingly seeing how the interplay across the health spectrum is shaping our customers approaches to solving their greatest challenges. For example, as genomics and multi-omics become even more established in pharmaceutical and academic research and development, we are focused on providing specific high value tools that help bring this new science to life, while also being a leading innovator of difficult to develop clinical assays and systems. And if we look at our life sciences business today, we not only help our customers invent the next ground breaking therapeutics, but also support their development to the point they can enter human clinical trials. In the not too distant future, we will aim to work with our customers as they work to bring these new offerings all the way to commercialization.

On top of that, we can combine some of the same innovative science with our robust know-how of developing novel diagnostic tools and assays, providing vital information to help specifically identify those patients who stand to benefit the most from these new therapies and careers. This is what’s so exciting about Revvity. We are in a unique position to embrace the impossible to improve lives everywhere. While Revvity was born from a significant portfolio transformation over the last few years, I think what is less known and more difficult to see externally is how much the company has also transformed internally at the same time. We have made meaningful progress in operating efficiency, R&D productivity, talent diversity and development and company culture.

Despite the impressive performance so far, we are still just scratching the surface of our potential. In terms of how the business is performing today, we generated 6% organic growth in 1Q, 2023 excluding COVID, which was against a strong 13% comparison from a year ago. As we look ahead to the remainder of the year, while there are always moving pieces, we remain optimistic the company is now extremely well positioned to outperform our underlying market growth and peer set in all types of macro environments. The 6% organic growth in the quarter, which was at the high end of our implied guidance, was despite our amino diagnostic business and China, which represents 5% to 6% of our total company revenue being softer than what we saw during 4Q and softer than our expectations coming into the quarter.

This piece of our business has been significantly impacted by both the lockdowns and the subsequent infection wave following the reopening. While daily life appears to have returned to normal in the country, the non-acute diagonostic testing that we support still has not fully recovered. We continue to expect it to take until the second half of the year to more fully return to normal which is consistent with our previous commentary and expectations. With that being said, we are expecting sequential improvements and absolute demand in 2Q in our diagnostics business in China. Even more than able to offset this continued pressure on a diagnostic business in China as the rest of the company performed stronger than anticipated. Our life sciences business grew in the high single digits overall with low double-digit growth in reagents and as expected mid-single digit decline in our informatics business due to the previously mentioned timing of renewals this year.

Our diagnostic business grew in low single digits overall despite the pressures in China as a immunodiagnostics business outside of China, which is three to four times the size of the business in China grew in the mid-teams in the quarter. I think this shows the underlying strength and potential of this franchise once we get through the patient accessibility issues we faced over the last year or so. Revvity is a company that will be leading with innovation and that was again apparent here in 1Q. At the SLAS conference in February we launched the EnVison Nexus, which is the next generation version of our most sophisticated Multimode Plate Reader, which has dedicated an optimized reagents and software, providing a complete solution for our customers right from launch.

Additionally, we are making good progress on our technology partnership and licensing opportunities and expect to be able to share more details later this year. Finally, we have a robust near-term pipeline of additional new product introductions slated for over the remainder of the year across our businesses, which we are excited about and look forward to getting in customers’ hands soon. As it pertains to our impact on the world overall, we are continuing to make good progress on our ESG journey, which is an integral part of Revvity and was reflected in a recent note was the improvement on our ESG rating with Moody’s, which put us well above our peer group overall. And now that the officially launched Revvity, we will look to get our current emission reduction targets certified by the science-based targets initiated in the coming months.

With the divestiture now complete, we have been busy preparing for and starting to take steps to redeploy the proceeds from the deal. While Max will share more details, we are appropriately aligning our balance sheet to maximize returns, while also planning for upcoming debt maturity over the next 16 months. We have also recently increased our flexibility to opportunistically repurchase shares should be choose with a new $600 million authorization from our board to replace what was left on our prior authorization. However, our primary focus for tactical deployment continues to be towards an organic investment, while also taking into account, some of the incremental organic investments we are beginning to undertake such as a new e-commerce platform and planning for additional GMP capacity.

In closing, Revvity’s future is extremely bright. We look forward to continuing to serve as a visionary partner to help solve the greatest health challenges, while also delivering market-leading financial performance at scale. With strong organic revenue growth and mid-teens adjusted EPS growth expected over the medium term, Revvity is poised to make a lasting and unique impact on the world in many ways going forward. With that, I’ll now turn the call over to Max.

