Revvity, Inc. (NYSE:RVTY) Q3 2023 Earnings Call Transcript

Revvity, Inc. (NYSE:RVTY) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: Hello, and welcome to the Q3 2023 Revvity Earnings Conference Call. My name is Alex. I’ll be coordinating the call today. [Operator Instructions] I’ll now hand it over to your host, Steve Willoughby, Senior Vice President, Investor Relations. Please go ahead.

Steve Willoughby: Thank you, operator. Good morning, everyone, and welcome to Revvity’s Third 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 would like to remind everyone of the safe harbor statements that we have 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 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 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. 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. Revvity has been built to help accelerate the advancement of human health through science, while also being able to execute at a high level through various macroeconomic conditions. This unique and differentiated profile is intended to help make a profound impact on the future of healthcare and to insulate our performance during periods of macro pressure, while still allowing us to capitalize when industry tailwinds are at our back. We and others are in the midst of one of those periods of macroeconomic and industry pressure. This is evident with the increased headwinds that we began to experience during the second quarter, which intensified during the most recent quarter.

While we attempted to build some cushion into our assumptions, should industry dynamics worsen, the level of increased challenges we face from our pharma and biotech customers, particularly in September, was more than we anticipated. As a result, while our total company organic revenue grew by 1% in the quarter, we finished well below our mid-single-digit assumption from 90 days ago. Our lighter-than-expected revenue was driven by softness that occurred fairly late in the quarter. Given this last minute pressure, I’m very proud of our continued strong margin and earnings’ performance as the incremental headwinds in September left us very little time to try to properly manage our expenses. Our adjusted EPS in the quarter of $1.18 was still in line with the low-end of our implied guidance, despite our revenues coming in meaningfully below our expectations.

The downturn in demand from our pharma and biotech customers led our Life Sciences business declining in the low-single-digits organically in the quarter, which was below our low-single-digit growth expectation. The softer spending from pharma and biotech customers also put pressure on our applied genomics and genomic lab businesses within our Diagnostics segment. While our sizable immunodiagnostics business performed extremely well and grew in the high teens overall, including high teens growth in China, the pressure from softer pharma spending impacting parts of this segment resulted in our overall Diagnostics business growing 4% organically year-over-year in the quarter, excluding COVID, slightly below our mid- to high-single-digit expectations.

While Max will touch on this in more detail, we anticipate these end-market headwinds to continue through the fourth quarter, resulting in our non-COVID organic growth expected to be down in the mid-single-digits year-over-year, which would bring our full year non-COVID organic growth to approximately 2%. As to when this industry downturn might dissipate, we do not have a crystal ball, but we remain confident as ever in the future potential of our industry and for Revvity itself. As of right now, though, we are anticipating the pharma/biotech headwinds persist into at least the first half of 2024. There is currently a wide range of potential outcomes for next year, which is why we want to take the next few months to further evaluate underlying trends.

This range of potential outcomes infuse the possibility that organic growth could be in a similar range to what we are now expecting for this year, with the second half of the year likely being stronger than the first half. Given this current outlook, we will look to take additional cost actions heading into next year beyond the roughly $80 million of expenses we will have cut in 2023, since some favorable items from this year are not expected to repeat at the same level in 2024. With the heightened level of industry demand over the last few years now being followed by a subsequent correction, we are also currently analyzing our previously provided 2024 through 2026 midterm outlook to ensure it remains reflective of what we expect the business to be able to produce over that timeframe.

We would expect this analysis to be completed by the end of this calendar year. While the future of our end markets remain bright, and we expect global investment levels into science to rebound, we are certainly seeing more end market pressure than we had previously anticipated in some of our markets. As we’ve highlighted in the past, while we are likely more insulated from the macro and industry pressures than many of our peers, we are not immune to the current softer spending environment from pharma and biotech customers. Our ability to still post positive organic growth in the quarter, despite these headwinds will likely standout as earnings’ season continue to progress as we prudently manage those items that are fully within our control, particularly as it relates to our margins.

