Revvity, Inc. (NYSE:RVTY) Q4 2023 Earnings Call Transcript

Revvity, Inc. (NYSE:RVTY) Q4 2023 Earnings Call Transcript February 1, 2024

Revvity, Inc. beats earnings expectations. Reported EPS is $1.25, expectations were $1.15. Revvity, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to today’s Revvity Inc. Q4 2023 Earnings Conference Call. My name is Delly I’ll be the moderator for today’s call. [Operator Instructions] I’d now like to pass conference over to your host today, Steve Willoughby, Senior Vice President of Investor Relations. Please go ahead.

Steve Willoughby: Thank you, operator. Good morning, everyone, and welcome to Revvity’s Fourth 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. As we highlighted in our pre-announcement a few weeks ago, while industry had been continued throughout the end of the year, we were able to perform slightly better than we had anticipated and finish the fourth quarter with a 3% decline in non-COVID organic revenue. While Max will provide more details on the quarter in a bit, I would say that our stronger than anticipated results were broad-based as both our Life Sciences and Diagnostic segments performed better than expected. I would also highlight that our performance was well-balanced geographically as each major region performed in line to slightly above what we had assumed. We also did a good job continuing to tightly control our expenses in light of the challenging environment that persisted through year end, and along with some favorable one-time tax benefits, helped deliver additional EPS upside in the fourth quarter.

We also had a very strong cash flow in the quarter with nearly $200 million of free cash flow while continuing to execute on our capital deployment initiatives. For the full year 2023, we generated 2% non-COVID organic growth. While not what we hoped for at the start of the year, I think you will see that our performance was differentiated versus the broader industry and likely will be near the high end of the peer set for the year once the dust fully settles. We expect this differentiated financial performance to continue going forward. As demonstrated in the new financial framework, we recently provided for our expected performance over the coming years. As part of this new long range outlook, we now expect revenues, organic revenue growth to be 200 basis points above the broader industry, regardless of the macroenvironment.

In a normal year, we would expect this to result in 6% to 8% organic growth and 75 basis points of operating margin expansion annually. In the post-COVID world we all now operate in; we anticipate this level of growth will result in performance that continues to be at the high end of our industry overall. As we highlighted during a recent investor conference, we expect approximately 60% of our business that is comprised of immunodiagnostics, Life Sciences reagents, and our signal software business to grow in the 9% to 11% range over the coming years, generating mid-single digit growth on their own for the total company. Given the stronger profitability of these segments, as they continue to grow faster than the remainder of the business, we expect it to result in natural margin expansion as they become an increasingly larger piece of the overall company over time.

Revvity is extremely well positioned to capitalize on some of the most exciting areas of pharmaceutical research and development, such as cell and gene therapy, multi-omics, and precision medicine. We are also involved in some of the most durable, higher growth areas within clinical Diagnostics such as autoimmunity, tuberculosis, and other emerging infectious diseases. With what our company has become over the last several years and where we are planning on going in the future, I think you will see that Revvity will continue to stand out as a very unique company. We have a differentiated approach with our customers, our competitive and novel product portfolio with continuous innovation and a unique position within the attractive Life Sciences and Diagnostic categories in which we compete.

A good example of this in the fourth quarter was the launch of our EONIS-Q system in our newborn screening business. The EONIS-Q system is a first of its kind workflow which streamlines molecular testing for both spinal muscular atrophy and SCID in newborns. It is a new and complete CE-IVD solution which consists of a new PEP-CR equipment with dedicated software and a specialized diagnostic SCID. With no wash steps being needed in the new workflow, it results in a significantly faster turnaround time and less hands-on involvement from samples to answer than existing methods. This allows for lower operating costs and greater sustainability as fewer consumables and plastic ware are required. The introduction of this innovative solution is also perfectly timed from a commercial perspective.

As the European Alliance for Newborn Screening and Spinal Muscular Atrophy mandates that by 2025, all newborns in Europe should be screened for SMA going forward. A new EONIS-Q system is just one example of how we are continuing to bring cutting edge and innovative solutions to market from across the company, benefiting both our customers and ultimately the patients they serve. We have also been making good progress on our operational initiatives. A good example of this is the launch of our new E-Commerce platform, which went live in the US in mid-December, approximately five to six months earlier than we anticipated. The platform’s integrated design was built specifically for the needs of what our business has become. It is expected to be extremely consumer friendly, while also over time delivering both revenue and operating synergies.

