Operator:

Hello, and welcome to the Q2 2024 Revvity Earnings Conference Call. My name is Elliott, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to Steve Willoughby, Senior Vice President, Investor Relations. Please go ahead.

Prahlad Singh:

Thank you, Steve, and good morning, everyone. The power and potential of Revvity were on displayed during the second quarter, which allowed us to exceed our financial expectations for the quarter despite continued market uncertainty persisting amongst some in the pharma biotech market. While the headcount reductions, site consolidations and other cost cutting measures we have seen from these customers since mid-last year continued, we were more than able to offset the impact of these actions through meaningful strength in our other businesses. Revvity's uniqueness enabled us to overcome these challenges and continue to post leading financial performance. I expect this differentiation to continue even as pharma spending eventually normalizes. Max will provide more specifics, but I wanted to briefly touch on a few key points as it pertains to our recent financial performance. Our negative 1% organic revenue decline was at the upper end of our expectations for the quarter. Our customers are continuing to work through temporary cyclical pressures with their preclinical spending, and I'm confident in the eventual return to a more normalized environment, like, we've seen over the last two decades. We had fantastic performance in a number of other areas of the business in the quarter, which should continue over the remainder of the year, specifically within our signal software and diagnostics franchises, both of which are somewhat unique to Revvity compared to our general peer group. We also continued to tightly manage spending, which resulted in 29% adjusted operating margins in the quarter, up significantly from the first quarter. These good top line results combined with our strong margin performance led to adjusted EPS of $1.22, which was meaningfully above our expectations. In addition to the strong P&L performance, we continued to show great progress on managing our operations, leading to another quarter of excellent cash generation. We had over 100% free cash flow conversion of our adjusted net income for the third consecutive quarter, which brings our free cash flow generated so far this year to approximately $300 million. In addition to our robust cash generation, I'm happy to report we also received nearly $150 million of additional inflows that were owed to us related to the divestiture of the PerkinElmer Analytical & Enterprise Services business. Given we expect this strong year-to-date performance to continue into the second half of the year and that we do not believe the market is currently appreciating either our recent relative outperformance or the significant potential still in front of us, we intend to use our healthy balance sheet to more aggressively repurchase shares over the remainder of the year. We believe this represents a tremendous long-term value creation opportunity for our shareholders, which will not exist forever. We currently have roughly $330 million remaining on our existing buyback authorization, which we will look to opportunistically capitalize on. Our operating margin performance and cash flow generation so far this year are both great examples of the company executing at a very high level. It is this determined ability to strongly execute in our key focus areas that will also contribute to our differentiated performance in the years to come. Now moving on to other highlights in the quarter. It was great to see how we continue to lead with innovation for our customers. In late April, we launched the more highly automated AP2400 workflow in our latent TB testing business. This new offering, which we expect to receive FDA clearance later this quarter has launched in Europe and will be launching in the U.S. and China upon receiving regulatory clearances. We anticipate that the increased automation and decreased hands-on time for our lab customers, combined with the superior sensitivity and specificity of our T-SPOT assay, should lead to improved competitiveness for us in the IGRA latent TB testing market globally. This is of particular importance in the U.S., which is by far the largest market in the world for latent TB testing, as customers will now be able to have the latent TB tests they really want with the level of automation they need. It was also great to see at the recent World Health Assembly in Geneva that a new resolution passed by all 194 countries recommends that newborn screening programs be established in every single country. With this key resolution being adopted, additional government agencies such as the World Bank and other federal governments will now consider providing funding for newborn screening. Additionally, a new World Health Organization working group has been created, focused on developing guidance to drive the adoption of newborn screening to cover more of the approximately 70% of babies around the world who go untested at birth today. We have also continued to make good progress in adopting new technologies, including AI, to further streamline our operations and improve our product offerings. A few examples of this are how we are now using an AI-based tool to drive improved collections from our customers. We can now instantaneously engage with multiple customers in any language, identify why an invoice has not been paid based on the customer's response and flag the concern to the appropriate internal team for resolution. Just 90 days ago, this same process would have required a person speaking a specific language to either personally e-mail or call a customer, have a conversation, take notes, investigate internally and to follow-up with the customer. Obviously, a much more manual and time consuming process, given a high volume of predominantly consumable related invoices. We expect to broaden the use of this system across the entire company in the coming months. With our customers, we are building on our past efforts in machine learning to adapt generative artificial intelligence into more of our offerings themselves. Since the beginning of the year, we have been using AI to support the design and sourcing of new materials used in the development of our life science reagent offerings. With this information, we can develop more complex biological structures more quickly using new and different materials than in the past. We have also recently been using AlphaFold to validate data from some of our high content screening offerings in a key project looking to uncover new insights on the GLP-1 receptor. These findings have recently been submitted to a key scientific journal for publication. I look forward to sharing more details on how we are using AI in our R&D and building it into our products themselves at our upcoming Investor Day in November. As it pertains to our upcoming Investor Day on November 21, we are preparing what should be a great day to get up close and personal with Revvity. Attendees will better understand who we are, the impact we are having on customers and patients and how we plan to accomplish our key goals over the coming years. It will also be a great opportunity to see BioLegend's operations and beautiful campus in San Diego. So I hope you join us either in person or virtually. Finally, I wanted to share that we continue to have a keen focus on not only what we are doing for the advancement of science and diagnosis of disease, but also how we are doing it. These efforts were recently recognized by the ESG rating agency MSCI, who increased our ESG rating to AA from A. We remain active on a number of fronts to increase our sustainability in our operations, R&D and logistics, which will continue. But it was great to see our progress so far resulting in an improved and now upper tier rating from one of the most prominent ESG rating agencies in the world. So in closing, before turning it over to Max, we had a very good second quarter on many fronts from our top line to margins to our cash flow generation. They were all strong and reflective of our organization's commitment to successful execution as we navigate this evolving end market environment. These results put us on a good trajectory for the year and allow us to raise our earnings expectations overall. While it is uncertain at this point as to when pharma spending will return to a normal environment, we are optimistic that the worst is behind us as the long term potential of our business remains bright. With that, I will now turn the call over to Max.

Operator:

Thank you. [Operator Instructions] Our first question comes from Patrick Donnelly with Citi. Your line is open. Please go ahead.

Prahlad Singh:

Hey, Patrick. Good morning. Sure. So on the reagent side, as you heard from both Max and I in the prepared remarks, we saw some sporadic, I would say, volatility and additional site consolidations and close down that happened around the middle of the quarter. But the headcount reductions and site consolidations we saw, I think it's now mostly behind us. I mean despite -- outside of this, I would say, sporadicness, we've seen generally nine months of stability and that's what gives us increased confidence that the worst is behind us. In terms of the current guidance, we assume very similar level of absolute dollars in the third quarter versus the second quarter with some, I would say, normal seasonal improvements from that going on in 4Q. But I think the essence to your question is, we feel like the worst of the cuts that are going on in the pharma biotech is now likely behind us and that's what sort of gives us a sense of increased visibility into the second half.

Max Krakowiak:

Yeah. Hey, Patrick. So from a margin standpoint, I think we're encouraged by the performance for the team for the first half of the year. Again, that's leading us to take up the margin expectations for the full year. I think when you think about the factors that are driving this, I would say it's really continued progress on our integrations and synergies from some of the recent acquisitions in addition to the restructuring actions that we took at the end of last year. So, I think it's kind of a combination of those two factors is really the predominant driving force on the margin side. As we look longer term, as a reminder, our LRP kind of calls for 75 basis points of OMX per year, assuming a normal market growth rate environment. I think as we mentioned in the call, we'll see about 25 here either at our Analyst Day or again in January. But I think for us, if we are in a normal market environment, we feel very confident on the 75 bps OMX per year.

Jack Meehan:

Thank you. Good morning. I wanted to ask about China diagnostics. Starting with immunodiagnostics flat in the quarter, what are your expectations for the second half of the year? And can you just remind us what the go-to-market changes you were made were earlier in the year and how those are playing out? Thanks.

Jack Meehan:

Got it. Okay. And then on the newborn screening side, it sounds like that was still down in the quarter, but you're confident in that making a turn, like, what are you seeing on the ground? What gives you that confidence that business is going to turn? Thanks.

Operator:

We now turn to Puneet Souda with Leerink Partners. Your line is open. Please go ahead.

Prahlad Singh:

Yeah, Puneet. I think the reason for the visibility that we talk about is that, yes, the headcount reductions have happened and the site consolidations are happening, but it's not that we are getting any indication that the programs are shutting down. It's the time that it takes to transition the program to say from the West Coast to an East Coast side that sort of gives us a sense of visibility as to when it comes back up and running. And then, that gives us a sense of, what I said earlier, visibility into when the programs are and that's what causes the volatility that I talked about earlier. In terms of early discovery versus clinical, if I'm not wrong, that was what your question was, Puneet?

Prahlad Singh:

I mean, at the end of the day, as I've said earlier, innovation is only going to happen as they continue to invest in early discovery programs, whether there are only two ways that you do it, either you invest in discovery or you buy compounds. And right now, what we are saying is that there is no indication that pharma biotech is saying that we are going to shut down the pipeline for innovation.

Puneet Souda:

Got it. Very helpful. And then just on the buybacks, Max, those $330 million, is that entirely this year? Just wanted to get the view on the cadence for that. Thank you.

Prahlad Singh:

Yeah. I mean, just to add to that, it's just the existing authorization that we have. But Puneet, more broadly, just looking at our current valuation and where we think we are headed in the future, the return on buying back our stock makes a lot more sense to deploy capital around that, particularly, if you look at the continued elevation for M&A candidates, and we honestly don't expect this valuation disconnect opportunity to last forever. So, we plan to be aggressive while it does.

Operator:

Our next question comes from Vijay Kumar with Evercore ISI. Your line is open. Please go ahead.

Max Krakowiak:

Yeah. So maybe I'll start with the second one first, Vijay, just on the China life sciences instrumentation. So as a reminder on our portfolio, most of the items are what we would consider bigger ticket items. The ASP is sort of 500,000 plus from a life sciences instrumentation standpoint. I think as we look at the second half of the year right now, our guidance assumes it's still down mid-single digits for the second half of the year from an instrumentation standpoint. And so, we'll see how that plays out, but that's what the assumption in the guidance is. I think as you look at the overall second half organic revenue ramp, in the second quarter, our guidance is for positive low-single digits, which then implies for the fourth quarter that you're going to be looking at high single to low double-digit organic growth range in the fourth quarter. Now that step up has a couple of different components. Half of that step up is related to instrumentation, which is really just normal seasonality between the third and the fourth quarter. We are not factoring in any change in market environment. Then there's another 2% of that is related to our software business, which is just the renewal timing in our pipeline, and we have good visibility into that. The remaining couple of percentage points is really related actually to China diagnostics and the two pieces there. One, it's an easier comp for immunodiagnostics in the fourth quarter. And then, as we already talked about, we are anticipating a step up in our neo business in the fourth quarter in China.

Max Krakowiak:

Yeah. I think, so just as a reminder too, Vijay, when we had come into this year and we are calling for flat operating margin performance year-over-year, the dynamics that played were one, the cost actions we took at the end of last year, but then two, the return of the variable comp, which we said should normalize in 2024 versus the compression that it faced in 2023. So those were the assumptions coming into this year. I think what you're seeing is just continued execution on a lot of the operational initiatives we have. I talked about some of the synergies and integration work that continues to be ongoing. And I think, again, as we look again in the outer years from a margin standpoint, this is what really gives us the confidence in our ability to execute and sort of reach our ultimate margin entitlement from an overall company perspective.

Operator:

Our next question comes from Matt Sykes with Goldman Sachs. Your line is open. Please go ahead.

Max Krakowiak:

Yeah . Hey, Matt. From an applied genomics perspective, I don't know, if there's anything specifically unique to that business that I would call out. I think as you've been following the company over the past six, seven quarters, it's been a meaningful headwind for us as an overall company. The business has been facing two headwinds. One is on the pharma biotech side and then the second was the build out of the installed base on the clinical side during the COVID period ramp. I think what we're seeing here is in the second half of the guidance is we are assuming a similar market dynamics that we saw in the first half of the year. We continue to work through those two headwinds and really the function of the performance in the second half is the same market environment and normal seasonality in the fourth quarter.

Matt Sykes:

Got it. Thank you. And then, Max, just for modeling, just would love to get what you achieved in terms of pricing in the quarter and what your expectations for pricing are embedded in the guide for the balance of the year?

Matt Sykes:

Great. Thank you very much.

Dan Brennan:

Great. Thank you for the questions, guys. Congrats on the quarter. If we can just go back to reagents, I know it came up earlier in the call given the size of that business for you. Could you just provide a little more color on BioLegend versus legacy and kind of how we think about reagents Q3, Q4 and kind of any visibility you can provide on that front?

Prahlad Singh:

Yeah, Matt. There is nothing here that is competitive driven. I mean what we are seeing is sporadic market softness because of site closures and consolidations.

Prahlad Singh:

Yeah. I think the way I would look at it, Matt -- Dan is that we still feel that the valuations continue to be elevated for the M&A candidates. We continue to have a fertile pipeline and we continue to build on the relationships, but I don't think you're going to see us do any sizable side or -- size M&A in the near future. I think we talked about the share buyback where we will have a focus on to continue to deploy capital in the near term.

Prahlad Singh:

Yeah.

Catherine Schulte:

Hey, guys. Thanks for the questions. First, just a modeling question. How should we think about growth by segment for the third quarter and the full year?

Catherine Schulte:

All right. Perfect. And then I guess if you do exit the year at high single to low double-digits in the fourth quarter, how do you think about how that sets you up heading into '25? I know it's still early now and there are some comp dynamics that are going on there. So how will those comps change as we head into next year as we try to level set? Thanks.

Catherine Schulte:

Great. Thank you.

Luke Sergott:

Great. Thanks, guys. I kind of want to follow-up on the applied genomics, that seems to be -- you continue to go through the headwinds there, but it seems to continue to get a little better and better. And so, as the confidence comes on, like, can you break out from a -- we had the Revvity OMX piece to start the year that was a slight headwind and that you're getting that coming back. And then you have the extract RNA, DNA extraction kits, things like that. So talk about the different pieces within that sub-segment that are kind of coming back and what it's going to take to continue that acceleration?

Luke Sergott:

[Multiple Speakers] get that. Sorry about that. Yeah.

Luke Sergott:

No worries.

Luke Sergott:

Great. Thanks. And then as you think about on the life sci and with the licensing comp on the reagents that you guys face, can you talk about what that licensing or technology license was for actually? Because I thought that you guys mostly did your own internal antibodies and you license them out and I guess you license them out to others. But kind of just walk us through the various details there and get a better understanding of what goes on.

Luke Sergott:

Yeah. That's helpful. Thanks.

Michael Ryskin:

Great. Thanks for taking the question, guys. Max, a couple of times in your prepared remarks and in your Q&A, you talked about seasonality in the fourth quarter and how that explains a lot of the ramp from 3Q to 4Q, both for total company and for some of the instruments business. I'm just curious what's driving that and what exactly do you mean by that. I mean, obviously, we know your typical seasonality, but is that attributed to budget flush? Is that attributed to customers coming back because if pharma and biotech is still a little bit pressured and it sounds like it's going to be pressure through the rest of the year and if China is a little pressured, maybe that seasonality won't come back to the normal effect that you see in prior years? Just trying to delve deeper into what's driving that confidence. Thanks.

Michael Ryskin:

Okay. Thanks. And then on China specifically, you talked a little bit about ImmunoDx and reproductive health, but excluding those, it sounded like China got a little bit worse as the quarter went on. I think you specifically said that. I mean, it sounds like your expectations for China are now lower than they were before. I realize a lot of this hinges on stimulus timing and magnitude and that's still a lot unknown. But just curious your thoughts on China, bigger picture, not just the next couple of months, the ability of that end-market to come back in 2025, the various outcomes possible with the stimulus. Just take a step back and sort of holistically talk us through what you're seeing in China. Thanks.

Michael Ryskin:

Thanks.

Paul Knight:

Hi. Thanks for the question. The BioLegend business, we're seeing on our side growth in clinical trials, Phase 1 since 2018. So maybe that's a sign things better. Does BioLegend win off of Phase 1, or are they more later-stage winner? I already...

Paul Knight:

Do you think we're seeing the effect of better funding in the therapy -- in the biopharma market?

Paul Knight:

Okay. Thank you.

Operator:

We now turn to Rachel Vatnsdal with JP Morgan. Your line is open. Please go ahead.

Max Krakowiak:

Yeah. Hey, Rachel. So as a reminder, our overall instrumentation in China is 3% of total company revenues. So it is in the grand scheme things still relatively small to the overall portfolio. Yeah. As I mentioned, I think it was a challenging second quarter. We'll see what happens here in the second half with stimulus. I think as we look outside to the rest of the world, we do continue to see sequential improvements in our instrumentation from the first quarter of this year. And I think as we look towards the second half, again, the conversations we're having with the customers are providing increased visibility on those pipelines and is alluding -- sort of leading us to our expectations for the second half of the year.

Prahlad Singh:

Yeah. I don't think we want to get into intra-quarter guidance, Rachel. I would say that over the last 45 to 60 days, we have seen continued to see the stability that we have seen. And as I mentioned, the sporadicness that we had was related to two or three site closures that happened in the West Coast and then those programs have now shifted to other sites. So it's more a matter of that and headcount reduction than any continued trend. On the other -- previous question that you had on the instrument side, I think one thing to add. As you -- if you recall, we totally revamped our in vivo imaging portfolio that was launched towards the end of the last year. And that's where we started to see increased conversations from customers. Particularly in the U.S., we continue to be more optimistic around this being the first market where we will start seeing signs of turnaround on the life sciences instruments side.

Tycho Peterson:

Hey, thanks. Good to talk to you, guys. So maybe, Prahlad, I want to go back to the buyback. And no, I appreciate you have $330 million left in your current program and you did $20 million in the second quarter. I guess, why not do something bigger? We've seen some of your peers kind of do multi-billion-dollar buybacks. And then on M&A, I guess you're saying multiples are high, but can you maybe just talk about digesting prior deals? I think in the past, you talked about reverse integration of BioLegend. So maybe just talk about kind of integration of some of the deals you've done.

Tycho Peterson:

Okay. And then maybe a follow-up, you've had a number of questions on pharma. I'm just wondering thinking ahead about IRA and kind of what happens in the next six months here, can you maybe just talk a little bit about how you're thinking about that impact in particular?

Tycho Peterson:

Okay. And then before I hop off, just one quick clarification. I think on value-based pricing, you previously expected about a 500 basis point headwind. Is that still accurate in China?

Tycho Peterson:

Okay. Thank you.

Steve Willoughby:

Thank you, Elliot. We look forward to catching up with everyone over the next few weeks. Talk soon.

Operator:

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

Prahlad Singh:

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

Maxwell Krakowiak:

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

Prahlad Singh:

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

Operator:

Our next question comes from Matt Sykes from Goldman Sachs.

Prahlad Singh:

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

Matthew Sykes:

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

Operator:

Our next question comes from Patrick Donnelly from Citi.

Prahlad Singh:

Yes, Patrick. I mean, again, starting with, as I said earlier, right to Mike's question, we expect our core reagents business to be up mid-single digits for the year. And I think also, the trends that we saw in March and April make us optimistic to keep that profile. As I mentioned, we had licensing comps, which pressured this, excluding that, the reagents are down mid-single. I think the way I would take it is that some of the budget finalization that happened with our pharma/biotech customers, typically, they would happen in December. But I think that sort of bled into January and the release of the budgets happen a little later into the year than as it typically happens.

Patrick Donnelly:

Okay. And just maybe just the trend on how to think about it for 2Q and the year?

Patrick Donnelly:

Yes. Perfect. And then maybe just quickly on the biopharma conversation firming up in the last 2 months, to your point, Prahlad. Have you seen this before in the last 1.5 years? I'm just wondering if you're seeing some false starts where things sound good and then they tightened back up? Or is this one of the more encouraging signs you've seen over the past few quarters and you feel that visibility is improving?

Operator:

Our next question comes from Andrew Cooper from Raymond James.

Prahlad Singh:

That's a great question, Andrew. I think we are very positive on our Software Signals business. And as you pointed out, we had several launches in the year. And I think, as I've said earlier, the product launches that happened in our Software business are a direct correlation of the user group and voice of customer meetings that we have at least twice a year in different continents. So basically, it's direct output of what our customers asks are and that's why there is a solid trend related to it. The expansion that we had with Signal Clinicals, it takes us outside of the preclinical environment to support customers on the analytics and the data that is generated from clinical trials.

Maxwell Krakowiak:

Yes. I think if you look at it long term, Andrew, I think we've already come out with the LRP growth assumptions for our Software business. It's high single digits to low-double-digits growth per year. It's what we are expecting here in 2024. And so depending on how long you're trying to model out, you can get to how big this business is, given that it's roughly a $200 million business for us today.

Maxwell Krakowiak:

Yes. Look, I mean, from a cash flow perspective, there will always be some quarterly notes to some extent just given business activity. I think as you look at this year, though, the second and third quarter, I would anticipate to be probably lower than the fourth quarter, but we're still maintaining our overall expectation this year to be greater than $475 million of free cash flow conversion.

Joshua Waldman:

One for Max and one for Prahlad. First, Max, can you talk a bit more on the drivers to the op margins coming in better than expected? I mean, it sounds like it was supported by cost efforts and I assume organic upside. I'm curious, how much of the cost benefit was onetime in nature? And I guess what would you need to see to start to pull up your margin outlook either for the year or longer term?

Joshua Waldman:

Got it. Okay. And then, Prahlad, a couple on China. Within the Life Science segment, curious, any trends you've seen, positive or negative, on the reagent side as the quarter played out and then here into April? And then within instrument, curious, have you seen any sign of stimulus showing up in the funnel or customer activity?

Prahlad Singh:

I'll try to remember all 4 or 5 of the questions that you've got in there, Josh. I think the reagent side pretty much played out on the Life Sciences side as we had expected. And to your second question around the stimulus, as some of our peers have mentioned, there has been talk and discussion about it, but that's not something that we are banking or assuming in any of our assumptions so far.

Operator:

Our next question comes from Doug Schenkel from Wolfe Research.

