Revvity, Inc. (RVTY) Q1 2020 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 PerkinElmer Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today to Mr. Bryan Kipp, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Bryan, and good evening, everyone. Before I begin my prepared remarks, I want to extend my well wishes to everyone on the call. The world has dramatically changed since our last earnings call, putting every person, country and company to the test. However, times of great uncertainty can also bring great clarity of purpose. Our guiding principles have been fourfold: first, to keep our employees and company safe; second, to utilize our expansive capabilities to join the fight against COVID-19; third, to serve all our customers with excellence in a difficult environment; and finally, to emerge from this crisis as a stronger company.

Thanks, Prahlad, and good evening, everyone. I want to echo Prahlad's well wishes to you and your families, and I want to give additional airtime to employees. I'm extremely proud and humbled to be part of the PerkinElmer family. Our colleagues around the world rallied together and worked tirelessly to develop solutions to help stop the spread of this pandemic and get products out the door. As Prahlad mentioned, we are improving and evolving as a company each day, and I have no doubt that we will emerge from this crisis as a stronger company. Before I begin, I want to point everyone's attention to our first-quarter earnings call presentation, which has been posted on the Investors section of our website under Financial Information. As always, I plan to begin my prepared remarks by highlighting the first quarter, then I'll provide some additional color on our served end markets and financial metrics. Typically, I end my prepared remarks with updated guidance commentary. However, due to the fact that we withdrew our annual guidance in the earnings press release issued earlier today and the ongoing forecasting challenges associated with the current unique environment, I will not be providing updated full year guidance. Instead, I will provide some context and additional details that will hopefully serve to assist you in your own modeling efforts. And as visibility improves, we hope to provide you with a more substantive update later in the year.

Thank you, sir. I show our first question comes from Dan Arias from Stifel. Please go ahead.

Good afternoon, guys. Thanks. Prahlad, on the EUROIMMUN assay, can you just speak to the path for the tests getting into the market in the way that you'd like it to? I mean, the performance of the assay looks pretty good, but obviously, you're up against some big players with big distribution capabilities. So I guess when we think about your comments on test differentiation, your own manufacturing levels, what are your expectations? What are the labs saying on test choice? And then to what extent are you constrained by the number of EUROIMMUN instruments that might be in the market?

Yeah. Thanks, Dan. I think you pointed out some very good things that I think it is good to elaborate on. When we started developing the assay at EUROIMMUN, our focus was around picking something that we would expect to have a high level of specificity. We focused on the S protein, which, as you probably know, has two functional domains, the S1 and the S2. The S1 has a much lower sequencing homology to other coronaviruses, meaning there is less risk of cross-reactivity. In terms of availability, I think our capability—as you saw, we got the EUA approval yesterday. In fact, we had this validated at the FDA's center. So it has been validated by the FDA. The largest antibody study happening right now in the country is using our automated workstation. It can be utilized on all open-ended workstations, of which there are thousands in the United States and globally. So I think I helped with the three questions that you had, right?

You did. Can I just ask, maybe a follow-up? I mean, the expectations for Q2. Does that assume that you'll be supply-constrained in any way? And what is the thought process around getting to the point in production where maybe you're building inventory and it's not just about how many tests you can get into the market? Thanks.

Yeah, Dan. Hey, it's Jamey. I'll talk about the second-quarter guide. So I'm going to leave out DAS and some of the products there because the bulk of our revenue is tied to diagnostic products. To talk a little bit around the current production capability of 2.5 million tests per month right now, we forecast that it could be as much as $10 million per month by the end of this month. I think about half of our guidance should come from the serology test, revenue guidance that is. PCR has been limited to date; we've had some restrictions that are now behind us, and product is starting to flow, but we don't anticipate it will be as much as the serology side. On the RNA extraction side, our revenue and our volume is up 20 times versus last year, and that has been flowing well and will continue to flow, so we're at 3 million extraction tests per month. The PCR and RNA portion should make up about 50% of the revenue as well.

Thank you. Our next question comes from Vijay Kumar from Evercore ISI. Please go ahead.

Hey, guys. Thanks for taking my question, and congrats on a good print here relative to peers. I guess, Jamey, back on the Q2 raw guidance. Organic, down 15% to flattish. That's almost in line with what one of your peers, Thermo, guided through. Maybe talk about what would cause you to come in flattish versus what kind of scenario bakes in the minus 15%, right? And even now, when I look at the COVID contribution here, 8% to 15%, what are you assuming for the low and high end for the contribution? Thank you.