We expect this new system to go live outside the US in early 2Q. Another thing I’m extremely proud to see is the strong collaboration that is occurring amongst our teams across the company. A great example of this was how last year we had a sole source antibody supplier for one of our Diagnostics assays begin to have quality inconsistencies in their batches. Through the rapid collaboration amongst scientists from Euroimmun, BioLegend and Horizon, within nine weeks we had developed our own replacement antibody, validated it and were able to manufacture it in sufficient scale for commercial use. The ability and agility would never have been possible in the company of the past and I’m not sure it would be possible at most companies today other than Revvity.

As we look ahead to this year, we expect the ongoing headwinds from our pharma and biotech customers to continue, particularly in the first half of the year as they still are working through the impact from their elevated spending levels during the COVID years. We are assuming this pressure will begin to stabilize in the back half of the year when we anticipate returning to growth for the company overall. In light of the dynamic end market challenges continuing into 2024, as well as the return of some of the variable costs that we reduced in 2023, we have recently implemented additional structural cost actions to protect our strong profitability through this temporary period. We anticipate these actions will allow for operating margins to remain approximately flat year-over-year at 28% this year despite the low single digit organic growth we expect to repeat into 2024.

We expect this to result in our 2024 adjusted EPS to be in the range of $4.55 to $4.75. With our significant number of acquisitions over the past several years, coupled with the large divestiture we completed in early 2023, we still have many areas to further optimize in order to reach our full potential as a company. The significant actions we took in 2023, combined with the additional measures being implemented as we begin 2024, has put us on a good trajectory to further streamline and adjust our operations for the business we have now become. It also strongly positions us to capitalize on the leverage potential that exists in our company once industry growth normalizes. Overall, when looking back on 2023, I’d say it certainly ended up playing out quite differently than we had anticipated when sitting here a year ago.

However, I’m so proud of the transformation that we have undergone over the past few years, which we ultimately completed last year. While we are continuing to face external challenges, I’m extremely grateful for what Revvity has become and the significant efforts of so many who have made it come to fruition. Without everyone’s efforts and the rebirth of the company, our differentiated performance in 2023 would not have been possible. We remain confident that we will emerge from this temporary period of industry headwinds as a unique and stronger company that remains well positioned to help expand the boundaries of human potential through science. With that, I’ll now turn the call over to Max.

Max Krakowiak : Thanks, Prahlad, and good morning, everyone. The company demonstrated its perseverance in the fourth quarter during a period in which underlying industry demand continued to remain dynamic. I am proud of our team’s performance despite these challenges continuing through yearend, allowing our results to exceed our expectations for the quarter. As I’ll comment on more in a bit, we are now assuming the current market environment remains largely in place through at least the first half of this year, which will continue to put pressure on our results and cause our full year expectations to look fairly similar to what we achieved in 2023. However, we would expect our performance to be somewhat of the inverse of what we saw last year with the first half of 2024 remaining challenge and facing organic revenue declines before returning to growth in the second half.

While we work through this dynamic period, we have continued to remain extremely focused on those items and actions that are more fully within our control. We progressively tightened our expense management efforts throughout last year, and as previously mentioned, we have already implemented significant additional structural cost measures so far this year, which we anticipate will allow our operating margins to remain flat at 28% this year, despite our low single digit growth outlook paving the way for greater operating leverage in the future when growth normalizes. We also made good progress with our balance sheet and cash flow in 2023. In the fourth quarter, we generated $196 million of free cash flow as we made meaningful progress on collections and inventory management.

Excluding the divestiture related outflows we incurred during the year, much of which will be coming back to us in 2024, we generated over $400 million of free cash flow in 2023 overall. Given the amount of change that has occurred at the company over the past year, I view this as very strong performance and we are well positioned to continue executing on our capital deployment initiatives this year. Now moving to our specific fourth quarter and full year results. Overall, the company generated total adjusted revenues of $696 million in the quarter resulting in a 3% decline in non-COVID organic revenue which was above the high end of our guidance. The outperformance was fairly broad based as both our Life Sciences and our Diagnostic segments performed slightly above our expectations for the quarter.

FX was a 1% tailwind and we again had no incremental contribution from acquisitions. For the full year, we generated $2.75 billion of total adjusted revenue which was comprised of 2% non-COVID organic growth, no impact from FX or M&A and a modest $3 million contribution early in the year from COVID. As it relates to our P&L, we generated 27.5% adjusted operating margins in the quarter, which were in line with our expectations. For the full year, our op margins were 28%, which represented approximately 100 basis points of expansion excluding the removal of COVID related revenues. We incurred a favorable pricing impact of approximately 130 basis points in the quarter, which brought the full year impact from pricing to approximately 150 basis points.