While we persevered through this current market, I believe we are making good progress on coming together as Revvity by focusing on our operational, commercial and R&D priorities as a new company. This focus and progress sets us up very well to prosper in the future once this period is over. A few recent examples of this were the launch of 2 new in vivo imaging platforms, the IVIS Spectrum 2 and the Quantum GX3. These launches represent a nearly complete refresh of our market-leading in vivo imaging portfolio. The Quantum GX3, for example, with its market-leading resolution allows us to now have a competitive solution for the bone market, which is a field we have not previously meaningfully participated in. It was also great to see our initial set of Pin-Point base editing reagents debut following our recent first license of our technology to a major pharma customer earlier this year.

These new reagents provide customers for the first time ready-to-use consumables to allow them to begin exploring the scientific potential of our novel base editing technology and its unique ability to perform complex and multi-gene editing. Our ability to now offer these 2 customers is another proof point for how we are leading with science and working to democratize base editing technology for all. You may have also seen recently that we’ve entered into 2 new important commercial collaborations. First, we announced a collaboration with Element Biosciences to use their cutting-edge AVITI sequencer system, combined with our significant portfolio of sample prep instruments and consumables to jointly offer unique complete NGS workflows. We expect this collaboration to initially focus on continuing to expand our NGS presence in newborn screening.

Secondly, we also recently announced an agreement with Danaher SCIEX business to begin providing their mass specs in select markets as a new option to be used with our newer base, newborn screening reagents in our customers’ workflows. While expanding the breadth of instruments we offer our customers in our newborn screening business, we are providing them a greater range of options to choose from that are fully supported by both companies. Both these recent collaborations are great examples of how we seek to provide our customers the most cutting-edge and efficient solutions, even if sometimes they may not fully reside within the foul balls of Revvity itself. Our recently released 2023 ESG report also highlights how we are having a meaningful impact on society.

This year’s report shows how we have dramatically expanded our environmental data collection efforts across the new company to provide us with an even more solid footing to build on in the years to come. Based on stakeholder feedback from our last materiality assessment, the report also highlights our continued focus on top employee issues and how we have introduced many new company policies targeting emerging topics such as bioethics, animal welfare and sustainable procurement amongst others. Finally, we have provided a new external ESG goal that we plan to pursue going forward. These include a 50% reduction in our Scope 1 and 2 emissions over the next decade, maintaining greater than 40% of senior leadership roles held by females and achieving a 75% or greater employee satisfaction rate.

In closing, before handing it to Max, our industry is currently going through one of its most difficult periods in the last 2 decades. While this period is not enjoyable for anyone, I’m thankful for the transformation that has occurred at the company over the last 3 years, including our successful divestiture back in March. As I mentioned, we are not immune to the current pressures. But, I think, you will see that Revvity has been built to perform better than most to macroeconomic environments, including tough ones like we are now in. We are focused on maintaining our strong relative margin profile and are making good progress on our operational, commercial and R&D initiatives. We also have a strong balance sheet, which we believe will likely become an even greater asset to us in the coming quarters.

I’m excited about our future and know we will come out of this period an even stronger and more efficient company than we are already today. With that, I’ll now turn the call over to Max.

Max Krakowiak: Thanks, Prahlad, and good morning, everyone. The company has gone through a significant amount of change over the past year and has continued to execute at a high level as our employees have risen to the occasion to overcome the dynamic environment we’ve been facing so far this year. We are now in the midst of our next challenge as we saw a noticeable step-down in demand from our pharma and biotech customers as we progress through the quarter, especially in September. Although we expect these headwinds to continue, we remain focused on the items that are within our control and remain excited about the opportunities that lie ahead for our new company. As Prahlad has mentioned, we continue to make progress on our strategic initiatives across R&D, operations and sales and marketing, while continuing to rightsize the business.

In addition to the previously discussed $60 million of cost actions we have taken so far this year, given the softer top-line trends we experienced as the third quarter progressed, we have identified another $20 million of further cost reductions that will impact the remainder of this year. Since we currently expect the softer pharma/biotech spending to be in place for at least a few more quarters, we are also working to take additional actions to properly align our cost structure as we head into next year, to ensure we appropriately balance strategic investments, while preserving our elevated margin profile. Now, moving on to our third quarter results. The company generated 1% non-COVID organic growth overall in the quarter, which resulted in total revenue of $671 million, which was down 6% due to the drop in COVID-related revenues compared to a year-ago.

