Revvity, Inc. (RVTY) Q1 2022 Earnings Call Transcript

Good afternoon. Thank you for attending today's PerkinElmer First Quarter 2022 Earnings Call. My name is Amber, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. It's now my pleasure to hand the conference over to our host, Steve Willoughby, with PerkinElmer.

The 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 forward-looking 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. To the extent we use non-GAAP measures during this call that are not reconciled to GAAP, we will provide reconciliations promptly. I will now turn it over to our President and Chief Executive Officer, Prahlad Singh.

Thank you, Steve. And good afternoon, everyone. The first quarter of 2022 continued to both challenge and inspire us as we faced varying dynamics across the globe. I want to start my remarks today by taking a moment to once again acknowledge all of PerkinElmer employees in Poland who have opened their hearts and even their homes to support Ukrainian refugees. It's been uplifting to see the different ways our teams around the world have been helping during this extremely difficult situation, and we hope for peace to come soon. I also want to highlight and thank my colleagues in China, who have gone to great lengths to continue to deliver for our customers during these extraordinary times. Finally, as I reflect on all the events that have shaped this past quarter, I want to also express my gratitude to the team behind the COVID testing lab in Valencia, California, which as we announced a month ago, will be closing later in May as a result of declining COVID cases and the subsequent need for testing. The team stood up the Valencia lab during the height of the pandemic in a matter of 60 days and ultimately, helped dozens of underserved communities obtain vital COVID testing, processing over 9 million samples from this lab. I also appreciate the efforts of our colleagues in the UK, who were a part of our COVID testing lab in Wales, which was closed at the end of March. While we are thankful that the pandemic is now more under control in parts of the world, it does not seem to be fully going away, as shown by the recent rise in cases in parts of Asia and some parts of Europe, as the new Omicron sub-variant takes hold. In the midst of our response to the pandemic, PerkinElmer has also been going through an immense transformation. As we have entered the new year into what appears to be an evolving and somewhat turbulent operating environment, our teams are continuing to perform at a high level, from the successful integration of our recent portfolio additions to our focus on commercial excellence, to our achievements with new product innovation, all the while against the backdrop of a very dynamic macro environment. I think our ability to execute so well under these conditions speaks to what the company has become. Today more than 80% of our revenue comes from life science and diagnostics, up from two-thirds just five years ago, with more than 75% of our revenue now being recurring in nature, compared to only 60% five years ago. And today more than one-third of our non-COVID revenue is derived from pharma and biotech customers, a figure we expect to continue to grow in the future. This shift to less cyclical, faster growing markets is a proof point of the changes that have already taken place. With the transformation of our portfolio has undergone over the last 24 months, the integration and ultimate synergy of these new businesses is paramount. Let me provide you a few examples of how our recent additions are already collaborating with each other and within the broader company overall. Our commercial teams are now partnering with each other across our BioLegend, PerkinElmer, and Horizon product portfolios, including unique opportunities at key pharma incubators in North America. Within our lab services organization, we are introducing a new service offering focused on flow cytometry. In our diagnostics segment over the past few months, our Oxford Immunotec business began selling PerkinElmer JANUS liquid handling instruments, along with cell counting instruments from Nexcelom, as part of its new optimized and automated workflow that is now becoming available to customers. Finally, our Oxford business is collaborating with EUROIMMUN by starting to offer its TB test kits in regions where EUROIMMUN has strong existing customer relationships. While our portfolio transformation has been significant, we continue to build on our momentum. And earlier this year, we welcomed