PerkinElmer, Inc. (NYSE:PKI) Q4 2022 Earnings Call Transcript

PerkinElmer, Inc. (NYSE:PKI) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Hello, and welcome to the PerkinElmer Fourth Quarter 2022 Earnings Conference Call. My name is Alex, and I’ll be coordinating the call today. 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 PerkinElmer’s fourth quarter 2022 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: Thank you, Steve, and good morning, everyone. Before I begin, I want to express my deep sorrow for our colleagues, along with their friends and families in Turkey and Syria following the recent earthquake. What you are having to go through is something no one ever thinks can happen. And I want you to know that PerkinElmer will be supporting you in any way we can. Needless to say, the start of the year has been an eventful one, and from a business perspective, we have hit the ground running after finishing 2022 on a strong note that played out right in line with our expectations from the start of the quarter. We continue to successfully navigate an evolving macroenvironment, particularly in China, while staying tremendously focused on executing our upcoming divestiture of our Analytical and Enterprise Solutions business, which we expect to complete before the end of March.

Amid these undertakings, we, again, exceeded our total adjusted revenue and adjusted EPS targets for the quarter. The continued high level of execution throughout a period of transition for the company is a testament to the team we’ve built, the processes we’ve implemented and the quality of the businesses that comprise our new company. I couldn’t be more excited for our future, and the impact I expect us to have by helping our customers develop and deliver novel scientific breakthroughs that will have a profound impact on improving global health in the future. I would be remiss not to also thank all our colleagues who have spent a significant amount of time and effort preparing for the upcoming split of the company, including those roughly 6,000 employees who will be part of the divestiture.

I look forward to watching what the Analytical and Enterprise Solutions business can accomplish in the years to come, and thank you for all your efforts and impact which have made getting to this point a reality. As it pertains to the future of our Life Science and Diagnostics business, which is going to be renamed and rebranded in the months following the close of the divestiture, a significant amount of work has already taken place to prepare for this transition. I’m eager to share with you and our employees more about the direction of the new company in the near future. As I have highlighted to you over the last several quarters, the level of focus on material innovation that is now occurring within the company has meaningfully increased.

This was again on display over the last few months as our new high-throughput random access chemiluminescent diagnostic testing platform, the Excentis received its CE Mark and began initial commercial installations. While the test menu for this platform will continue to ramp over the next several years, it marked a multi-year effort of significant development to bring this next-generation platform to market. We will look to also bring this new system to the U.S. market in the coming year. With the low and medium throughput platforms that were added with the acquisition of IDS in 2021, the initial launch of the Excentis now provides a complete portfolio of chemiluminescent analyzer platforms spanning all throughputs to support our full spectrum of customers.

We were also excited to see in early January that the GAMT disorder was added to the RUSP panel for newborn screening in the United States. This deficiency can result in severe intellectual disabilities if it goes undetected and untreated within the first few years of a child’s life, and we continue to collaborate with KOLs to support their research and pilot programs on this. With our EONIS platform for SMA and SCID screening receiving FDA authorization last quarter, the recent additions of GAMT and MPS II are examples of the continuous innovation from our reproductive health business, allowing it to continue to grow despite well-known birth rate pressures over the last several years. In our Life Sciences business, we continue to bring innovation to the cell and gene therapy industry with the launch of adeno-associated virus AAV detection kits, which leverage our proprietary AlphaLISA technology and help researchers quickly and easily characterize viral vector particles being introduced.

Additionally, we signed a collaboration agreement in December with a leading global biotechnology company to identify novel AAV vectors aimed at crossing the blood-brain barrier. Working in conjunction with Professor Grimes Lab at the University Clinic, Heidelberg, our in-house team of viral vector experts in Munich, Germany are tasked with developing a novel generation of gene delivery vectors for treating a growing population affected with neurodegenerative diseases. The scope, high unmet clinical need and social challenge underpinning this collaboration is an illustrative example of just how much we have transformed our life science portfolio over the past few years. We are not only increasingly aligned with rapidly evolving and attractive fields like cell and gene therapy, but we’ve positioned ourselves to be uniquely focused to help accelerate these advancing fields forward.

In addition to continuing to invest in our R&D, we are also significantly focusing on internally developing our people. In the fourth quarter, we launched three new employee resource groups centered on supporting our Hispanic employees, our veterans and our employees with disabilities. We also started several employee networking groups to help employees with similar interests get to know one another and communicate across the company. These are both great examples of the change in culture that has been occurring at the company recently, which I expect to even further accelerate as we enter the next exciting phase of our corporate journey. While Max will share more details with you in a bit, it was encouraging to see our Life Science and Diagnostics business finish off the year on a strong note resulting in 9% non-COVID organic growth for the full year.

