Thanks for joining us. I'm Tom Peterson. I'm an associate on our life sciences and diagnostics team here at Baird. We're really excited to have Revvity presenting today, and representing the company, we have SVP of Investor Relations, ESG, and Risk Management, Steve Willoughby. Steve, thanks. Thanks for joining us.
Yeah, thanks for having me.
So before we begin, just a quick reminder to refer to Baird's website and our published research to go over important disclosures about what we'll be discussing today. In terms of our agenda, I think Steve's gonna maybe give just a quick overview, a couple of slides, and then we'll hop right into Q&A from there.
Sure. Is that up here?
Yeah.
All right. I'll just stand real quick.
Sure.
So for those of you who are not familiar with Revvity, it's a company that's undergone a significant transformation over the last few years. Formerly known as PerkinElmer, it's a business that we've done about 11 acquisitions in the last three or four years. We ended up divesting 30% of our company to a private equity firm, including the PerkinElmer brand name, and then a little over a year ago, rebranded as Revvity. So let me tell you a little bit about it here. So just under $3 billion in revenue last year, fairly evenly split between life sciences and diagnostics. But what we do within life sciences and diagnostics is a little bit different than many other publicly traded companies you might be familiar with, and I'll get into that.
Today, about 80% of our revenue is recurring in nature, with the remaining 20% being instrumentation, and you can see a fairly diverse geographic dispersion of revenue. So in life sciences, again, about half the business, you know, what we are focused on in life sciences is preclinical, and so helping pharma companies, academia, invent and then develop new drugs and compounds. We do that with leading products in things like antibodies, preclinical imaging, high content screening, a unique instrumentation portfolio, and then a leading preclinical software business. The life sciences business has operating margins in the mid-thirties. On the diagnostic side, a little about $1.5 billion in revenue last year. Again, a little bit unique compared to other publicly traded companies you might be familiar with.
The largest categories here that we play in are in specialty diagnostics, so things like autoimmune, allergy, latent tuberculosis, areas within diagnostics that have, we believe, inherently higher underlying market growth rates, that we also have leading market positions in. We're also the market leader globally in reproductive health testing, particularly newborn screening, and then we also have a... We're a player in, what we call applied genomics, which is, sequencing and PCR sample prep. You know, this differentiation of our products and our business, we believe, should lead to some differentiated financial performance as well. You can see two-thirds of our business are comprised of, specialty reagents and consumables in life sciences, specialty diagnostic assays, and our unique software business. This two-thirds of our revenue, we expect to grow 9%-11% in our current LRP.
This leads the overall company, we believe, should have organic growth that is two hundred basis points above normal underlying market growth rates. So in a normal environment, our industries grow approximately 4-6%. We expect our top line growth to be in the 6-8% range. We have tremendous margin expansion potential, and so with 6-8% organic growth, we expect to be able to deliver seventy-five basis points of margin expansion, leading to double-digit EPS growth before any capital deployment. So with that, Tom, I think we can probably open up the Q&A.
Great. Thanks, Steve, for that overview. Very helpful. You know, following the two key results, you narrowed the revenue guide for the year, talking about 2% organic growth for 2024. It feels like the tools group overall is seeing some stability in end markets here as we get into the middle part of the year. Is that how you would characterize things? And at a high level, you know, what's allowing you to outgrow the peer group in 2024?
Yeah, I mean, it's, it's interesting because I think both this year as well as last year. Last year, we did 2% organic growth, as you mentioned. This year, our current guidance is for 2% organic growth. You know, it's not the 6%-8% that we expect over the long term, but, you know, 2% has been better than most all peers out there, both last year and this year. And I think it, you know, comes down to the uniqueness of our portfolio. You know, we like to say how, you know, we are not immune to various market pressures, but we are more insulated.