Max Krakowiak: Thanks Prahlad. Good morning everyone. As Prahlad highlighted, it was a significant and transformational accomplishment to successfully complete the divestiture of our analytical and enterprise solution spaces during the first quarter. This was followed by officially launching the new brand’s Revvity just two days ago. There’s been a tremendous amount of work and effort by so many over the last few years to complete this transformation of the business. But at the same time, it also feels like we are now just getting started and beginning to scratch the surface of our full potential. It is a unique opportunity to name an existing business and I’m excited about how the name Revvity links to our company’s purpose.

Rev comes from the concept of revolutionizing, while Vity stems from the Latin word Vita which translates to life. This ability to help our customers revolutionize human life through science is both humbling and energizing experience not only for me personally but for our entire company. As I begin to walk through our financial results, I wanted to remind you that all of my following commentary completely excludes the business that we divested and only includes our life sciences and diagnostic businesses which now make up Revvity. Overall, the business reform well in the first quarter. Our adjusted revenues were $675 million, which was down 30% due to the significant drop in COVID-related revenues compared to a year ago. On a non-COVID basis, our organic growth was 6% which was at the upper end of our expectation despite a slower than expected recovery so far in our China diagnostic business.

FX was a 3% headwind which was a point worse than we had expected and we had no contribution from recent acquisitions. As previously mentioned, while we are now excluding all COVID revenue from our expectations and guidance, we did generate $3 million of COVID related revenue in the first quarter, which is obviously a dramatic reduction from the $310 million of COVID related revenue we had in the first quarter a year ago. As seen in the first quarter, we expect our COVID revenues going forward to be diminished, which is why we are they are no longer included in our guidance. As it relates to the P&L, we generated 28% adjusted operating margins in the quarter overall. This was driven by adjusted gross margins of 62.4% as we continue to see progress on our supply chain productivity and pricing initiatives.

This was partially offset by product mix given the aforementioned headwinds in our diagnostics business in China were greater than we had planned. As for pricing, we generated around 200 basis points of net price realization in the quarter as you started to last some of the more significant pricing efforts we implemented a year ago. For the full year, we continue to expect at least 100 basis points of net pricing realization for the company overall. Looking below the operating line, we had net interest expense and other of $27 million in the quarter and our adjusted tax rate was 21.5%. This all resulted in the adjusted EPS in the first quarter of $1.01, which is at the upper end of our expectations. Moving beyond the P&L, we generated adjusted free cash of $51 million in the quarter, which on a year-over-year basis was pressured significantly from the meaningful drop in COVID related revenues.

Additionally, we had approximately $80 million of cash outflows related to our divestiture rebranding and pension related expenses. So on a normalized basis, our cash flow performance is off to a strong start so far this year. With regard to capital deployment, we’ve been much more active so far this year as we’ve deployed over $800 million year-to-date, which includes $130 million of share repurchases and approximately $700 million towards preparing for a $1.2 billion of remaining short-term debt maturities over the next 16 months. We continue to expect to arrange additional investments to align with these upcoming maturities over the coming weeks. This left us with a net debt to adjusted EBITDA leverage ratio of 1.9x at the end of the quarter, which is down from 2.7x at the end of the year and down from 2.3x a year ago.

We are very well positioned from a capital structure standpoint and have ample flexibility to pursue those investments we believe are in the best long-term interest for our shareholders. I’d now like to provide some commentary pertaining to our first quarter business trends. You’ll see on our investor website a new quarterly earnings related slide deck that has been revamped for Revvity to provide some additional information on the financial performance of the company. The 6% non-COVID organic growth generated in the quarter was comprised of 9% growth in our Life Sciences segment and 3% Diagnostics. Geographically, we grew in the low single digits in the Americas, low double digits in Europe and mid-single digits in Asia Pac, with flat performance in China overall.

Within China, we continue to see greater than 20% year-over-year organic growth in our Life Sciences business, which was offset by the larger than anticipated headwinds from the reopening-related infection wave on our diagnostics business. Overall, our Diagnostics segment in China declined in the low double digits with immunodiagnostics declining in the high teens, which was worse than our low double-digit decline expectation. While we expect trends to improve sequentially in the second quarter for this pressure part of our Diagnostics business in China, we still do not expect volume trends to begin to fully normalize until the second half of the year, consistent with our previous expectations. From a segment perspective, our Life Sciences business generated adjusted total revenue of $328 million in the quarter.