This was despite an approximate 300 basis point headwind from the lockdowns in China negatively impacting our immunodiagnostics business which we had assumed in our most recent guidance. At this point, we have continued to see an impact from the change in COVID policy in China and assume that we will not see our immunodiagnostics business there return to normal until the second half of 2023, which will have a big tough end impact on our overall expected growth for the year, particularly in the first half. As it relates to COVID, we have been a significant player in the response to the pandemic with the both lab-based PCR and the several government lab contracts we participated in. The testing mandates now ending in most areas around the world, it has recently resulted in a strict and dramatic decline in the demand for lab-based PCR tests and supplemental lab capacity.

While Max will provide more detail, we have decided to completely remove all COVID revenue from our guidance for the year and let what we expect to be minimal related revenue provide modest upside to our official guidance, a significant change from our prior expectations. Despite these two impacts, we are looking for 2023 to be another very strong year overall and one that will set the new company off on a great foundation to build upon in the years to come. As we execute on our transformation and the future accretive capital deployment opportunities it provides, we will unlock the full scientific, operational and financial potential of our Life Science and Diagnostics business resulting in a best-in-class culture, market-leading innovation and top-tier shareholder returns.

Our business is in an excellent position today with tremendous additional opportunity right in front of us that we are going to capitalize on. With that, I’ll now turn the call over to Max.

Max Krakowiak: Thanks, Prahlad, and good morning, everybody. As Prahlad mentioned, we are nearing the completion of our planned divestiture of our Applied and Enterprise Solutions business to New Mountain Capital, which we expect to wrap up before the end of March. Following the deal closure, we will continue our work to rebrand the company with an expectation of unveiling our new identity within the next few months. Until then, we will continue to refer to the Life Science and Diagnostics business externally as PerkinElmer just as we do today. With that said, we’re very excited to share with you our new name, identity and mission when the time comes. As it pertains to the divestiture, our teams across both businesses are working extremely hard to ensure a smooth transition and I am grateful for everyone’s continued efforts as we work towards a close over the coming weeks.

While there has been and will continue to be a lot of work involved, I’m even more confident that this decision will maximize the long-term potential of both businesses and I look-forward to seeing it come to fruition. Once the deal is closed, we expect to set aside a sizable portion of the after-tax proceeds to prepare for our upcoming debt maturities over the next 18 months with an initial $500 million coming due this September. This will still leave us with ample capacity to pursue additional capital deployment activities as they arise, such as continuing our track record of finding strategically important and accretive acquisitions. With these proceeds and the cash we expect to generate, we will have more than $2 billion of additional unencumbered cash available to deploy over the next three years without taking on any new debt.

We expect our future organic and inorganic investments will only further bolster the strong medium-term financial outlook we have previously provided. As it relates to the fourth quarter, we saw a strong performance despite continued challenges from disruptions in China, and we were again able to exceed our revenue and adjusted EPS targets. While most of my comments during the fourth quarter refer to just our Life Science and Diagnostics segments, which I’ll refer to as continuing ops, I thought I’d first start with a brief look at the combined company’s performance including the businesses that are intended to be divested. On a combined basis, including continuing ops and discontinued ops, we generated total adjusted revenues in fourth quarter of $1.09 billion, which was solidly above the high-end of our guidance.

Non-COVID organic growth for the combined businesses was 8% in line with our guidance while an FX headwind of approximately 5% and COVID revenues of $31 million were both slightly favorable to our expectations. As expected, there was no inorganic contribution from recent acquisitions. In relation to the P&L, our combined company adjusted operating margins were 27.3% for the quarter. We continue to see a benefit from our recent initiatives within our supply chain, operational expense management, and again, delivered strong pricing performance as we realized more than 200 basis points of positive impact in the quarter. Despite some modest non-operating expense pressures and a slightly higher tax rate, we were still able to generate $1.70 of adjusted EPS for the combined company, which was $0.04 above the midpoint and $0.03 above the high-end of our expectations.

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Moving beyond the P&L, we generated $112 million of adjusted free cash flow in the quarter, which was pressured on a year-over-year basis by a significantly lower COVID revenues, the divestiture and deal-related costs and the timing of tax payments. These dynamics are expected to continue in 2023 as COVID continues to roll off and we complete the divestiture and other activities related to the rebranding of the company. We continued our planned deleveraging by paying down another $53 million of debt in the quarter, bringing the full-year debt reduction to nearly $600 million. This resulted in our net leverage finishing at 2.7x at the end of the year. So far this year, we’ve already opportunistically paid down $30 million of shorter duration debt and continue to be well-positioned from a capital structure standpoint ahead of our upcoming divestiture.