And so, you know, whether it's within pharma biotech, where, you know, as you well know, you know, the industry has been under pressure for, let's say, a year and a half now, you know, we're impacted, but I would say we're because of the nature of our products and how innovative and unique they are, we're not being impacted to the same degree that maybe some others are. On the flip side, on our diagnostics business, you know, our diagnostics business is not overly macro-sensitive. It's been. It's had some headwinds as it relates to China lockdowns, which I would say are hopefully a once-in-a-lifetime, you know, experience. But outside of that, you know, the underlying drivers to the growth within our diagnostics business, you know, are. We don't believe should be materially impacted by, you know, varying economic conditions.
Great, that's helpful. And maybe getting into sort of the back half outlook in the guide, your guidance assumes a return to growth in the Q3, and then an acceleration to high single digits or better, kind of in the Q4. And I know there's some comp dynamics going on. So can you kind of walk through some of the timing dynamics between Q3 and Q4, and what gives you confidence in kind of getting to that high single digit number in the back half?
Sure. Yes, we are facing easier comparisons as the year progresses, particularly in the back half of the year. You know, as we move through the back half of the year and into the Q4, there's a couple of different things going on. So, you know, in the Q3, our current guidance is for low single-digit positive growth, which then implies 9%-10% organic growth in the Q4. That step up quarter over quarter, half of that is very company specific. And so there's an aspect within our newborn screening business, particularly in China, where there has been even more significant pressure on births in China over the last six to nine months than there have been for the last five years.
Births have been declining quite significantly in China, but they took an even further step down, following basically the fallout from the pandemic. We expect that to turn around here in the back half of the year, and we expect our newborn business in China to return to growth in the Q4, you know, helping drive that improvement in the Q4. The other aspect is our software business. So within life sciences, we have a fairly unique preclinical software business that it's a fantastic business. And, you know, we're looking for this business to grow in the low double digits for the year overall. Based on the way some revenue recognition accounting works, there can be just some lumpiness in organic growth, where the underlying business is actually extremely consistent.
And, you know, based on the timing of when some contracts are renewing, that business, which grew high teens in the Q2, we expect to be down low single digits in the Q3, improve back to over 20% growth in the Q4. And so that'll also drive a portion of it. And then, I would say, in our instruments businesses, we're expecting normal seasonality this year. And so, you know, as you might recall, you know, this time through the end of the year last year was not normal.
Yeah.
You know, there was significant pressure going on post-Labor Day last year. You know, we do not anticipate that same level of, you know, cutbacks and activity reductions and headcount reductions from pharma customers to reoccur again this year.
Got it. That, that's really helpful. And then maybe just quickly on margins in the back half, you know, Q2 margins were better than expected. Just what gives you confidence in the op margin improvement through the back half of the year, and how much are, you know, cost control measures and other synergies as a result of the portfolio transformation, you know, starting to play out more deliberately in the business?
Sure. You know, I think this is actually a great example of how strong the execution has been at our company over the last few years. You know, the top line has obviously been challenged for us and for the industry. And even with our organic growth maybe being a few hundred basis points better than most others, you know, it's somewhat outside of our control when the whole industry is under pressure. Those things that are more in our control, I would say we're executing extremely well on, so for example, margins, cash flow, et cetera.
And so, you know, you saw here, even in the Q2, you know, the margins come in better than expected, and we actually took up our operating margin guidance for the year, now expecting 28% to 28.5% operating margins, which would be up year over year, despite only 2% organic growth. And so, you know, we're doing a very good job of managing expenses. I would say we're also seeing a larger benefit come through from a number of our different integration and synergy activities and the host of operational initiatives we have going on in the company. You know, again, as I mentioned in my preview or overview, you know, we did 11 acquisitions in two years, then we sold 30% of the company.
There's a lot of things that we can still go after from an operational standpoint, so things like footprint consolidation, insourcing, vendor consolidation, freight lane optimization. We've recently rolled out a brand-new built from the ground up e-commerce portfolio or e-commerce system. And so I think it's, those actions that are fully in our control is what's helping drive, you know, the margin expansion here, even when the top line is pressured.