We continue to expect at least 100 basis points of favorable pricing annually going forward. Looking below the line, we had adjusted net interest in other expense of $16 million, which was largely in line with our expectations. For the full year, our adjusted net interest in other expense was $58 million. Our adjusted tax rate was 12% in the quarter, which was favorable by a few 100 basis points to our expectations due to a couple of one-time tax items. These favorable discrete tax items contributed approximately $0.05 to our EPS in the quarter. For the full year, our adjusted tax rate was 18.6%, but would have been approximately 20% and in line with our expectations excluding the favorability we incurred here in the fourth quarter, which we do not expect to repeat in the future.

We averaged 123.4 million shares outstanding in the quarter and 124.8 million for the full year. This all led to adjusted EPS in the fourth quarter of $1.25, which was $0.09 above the midpoint and $0.07 above the high end of our expectations. Our full year 2023 adjusted EPS was $4.65. Moving beyond the P&L, as I mentioned, we generated free cash of $196 million in the quarter, while on a full year basis, our free cash flow was $198 million, which includes a headwind of slightly over $200 million from one-time divestiture and rebranding related activities. Also, as I previously mentioned, we expect a large portion of these outflows to reverse in 2024 and positively impact our investing cash flows when they come back to us. As for capital deployment, we continue to remain active in the fourth quarter.

We purchased an additional $400 million of U.S. Treasuries with maturity aligned to the remainder of the $800 million bond we have coming due in September. We now have over $700 million of Treasuries on our balance sheet, which will mature shortly before our bond comes due this September that we will use to extinguish this debt. We finished the quarter with a net debt to adjusted EBITDA leverage ratio of 2.8x. I will now provide some commentary on our fourth quarter and full year business trends, which is also included in the quarterly slide presentation on our investor relations website. The 3% decline in non-COVID organic revenue in the quarter was comprised of a 9% decline in our Life Sciences segment and 3% growth in Diagnostics. Geographically, we declined in the high single digits in the Americas, declined in the low single digits in Europe, and grew low single digits in Asia with China flat overall.

For the full year, we achieved 2% non-COVID organic growth with 5% growth in Diagnostics and flat performance in Life Sciences. The Americas declined low single digits, Europe grew mid-single digits, and both Asia and China grew mid-single digits for the full year. Within China in the quarter, we experienced mid-single digit growth in Diagnostics with high single digit growth in immunodiagnostics offset by a high single digit decline in Life Sciences. For the full year, China grew in the mid-single digits organically with high single digit growth in Diagnostics overall, low double digit growth in immunodiagnostics, and mid-single digit growth in Life Sciences. From a segment perspective, our Life Sciences business generated total adjusted revenue of $320 million in the quarter.

This was down 8% on a reported basis and 9% on an organic basis. For the full year, our Life Sciences business was flat organically. From a customer perspective, sales into pharma biotech customers declined in the mid-teens in the quarter, and in the mid-single digits for the year, which was offset by high single digit growth from academic and government customers in the quarter, and mid-teens growth for the year. Our Life Sciences instrument revenue represented about 30% of total Life Sciences revenue in 2023 and was down high teens in the quarter and down in the mid-single digits for the year. Our reagent, licensing, and specialty pharma services revenue represented about 57% of Life Sciences revenue in 2023 and grew low single digits in the quarter and in the mid-single digits for the year.

Finally, our signal software business, which represented the remaining 13% of Life Sciences revenue in 2023, declined double digits in the quarter and in the high single digits for the year. The decline in both the quarter and the full year was in line with expectations and was driven by fewer multiyear contracts renewing, which we anticipate to normalize in 2024. In our Diagnostics segment, we generated $376 million of total adjusted revenue in the quarter, which was down 4% on a reported basis and 6% on an organic basis. On a non-COVID basis, the segment grew 3% versus a year ago in the quarter and 5% for the year. Our immunodiagnostics business represented about 50% of our total Diagnostics revenue in 2023 and grew in the mid-teens organically excluding COVID during both the quarter and the full year.