Upon complete retirement of this shorter-term debt over the next two years, we will have approximately $3.2 billion of debt outstanding at an average fixed interest rate of 2.6% with a seven-year average duration. I would now like to provide some commentary pertaining to our fourth quarter and full year business trends. To give some perspective on what the company will look like going forward, all of my following commentary will only pertain to our continuing operations, which consist of our Life Science and Diagnostics business, and excludes our Applied and Enterprise Solutions businesses. Our Life Science and Diagnostics business generated 8% non-COVID organic growth in the quarter, which was in line with our expectations. For the full year, our Life Sciences and Diagnostics business grew 9% organically, excluding COVID, which includes a 300 basis point headwind from the China lockdowns.

So I’d say, it was a very strong year overall. Geographically, our Life Science and Diagnostics business grew in the high single-digits organically excluding COVID in all major regions in the quarter, including the Americas, Europe and Asia Pacific, with China growing in the low single-digit overall. For the full year, Americas and Europe, both grew in the low double-digits organically, while Asia grew in the mid-single-digits, with China being down in the low single-digits year-over-year. From a segment perspective, our Life Science business, which is currently being reported as our DAS continuing operations business for the time being, generated adjusted total revenue of $347 million in the quarter. This was up 9% year-over-year and represented 47% of our continuing ops total revenue.

Organically, the business grew 13% with mid-teens growth from pharma and high-single-digit growth from academic and government. From a product perspective, our Life Science research reagents, assays and pharma services represented approximately 54% of our total life science business in 2022, including acquisitions and grew in the low double-digits organically in the quarter and for the full year. Our instrument and related services, which represented approximately 31% of our Life Science revenue in 2022 also grew in the low double-digits in the quarter, which finished off an exceptional year with approximately 20% organic growth. Finally, our informatics business, which represented the remaining 15% of our Life Science revenue in 2022, grew in the mid-teens organically in the fourth quarter, also finishing off an outstanding year of approximately 20% organic growth.

Moving to our Diagnostics segment, we generated $394 million of total revenue in the quarter. This was down 44% year-over-year and represented 53% of our total continuing ops revenue. Organically, the business was down 39% year-over-year due to the $31 million of COVID revenue we generated being down significantly from the $336 million in the year-ago period. On a non-COVID basis, the diagnostics business grew 4% in the quarter and 5% for the full year. When excluding our immunodiagnostics business in China, our Diagnostics segment generated high single-digit non-COVID organic growth in 2022. While the pressures in China remained significant in the fourth quarter, the impact was largely in line with our expectation of our immunodiagnostics business in the region being down in the high single-digits year-over-year.

Excluding China, our immunodiagnostics business continued to perform very well and grew in the high-teens organically year-over-year in the quarter excluding COVID and was up mid-teens organically ex-COVID outside of China for the full year. So to look at it another way, when including the impact from lockdowns, our immunodiagnostics business was still up approximately 10% in the fourth quarter ex-COVID and grew low to mid-single-digits for the full year overall. On a non-COVID organic basis, our reproductive health business declined slightly year-over-year in the fourth quarter, but we’re still able to deliver mid single-digit growth for the full year. Favorable trends in Europe were offset by softness in Asia and a, slowing birth rate again in the Americas as global population growth pressures continue.

These macro-dynamics are masking the solid progress we are making with menu and geographic expansion, driven by our recent new product introductions and commercial execution. Our applied genomics business also declined slightly year-over-year on a non-COVID organic basis in the quarter. However, for the full year, the business grew organically in the high single-digits excluding COVID, resulting in a high-teens CAGR over the last three years, while this market is likely going through somewhat of demand adjustments from an instrument perspective given how many were sold over the last three years. We continue to feel very good about our new products in this area as well as our improved market positioning and consumables. Now as it pertains to our outlook for 2023, we expect it to be another strong year financially while we also worked through managing the transition with the divestiture and rebranding as a new company.

All of the forward-looking guidance commentary I’m about to provide only pertains to our remaining life science and diagnostics company and exclude the businesses that are soon to be divested. I would also note for your modeling purposes, that we have provided some additional historical performance metrics. As it pertains to the life science and diagnostics company quarterly non-COVID organic growth performance during 2022 and a reconciliation document that can be found on our investor website. First, as it pertains to COVID while our performance in the fourth quarter was still in line with our expectations. We did see a significant slowing in global demand as the year came to a finish. This fall off and COVID related demand and even more dramatically accelerated so far here in 2023 and we now expect COVID to represent less than 50 basis points of our overall revenue for the year.