This was up 7% year-over-year on a reported basis and up 9% on an organic basis against a strong 19% year ago comparison, and represented 49% of total company revenue overall. From a customer perspective, our sales in the pharma/biotech grew in the mid-single digits, while sales to academic and government grew in the strong double digits organically year-over-year. As it pertains to pharma biotech, which makes up approximately 75% to 80% of our revenue in the Life Sciences segment, our business today is predominantly focused on preclinical R&D workflows, such as content development, discovery and target identification, target verification and preclinical QA/QC. Consequently, we are not overly impacted by changes or reductions in the number or scope of clinical trials, but rather the amount of activity actually being performed in our customers’ R&D labs.

In the first quarter, we saw continued strength in this earlier-stage R&D across our large midsized customers that make up the vast majority of our revenue. We did start to see some softening in trend from our smaller pre-revenue customers, we estimate represent approximately 5% of total company revenue. From a product perspective, our research reagents and Specialty Pharma Services continued their strong performance, and again grew in the low double digits organically in the quarter. Instrumentation and related services exceeded expectations by growing in the low double digits, while informatics declined in the mid-single digits in line with our expectations due to pressure from the timing of multiyear contract renewals. Despite this modest decline, our informatics business is still up in the teens on both a 2- and 3-year average basis.

Moving to our Diagnostics segment. We generated $347 million of total revenue in the quarter. This was down 47% year-over-year and down 44% organically due to the significant drop in COVID-related revenues versus a year ago. As previously mentioned, on a non-COVID basis, the Diagnostics business grew 3% versus a year ago. Excluding the low double-digit non-COVID organic decline, our overall Diagnostics business in China experienced in the quarter, our remaining Diagnostics transit outside of China, would have grown 6% year-over-year. From a business perspective, our reproductive health business was flat overall organically in the quarter, a slight improvement from the modest year-over-year declines we saw last quarter. We saw strong growth in our neonatal business, which offset declines in our genomic lab businesses.

While we had seen a small positive inflection in birth rate trends this time a year ago, over the last several quarters, including here in the first quarter, we’ve seen the number of babies being born unfortunately begin to slow again. Our continued success with bringing novel new products to market and getting them on approved testing menus continues to be our playbook to help offset these continued demographic pressures. On a non-COVID basis, our immunodiagnostics business grew in the mid-single digits overall and was up mid-teens when excluding China. Our immunodiagnostics business in China, which represents around 20% to 25% of our overall immunodiagnostics business and 5% to 6% of total company revenue, declined in the high teens organically when excluding COVID, which, as mentioned, was worse than our low double-digit expectation.

Given the non-acute nature of our immunodiagnostics testing business, as we had previously cautioned, it appears a rebound in this type of care is likely to come as a lag to other more acute medical needs that needs to be addressed more immediately. While we are expecting a meaningful sequential improvement in the second quarter, we still do not expect a full normalization in demand to be realized until the second half of the year. Finally, our Applied Genomics business slightly declined year-over-year on a non-COVID basis in the quarter, similar to its performance in the fourth quarter. Despite this slight year-over-year decline, this still resulted in double-digit average growth on both a 2-and 3-year average basis. Similar to last quarter, we continue to see double-digit organic growth in consumables, while instrumentation declined in the low double digits year-over-year, as it continues to go through an adjustment period, which could last all of 2023.

Now moving on to guidance. we performed at the upper end of our expectations during the quarter despite some greater-than-expected headwinds in our Diagnostics business in China. We also successfully navigated the completion of the divestiture of our Analytical and Enterprise Solutions businesses, and began our initial capital redeployment activities. As we look ahead to the remainder of the year, we continue to expect it to be a very strong year overall but are adjusting our non-COVID organic growth outlook to now be in the high single-digit range year-over-year to account for the dynamic market environment we are now all clearly facing. While there remains a path to the 9% organic growth we initially expected at the beginning of the year, we felt it would be prudent to take a slightly more conservative approach to our outlook given the slower-than-expected ramp in our Diagnostics business in China so far this year, and what appears to be some increased uncertainty among some in pharma biotech and the genomic lab industries.