Maxwell Krakowiak:

That's exactly right. And I would say as we get going throughout the rest of the year for Applied Genomics, it will improve from the first quarter. The fourth quarter will be its worst performance from an overall organic growth perspective. But when you look at multi-year stacks, although it's still improving in a discrete organic growth for the second through fourth quarters, the multiyear stack, we are actually assuming a little bit slower than the multiyear stack we had in the first quarter, which gives us confidence in terms of the rebound for that business for the rest of the year.

Vijay Kumar:

Prahlad, just on the second quarter, I think you mentioned organic is down low singles. And I think reagent are expected to be up. So what drives that low singles, right? If reagents improved sequentially, is there some timing of VBP impact? Like when is VBP supposed to hit? Did we see any impact in Q1?

Maxwell Krakowiak:

Yes. I think maybe just to add more specifics to it, Vijay, in terms of what's changed in Q1 to Q2. To your point, reagents will get a little bit better as well Applied Genomics per my response to Doug. Really, what we're not assuming repeats in the second quarter, I think, is the robust growth we saw in both the Newborn business and Immunodiagnostics outside of China, they both continue to grow low double digits, mid-teens, respectively. And so I think we're just being a little bit more conservative in the assumptions for those in the second quarter.

Maxwell Krakowiak:

No. I mean I don't think there's discrete quarterly timing around the pricing there, Vijay. It's kind of a consistent pricing headwinds that we face over the course of the year. So I don't think there's anything specifically there to call from a corporate perspective.

Jack Meehan:

I wanted to ask about pharma and biotech maybe through a different lens. I know you're not seeing improvement in orders at this point, but is there any commentary you can share across the different businesses? I'm curious if some of the more production-oriented businesses like a surprising discovery or SIRION are doing better than the lab-oriented areas?

Jack Meehan:

Okay. Got it. And then on -- I was just curious, operationally with Spotfire, I know there was some disruption that was caused back in March. How are things going there? I know it's a small business, but just -- how's the customer impact? How is that going?

Operator:

Our next question comes from Catherine Schulte from Baird.

Prahlad Singh:

Yes. Catherine, I think the pipeline realignment is happening, and it will continue to happen. I mean from our perspective, just as we look at preclinical research and discovery, both on the small molecules and on the biomolecule side, and as I've pointed out, the funnel has to be broad enough at the beginning for it to narrow down. I think as they realign their portfolio, they will continue to optimize cost measures as they go further into development from preclinical research and into clinical. But in order to get into development and clinical, they have to have a broad enough funnel.

Catherine Ramsey:

Okay. And then could you just talk through your expectations for pharma and biotech for the second quarter? And when do you think we could see a return to growth in that end market?

Operator:

Our next question comes from Dan Brennan from TD Cowen.

Maxwell Krakowiak:

Yes. I think as you -- as we look at the outlook for IDX, to your point, it was another strong first quarter here. We continue to expect the business to continue to perform well, even both in China for the rest of the year as well as outside of China. And so our expectation is that for the business for the full year, it's still going to grow in the high single digits. It's multiyear stack, they're still in line with our LRP. And it's really a combination of both the geographic expansion of our Immunodiagnostics portfolio, but then also the wave of innovation and menu expansion that we've been driving for the past couple of years.

Daniel Brennan:

Got it. And then maybe just one on costs. You had a lot of comments in the prepared remarks on new programs, it sounded like, or maybe some emerging programs to take costs out, talked about stranded costs. Can you just elaborate a little bit? Like it sounds like maybe those impacts are going to come after '24? Maybe we'll learn more at the Investor Day, but just kind of any impact in '24 baked in from some of these additional focus on costs? And if not, kind of how do we think about the magnitude of upside beyond?

Operator:

And our final question comes from Luke Sergott from Barclays.

Prahlad Singh:

I think if you look at our Immunodiagnostics business in the U.S., it has grown at a 20% CAGR since the acquisition. And I don't think we have really gone to where we would say that we have reached close to critical mass so that it would plateau out. It's gone from being 5% to nearly 15% of our overall Immunodiagnostics business. But there is still a lot of growth that we have to cover in the U.S. And I would say that we are still in the early phases of growth that this business is going to see over the next several years in the U.S.

Luke Sergott:

All right. Great. And then just another follow-up here on the Diagnostics side from -- you guys came out with the automated tuberculosis testing. Can you talk about any recent tenders that you've won, any that are coming up throughout the rest of this year? And then I guess, how does the new automated system compared to the quantiferon and the liaison?

Operator:

We currently have no further questions. I will hand back to Steve Willoughby for final remarks.

Operator:

This concludes today's call. Thank you for joining. You may now disconnect your lines.

Operator:

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

Prahlad Singh:

Thank you, Steve, and good morning, everyone. As we highlighted in our pre-announcement a few weeks ago, while industry had been continued throughout the end of the year, we were able to perform slightly better than we had anticipated and finish the fourth quarter with a 3% decline in non-COVID organic revenue. While Max will provide more details on the quarter in a bit, I would say that our stronger than anticipated results were broad-based as both our Life Sciences and Diagnostic segments performed better than expected. I would also highlight that our performance was well-balanced geographically as each major region performed in line to slightly above what we had assumed. We also did a good job continuing to tightly control our expenses in light of the challenging environment that persisted through year end, and along with some favorable one-time tax benefits, helped deliver additional EPS upside in the fourth quarter. We also had a very strong cash flow in the quarter with nearly $200 million of free cash flow while continuing to execute on our capital deployment initiatives. For the full year 2023, we generated 2% non-COVID organic growth. While not what we hoped for at the start of the year, I think you will see that our performance was differentiated versus the broader industry and likely will be near the high end of the peer set for the year once the dust fully settles. We expect this differentiated financial performance to continue going forward. As demonstrated in the new financial framework, we recently provided for our expected performance over the coming years. As part of this new long range outlook, we now expect revenues, organic revenue growth to be 200 basis points above the broader industry, regardless of the macroenvironment. In a normal year, we would expect this to result in 6% to 8% organic growth and 75 basis points of operating margin expansion annually. In the post-COVID world we all now operate in; we anticipate this level of growth will result in performance that continues to be at the high end of our industry overall. As we highlighted during a recent investor conference, we expect approximately 60% of our business that is comprised of immunodiagnostics, Life Sciences reagents, and our signal software business to grow in the 9% to 11% range over the coming years, generating mid-single digit growth on their own for the total company. Given the stronger profitability of these segments, as they continue to grow faster than the remainder of the business, we expect it to result in natural margin expansion as they become an increasingly larger piece of the overall company over time. Revvity is extremely well positioned to capitalize on some of the most exciting areas of pharmaceutical research and development, such as cell and gene therapy, multi-omics, and precision medicine. We are also involved in some of the most durable, higher growth areas within clinical Diagnostics such as autoimmunity, tuberculosis, and other emerging infectious diseases. With what our company has become over the last several years and where we are planning on going in the future, I think you will see that Revvity will continue to stand out as a very unique company. We have a differentiated approach with our customers, our competitive and novel product portfolio with continuous innovation and a unique position within the attractive Life Sciences and Diagnostic categories in which we compete. A good example of this in the fourth quarter was the launch of our EONIS-Q system in our newborn screening business. The EONIS-Q system is a first of its kind workflow which streamlines molecular testing for both spinal muscular atrophy and SCID in newborns. It is a new and complete CE-IVD solution which consists of a new PEP-CR equipment with dedicated software and a specialized diagnostic SCID. With no wash steps being needed in the new workflow, it results in a significantly faster turnaround time and less hands-on involvement from samples to answer than existing methods. This allows for lower operating costs and greater sustainability as fewer consumables and plastic ware are required. The introduction of this innovative solution is also perfectly timed from a commercial perspective. As the European Alliance for Newborn Screening and Spinal Muscular Atrophy mandates that by 2025, all newborns in Europe should be screened for SMA going forward. A new EONIS-Q system is just one example of how we are continuing to bring cutting edge and innovative solutions to market from across the company, benefiting both our customers and ultimately the patients they serve. We have also been making good progress on our operational initiatives. A good example of this is the launch of our new E-Commerce platform, which went live in the US in mid-December, approximately five to six months earlier than we anticipated. The platform's integrated design was built specifically for the needs of what our business has become. It is expected to be extremely consumer friendly, while also over time delivering both revenue and operating synergies. We expect this new system to go live outside the US in early 2Q. Another thing I'm extremely proud to see is the strong collaboration that is occurring amongst our teams across the company. A great example of this was how last year we had a sole source antibody supplier for one of our Diagnostics assays begin to have quality inconsistencies in their batches. Through the rapid collaboration amongst scientists from Euroimmun, BioLegend and Horizon, within nine weeks we had developed our own replacement antibody, validated it and were able to manufacture it in sufficient scale for commercial use. The ability and agility would never have been possible in the company of the past and I'm not sure it would be possible at most companies today other than Revvity. As we look ahead to this year, we expect the ongoing headwinds from our pharma and biotech customers to continue, particularly in the first half of the year as they still are working through the impact from their elevated spending levels during the COVID years. We are assuming this pressure will begin to stabilize in the back half of the year when we anticipate returning to growth for the company overall. In light of the dynamic end market challenges continuing into 2024, as well as the return of some of the variable costs that we reduced in 2023, we have recently implemented additional structural cost actions to protect our strong profitability through this temporary period. We anticipate these actions will allow for operating margins to remain approximately flat year-over-year at 28% this year despite the low single digit organic growth we expect to repeat into 2024. We expect this to result in our 2024 adjusted EPS to be in the range of $4.55 to $4.75. With our significant number of acquisitions over the past several years, coupled with the large divestiture we completed in early 2023, we still have many areas to further optimize in order to reach our full potential as a company. The significant actions we took in 2023, combined with the additional measures being implemented as we begin 2024, has put us on a good trajectory to further streamline and adjust our operations for the business we have now become. It also strongly positions us to capitalize on the leverage potential that exists in our company once industry growth normalizes. Overall, when looking back on 2023, I'd say it certainly ended up playing out quite differently than we had anticipated when sitting here a year ago. However, I'm so proud of the transformation that we have undergone over the past few years, which we ultimately completed last year. While we are continuing to face external challenges, I'm extremely grateful for what Revvity has become and the significant efforts of so many who have made it come to fruition. Without everyone's efforts and the rebirth of the company, our differentiated performance in 2023 would not have been possible. We remain confident that we will emerge from this temporary period of industry headwinds as a unique and stronger company that remains well positioned to help expand the boundaries of human potential through science. With that, I'll now turn the call over to Max.

Operator:

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

Prahlad Singh:

Good morning, Jack. ‘23 certainly did not play out as we or others had envisioned it. But I think it was good to see that in the fourth quarter, while the environment remained challenging, for the first time in ‘23, it did not deteriorate more than what we had anticipated. I mean I’d say as we look forward into ‘24, including here in the first quarter, we are not anticipating any sort of meaningful or significant improvement. But I would say rather more of a continuation of current trends. So things do start to pick up. I would say that, I would expect that to provide more upside to the current outlook. So, somewhat where we are is more of a temporary holding pattern before demands comes back. But I'm optimistic that, we are perhaps what we are experiencing currently is more of a drove. As far as we go, I think, one of the things that do help us is the portfolio transformation journey that we have gone through. If you look at our portfolio now, we have more Diagnostic than our peers, we've got less of a capital intensive business now than our peers, we've got a meaningful software business. And this differentiation allows us to have the confidence that we are in a pretty decent spot.

Max Krakowiak :

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

Matthew Sykes:

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

Matthew Sykes:

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

Operator:

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

Max Krakowiak :

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

Prahlad Singh:

Yes, Josh, I think and I mentioned that during one of the healthcare conferences earlier in January our example with one of our most important customers that we talked about in the pharma side is how we are able to leverage our relationship both in the Diagnostic and the Life Sciences side of the portfolio to not only license technology to them, but also provide the tools and capabilities and our service offering from the DX side that allows for being part of the journey of drug development for our important customers all the way from preclinical research and licensing them the technology, providing them the tools and capabilities that allows them to use and leverage that technology towards drug development and then being part of the journey with them through their development process as they take it through the regulatory approval processes and then further on leveraging our global lab infrastructure from the Omic side of the business to be able to follow up those patients both for efficacy of the drug and for follow ups. So that sort of allows us initially when we were on the small molecule side in Life Sciences, our focus was on providing them the reagents and tools and instruments and pre in vivo imaging components to just do their research. Now, with the full expansion of our portfolio, it allows us to be with them from the start to when it gets to commercialization.

Patrick Donnelly:

Hey, good morning, guys. Thanks for taking the questions. Probably one for Max on the margin side. Understand this year more flattish given the revenue outlook. It sounds like you guys are continuing to implement some cross plan there. Can you just talk about the confidence in that 75 bps expansion algorithm that you guys talked about at JPM and just this becoming that 30-plus percent margin business in the relative near term? What are the key levers you see? And maybe just the process that went into revisiting that algorithm. Did you guys want to set it more as a floor where you saw a clear path to executing on it? Even the China piece sounds like you're chasing more profitability there. So maybe just kind of pull the current back a little on the margins and again that algorithm you guys set.

Patrick Donnelly:

Okay, that's helpful and Prahlad, maybe just on China, something you guys talked a little about the ImmunoDX on an earlier question but just in terms of this year what you're seeing their confidence both on the Diagnostic and then the Life Sciences side which is obviously a little more variable, again it sounds like you guys are making some changes in terms of going after a little more profitable business which is the outlook in China confidence in that region and what you're seeing here near term? Thank you.

Operator:

The next question today comes from the line of Andrew Cooper from Raymond James.

Max Krakowiak :

Yes. Hey, Andrew. I think as we previously mentioned, the one dynamic you didn't mention for 2024 that we have already previously discussed is the fact that we will have variable costs that are returning in 2024. And I do not believe we are alone. And that dynamic is, as you've heard, some of the others in the industry mentioned it. So I think from that perspective, that's really what's off setting to your point, the price and the structural cost actions that we have been taking. As you look out more longer term, I would say in a normal environment where you don't have that snapback of the variable costs, even with I would say a lower growth than the LRP model assumes. I would anticipate us still being able to drive margin expansion, given some of my earlier points. But again volume is a heavy driver when you think about it from a margin expansion standpoint.

Prahlad Singh:

Yes. Andrew, I mean, as we mentioned, it we just rolled it out in mid-December. So it's early days of the MVP and we are seeing good traction on it from a customer flow perspective. The OUS launch is expected to be out in the early part of the second quarter. So I would say it's four to five months ahead of schedule. It is still early days, and looks promising. I think over the longer term, the benefit that we get out of it is not just synergies of being able to offer a comprehensive portfolio to our customers on a common platform, but obviously the synergistic opportunities that you get from a cost perspective or an OpEx perspective. So we are very excited about what we are hearing and seeing, but early days is the best way I would frame it for now.

Catherine Schulte:

Hey guys, thanks for the questions. Maybe first, your software and genomic lab businesses have faced headwinds over the last year due to some contract renewal and project timing dynamics. You mentioned those normalizing in ‘24, but can you just walk us through the timing there and what kind of performance you expect from those businesses both for the first quarter and the full year?

Catherine Schulte:

Okay, great. And then how should we think about free cashflow in 2024 particularly with those AES outflows coming back to you?

Operator:

The next question today comes from the line of Vijay Kumar from Evercore ISI.

Prahlad Singh:

Yes, I think as we talked about, from a Q4 to a Q1 perspective, a lot of it is obviously the comps that we had from last year. So it is more an impact of that than anything else. And I think as Max laid out the cadence of the calendar for the year, there is nothing outside of that, that I would say. We do have some pressure from reproductive health, especially in China. And on the instrument side, we will see some impact of that. But more than anything else, it is just timing, is where I would allocate it to the impact that we see on Q1 versus anything else.

Vijay Kumar:

Understood. Max, maybe one for you. If you have gross margins in Q4 down sequentially. So what happened in Q4? And when you think about fiscal ‘24 guide, is the guide assuming gross margins be flattish up or down versus fiscal ‘23?

Vijay Kumar:

And so essentially the mix improves? Max, is that the assumption? Like what's driving the step up from Q4?

Operator:

The next question today comes from the line of Daniel Brennan from TD Cowen.

Prahlad Singh:

Dan, I think, again, as I talked about earlier, it is the differentiate portfolio of the high end Euroimmun test that we have in China that allows us to be in the face of limited competition that we see in that marketplace. And that has innovation pipeline has worked for us and we expect that to continue as we look forward.

Prahlad Singh:

Yes, Dan. I think on the instrument side or on the capital side, I think we will continue to see some pressure or at least the current trend we expected to continue in the first half of the year. The benefit again that allows us is that the reagent side of the portfolio, once that starts stabilizing and coming up in the second half of the year, at least that's what the assumption that we have in our current forecast allows us the confidence that we would look. Overall, as we see pharma, I continue to believe that this is a temporary drove in the marketplace and I think it will continue, it will come back to what we have seen is normal pattern of mid-single digit growth in the market over the past several years.

Eve Burstein:

Good morning, thanks a lot for the questions. And first one, you said that you've already taken structural cost measures so far this year and you'll be taking additional cost actions in ‘24. Can you just give us some more color on what those actions are and what's giving you confidence and the ability to achieve those benefits in this timeframe?

Eve Burstein:

Great. Thank you. And then you just talked about integration of your acquisitions. You said it's still early to mid-innings, but you also shared an example of how you brought a Biolegend together with other parts of your business to do something really cool. Where are you really against your synergy target of $100 million in year five, your two-fifths of the year, two-fifths of the way through? Where would you put yourself on that scale?

Operator:

Our final question today coming from the line of Luke Sergott from Barclays.

Max Krakowiak :

Yes. Hey, Luke. So, I think maybe just to tackle the margin question first, you kind of led with that. So, look, I don't think your math is that far off from Q1. I think we've given you the pieces below the line in Q1 that you're going to get to roughly that number. As you look at comparing that to Q4, I would say the two mains, really the main driver of that is just a volume step down from a top line perspective. If you look at the actual overall gross margin percentage, it's roughly flat quarter-over-quarter, OpEx costs are similarly in line quarter-over-quarter. And so from that standpoint, I don't think really much has changed. Again, as you then look at the volume ramp over the remainder of the year, as we mentioned, one, you're going to have the timing of the structural cost actions coming into play and the second piece is you're going to have volume leverage as the year builds. So that's how I would think about it from a margin perspective. In terms of the slowdown from an organic growth perspective between Q4 to Q1, I think we've mentioned part of that is definitely comp driven. And the biggest piece of that is going to be on the immunodiagnostics business outside of China. Outside of China in the first half last year, immunodiagnostics grew in the high teens. We've always said it should be a sort of a low double digit. And so, there is just some normalization there on a two year stack for immunodiagnostics business outside of China.

Max Krakowiak :

Yes, so then I'll maybe start with your second question first, Luke. So as I mentioned, software business was down high single digits in ‘23. It should be moving to up high single digits. That's what's assumed in our guidance here for ‘24. That is roughly 125 basis points to the overall company from an organic growth perspective. And so as you look at that dynamic, it's really driven by this contract renewals. Again, that's a business that has upper 90% renewal rate. And so most of the contracts we know and they're coming due and I would say have a high degree of confidence in our ability to deliver on our ‘24 expectations. And then to your first question on sort of the SaaS transition, I think we continue to make really good progress. We view the transition to SaaS as actually a differentiator for us versus our peers. We believe we are ahead of them in terms of that transition. And so although that might create a little bit of noise from a revenue recognition standpoint, it is the right thing to do for the business. And if we think our SaaS products are going to help us actually take share from our competition.

Operator:

This concludes today's question and answer session. I'd like to pass the call back over to Steve Willoughby for any closing remarks.

Operator:

This concludes today's conference call. Thank you all for your participation. You may now disconnect your line.

Operator:

Hello, and welcome to the Q3 2023 Revvity Earnings Conference Call. My name is Alex. I’ll be coordinating the call today. [Operator Instructions] I’ll now hand it over to your host, Steve Willoughby, Senior Vice President, Investor Relations. Please go ahead.