While we will continue to report what our actual COVID revenue is each quarter this year, given the uncertainty of PCR testing over the remainder of the year and the immaterial contribution, we now currently project. We felt it would be prudent to just completely take it out of our assumptions for the year and let it be modestly incremental to our stated guidance. For our non-COVID business we anticipate another very strong year for our continuing ops life science and diagnostics business. But I expect you 9% non-COVID organic growth this year. This is driven by our assumption for low-double-digit growth in our life sciences business and high single-digit growth in diagnostics. As we have previously commented there continues to remain significant uncertainty as it pertains to the timing and magnitude of the potential rebound in non-acute diagnostic testing demand in China which so far quarter-to-date.

We have not seen meaningfully improve. While some may project that non-COVID diagnostic testing demand to rebound more significantly in the short-term, we are continuing to assume that our immunodiagnostics business in the region does not normalized until starting in the second half of the year. Should it normalize more quickly or significantly than this, it would present upside to our current assumptions. Consequently, we are expecting our overall immunodiagnostics to grow in the low double-digits in 2023 excluding COVID. Lastly, we are not assuming any revenue contribution from recent acquisitions and FX is currently expected to be neutral to our total year revenue. This results in our expected total 2023 revenue to be approximately $2.94 billion.

With our updated expectation for now having zero COVID revenue in our guidance for the year and despite historically carrying a very favorable margin profile compared to the rest of the business. I’m proud to share that we still expect to average 30% operating margins in 2023 in our life science and diagnostics business. Our ability to overcome this approximate 100 basis point operating margin headwind further reinforces the power of the underlying business and our ability to execute during this period of transition. We are assuming approximately $90 million of net interest and other expense this year, which is benefiting from the assumption of some additional interest income starting in the second quarter, but it’s also being negatively impacted by a significant year-over-year increase in our pension expense throughout the year, that is primarily driven by higher interest rates.

As for taxes, we continue to expect that the new company will start with an approximate 20% tax rate that we believe we can work to improve in the years to come. Our diluted share count should stay relatively stable at around 126.5 million average shares outstanding, this all results in us expecting adjusted EPS this year of $5.05. I note, this guidance includes approximately $0.45 of combined headwinds from the removal of all COVID revenue in our guidance compared to our previous $100 million expectation and the increased pension expense we are forecasting. To give you some perspective on the financial power of our life science and diagnostics business, this guidance implies at least the mid-teens underlying year-over-year EPS growth when excluding COVID completely in both years.

In terms of phasing, we expect our non-COVID organic growth to be fairly consistent throughout the year when taking year-ago comps into account. So on a two year average basis, we expect our non-COVID organic growth each quarter this year to be around that 9% we are expecting for the full year. From an EPS perspective, given our elevated prior year Q1 comps of 13% which is our most difficult comp of the year, we expect less operating leverage here in 1Q. Additionally, our 1Q operating margins will continue to be pressured by the impact of continuing ops accounting rules, until we close the divestiture. Moving to below the line, we will also not materially benefit in the first quarter from the increase in interest income. We anticipate once we receive the divestiture proceeds.

And finally, we expect our Q1 adjusted tax rate to be slightly above our full year average rate. Consequently, we expect the first quarter to represent approximately 19% to 20% of our full year adjusted EPS. With that, I’d like to turn it back over to Prahlad for some closing remarks. Prahlad?

Prahlad Singh: Thank you, Max. 2022 was clearly another strong year for PerkinElmer, but if we take a step-back and look at the past three years. Our focus was always to emerge from COVID as a stronger company. We believe that chapter has been successfully completed for both, the analytical and enterprise business as well as our new life science and diagnostics business. Within those three years our rapid and significant response to the COVID pandemic enabled more than 10 acquisitions fast-tracking the transformation of our company to higher growth and higher margin areas. Additionally, we embarked on a significant undertaking of splitting the company into two distinct businesses and yet through all that we’ve consistently executed on our financial targets which is a testament to our employees and pleasure we have created.

Looking forward, 2023 will be no different as our teams rise to the challenge of finishing the divestiture, rebranding our company and continuously executing against our financial commitments. We are in an excellent position today and our future is very bright. With that operator, we would now like to open up the call for questions.

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Q&A Session

Operator: Thank you. Our first question for today comes from Derik de Bruin of Bank of America. Derik, your line is now open. Please go ahead.