Yeah. Okay, that's really helpful. Maybe getting into some business specifics, we'll start on the life sciences side of the house. I wanted to get into reagents visibility, in particular, you know, Q2, I think ex-licensing comps was maybe a little bit lighter than expected, you know, attributed to pharma consolidations, headcount reductions, as you mentioned. So I guess, what's your level of visibility here specifically, and your level of confidence that kind of Q2 is perhaps, you know, peak cut in terms of those consolidations and headcount reductions?
Sure. Yeah, I mean, to your point, yes, our life science reagents, about a $750 million business on an annualized basis, was down modestly in the Q2, a little bit worse than we had anticipated. You know, we continue to see some unexpected, activity reductions from pharma biotech customers, things like, you know, whether it's headcount reductions, project cuts, site consolidations, et cetera. I would say since around this time last year, the severity and the frequency of those unplanned actions from customers are decreasing and becoming less frequent. But they weren't. They didn't end in the Q2. You know, we obviously were more than able to offset that with our strength in other businesses, even strength in some of our other life science businesses-
Yeah
... you know, such as software, such as life science instruments. So, you know, we are assuming that on an overall dollars basis, it's fairly flat throughout the remainder of the year, just like it was Q1 to Q2. So we're not really assuming any uptick in reagent demand. We're expecting it to remain fairly, fairly flat, which, you know, if you think about what these products are, they are, while they're highly specialized and highly innovative, they're also based off of underlying lab activity.
Mm-hmm.
And so, you know, we've adjusted our outlook for the back half of the year to account for this as well.
Independent of sort of those potential actions or future actions, you know, would you expect that, you know, upon normalization, that kind of reagent run rate would more quickly return to, quote-unquote, "normal?
I think it's. Yes, I mean, we. It's a fairly short cycle business.
Yeah.
You know, for the vast majority of our orders and our revenue in the reagent business, you know, we are delivering next day. Not shipping next day, we are delivering next day, which is actually a competitive advantage for us. You know, we're recognizing revenue on those orders fairly quickly. When activity does come back, you know, I would expect us to be able to see that pretty quickly.
Yeah, that's great. Maybe on that competitive positioning and point, we've seen some moves in the competitive landscape with Danaher and Abcam. You know, how are you thinking about Revvity's competitive positioning? Have you seen any changes, and just how do you view the portfolio going forward, given the industry movement?
Sure. So obviously, you're referring to the antibody business. So antibodies within the BioLegend acquisition, which we did three years ago, largest acquisition in company history. You know, antibodies are a little over half of our $750 million reagent portfolio. You know, from a competitive perspective, you know, I wouldn't say anything has, you know, meaningfully changed. You know, I would say BioLegend is a business that has consistently been able to take share in the industry, and, you know, we don't view anything changing competitively that would disrupt that.
Yeah. Maybe talking about reagents in China, I think reagents grew in China in the first half.
They did.
So, you know, what are you hearing from customers there? You know, where are you starting to see pockets of underlying activity, you know, improvements in, recovery, given the challenges we've seen in China over the last, 12 months, at least?
I think this is another great example of how the differentiation of our portfolio. You know, if you even go back to last year, in 2023, our life science business grew in the mid-single digits in China. You know, I don't know of another company in this industry that grew in China, let alone in the mid-single digits. And I think it comes down to that, the nature of our products. You know, people are buying our antibodies, our specialized reagents, because they are novel, they have a high degree of innovation, and they allow the customers to do something new or different. You know, our products are not used to run a lab. Our products are not used to turn the lights on.
You're buying our products to do something new from a scientific perspective, and so it has a different demand profile than consumables, just generally speaking. And I think that's allowed, you know, demand to hold up better than maybe in some other areas that have been, you know, impacted to a greater degree by, you know, budgetary cuts, stimulus being cut, etcetera. You know, I think the other thing to understand, too, is, China's 17% of our revenue, 7% of that is life sciences. But over half of that is consumables.
Yeah.
And so it's just. I may have mentioned this already. We're not immune, but we are more insulated.