Prahlad Singh:

Thank you, Steve, and good morning, everyone. Revvity has been built to help accelerate the advancement of human health through science, while also being able to execute at a high level through various macroeconomic conditions. This unique and differentiated profile is intended to help make a profound impact on the future of healthcare and to insulate our performance during periods of macro pressure, while still allowing us to capitalize when industry tailwinds are at our back. We and others are in the midst of one of those periods of macroeconomic and industry pressure. This is evident with the increased headwinds that we began to experience during the second quarter, which intensified during the most recent quarter. While we attempted to build some cushion into our assumptions, should industry dynamics worsen, the level of increased challenges we face from our pharma and biotech customers, particularly in September, was more than we anticipated. As a result, while our total company organic revenue grew by 1% in the quarter, we finished well below our mid-single-digit assumption from 90 days ago. Our lighter-than-expected revenue was driven by softness that occurred fairly late in the quarter. Given this last minute pressure, I’m very proud of our continued strong margin and earnings’ performance as the incremental headwinds in September left us very little time to try to properly manage our expenses. Our adjusted EPS in the quarter of $1.18 was still in line with the low-end of our implied guidance, despite our revenues coming in meaningfully below our expectations. The downturn in demand from our pharma and biotech customers led our Life Sciences business declining in the low-single-digits organically in the quarter, which was below our low-single-digit growth expectation. The softer spending from pharma and biotech customers also put pressure on our applied genomics and genomic lab businesses within our Diagnostics segment. While our sizable immunodiagnostics business performed extremely well and grew in the high teens overall, including high teens growth in China, the pressure from softer pharma spending impacting parts of this segment resulted in our overall Diagnostics business growing 4% organically year-over-year in the quarter, excluding COVID, slightly below our mid- to high-single-digit expectations. While Max will touch on this in more detail, we anticipate these end-market headwinds to continue through the fourth quarter, resulting in our non-COVID organic growth expected to be down in the mid-single-digits year-over-year, which would bring our full year non-COVID organic growth to approximately 2%. As to when this industry downturn might dissipate, we do not have a crystal ball, but we remain confident as ever in the future potential of our industry and for Revvity itself. As of right now, though, we are anticipating the pharma/biotech headwinds persist into at least the first half of 2024. There is currently a wide range of potential outcomes for next year, which is why we want to take the next few months to further evaluate underlying trends. This range of potential outcomes infuse the possibility that organic growth could be in a similar range to what we are now expecting for this year, with the second half of the year likely being stronger than the first half. Given this current outlook, we will look to take additional cost actions heading into next year beyond the roughly $80 million of expenses we will have cut in 2023, since some favorable items from this year are not expected to repeat at the same level in 2024. With the heightened level of industry demand over the last few years now being followed by a subsequent correction, we are also currently analyzing our previously provided 2024 through 2026 midterm outlook to ensure it remains reflective of what we expect the business to be able to produce over that timeframe. We would expect this analysis to be completed by the end of this calendar year. While the future of our end markets remain bright, and we expect global investment levels into science to rebound, we are certainly seeing more end market pressure than we had previously anticipated in some of our markets. As we’ve highlighted in the past, while we are likely more insulated from the macro and industry pressures than many of our peers, we are not immune to the current softer spending environment from pharma and biotech customers. Our ability to still post positive organic growth in the quarter, despite these headwinds will likely standout as earnings’ season continue to progress as we prudently manage those items that are fully within our control, particularly as it relates to our margins. While we persevered through this current market, I believe we are making good progress on coming together as Revvity by focusing on our operational, commercial and R&D priorities as a new company. This focus and progress sets us up very well to prosper in the future once this period is over. A few recent examples of this were the launch of 2 new in vivo imaging platforms, the IVIS Spectrum 2 and the Quantum GX3. These launches represent a nearly complete refresh of our market-leading in vivo imaging portfolio. The Quantum GX3, for example, with its market-leading resolution allows us to now have a competitive solution for the bone market, which is a field we have not previously meaningfully participated in. It was also great to see our initial set of Pin-Point base editing reagents debut following our recent first license of our technology to a major pharma customer earlier this year. These new reagents provide customers for the first time ready-to-use consumables to allow them to begin exploring the scientific potential of our novel base editing technology and its unique ability to perform complex and multi-gene editing. Our ability to now offer these 2 customers is another proof point for how we are leading with science and working to democratize base editing technology for all. You may have also seen recently that we’ve entered into 2 new important commercial collaborations. First, we announced a collaboration with Element Biosciences to use their cutting-edge AVITI sequencer system, combined with our significant portfolio of sample prep instruments and consumables to jointly offer unique complete NGS workflows. We expect this collaboration to initially focus on continuing to expand our NGS presence in newborn screening. Secondly, we also recently announced an agreement with Danaher SCIEX business to begin providing their mass specs in select markets as a new option to be used with our newer base, newborn screening reagents in our customers’ workflows. While expanding the breadth of instruments we offer our customers in our newborn screening business, we are providing them a greater range of options to choose from that are fully supported by both companies. Both these recent collaborations are great examples of how we seek to provide our customers the most cutting-edge and efficient solutions, even if sometimes they may not fully reside within the foul balls of Revvity itself. Our recently released 2023 ESG report also highlights how we are having a meaningful impact on society. This year’s report shows how we have dramatically expanded our environmental data collection efforts across the new company to provide us with an even more solid footing to build on in the years to come. Based on stakeholder feedback from our last materiality assessment, the report also highlights our continued focus on top employee issues and how we have introduced many new company policies targeting emerging topics such as bioethics, animal welfare and sustainable procurement amongst others. Finally, we have provided a new external ESG goal that we plan to pursue going forward. These include a 50% reduction in our Scope 1 and 2 emissions over the next decade, maintaining greater than 40% of senior leadership roles held by females and achieving a 75% or greater employee satisfaction rate. In closing, before handing it to Max, our industry is currently going through one of its most difficult periods in the last 2 decades. While this period is not enjoyable for anyone, I’m thankful for the transformation that has occurred at the company over the last 3 years, including our successful divestiture back in March. As I mentioned, we are not immune to the current pressures. But, I think, you will see that Revvity has been built to perform better than most to macroeconomic environments, including tough ones like we are now in. We are focused on maintaining our strong relative margin profile and are making good progress on our operational, commercial and R&D initiatives. We also have a strong balance sheet, which we believe will likely become an even greater asset to us in the coming quarters. I’m excited about our future and know we will come out of this period an even stronger and more efficient company than we are already today. With that, I’ll now turn the call over to Max.

Operator:

Thank you. [Operator Instructions] Our first question for today comes from Patrick Donnelly of Citi. Patrick, your line is now open. Please go ahead.

Prahlad Singh:

Sure, Patrick. As we entered September, what we realized is that the pressure on the reagent side was more than we anticipated. And some of it was what we realized is the site consolidations and the closure of some site from big pharma, which obviously impacted the reagents numbers, and we saw that impact. Second one was the CRO side in China, that continue to see more pressure than anticipated as we came closer towards the end of the quarter. Also, if you keep in mind, if our licensing comp revenue shows up in our reagents number. So if you were to – ex-licensing, our revenue for the reagents would have been flat.

Prahlad Singh:

Yeah, I think it’s a fair question. Patrick, I think what we want to do is, as we said in our prepared remarks, we want to take the time to see how the macro evolves over the next couple of months and provide a more complete update towards the year-end. I think as we look at the line – as we and our peers have pointed out, as we look into the 4Q and especially on the instrument side of the business, generally, if you recall, 4Q generally tends to have a budget flush. That budget flush, we are very comfortable saying that, that’s not – there is no visibility into that. But, more importantly, I think as we look also into the first half of the year, we are not assuming a ramp-up in the first half. But in the second half, as you pointed out, obviously, because a lower comp, but also as things start coming back, our expectation is that it definitely would be better than as we would see in the first half. Max, anything I’m missing?

Patrick Donnelly:

Okay. Thank you, guys.

Vijay Kumar:

Hey, guy. Thanks for taking my question. Prahlad, maybe just one on your September commentary on the guidance. So the guidance changed by $90 million. Is that all pharma? What is it assuming for China that $90 million change in guidance in that implied minus 5% for Q4? Is that the trend you guys saw in September and that’s what the guidance is as you look into Q4?

Vijay Kumar:

Understood. Max, one for you. I just want to understand your 2024 comments here. But did you say – did I hear you correctly when you said no operating leverage if revenue outlook was similar to fiscal 2023 on a base organic basis? And, I think you said net interest and other of 40%. Can you just put a dollar number, please? What’s the right base when you say up 40%?

Vijay Kumar:

Very clear. Thank you, guys.

Derik De Bruin:

Hi, good morning. Thank you taking the question. Just to put a point on it on the 2024 outlook. I mean, can you hold EPS flat or with the cost cutting? Or should we think about it as potentially being down year-over-year?

Derik De Bruin:

Got it. And just a little bit more color on what’s going on at BioLegend and Horizon, and just talk about sort of like some of the trends in pharma. Are they just – I mean, are they hesitating on spending? Are they doing it? Just any more incremental color you can sort of like give us on what’s going on with that end market. Thank you.

Derik De Bruin:

Got it. And services in general being more so than just than the consumables?

Derik De Bruin:

Got it. Thank you very much.

Operator:

Thank you. Our next question comes from Andrew Cooper of Raymond James. Your line is now open. Please go ahead.

Max Krakowiak:

Yeah. Hey, Andrew. So the way I would think about the cost of the $80 million number is the reduction that we have in our P&L and financials for this year. As you think about it for next year, we mentioned a little bit in the prepared remarks, we will have some costs that were a tailwind for us this year that are going to come back into our financials for next year, which is kind of getting offset by some of the annualization of the cost actions we have taken this year. And so that is kind of balance each other out. And then, again, as I mentioned in one of the previous Q&A, it’s going to ultimately depend on what our organic growth looks like for next year as well.

Max Krakowiak:

Yeah, it’s a great question. And so, I think you’ve heard about us talk about the Diagnostics business being impacted by pharma/biotech and really 2 of our business signs. The first is the applied genomics business, which as a reminder, is roughly $250 million of revenue per year, about 60% of that business goes into the pharma/biotech customer base. And then, you’ve got the second piece is our Revvity Omics business, which is last year that was roughly an $80 million business for us. I would say more than half of that business is related to the pharma/biotech customers as well.

Operator:

Thank you. Our next question comes from Eve Burstein of Bernstein Research. Your line is now open. Please go ahead.

Prahlad Singh:

Yeah. Hey, good morning, Eve. I think there are 2 ways to look at it, right? We definitely feel very confident that our portfolio continues to remain differentiated. As we even in this tough market environment, let me point out to a couple of things that we feel are bright spots. Our immunodiagnostics business globally grew in the high teens, especially in China, it has continued to grow in the high teens and will grow 10%. China performance, we had low-double-digits growth there. For the full year, we will expect mid-single-digits growth there. So, I think if you look at China, if you look at our immunodiagnostics business, that continues to be resilient. Our neonatal business despite pressure from both rate continues to do very well. Even on the Life Sciences side, despite the depression that we saw in 3Q, our reagents business will still grow mid-single-digits for the year even when you include the licensing comp headwinds that we have for this year. And going forward also, we expect our reagents business to be resilient and continue to do very well. At the end of the day, what it comes down to is the pressure from pharma/biotech on CapEx spending, which is on the Life Sciences instrument side and also on some on the software renewal side that we had. So that pressure, we expect, as I pointed out, to sort of elongate into the first half of next year. But from a portfolio perspective, we feel very confident that we will be differentiated.

Prahlad Singh:

From our business perspective, we have seen no to very minimal impact in our business. If anything, it’s just more delays versus any cancellation. I think in the longer-term, Eve, this will probably benefit multinationals more given the anti-corruption initiative that the government has going on.

Operator:

Thank you. Our next question comes from Jack Meehan of Nephron Research. Your line is now open. Please go ahead.

Max Krakowiak:

Yeah, sure. Hey, Jack. So actually, for the fourth quarter guidance for our Diagnostics business will be roughly flat for the fourth quarter. And so, when you then look at it versus the third quarter, really the drop versus the mid-single-digits growth in the third quarter was driven by the fact that our applied genomics business, as I previously mentioned, continues to face increased headwinds from the pharma/biotech. That is really the only thing that I would say is changing dramatically from the third quarter to the fourth quarter. The other 2 pieces of it, albeit they’re smaller is

Prahlad Singh:

Yeah. And, Jack, we’ve talked about this earlier, right? I think our NPIs are differentiated enough. I mean, I think if you just to frame it, roughly high-single to probably 10% of our DX business will see some impact from value-based pricing. And over the years, we’ve continued to see mid-single-digit price rate declines in China on our portfolio. However, we’ve continued to compensate for that with newer NPIs and increased volume that we have seen, and we expect to continue to see that more than offset the price decline and result in double-digits immunodiagnostics growth for our portfolio there into the future. As we assume sort of flat growth for reproductive health and applied genomics in China DX are in mid-single-digits overall for the whole year though. I think the future potential impact from VBP price expanding, we will see it decline each year, given the mid-single-digit gradual price decline that we currently continue to see in China.

Matthew Sykes:

Thanks for taking my questions. Good morning. Maybe just to start on the academic government end market. You showed pretty solid growth in the quarter. How are you thinking about that end market in the context of some of the budgets being set over time, whether it’s NIH or others in terms of the stability of that end market as we move into 2024?

Matthew Sykes:

Got it. Thanks, Max. And then just more of a high-level question. As you saw some of that demand from pharma/biotech drop off in September, could you maybe characterize the nature of that slowing in spend, just given the fact that a lot of these large pharma companies have big budget decisions to make and turning that around and respending sometimes takes a lot of time. I’m just wondering, do you see these sort of the slowdown in spending is sort of a transitory in terms of 2023 budgets? Or do you think there’s some bigger reprioritizations and spending and budget decisions moving forward into 2024?

Matthew Sykes:

Thanks, Prahlad. I appreciate it.

Joshua Waldman:

Good morning. Thanks for taking my questions. 2 for you. First, Max, can you help us think about the right earnings base for 2024? I mean, you have $80 million of cost reductions this year. I guess, how much of that is discretionary comp that will be coming back into the business? And then it sounds like you have higher interest expense, maybe tax rate and share count or tailwinds. Just curious if you think the $455 million guide for this year is the right way to think about the base entering next year? Or is it below that?

Prahlad Singh:

And, again, I’ll just add to this, Josh, because I know, obviously, people are curious on 2024. We really need to take the time to ensure that we understand what customer buying behavior looks like and how it evolves, the macro evolves over the next few months. But I think more importantly, as Max said, we are taking the right measures. We are taking action to protect our top quartile margin profile, despite revenue growth weakness and that includes the cost-cutting measures that we’ve already taken, and we will continue to take to protect and even expand our margins.

Prahlad Singh:

Look, I mean, I think on the Life Sciences instruments side, we’ve assumed double-digit decline in the fourth quarter, and we’ve kept our reagents flat versus our third quarter. And essentially, the way I would say it is that we pattern that based on the buying behavior of our customer towards the end of the quarter, which was – as we said, and both Max and I pointed out, it was more of a steeper decline in the second half of the quarter.

Joshua Waldman:

Got it. That’s helpful. Thanks, guys.

Daniel Brennan:

Great. Thanks for taking my questions, guys. Just maybe on the immunodiagnostics business since that’s been such a driver here. You guys sounded very positive on the continuation. Can you just give us a little color on kind of what you’re seeing there globally and the confidence that that kind of double-digit growth continues here in 2024?

Daniel Brennan:

Great. Thanks. And then maybe just on the free cash flow. You talked about some of the one-off headwinds here with the divestiture and also some of the rebranding. How should we be thinking about today if we think about conversion into 2024 at this point on free cash flow?

Daniel Brennan:

All right. Thanks, Max.

Luke Sergott:

Great. Thanks. Good morning. I have 2 quick cleanups and then I have better question on the quarter. So you talked earlier about the instruments being down double-digits in the quarter. Is that year-over-year or quarter-over-quarter? And then can you update us what EUROIMMUN did?

Luke Sergott:

Got you. And then, so just trying to figure out here how the quarter sounded like it could continue to get worse. And so, is it safe to assume like the step-down in September was something like 25%, 30%? And then does your current guide contemplate the demand environment getting worse? Or is it just kind of steady state at these levels that you exited September in?

Luke Sergott:

All right. That’s helpful. Thanks.

Dan Leonard:

Thank you very much. I just want to make sure I understand all the moving pieces in China. I think you said the expectation is mid-single-digit growth for the year. How would you break that down between Life Sciences and Diagnostics?

Dan Leonard:

Appreciate that. And then on Diagnostics in China specifically, I appreciate you had that high teens result, a growth result in immunodiagnostics, but that was off of a high teens’ decline. So in aggregate, it doesn’t seem like the business is growing a whole lot, but you’re not overly concerned about volume-based procurement. It sounds like there are several offsets and you’re bullish on the long-term. So I was hopeful that maybe you could help me reconcile some of those comments. Thank you.

Dan Leonard:

Thanks for the color.

Dan Leonard:

Understood. Thank you.

Daniel Arias:

Good morning, guys. Thanks for get me in here. Max, just going back to applied genomics, the comp gets several points easier in the coming quarter. I think you were down year-over-year in 4Q last year. But, obviously, you are talking about these incremental pharma headwinds. So what sequentially are you expecting there? Does the low-double-digit decline this quarter moved to something lower? Or can you kind of be in that same neighborhood, just given the easier comp?

Daniel Arias:

Okay. And then maybe, Prahlad, just big picture. I mean, is the state of the end-market environment right now impacting your view on M&A? Are you more or less enthused about doing another deal and does the priority list of the preference list, does it change at all just given the way that things are moving around here? Just curious about your appetite for additional M&A here?

Daniel Arias:

Okay. Helpful. Thank you.

Catherine Schulte:

Hey, guys. Thanks for taking the questions. Maybe just on the comments on reexamining your midterm growth outlook. Is that more of a comment on the Life Sciences side of the business? Or do you think the Diagnostics side needs to be reevaluated as well?

Catherine Schulte:

Okay. And then I just want to clarify your comments on reagents for the fourth quarter. I think you both said that those would be flat versus the third quarter. Is that on a dollar basis sequentially? How should we think about reagents year-over-year growth rate in the fourth quarter?

Catherine Schulte:

All right. Thank you.

Steve Willoughby:

Thank you, Alex. I hope everyone has a good day, and we’re here all week. Take care.

Operator:

Hello, and welcome to the Revvity Second Quarter 2023 Earnings Conference Call. My name is Alex, I’ll be coordinating the call today. [Operator Instructions] I’ll now hand over to your host, Steve Willoughby, Vice President of Investor Relations. Please go ahead.

Prahlad Singh:

Thank you, Steve, and good morning, everyone. Revvity has gone through a dramatic transformation over the last several years, which culminated with our rebranding midway through the second quarter. At the same time, the environment for some of the end markets we play in has also recently undergone significant changes. After multiple years of significant growth, our Life Sciences business is now facing new pressures due to softer demand from our pharma biotech customers globally, including in China. Our Diagnostics business has been improving as the year is progressing, which we expect to continue into the second half of the year. Despite these more challenging end-market conditions, we continued to perform well in the quarter and achieved our objectives. The 6% non-COVID organic growth was in line with our outlook, and the $1.21 of adjusted EPS we generated was slightly above our expectations. However, given the significance of the cautiousness we are seeing from our pharma biotech customers, we are realigning our expectations for the full year and now expect organic growth in the 4% to 6% range overall. We believe this remains meaningfully above market growth rates, driven by the uniqueness of what Revvity is. We are building the company for the long term, and we’ll continue to fully invest in core projects that will drive the business in the future while being diligent and proactively managing our spend in some areas to align with the lower volumes we are seeing. The incremental cost actions we are taking currently represent approximately $30 million of savings on an annualized basis, bringing the impact from our total cost reduction efforts so far this year to be $60 million. We expect this to now result in approximately 29% operating margins and adjusted EPS in the range of $4.70 to $4.90 for the full year. While there is clearly more uncertainty in some of our markets as compared to 90 days ago, we have intended for this new outlook to account for this uncertainty and believe our actions will enable us to build from a position of strength in the years to come. While it’s been only approximately four months since we successfully completed our significant divestiture and only a little over two months since we fully transformed into Revvity, I’m pleased to see that both our employees and our customers are strongly embracing the new company. I’m also proud to be reporting our first full quarter of financial results as Revvity here for the second quarter, which will hopefully continue to result in even greater simplicity and transparency for our investors, enabling them to better comprehend the exciting and unique company we now are and a compelling financial profile we expect going forward. The distinctive makeup of the company was on display during the second quarter as our Diagnostics business performed well, growing in the high single digits organically, excluding COVID in the quarter, with particular strength in the immunodiagnostics globally, especially in China. We also continued to see strong performance from our newborn screening business, which again grew in the double digits despite continued global spot rate pressures. This is a testament to our R&D and commercial strategies, which lead to broader screening menus overall and our ability to consistently bring new assets to the market for rare diseases and help them get adopted by governments around the world. While this is important to us as a business financially, even more importantly, it makes us proud that we help play a key role in identifying babies who can potentially benefit from medical intervention at a very early stage of their lives. I’m not sure there is a much greater purpose for our organization than this. One recent example of this is that the state of Ohio recently became the first state in the U.S. to require universal screening for Duchenne muscular dystrophy for all babies born in the state. With approximately 120,000 babies born in Ohio every year, it’s estimated that this screening will help identify approximately 12 babies with DMD annually. These newborns can now be treated and hopefully cured with novel gene therapies that are becoming available from the pharmaceutical community. In our Life Sciences business, while the market environment is more challenging than we had envisioned at the start of the year, our differentiated and high-value portfolio, innovative preclinical reagents, software and instrumentation is performing well and growing above broader market trends. This is particularly evident in our reagents and specialty pharma services business, which again grew double digits organically in the quarter. This is being offset by the pharma biotech softness more heavily impacting customer decision-making on CapEx investments such as instrumentation, new software contracts and the timing of finalizing new technology licenses and partnerships. This solid performance, in light of the dynamic market environment we are all facing currently, is exactly what Revvity was built for and is all about. While we are not immune to some of the macro pressures that exist, our unique portfolio and its leading positions in high-growth markets allows us to continue to deliver above-market performance through all macro environments. Over the past quarter, the Revvity team around the world shared in the excitement, energy and inspiration from our global launch in May. Apart from the modern and vibrant visual rebranding of our new company, we have taken on a spirit that is bold and courageous. This new shared direction is one that we have collectively aspired to over the last few years, and it is now a reality. Following our visit to the New York Stock Exchange to commemorate the rebranding and ticker symbol change, I have the opportunity to visit some of our sites around the world, including in the UK, Thailand, Korea and India. We talked about our vision for the new company. When I was in Mumbai, I also attended the thought leaders confluence, an exciting event hosted by the Revvity India team. I was able to share our brand’s story and discussed emerging trends with other industry leaders, drawing insights about the customers we serve in areas where we can further support their needs. With innovation at the center of our purpose to expand the boundaries of human potential through science, we have also recently created new leadership roles that will help us better achieve our goals. For example, we have appointed Arvind Sundar-Rajan as our new Vice President of Digital and Technology, responsible for advancing common capabilities across all markets and segments, from science to the cloud, from sample to answer. Moreover, we appointed Dr. Madhuri Hegde as Revvity’s first Chief Scientific Officer to focus on driving our scientific strategy to translate relevant customer pain points into actionable solutions while enhancing our customer relationships with existing strategic partners. This focus on innovation was again evident this quarter as we announced our first nonexclusive license of our novel base editing technology, PinPoint, with AstraZeneca. It is exciting to begin to see this unique technology being embraced by one of our most strategic partners. I look forward to sharing even more with you on the commercial development of PinPoint over the coming months. In addition to PinPoint, novel innovation was on display across the business over the last few months, including our new automated indirect immunofluorescence test system, the UNIQO 160 from our EUROIMMUN business. This new system was recently launched in Europe and provides an all-in-one solution that reduces the amount of hands-on time necessary for our customers or our new SaaS-based Signals research suite software offering, which brings together several key pieces of preclinical development software all-in-one SaaS-based solution. This consistent drumbeat of significant innovation across the company is one of the key things I expect to set Revvity apart in the marketplace with our customers. These past several months have been just an initial glimpse of the drive, passion and commitment we have as a team at Revvity, and I simply could not be more confident in our future. Finally, we’ve continued to make progress with our organic investments and our external capital deployments during the quarter. While we continue to actively review attractive M&A opportunities, we did repurchase just over $200 million of shares in the quarter. So overall, I think the uniqueness of Revvity really shined through here in the second quarter as we were able to achieve our objectives despite increasing end-market pressures in some of our businesses. While our updated outlook is reflective of the more challenging macro environment we are all facing currently, I think the resiliency of Revvity is being proved and allowing us to stand out with our customers and our other stakeholders. With that, I’ll now turn the call over to Max.