Derik de Bruin: Hi, good morning and thank you for taking the questions. So just Max, just to clarify something so your – your full end interest expense guide includes I’m just sort of – what are you assuming in terms of interest, interest income on the incremental. Just trying to make sure that $90 million guiding you’re guiding is an all-in number is sort of like how you see it – if there is some potential upside of that depending on the interest rate?

Max Krakowiak: Yes, hi Derik. So for your question, yes, it is an all-in number. So right now, we’re going to be probably putting aside, somewhere between $800 million and $900 million of the after tax proceeds into treasuries that will match up with the short-term debt that we have on our books. We’ve got the $500 million note coming due in Q3, 2023 and then we’ve got another $800 million coming due in Q3, 2024. And so our assumption is that, that $800 million to $900 million will initially go, there’s a chance for upside, but that is an all-in number there.

Derik de Bruin: Great, thank you for clear clarity. And when you look at the China progression in immunodiagnostics just sort of thinking about the one half of two halves expectation, I appreciate the color on the overall commentary on the business, but can you just sort of walk through how you’re sort of seeing that flow through the model?

Prahlad Singh: So well, maybe just to go back Derik, when you look – when we’ve seen China in our assumption right now is that it will be – overall China for us will be double-digit or growing above our company average growth rate for the – for 2023. And our assumption right now is it will come and come more into the second half of the quarter rather than – the second half of the year. And the first quarter, what we are assuming is China IDX will be worse than what we had approximately in the fourth quarter of 2022.

Derik de Bruin: Okay. Great. And then just one final, if I may. Pricing assumptions for 2023?

Max Krakowiak: Yes. So from a pricing standpoint, Derek, we’re assuming at least 100 bps pricing contribution in 2023.

Derik de Bruin: Great, thank you very much.

Operator: Thank you. Our next question comes from Patrick Donnelly of Citi. Patrick, your line is now open. Please go ahead.

Patrick Donnelly: Good morning, guys. Thank you for taking the questions. Maybe following up on Derek there on the China piece. Prahlad, it was encouraging to hear you guys talk about 1Q being consistent with that, call it, 9% for the year, given the China headwinds upfront, COVID coming out of the model, obviously. Can you just talk about, I guess, it seems like you have good visibility into 1Q being at that level, when China comes back in that back half, I would have thought that would accelerate growth. Can you just talk about, I guess, the cadence throughout the year, why the back half wouldn’t be stronger? Is it just layering in a level of conservatism in the back half? And then if China does indeed recover, you can kind of ride that to higher numbers. Just trying to get a sense there, given the 1Q guidance was pretty healthy from where we were standing.

Prahlad Singh: I think Derek, – Patrick, sorry, you’re right, I think if China – right now, the way we’ve assumed that it comes back to a normal growth rate in the second half of the year. Obviously, whether if it comes back faster or is more significant earlier than that, that would be upside to the model. And also, if the stimulus continues to sort of show its impact earlier, then that might be upside. So I think we’ve just been prudent in our guidance, seeing what we have seen in the first month of the – in the quarter when post – just before the spring festival. And it’s been only a week since people have started coming back from this spring festival. So I think I would just say, we are being cautious in our guidance and continue to watch it closely.

Patrick Donnelly: Okay. Understood. And then maybe on the margin side, certainly understand 1Q being a little lighter just given some of the continued ops piece. Can you just talk about, again, I guess, how we think about that throughout the year? And then particularly near-term, not – obviously, not asking for ’24, ’25 guidance just yet, but it seems like as those stranded costs come out, I wouldn’t see any reason why we wouldn’t be kind of 100 bps plus in the near term, just naturally as those come out. Can you just talk about, I guess, how that progresses in terms of the model? Again, the exit rate should be a little bit higher than I would think the near-term years skew on the upside as some of those stranded costs come out. But it would be helpful just to get a sense for what those look like as we work our way through the model here.

Max Krakowiak: Yes. Hi, Patrick. So the way I would think about it from a margin perspective in 2023 is if you go back to what we mentioned on the call, we are implying sort of a mid-teens EPS growth year-over-year when you strip out COVID from both periods. Implied in that mid-teens EPS growth is obviously the 9% organic growth, and then we are expecting about 100 basis points of margin expansion year-over-year on a non-COVID basis. So we are already to see about maybe 40% of that comes through the gross margin expansion, about 60% of that comes through operating expense leverage. So we feel good about the margin expansion we expect next year, which gives us, I think, even further momentum to your point on the midterm outlook and us feeling very confident in our margin expansion targets that we previously have put out there and don’t see any reason why 100 basis points per year is out of the question.

Patrick Donnelly: Great, thanks guys.

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