Yeah, that's a good point, and on those mix, I was gonna flip over to instrumentation in China, specifically. You noted on the Q2 call you saw some signs of customers perhaps delaying or extending those purchasing decisions, just given the stimulus timing. So I guess, any updates on this trend, and are you still expecting kind of more of a constrained environment in the back half until we get more concrete stimulus funding?
For the time being, we are.
Okay.
You know, I think what we saw in the Q2, in the latter half of the Q2, was, you know, stimulus in China continuing to work its way through the various levels of government approvals, and getting closer to coming to fruition, but not yet there. And so I think as it got closer, you know, more customers decided to hold off on finalizing that purchase to see if they would benefit from stimulus. And so I think for the time being, you know, until stimulus is fully flowing, you know, instruments will continue to be a little bit more pressured in China.
However, you know, in the Q2, you know, our life science instruments were down, for the whole company, were down low teens, which was in line with our expectations, and that is with China being, you know, worse than what we had expected. Which means that our life science instruments, you know, outside of China, were better than anticipated, particularly in the U.S., and so that's a promising sign that things are starting to hopefully heal and, and start to normalize.
Got it. And maybe just, you know, one: are you... what's baked into the guide for the back half on instrumentation overall for the portfolio? Are you, you know, kind of assuming a normal budget flush for the year, and what should we be thinking about from a growth perspective for the back half?
Yeah. You know, we are assuming more normal seasonality, which I would say is, in our view, different than a budget flush.
Yep.
You know, there have been years in the past where there have been significant budget flushes, where there was a meaningfully underspending in the first part of the year, pent-up demand, and that came and flushed through. You know, we're not assuming that to happen. We are assuming normal seasonality, though, which, you know, for us, there is a step up on instrumentation.
Yeah. Okay, maybe just given the developments on Biosecure and the passage in the House, can you just remind us, what are your current thoughts on sort of potential impact in China? How are you thinking about just your competitive positioning overall? And obviously, we have a ways to see, you know, if there's any finalization, but are you noticing any trends in, you know, different customer behavior ahead of any potential impacts from that bill?
You know, our products really follow the science, and so, you know, whether it's an antibody that it's being used to be part of building a new drug, you know, or some of the screening reagents or in vivo imaging reagents that are being used to analyze a new compound or drug, you know, where that science is being done geographically, you know, it doesn't matter, I would say. You know, whether it's being done in China or outside of China, you know, our products really follow the science, I would say, and so, you know, I also think that, you know, there's not a lot of local market competition for what we do on the life sciences side as well, because of the innovative nature of it.
You know, you compare and contrast that to maybe some of the things that we divested, you know, there might have been more local market competition for some of those products, where that's just not the case in what we do. You know, if there are redundant supply chains that are set up outside of China, that, in theory, could potentially be an opportunity for us, you know, if more systems or people or consumables need to be used.
Got it. That's, that's helpful. Let's maybe zone in on emerging biotech. If you could just one remind us kind of where the exposure is across the portfolio, how you define that. But also, you know, we've seen good improvements in biotech financings here in calendar 2024. I guess, what's your level of insight in terms of when that funding starts to flow through, and your level of visibility into order and activity improvements for those customers?
Sure. So we look at it as, and we define it as pre-revenue pharma biotech. And those pre-revenue pharma customers represent 5% of our total company revenue, which equates to about 10% of our life science business, which equates to about 15% of our pharma biotech exposure. And so, you know, when you think about, you know, as I mentioned, we are very focused in preclinical R&D. Preclinical does not necessarily mean pre-revenue.
Mm.
And so 85% of our pharma biotech revenue comes from medium and large-sized customers. You know, the Pfizers of the world are doing a lot more preclinical R&D than these small companies. And so, you know, we have been impacted by some of the capital constraints, but it's, you know, 5% of revenue.
Yeah.
You know, I would say our revenue from those small customers has been down double digits since the beginning of 2023, which continued into the Q2 here. But I would say that the declines are, you know, shrinking, you know?
Okay.