Yeah. Thanks for the kind words, Vijay. We put a lot of thought into our guide and looked at it in many different ways and have continued to review it throughout the month of April as well in relation to all the recent trends. When elaborating on the 15% to 23% down, we are assuming a mild reopening in the Americas and Europe, while the 23% down assumes no reopening, with only recurring revenue flowing throughout the quarter. To reach 0%, you take the high end of our COVID range and add it to the minus 15% organic demand. We had a lot of experience that we looked at in China, which gave us good information on how the rest of the world will operate, albeit with subtle differences, especially around immunodiagnostics and reproductive health. Overall, we've been looking at many factors and feel very confident in our guidance.

Okay. This is helpful color. Just one maybe on the operational side and free cash flow side. It was quite remarkable on the margin. Just maybe can you walk us through the cost controls? Is there something that you guys could increment cost actions after you saw some of the China trends sort of rough? How should we think about the margin trajectory here to your rate, maybe fixed versus the variable cost structure of the business? Thank you.

Yeah. We have a highly variable cost base with numerous levers to pull. There are three categories of costs: the biggest portion is labor, where we want to protect our workforce. Ways to control that cost include hiring freezes, merit increase freezes, pay reductions, and hour reductions. The second category is mostly related to products; you either have them or you don't. The third part is indirect costs, including travel and entertainment, third-party services, utilities, and supplies, where we have clamped down significantly. We began enacting several measures as soon as we saw China unfolding in February, which helped us immensely. Overall, those cost controls benefit us heading into the second quarter.

Thank you. Our next question comes from Derik De Bruin from Bank of America. Please go ahead.

Hi, good afternoon.

Hi, Derik.

Hey. I have a question regarding your access to labs with OneSource. I'm curious about what you're observing regarding the number of lab shutdowns. While I know you're not heavily involved with academic and government sectors, I'm interested in your perspective on colleges and universities, and how you view spending in that market. How are you considering the reopening of these markets?

Derik, on the OneSource side, I think we are starting to see that some of the large pharma companies are putting plans in place for us to get back. Engagement there is beginning to pick up. You want to talk about academia?

Yes. The enterprise side is holding up better than just core services. We have some access throughout the Americas more so than Europe. But in general, the enterprise holds up a little bit better. In terms of academia, it’s a small percentage of our revenue base, but it is down and mostly closed. I anticipate that it will mostly remain closed throughout the entire second quarter.

Even in China, even though some of the academic institutions are coming back, they are now enacting safety measures and new ways of working. So, it hasn't really started to return fully.

This may be an unfair question, but I'm going to ask it anyway. Apologies in advance. Everyone is benefiting from the current situation, and there is a lot of testing taking place. One major question from investors right now is about sustainability. As we look toward exiting Q4 and entering 2021, what are your plans regarding demand for molecular and serology testing? The top concern I hear is whether this demand will be sustainable throughout the year for companies that are currently benefiting. Will it diminish or continue until a vaccine is available? I appreciate your insights on sustainability, as it is closely related to how markets will return to normal.

I mean, it's a very interesting question that we brew and spend a lot of time thinking about. The one benefit we have is that we've got 13 sites across the globe. What we focus on is the sustainability of the supply chain, second-level suppliers, redundancy, and how to ensure that if there is an infection at a site, another site can run. You will see that we've got RT-PCR coming in from different sites. There was a shipment issue from China, which is now resolved, and that becomes a focus for our long-term product availability. We continue to ramp up our capabilities and the availability of products over the next several months.

Thank you. Our next question comes from Steve Willoughby from Cleveland Research. Please go ahead.

Good evening. Hi everyone. Two things for you. I guess first, Jamey, just so we're all on the same page. The commentary you provided as it relates to the second quarter and EPS of at least $0.65. Just to be clear, in a worst-case scenario situation, if organic revenue was down 15%, do you still feel comfortable with that $0.65 number?

Yes, that's right. The $0.65 is tied to the low end of our guide or the down 15% overall. I encourage you to compare the first quarter of 2020 to the second quarter of 2020. In the first quarter, we generated about $650 million of revenue. So we're down $40 million on the revenue line, but there's a significant mix shift moving forward that we anticipate to be more COVID-related revenue, helping the gross margin overall. That offsets the volume decline. And on cost, we get a full quarter of cost control versus measures taken in the first quarter.

Okay. And then, secondly, the serology test. It was commented, you're able to make 2.5 million a month right now, but potentially could ramp that up to 10 million by the end of the month. The incremental COVID-related revenue of the 8% to 15% tailwind, does that assume the 2.5 million run rate, or does it also include ramping up to 10 million for the month of June?

No, that includes some kind of ramp. Whether it gets to exactly 10 million or not, is kind of in the range here. But yes, that assumes some ramp from the 2.5 million.