We are still expecting FX to have a neutral impact to the full year and no impact from M&A. We are only taking into account in our guidance the modest $3 million of COVID revenue we did in the first quarter, which all results in our 2023 total revenue now expected to be in the range of $2.9 billion to $2.94 billion. From a profitability perspective, we continue to expect 30% operating margins this year, unchanged from our previous guidance. Below the line, we have a few moving pieces which largely offset each other. First, now that we have received the proceeds from our recent divestiture, we are actively working on repatriating those funds to the most appropriate geographic jurisdictions to be effectively redeployed in the future. This process is already underway and is likely to take at least through the end of the year to be fully complete.

In the meantime, we have already begun to reinvest some of the proceeds as we have repurchased approximately $130 million of shares year-to-date. We have also been appropriately aligning and investing our excess cash to fund our upcoming debt maturities over the next 16 months. Given the more favorable interest rate environment as of late and the fixed nature of all of our debt, we now expect net interest expense and other to be approximately $80 million this year, down from our prior $90 million expectation. However, this is being largely offset by a slightly higher expected tax rate of 21% compared to our previous 20% outlook, as the impact from our strategic tax planning initiatives that are already underway will largely fall outside of 2023.

With our year-to-date share repurchases, we now expect our average shares outstanding for the year to be approximately 126 million, down 0.5 million shares from our previous outlook. At this point, we are not assuming any future repurchases or reductions in our share count in our guidance, but do plan to remain flexible with our capital deployment activities to ensure our actions maximize long-term shareholder value creation. All of this guidance now results in an expected EPS range of $4.85 to $5.05 for the full year and is detailed on the second to last page of our earnings presentation. For pacing throughout the year, we now expect non-COVID organic growth in the second quarter to be fairly similar to the first quarter as Diagnostics volumes are still working to fully recover, and to account for some of the increased market uncertainties that have recently been highlighted certain areas.

We continue to expect our non-COVID organic growth to improve in the back half given an anticipated normal Diagnostics business in China, and a return to growth in our software business. As for margins, we expect in the second quarter to be up sequentially from the 28% we generated in the first quarter and slightly below our full year outlook. Below the line, we expect second quarter to represent the lowest quarter of the year for our net interest income given we’ll have an entire quarter of our cash being reinvested, resulting in about half of the net interest expense as compared to $27 million we incurred here in the first quarter. We expect our net interest expense to increase sequentially in the third and further increase again in the fourth quarter.

As for tax, we expect the second quarter to represent the high point for our adjusted tax rate for the year, and likely to come in approximately 100 basis points or so above our updated 21% full year outlook. We expect this to result in adjusted EPS in the second quarter to represent approximately 24% of our updated full year outlook. With that, operator, we would now like to open up the call for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question for today comes from Patrick Donnelly of Citi. Patrick your line is now open, please go ahead.

Operator: Thank you. Our next question comes from Catherine Schulte from Baird. Catherine your line is now open, please go ahead.

Operator: Thank you. Our next question comes from Michael Ryskin of Bank of America. Michael, your line is now open, please go ahead.

Operator: Thank you. Our next question comes from Jack Meehan of Nephron Research. Jack your line is now open, please go ahead.

Operator: Thank you. Our next question comes from Vijay Kumar of Evercore. Vijay your line is now open, please go ahead.

Operator: Thank you. Our next question comes from Dan Arias of Stifel. Dan your line is now open, please go ahead.

Operator: Thank you. Our next question comes from Josh Waldman of Cleveland. Josh, your line is now open, please go ahead.

Operator: Thank you. Our next question comes from Luke Sergott of Barclays. Luke your line is now open, please go ahead.

Operator: Thank you. Our next question comes from Matt Sykes of Goldman Sachs. Matt your line is now open, please go ahead.

Operator: Thank you. Our next question comes from Dan Brennan of TD Cowen. Dan your line is now open, please go ahead.

Operator: Thank you. Our next question comes from Rachel Vatnsdal from JPMorgan. Rachel your line is now open, please go ahead.

Operator: Thank you. Our next question comes from Brandon Couillard from Jefferies. Brandon your line is now open, please go ahead.

Operator: Thank you. I will now turn the call back over to Steve Willoughby for any further remarks.

Steve Willoughby: Thanks, Alex. Thanks, everyone, for your time today and your questions this morning, and we look forward to speaking with you over the coming weeks and months and, again, next quarter. Have a good day.

Operator: Thank you for joining today’s call. You may now disconnect your lines.