SonoVol to the PerkinElmer family. Although a small overall business today, we've already integrated SonoVol's Vega technology into our in vivo imaging portfolio to offer our customers a first-of-its-kind ultrasound platform. The Vega system will enable us to meet growing demand for non-invasive imaging technologies for use in preclinical research and drug development studies of cancer, liver and kidney disease, cardiology and more. SonoVol's unique ultrasound offering continues to increase the breadth and differentiation of our in vivo imaging offerings and helps ensure we maintain our leading position in this key market. From a commercial excellence perspective, life began to show some signs of normalizing during the quarter as we were excited to return in-person to this year's SLAS Conference in Boston, with several of our newly acquired companies co-exhibiting and meeting with customers. Together, we showcased how our end-to-end life sciences solutions and automated workflows can accelerate scientists' R&D productivity so customers can get the right therapeutic candidates to market faster. Another example is our Power Up 2022 - Battery Summit we held last month in Berlin with key customers and contributors in this fast-evolving market. This two-day summit was in advance of our upcoming Battery Center of Excellence opening in Germany, located in the heart of its electric vehicle manufacturing area outside of Frankfurt. From an innovation perspective, we remain very active as all aspects of improving human health didn't start with COVID, especially efforts to get smarter about how we approach research and diagnostics. For instance, just in the past quarter, EUROIMMUN's test to confirm previous dengue infection has been included in the CDC's recently released pre-vaccination screening algorithm for the Dengvaxia vaccine. According to the CDC, about 400 million people are infected with dengue viruses each year, transmitted primarily through the bites of infected mosquitoes. While there is no specific treatment for dengue, in some cases it can be prevented in children and adolescents with Dengvaxia. Because eligibility for the vaccine requires proof of prior dengue infection, an assay that can measure virus-specific antibodies for dengue like EUROIMMUN's is needed. During the quarter, we were also proud to have PerkinElmer Genomics join other leading genomics companies and laboratories to establish the CardioGenomic Testing Alliance. The group is aimed at raising awareness and utilization of genomic testing in cardiology, which can be a powerful tool to identify those at risk for specific cardiac conditions. From a geographic perspective, we continue to actively collaborate with governments around the world to provide critical solutions to advance their healthcare agendas. I was honored to meet with the Minister of Health and Prevention of the United Arab Emirates in March to discuss the future of PerkinElmer in the region. During my trip, we inaugurated PerkinElmer's first office in Dubai, which has been evolving into an R&D hub for the Middle East in a growing market for diagnostics. With our new site, PerkinElmer will be able to better serve our customers with an in-country, for-country approach. Additionally, when I was at the Dubai Airport, I had a chance to view our G3 explorer Workstation, which will be used to screen arriving passengers for COVID. As we look to the second quarter, the entire organization remains motivated to keep up the momentum from the first few months of the year. Despite ongoing global unrest, higher inflation and an evolving supply chain, we continue to have both significant incoming demand from customers and resulting backlogs, which we are executing upon as quickly as possible. Overall, I remain quite optimistic as PerkinElmer has proven we can navigate through pandemics, cyclical headwinds and now world crises while continuing to execute on our plans, delivering for our customers and emerging as a stronger company. Our performance during the first quarter was a testament to this, as we grew our non-COVID revenues organically by 11% year-over-year and generated $2.41 in adjusted EPS, both of which are solidly ahead of our expectations. As Jamey will touch on in more detail, due to the strong performance here in Q1, our continued optimism over the remainder of the year, despite some incremental challenges and the net impact on our reported results from our COVID contract in California coming to an end, we are now projecting our 2022 adjusted EPS to be in the range of $7.15 to $7.45.

