Revvity : Q1 2024 Earnings Transcript

REVVITY, INC. FQ1 2024 EARNINGS CALL APR 29, 2024

Call Participants

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REVVITY, INC. FQ1 2024 EARNINGS CALL APR 29, 2024

Presentation

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Operator

Hello, and welcome to the Q1 2024 Revvity Earnings Conference Call. My name is Carla, and I will be coordinating your call today.

[Operator Instructions]

I will now hand you over to your host, Stephen Willoughby to begin. Steve, please go ahead.

Stephen Barr Willoughby

Senior VP of Investor Relations & Head of ESG

Thank you, operator. Good morning, everyone, and welcome to Revvity's First Quarter 2024 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. I'd like to remind you of our safe harbor statements 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 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 R. Singh

CEO, President & Director

Thanks, Steve, and good morning, everyone. Following the company's transformation over the last several years, today marks the fourth quarter that we have reported our results as Revvity. And in 2 weeks, I look forward to celebrating with my colleagues, the 1-year anniversary of our new company unveiling. I'm proud to look back on all that we have accomplished in such a short period of time, and I'm excited to continue to build on the great progress we have been making towards reaching our ultimate potential.

We were extremely active during the first few months of the year as the team hit the ground running on a number of key initiatives, on which I thought I would provide some more insight this morning. First, from a market perspective, while we have begun to have more constructive conversations with our pharma and biotech customers over the last 45 to 60 days, their actual spending has not yet begun to meaningfully pick back up.

So while it is promising to see continued stability, and there are a couple of potential trends on the horizon, which could turn into tailwinds, given we have yet to see a meaningful inflection in actual order trends, we are currently maintaining our outlook for the remainder of the year.

Revvity's uniqueness was on display through -- in the first quarter as our Diagnostic businesses have continued to remain strong and performed well. Our Immunodiagnostics franchise, which is by far the largest piece of our Diagnostics segment driving the low double digits in the quarter.

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REVVITY, INC. FQ1 2024 EARNINGS CALL APR 29, 2024

Our newborn Screening business also continued to perform well with mid-single-digit growth overall, including double-digit growth outside of China. This helped to offset the significant declines that occurred as we had anticipated in our Applied Genomics business.

The combination of these market environments led our performance overall to be better than we had anticipated with our organic revenue declining 3% ahead of our mid-single-digit decline expectation. Given the trends we experienced over the last few months of 2023, which continued into this year, we entered 2024, accelerating our efforts to eliminate stranded costs from our recent transformation and offset the return of variable expenses, which were reduced last year.

These cost containment efforts continued through the first quarter and will help us further optimize the organization moving forward. Our newly formed enterprise operations team is making good progress on leading a number of initiatives to further streamline our business in the near term, while also setting us up to capitalize on more significant internal opportunities over the coming years, such as footprint consolidation, logistics optimization, vendor consolidation, and several very intriguing insourcing opportunities.

Secondly, as part of this concerted effort to reach our full potential as quickly as possible, earlier this month, we realigned the management of a few of our business units. As part of these changes, I'm pleased to announce that Gene Lay, the founder of BioLegend, has now become the head of our overall Life Sciences segment. As we have mentioned in the past, we have intentionally taken a more flexible approach to the integration of our acquisitions in order to benefit from the strengths and the opportunities each of them uniquely provides.

With this change, we have cemented the reverse integration process we have been working through in our Life Sciences business since we acquired BioLegend 2 years ago. This change in leadership is part of a broader streamlining of my direct organization and builds on the recently completed successful integrations of several acquisitions, including IDS, Oxford Immunotec and eXcelon.

With these changes, we are now poised for tremendous internal collaboration and the company will be in an even stronger position to drive key initiatives going forward, including aggressively bringing new innovations to market, capitalizing on new go-to-market opportunities, making consistent progress on our key areas of operational focus, and advantageously deploying capital both internally and externally.

For example, these organizational changes are intended to build an even stronger connection between our Life Sciences, Revvity Omics and Diagnostics businesses. I look forward to continuing the invaluable partnership Gene and I already have built as well as seeing the further progress that I expect will come from this evolution.

From a financial standpoint, our strong focus on expense management during this current period of softer market conditions led our adjusted operating margins in the first quarter to be 25.5%, which is approximately 100 basis points above our expectations. We are making good progress in a number of areas, and I expect our margins in both our Diagnostics and Life Sciences segments will continue to improve over the remainder of the year.