We're still seeing declines, but not as severe as what we had been seeing throughout 2023. You know, in terms of how long it takes to flow through, I think a key question will be: How much of that biotech funding is spent on preclinical R&D versus clinical trials?
Yeah.
I think a rule of thumb is typically about 30% or so of pharma R&D dollars is spent preclinically, 70% is spent clinically in clinical trials. So I think it's a question that remains to be seen, of, you know, where this increased funding actually ends up and ends up going.
Great. You talked about software a little bit in terms of the timing dynamics in the back half, another strong quarter in Q2. You know, kinda independent of some of the quarter-to-quarter lumpiness, I wondered if you could, you know, zone in on sort of where you're seeing the most success here in terms of new products. You know, can you parse out the mix between, you know, net customer retentions, new business wins, SaaS conversions-
Yeah
... those things?
Yeah. So, you know, our software business is a... It's a fantastic business. You know, it's a business that, you know, in our LRP, we expect it to grow, you know, 9%-11%. Historically, it's done a little bit better than that. Very profitable business. The growth algorithm for our software business is a number of things. I would say it's, one, it's increased penetration in existing accounts. As accounts come up, and contracts come up for renewal, you know, expanding that contract, adding more seats, turning on more modules, coming out with new products. And so earlier this year, we came out with two new software offerings that expand our capabilities a little bit further downstream into clinical trials and CROs, which is an area that we have not historically played in. So that's a true market expansion.
You know, I would also say is that today, of our roughly $200 million in software revenue, about a third has converted to SaaS, two-thirds remains on-premise licenses. And as we bring more of our modules and offerings into the cloud, it will allow us to better target medium and smaller-sized customers, which we really haven't gone after tremendously in the past. And so that's something that will be another nice growth driver as we move forward, as we have more of our products available, you know, on a SaaS offering.
Got it. Let's flip over to diagnostics. You know, immunodiagnostics continues to see impressive demand here. The LRP kind of assumes 9%-11%. Can you talk about some of the menu and geographic expansion opportunities that are still ahead of this business, you know, before we get into China? I know Euroimmun, you know, initially was under-penetrated in the US, so maybe we can start there.
Sure. Yeah. So, you know, immunodiagnostics, half our diagnostics portfolio, as you mentioned, we expect it to grow, you know, 9%-11%. Year to date, it's grown 10% against mid-teens comps, so it's putting up a very good performance, I would say. You know, I think a key thing to understand about our immunodiagnostics business, the vast majority of it is the largest piece of it is autoimmune. And the autoimmune market for diagnostic testing is different than other areas that are more routine. It's different than general respiratory or general infectious disease. It has a higher underlying market growth rate. You know, autoimmune testing is still a very under-diagnosed area of diagnostic testing, and so as it gains greater adoption, that inherently drives a faster level of market growth.
It's one of the primary reasons we got into this business six or seven years ago, is because of that potential. You know, I would say, in addition to that higher level of underlying market growth, you know, we've done a really good job of new products. And coming out with highly sensitive, highly specialized assays in both existing markets to expand the menu, but also in what I would consider adjacent markets, that are maybe just another other areas of under-diagnosed specialty diagnostics. And then, as you had mentioned, another key growth driver for us, which is probably a little bit different than other diagnostic businesses you might look at it from an investor perspective, is historically, this business has been dramatically under-penetrated in the U.S. So the U.S. is the major growth market for us.
When we acquired Euroimmun in 2017, 5% of its revenue came in the US. Today, that's 15%. It should be 35 or 40% based on normal geographic dispersions for diagnostic testing. And so while our overall autoimmune business has been growing in the low double digits over the last five, six, seven years, obviously, for the US to go from 5 to 15%, it means the US has been putting up even more significant growth, which, you know, we don't see ending, as you know, we are still in the fairly early innings of getting our full menu, you know, FDA approved, which, you know, we will continue to do over the next couple of years.
Yeah. Maybe in China, specifically, immunodiagnostics, somewhere around three-quarters of-
Yep
... of China diagnostics revenue. You know, what's your go-to-market strategy in China? Have there been any changes to that approach? And just given the competitive dynamics there, how would you frame Euroimmun's positioning in China, specifically?