Operator:

Thank you. [Operator Instructions] Our first question for today comes from Patrick Donnelly of Citi. Patrick, your line is now open. Please go ahead.

Maxwell Krakowiak:

Patrick, so from a margin standpoint, in terms of the near-term cost actions that we are taking, I would consider this more from the OpEx line as we look to, I would say, more rightsize our costs given the current market conditions while still protecting our strategic investments that we need to make around areas of e-commerce, GMP, et cetera. But that near-term is going to be more on the OpEx side. As to your point, the gross margin expansion is really longer-term plays. As you look out to 2024, obviously, we’ll have to see how the market turns here over the next couple of months and what that means for 2024. But for right now, I would say the thesis still on our op margin expansion of the 75 to 100 basis points is what our target is for next year.

Maxwell Krakowiak:

Yes, absolutely. So I think, Patrick, to your point, as we look at China, it’s really a tale of 2 cities right now as we look into the second half. So let’s start first on the Diagnostics side, with immunodiagnostics being in the biggest piece there. It was great to see that exiting the second quarter. We were starting to get back to what we would consider more normalized volume from a China testing standpoint, which was in line with our expectation and we expect that momentum to continue in the second half. And so as we look at the second half, particularly for the immunodiagnostics business, we expect that to be close to an upper-teens growth rate in the second half. If you look though on the Life Sciences side, obviously, that has been more pressured. I think you heard some of the other commentary on the market environment there. It’s obviously very challenging. As we look into the second half for the Life Sciences business, we’re probably expecting that to be slightly down in the low to mid-single-digit range versus the first half that was more in sort of a low-teens growth rate in the first half. So we are expecting to see some pressure there. However, if you look at Life Sciences on a multiple year CAGR since the start of the pandemic, even with the downturn in the second half, it’s still growing at a mid-teens CAGR over that time period. So we continue to be excited there. It’s just given the second half right now, it will be a little bit pressured due to the market environment.

Patrick Donnelly:

Yep, understood. Thanks a lot. Thanks, Max.

Daniel Leonard:

Thank you and good morning. My first question, I wanted to clarify on China. What is your current view for China growth in aggregate in 2023? And how does that change from your prior view?

Daniel Leonard:

Thank you. And then for my follow-up, Max, you mentioned that in some areas of your instrument business, applied genomics specifically, there’s a bit of a COVID digestion going on. How broad do you think that is across your instrument portfolio? And how long do you expect that digestion period could last?

Daniel Leonard:

Okay. Thank you.

Matthew Sykes:

Thanks. Good morning. Thanks for my question. Maybe just on sort of the pace of the slowdown that you saw towards the end of Q2 as you exited and then, in particular, sort of what you’ve seen this month now that we’re in August. Just trying to get a sense for the pace of sort of slowdown, particularly on the capital equipment side in China, just giving you the confidence to sort of extrapolate that pace into the full year guide that you’ve changed.

Prahlad Singh:

No, I think, Matt, overall, the guidance that we are putting out there is just trying to get ahead of any softer trends that we – what we just started to observe. And our assumption is that will continue at least for the second half of the year.

Maxwell Krakowiak:

Yes. Matt, so when we were coming into this year, right, as we were talking about our Signals business, we were already flagging that there was going to be issues from a timing of the multiyear renewals. And so coming into this year, from a software perspective, we were expecting software to grow mid-single digits, which is compressed from what it’s normally been of mid-teens. And again, this is on the backbone of sort of the renewal timing, if you will. Now as we look out for the course of the year, we’re probably calling our Signals business to be actually down mid-single digits for the year. The swing you are seeing there is the impact of a softer pharma biotech on the new orders as CapEx budgets impact both instruments, and we are also seeing it on the software side. So this new guidance basically derisks the new order go get of our Signals business for the second half.

Operator:

Thank you. Our next question comes from Vijay Kumar from Evercore. Your line is now open. Please go ahead.

Prahlad Singh:

Yes, I think the way I would look at the guidance, Vijay, is that assume 400 bps of headwind from pharma biotech overall, which is offset by about 100 bps or stronger in immunodiagnostics. And I think the way I would look at it, of the 300 bps, 100 bps is essentially China Life Sciences softness. And I would say all of it is evenly split between instruments, reagents and the software piece that Max just talked on Matt’s question. So hopefully, that gives you a sense of how we are looking at it in terms of guidance for the second half.

Prahlad Singh:

I mean the way I would say it, you should – if you look at the current portfolio, it’s very different than what historically we have been used to. I think on – if you are in the QA/QC cycle, it would be a different perspective. But I would say probably a couple of quarters to three quarters is what our expectation is this will be. And again, let’s keep in mind, 80% plus of our business is now on the reagents consumables side. So that downturn is not going to impact it as longer as if it was a much more CapEx-heavy business.

Maxwell Krakowiak:

Yes. So I think there’s a couple of things that play, Vijay. So one, volume will actually be down quarter-over-quarter given the midpoint of our commentary on the third quarter number. So volume leverage is a piece of it. The second from a cost perspective, so the – some of this takes time, right? As I mentioned, this is incremental actions from what we’re taking from the beginning of the year. We do expect most of that benefit, I would say, to show up in the fourth quarter, Vijay, from a cost perspective. And then there are some actual strategic investments as well that we are making in the third quarter, again, that we do not want to delay, but we feel comfortable in our ability to hit our overall updated cost target for the full year.

Operator:

Thank you. Our next question comes from Catherine Schulte of Baird. Catherine, your line is open. Please go ahead.

Maxwell Krakowiak:

Yes. Hey, Catherine. So I mentioned it a little bit on the software side, but it’s a similar story on the lab. So what we wanted to do for our updated guidance is to basically derisk what we had assumed in terms of new orders, both on the Signal side as well as the genomic lab side. In terms of the commercial activity, we still expect – it’s still going incredibly strong. It’s a matter of when, not if these deals are going to close. There’s obviously the chance that they could push out to 2024. So we thought it would be better to derisk our second half guidance and assume essentially none of those new orders come in from a genomics labs perspective. And so we would expect similar growth rates or growth declines that we had in the first half to persist in the second half as we’ve derisked the forecast.

Prahlad Singh:

Yes. I think in the medium-term outlook, assuming – I think you pointed it out, assuming a stable macro environment, that is what our goal and target is. So yes, there is no change to that, again, assuming the stable market environment.

Operator:

Thank you. Our next question comes from Jack Meehan of Nephron Research. Your line is now open. Please go ahead.

Prahlad Singh:

I don’t think it’s competition, Jack. I just think that there is – as you heard last week from our peers and from us today, there is just a softness. I mean there was a lot of noise and talk about the stimulus coming in. I mean there was some uptick from it, but that funding has not fully materialized. And I think you are seeing the impact of that because there was an assumption from all of us that, that stimulus was for real. And clearly, that hasn’t panned out yet. And then I think we are all seeing the impact of that.

Maxwell Krakowiak:

Yes. Hey, Jack. So from an academic and government standpoint, it’s actually been pretty balanced across all regions. So I would say all regions are growing safely in the double-digit range. So it’s not one region versus another. Coming into this year, we had a hunch that academic and government was going to be stronger, especially if you look at what had happened in Europe over the course of 2022 and with some of the stimulus that has been mentioned that we did see come through from the China side. So I would say it’s been relatively balanced performance across the board from an academic and government perspective.

Joshua Waldman:

Hey, guys. Thanks for taking my questions. Two for you. First, Prahlad, a follow-up on the ImmunoDx business outside of China. It sounds like it grew high teens, if I heard Max right. How is that versus your expectations? And any drivers you could point us to? Just curious if it’s more underlying growth in the end market or is it share gain, maybe menu expansion? And then how sustainable do you think this could be throughout the remainder of ‘23?

Maxwell Krakowiak:

Yes. And just to it from a numbers perspective, Josh, to your point, it was high teens in the first half. We expect the second half to be closer probably to low teens, which is still very strong performance. And so we expect that business to continue doing well.

Maxwell Krakowiak:

Yes. So a couple of questions in there, Josh, I’ll kind of unpack them here one by one. So the first one is as you look at the performance of reagents to your point, it was low double digits in the first half. In terms of the combination of volume and price, we did roughly a little bit more than 150 basis points of price overall in the first half. Our strongest portfolio in terms of pricing power is our reagents business, so you could assume it’s going to be slightly above that number. And so then that should help you give some perspective from a volume or somewhere in the high single-digit range from a volume perspective overall is probably a fair assumption. Then as you look in terms of the trends for the second half, I do think that the reagents business will be slightly pressured versus the first half performance. So our current midpoint assumption has the business going from low double digits in the first half to more of a mid-single-digit performance in the second half. However, I will note, though, that if you were to look at this on a two-year stack basis for our reagents business, it was low double digits in the first half. It will still be low double digits in the second half. So it’s a relatively fair comparison on a year-over-year comp basis. It’s just we have a tougher comp in the back half of the reagents.

Operator:

Thank you. Our next question comes from Andrew Cooper of Raymond James. Your line is now open. Please go ahead.

Maxwell Krakowiak:

Yes, Andrew, I don’t know that I would say anything has been different from our expectations, right? So instruments is obviously a group that has been hit hard by the pharma biotech CapEx. You’ve got the new software and genomics deals that I mentioned earlier that have been hit by, I would say, the more cautious spending level from the pharma customers. Reagents has probably hung in better than both those two, but it’s not like that is also completely immune, especially when you look at the pre-revenue from our biotech customers, we are seeing reagent volumes drop there year-over-year. And so I would say it’s been relatively consistent from our expectation. I don’t think there’s any surprises from what we’re seeing in terms of the broader CapEx caution from the pharma biotech customers.

Maxwell Krakowiak:

Yes, Andrew, I’m not sure I completely follow your math there on the EBIT drop. In terms of looking at the cost actions and how we think about that, again, I don’t know that I have too much further color to add other than the fact that we are continuing to be prudent in our cost management given the market conditions and want to maintain our margin profile. But what – and yet we are still very much protecting our core strategic investments that we’re going to need for the next couple of years for our business.

Operator:

Thank you. Our next question comes from Dan Brennan of TD Cowen. Your line is now open. Please go ahead.

Prahlad Singh:

Yes, I think as you know them, our pre-revenue biotech pharma is a very, very small component of our business. And we – that was already being highlighted as being pressured early in the first half of the year. So I don’t think that there is much change. I think the way I would sort of color the mid-large biopharma biotech is the pause, the caution and the delay in terms of CapEx spending. And then that is what is basically driving the – being influenced by the macro environment that we are all seeing. So I would say it’s across the board, but it is having an impact primarily on the organic, on the CapEx investments that our customers are looking at making. And I think the delay in that is what is that we are accounting for in the second half of our forecast.

Daniel Brennan:

Great. And then maybe just a follow-up, just on the guide. The guidance reduction completely not surprising given what we’ve seen so far. It’s actually more modest than what we’ve seen so far from the peers. Prahlad, I think I heard you discuss earlier that in terms of trends in the quarter, it was really June where the weakness occurred and you guys are assuming kind of where we are today in July kind of persists. So I guess the question is, how do investors view like the cushion per se that you may have baked in the back half of the year. I guess you’re assuming kind of where we are today is stable and that’s it, so things don’t get worse. So just kind of wondering if you’ve kind of incorporated any kind of further weakening possibly in the back half of your implied guidance. Thanks.

Daniel Brennan:

Great. Thanks, Max.

Derik De Bruin:

Hi, good morning. Thank you for taking my questions. Just the first one, what’s your overall instrumentation as a percentage of the portfolio? And how much was that just down in aggregate?

Derik De Bruin:

Got it. Okay. So just going back, sorry to repeat on this, but I’m just sort of trying to digest what everybody means by macro because, I mean, our economists are sort of getting a little bit more less likely on recession, people’s numbers see be picking up, yet the pharma industry seems to be having some issues. So I’m just curious on what is – can you differentiate what is just – what was just excess spending during COVID, right? Does extra spending because times are flush and everybody had money versus a new sense of concern, caution because people worry about the regulatory environment, IRA, or whatever it is. I’m just trying – can you differentiate between what is like excess spend in that market? Was there – and have you noticed any difference between U.S. and European pharma? So thanks.

Derik De Bruin:

Got it. Okay. Thank you. Appreciate it.

Daniel Arias:

Yes, good morning. Thanks for the questions here. Prahlad, maybe just rounding out the commentary on the portfolio, can you just add some color to what’s taking place in the Pharma Services business? How would you compare the demand that you’re seeing for genomics versus sell-on development versus some of the other applications like viral vectors? Obviously, anything that helps triangulate biopharma is just helpful right now. And then as an add-on, I’m curious how OneSource is doing in this environment.

Daniel Arias:

Okay. Totally fair. Then I’d ask you to comment on a business that you did not own anymore. Max, on the cost reduction. Simply if you think about the split on…

Daniel Arias:

Sure. Absolutely. Congratulations on the milestone there. If I could just sneak one more in, Max. How should we think about the split of what you’re doing when it comes to the cost reductions, Life Sciences versus Diagnostics? I don’t know if you’re interested in talking about segment margins, but it would just be helpful to know what kind of mix to assume there on spending changes. Thanks.

Daniel Arias:

Okay. Thank you.

Rachel Vatnsdal:

Hi, thanks for taking the questions, you guys. There’s been a lot of pharma biotech questions, so I thought maybe I’d shift over to M&A. You guys mentioned some of the share repurchases this quarter and that M&A still remains a priority. So can you just talk about how you’re thinking about the current M&A environment? Valuations have come in pretty meaningfully in the last six to nine months here. So what are you seeing in the marketplace? And then are there any pockets that you’re most interested in?

Rachel Vatnsdal:

Great. And then just one follow-up. You mentioned that reagents were weaker in China this quarter. Can you kind of clarify for us what did reagents grow in China? And then what are your latest expectations for the year for reagents in China as well? Thank you.

Operator:

Thank you. Our next question comes from Liza Garcia from UBS. Your line is now open. Please go ahead.

Prahlad Singh:

Sure, Liza. I think as you know and you probably heard on the reproductive health side, majority of our products have moved to China and are in China for China. On the EUROIMMUN side, I would say probably 25% of our products are in China for China. The rest, we continue to move. And of course, the NMPA approval process is what becomes a more of a timing factor. And I would expect that over the next couple of years to two to three years, most of what we think needs to be moved to China will be moved to China. It’s not a CapEx issue. The building, the facilities and all are ready and already invested in. It’s just more from a timing perspective to get the studies done there and submission of NMPA and getting the approvals from there.

Maxwell Krakowiak:

Yes. So maybe just to address the first – one part of that question in terms of the operating margin expansion, yes, the 75 to 100 basis points is still what we are planning in terms of our midterm margin expansion targets. Obviously, we will have to see what happens from a market perspective. But as of today, that is still our assumption. To your question on e-commerce, it continues to be an area we are very excited about. We continue to make great strides there. We will be having sort of the launch of our new e-commerce platform here in the first quarter of next year. And then Europe will be shortly following on sort of a six to nine-month lag from an e-commerce platform perspective, but we do expect that to be a continued area of opportunity for us as a company.

Stephen Willoughby:

Thanks, Alex, and thanks, everybody, for all your great questions today. We look forward to catching up over the remainder of the week. Talk soon.

Operator:

Hello, and welcome to the Q1 2023 Revvity, Inc. Earnings Conference Call. My name is Alex, and I'll be today for the call today. [Operator Instructions]

Stephen Willoughby:

Thank you, operator. Good morning, everyone, and welcome to Revvity's First Quarter 2023 Earnings Conference Call. On the call with me today are Prahlad Singh, our President and Chief Executive Officer; and Max Krakowiak, our Senior Vice President and Chief Financial Officer.

Prahlad Singh:

Thanks, Steve, and good morning, everyone. It is great to be speaking to all of you for the first time as Revvity. We are here in Dallas today as we are hosting a global gathering of employees to officially launch the new company and brand this week. Our objective is to not only familiarize and engage our employees with the new brand but also to organize and collaborate in person for the first time as a collective group since before the pandemic.

Jason Cassorla:

You got Jason on for Patrick. Maybe first, just on China, you noted a little bit worse than you had initially anticipated there in immunodiagnostics. I guess maybe just talk to what you're seeing there on the ground and kind of what the expectation is for the second quarter.

Jason Cassorla:

Got it. Okay. And then maybe just on the applied genomics business. Just thinking about that ramp throughout the year, I think you had guided 1Q to be similar to that of 4Q. So just what are we expecting there for the remainder of the year?

Operator:

Our next question comes from Catherine Schulte from Baird.

Maxwell Krakowiak:

Yes. So from a pharma/biotech perspective, I'd say maybe a couple of dynamics to call out. So I'd say first is that from an instrumentation standpoint, we actually exceeded expectations here in the first quarter, growing in the low double digits. Now I do expect that those spending levels, we're expecting to be a little bit more cautionary in the second quarter, and that is factored into our current guidance. And then if you look at the reagents business, the reagents continue to perform very well in the first quarter, and we expect that to continue for the rest of the year. So it did low double digits here in the first quarter, and we're pleased by the performance of that group.

Catherine Ramsey:

Okay. Great. And then, Prahlad, as you mentioned, it's a significant undertaking to rebrand the company. How did the new revenue brand come about? What do you want your new identity to stand for? And how do you make sure that this rebrand transition goes smoothly with customers?

Miriame Victor:

So maybe let me start off how we came up with the name. We have listened to our employees, our customers around the globe, through a number of focus groups, creation workshops. And there are 3 main themes that came through, and that was consistent across the globe. They wanted something that is unconventional, precise and united. So we wanted a name really that is unconventional for the company we would be, representing us as a category of one. And we wanted to show the world our quality of work and the precision of our breakthrough innovation and to be united with all the capabilities we have added through the acquisitions over the last 5 years.

Operator:

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

Prahlad Singh:

Mike, this is Prahlad. Again, as you know, majority of our revenue stream now comes from reagents and consumables, which have a very short shelf life and customers generally don't have a lot of space to keep our products in that sense. So really, there is not a whole lot of inventory building that we have seen. And as I've shared earlier, most of our products, and if you take BioLegend as an example, it's shipped overnight to customers. So there is not really a whole lot of scope to see stocking in the product profile that we have.

Prahlad Singh:

It's a great question, Mike. I think let me just sort of take it a little at the macro level, right? We feel really good about our first quarter performance, which was strong and at the high end of our expectations despite evolving macro conditions and what we talked about China DX. As you pointed out, we have completed 2 successful undertakings, the divestiture and the brand launch. Just to be clear, the divestiture is done. We are closed. There are a few TSAs in place, but that's as part of any norm that would be at such a significant undertaking.

Operator:

Our next question comes from Jack Meehan of Nephron Research.

Maxwell Krakowiak:

Yes. Sure, Jeff. So from an immunodiagnostics standpoint, maybe the best place to start is just the overall business. So you're correct, first quarter was about mid-single digits. As we look out to the rest of the year, we expect to be in the low double digits to sort of low teens from an organic growth rate perspective. .

Jack Meehan:

Great. And then 2 questions on reproductive health. First, you called out slower birth trends. Can you just talk about the regional dynamics you're seeing? And then second, can you give an update on Vanadis and customer uptake?

Vijay Kumar:

Prahlad, maybe first one for you. Q1 came in at the high end of your guidance, Q2 looks like perhaps in line or even better than Q1. I think the midpoint of your annual guidance implies the back half needs to be about 350 to 400 basis points above first half. With your comments on China ImmunoDX improving, I think that's a 100, 150 basis point step-up versus first half. Where is the remaining acceleration coming from? If we're doing the math correctly, the second half needs to be low doubles versus first half to hit the midpoint of the guidance. Is that just an easier comp? Or are we assuming certain end markets to improve in the back half?

Maxwell Krakowiak:

Yes. So maybe to address the first question on share repurchases for the remainder of the year. Right now, our guidance assumes no further repurchases. Obviously, we have authorization from the Board that we've received to up to $600 million. Right now, that is more of an optionality for us, and we'll continue to evaluate all of our capital deployment opportunities. But right now, in our guidance, we are assuming no further share repurchases. To your question on the tax rate planning, as we mentioned in my prepared remarks, those are probably, I would say, not delayed. It's just taking a little bit longer to get done. We still expect our midterm sort of tax rate to be in the high teens rate, and we are confident in our ability to get there.

Daniel Arias:

Congrats on the new identity. Maybe just to that point, a high-level question for Max. Max, a lot of moving parts for you as you walked in the door there as CFO. Do you feel like the heavy lifting on the math around the divestiture and just sort of the complex elements of the overall business transition are behind you at this point? Or are there still some things that need to be worked through just when it comes to cost allocation, head count investment, et cetera? How many variables are still in the mix for you?

Prahlad Singh:

Yes. Dan, I mean, yes, we did quite a bunch of acquisitions, as you said, on the Life Sciences side of the segment. But again, those were all thought-out and strategic in nature. Despite all of that, as Max has pointed out, only 5% of nearly total company revenue is in pre-pharma/biotech, and that is inclusive of all the acquisitions. So if you look at our total Life Sciences business, including the acquisitions that have been made, only 10% of the revenue comes from pre-pharma and biotech in the Life Sciences. So we are very well protected from that perspective.

Daniel Arias:

Okay. So Prahlad, I'm going to take that comment to mean that all of these acquired assets are performing the way that you thought they would at the time of acquisition. There's nothing that you would call out that, a quarter or so down the road, we might be thinking about as underperforming or outperforming, such that the outlook is now different. I mean I guess what I'm saying is you did this M&A, you did it for a reason, there isn't a lot of visibility on it again. So are you saying that everything that's been acquired is trending the way that you thought it would be? And coming out of COVID, things are not really different than they were when you acquired them?