The improvement in our Diagnostics margins will be a key factor in the years to come as we look to achieve our 75 basis points of annual margin expansion once organic revenue growth normalizes. Despite already having near industry-leading operating margins for the company overall, in just our first year as Revvity, it has been great to see the successful impact our actions over the last few quarters are already having. I'm confident in our ability to drive additional margin improvement over both the remainder of this year and in the years to come.

Now that the majority of our divestiture and rebranding activities are behind us, I was also very pleased to see that our cash generation performance was again quite strong in the first quarter of the year. During the first quarter, we generated over $130 million of free cash flow for the second quarter in a row.

While the first quarter of the year is typically the lightest from a cash flow generation standpoint, it was great to see such strong performance this quarter. This is a testament to the keen attention being paid by the team on all things that impact our cash flow, such as purchasing and inventory, improving collections,

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REVVITY, INC. FQ1 2024 EARNINGS CALL APR 29, 2024

strong management of our payables and an otherwise tight focus on our spending. We expect these positive cash flow trends to continue over the remainder of the year and be supplemented by additional meaningful inflows related to the divestiture that are due to us in the coming months.

In addition to our better-than-expected financial performance in the first quarter, we also had an extremely robust first few months from an innovation perspective. Starting in our Revvity Signals Software business, we launched 3 new SaaS-based offerings, two of which, Signals Clinical and Signal Synergy, enter us into new adjacent markets for which we have not previously served. Our Signals business is off to a strong start this year by growing a better-than-expectedhigh-single digits in the first quarter, and is well positioned to continue to perform well, both from a financial standpoint and an innovation standpoint over the remainder of the year.

Also software-related, we launched our next-generation sequencing solution for newborn screening during the first quarter. This new optimized RUO workflow will build on our already strong market leadership position in newborn screening as the technology continues to develop.

One initial success story of this offering is our recently announced collaboration with a large nonprofit research institute, RTI, thereby their groundbreaking early check research study for newborn screening will benefit from Revvity's genomic sequencing capabilities starting in May. These are the types of cutting- edge collaborations with the world's leading scientists that Revvity excels at.

Finally, we again had a strong quarter of innovation in our Life Sciences Reagents business. As our GMP reagent capacity expansion begins to fully come online, we launched a number of new GLP recombinant proteins in addition to several products incorporating our new next-generation UV dies.

I'm also proud to announce that our BioLegend business was awarded several grants from the Michael J. Fox Foundation to become one of their main partners in helping to commercialize the profound scientific breakthroughs from Parkinson's disease that their impactful work is producing.

So in closing, now that we are almost at 1 year since becoming Revvity, and having already crossed over the first anniversary of completing a significant divestiture, with those time-consuming activities now largely behind us, I see every day how the company is beginning to hit its stride. We are making more profound advancement in our operating structure and our go-to-market strategy, which will both enable us to properly weather the current industry environment as well as set us up to accelerate our financial performance as more normalized demand returns, hopefully, starting in the second half of this year.

I wanted to share that we plan to provide additional insight on our significant potential and the progress we are making at an Investor Day, we will host this November both in-person and virtually from our BioLegend campus in San Diego. We look forward to being able to provide an even deeper dive on our key operational initiatives and the status of the transformation that has already occurred.

We also plan to share more perspective on our new product pipelines and key strategic partnerships as well as how our capital deployments, both internally and externally over the last few years have set up the company for consistent industry-leading financial performance in the years to come. We will communicate more details on this event in the coming months, but wanted to put it on everyone's radar screen now.

With that, I'll now turn the call over to Max.

Maxwell Krakowiak

Senior VP & CFO

Thanks, Prahlad, and good morning, everyone. During the first quarter, we continued to execute at a high level despite the continued challenges in the pharma/biotech industry. As we face these headwinds, the strength of our Immunodiagnostics, newborn and software businesses allowed us to exceed our organic revenue expectations and also overcome some incremental FX pressure.

As we've been discussing over the last several quarters, during this period of software, pharma and biotech spending, we have had a concerted effort on controlling those items that are more directly within our control, specifically our operational efficiency and our cash flow generation. It was great to see both of

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REVVITY, INC. FQ1 2024 EARNINGS CALL APR 29, 2024

these focus areas really performing well in the first quarter, with our adjusted operating margins of 25.5% being approximately 100 basis points above our expectations, and our $132 million of free cash flow being well over 100% of our adjusted net income in the quarter.