Thank you. Our next question comes from Doug Schenkel from Cowen. Please go ahead.

Hey. Good afternoon. I'm going to build off of that last question and then, I just want to come back to a couple of quick guidance cleanup questions. Following up on the earlier questions on serology testing, it definitely looks like a very good assay, and you should be commended on moving so quickly. That said, there are now some very high throughput, high-quality solutions available from major automated immunoassay platform companies. We just did a call this afternoon with the CEO of one of these major companies, and he confirmed pricing per test is well below $10 per test, I think, actually below $5 per test, actually. And he noted that they have an installed base of thousands of instruments that can do tens of thousands of tests per week with plans to produce nearly 100 million tests per month. With that in mind, what’s the sweet spot for the EUROIMMUN tests? And how are you going to price relative to Roche, Abbott and the Beckmen's of the world?

Hey, Doug, this is Prahlad. Our focus is on differentiation around the science. When we went with the S1 spike protein focusing on IgG, if it is proven that IgG does confirm immunity, our IgG test will be more useful than other dual or tri antibody tests. Having the S1 spike protein, developed around a mammalian cell line, provides a high degree of specificity, which is what the larger labs and customers are looking for. Our aim is to focus on highly specific IgG-based tests that provide more value around disease immunity.

I would just go back to the automation point too. There are thousands of systems that are open to use our product. Moreover, the workstation that EUROIMMUN provides is a high throughput solution, and many companies are adopting it along the way.

Understood. No, again, it's a good assay, and it can run on a lot of platforms. It's just, and again, I think there's probably enough demand for almost everything in the near-term. You look at companies like Roche and their test is IgG, and they're talking about close to 100% specificity; they have a lot of capacity and are pricing closer to zero than $10 per share. That's kind of the root of the question. The other part of my question was your pricing assumption there. Are you – we've heard you guys are pricing closer to $20. I don't know if that's true, but is there an expected change in pricing moving forward?

That is not the assumption. I'm not sure where you got that number.

That's very high, Doug.

Okay, that's great. And then just very quickly on guidance. It appears just given some quick math—and I might be wrong—but it seems you're assuming operating margin in the mid-teens in the second quarter. Is that right? And then is the answer to how you get there just the answer to the last question—think about what you did in Q1 and some rationalization and improvement in mix, and that's how you get there?

You got it. That's right.

Thank you. Our next question comes from Steve Beuchaw from Wolfe Research. Please go ahead.

Hi, thanks for taking the question. Thanks for your time here this afternoon. I wanted to ask, first, more of a zoom-out strategic planning question. The operating environment you're contemplating for the next year or so is going to be unique in that some of your customers in the government and academic space are going to have to make decisions about how they allocate funds. How do you think about this across academic, food, environmental, and other big product buyers affiliated with the government? How do you expect their fund allocation to look different relative to 2019 or recent history?

The way we would look at it is dependent on the end market segment. Take food, for example; certain aspects of food testing and quality will become more important as you look at the food supply chain. Around diagnostics, funding related to COVID products will likely continue over your timeframe of interest. On the life sciences side, significant funding is moving into infectious diseases. Our diverse portfolio allows us to pivot our offerings based on market needs, so while some product lines might see pressure, we have enough options to meet our customers' needs and demands.

Okay. Much appreciated. One for Jamey. I wanted to follow-up on a topic that came up in Q&A, pertaining to the margin trajectory. I think another way to look at it that could be helpful is if you compare and contrast the margin structure now versus your prior cycles of challenges. For instance, was it similar during the 2008, 2009 cycle or some challenges seen in China? How is the cost structure really different such that we should model it differently?

I would break it down between the gross margin line and the OpEx line. On the gross margin line; we have a very different portfolio. Less instrument drop-off occurs than in the past, and we probably have more recurring revenue that keeps our gross margin line higher during this time period. On the OpEx line, it’s a choice. It’s more about what you want to invest in for growth in R&D or sales. We have a highly variable cost base that can flex well in any environment.

Thank you. Our next question comes from Tycho Peterson from JPMorgan. Please go ahead.

Thanks. Prahlad, you commented on the serology export issue out of China earlier. Are you able to comment on how much of a headwind that was? Also, you mentioned pre-COVID stocking in the Diagnostics business; can you quantify that?

Yes, Tycho, the issue regarding China earlier was not serology but related to RT-PCR. I wanted to clarify that because all the serology tests come from Lübeck in Germany. The RT-PCR issue has been resolved, and both governments have worked hard to facilitate that. As for the second question...

I didn't catch it.

Pre-COVID stocking. You called out pre-COVID stocking in your prepared comment.