Operator:

Our next question comes from Josh Waldman of Cleveland.

Maxwell Krakowiak:

So okay, so maybe to again further elaborate, I think you called out the key pieces there. So there's basically two reasons why we are being more prudent in expanding the range of outcomes, and it does come down to really the second quarter. Again, our second half expectations have not really changed. So for the second quarter, I'd say there's a couple of drivers. One is that, although the immunodiagnostics business in China is improving sequentially versus the first quarter, it is a little bit lighter than what we had initially anticipated coming into the year. The second is that we are seeing more cautionary spending levels, particularly on our instrumentation business in the pharma/biotech space. And the third, as I had previously mentioned, is that the second quarter will be the trough for both our informatics and U.S. genomic lab business.

Joshua Waldman:

Got it. Then Prahlad, I guess, wondering if you could give us an update on how synergies between the two segments are evolving. Maybe talk through any recent examples of synergies that teams have been able to identify, either on the cost front or revenue synergy side.

Operator:

Our next question comes from Luke Sergott of Barclays.

Maxwell Krakowiak:

Yes. So I think as we've previously mentioned, we're not going to specifically talk about individual business growth rates, but BioLegend is a major part of our overall reagents business, which continued to grow in the low double digits during the first quarter, and we expect that trend to continue for the rest of the year.

Luke Sergott:

Awesome. And then specifically again on -- I know it's another business, but with the latent TB testing in China, is this more -- for that to come on, does there need to be regulatory approval there from China? Or like what's the gating factor for that coming back?

Operator:

Our next question comes from Matt Sykes of Goldman Sachs.

Maxwell Krakowiak:

Matt, so from an academic and government perspective, I think it's a 10% of -- high single digits, 10% of the overall company revenue. And so from that perspective, a big component of it is the reagents business, with BioLegend being a major part of that. And so as we continue to see strength in our reagents business, a big proponent of that is through the academic and government end markets.

Prahlad Singh:

Yes. Matt, Miriame is on the call, as you know, as I've said, the transition has gone really well. I will take -- I will say that on her behalf that the team took its own time to ensure that we have the right planning in place. Because we were actually -- as we were continuing with the divestment process, that was an integral part. We were going from an instrument-heavy focused business to a more reagent-based model. And right now, to give you an example, it's now much more akin to what the reproductive health business does for -- as an example.

Operator:

Our next question comes from Dan Brennan of TD Cowen.

Maxwell Krakowiak:

Dan, yes, your math is correct. The initial assumption coming into the year was low double digits for the immunodiagnostics business in China, and now we are expecting high single digits. And the reason for that drop is just a slower first half ramp recovery. Again, we are seeing positive signs from a volume perspective, and it's going to step up here in 2Q, and we still expect to return to normal for the second half.

Maxwell Krakowiak:

Yes. So Dan, to your point, we did not. Given it to a small part of our overall business, we didn't have a specific number in mind. I think the down mid-teens was a little bit larger than what I think we would have been expecting. And so that is now factored into what we're considering more of a cautionary spending level for the rest of the year.

Maxwell Krakowiak:

Yes. Look, Dan, to that point, I think what we wanted to do coming into the guidance was to give a realistic range given the macro environment. And we still have a path to what we think we can achieve to our original guidance of the 9% and the $5.05. And yes, there is the case that as the macro environment continues to trend downward, we must see a little bit softer results. But I think overall, we are confident in the position that we are sitting in today and confident in our team's ability to execute against our pipeline.

Rachel Vatnsdal Olson:

Congrats on the new name. So I wanted to follow up on Dan's question there around some of these pre-revenue customers. You said those customers declined mid-teens in Life Sciences during 1Q. So can you walk us through how that customer segment trended by month throughout the quarter? And then have you started to see any recovery here in April at all? And then I have a follow-up as well.

Rachel Vatnsdal Olson:

Noted. And then on operating margins, you were able to reiterate that 30% OPM for the year despite some of these puts and takes on the top line. So can you just remind us of margin profile of ImmunoDX, especially in China, and then of some of these emerging biotech pre-revenue customers within Life Sciences? And how should those kind of offset throughout the P&L to be able to reiterate that 30% OPM guide?

S. Brandon Couillard:

Just one quick one for you, Max. How are we thinking about free cash flow conversion for the year? And where do you expect that leverage of land exiting '23?

Operator:

I will now turn the call back over to Steve Willoughby for any further remarks.

Operator:

Thank you for joining today's call. You may now disconnect your lines.

Operator:

Hello, and welcome to the PerkinElmer Fourth Quarter 2022 Earnings Conference Call. My name is Alex, and I'll be coordinating the call today. I will now hand over to your host, Steve Willoughby, SVP of Investor Relations. Please go ahead.

Prahlad Singh:

Thank you, Steve, and good morning, everyone. Before I begin, I want to express my deep sorrow for our colleagues, along with their friends and families in Turkey and Syria following the recent earthquake. What you are having to go through is something no one ever thinks can happen. And I want you to know that PerkinElmer will be supporting you in any way we can. Needless to say, the start of the year has been an eventful one, and from a business perspective, we have hit the ground running after finishing 2022 on a strong note that played out right in line with our expectations from the start of the quarter. We continue to successfully navigate an evolving macroenvironment, particularly in China, while staying tremendously focused on executing our upcoming divestiture of our Analytical and Enterprise Solutions business, which we expect to complete before the end of March. Amid these undertakings, we, again, exceeded our total adjusted revenue and adjusted EPS targets for the quarter. The continued high level of execution throughout a period of transition for the company is a testament to the team we've built, the processes we've implemented and the quality of the businesses that comprise our new company. I couldn't be more excited for our future, and the impact I expect us to have by helping our customers develop and deliver novel scientific breakthroughs that will have a profound impact on improving global health in the future. I would be remiss not to also thank all our colleagues who have spent a significant amount of time and effort preparing for the upcoming split of the company, including those roughly 6,000 employees who will be part of the divestiture. I look forward to watching what the Analytical and Enterprise Solutions business can accomplish in the years to come, and thank you for all your efforts and impact which have made getting to this point a reality. As it pertains to the future of our Life Science and Diagnostics business, which is going to be renamed and rebranded in the months following the close of the divestiture, a significant amount of work has already taken place to prepare for this transition. I'm eager to share with you and our employees more about the direction of the new company in the near future. As I have highlighted to you over the last several quarters, the level of focus on material innovation that is now occurring within the company has meaningfully increased. This was again on display over the last few months as our new high-throughput random access chemiluminescent diagnostic testing platform, the Excentis received its CE Mark and began initial commercial installations. While the test menu for this platform will continue to ramp over the next several years, it marked a multi-year effort of significant development to bring this next-generation platform to market. We will look to also bring this new system to the U.S. market in the coming year. With the low and medium throughput platforms that were added with the acquisition of IDS in 2021, the initial launch of the Excentis now provides a complete portfolio of chemiluminescent analyzer platforms spanning all throughputs to support our full spectrum of customers. We were also excited to see in early January that the GAMT disorder was added to the RUSP panel for newborn screening in the United States. This deficiency can result in severe intellectual disabilities if it goes undetected and untreated within the first few years of a child's life, and we continue to collaborate with KOLs to support their research and pilot programs on this. With our EONIS platform for SMA and SCID screening receiving FDA authorization last quarter, the recent additions of GAMT and MPS II are examples of the continuous innovation from our reproductive health business, allowing it to continue to grow despite well-known birth rate pressures over the last several years. In our Life Sciences business, we continue to bring innovation to the cell and gene therapy industry with the launch of adeno-associated virus AAV detection kits, which leverage our proprietary AlphaLISA technology and help researchers quickly and easily characterize viral vector particles being introduced. Additionally, we signed a collaboration agreement in December with a leading global biotechnology company to identify novel AAV vectors aimed at crossing the blood-brain barrier. Working in conjunction with Professor Grimes Lab at the University Clinic, Heidelberg, our in-house team of viral vector experts in Munich, Germany are tasked with developing a novel generation of gene delivery vectors for treating a growing population affected with neurodegenerative diseases. The scope, high unmet clinical need and social challenge underpinning this collaboration is an illustrative example of just how much we have transformed our life science portfolio over the past few years. We are not only increasingly aligned with rapidly evolving and attractive fields like cell and gene therapy, but we've positioned ourselves to be uniquely focused to help accelerate these advancing fields forward. In addition to continuing to invest in our R&D, we are also significantly focusing on internally developing our people. In the fourth quarter, we launched three new employee resource groups centered on supporting our Hispanic employees, our veterans and our employees with disabilities. We also started several employee networking groups to help employees with similar interests get to know one another and communicate across the company. These are both great examples of the change in culture that has been occurring at the company recently, which I expect to even further accelerate as we enter the next exciting phase of our corporate journey. While Max will share more details with you in a bit, it was encouraging to see our Life Science and Diagnostics business finish off the year on a strong note resulting in 9% non-COVID organic growth for the full year. This was despite an approximate 300 basis point headwind from the lockdowns in China negatively impacting our immunodiagnostics business which we had assumed in our most recent guidance. At this point, we have continued to see an impact from the change in COVID policy in China and assume that we will not see our immunodiagnostics business there return to normal until the second half of 2023, which will have a big tough end impact on our overall expected growth for the year, particularly in the first half. As it relates to COVID, we have been a significant player in the response to the pandemic with the both lab-based PCR and the several government lab contracts we participated in. The testing mandates now ending in most areas around the world, it has recently resulted in a strict and dramatic decline in the demand for lab-based PCR tests and supplemental lab capacity. While Max will provide more detail, we have decided to completely remove all COVID revenue from our guidance for the year and let what we expect to be minimal related revenue provide modest upside to our official guidance, a significant change from our prior expectations. Despite these two impacts, we are looking for 2023 to be another very strong year overall and one that will set the new company off on a great foundation to build upon in the years to come. As we execute on our transformation and the future accretive capital deployment opportunities it provides, we will unlock the full scientific, operational and financial potential of our Life Science and Diagnostics business resulting in a best-in-class culture, market-leading innovation and top-tier shareholder returns. Our business is in an excellent position today with tremendous additional opportunity right in front of us that we are going to capitalize on. With that, I'll now turn the call over to Max.

Prahlad Singh:

Thank you, Max. 2022 was clearly another strong year for PerkinElmer, but if we take a step-back and look at the past three years. Our focus was always to emerge from COVID as a stronger company. We believe that chapter has been successfully completed for both, the analytical and enterprise business as well as our new life science and diagnostics business. Within those three years our rapid and significant response to the COVID pandemic enabled more than 10 acquisitions fast-tracking the transformation of our company to higher growth and higher margin areas. Additionally, we embarked on a significant undertaking of splitting the company into two distinct businesses and yet through all that we've consistently executed on our financial targets which is a testament to our employees and pleasure we have created. Looking forward, 2023 will be no different as our teams rise to the challenge of finishing the divestiture, rebranding our company and continuously executing against our financial commitments. We are in an excellent position today and our future is very bright. With that operator, we would now like to open up the call for questions.

Derik de Bruin:

Hi, good morning and thank you for taking the questions. So just Max, just to clarify something so your - your full end interest expense guide includes I'm just sort of - what are you assuming in terms of interest, interest income on the incremental. Just trying to make sure that $90 million guiding you're guiding is an all-in number is sort of like how you see it - if there is some potential upside of that depending on the interest rate?

Derik de Bruin:

Great, thank you for clear clarity. And when you look at the China progression in immunodiagnostics just sort of thinking about the one half of two halves expectation, I appreciate the color on the overall commentary on the business, but can you just sort of walk through how you're sort of seeing that flow through the model?

Derik de Bruin:

Okay. Great. And then just one final, if I may. Pricing assumptions for 2023?

Derik de Bruin:

Great, thank you very much.

Patrick Donnelly:

Good morning, guys. Thank you for taking the questions. Maybe following up on Derek there on the China piece. Prahlad, it was encouraging to hear you guys talk about 1Q being consistent with that, call it, 9% for the year, given the China headwinds upfront, COVID coming out of the model, obviously. Can you just talk about, I guess, it seems like you have good visibility into 1Q being at that level, when China comes back in that back half, I would have thought that would accelerate growth. Can you just talk about, I guess, the cadence throughout the year, why the back half wouldn't be stronger? Is it just layering in a level of conservatism in the back half? And then if China does indeed recover, you can kind of ride that to higher numbers. Just trying to get a sense there, given the 1Q guidance was pretty healthy from where we were standing.

Patrick Donnelly:

Okay. Understood. And then maybe on the margin side, certainly understand 1Q being a little lighter just given some of the continued ops piece. Can you just talk about, again, I guess, how we think about that throughout the year? And then particularly near-term, not - obviously, not asking for '24, '25 guidance just yet, but it seems like as those stranded costs come out, I wouldn't see any reason why we wouldn't be kind of 100 bps plus in the near term, just naturally as those come out. Can you just talk about, I guess, how that progresses in terms of the model? Again, the exit rate should be a little bit higher than I would think the near-term years skew on the upside as some of those stranded costs come out. But it would be helpful just to get a sense for what those look like as we work our way through the model here.

Patrick Donnelly:

Great, thanks guys.

Joshua Waldman:

Hi, good morning guys. Thanks for taking my questions. A couple for you. First, I wondered if you could provide an update on BioLegend, maybe what the business grew here in Q4. Curious if it was impacted by China lockdowns, and thus, maybe represents potential upside to the model. And then just curious, what you're assuming for that business within that 9% non-COVID guide for '23?

Joshua Waldman:

Got it. And then Prahlad or Max, I wondered if you could comment on what you're seeing from maybe biotech and early-stage pharma accounts. It sounds like Pharma was up mid-teens in the Life Science segment, but applied genomics maybe a bit lighter. Just wondered if you're seeing any indication that these accounts are slowing spend. Anything leaving you more cautious on outlook within this end market?

Joshua Waldman:

Got it. Appreciate it.

Liza Garcia:

Hi, guys. Good morning. Thanks for taking the question. So I guess, if we could start on talking about the informatics business, it's just been a bit since the last DAS deep dive, I think it was like 2022. So how do you think about the right growth trajectory for that business given the 20% that you guys got to accrue this year?

Liza Garcia:

Awesome. Thank you. And then I guess, just talking a little bit into like the reproductive health. I guess, a little bit softer this quarter, but - with the birth pressures, but you did have the - you've highlighted the FDA marketing authorization for SCID and SMA. How should we think about that? And kind of if you could provide any qualitative kind of update on Vanadis? That would be great.

Liza Garcia:

Okay. Thank you.

Dan Arias:

Good morning, guys. Thanks a bunch. Prahlad or Max, I hate to put too fine of a point on it, but the return to normalization for EUROIMMUN in the second half of the year, is that to say getting there by year-end or is that more like you think you'd improve through midyear and you can get back to normalization at some point in 3Q or 4Q? I'm sure you're not interested in giving growth rates by quarter, but it would just be helpful to get a sense for the shape of the curve, sort of to Derek and Patrick's point, just given that it does seem like that's the biggest swing factor here for growth in 2023.

Dan Arias:

Yes. Okay. That is helpful. And then maybe on margins and M&A, you've been pretty upfront here about having this extra dry powder that you think you can deploy for M&A later in the year 2024. So it feels like you're active there, but you've also made op margin improvement in one of the key selling points of the spin. So I guess, I'm just curious to what extent do you have an appetite for something that might be strategically positive, but dilutive to margins.

Dan Arias:

Do you think that the - if the revenue trajectory one that Vanadis has right now, that would still be something you'd be interested in?

Dan Arias:

Okay. Thanks, Prahlad.

Operator:

Thank you. Our next question for today comes from Jack Meehan of Nephron Research. Jack, your line is now open. Please go ahead.

Max Krakowiak:

Yes, Jack, the way I would think about it is the $5.05 guidance includes the impact of continuing ops accounting headwinds that we're going to have in the first quarter or really the first couple of months until the divestiture closes. And then for the remainder of the year, yes, that - cont ops accounting will more or less turn into stranded costs, but that will be partially offset also by the TSAs that we will have. So sort of net-net, it all more or less washes out over the course of the year. We think $5.05 is a very good indication of what sort of the true LSDx performance is once you kind of put all that together.

Max Krakowiak:

Yes. I think I mentioned that earlier as well in one of the responses. I do probably - we do probably anticipate that to continue here in the first quarter. But I think as we look over in the full year for applied genomics, we probably expect it to be slightly down from this year on a non-COVID basis. So in 2022, it was high single-digits. We probably expect it for the full year to be slightly below that, but we do expect it to rebound sort of after the first quarter here.

Operator:

Thank you. Our next question for today comes from Paul Knight of KeyBanc. Paul, your line is now open. Please go-ahead.

Prahlad Singh:

I think spatial biology and proteomics and all of that is a growing area, Paul. But I think BioLegend and our Life Sciences research reagents business overall is a very strong portfolio that we are able to now deploy globally with the channels that we have access to that BioLegend didn't have. So I think the growth trajectory over the next foreseeable future just is in terms of providing the commercial footprint, the infrastructure, the capabilities and competencies of overall PerkinElmer rather than one particular area of growth.

Prahlad Singh:

Yes. We will continue to be acquisitive as we have been, and we continue - we will continue to add growth trajectories to our portfolio given that we will have a robust balance sheet and we'll have an even more robust balance sheet post the divestiture.

Operator:

Thank you. Our next question comes from Max Masucci from Cowen. Max, your line is now open. Please go-ahead.

Prahlad Singh:

Max, as you know very well, today, the way that newborn screening is done, that the states pay for it, right, it's not reimbursed. It's sort of - it's not a private insurance or an insurance reimbursement play. And I think the way our view of this is that going forward, newborn screening will continue to be mandated by the states and by RUSP and by the newborn screening law. In terms of rapid genome sequencing, as you said, for newborns, that as you - is going to be an area of interest for us and for others. There are certain regions where we are playing a role in it. But I think it will continue to be more esoteric and specialized for the foreseeable future. The cost the turnaround and the speed and the scale and magnitude, by which newborn screening is done by the state labs today is unmatched and it will continue to be so.

Max Krakowiak:

Yes, so maybe I'll answer the first question on the growth rates, and then I'll let Prahlad talk about the synergies here Max. So - again from an overall reagent standpoint in both the fourth quarter and the full year, we've performed at a low double-digit. I would say that was pretty consistent across all, our reagent portfolio, there's not one shining star versus another. So I think we're pleased overall with our reagents growth across everything from BioLegend, just bio some of our legacy reagent product lines, et-cetera. It was strong growth overall for everybody.

Max Masucci:

Great, thanks for taking the questions.

Dan Leonard:

Great, thank you. I appreciate you taking COVID revenue out of your forecast, but curious, have your views changed at all on the non-COVID pull-through opportunity from instruments placed during COVID?

Dan Leonard:

Understood and Max, my follow-up. I'm trying to better understand the EBIT margin bridge from the 32% plus in Q4 to the 30% guidance for 2023, both for RemainCo. I know there's some COVID revenue in Q4, but not overly material. So what are the other drivers of the walk-down from that 32% to 30%? Thank you.

Dan Leonard:

Okay, got it that makes sense. Thank you.

Matt Sykes:

Thanks, good morning. Thanks taking my question. Maybe just to clarify just following-up on Dan's last question on margins, just if we focus on diagnostics you did 28.7% in the fourth quarter, and that was significantly lower COVID revenue than you've done in the past? So should we see that 28.7% just for diagnostics is being closer to the lower end, troughing as we kind of look out to 2023, understand that there is some China-related impact and other things like that, but just wanted to get a sense for that 28.7% where that is and sort of the range of margins you think diagnostics can do over the course of '23?

Matt Sykes:

Got it, thank you. And then just, Max post the debt pay-downs. Going into '24, how are you thinking about sort of a target net leverage, prior to any acquisitions like what's your comfortable range to be in sort of on an ongoing basis?

Matt Sykes:

All right, thank you.

Rachel Vatnsdal:

Great, thanks for taking the question. And so first off there's been a lot of discussion on China as it relates to the diagnostic side business. But you also flagged some of those tailwinds related to the potential stimulus? So can you just give us some color on what's assumed within your guidance for China stimulus tailwind? And then how do you think Perkin position to benefit from that. And then on timing, how long do you think that that stimulus benefit could play-out for us? Thanks.

Rachel Vatnsdal:

Helpful. And then maybe just a follow-up on your comments around and consistent guidance throughout the year on that non-COVID organic growth so can you just clarify that you mean on a stack basis. So for example, 1Q is 9% on a two-year stack versus 13% in the prior year. So that imply more like a 5% organic growth in 1Q or kind of how should we think about that on that commentary? Thanks.

Rachel Vatnsdal:

Great. And then last quick one from me. Just your commentary so you guys grew high single-digits ex COVID during 4Q in Europe, which was encouraging. But can you just talk about how have conversations with customers evolved in the past few weeks? It sounds like things have gotten better just from the energy crisis, less on severe winter than anyone was expecting. So what's your kind of outlook for Europe for the year as well? Thank you.

Prahlad Singh:

And qualitatively, Rachel, what you said is pretty much what's playing out.

Operator:

Thank you. Our final question for today comes from Vijay Kumar from Evercore ISI. Vijay, your line is now open. Please go ahead. I'm sorry Vijay. We're not receiving any audio. Your line is now open. Please go ahead. Sorry Vijay - you might be on mute, sorry Vijay, we're not receiving any audio. My apologies we're not receiving any audio from Vijay.

Max Krakowiak:

Yes, we'll follow-up with him. We can probably just wrap-up now. Thank you everyone for your time, your questions this morning and we look forward to speaking with everyone again next quarter. Take care.

Operator:

Thank you for joining today's call. You may now disconnect your lines.