As I begin to walk through our financials for the quarter, I wanted to remind everyone that 2023 revenues related to COVID were de minimis, and as such, we will no longer be referencing non-COVID revenue. Instead, I will focus my commentary in our disclosed results solely on our organic performance.

Overall, the company generated total adjusted revenues of $650 million in the quarter, resulting in a 3% decline in organic revenue, which was above our expectations. FX was a modest year-over-year headwind, roughly 100 basis points, worse than we had assumed, and we again had no incremental contributions from acquisitions.

As it relates to our P&L, we generated 25.5% adjusted operating margins in the quarter as we continued to focus on controlling our operational costs while accelerating the elimination of divestiture-related stranded costs, leading to stronger margins this quarter. We incurred a favorable pricing impact of approximately 100 basis points in the quarter, and we continue to expect at least 100 basis points of favorable price annually going forward.

Looking below the line, we had adjusted net interest and other expense of $11 million and an adjusted tax rate of 22.2%, both in line with our expectations. With an average diluted share count of 123.5 million for the quarter, this resulted in adjusted EPS in the first quarter of $0.98, which was $0.05 above the midpoint of our expectations.

Moving beyond the P&L, as I mentioned, we generated free cash flow of $132 million in the quarter. I'm encouraged by the strong cash performance and diligent execution across all teams. We expect this momentum to continue given our recent AI-driven cash collection investments and an increased focus on inventory management. In addition to this internally generated cash flow, we are anticipating some divestiture-related outflows from last year to be reversed and return to us in the coming months, further strengthening our balance sheet.

As for capital deployment, we remain active in the first quarter. We repurchased $11 million of shares in the quarter and remained active in evaluating potential inorganic opportunities that are of interest to us. As a reminder, we continue to hold a significant amount of U.S. treasuries, which are term match to the remainder of the $800 million bond we have coming due this September. We finished the quarter with a net debt to adjusted EBITDA leverage ratio of 2.7x.

I will now provide some commentary on our first quarter business trends, which is also included in the quarterly slide presentation on our Investor Relations website.

The 3% decline in organic revenue in the quarter was comprised of an 8% decline in our Life Sciences segment and 1% growth in Diagnostics. Geographically, we declined in the low single digits in the Americas, declined in the mid-single digits in Europe and declined low single digits in Asia, with China declining mid-single digits.

From a segment perspective, our Life Sciences business generated adjusted revenue of $303 million in the quarter. This was down 8% on both a reported on an organic basis. From a customer perspective, sales to pharma/biotech customers declined in the low double digits in the quarter, while sales to academic and government customers declined low single digits.

Our Life Sciences instrument revenue was down mid-teens in the quarter, and our reagents technology licensing and specialty pharma services revenue declined high single digits. We saw delays in our pharma customers finalizing their budgets for this year and continued lower overall lab activity levels.

As Prahlad mentioned, while we now do have more insight into what customers' budgets look like for this year than we did 90 days ago, and are observing pockets of more favorable trends, we have not yet seen this result in a meaningful improvement in underlying order rates outside of normal seasonality.

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REVVITY, INC. FQ1 2024 EARNINGS CALL APR 29, 2024

Our Signal Software business grew high single digits in the quarter, which was a bit ahead of our expectations. We continue to have very strong growth in our SaaS offerings, which bodes well for the long-term potential of this business, especially as we continue to bring new SaaS offerings to market as we have demonstrated with our multiple launches so far this year.

In our Diagnostics segment, we generated $347 million of adjusted revenue in the quarter, which was flat on a reported basis and grew 1% on an organic basis. From a business perspective, our Immunodiagnostics business grew in the low double digits organically during this quarter. This consisted of high-teens organic growth in China and high single-digit growth outside of China. The strong performance marks another quarter of above-market growth, which is driven by the uniqueness of the markets we play in as well as capitalizing on our strong menu and geographic expansion opportunities.

Our Reproductive Health business grew in the low single digits organically in the quarter. This was driven by stabilization in our revenue Omics lab business as it has now anniversaried the contract completions and new project delays, which pressured growth last year. Our Newborn Screening continued to perform well and grew in the mid-single digits in the quarter globally.

Finally, as we had expected, the pressures our Applied Genomics business experienced in the latter half of 2023 continued into this year, resulting in this business declining in the mid-20syear-over-year. Clinical customers continued to absorb the instrumentation they purchased for COVID testing and our pharma customer spending remains subdued. We expect our Applied Genomics performance to improve as the year progresses, and we continue to expect a high single-digit decline in the business for the full year.