Of the 400 basis points lower-than-anticipated organic growth we experienced in the quarter versus the midpoint of our guidance, approximately 300 basis points of the shortfall was pressure related to our instrument and software businesses, while 100 basis points was from softer reagent and consumable demand, particularly in September. APAC added 1% to our third quarter revenue, and we again had no incremental contribution from acquisitions. As it relates to our P&L, we generated 27.5% adjusted operating margins in the quarter overall, which were largely in line with our 28% expectation, despite the late fall off of revenue in the quarter. Our gross margins of 61% were down from last quarter due to a combination of less volume leverage and an unfavorable mix shift.

We incurred a favorable pricing impact of approximately 150 basis points in the quarter, which is helping to offset the continued inflation we are seeing across parts of the business. For the full year, we now expect at least 125 basis points of net pricing realization for the company overall. Looking below the line, we had net interest expense of $7 million, which was again favorable by a couple of million compared to our expectations. This favorability was primarily driven by better-than-expected interest income as we did a better-than-anticipated job of repatriating our cash so far this year. Our adjusted tax rate was 18% in the quarter, which was favorable to our expectations. We also continued to repurchase shares in the quarter buying back $111 million in total, bringing our year-to-date repurchase activity to $384 million.

We averaged 124.2 million shares in the quarter and exited the quarter with 123.5 million shares outstanding. Moving beyond the P&L, we generated adjusted free cash flow of $8 million in the quarter which on a year-over- year basis continue to be pressured from the drop in COVID revenues and roughly $21 million of outflows associated with one-time divestiture-related costs and rebranding activities. We expect some of these outflows to reverse over the coming months and positively impact our investing cash flow when they come back to us. On a year-to-date basis, our adjusted cash flow has been $2 million, which includes a headwind of nearly $200 million from one-time divestiture and rebranding-related activities. As for capital deployment, we continue to remain active in the quarter.

As mentioned, we bought back another $111 million of stock, and we paid off the remaining $467 million of our 2023 bond which matured in mid-September. We have significant cash and equivalents on our balance sheet and are well positioned to pay off the $800 million bond we have coming due next September. With this activity, we finished the quarter with a net debt-to-adjusted EBITDA leverage ratio of 2.8 times. I will now provide some commentary on our third quarter business trends, which is also included in the quarterly slide presentation on our Investor Relations website. The 1% non-COVID organic growth in the quarter was comprised of a 3% decline in our Life Sciences segment and 4% growth in Diagnostics. Geographically, we declined in the low-single-digits in the Americas, grew low-single-digits in Europe and grew mid-single-digits in Asia with China growing in the high-single-digits overall.

Within China, we saw our Diagnostics segment grow in the low-double-digits, driven by high teens growth in immunodiagnostics. This was offset by low-single-digit growth in Life Sciences. Looking ahead to the fourth quarter, we continue to expect our immunodiagnostics business to grow well in China, but likely more at a low-double-digit rate as comps continue to strengthen. From a segment perspective, our Life Sciences business generated total adjusted revenue of $308 million in the quarter. This was down 2% on a reported basis and 3% on an organic basis. From a customer perspective, sales in the pharma/biotech declined in the high-single-digits organically, which was offset by low-double-digit growth from academic and government customers. Our Life Sciences instrument revenue was down high-single-digits, while our reagent licensing and specialty pharma services revenue declined low-single-digits year-over-year.

The step down in reagent growth was driven by as anticipated lower licensing and pharma services revenue year-over-year and some pressure from the pharma/biotech customer weakness. While our reagent sales has been largely immune from some of the softer trends we started to see in the first half of the year, as we progress through the third quarter, we did begin to see some pullback on consumable spending from these customers as well. Our Revvity signal software business grew in the low-double-digits as it benefited from the timing of renewals year-over-year. We continue to expect this business to be down double-digits in the fourth quarter as we assume minimal new contract sales, and we have fewer multiyear contract renewals this quarter. At our Diagnostics segment, we generated $363 million of total adjusted revenue in the quarter, which was down 9% on a reported basis and 10% on an organic basis.