Sure. You know, I would say, first, Euroimmun has been in China for a very long time. And, you know, the question comes up a lot about VBP, or value-based pricing. And, you know, this is an area that has not impacted us, you know? And I think it's, one of the reasons for that is because of the specialty nature of what we do. If you think about autoimmune testing, you're somewhat trying to find a needle in a haystack with a patient. And if you know anybody, if your friend or family member has ever had an autoimmune condition, you know, many times you have to go through rounds and rounds and rounds of testing over months, if not sometimes even over years, to figure out what is wrong with these people.
You need a test that works, and you need a test that's very sensitive. So it's one of the key reasons why we are the market leader globally, is because we have very highly sensitive, you know, very good products. I would say that's the same thing in China as well.
Got it. Well, a lot more we could talk on diagnostics, but with a couple minutes left, I wanted to talk on capital allocation. You know, on the Q2 call, you highlighted plans to accelerate share repurchases moving forward. You know, do you think this is more of just a short-term option, or are there, you know, any shifts towards your longer-term capital allocation focus, and just maybe your high-level thoughts on M&A, given the portfolio transformation over the last couple of years.
Sure. You know, yes, obviously, in our prepared remarks on the Q2 call, we talked, you know, more about capital employment and about share repurchases, and how we, you know, plan to be more aggressive with share buybacks. If you look back historically, you know, the vast majority of our capital deployment has gone towards M&A, and, you know, we, in the past, as PerkinElmer, I would say we needed to do M&A to transition and transform the portfolio. We've now done that, and, you know, the business that Revvity is today, we really, really like, and have a, you know, a very bright future, and we believe is one that, you know, you... I think you will see over the coming years, we're a business that's gonna have, you know, industry-leading financial metrics.
You know, with where our stock is today, I think that should have buying back some more stock here, should have a very good return for shareholders in the future. I think it also signals, you know, we've also done a very good job with cash flow. You know, year to date, I think maybe the last three quarters, we've had over 100% free cash flow conversion to adjusted net income. So, you know, we've got a very healthy balance sheet as well, that we can go look to opportunistically deploy here.
Yeah, you've got an upcoming debt repayment here, in the Q3.
I think it's, like, next week or something.
Like, this week. Yeah, yeah.
Yeah.
But, you know, any thoughts on sort of the portfolio as it sits today and any kind of high-level gaps that you would look at?
You know, there are things that are certainly strategically interesting to us. You know, it has been... While we were very busy with M&A for a period of time, it's now been three years since we've done an acquisition. And it's not like we haven't continued to remain very active in discussions and evaluations. You know, I think for M&A, you also, particularly for a financial profile of a business like we now have, you need the math to make sense.
Yeah.
While there are things that are strategically interesting to us, as you know, cost of capital has gone up. Valuations really haven't come down, and so, you know, we'll take our time, and I think, you know, buying back our own stock right now is a good investment as well.
Great. Well, with about 30 seconds left, you've got the LRP up there on the slides that you issued in January of this year. You've got an upcoming Investor Day in November. So, you know, any initial items that we should be thinking about that you're particularly excited to share with the investment community, you know, maybe outside of the financial metrics that you presented thus far?
Yeah, I mean, you know, Revvity is a company that's been around for, you know, fourfour quarters now, in its current form, and so, you know, I think we need to continue to do a good job of further educating investors on who we are, what makes us different, why that differentiation, we believe, should lead to differentiated financial performance. I think if you get the opportunity, hopefully you can come, Tom, out in San Diego. You know, investors will be able to see our BioLegend campus for the first time. It's a fantastic facility. It was just built a few months ago, or a few years ago, and so that, I think that'll be another big highlight in addition to investor education, then there'll be some other things we've got in the works as well.
Great. Well, we're looking forward to it. We'll leave it there since we're out of time.
Okay.
Steve, thanks so much for joining us.
Thank you.