As it pertains to China specifically, as mentioned, our revenue in the country overall declined in the mid- single digits year-over-year, which was in line with our expectations. This consisted of a high single-digit decline for Diagnostics in the quarter, with high-teens growth in Immunodiagnostics, offset by a significant decline in Reproductive Health. Our Chinese Reproductive Health business faced incremental headwinds as birth rates came under more pressure related to the COVID lockdowns ending and the impact from the reopening wave.

Our Life Sciences business in China declined mid-single digits, which was slightly better than we had anticipated. While there has been talk regarding additional stimulus, which could impact our industry, at this point, we have not yet seen this show up in orders. Consequently, while we are ready to capitalize on any opportunities that could arise, we are remaining cautious as it pertains to our assumptions on the potential impact to our business this year.

In regards to our outlook for the remainder of the year, we are encouraged by our Q1 results, but are maintaining our full year assumptions, which includes organic growth in the 1% to 3% range. While feedback from our pharma partners is now more constructive, these insights are leading us to assume that the softer end market environment that we've experienced over the last 6 months will continue.

Given how dynamic things have been, we will want to see clear signs of recovery before potentially making any adjustments to our outlook for the remainder of the year. As a result, we expect the company won't return to positive organic growth until the second half of this year as we expect our organic revenue to decline in the low single digits in the second quarter.

Given the increased fluctuation in currency rates over the last few months, we now anticipate FX to have a neutral impact to our revenues this year, down from our previous 1% tailwind assumption. This results in our full year revenue now expected to be in the range of $2.76 billion to $2.82 billion.

Moving down the P&L, we continue to expect to hold our operating margins this year roughly flat at 28% as our recent cost actions are offsetting the return of some variable expenses. We continue to expect our operating margins to be fairly similar in the second and third quarters and slightly below our full year average before improving sequentially in the fourth quarter.

Below the operating line, we now expect a few moving pieces, which largely offset each other. First, we now expect our net interest and other expenses for the year to be approximately $60 million, down $10 million from our prior outlook. However, this will be offset by a modestly higher-than-expected tax rate, which we expect to still round to approximately 20%.

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REVVITY, INC. FQ1 2024 EARNINGS CALL APR 29, 2024

Our average diluted share count, we still assume will be 123.5 million shares this year. For the second quarter specifically, we expect our below-the-line items to be similar to what we have just reported in the first quarter. This results in our adjusted EPS guidance for the year remaining unchanged in the range of $4.55 to $4.75 as the $0.05 outperformance here in the first quarter is largely being offset by the increased FX headwinds we are now facing.

In closing, the company has performed well over the first several months of 2024 despite a continued challenging end market. We did a great job executing on those items that are more fully in our control, such as managing our expenses and driving strong cash flow. When combined with our success in bringing significant innovation to the market, the improvements we have made on both our transformation initiatives and key processes across our organization are positioning us extremely well to deliver differentiated performance in the years to come.

With that, Operator, we would now like to open up the call for questions.

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REVVITY, INC. FQ1 2024 EARNINGS CALL APR 29, 2024

Question and Answer

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Operator

[Operator Instructions]

Our first question comes from Michael Ryskin from Bank of America.

Michael Leonidovich Ryskin

BofA Securities, Research Division

I want to ask one big picture, one sort of qualitative, and then I'll follow up, drill in with a little bit more specifics. So in terms of how the quarter played out, it seems like there's still a decent number of surprises. You talked about Reagents coming out a little worse, pharma and biotech being a little bit worse, but then China was a little bit better, Diagnostics was better. So it just seems like there was a lot of moving pieces. I know we're still operating in a pretty volatile end market environment, but how do you feel about your confidence in terms of predicting growth going forward, in terms of the visibility? Is this something that you anticipate will improve? Is this just -- is this temporary? Or is it something a little more inherent to the business mix as it is?

Prahlad R. Singh

CEO, President & Director

Mike, I think it's a great question. As both myself and Max said in our prepared remarks, overall, I would say that the market has stabilized. Obviously, our Diagnostics business has done -- continues to shine in light of that. But you'll got to break it down into pieces. You are right on the Reagent side, the Life Sciences, but we had some licensing comp, which pressured things. But excluding that, our core reagents were down only mid-single digits.