Thanks, Prahlad, and good evening, everyone. As Prahlad mentioned, the business maneuvered various obstacles well during the first few months of 2022, which is a continuation of our solid execution over the last two years during this pandemic. Our internal and external transformation remains on track, and I'm pleased to see both our COVID and non-COVID performance again exceeded our expectations this past quarter. This resilient performance is a testament to the progress we've made and the exceptional efforts and sacrifices of our employees. During the first quarter, adjusted revenue declined 4%, compared to last year to $1.26 billion, which included a 2% headwind from foreign exchange and a 10% contribution from recent acquisitions. Organic revenue declined 11% year-over-year, driven by a drop in total COVID revenues. On a non-COVID basis, our revenue increased 11% organically, which was above the 7% to 9% growth we were looking for coming into the quarter. Our total COVID revenues came in at $310 million, which was above our $240 million guidance, as the Omicron spike in January and February proved larger than we had anticipated. The revenue upside in the quarter, along with solid adjusted operating margins of 32.5%, helped drive our adjusted earnings per share to $2.41, which was also ahead of our expectations. Driven by the strong top line and bottom line performance, we again saw good free cash flow generation totaling $254 million in the quarter. As we've previously discussed, our capital deployment this year is focused on deleveraging, which we executed on in the quarter and expect to continue to do so over the remainder of the year. We ended the quarter with a leverage ratio of 2.3 times net debt-to-EBITDA, which is up slightly from the 2.2 times it stood at year end. I'd now like to provide some additional color on the performance of the business during the quarter, before wrapping up with some updated thoughts on the environment we are currently operating in and our outlook for the remainder of the year. Starting with our Discovery & Analytical Solutions segment, which generated $602 million of revenue in the quarter, this was up 33% year-over-year and represented 48% of our total revenue. Organically, the segment grew 12%, with sales to pharma biotech customers leading the way and growing in the upper-teens organically. The strong growth we saw in pharma was driven by continued robust demand in our preclinical discovery business and strength in our informatics franchise. Its unique SaaS-based Signals Research Suite is a market-leading scientific data management and workflow platform used by tens of thousands of users worldwide. Sales to applied market customers grew in the low double digits organically, while revenue declined in the high single digits organically to academic and government customers, who represent approximately 5% of our total revenue. Turning to Diagnostics, the segment generated $657 million of revenue in the quarter, which was down 23% year-over-year and represented 52% of our total revenue. Organically, this segment declined 24%; while on a non-COVID basis, our Diagnostics business grew 10% organically. As previously mentioned, COVID-related revenues totaled $310 million, down slightly from Q4 levels and down from $550 million a year ago. Our Applied Genomics business, which consists of various instruments, kits and other consumables for NGS sample prep, continues to post excellent performance, growing more than 20% organically year-over-year on a non-COVID basis in the quarter. While we are very pleased with the continued strong performance, we still expect its growth rate to moderate over the remainder of the year. In our Immunodiagnostics franchise, we did see some incremental headwinds from lockdowns in various regions throughout the quarter, which became more pronounced in China as the quarter progressed. However, despite these headwinds, the segment was still able to post mid single-digit non-COVID organic growth in the quarter, with EUROIMMUN growing in the high single digits ex-COVID. Our Reproductive Health franchise grew in the high single digits on a non-COVID basis in the quarter, as the positive inflection in birth rate trends we saw in the US and parts of Europe in the fourth quarter appear to have continued so far this year. For example, we believe births in the US were up in the 4% range year-over-year in the first quarter. The business also continues to benefit from continued geographic and menu expansions, the contribution from new product introductions and a relatively small, but growing contribution from our Vanadis NIPT offering. From a geographic perspective, our 11% non-COVID growth in the quarter was led by the Americas, which grew in the upper teens, while Europe was up in the high single digits. Asia-Pacific and China were both up high single digits despite lockdown-related pressure on our diagnostics franchise due to the strong growth from pharma biotech customers. Now moving on to the current view of the world and its impact for the remainder of the year. As you saw with the 11% non-COVID organic growth we posted here in Q1, the demand environment continues to look very healthy, while supply chain and lockdown pressures persist. As a result, our overall backlog entering 2Q increased slightly, as compared to where it started at the beginning of the year, so that for the full-year, we are reiterating our full-year non-COVID organic growth outlook of 6% to 8% even with the number of various uncertainties that exist in the world today. As you saw in the 8-K we filed in April, the State of California provided us notice at the end of March that it decided to end our COVID lab testing contract within the 45 days stipulated by the terms of our agreement. Consequently, as of the middle of this month, the lab will be closed and the contract will be over. Because of the accounting treatment related to the upfront milestone payments we received when opening the lab, all of the roughly $100 million of deferred revenue we have related to this contract will be recognized in 2Q. Along with the associated cost of closing the lab and a 1% higher effective tax rate for the year as a result of greater COVID revenue and income, we estimate the net impact to contribute approximately $0.35 of earnings per share in the second quarter, which will be included in our updated revenue and earnings guidance I will share with you shortly. For your modeling purposes, our much smaller COVID lab in the UK was also closed at the end of March. So as we look ahead, while COVID cases have increased in some markets recently, such as China, testing has dropped significantly over the past few months in most other areas. After generating $310 million of COVID revenue in 1Q, we are now looking for $570 million of total COVID revenue this year, which includes the non-cash deferred revenue related to the California contract being fully recognized. With an expected 7% contribution from M&A and a 2% headwind from foreign exchange, we are now forecasting our total reported revenue this year to be in the range of $4.56 billion to $4.63 billion. In terms of adjusted earnings per share this year, we are increasing our guidance to a new range of $7.15 to $7.45, which includes the favorable impact from the California-related deferred revenue being fully recognized, as well as our Q1 outperformance. And for the second quarter, we are projecting total revenue to be in the range of $1.20 billion to $1.22 billion, which consists of non-COVID organic growth of 4% to 6%, an M&A contribution of 10%, a 3% headwind from foreign exchange and approximately $210 million of total COVID revenues inclusive of the deferred revenue being fully recognized. In terms of adjusted earnings per share guidance for the quarter, we are forecasting to be in a range of $2 to $2.05. All of this guidance is detailed on the second to last page of today's presentation that is on our investor website. In closing, I'm proud to see how our team is responding and continuing to deliver on the very strong demand we are experiencing from our customers. I know I've made the comment before, but it is really amazing to see the rapid transformation that has occurred at the company over the last two to three years, both internally and externally, which I feel has positioned us extremely well going forward.