Our immunodiagnostics business was strong globally as it continued to grow in the high teens outside of China both in the quarter and the full year. Our reproductive health business, which represented about 34% of total Diagnostics revenue in 2023, declined in the low single digits organically in the quarter and the full year. This business was again pressured by a significant mid-20% decline in our Revvity Omics lab business in the quarter and nearly 35% decline for the full year. As we transitioned to 2024, we will have now lapped the contract completions which pressured growth last year and do not anticipate such major year-over-year declines to continue. These pressures were partially offset by strong performance in 2023 from our newborn franchise, which grew in the high single digits overall for the year.

Finally, our applied genomics business, which represented the remaining roughly 16% of total Diagnostics revenue in 2023, continued to see pressure from the slowdown in pharma biotech spending and the hangover effect from elevated clinical lab COVID spending. Non-COVID organic revenue for our applied genomics business was down in the mid-teens during the quarter and was down in the high single digits for the full year. Now as it pertains to our outlook for 2024, we expect current industry headwinds to remain over at least the next couple of quarters before we begin to face easier comparisons as the year progresses. Our initial guidance for organic growth is similar to what we experienced in 2023 in the 1% to 3% range. From a quarterly pacing perspective, we expect revenue in the first quarter to be down mid-single digits with a sequential improvement in the second quarter, resulting in the first half still being down year-over-year overall.

We expect to return to positive growth starting in the third quarter this year. We also expect FX to contribute approximately 1% to total revenue based on the rates at the end of December. Moving down the P&L, we expect to hold our operating margin flat at 28% as our recent structural cost actions will help offset both some variable cost returning and the lower than normal organic growth we expect for this year. We expect total revenue in the first quarter to be the lowest of the year, which when combined with the only partial quarter impact from our recent cost actions, we expect the results in our operating margins being several hundred basis points below our full year guidance here in the first quarter. We currently expect our margins to be fairly similar to each other in the second and third quarters at around our overall full year average, with the fourth quarter being the strongest quarter of the year.

We expect adjusted net interest and other expense in 2024 to be approximately $70 million, representing a 20% increase versus last year. This increase is attributed to less interest income on lower cash balances as we pay off $1.3 billion in debt in 2023 and 2024. We expect our tax rate to be 20% and our average share count to be $123.5 million, similar to what it was in the fourth quarter. This all results in our initial 2024 adjusted EPS guidance to be in the range of $4.55 to $4.75, with the midpoint being flat to what we generated in 2023. We expect approximately 20% of our full year earnings to come here in the first quarter, as our tax rate will be about 200 basis points above our full year average, and net interest expense will be down about $5 million sequentially from the fourth quarter before increasing over the remainder of the year.

As we enter 2024, we will ensure we closely manage those items that are fully within our control, such as delivering on our innovation pipelines, reducing our working capital, and remaining active with capital deployment while continuing to take appropriate actions to further streamline and optimize the company following its transformation. When current industry headwinds subside, Revvity will be in an even stronger position to capitalize on this recovery, continue to highlight our differentiation, and realize the full potential of what we have become. With that, Operator, we would now like to open up the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from the line of Jack Meehan from Nephron Research.

Jack Meehan: Thank you. Good morning. Prahlad, I wanted to just start and get your thoughts on how you’re feeling about visibility in the business now. The macro is still pretty volatile. It would be great to hear what you’re hearing from customers and the things that build your confidence this 2024 outlook is in the right spot.

Prahlad Singh: Good morning, Jack. ‘23 certainly did not play out as we or others had envisioned it. But I think it was good to see that in the fourth quarter, while the environment remained challenging, for the first time in ‘23, it did not deteriorate more than what we had anticipated. I mean I’d say as we look forward into ‘24, including here in the first quarter, we are not anticipating any sort of meaningful or significant improvement. But I would say rather more of a continuation of current trends. So things do start to pick up. I would say that, I would expect that to provide more upside to the current outlook. So, somewhat where we are is more of a temporary holding pattern before demands comes back. But I’m optimistic that, we are perhaps what we are experiencing currently is more of a drove.

As far as we go, I think, one of the things that do help us is the portfolio transformation journey that we have gone through. If you look at our portfolio now, we have more Diagnostic than our peers, we’ve got less of a capital intensive business now than our peers, we’ve got a meaningful software business. And this differentiation allows us to have the confidence that we are in a pretty decent spot.

Jack Meehan: Great. And then follow up for Max, just as you, I appreciate the color on the pacing you provided, if you look at sales, so core down mid-single in the first quarter, just to get to the ramp you’re talking about, just wanted to confirm, are you kind of assuming this is just comp dynamics or is there anything else like noteworthy you’re assuming in terms of the assumptions behind that? Thanks.