Operator:

Ladies and gentlemen, welcome to the PerkinElmer Third Quarter 2022 Earnings Call. My name is Glen, and I'm your moderator for today's call. I will now hand you over to your host, Steve Willoughby to begin. Steve, please go

Prahlad Singh:

Thanks, Steve, and good morning, everyone. We achieved yet another excellent quarter in Q3, both financially and operationally again exceeding the financial commitments we have provided. This consistency in our results is a testament to both the resilient and reliable execution of our teams and the significant transformation of the company itself over the last several years. We have worked diligently to transform the company into an organization that functions at an exceptionally high level with strong operational and financial rigor. While at the same time strengthening our corporate culture and making a positive impact in the communities where we live and work. I'm especially proud that our team has continued to execute at a high level, while many individuals both internally and externally have been extremely busy over the last 90-days working through the necessary steps to ensure that the divestiture of our analytical, food and enterprise services business is accomplished with precision and on time. As it pertains to the planned divestiture, our teams are collaborating well and New Mountain Capital has been a great partner that has been appropriately engaged to ensure a smooth transition. We remain on track to complete the transaction in the first quarter of next year and to then unveil to the public a new corporate name, brand, and identity for the Life Sciences and Diagnostics business. While businesses are always evolving with the culmination of the closing of the divestiture and the rebranding of the remaining business, it will mark the completion of the major portfolio transformation we have undertaken over the last several years. We are very happy with the strength of our balance sheet and we'll look to redeploy the nearly $2 billion of after tax proceeds we will receive from the divestiture through a combination of funding upcoming debt maturities, opportunistic share repurchases and of course continued strategic and value creating M&A. Upon the transaction closing, we will become a more simplified company with over 80% of our revenue recurring in nature and nearly zero exposure to more cyclical end markets such as industrial, applied and environmental. We expect the Life Sciences and Diagnostics business to generate 10% percent organic growth and 30% operating margins following the divestiture with even stronger working capital dynamics consistent with the outlook we provided at the deal announcement last quarter. I appreciate all the effort that is going into completing this transaction by many of our employees, who are demonstrating their tenacity by simultaneously executing flawlessly on day-to-day operations, as evident in our strong third quarter results announced today. As it pertains to our third quarter results, I'm pleased to see the company again exceeded our initial expectations by generating 9% pro forma non-COVID organic revenue growth in the quarter, ahead of our 6% to 8% guidance. While FX was again a greater than anticipated headwind, the business was able to mitigate the impacts leading to pro forma adjusted EPS in the quarter of $1.51, solidly above the $1.40 to $1.45 we were anticipating. Max will provide more details later, but I was glad to see our Life Science business continuing to show outstanding performance by again growing in the double-digits, while the significant headwind from China lockdowns on our diagnostics business was in line with our expectations. This trend leads us to again increase our pro forma a non-COVID organic growth and pro forma adjusted EPS guidance for the full-year. All in all, heading into the end of the year, we are performing at a very high level across our entire business, including those divisions that we intend to divest. I'm looking forward to the first quarter of next year when we expect to begin operating as a more streamlined and focused high growth, high margin business that has leading positions in several attractive end markets. Our new Life Sciences and Diagnostics company will be dedicated to helping close the chasm between research in the lab and entering clinical trials and then from those trials to hopeful cures. I believe that our focus on enabling customers to invent and developing the next groundbreaking therapeutic or to effectively diagnose disease, we can build on the impact we are already having on global health and can meaningfully further improve the quality of life around the world in the years to come. Our increasing contribution to Global Health has always been driven by the new innovations we consistently bring to the market, who meet and anticipate customer needs in an ever changing field of science and health care. This innovative spirit was evident again over the last few months as we introduced a number of exciting new products across the business. In our Diagnostics business, our Oxford Immunotec franchise received FDA approval in late September for its T-cell select reagent kit and related complete workflow. This new workflow significantly increases the use of automation for our clinically superior T-SPOT .TB test for latent tuberculosis, dramatically reducing the amount of manual hands on time required to complete the test. I'm excited to see the impact that this even more competitive offering can have on this business over the coming quarters. As the U.S. market represents more than half of the global IGR and latent TB testing market, one in which Oxford has historically been underpenetrated. In our Life Sciences business, in addition to regularly introducing 100s of new consumables, antibodies and reagent kits each quarter, we recently launched the Celleca PLX system and workflow from our (ph) business. This new system builds upon its existing highest revenue generating line, the nexolon business MX. The Cellica PLX is unique in the industry as it combines image cytometer with cell counting, allowing for scientists working in cell and gene therapy to perform both cell identification and cell viability work all in one instrument. This platform utilizes proprietary consumables that contain antibodies from our BioLegend business, as well as user friendly software, resulting in simplified scientific workflow, while also improving cell integrity. This is made possible due to the less potential cell damage as a result of reduced manual interaction throughout the analysis. Alongside positively contributing to the advancement of global health by leading with science, we also remain very focused on how the specific actions we take can impact our people and our communities. In our latest ESG report, which we published just yesterday, we highlight the significant progress we are making in these areas, from recently signing on to support the UN Global Compact to increasing our commitment to reducing our Scope 1 and 2 emissions by 50% by 2032. We are providing increased transparencies in areas such as our emissions, our diversity and our enhanced government policies. I encourage you to read more in the report and on our new ESG dedicated website, esg.perkinelmer.com. Moreover, it’s encouraging to see several third-party ESG rating agencies recognize our progress by recently, either upgrading or improving our various scores within their respective rating platforms. In closing, before I turn it over to Max, I again want to thank all our employees for their dedication and strong execution over the past few months, which has continued to enable us to perform at a very high level. This strong and consistent execution over not just the last 90-days, but over the last several years, during the time when there has been significant change occurring inside the company and around the world, has been what has allowed us to position both the business we intend to divest and the remaining Life Sciences and Diagnostics business on strong foundations for future success. I'm highly confident in our ability to continue to execute over the coming months as we complete the divestiture and look to redeploy the proceeds in the most value creating way possible. All while achieving the strong financial outlook, which we have outlined. With that, I would like to turn the call over to Max to provide more specifics on our recent performance and an update on our outlook. Max?

Operator:

Thank you. We have our first questions comes from Dan Arias from Stifel. Dan, your line is now open.

Max Krakowiak:

Yes. Hey, Dan. So I think maybe starting with the first question on the gross margin. I would say we are very confident in the ability to be sort of the 60%-plus range coming out of the gate in terms of the remaining business. If you think about the gross margin level we had in the third quarter coming in at the mid-50s, you had to remember too that had the mix of the AES business, which we are divesting, which is dilutive to the overall company mix. And so again, we feel very confident in the 60%-plus gross margin exiting the divestiture. And then on the overall operating margins, the way I would think about the 30% is that is what we will achieve in the first 12-months post deal closure. Obviously, there's a little bit of timing noise with when it will close here in Q1. But in the first 12-months, the 30% is what we are targeting for the overall company.

Prahlad Singh:

Yes. Thanks, Dan. Good morning, again, I think on both of them, as we've talked about the immunodiagnostics business, it is performing well out outside the lockdowns ex-China, but even in China, it is pretty much -- it was in line to the expectations that we had in third quarter as to what it would do. And the assumption that we have made and I think it's declining high-single is what our assumption is for the fourth quarter and we expect it to be in that range. Going into next year, obviously, one is naturally the comp would be much easier for the IDX China business. But overall, just with the NPIs that we have in place coming out of reproductive health, the health of the Applied Genomics business and China coming out of the lockdowns, we feel pretty good about the numbers that we have for diagnostics too.

Derik de Bruin:

Hey, good morning. Thanks for taking my question. Hey, just can you sort of talk about, I was bouncing around a little bit this morning, but can you talk a little bit about just for some of the dynamics, particularly in Europe that you're seeing right now? And also just your generally preliminary thoughts on FX headwinds for next year and interest expense, I know you're paying down some debt, but just some general guidance so we can help trying to itterate those numbers? Thanks.

Derik de Bruin:

Got it. Thank you. And any -- are you still expecting to take -- I mean, what was the price realization in the quarter? And are you still expecting to take price next year?

Derik de Bruin:

No, that was it. Thank you.

Operator:

Thank you. We have our next question comes from Jack Meehan from Nephron Research. Jack, your line is now open.

Prahlad Singh:

So, you know, let me take the win on the broader strategic level, Jack. As you've said, right, you know, we will continue to be diligent on how we deploy capital as it comes through and no. We'll continue to look at the three combination that we've talked about earlier, whether it's being opportunistic on share buybacks, on paying down debt and on the M&A side. Again, on the M&A side, our number one focus is to ensure a smooth close to the transaction that we've announced and ensure the integrations that we have ongoing on the acquisitions that we have made are complete, which to a big degree they are already there. And then look at opportunistic deals that we can do that would fit to any gaps that we might have on our portfolio. So that trend is not going to change and I think we'll continue on that path. Was there a second part, do you mention, Jack?

Prahlad Singh:

Max, go ahead.

Jack Meehan:

Fair. Okay. And then the follow-up, just on BioLegend, by my math based on the M&A contribution in DAS, it looked like it had a nice sequential step up in revenues. So I was wondering if you could just talk about maybe any quarterly dynamics and how that business is performing?

Operator:

Thank you.

Operator:

We have our next question comes from Josh Waldman from Cleveland Research. Josh, your line is now open.

Max Krakowiak:

Yes. So I think speaking maybe overall to the academic and government portfolio that we'll have for the remaining business, it will kind of be a high single-digit percentage of the overall company. And then to answer your second question on how does it impact the 10% for next year? I think, look, there's obviously puts and takes across portfolio, but I think, again, we feel confident in our ability to hit 10% plus organic growth next year and I think that's part of the assumption.

Prahlad Singh:

Yes. Hey, Josh, this is Prahlad. I think the -- you know, the answer to your second part of the question is that the number that we have put out 10% organic growth includes synergies, because all the acquisitions are now pretty much integrated. I gave two examples of synergies that we are already seeing on the technology front in my prepared remarks, the Celleca system that Nexcelom launched has BioLegend antibodies that are attached to it. The other one is if you look at the T-SPOT approval that we got from the automation component that has around it as the liquid handling capability, et cetera, that comes the legacy PerkinElmer applied genomics business. So those are two very near-term examples or real life examples of how the integration is already, it’s not a work in progress anymore, it’s actually in motion and it's being executed as we speak.

Prahlad Singh:

Yes.

Catherine Schulte:

Hey, guys. Thanks for the questions. First, now that the COVID side of your business was moderated, what are you seeing in terms of early signs of your customers shifting that capacity to non-COVID applications? And how do you view what that tailwind could look like for the non-COVID diagnostic side in ‘23 as COVID testing further winds down?

Catherine Schulte:

Okay, got it. And then for China, can you just talk a little bit about what your overall growth expectation is for the fourth quarter? And I know in the past you have not been impacted by any volume based pricing initiatives or tender processes, but anything new you're seeing on that front in China, primarily on the diagnostic side?

Prahlad Singh:

Yes. And to your second question, Catherine, I think we have not yet seen pricing based pressure, but it's not going to be too far. Eventually, it will start showing up. As we've talked earlier, it's more on the routine testing that you have -- that people are seeing pressure on tenders, but I think eventually it will get there. But on the con side to that, I think the lower -- the more mass pricing model will bring more people into testing. So the overall volume growth will hopefully help take care of any impact that we will have from pricing.

Prahlad Singh:

Yes.

Liza Garcia:

Great. Good morning, guys. Thanks so much for taking the question. I guess, first of all, sticking on the topic of China and kind of thinking about made for China -- in China. Can you provide an update on kind of where you sit with the diagnostic business and localization of manufacturing and kind of how that's ramping? I know that you had a facility in Beijing that came on this year?

Liza Garcia:

Great. Super helpful. And then maybe in this -- but I haven't heard any backlog commentary. I would love to kind of just kind of get some if you could just maybe speak to the backlog and kind of the trends you're seeing there and kind of how it gives you some maybe some confidence in 4Q and whether it can give you any early reads into 2023?

Liza Garcia:

Great. Thanks so much guys.

Matt Sykes:

Hey, good morning, guys. Thanks for taking my questions. Maybe just to start on reproductive health, you know, you had high single-digit organic growth in the quarter. Obviously, the birth rate is consistent headwind going forward. But can you maybe talk about some of the trends you're seeing in reproductive health driving that high single-digit organic growth? And then any update on Vanadis in terms of installed base and growth for that instrument?

Matt Sykes:

And then Max maybe just on overall customer inventory levels in Life Sciences? I'm sure shelf life kind of mitigates some of this. Could you maybe talk about any kind of customer level customer inventory levels as you see that you saw in this quarter and moving forward?

Prahlad Singh:

Yes. And also Matt, if you , remember we've talked about this, right? 80% of our revenue is a regular run rate business for RemainCo now. And these are all vials and assays and tests. So it's not that customers are going to keep a whole lot of inventory for those products. So it really does not -- it becomes a moot issue for us going forward.

Prahlad Singh:

Yes.

Vijay Kumar:

Hey, guys. Thanks for taking my question. Congrats on the steady print share. Prahlad, maybe my first one for you, so I've shared all the color on the outlook for the base business, confidence in double-digit organic for fiscal ‘23. But what is the right base in fiscal ‘22, when you think about year-to-date trends in the base business and the implied Q4 guidance? I think we get to $3.3 billion should be back out $600 million of COVID. Is $2.7 billion the right base? Or I think in the past you've spoken about $100 million of sustainable COVID revenues. Is that baked into that $2.7 million? Or maybe just give us some color on what is the right number?

Vijay Kumar:

That's helpful. And then maybe one on margins here at 3Q, I'm assuming 3Q is the right run rate given minimal COVID revenues. We get to RemainCo (ph) margins of 31.4% and I think you noted 30%-plus confidence in fiscal 2023. Is the delta between $30 million and $31 million plus dis synergies?

Vijay Kumar:

Sorry, just to clarify that 31.4% in 3Q for RemainCo LSDX operating margins, that includes trended costs.

Vijay Kumar:

Thank you, guys.

Unidentified Analyst:

Hey, this is (ph) on for Patrick. Maybe just a follow-up on gross margin, it sounds like you expect to continue to have elevated price performance in the fourth quarter of next year. So just curious what you're seeing maybe on the input cost side and anything to flag across the supply chain or logistics there?

Unidentified Analyst:

Got it. That's helpful. And then maybe just a follow-up on China, you mentioned you might be expecting another few quarters of lockdowns there? And then another couple of 100 basis point headwind in the fourth quarter. So 423 in that 10% percent number, are you baking in any assumptions for prolonged markdowns in the year? Thanks.

Operator:

Thank you. We have our final questions from Max Masucci from Cowen & Co. Max, your line is now open.

Prahlad Singh:

Hey, good morning, Max. So yes, the program went live in California for us early October. I would say, look, the injunction doesn't really impact our existing business there and things could always change, but we are just in the process of currently starting to ramp up. And in terms of the impact, as we've talked about, the way to look at it is to measure the performance of our overall reproductive health business, of which Vanadis and prenatal is a part of. And we expect that to continue to show a healthy growth trend. So doing well, but it's just in its early stages of ramp up, I guess. It's the way I would think of.

Prahlad Singh:

Yes, Max. We’ll continue to sell both obviously the MX and the PLX. I think the MX is a significant upgrade to the PLX is a significant upgrade to the MX product, which is out there. As I mentioned earlier, the benefit of it is it does both be cytometry and cell counting while maintaining the viability of the cells and it also allows us the opportunity to attach BioLegend antibodies to it along with the software that goes with it. In terms of how many units and how many numbers of you know MX or PLX are there? I really don't have, you know, exact number that I can share with you. And then I think the way I would measure is continue to look at the performance of our overall Life Sciences business rather than a particular product. Nexcelom is being a great acquisition, it’s probably been one of our biggest success stories and how smoothly the integration has gone. And the way the teams have worked across in terms of combining it with the total workflow that we present to our customers, it's been a home run for us.

Prahlad Singh:

Yes, Max. Thank you.

Rachel Vatnsdal:

Perfect. Thanks for squeezing me in. So just first off, on Oxford Immunotec, great to hear that you guys got the FDA approval of T-Cell Select. So can you just talk about if that was really in line with your expectations for timing? And then how much material could that approval be?

Rachel Vatnsdal:

Great. And then just a follow-up on some of the earlier questions about capital deployment, you guys have said that M&A is going to be one of the main priorities post-divestiture. So can you just spend a minute talking about how private valuations have been in that M&A market? And then on leverage, just what type of leverage would you guys stretch to on RemainCo, post-divestiture onto the that many deals that you plan to deal? Thanks.

Operator:

Thank you. We have no more further questions on the line. I will now hand back to Steve Willoughby for closing remarks.

Operator:

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

Operator:

Good morning. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Perkin Elmer second quarter 2022 earnings conference call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After our speaker's remarks, there will be a question and answer session. . Thank you. And I will now turn the conference over to Steve Willoughby, vice president of investor relations. Mr. Willoughby, you may begin your conference.

Prahlad Singh:

Thanks, Steve. And good morning, everyone. Clearly, we have a lot to cover today and I thank you for taking the time to adjust your schedules and join us to discuss our exciting news. Today marks one of the most significant developments in the 80-plus year history of Perkin Elmer. As you know, we have been executing a significant portfolio transformation over the last few years. Today, we've announced a pivotal agreement that accelerates this work and establishes us as a leading pure play, high growth, high margin, life sciences and diagnostics company with scale. in particular, we have reached a definitive agreement whereby we intend to divest our analytical food and enterprise service businesses to New Mountain Capital. We will become a company that has greater focus, less complexity, and extremely high recurring revenue mix, improved profitability and faster growth. At the same time with New Mountain Capital, the analytical and enterprise solutions business will receive increased focus and dedicated investment, which should accelerate its ability to reach its full potential. In addition to creating significant shareholder value, we believe this transaction will lead to superior service and outcomes for customers and increased opportunity for employees. More on this exciting transformation in a minute. As Jamie will touch on in more detail in the moment, we also announced earnings this morning. We had an outstanding quarter in Q2, which meaningfully exceeded our guidance on both the top and bottom line, despite various continuing macro pressures. This excellent operating and financial performance is a Testament to our employees resilience and the portfolio shift that we have been pursuing over the past few years. I'm also pleased to share with you that we are raising our full year revenue, organic growth and EPS guidance by a level above and beyond our performance here in the second quarter. While various pressures will likely always exist, the increase to our guidance highlights our confidence in our business and our ability to execute in the face of unanticipated challenges. Now looking at slide 2 off the transaction related slide deck, with this agreement, we intend to divest our analytical food and enterprise businesses, including one source to New Mountain Capital for a total consideration of $2.45 billion. This includes $2.3 billion in cash upon closing and $150 million of future contingent consideration. We expect to receive approximately $1.9 billion of net after tax proceeds when the deal closes in Q1 of 2023. This transaction will result in the remaining life sciences and diagnostics business, having a unique financial profile that is high growth, high margin, is less cyclical, all while retaining significant scale. It also further increases our flexibility and allows us to solely focus on these attractive end markets. The new business that will be owned by New Mountain Capital will consist of almost 6,000 current employees, and is expected to generate approximately $1.3 billion in revenue this year. I'm confident that a focused vision and growth plan will enable this business to flourish in the years to come by building upon its existing competitive advantages and reestablishing leadership positions in some. As part of this transaction, we intend to transfer Perkin Elmer brand name logo and other marketing elements to the new owner, which we expect will be an important asset, given the long history and strong reputation in these markets in particular. Prior to closing, which we expect to occur in the first quarter of 2023, we expect to introduce a new brand name and stock ticker for the life sciences and diagnostics business. Until closing, both businesses will continue to operate as they currently do under the Perkin Elmer name and the existing enterprise will continue to trade under the PKI ticker. Now moving to the life sciences and diagnostics business on slide 3, which are existing senior management team and myself will continue to lead. I could not be more excited, not only for how we have gotten here, but also for the significant potential of what we expect to achieve. Upon the closing of this transaction, we will become a leading edge science first company fixated on driving new innovations for our customers from a best-in-class preclinical discovery franchise with significant breadth and expertise crossing over to our leading diagnostic franchises that are developing next generation innovations to help diagnose the world's still unmet medical needs. As you see on slide 3, it has been quite the evolution of our portfolio over just the last 4 years. Through intentional internal investments and strategic value creating acquisitions, including our BioLegend acquisition last year, we took important steps to shift the profile of the company over just the last 3 years. The company has gone from generating only 60% of its revenue from our target markets to upon the closing of the sale of our applied food and enterprise services businesses, having a portfolio that is singularly focused on these highly attractive, less cyclical end markets, outstanding margins and a highly that current revenue mix. We expect an approximately 500 basis point uplift in gross margins once this transaction is complete, putting us over the 60% range going forward. This transformation redefines the financial profile of the company and results in even greater opportunities for investment that will meaningfully improve how we serve our customers and bring new innovations to the market. We expect the focus we achieve as a pure play will allow for even greater strategic operational decision making and a unified commercial approach to deliver for our customers even better than we already are doing. Additionally, we will be able to align our internal and external investment priorities more closely to further capitalize on the strong market growth potential that we expect in the years to come. We couldn't be more excited about the potential of this new, more efficient structure and the impact it will have on our ability to innovate and execute to an even stronger degree than we already are doing. So now, moving to slide 4. As you see here, the new life sciences and diagnostics company will have its revenue fairly evenly split between the 2 segments with each having significant addressable markets. It'll also be balanced and diverse across geographies with approximately 45% of non-COVID revenues coming in the Americas, 25% coming from greater Europe, and approximately 30% coming from Asia, of which approximately 18% is in China. As we've been increasingly highlighting to you over the past 2 years, our life sciences franchise is acutely focused on preclinical research and discovery solutions, which help our customers develop new scientific breakthroughs. This business has grown significantly over the last several years, both through low double digit organic growth on average over the last 3 years and via meaningful inorganic additions. Today, we are able to offer both a small molecule and increasingly our large molecule focused customers, more complete preclinical discovery workflows, which we are rapidly building upon, as we continue to bring new innovations to the market. Our diagnostics franchise has also undergone a significant transformation over the last few years and has now nearly tripled in size as compared to 2015 on a non-COVID basis. Diagnostics is focused on delivering highly sensitive, easy-to-use assays that targets specific disease states, where we have a strong competitive position in markets with favorable underlying demand trends. A diagnostics business now has the size and capabilities to act as a platform to propel future additions we may add over time, allowing them to perform at an even higher level than what they are able to do on their own. 2 recent examples of this are our entry into the latent tuberculosis market and are beginning to offer a broad menu of chemiluminescent assays and related analyzers. Put simply, our more focused new company is built to help close the chasm between research and the clinic, all the way through to diagnosis and treatment. Now, moving to slide 5, let me provide a few additional specifics about what a life science business is, what we are focused on today, and at a high level where we see it going in the future? Today, life sciences is a greater than $1.3 billion franchise growing in the low double digits organically. Approximately, 80% of this business is recurring in nature with the remainder being instrumentation. I note the $0.4 billion of instrumentation revenue shown on the slide does include related service revenue. This cohesive business segment is focused on rapidly introducing new innovations that are intended to help our customers expedite their own preclinical development and scientific discovery. Our leadership positions in reagents, consumables, instruments, and software provide complete workflow solutions, which enables our customers to make informed decisions more quickly by replicating a clinical experience in a pre-clinical setting. This ultimately helps lower our R&D costs by shortening development times and driving higher success rates downstream. We do this with market leading positions across our entire life sciences business, such as preclinical imaging and detection, cellular analysis, biomarker kits, single cell and flow cytometry reagents, and cloud based lab informatics. We bring this broad and rapidly expanding consumable portfolio together with our market leading instrumentation to help drive discovery across the spectrum of science with a strong focus in the areas of cell and gene therapy and single cell analysis in particular. This business is at the forefront of new scientific discoveries that can have a profound impact on the medicines and therapies that are ultimately brought to market, which can help treat and save lives around the world. Moving to slide 6, our diagnostics portfolio is comprised of leading franchises in specific markets that we believe have outsized growth potential, where we can have strong and durable competitive positions and drive an expected overall high single digit growth rate going forward. As mentioned earlier, this business has expanded significantly over the past few years, going from being singularly focused on reproductive health to one that now spans a number of important clinical diagnostic categories with number one or 2 market positions in areas such as autoimmune diseases, latent tuberculosis, allergy, and a variety of infectious diseases. We also now have a much stronger position in next generation sequencing, sample prep instruments and related consumables in our applied genomics business. Our applied genomics franchise has seen its install base of equipment increase materially over the last 2 years during the period. With our new streamline structure and increased focus within the company, combined with our stronger market positioning over the last few years, applied genomics is well positioned to bridge our life sciences and clinical diagnostics franchises to help drive new innovation and growth across the company, including the support of select areas in the clinical development of therapeutics. As you can see, our immunodiagnostics franchise represent the largest piece of our overall diagnostics business with an estimated $1.1 billion in revenue this year with our reproductive health businesses representing roughly half a billion in annual revenue and our applied genomics business expected to be around $400 million in revenue this year, which is up significantly from before the pandemic. And now on slide 7, our transformed company will have tremendous benefits for all our stakeholders. For our customers it'll mean that we can now better and more quickly respond to their unmet needs by using a scale to drive scientific collaboration across our organization, leading to novel solutions and offerings. We will have the flexibility to respond to our customers in the most efficient manner possible walking side by side with them to develop new scientific breakthroughs in drug discovery, translational medicine, and disease detection. For the employees, the transformation will result in increased managerial focus that is properly aligned to drive growth and achieve our respective goals. We will also be able to deploy our internal and external investments in a more focused way. By doing so, the even stronger financial profile of the new life sciences and diagnostics business will lead to new opportunities for internal collaboration, new growth accelerators, and a greater ability to develop our people. I think this combination sets up the future for our employees extremely well and will further enhance our ability to attract and retain excellent talent. Now moving to slide 8, the company we create as a result of this transaction is well positioned to deliver outstanding sustainable value creation for shareholders. It'll have a meaningfully improved financial profile that is just extraordinary. In addition to higher top line growth and a highly recurring revenue mix, we will have gross margins that are expected to be up approximately 500 basis points from previous levels, leading to best-in-class operating margins, with the ability to expand operating margins in the future at an even faster rate than we have been projecting historically. We will also be a standout company as a result of our scale. To have as attractive of a financial profile as we will have with more than $3 billion of annual revenue makes for a combination that is extremely rare having both significant size and high performance. We expect to be able to grow EPS in the low to mid teens and have additional upside from our track record of successful capital deployment. This transformation into a pure play life sciences and diagnostics company takes us into a whole new spectrum from a financial perspective. Additionally, with the $1.9 billion of net proceeds we will receive and our recent aggressive de-leveraging, it makes our already well managed balance sheet that much more robust providing us the ability to continue to rapidly invest on our areas of focus and positions us well to begin appropriately deploying capital meaningfully sooner than we have previously anticipated. Trning to slide 9, let's talk about the valuation of the remaining life sciences and diagnostics portfolio. Following the transaction, our company will have a compelling revenue growth rate in the double digits, largely in line with our new higher value peers. We'll have stronger margins and differentiated scale with total revenues that well exceed the average of our peers. We currently trade at a one term discount to the core tools, peer group, despite of similar financial profile. Post close, we will have a best-in-class financial profile that deserves the higher multiple to reflect it. Moving to slide 10. Overall, I believe this transformation will have tremendous benefits for our new standalone businesses, our shareholders, our people and our customers. Upon closing, we will become a company focused on serving extremely attractive markets with first class financial outlook for our customers. The output of today's announcement is the culmination of all the effort, determination and excellence that all our employees have shown over the past several years. And I could not be more excited for everyone involved. Finally, I'm pleased to welcome Dr. Michelle McMurray-Heath to our board of directors. A medical doctor, and molecular immunologist by training, Michelle's experience and expertise across a broad spectrum of public and private roles, including currently leading Bio, the world's largest biotech association will bring a very unique perspective to our company, which will be invaluable as we enter this next stage in our corporate journey. With that, I will now turn the call over to Jamie to walk you through our current financial performance in more detail and provide specifics as it relates to our outlook and updated guidance. Jamie.