At this time, we would like to open up the call to questions.

Hey, everyone. Congratulations on Q1, and thank you for answering my question. Jamey or Prahlad, could you provide some insight on the guidance? There's been a lot of interest regarding the change in base guidance. You mentioned 11% for the base and the annual figure of 68% remains the same, correct? It seems the implied organic growth from Q2 to Q4 may be a bit lower than previously anticipated. I’d like to know if there was any revenue that was pulled into Q1 contributing to that 11% base. Additionally, how are you factoring in the impact of the China lockdowns for Q2? I'm assuming these would result in lost revenue since it pertains to diagnostics. Could you discuss the base business and the potential effects from the situation in China?

Yes. Thanks, Vijay. So we are not changing our overall non-COVID core organic growth guidance of 6% to 8%. Yes, we beat the first quarter, the team is executing extremely well. I think I mentioned in my prepared remarks that the demand looks great, our backlog continues to rise. So I think it's basically just a little conservatism; the first quarter is always the lightest from a revenue perspective. But the outlook looks strong, and I think we are poised to at least deliver the 6% to 8%, but I thought it was a little too soon this early in the year to raise the overall organic growth guidance. As you know, there's a lot of geopolitical and macroeconomic pressures out there. You mentioned China as an example. So I don't think we'll lose the testing. Not a lot of this was due to reproductive health, Vijay. I think most of it is due to EUROIMMUN and the autoimmune testing, which just gets pushed out a little bit. So it might be pushed out of the year, but not necessarily pushed out because someday they will need testing. So what we've baked into our guidance for the second quarter is that the operating environment that we saw at the end of the first quarter for most of the month of March continues through mostly May and returns to normal at the start of June. So overall, we still feel very confident that 6% to 8% is probably a little conservatism, but it's still early in the year. And things are operating well; the team is doing a great job.

Yes, Vijay, I’d like to add that despite the lockdowns, our facilities in Shanghai and Suzhou have not completely shut down. We have been collaborating with authorities to maintain manufacturing and shipping operations. As Jamey mentioned, the impact has not affected our reproductive health segment, although it has on immunodiagnostics; however, we believe that will recover. More importantly, it’s essential to recognize that our company's portfolio has evolved significantly. As I previously mentioned, 80% of our focus is now on life sciences and diagnostics, which continue to perform well, now representing two-thirds of DAS revenue. Overall, we anticipate that China will recover, assuming the lockdowns lift by the end of May, and we should be in a good position. We are just being cautious, which aligns with our approach in previous quarters.

That's a helpful perspective, Prahlad and Jamey. Prahlad, I have a question for you. Earlier this year at JP, you mentioned that your fiscal '23 earnings would exceed $7. If I refer to your annual guidance, the high-end is $7.45, and if I exclude the Q1 and Q2 EPS guidance, it seems that the back half for Q3 and Q4 would annualize to around $6. Can you discuss your confidence in the fiscal '23 earnings projection that you outlined earlier this year?

I would say that our confidence in the work we've done and the effort we've put into transforming our portfolio over the last several quarters remains strong. Even though the market environment is shifting, I am very optimistic about the company's future. We have made significant progress in transforming our portfolio, particularly in life sciences, where we expect our reagent business to exceed $700 million and grow in the low to mid-teens. Overall, I believe we are well positioned to handle any market challenges and have demonstrated our ability to execute successfully over the past couple of years.

I'm sorry, so there is no change to the $7-plus earnings outlook for fiscal '23, correct?

Yes, as I said, right? Given the market conditions, we are, i.e., there is absolutely, as of this point, no change in applied processes towards that number.

Okay. Thanks, guys.

Thank you.

Thank you, Vijay. Our next question comes from Derik De Bruin with Bank of America. Derik, your line is now open.

Great, thanks. This is Mike Ryskin on for Derik. I want to start on the M&A contribution. Appreciate your color in the beginning of the prepared remarks, Prahlad, on some of the synergies and from the benefits you're seeing from bringing these businesses together. But you did initially point to, I think, 11% M&A in the quarter and also if you're going to blow wide with that. Can you sort of break down some of the various points there? I know there's a lot of deals that are still in the quarter. So could you talk specifically how BioLegend did versus some of the other pieces, whether it was Oxford or some of the other acquisitions?

Sure, Mike. Let me start by saying that overall for 2022, our forecast for our M&A does not change, and in fact, would reiterate that. Yes, as you pointed out, 1Q did come a tad below our expectation, and it was primarily because of the lockdown impact at BioLegend when Omicron hit in January. So there were two things. One, the academic customers had shut down for some time and there were some closures also from employee disruption in January at BioLegend. But that was in January and that's gone. And there was some, I guess, impact also at Oxford. So overall, I think for the year rate hasn't changed. It probably has just pushed out from Q1 to Q2 and beyond.

Okay, thanks. And on the number you printed in DAS, really strong number despite the comps. Could you talk us through what you're seeing there, what's really driving that trend, and what are your expectations for the rest of the year if you're going to take up your DAS assumption a little bit?

Sure. Let's begin with life sciences. The innovations we've implemented are significantly driving the strong growth and market share that we are experiencing. For instance, our informatics business is leading the way in research with our SaaS-based workflow and portfolio on the preclinical side through our product launches and reagents. Acquiring BioLegend has also enhanced our capabilities in sourcing antibodies, benefiting Cisbio and our traditional reagents business. From a market standpoint, the pharmaceutical sector continues to perform well for us, and our backlog keeps increasing. Life sciences, especially in DAS, has been the primary growth driver. Additionally, we have rolled out several new products within the applied segment, a trend that reflects our organic investments in this portfolio, with positive results starting to emerge. For example, our solid test program in China is gaining traction. The Battery Summit we held near Berlin has also begun to show benefits for us. In the food sector, particularly regarding safety, we are seeing robust demand in China. Overall, the end markets we mentioned—food, applied, and life sciences—are all performing well. Specifically, the semiconductor and battery markets within applied are thriving.