Yes, that's right. As the rest of the world began to realize what was happening in China, we observed a bit of stocking in our EUROIMMUN business. That's why EUROIMMUN's European revenues were up over 30%. We don't think that's sustainable, rather it'll be more in the low double-digits. There was probably $4 million to $5 million of stocking in EUROIMMUN. Additionally, reproductive health in Europe saw $2 million to $3 million of stocking as well. Overall, we talked about $46 million in headwinds; at a high level, that is solely China. That was a significant organic swing for us.

Thank you. Our last question comes from Paul Knight from Janney. Please go ahead.

Good evening. Talking about the sensitivity of your EUROIMMUN ELISA test, with specificity close to 100 as well, how do you think that compares to what is out in the field? It seems strong. But I'd love your color about that data readout on high sensitivity and specificity.

It's a very good question, Paul. When we look at studies showing sensitivity, we have seen data exceeding 94% three weeks post onset, including 100% in our EUA approval data. But metrics should be ranges and not discrete. True comparisons need consistent factors. The assays now available are different; some are total antibody, while ours is only IgG. The studies are being performed at different times post-infection. We expect the antibody response to vary early on but be more robust three to four weeks later. Most studies were not independently validated; ours was. Such comparisons require the same cohort of patients. In short, it’s difficult to compare, and we believe independent bodies should make these comparisons.

Thank you. It just seems like well above typical readouts we've been seeing. The last question would be whether you think some sectors, like energy, are permanently impaired and whether you're having to rethink about what growth rates look like in those niche markets?

I'm not sure. If you take E&P producers for oil and gas firms, that's troubled by low oil prices. However, many companies in chemicals and energy can benefit from low oil prices. Chemicals and energy, which make up about 40% to 50% of our industrial business, were quite steady in the first quarter. We’ll keep a close eye on those markets.

Thank you. I show our next question comes from Brandon Couillard from Jefferies. Please go ahead.

Hey, thanks. Jamey, you mentioned operating cash flow is pretty good, especially for the first quarter of the year. Could you speak to how you're managing working capital in this environment? Are you extending payment terms at all? And have you revised your CapEx plans for the year?

Yeah, Brandon, we were quite encouraged by the progress made in the first quarter overall. CapEx is relatively flat but that was our operating assumption heading into the year. In terms of inventory, we typically see a first-quarter build, but this quarter was accentuated because we had about $40 million or $50 million of volume drop-out. We are working on receivables; we’re putting in a lot of effort on invoicing accuracy and collaboration with customers. As for extending payment terms, the answer is yes, for a handful of high-quality customers. However, it's not expected to last long.

In case you can speak to DAS overall for either March or April, perhaps?

In general, if you think about this down 15% to 23%, areas that will fare better will include life sciences, reproductive health, and applied genomics. The tougher side includes applied markets, which is why I mentioned that. Food in the core immunodiagnostics business is also weaker, excluding what EUROIMMUN does with serology.

Thank you. Our last question comes from Catherine Schulte from Baird. Please go ahead.

Hi, guys. Thanks for the question, and thanks for all you and your team are doing to help combat this virus. First on immunodiagnostics, you talked down 30% in China in Q1. What has the recovery look like in that business so far? And how long do you think it takes to return to growth there?

Thanks for the question, Catherine. I hope you're doing well. So yeah, the immunodiagnostics in China was over 40% down in Q1. I'd say it's not back to normal levels, but it's growing mid-teens in China. We're assuming flattish growth in the second quarter in China and APAC.

Okay. And then you talked about developing a rapid lateral flow test in China and India. Is that something you plan on bringing to the U.S. or Europe? Or is that more of an emerging marketplace?

Catherine, this is Prahlad. On the lateral flow test, which we received approval for in India, India currently does not allow export of any COVID-related products. So that will focus more on the emerging marketplace. The work ongoing in Taicang and Beijing might potentially be brought to markets outside of China upon development.

Thank you. This concludes our Q&A session. At this time, I’d like to turn the call back to Mr. Prahlad Singh, President and CEO, for closing remarks. Please go ahead, sir.

Thank you, operator. Thank you all for your questions. Again, I'm proud of our entire organization and how everyone has rallied together over the past few months. We delivered very good first-quarter results despite the macro uncertainty, and our improved liquidity profile should better position the company in the months ahead. While many unknowns still exist, our diverse capabilities put us in a unique position to help combat this pandemic. We are leading with science, and that is clearly resonating. I have no doubt we will emerge from this crisis as an even stronger company. Thank you for supporting PerkinElmer, and I look forward to providing further updates on our second-quarter earnings call. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.