We did see a slower start to the year as customers delayed their finalizing their budgets and lab activity that continues to have some pockets of volatility. However, given the trends that we have seen now in March and so far here in April, we feel much more optimistic and have not changed our assumption for the full year and continue to expect core reagents to be up in the mid-single digits.

On the Diagnostic side of the business, yes, Newborn Screening was pressured in China. But outside of China, Newborn Screening actually grew in the double digits. Software business continued to be better than our expectations. So I think, all in all, you are right that there are quite a few moving pieces. But as you said, at a high level, the differentiation of our portfolio actually shines in markets like this where there is pressure some place else, something else picks it up. So overall, we feel pretty good about where we are.

Michael Leonidovich Ryskin

BofA Securities, Research Division

Okay. That's helpful. And then the follow-up, I do want to drill in exactly into that, Life Science business, the reagents, pharma and biotech. I mean there's a lot of overlap between that, but it seems like that was an area that was a little bit weaker than you thought. And it sounds like it was a little bit weaker than what we've seen from some of your peers reporting. Your mix is a little bit different there. I mean BioLegend alone is a good chunk of that reagents business. But anything in particular you want to call out there?

You talked about the licensing comps. Could you provide some clarity on that? How that's going to phase as you go through the rest of the year? And just what gives you confidence that, that business can reaccelerate, pharma and biotech and reagents specifically?

Maxwell Krakowiak

Senior VP & CFO

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REVVITY, INC. FQ1 2024 EARNINGS CALL APR 29, 2024

Yes, Mike, I mean, I don't have too much further to add on to what Prahlad already mentioned. I guess if you were to break it down a little bit further, if you look at our performance of the reagent business between academic and government and pharma/biotech, academic and government still grew in the quarter for us from a reagent perspective, which is predominantly the BioLegend portfolio. I think when you look at pharma/biotech, it really goes back to some of Prahlad's comments around, it was just

a slower overall start for the year. We have seen good progress through March and April, and we're confident in our full year outlook.

Operator

Our next question comes from Matt Sykes from Goldman Sachs.

Matthew Carlisle Sykes

Goldman Sachs Group, Inc., Research Division

Prahlad, maybe big-picture question for you on capital allocation. If you kind of look back to over the past couple of years, the acquisitions that you've made that you're now integrating, given what you know now about the environment, both on the capital equipment and just pharma/biotech, is there anything you would have done differently in terms of those acquisitions in the [Technical Difficulty] business? Or do you feel like a better position -- the business position today is just a macro-related issue and that they should start outperforming going forward?

Prahlad R. Singh

CEO, President & Director

It's a good, great question, Matt. I mean, I think if you look at the acquisition that we did, majority of our acquisitions were in Life Sciences reagents related to biomolecules and large molecules and cell and gene therapy. And I think the longer-term trend that if you look in the marketplace, that is where a majority of the investment is going to go. As you pointed out, there are some headwinds in the market right now, but we are very confident in our strategy about the acquisitions that we have made.

Again, going back, what it has done is it has put us in a place where 80% of our revenue is coming on a recurring basis. Life Sciences, Software and even in the Diagnostics area where we play, we have a portfolio that we feel is very differentiated. And I think it is going to serve us well.

Matthew Carlisle Sykes

Goldman Sachs Group, Inc., Research Division

Got it. And then if I could just kind of understand a little bit better the dynamics behind the instruments. I know that in Life Sciences, a mid-teens decline might have been a little bit better than expectations. But could you just characterize instrument demand, whether it's in Life Sciences or Applied Genomics in terms of the stabilization that occurred during Q1? Or did things actually incrementally get worse in terms of demand? And what is your outlook for capital equipment demand and the impact on revenue over the course of the year, whether it's phasing of growth over the year or stabilization versus recovery? Just would love to kind of get your view on instrument capital equipment demand as we trend through '24.

Maxwell Krakowiak

Senior VP & CFO

Yes. Matt, so as we look at the instrumentation for the rest of the year, we are still basically assuming across both Applied Genomics business as well as our Life Science instrumentation business that it will be down mid- to high single digits for the full year. That was consistent with our previous outlook. I'd actually say for the first quarter, it was an improvement versus what we were anticipating heading into the period. So it was encouraging to see that uptick. And when you really look at the assumptions for the rest of the year, we aren't assuming a recovery in the market. It is kind of assuming a steady-state environment from what we are facing today. And that's, again, consistent with our assumptions we had 90 days ago.

Operator

Our next question comes from Patrick Donnelly from Citi.

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