Okay, thank you.

Yes.

Thank you, Derik. Our next question comes from Dan Arias with Stifel. Dan, your line is now open.

Hey, guys. This is Daniel Macek on for Dan Arias. Thanks for the questions. So just starting with EUROIMMUN for the non-COVID portion of the business, you're expecting to get back to double-digit growth this year. I think it was high single-digits in the quarter. So I just want to clarify if China was probably the main issue there. And then so is what's baked into guidance, is that assuming these lockdowns ease up at the end of May or beginning of June? Thanks.

Yes. Great question, Daniel. So, yes, if you look at EUROIMMUN, they continue to do extremely well. So China did impact their business; it's a relatively large proportion of their revenue. Outside of China, EUROIMMUN grew in the high teens across the rest of the geographies. And so China was probably flat to down low-single, I think, or maybe down 5%. And as we look forward into the second quarter here, we continue to believe that will happen. So I think by the third quarter, I would expect EUROIMMUN overall to get back into the normal high teens, but the performance of the business outside of China is terrific. And I think when China opens up again, it will snap back as well like we saw in the past.

That's very helpful, thanks. And then what's the latest on Vanadis? You mentioned a small contribution in the quarter. So just first, how is utilization within your customer base, how is adoption, and then just what's expected for the year in terms of placements and utilization and revenue contribution. Thanks.

Sure, Daniel. I mean, let me start by just taking it up and talk about the whole reproductive health segment as we've done in the past. Clearly, our new products are seeing strong uptake with SCID, XLA, SMA, preeclampsia, and I think that's shown in the numbers. Obviously one of the things that has also helped is the improvement in the birth trends, especially in the US, continues to gain traction. We pointed that out in the fourth quarter and I think even in the first quarter, it was roughly about 4% growth in the birth rates. And Vanadis is another contributor towards that growth, albeit small, but it continues to sequentially grow and we expect this growth to continue in the future quarters. We are seeing a lot of commercial traction; we continue to refine the system and reagents, and keep looking at adding what are the features we need to do. So overall, we could not be more happy with the way that NPI is progressing and that it's going as per our plan, if not better, I would say.

Thanks, guys.

Yes.

Thank you.

Thank you, Dan. Our next question comes from Josh Waldman with Cleveland Research. Josh, your line is now open.

Hey, thanks for taking my questions. One on margins and then one on recent acquisitions. Jamey, wonder if you could talk through how you think margins in the non-COVID business performed versus maybe internal expectations in the first quarter, and then maybe how you're thinking about margins within that business for the full year, any change maybe versus initial plan?

No, there is no change from the initial plan. We have always been cautious with our investments to support organic growth alongside our COVID-related business. As COVID diminishes, we will need to reduce some of our increased investments, but that was part of our strategy all along. Therefore, we are maintaining our overall approach. As we have mentioned before, we expect to achieve a 26% operating profit by 2023. Currently, the environment is changing, but we still anticipate positive outcomes. We have numerous productivity programs in place, and we believe growth will continue as our business mix shifts. Additionally, our $700 million life sciences reagents business, which has been growing in the low teens with high profitability, is often overlooked. We feel confident about our margin rate as we approach year-end, and by the fourth quarter, we are likely to achieve the adjusted operating margin we anticipate for next year. This projection aligns with our strongest quarter, which reinforces our belief in reaching our goals for the upcoming year.

Got it. And then a follow-up on acquisitions. Appreciate the timeline you laid out, but wondered if you could provide some context on how you expect acquisitions from 2021 to contribute to the 6% to 8% organic here in 2022. And then maybe again kind of back to margins, any context on what the margin profile of that revenue has looked like kind of year-to-date?

Yes. So for the overall year, Josh, we were originally saying before acquisitions, we've been a 5% to 7% business, and so that the acquisitions and the effect that they would have on 2022 would be an extra point, which is why we guided 6% to 8% overall. The majority of that revenue or a big portion of that revenue comes in the fourth quarter when BioLegend kicks in and the growth rate that they have. So that's where you'll see the biggest contribution from an organic growth perspective. So I think in the first quarter, with Horizon for the whole year, Oxford starts here in the second quarter, Nexcelom starts in the third quarter, and then IDS here and then BioLegend starts in the fourth quarter. So it will be an increasing contributor through the year, but it's relatively small in the first and second quarter here. As it pertains to margins, margins continue to look very good, I'd say maybe even better than we anticipated at the outset of the year. BioLegend remains strong, Horizon is doing a good job, Oxford is doing a great job. So things are going well on both the growth and the margin rung for all the acquisitions.

Got it. Appreciate all the detail.

Thank you, Josh. Our next question comes from Catherine Schulte with Baird. Catherine, your line is now open.

Hey, guys. Thanks for the questions. Maybe first for the China lockdown, I believe in the fourth quarter, you had quantified that as a point to a point-and-a-half headwind. So what was that headwind in the first quarter? And can you quantify what's baked into the second quarter in terms of that 4% to 6% non-COVID organic guide for a lockdown headwind?