Max Krakowiak : Yes, hey, Jack. So comp is definitely driving the majority of it. So we mentioned a little bit in the prepared remarks as you pointed out that we’d be down mid-single digits for Q1, a slight improvement in Q2 but still negative with the return of growth in the third quarter. I wouldn’t say that we are expecting material change in the market environment in second half. There’s always a little bit of quarterly noise, but it’s mostly comp driven. And another way to think about it is if you look at our two year stack between the first half and second half, both are at a low single digit with those sorts of annual cadence that I previously mentioned.

Operator: The next question today comes from the line of Matthew Sykes from Goldman Sachs.

Matthew Sykes: Thanks for taking my questions. Good morning. Maybe a Prahlad, wanted to start for you. As you look at the Life Sciences segment and the number of acquisitions you’ve made in that business, how do you feel the synergies are playing out in terms of covering the needs of researchers in both academic and biopharma? Are there portions of workflow and spend where you see gaps in your offering? And do you think you might lose the customer touch points along the way because of those gaps? Do you think you’re capturing the customers through the majority of their early R&D workflow? And if there are gaps, is that an organic solution, inorganic solution? Just would love to get your thoughts on that.

Prahlad Singh: Yes, good morning, Matt. Great question. I think the whole journey that we have gone through on our portfolio transformation was indeed to fill the gaps that we had in our portfolio. And if you recall two years ago, it was primarily a small molecule portfolio in preclinical research and differentiation — preclinical research and development. I mean, the whole concept of what we went through our acquisition journey was to fill the gaps in our portfolio around large molecules, biomolecules, cell and gene therapy. And I think, the synergies that we have started seeing from the Horizon, Sirion, Biolegend and Nexcelom acquisition is on the biomolecule side of the table. So I think we feel very good where we are. And if you add the software component that allows us more differentiation, we feel very good with the portfolio that we have.

Will the other additions that we will continue to make? Absolutely. But I think we feel very good with the portfolio that we have built.

Matthew Sykes: Great. Thanks for that. And then Max, just on phasing for Diagnostics specifically, how are you thinking about as we progress through the year in terms of Diagnostics growth and recovery, there are some different types of comps that business has relative to maybe Life Sciences. And then specifically on China, ImmunoDX, how are you thinking about that phasing of growth within your 2024 guidance framework? Thanks.

Max Krakowiak : Yes. Hey, Matt. So, I would say from the Diagnostic ramps perspective, the first half will be, I think, roughly flat from a Diagnostics standpoint. So if you remember, we have the big, the continued headwinds we’ll have in applied genomics throughout the year as we still are going through the additional COVID purchases and the Life Sciences’ weakness. And so it’ll be about, flattish for the first half and then second half, we’re anticipating a return to mid-single digit growth for the Diagnostics business. In terms of your question on Immunodiagnostics China, our assumption there for the full year is mid-single digit growth. However, if you exclude the impact of a change and go-to-market strategy we had for one of our legacy infectious disease businesses in China, the growth there is still similar to what it was in 2023 in terms of the high single to low double digit range.

And the reason why we made that change in the legacy business was actually to improve the profitability of us overall, though we’ll come with a little bit of heck from a revenue perspective.

Operator: The next question today comes from the line of Joshua Waldman from Cleveland Research.

Joshua Waldman: Hey, thanks for taking my questions. Two for you. First, either for Prahlad or Max. Wondered, if you could provide more context on what you’re seeing in the Life Sciences instrument business. I guess the instrument business broadly both life science and applied genomics. I mean it looks like both of those came in a bit better than you were thinking when you guided Q4. Curious if maybe you didn’t see quite the pullback from pharma you were expecting or maybe did you see some budget flushing in December come through. And then what’s assumed for those businesses in ‘24?

Max Krakowiak : Yes, hey, Josh. So I would say if you look at the fourth quarter results, to your point instrumentation on both the Life Sciences and applied genomics standpoint, they’re a bit better than our expectations. I think coming into the quarter, we had mention that we were wanting to be a little bit more conservative on our instrumentation assumptions. And so those did prove out to be conservative and they were slightly better. Although, I would — we would have really call it there was a budget flush activity in the fourth quarter. So as we look out to 2024, we do still believe our instruments will be pressured for this year. And I think if you look at the overall assumptions, both the Life Sciences instruments and applied genomics will be down in the high single digit range for 2024. And that’ll put them closer in line to what their LRP is when you look over — at that over a four or five year period.