Operator:

. And we will take our first question from Dan Arias with Steve. Your line is open.

Prahlad Singh:

Sure, Dan. There are two ways to look at it. One, as you've seen EuroImmun, they're historically grown in the low double digits, and they've pretty much beaten the deal model since we've acquired that. We do not see that stopping in the future. Obviously, because of the COVID situation in China, it has had some issues in the current quarter, but overall that growth trajectory, if you take China out, that continues to be there. So similarly, just as diagnostics has grown, it will continue to grow in the high single digits. And overall for the new company, you should expect this to be growing double digits in the future.

Prahlad Singh:

I think the way I would answer that question, Dan, is just go back and look at our past 2, 3 years M&A track record. We've done more than 10 deals over the last 24 months and that should be a proof point of what our strategies around M&A and it'll continue now. Again, just to remind and as you very well know, the kinds of deals that we do are very focused and very strategic, which tend to be founder owned company. So I think that's where our continued focus will be. And in our base plan, you should expect us to continue to be acquisitive. But more importantly, Dan, I think what this does, it gives us an opportunity to deploy capital and makes our balance sheet much more robust to do that.

Derik De Bruin:

A couple of points. So I guess what's the implied EBITDA margin in the RemainCo?

Derik De Bruin:

Great. That's what I was looking for. And just on the current quarter, what was the overall headwind on China that you saw in 2 Q and sort of like what's the embedded headwind since the lockdowns were lasting longer in the 22 guide?

Derik De Bruin:

And are you embedding anything into the guide for potential recessionary headwinds and purchasing delays? Have you seen anything to suggest that your customers have had some hesitation in buying particularly on the DAS side of the business?

Prahlad Singh:

And also as we look at the future, the new company allows us to avoid some of this macro uncertainty.

Vijay Kumar:

And congratulations on the transactions here. Had 2 margin related questions. Jamie, maybe, the first one for you. The EPS bid in the quarter was very healthy. Gas margins came in well above and I look at the guidance. Revenues, maybe up 50 basis points at the midpoint, EPS up almost 8%. Your COVID revenues really didn't change a whole lot. Below the line seems fairly consistent. I'm wondering what the Delta is. Did anything change on the accounting front here that would explain the magnitude of the EPS raise?

Vijay Kumar:

And just sorry to clarify that, Jamie. There was no- I guess the question I got was how is the legacy divested assets being treated from an accounting perspective? Is this being held for sale accounting?

Vijay Kumar:

Understood that's helpful. And Prahlad, one for you. I think the prior operating margin target of 26%, I think the deck had 30% operating margins. If I assume the base LSDX at 30% for fiscal 23, just one, is that 30% for 23 or 24? And then if I assume double rate margins for the divested business, I'm getting to something like 25%. So is that prior 26% target still relevant or perhaps that's changed given some of the strand costs here?

James Mock:

And 30% next year, it's, as Prahlad mentioned, 2023 number. And Vijay, we wanted to get some modeling guide out there and yes, it does have stranded costs. And as I mentioned in my earlier remarks, it's difficult to ascertain what that total amount is yet. We feel very comfortable with at least 30%, it's not really coming off the overall 26% that you're talking about, but it is a different size company and there will be stranded costs that we will have to work through both in 2023, probably a little bit less in 2024 and by 2025, I would assume we're back to normal, but absent that, the 26% is still fully in intact here.

Catherine Schulte:

I guess first for the new life sciences segment. Can you just talk through the end market mix post divestiture? And then maybe give us an update on BioLegend performance in the quarter?

Prahlad Singh:

The trends, Catherine, for these businesses- the bigger question really what we were looking for, to the Derik's earlier question, it is not a cyclical business from a research, discovery, and preclinical perspective. It allows us to largely avoid the macro uncertainty and given our focus typically on large pharma and biotech, it insulates the business from those uncertainties.

James Mock:

Well, let me talk about it as overall framework first, and then we can talk about NewCo. So in general, we feel as positive about how the company is operating as we ever have. So as you know, Catherine, we said we'd hit high single digit organic growth next year, absent some large economic condition change that we still feel excellent about that. We said 26%, which is what I talked about on Vijay's, operating margin, that is, which is what I answered with Vijay. We still feel great about that. I'd say the only wild card is foreign exchange and it has been severe. So maybe that has a minor impact on the overall year. But overall I think the way the team is operating is terrific, and we wouldn't change any of that guidance overall. In terms of RemainCo that's maybe, I'm wanting to make sure I understand the question. So what we're really trying to put out some markers here that says, hey, look, RemainCo should be growing 10% plus, and this year, let's say RemainCo is $3.3 billion we put on the chart, you know, take out $600 million of COVID revenue, grow that 10%, then add a $100 million dollars back for COVID durability. That should give you some modeling numbers here. Feel great that at a minimum, including a lot of stranded cost, that we should be at least 30% operating profit. And so we feel great about that financial profile and over the next 2 years is that stranded cost comes out. We see no reason why this business shouldn't be in the mid thirties from an operating profit perspective. It'll take a couple years to work through that, but I think it has a terrific financial profile ahead of it.

Joshua Waldman:

First, just to clarifying question on the divestiture. Are you selling the entire analytical instrument business, including, for example, like LCMS that touches life science and DX?

Joshua Waldman:

Got it. And then a follow-up on Dan's question, I guess. Where do you think that divestiture leaves gaps in the portfolio that you'll target within organic investments? Or I guess, asked another way, where do you think the most opportunity from an M&A standpoint exists within the new company?

Joshua Waldman:

Okay. And then lastly on, I guess, existing deals that you've done. Can you talk to the performance on recent deals? I know you reiterated the 7% M&A impact, but curious how other recent acquisitions that are now in the organic comp are performing versus expectations, then maybe how those acquisitions are contributing to the organic outlook and margin outlook for 22 and 23?

James Mock:

I would just add, I think on a pro forma basis, Josh, this entire year, the basket of acquisitions you're talking about would grow mid teens, which is terrific and in line with what we're talking about here. So as you look to 2023, obviously that does help with the stepup in the RemainCo company here, the life sciences and diagnostics company moving forward since all of these assets are in there. That's why they are a major contributor to this business with us having confidence that they can grow with over 10% here.

Liza Garcia:

Congratulations on the transaction. I'm not sure if I caught it, but just wondering if you guys could maybe touch on- I know it's kind of a little bit less for you guys, but pricing and kind of what you saw and your expectations kind of for the balance of the year for you guys.

Liza Garcia:

Great. And if you could just touch a little bit on kind of what you're seeing in supply chain as well. I know obviously it kind of hasn't impacted you guys, but if you're seeing any changes there and kind of your expectations through the year on that, that would be great as well.

Operator:

And we will take our next question from Jack Meehan with Nepron Research.

Prahlad Singh:

Yes, Jack, I mean it's a good question. From our perspective, when we look at where we are today, this is probably the best path for most value creation for both companies. We see some overlap on the enterprise side, as you said, but there is not much overlap from product that goes from life sciences or a diagnostics business through one source or through that channel. That, as you know, is mostly service focused. But what it does now is it allows us to singularly put more focus around the market trends in life sciences and diagnostics. And honestly it gives a lot of simplicity and reduces the complexity, both for our employees and investors in how they look at the company.

Jack Meehan:

Great. And then two clarifications for Jamie. Just first, what's your updated target for BioLegend in 2022? And then can you break down the $222 million of COVID sales between the service lab and everything else? That would be helpful.

Operator:

And we'll take our final question from Paul Knight with KeyBanc.

Prahlad Singh:

Thanks, Paul. I think the way to think of it, as Jamie mentioned earlier and during the Q and A session, things are improving, but it's not really totally back to, I would say, a hundred percent normal. So we've started seeing people coming out, going to see their physicians, going to hospitals for testing. The newborn screening side has come back. I would say that's the piece that has come back. It's more around the autoimmune and allergy. There are still some sporadic shutdowns that you see. And even where things have opened up, people are still hesitant to go to physicians or to hospital for those testings. And I think that'll gradually come back over the next several weeks or months.

James Mock:

$50 million in the third quarter. And then we get to our kind of normal, we've always said $100 million COVID durable revenue. So the implied 4 Q guidance is about $25 million.

Stephen Willoughby:

Thank you, Abby. And thank you everyone this morning on short notice. We appreciate your questions. We look forward to speaking with you all again next quarter. Have a good day.

Disclaimer*:

This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.:

Stephen Willoughby:

01:44 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. 02:02 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. 02:24 I will now turn it over to our President and Chief Executive Officer, Prahlad Singh. Prahlad?

Jamey Mock:

14:04 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. 14:36 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. 15:06 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 a good free cash flow generation totaling $254 million in the quarter. 15:41 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. 16:02 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. 16:36 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. 16:56 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. 17:10 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. 17:40 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. 18:05 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. 18:27 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. 19:00 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. 19:21 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 1Q, 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 68% even with the number of various uncertainties that exist in the world today. 19:57 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. 20:27 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. 20:54 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. 21:35 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. 22:16 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. 22:30 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. 22:53 With that, operator, at this time we would like to open up the call to questions.

Vijay Kumar:

23:34 Hey, guys. Congrats on Q1, and thanks for taking my question. Jamey or Prahlad, maybe one on the guidance here, a lot of inbounds here on -- with the base guidance change. I guess the question I'm getting is you guys said 11% on base and the annual of 68% was unchanged, right? So I guess the implied 2Q to 4Q organic is perhaps coming in a little bit lower versus prior guide. 24:05 So the question is, was there any pull-forward of revenues into Q1 in the base of 11%? What is the guidance here I mean for China lockdown impacts in 2Q, and I'm assuming given it's diagnostics, those are lost revenues, right? So maybe talk about the base business and what is perhaps some impact from China.

Prahlad Singh:

25:51 Yes. And, Vijay, just to add to that also. Just in keep in mind that despite all the lockdowns, our facility in Shanghai, or in Suzhou, has not fully closed. We've been working with authorities to continue to manufacture and ship product out of there. So as Jamey mentioned, the impact has not been on reproductive health. It has obviously been on immunodiagnostics, but we think that will come back. But I think more importantly, let's keep in mind that for us, the company's portfolio is very different today. Again, going back to as I said in my remarks, 80% is life sciences and diagnostics. And life sciences there continues to do well, which is now two-thirds of DAS revenue. 26:31 So overall, I think China will come back, assuming -- our assumption is that at the end of May, the lockdowns will open up and I think we should be okay. But it's just being prudent, and this is no different than what we have done in the previous quarters.

Prahlad Singh:

27:31 Yes, I think the way, Vijay, I would answer is that our confidence in what we've done and the hard work that -- and the time that we've put over the past several quarters in the transformation of the portfolio has not changed at all. So while obviously the market environment is changing, but here's what I would say, could not be more bullish on the company's outlook. A ton of work has gone into transforming our portfolio. I mean, just look at what we've done with life sciences. We will have a $700 million-plus of just reagent business which will be growing in the low to mid-teens. So the way I would answer the question is that I think we are very well positioned to deal with whatever market conditions are thrown our way and have shown our ability to execute over the past couple of years, and nothing changes from that perspective.

Prahlad Singh:

28:35 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.

Prahlad Singh:

28:50 Thank you.

Mike Ryskin:

29:06 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?

Mike Ryskin:

30:41 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?

Mike Ryskin:

32:40 Okay, thank you.

Operator:

32:45 Thank you, Derik. Our next question comes from Dan Arias with Stifel. Dan, your line is now open.

Jamey Mock:

33:33 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.

Prahlad Singh:

34:39 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 bot 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 bought 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 happier with the way that NPI is progressing and that it's going as per our plan, if not better, I would say.

Prahlad Singh:

35:49 Yes.

Operator:

35:54 Thank you, Dan. Our next question comes from Josh Waldman with Cleveland Research. Josh, your line is now open.

Jamey Mock:

36:31 No, no change versus initial plan. I think we've always been metering our investments to do organic growth, as well as the COVID side of our business. So as COVID winds down, we'll have to wind down some of our increased investments. But that was always the plan, so I would say no change in our overall approach here. 36:48 So I think we've mentioned in the past, Josh, about it and to the earlier question around the $7, 26% operating profit by 2023. I think right now, as Prahlad said, for the most part there's a lot of -- yes, I would say the environment is involving, but -- or evolving and we still think that we will continue to do well. So we have a lot of productivity programs, we assume that the growth will still be there as the mix of our business has changed. I think something that is underappreciated is the $700 million life sciences reagents business that we have, that has been growing low-teens and comps at a very high profitability. 37:24 So we feel confident exiting the year, to Vijay's question earlier, in terms of the margin rate. And I think at the end of the year by the fourth quarter, we're probably going to be at that adjusted operating margin for next year. Now that comes on the highest core quarter, but overall I think it speaks to the fact that we can get there for next year.

Jamey Mock:

38:10 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. 38:38 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.

Operator:

39:22 Thank you, Josh. Our next question comes from Catherine Schulte with Baird. Catherine, your line is now open.

Jamey Mock:

39:55 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 was a lot of shipping issues at the end of the quarter, as well as some of the delays in the logistics of our business. 40:28 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 with that -- 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. 41:22 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.

Jamey Mock:

42:02 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.

Jamey Mock:

42:44 Thank you.

Jack Meehan:

43:00 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?

Jack Meehan:

45:13 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?

Jack Meehan:

46:32 Thanks, Jamey.

Operator:

46:37 Thank you, Jack. Our next question comes from Brandon Couillard with Jefferies. Brandon, your line is now open.

Jamey Mock:

47:02 Hey, Brandon. Yes, so yes, maybe I'll start with the second part. So we are actively and aggressively delevering. The term loan was $500 million at the outset of the year, we paid down $100 million in the first quarter. I think we should be able to get that off the balance sheet by end of July/August timeframe here. We certainly have the cash across the globe, you're very familiar with our balance sheet, so you can see that we have a substantial amount of cash. Making it -- dividending it back to the U.S. in a tax-efficient way is what we are focused on. So it takes a little bit of time to repatriating it. But just the general free cash flow that we're also kicking off, we kicked off $250 million in the quarter. So therefore, we can use $100 million to paydown the term loan. So anyways, I think it will be done relatively soon. 47:44 In terms of free cash flow, you know this better than most people, 83% free cash flow conversion in the first quarter is one of the best quarters we've had in a long history. So if you go back to the pre-COVID days, we were sometimes in the negative range. And so we've focused a lot on free cash flow conversion. We've always said -- we said we'd be above 85% or 85% to 90% in the past. BioLegend only helps that, and I would say there is nothing really to come off that. The only thing that will impact free cash flow is this deferred revenue and the fact that it won't -- it is mostly -- it's all non-cash. So instead of 85% to 90%, I would think 80% to 85% for the year and we still feel very confident in achieving that.

Jamey Mock:

48:39 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.

Operator:

49:21 Thank you, Brandon. Our next question comes from Rachel Vatnsdal with JPMorgan. Rachel, your line is now open.

Jamey Mock:

49:54 Yes. Thanks, Rachel. So yes, we in the past have historically said -- what we've said is we've seen about 50 basis points to 100 basis points in the year, and we've said that we think that might be able to double. And as you might remember in the first quarter, we saw kind of the average rate, maybe a little bit above that, because we knew we were working off a substantial backlog from the fourth quarter. As we look at the order book that will -- that transpired and what was taken in the first quarter, which will start flowing through in the second quarter, there is a substantial amount -- a significant amount more of price in the second quarter. And we think that will continue to increase throughout the year. 50:31 So it takes a little time to get through to customers to understand, then get it through the entire salesforce. But I think what might have been 50 to 75 increase is probably 50 basis points every single quarter. So that by the end of the year, we might be in the kind of 100 to 200 range, or 150 to 200 range, and feel very good about how the team is responding.

Jamey Mock:

51:12 Yes, I think it's -- Rachel, similar to my response on China, it's just kind of the new norm. It hasn't gotten better, it hasn't gotten worse. So the 300 to 400 basis points to the fourth quarter probably is a similar number than we experienced in the first quarter, so it didn't get any better, it didn't get any worse. As we head into the second quarter, I don't think supply chain gets better -- or gets worse. We did say China is down a little bit. But overall, I think we're kind of living in the new norm and I think the team is navigating it well. And so therefore, it's not really worth calling out because it's kind of been there for at least two quarters now, and we believe will continue to remain for the rest of the year.

Paul Knight:

52:16 Thanks. Jamey, I didn't quite catch the color on California. That was $125 million or $100 million?

Paul Knight:

53:23 Got it, okay. And that's how you get to that $0.35 of contribution in Q2?

Paul Knight:

53:51 Great, and then overall tax for the year?

Paul Knight:

53:57 Okay, thank you.