On a non-COVID basis, the segment grew 4% versus a year ago. Our immunodiagnostics business grew in the high teens organically, excluding COVID. It is great to see this business in China continue to normalize and I would again reiterate how important and impressive it is that this significant franchise continues to grow at a very high rate outside of China as well. We expect this business, which represents more than 25% of our total company revenue to continue to grow in the double-digits globally in the years to come. In our reproductive health business, overall organic revenue declined in the mid-single-digits year-over-year. We experienced mid-single-digit positive growth in our newborn business, which was offset by weaker trends in prenatal and continued known headwinds in our Revvity Omics genomics lab business, which should subside by the end of this year.

Our applied genomics business incurred increased pressure from the slowdown in pharma/biotech spending and declined organically in the low-double-digits, when excluding COVID across both instruments and consumables. While Prahlad has already provided some high-level commentary as it pertains to our guidance expectations, I thought I would provide some additional color. End market demand has been a very fluid and somewhat volatile issue that continues throughout this year. For the fourth quarter, we expect our non-COVID organic growth to decline in the mid-single-digits year-over-year as we expect our Life Sciences business to decline in the low-double-digits and our Diagnostics business to decline in the low-single-digits. For your modeling purposes, we would point you to the lower end of our total company organic growth range and highlight that we expect our operating margins to be similar to this past quarter.

Net interest and other expense is expected to be approximately $50 million as we will have less interest income going forward after paying off the remainder of our $500 million bond in mid-September, resulting in less cash available to invest. With a 16% tax rate, we expect adjusted EPS in the fourth quarter of $1.14 to $1.18. When combined with our year-to-date performance, this fourth quarter outlook equates to full year 2023 non-COVID organic growth of approximately 2%. We expect FX to be a 1% headwind and M&A to have no impact on the full year. This results in our 2023 total revenue now expected to be in the range of $2.72 billion to $2.74 billion. With the lower expected volumes, we now expect 28% adjusted operating margins this year, down from our 29% prior outlook.

Below the operating line, we do have some favorability that we expect to drive our adjusted net interest and other expense to be approximately $57 million this year in total, down slightly from our prior outlook. We experienced some favorability in the third quarter, which we expect to continue into the fourth. So we are now looking for a full year adjusted tax rate of 20%, down from our prior 21% outlook. Given our additional share repurchase in the quarter, we now expect the full year average fully diluted share count of a little under 125 million shares, down slightly from our prior assumption. This guidance now reflects our expected adjusted EPS to be in the range of $4.53 to $4.57 for the full year overall and is detailed on the second last page of our earnings presentation.

While Prahlad already provided some high-level thoughts on 2024, the only 2 things I would add are that while there are a wide range of potential outcomes for our organic growth next year, if growth did end up looking similar to what we now expect for this year, we would expect to have nominal margin expansion as the further cost actions we plan to take will be partially offset by general inflation and some costs returning. Secondly, we’d expect our net interest and other expense to be up approximately 40% next year as we will have significantly less interest income after paying off the remainder of the $500 million bond a month ago and the $800 million bond this upcoming September. While we are currently going through a challenging market environment that may extend for at least a few more quarters, we are confident in our ability to continue rising to the occasion as we have done over the past couple of years.

We remain focused on the items in our control such as our significant cost control actions and executing on our operational initiatives. These actions will allow us to be well positioned to capitalize on the exciting future opportunities in front of us as we continue to shape Revvity to realize its full potential. With that, operator, we would now like to open up the call for questions.

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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.

Patrick Donnelly: Thank you for taking the questions. Prahlad, maybe one for you, just in terms of the cadence of the quarter, it sounds like you flagged September as being quite a bit worse. Can you just talk about, I guess, what you saw as is kind of that exit rate what you’ve seen so far in October? And maybe specifically on reagents, it seems like those softened maybe more than others, just what you saw from customers and what you’re hearing on the go-forward on that piece?

Prahlad Singh: Sure, Patrick. As we entered September, what we realized is that the pressure on the reagent side was more than we anticipated. And some of it was what we realized is the site consolidations and the closure of some site from big pharma, which obviously impacted the reagents numbers, and we saw that impact. Second one was the CRO side in China, that continue to see more pressure than anticipated as we came closer towards the end of the quarter. Also, if you keep in mind, if our licensing comp revenue shows up in our reagents number. So if you were to – ex-licensing, our revenue for the reagents would have been flat.