Sure. Thanks, Catherine. Yes, I thinking in the fourth quarter, we might have said it was 200 basis points to 300 basis points at a company level. So for China specifically, that translates to more like high single digits to a 10% impact on China. So in the first quarter, we continue to experience the same thing. I mentioned EUROIMMUN already, so EUROIMMUN was down versus up 17% in China, so that's one impact. There were a lot of shipping issues at the end of the quarter, as well as some of the delays in the logistics of our business. So to China specifically, we were up high single digits. And I think we had the same impact in the first quarter that we saw in the fourth quarter. And I think we probably would have been up mid-teens to high-teens excluding those impacts, specifically in China, and are probably a couple of points to the overall organic growth of our company in the first quarter. As we fast forward to the second quarter, really we think in China down to mid single digits. So it's a little bit of a longer operating environment that we're assuming here. So China was really impacted primarily in March. We're assuming that will be impacted in April and May. And so therefore, we've taken high single digits down to mid single digits, on top of the fact that overall it's a tougher comp year-over-year from a China growth perspective. So hopefully, that gives you a bit of color, but it's basically the same that we've been operating in for the last two quarters and it gets a little bit worse in the second quarter here. The other thing I'd say, Catherine, just to emphasize is when we initially guided the year, we obviously said high single digits and then 6% to 8% for the overall year. And we're still keeping the overall 6% to 8%. And specifically for the second quarter, we're really not changing our overall guidance. So again, I just think it speaks to the portfolio and how we're able to weather the storm of certain issues across the globe.

Got it. And then you had mentioned in your lab services organization you're adding a new service offering focused on flow cytometry. Can you just talk a bit more about that offering and how it's additive to what BioLegend was doing?

Yes. So this is as it pertains to our enterprise OneSource business, Catherine. And so the team has been working with BioLegend, our enterprise business obviously maintains assets, but it also does a lot of professional services. It does compliance services, it does IT services. So they work with the BioLegend team to be able to optimize testing in the lab as it pertains to flow cytometry. And I don't know all the details behind it, but when you combine the BioLegend experts and PhDs with our enterprise team, they're basically able to better operate a flow core cytometry lab.

Got it, thank you.

Thank you.

Thank you, Catherine. Our next question comes from Jack Meehan with Nephron Research. Jack, your line is now open.

Thank you. Good afternoon. Jamey, I was wondering if you could give a breakdown of the $310 million of COVID sales in the quarter, how much came from the lab service operations. And just the $25 million per quarter in the back half of the year, just walk us through again what your framework is for kind of endemic COVID for PerkinElmer?

Sure. I can say that we're looking at approximately $175 million from our core COVID revenue and around $135 million from lab revenue, which aligns with our previous guidance for that segment. The core product revenue saw an increase, primarily driven by the Omicron variant and significant activity in January and February, leading to higher throughput in that area. The lab revenue remained relatively stable. As we look ahead to the second half of the year, we're feeling more confident about achieving around $25 million per quarter, totaling $100 million for the year. Our extraction beads and use of chemagen have been performing well, and customers are familiar with their effectiveness, which has led to consistent orders. Additionally, we are seeing customers utilize and renew instruments for purposes beyond COVID testing, opting for extended warranties which indicates a commitment to diverse testing applications. While we believe there will be ongoing PCR testing, we don't specifically delineate the revenue from PCR versus other components, but it seems that PCR revenue represents only a small portion of that $25 million. We anticipate increased testing in the latter half of the year, and we believe we will benefit from that growth along with the use of chemagen and our liquid handling systems.

That's helpful. And then just a clarification, sorry if I missed this, on BioLegend. What was the sales contribution in the quarter, and just still feel good about the $308 million target for the year?

Yes, we still feel good about the $308 million target for the year, Jack. I think we want to start talking about the entire life sciences reagents business, because I think it's underappreciated. It makes up almost 30% of the entire DAS business and so in life sciences in total makes up 66% of the entire DAS business, which to the earlier question is why we are so bullish on the changed organic growth rate of our company. And so I will quote, the life sciences reagents business, inclusive of BioLegend, grew in the low-teens in the first quarter. So I don't think we're going to give out, hey, here's exactly what BioLegend is, here's what Cisbio was, and our historical discovery. I think we want people focused on the big picture that we now have a substantial life sciences reagents business that is growing low-teens and it has a ton of innovation and opportunity when you combine Alpha technology and everything that Cisbio brought, HTRF technology, and now everything that BioLegend has brought, in addition to Horizon Discovery. So we're quite excited with Bio and it continues to perform well.

Thanks, Jamey.

Thanks, Jack.

Thank you, Jack. Our next question comes from Brandon Couillard with Jefferies. Brandon, your line is now open.