Patrick Donnelly: Okay. That’s helpful. And then maybe one, just as we think about kind of the end of this year into early next, Prahlad, it was helpful here, you’re kind of talk about the first half of next year, maybe some of these headwinds lingering. It sounds like 4Q is maybe down mid-single non-COVID and, Max, kind of framing up maybe as next year does look similar to this year, you’re kind of in that low-single range. Is it the right way to think about the first half as we model maybe thinking about something in that down mid-single range and then ramping, and is it just going to be easier comps in the second half? Is there any visibility into a level of improvement? Or for now, given, as you said, the range of outcomes, is it just uncertainty?

Prahlad Singh: Yeah, I think it’s a fair question. Patrick, I think what we want to do is, as we said in our prepared remarks, we want to take the time to see how the macro evolves over the next couple of months and provide a more complete update towards the year-end. I think as we look at the line – as we and our peers have pointed out, as we look into the 4Q and especially on the instrument side of the business, generally, if you recall, 4Q generally tends to have a budget flush. That budget flush, we are very comfortable saying that, that’s not – there is no visibility into that. But, more importantly, I think as we look also into the first half of the year, we are not assuming a ramp-up in the first half. But in the second half, as you pointed out, obviously, because a lower comp, but also as things start coming back, our expectation is that it definitely would be better than as we would see in the first half. Max, anything I’m missing?

Max Krakowiak: No, I’m done, Prahlad.

Patrick Donnelly: Okay. Thank you, guys.

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

Vijay Kumar: Hey, guy. Thanks for taking my question. Prahlad, maybe just one on your September commentary on the guidance. So the guidance changed by $90 million. Is that all pharma? What is it assuming for China that $90 million change in guidance in that implied minus 5% for Q4? Is that the trend you guys saw in September and that’s what the guidance is as you look into Q4?

Prahlad Singh: I think majority of that, obviously, is on the Life Sciences side of the business, Vijay. Our assumption around instruments is that they would be down double-digits. Our assumption around reagents is that it would be flat versus 3Q. I think, also to keep in mind, on the Diagnostics side, applied genomics is getting impacted, because it’s the overlap of customers that we see on pharma/biotech. Our IDX business in China and everywhere else, while it continues to grow, it’s got a much tougher comp in 4Q versus what we had in 3Q. So it’s probably a combination of all the 3 things that I pointed out, which is what is leading us to what we’ve guided in 4Q.

Vijay Kumar: Understood. Max, one for you. I just want to understand your 2024 comments here. But did you say – did I hear you correctly when you said no operating leverage if revenue outlook was similar to fiscal 2023 on a base organic basis? And, I think you said net interest and other of 40%. Can you just put a dollar number, please? What’s the right base when you say up 40%?

Max Krakowiak: Yes. So a couple of points there, Vijay. One, I would say for 2024, right, I think we were saying there’s a wide range of potential outcomes for next year, and we’re going to take the next couple of months to further refine it. In the event that organic growth did look similar to this year, you are correct, we said that there will be nominal margin expansion, right, very low-single-digit growth year-over-year. In terms of your interest in other question, the 40% growth is off a $57 million number this year, which we provided in our prepared remarks. And the reason for the increase year-over-year is because of the lower cash balance we have on average in 2024. As we mentioned, we paid off the $500 million note in Q3 of this year, and we’ve got another $800 million that we have to pay off in September of next year.

Vijay Kumar: Very clear. Thank you, guys.

Operator: Thank you. Our next question comes from Derik De Bruin of Bank of America. Your line is now open. Please go ahead.

Derik De Bruin: Hi, good morning. Thank you taking the question. Just to put a point on it on the 2024 outlook. I mean, can you hold EPS flat or with the cost cutting? Or should we think about it as potentially being down year-over-year?

Max Krakowiak: Yeah, I think as we mentioned, Derik, right, we are not providing a guidance here for 2024. If we said there’s a potential range of outcomes, I think in the event that organic growth did look similar, we’ve given you enough pieces to go ahead and model down to the EPS. But again, we’re going to take the next couple of months to really refine what the organic growth assumption is, which will have a big impact on what our ultimate EPS is for next year.

Derik De Bruin: Got it. And just a little bit more color on what’s going on at BioLegend and Horizon, and just talk about sort of like some of the trends in pharma. Are they just – I mean, are they hesitating on spending? Are they doing it? Just any more incremental color you can sort of like give us on what’s going on with that end market. Thank you.