Hey, thanks. Good afternoon. Jamey, just an update on where you're thinking about free cash flow conversion for the year, and I think there's $400 million left on the term loan, correct me if I'm wrong, and do you expect to pay that down ratably over the balance of the year?

Hey, Brandon. To start with the second part, we are actively working on reducing our debt. At the beginning of the year, the term loan was $500 million, and we paid down $100 million in the first quarter. We expect to have that paid off by the end of July or August. We have ample cash globally, as you are aware of our balance sheet. We are focused on returning that cash to the U.S. in a tax-efficient manner, which takes some time to arrange. Additionally, we generated $250 million in free cash flow during the quarter, allowing us to use $100 million to pay down the term loan. I believe we will complete this soon. In terms of free cash flow, we achieved an 83% conversion rate in the first quarter, which is among our best in a long time. In the pre-COVID era, we sometimes saw negative conversions. We have concentrated on improving this metric and previously stated that we would be in the 85% to 90% range. The acquisition of BioLegend supports this, and there are no major concerns affecting free cash flow apart from deferred revenue, which is primarily non-cash. Therefore, I would anticipate a conversion rate between 80% and 85% for the year, and we remain confident in reaching that target.

Okay. And then any more color you can help us with as far as gross margins in the back half of the year once COVID testing sort of normalizes at the endemic steady state?

Yes. So as COVID rolls off, and we always knew this day was coming, I would expect gross margins to settle in the mid '50s, so call it 55%. And as I mentioned in my prior response, I think operating profit will be low 24% for the second half and we might even exit in the 25% to 26% range. So I think we're really going to be monitoring the investments as COVID rolls off. But again if COVID is better than we anticipated, we might choose to continue to invest. But overall, we're still laser-focused on the 26% for 2023.

Got it, thank you.

Thank you, Brandon. Our next question comes from Rachel Vatnsdal with JPMorgan. Rachel, your line is now open.

Great, thanks for taking the question. So could you just spend a minute talking about pricing? I know that you've started taking up prices in the back half of last year in light of all the inflation that we've been seeing, so can you walk us through how much pricing is expected to contribute this year? And then have you faced any pushback from your customers on any of these pricing increases at all so far?

Thank you, Rachel. In the past, we’ve mentioned that we typically see an increase of about 50 to 100 basis points per year, and we believe this could potentially double. In the first quarter, the average rate was slightly above that due to the considerable backlog we had from the fourth quarter. Looking at the orders from the first quarter, we expect a significant amount of price increases in the second quarter, which we believe will continue to rise throughout the year. It takes some time for customers to adjust and for the salesforce to communicate these changes effectively. Therefore, what might have started as a 50 to 75 basis point increase could actually translate to a consistent 50 basis points each quarter. By the end of the year, we could find ourselves in the range of 100 to 200 basis points, perhaps even 150 to 200, and I feel confident about how our team is handling these adjustments.

Great, thanks. And then my last question is about the supply chain. So last quarter, you highlighted about 300 to 400 basis points headwinds between supply chain and lockdown pressures. So specifically, how meaningful is that supply chain headwind in 1Q, and then what's baked into the guidance for supply chain and logistics constraints for the rest of the year?

Yes, I think it's similar to my response on China; it's just the new norm. It hasn't improved or worsened. The 300 to 400 basis points impact for the fourth quarter is likely similar to what we saw in the first quarter. As we approach the second quarter, I don't anticipate any changes in the supply chain situation. We did mention that China is slightly down. Overall, we're adapting to this new norm, and the team is managing it well. Therefore, it's not really significant to highlight, as it has been consistent for at least two quarters now, and we expect it to continue for the rest of the year.

Thank you, Rachel. Our next question comes from Paul Knight with KeyBanc. Paul, your line is now open.

Thanks. Jamey, I didn't quite catch the color on California. That was $125 million or $100 million?

In the second quarter, we have $100 million in additional deferred revenue that we will be amortizing, which is above our previous guidance. The labs generated about $135 million in total, including the UK lab, during the first quarter, which is close to our original estimate. We previously guided around $50 million, so I hope this clarifies things. We are not changing our original guidance; it remains $110 million for the second quarter, and we are simply adding the extra $100 million of deferred revenue.

Got it, okay. And that's how you get to that $0.35 of contribution in Q2?

That's right. There are other costs associated with decommissioning the overall lab and taking out the equipment and that kind of thing, but including the extra COVID revenue that we have that increases our overall tax rate for the year, when you put that all together, that's $0.35 to the second quarter and the overall year.

Great, and then overall tax for the year?

Yes.

Operator, maybe just one more question.

Of course. Our next question comes from Patrick Donnelly with Citi. Patrick, your line is now open.

Hey, guys. Appreciate you squeezing me in there. Jamey, just maybe one on the EPS guide. I was hoping for a bridge. I mean, you guys, I think you raised by about $0.40, beat 1Q by $0.30, the California contracts and another $0.35. So by math, 2Q through 4Q guidance came down by $0.25. I'm sure part of that is FX, but was hoping just for a bridge, if you had it, in terms of the EPS guide from last quarter to this.

Yes, you're on the right track, Patrick. We believe the team performed exceptionally well in the first quarter and continues to thrive in a challenging environment. To summarize, we exceeded our first quarter expectations by $0.31 at the higher end. Additionally, there is an extra $0.35 related to California contracts. Essentially, we are not realizing an additional $0.20, which can be attributed mainly to foreign exchange issues that many of our peers are facing. Moreover, the current inflation and freight situation has presented some challenges, leading to additional costs. Pricing is progressing positively, and the team is taking measures to counterbalance the rising freight expenses by exploring various routes, providers, and packaging options. However, it is still early, and there is considerable macroeconomic uncertainty. Therefore, we decided to incorporate an increase of $0.10 at the higher end of our guidance, as we are confident in at least meeting, if not exceeding, our targets.

Yes, that's helpful. And then maybe one on China, you obviously talked a lot about it with 1Q and 2Q. Can you just remind us, first of all, how much of the China revenue is in the diagnostics world, and then how do you think about the recovery? A lot of the companies, a lot of your peers have said instruments will probably snap back fast, consumables service, maybe that's a little more lost than recovered. How are you guys thinking about that? And then again would love to just talk through your split there in China.

Yes. So I'll just talk non-COVID, Patrick, COVID just sort of So non-COVID, I think that's what we're trying to portray; that it is different. I mean, if you go back two or three years ago, we used to say China diagnostics was 60% of the business and DAS was more like 40%, which was the inverse of the total makeup of the company. If you fast forward to this past quarter, DAS is now 55% of overall China and diagnostics is 45%. And life sciences is about 30% of overall China. And I think that's where all these investments in terms of BioLegend, Nexcelom, Horizon, et cetera, have really changed the game for us in China. So even though life sciences has always grown very well there for us, and this past quarter, it grew over 20%, it's now a much bigger piece of the pie, which I think then changes the trajectory of the growth rate for us in China. Applied continued to do well in a kind of tricky environment; I mentioned all the supply chain issues at the end of the quarter, and everybody knows about the chip issues that all of us are experiencing. They still grew mid single digits. So DAS is probably 50-50 life sciences and applied markets, and then the rest is diagnostics, call it 45%. You know diagnostics is two-thirds of that, and it's mostly EUROIMMUN, and I've already hit that. But overall, China diagnostics at a company level, or immunodiagnostics at a company level is less than 5% of the revenue of the company. So while it has been impacted, overall it grew low single digits in the first quarter. And I think we're weathering the storm pretty well and quite excited about the future of China for us, particularly with the greater life sciences business.

I mean, even within diagnostics, the applied genomics business continues to do very well there. So I think once the lockdowns open up and we get back to normal double-digit growth, that's on the upside.

Great. Thanks, Prahlad and Jamey.

Operator, we have a few extra minutes. So if there are any other questions, we'd be happy to take them.

Of course. Our next question comes from Matt Sykes with Goldman Sachs. Matt, your line is now open.

Thank you. Good afternoon, Jamey and Prahlad and Steve. Appreciate you squeezing me, and I just have one quick one. Prahlad, you talked a lot about life sciences becoming such a large portion of DAS and it's a great story. And I'm just also looking at the growth rate you guys put up in your industrial environmental and food within that, which is still strong and there seems to be some secular tailwinds driving some of that. As you allocate internal resources within the company and you think about DAS, how are you thinking about sort of that life sciences split between the other divisions within DAS in terms of allocating capital and growth initiatives?

Yes. I think the way we've talked about, Matt, and especially as we look at our overall allocation both organically and inorganically, over the past several quarters, we've continued to make organic investments disproportionately on the applied side of the business. And if you look at the inorganic trend over the last 18 months, I would say a dominant if not a majority of our acquisitions has been on the life sciences side of the business. But consequently, the thing is also in this case for applied, the end markets where we have a strong position, whether it's applied sciences, or inorganic and especially with semiconductors on batteries with our ICP-MS portfolio or IR portfolio, those end markets are doing very well and we are seeing the benefits of that. But I think again going back to what I've been mentioning, Jamey has been saying, the DAS business now is two-thirds life sciences. For us, what becomes important is what might be a $700 million business this year and end up being an $800 million business life sciences reagents business that's growing in the low-to-mid teens. And I think that is going to be the growth drivers for not just DAS, but for the company. And I think that's what we feel very good and confident about the assets that we've put in place for that.

Great. Appreciate you squeezing me, thank you.

Yes.

Thank you, Matt. There are no further questions, so I'll turn the conference back over to our management team for any closing remarks.

Thank you, Amber. And thank you, everyone, for your time and questions this evening, and we look forward to speaking with you all again next quarter. Have a good night.

That concludes today's PerkinElmer first quarter 2022 earnings conference call. Thank you for your participation. You may now disconnect your line.