Operator:

54:08 Of course. Our next question comes from Patrick Donnelly with Citi. Patrick, your line is now open.

Jamey Mock:

54:47 Yes. You're in the ballpark there, Patrick. So again, we believe the team did an outstanding job executing in the first quarter and continues to execute well in a turbulent environment. To give you the bridge, yes, we beat the first quarter -- I'll take the high end. We took -- the high end, we beat by $0.31. You've got the extra $0.35 for California, which I just described. So we're basically not flowing through $0.20. That's primarily three things. For the most part, it's foreign exchange, I think you've heard that with all of our peers as well. And then the inflation and freight environment is a little bit tricky right now, so we put in a little of extra costs. I think as I mentioned, pricing is going well, the team continues to execute. We're doing a lot to offset increased freight cost in terms of different routes, different providers, different packaging, frankly. 55:38 But I think right now, it's early. There is a lot of macroeconomic uncertainty out there, Patrick. So we felt like we wanted to flow through $0.10 on the high end because we wanted to increase the guidance by something that we are very confident as always in at least meeting if not beating.

Jamey Mock:

56:21 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. 56:58 And I think that's where all these investments in terms of BioLegend, Nexcelom, Horizon, et cetera, have really change 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. 57:19 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.

Patrick Donnelly:

58:17 Great. Thanks, Prahlad and --

Operator:

58:26 Of course. Our next question comes from Matt Sykes with Goldman Sachs. Matt, your line is now open.

Prahlad Singh:

59:16 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 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. 60:01 But I think again going back to what I've been mention -- 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.

Prahlad Singh:

60:40 Yes.

Stephen Willoughby:

60:52 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.

Operator:

Good evening and thank you for attending today's PerkinElmer Fourth Quarter 2021 Earnings Call. My name is Bethany, 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. I would now like to pass the conference over to our host, Steve Willoughby, Vice President of Investor Relations. Please go ahead.

Prahlad Singh:

Thank you, Steve. At this time of the new year, I think it's always a great time to reflect on the past. When I look back on the last three years at PerkinElmer, I see a significant transformation that has taken place, likely the most in the company's 85-year history in such a short period of time. From the changes we made and programs we implemented in 2019 around refocusing our commercial and operating teams, to the output from those changes really shining through in 2020 as the company was able to quickly and aggressively react to the challenges and opportunities presented by the pandemic. I think that the PerkinElmer of 5 or 10 years ago would not have been able to respond in such an agile or innovative way as it does today by leveraging our collective know-how and efforts around the globe. When I turn to reflect on 2021, I think it is clearly the year of portfolio transformation, especially within the life sciences business. As part of this transformation, including the addition of nine businesses over the last year, we are now keenly focused on successfully welcoming more than 2,000 new colleagues to the company and capitalizing on both the commercial and scientific opportunities of the combined company. Our integration transformation office, which was established 18 months ago, has been hard at work ensuring synergies are realized both today and in the coming years. I was very excited, for example, to see all the teamwork that went into the planning and execution of a company-wide innovation summit we held in mid-November at BioLegend's San Diego campus. Scientists, executives and other business leaders from across the company all came together for several days to lay the current work for the scientific collaborations, which we look to realize across our businesses, as well as build upon the commercial opportunities that can be successfully achieved by working together. So while the external world has recognized a few prominent transformational events, we are also making great progress on our strategic imperatives. 2022 is shaping up to be another strong year of internal innovation for the company with a number of exciting new product launches planned for over the coming months that I expect to meaningfully impact our business moving ahead. One example is EUROIMMUN's Accentis platform, which is a high throughput random access chemiluminescent's platform targeted towards high-volume laboratories, which will be supported by a strong menu of assays as we move into 2023. With this analytical, we are continuing our commitment to drive innovation as we refresh its portfolio with recent launches such as the NexION 5000 ICP-MS and the Spectrum Three FT-IR, both of which have been very well received. This year the focus is on chromatography. In addition to having just refreshed our LC and CDS, we expect to launch a new GC around midyear. It will be our first update to the platform in over a decade and I'm excited to see its increased performance, enhanced user experience and robustness provide meaningful and unique advantages to our customers. Finally, although not necessarily a new introduction, I'm enthusiastic around the potential for our Vanadis platform, particularly in the U.S. market as we expect system placements to continue to ramp up in 2022 and commercial test volumes on the system to more than double. All in all, we've been very active over the past 12 months adding new pieces to the company. But I think it's just as important to highlight our internal innovations, which drove a 15% increase in the number of new product introductions in 2021 and should help drive our organic growth in the years to come. Just as importantly, we believe a true differentiator for PerkinElmer is that we are now bringing significant value by offering a holistic suite of solutions across our portfolio to help customers solve their most critical challenges. We are empowering entire end-to-end workflows, that are helping diagnostic customers reach a wider spectrum of patients in the identification of diseases, improving the pharma discovery workflow or offering a differentiated solution for cell and gene therapy discovery and development. As the company has grown, I'm proud that we continued to have a keen focus on our people and their development, while building a company culture that values one and other diverse backgrounds and perspectives, including the wealth of expertise and talent from all our new PerkinElmer colleagues. From implementing new training and leadership programs, to getting a pulse on our employee satisfaction through a recent employee engagement survey, to sharing in our recent collective success through an incremental company-wide end-of-the-year bonus for the second consecutive year. I'm happy to see our strong focus on our employees and the great performance they have delivered over the last several years. So, while I know this has been a challenge in the last two years, I just want to say thank you to all our employees around the globe for helping turn PerkinElmer into such a great place to work, while executing at an extremely high level. In addition to our people, the customer experience, innovation and operational excellence comprise this year's strategic priorities that we have laid out for the company. In terms of the customer experience, we are all committed to serving customers when, where and how they need us. We couldn't have witnessed a better example of this during the pandemic as customers' requirements fundamentally shifted and require new ways of working, innovating and connecting, not only for our COVID-related customers, but also for those across all our market segments. When it comes to innovation, we are viewing it from a different lens than perhaps just a few years ago. The beauty of having these additions to the PerkinElmer family means that we can create new leading innovations. We are in the best position yet to bring together cutting-edge science in the emerging needs of our customers. And we do believe that any employee, no matter their role, can and should initiate and advance customer-driven ideas. Last but not least, many of you are familiar with the goals we have been driving around operational excellence, which encompasses delivering best-in-class product quality, continuously improving processes, as well as ensuring seamless and effective execution on our integration priorities. While Jamey will cover our financials in more detail, as you saw a few weeks ago in our pre-release, our fourth quarter results were again strong and above our initial expectations, despite facing several hundred basis points of supply chain and other headwinds that came in above and beyond what we had anticipated at the start of the quarter. I'm very proud to see how our team is reacting to these challenges and working to overcome them, while also handling the increasingly strong incoming demand from our customers, which has led to record high backlogs entering 2022 up significantly from a year ago. This strong performance in 4Q led to our full 2021 non-COVID organic growth coming in at 16%, which was above our previous guidance and more than double the initial 5% to 7% range we projected at the beginning of the year. And as I previously mentioned, this is all with us entering 2022 on a solid footing with very strong backlogs. So, I'm also pleased to share our initial outlook for 2022, which despite some headwinds likely continuing at least for the time being, is a testament to the company's transformation over the past several years. Furthermore, I believe our performance and expectations moving ahead are proof that we are now able to overcome various cyclical pressures and still deliver on our commitments in a way I'm not sure the company was able to consistently do in the past. Jamey will give you more details. But for 2022, we are working towards delivering upon our goals for 2023 that we highlighted at the recent J.P. Morgan conference. As part of this progression to high single digits of organic growth, we are raising our previous assumptions for 2022 non-COVID organic growth by 100 bps to now be in the 6% to 8% range this year. This increased outlook is driven by the very strong demand environment we currently see and the positive contribution from our recent high-growth acquisitions. While we do expect COVID testing demand to eventually fall off significantly, for the time being, it's clear that testing is likely to remain above our post-COVID baseline assumptions at least through the first quarter, and we are assuming at least $400 million of COVID revenues this year. This leads to our initial outlook for adjusted EPS for this year to be in the range of $6.80 to $7. So, as you can hopefully see, we are a fundamentally changed companies with great trajectory going forward, while being able to consistently execute and deliver on our commitments. I am inspired to see not only how PerkinElmer continues to enable our customers to advance their science like never before, but also the power of our diverse and talented employees constantly pushing the boundaries of what's possible. With that, I’d like to turn it over to Jamey to provide more color on our fourth quarter performance and our 2022 outlook. Jamey?

Operator:

We will now begin the question-and-answer session. The first question is from the line of Dan Arias with Stifel. You may proceed.

Jamey Mock:

Sure. Yes. Hi, Dan. So the operating margin assumption is in the high 20s, let’s call it, 27%, 28% overall. And much of it is due to mix. Well, obviously, we’ve got COVID going away at relatively high margin rates, and then growth in the core and M&A coming in at still 40% plus incremental, so that overall gets you to the 27%-ish operating margin rate. And in terms of driving productivity, I think it’s everything that we’ve always been talking about. We’ve got a lot of programs going on, both with our procurement teams, with new product introductions and reconfiguring everything that’s going on with services acceleration. And then to your point, we did make a lot of investments over the last year. We took some of the COVID products, the profits to invest in the future and things like R&D, in selling and marketing, digital and information technology and people. And so those will more normalize as we head into 2022. And so we feel confident that 27% is achievable here.

Prahlad Singh:

Yes, Dan. I think our assumption going into – as you pointed out, EUROIMMUN has always been a double-digit grower, and our assumption is that it will continue to be B1 in 2022 and beyond. I think the only caveat I will say, and I mean a lot of that obviously is dependent on what happens with COVID. There are severe lockdowns, and obviously, EUROIMMUN takes a backseat. But assuming, as we have assumed, that things will start to normalize into the second half of the year, that will be a double-digit grower.

Steve Willoughby:

Operator, we’re ready for the next question. Bethany, are you there? It looks like we’ve lost the operator for one moment, there just – bear with us one second. Thank you.

Vijay Kumar:

Hey, thanks for taking my question. Maybe, Jamey, one, I’ll start with the guidance here, and I had one for Prahlad. The guidance simplistically, you guys said 16% base growth, organic growth in fiscal 2021, and you’re guiding to 6% to 8%. That feels like it’s coming in a little bit better than what we were expecting given the comps here. I think you mentioned backlog here, orders coming in above. Maybe talk about your backlog, and how much visibility is that giving you to this high singles growth? Also maybe talk about pricing. I think you made some comments on pricing, price actions you took. And why is it prudent to assume no impacts of lockdown just given, I think you mentioned, three to four points of impacts in Q4?

Prahlad Singh:

And just to add to that, Vijay, this is probably another proof point that we are on our way to the high single digits growth that we said for 2023. As you recall, three weeks ago, we said at the JPMorgan conference that we will be 7% to 9% in 2023. I think our story that of being in the midst of the transformation is over. Our transformation is completed, and we are starting to see the benefits of what all the hard work that has gone on over the past two, three years. So, I think moving forward, as we move into 2023 as a high single-digit company, this is the next step in that direction.

Prahlad Singh:

I don’t think Q4...

Prahlad Singh:

And we’ve said $380 million for the year. That’s consistent and strong. Well, I think to your bigger question really, Vijay, that you asked. I think the way to think of it is that for us, and both Jamey and I have pointed out, 26% is just a midpoint into our journey as we continue to transform the company. This has really changed. We are now better equipped to overcome cyclical or other challenges. Essentially, if Diagnostics and Life Sciences is 80% of our business. I think that’s the piece that – and I continue to communicate to you guys that this is a company that is now going to be a high single-digit growth company, which is going to deliver margin in the late 20s. And we are at a point where essentially, you know what we have forecasted for the next 24 months. If you look at what we have pointed out for 2022 and we just pointed out where 2023 will be for us at JPMorgan. So, I think, I couldn’t be prouder of the story that we have. We are sitting here to communicate on behalf of our 16,000 employees today.

Jamey Mock:

Thank you, Vijay.

Operator:

Thank you. Our next question comes from Dan Leonard of Wells Fargo. Dan, please begin with your question.

Jamey Mock:

Hey, Dan. So a big portion of our business, as you know, is on reagent rental. So to the extent that they are coming up for renewal, we can affect those. But much of our business is under two-year, three-year, five-year contracts. Otherwise, though, historically, pricing has been, we’ve called it less than 100 basis points, maybe 50 basis points. And while we don’t want to guide specifically or I would say exactly what our pricing power will be, it’s going to be, as I mentioned in my prepared remarks, substantially more this year. And we’ve been having conversations with our customers, our commercial team, as I’ve mentioned in the past, there doesn’t seem to be a lot of pushback. So, we feel confident in having a lot more pricing power this year to the extent that we can affect it in certain contracts.

Jamey Mock:

Yes. I would say it’s a small – the supply chain issues, Dan, were a relatively small component of our backlog growth. So to put that into perspective, our backlog is up 50% year-over-year, and it’s the strongest it’s ever been. So yes, supply chain played a small role in that, supply chain pressures and push out that is. But overall, the demand on all the end markets is extremely strong, both instruments and consumables are up substantially, so not a huge impact on backlog.

Prahlad Singh:

Thanks Dan.

Derik De Bruin:

Hi, good afternoon. I wanted to follow up on Dan's question. So across the Life Sciences industry, everyone is talking about just gaining share and not everyone apparently can gain share. I mean, is it just that the fact that the markets are much stronger than they have before and we're sort of the next level of demand versus everybody claiming they're taking share from maybe else? I mean, I'm just trying to understand the dynamics because the growth for most companies is doing a lot better, and we're sort of that – you would think that a lot of catch-up spending is done. So it's more of a commentary on the broader end market outlook that you're seeing. And then it goes to the next point on this one is like how sustainable is this? I mean, are we in a new – is the market is now 4% to 6% growth where they were historically particularly in the DAS segment? Thanks.

Jamey Mock:

I think that's it.

Jamey Mock:

Hard to say, Derik, at this point. I mean, I think, overall, the value proposition of our products is quite strong out there. So you would hope that much of this sticks and remains moving forward.

Prahlad Singh:

Sure, Derik. I mean, I think as I've mentioned, we are sort of trying to stay away from providing numbers and how many units we are installing. But as I have pointed out earlier, we have a very strong pipeline. We've started shipping equipment and instruments, and we are doing a lot of validations across several sites. I think our expectation, I would say, that from a commercial perspective, that we'll double our volume in 2022. But I think more importantly, it was the fact that you pointed out around some of the other players. And I think there has been enough information out there around the press that sort of validates our product segmentation that we were trying to do with Vanadis when we launched it, i.e., provide OBGYNs and our customers with a solution that is easy to put into action and implement. And more importantly, it focus on what matters, which is 13, 18 and 21. And I think you have seen hopefully enough news and articles around that, that helps validate that assumption that we made going into with Vanadis. And I think it's going to be a big driver for us to be productive health into mid-single digits.

Derik De Bruin:

And what's the price point of Vanadis test versus an IPT, and I really have done –with the sequencing based on IPT.

Derik De Bruin:

Thanks.

Operator:

Thank you, Mr. Bruin. Our next question comes from Catherine Schulte of Baird. Please go ahead Catherine, your line is open.

Jamey Mock:

Yes. Catherine thanks for the kind remarks. I would say COVID has pretty fairly high incrementals. So without giving specifics, we have been saying its north of the Diagnostics gross margins, not a lot of extra selling cost to it. So I think that should give you some math in terms of what an extra $100 million could be. It could be $50 million to $60 million of operating profit and then tax effective. It does come with a higher tax rate. Most of the jurisdictional incomes are a little bit higher than where we play and where our mix is. So hopefully, that gives you a little bit of color there.

Jamey Mock:

That's right. Yes, it will remain in the first quarter here. To your point, we've taken that into account in our guidance. But I would say the lockdown impact as opposed to supply disruption impact is maybe 1/3 to 40% of that overall number. So call it one point to 1.5 points.

Jamey Mock:

Thank you.

Jamey Mock:

Josh, are you there?

Josh Waldman:

Yes. Sorry, guys. I was on mute. Just two for you. First, I wondered if you could comment on recent trends within the food business. I know last couple of quarters, that business has been growing mid-single digits, maybe a bit below the gas average. Are you seeing backlog build in that business as well? I know you called out Life Sciences seeing backlog build in Life Sciences, but wondered if you're seeing backlog build in the food business.

Josh Waldman:

Got it. And then can you provide some additional context on what you’re seeing in China from an end market perspective? I guess, what level of growth are you expecting from that region kind of within your 2022 guide?

Josh Waldman:

Got it. Appreciate the context.

Jack Meehan:

Thank you and good afternoon. I wanted to continue on the China discussion, but just more focused on a reflection on the fourth quarter. It’s still early in earnings season, but haven’t heard other companies really talk about disruption in the region, and we’ll have to wait and see what others have to say. But I was just curious if you could elaborate a little bit more on some of the headwinds you saw in the quarter and what might have been unique to PerkinElmer that others haven’t called out yet.

Prahlad Singh:

I think, Jack, more importantly, if you just look at the macro factors for China for us, that continues to be a growth market for us. That’s not going to slow down. If you look at the – one of the bigger challenges for us for some time, as you know, has been the birth rates. I think it’s going to, hopefully the government is putting enough incentives, and our hope is that as the party meets again in August this summer, they are going to put more incentives into play for people to have kids. So either from immunodiagnostics, and as Jamey pointed out, Diagnostics is a big piece of our play there. That market is not going to slow down. And we haven’t seen any impact as such that it would.

Prahlad Singh:

Yes. I mean, I think there are three questions in there, Jack. In terms of our ability to do M&A, in terms of the timing on that, and in terms of the space, right? So I think we both said pretty clearly that I think our focus right now will be on debt repayment and ensuring that we get back to the leverage that we are comfortable in, as we've pointed out. So once we do that and once we get to a position where we do M&A, you will see more of it in the spaces that we have played recently. In the Life Sciences segment, if there are any holes in our portfolio, we'll continue to fill that and bolster that. And on the Diagnostic side around infectious diseases. As you know, we've now got a significantly large installed base of new customers, and we need to fuel that engine. So similar to what you saw with Oxford around tuberculosis or with ideas around endocrinology, we will continue to bolster our portfolio on assays on the Diagnostic side.

Operator:

Thank you, Mr. Meehan. The next question is from the line of Patrick Donnelly with Citi. You may proceed.

Jamey Mock:

Yes. I mean, I don't want to give too Patrick, but I would say it's material particular to the businesses where we sell instruments. And that's now 20% to 25% of our overall revenue, just to put that into perspective. So if we're $5 billion, $1 billion, $1.5 billion is what we're talking about here. And instruments provide good visibility and I think consistency in our ability to meet what we say we're going to do here. So I'd say it's a relatively high portion of that overall segment. On the consumables side, that's much more flow and even though the backlog did increase, like I mentioned, that just already has some level of consistency to it. So I don't know. That's a little bit more color, but I think that level of backlog affords us the visibility to consistently execute what we say we're going to do.

Jamey Mock:

Yes. So like you said, Patrick, this is not a cost synergy play whatsoever with BioLegend. We plan to continue to invest in the business. And we did say, yes, operating profits is in the high-40s. I think they can continue to tick up as they get more volume leverage for sure over time. So nothing has affected our overall 50 to 75 basis points beyond 2023, and BioLegend fits into that. I'd say as we look at 2022, commercial synergies is what we're looking at. We've mentioned five years out; we could have $100 million of annualized. And so I don't think it will be a perfect linear $20 million in the first year, it might be half that from a synergy perspective, but I think the teams are already working together. There's been a lot of training sessions, a lot of different discussions around how to execute, how to quote, et cetera. And then on the innovation side, I think that's what's more exciting. I mean, Peter Brighton Smith talked about Oxford and being able to use some of their antibodies, and we're starting to look at that. But we and Prahlad mentioned we had our summit recently. I think if you look at the innovation side, wrapping not only Biogen, but Nexcelom, Oxford, SIRION, Horizon, we have some serious plays be able to make a difference in cell and gene therapy, our continued discovery business, more on the biologics, as well as Diagnostics. So I think the technology and innovation play is probably more exciting in the longer term.

Patrick Donnelly:

Thanks helpful. Thank you guys.

Matt Sykes:

Thank you. Good afternoon and thanks for taking my questions. Appreciate squeezing me in. Just two quick high-level ones for me. Just one on DAS. We spent a lot of time over the past year, a couple of years improving the business from an operational efficiency standpoint, but also obviously putting in acquisitions. I'm just wondering, it sounds like you feel like you've set that business up very well for future growth. When it comes to profitability, are there still areas like OneSource comes to mind where you feel like you can still get some levers on increasing margins from an operational efficiency standpoint? And could you just comment on the progress you think you've made to that point? And how much more there is maybe to go for in that?

Prahlad Singh:

Or I think just taking the – I mean, the natural progression of it has happened, Matt. Because as we've evolved the portfolio, if you just put Life Sciences in the DAS side, if you just put Life Sciences and informatics together, that's close to 70% of the business now, right?

Prahlad Singh:

And I think that itself is a big needle move around the operating margin for the business.

Jamey Mock:

Yes, on a pro forma basis, Matt. This is 68% of the revenue of DAS that's going here. So I think that helps for sure. And that's really what's moved from mid-single digits overall to on a pro forma basis, DAS had a high single-digit overall organic growth perspective.

Prahlad Singh:

Yes, there are two levers to it, right? Obviously, one that you're talking about, Matt is the geographic expansion that we would be able to offer in place. But also the recent new NPI launches that we have had from a menu expansion perspective, whether it's around DMD, around SLA, around X-ALD, as they start gaining traction and as more and more states for example, in the U.S. and in Europe start adopting those that will help. But I think the biggest driver for reproductive health in 2022 and beyond is still going to be Vanadis. And I think as Vanadis gains traction, as it gains adoption, that is the needle mover that to bring reproductive health back into the mid-single digits.

Matt Sykes:

Great. Thank you very much for the clarification. Appreciate it.

Operator:

Thank you, Mr. Sykes. Our last question is from the line of Max Masucci with Cowen. Please go ahead.

Prahlad Singh:

Yes, Max. As you know, we don't play in cell culture media or in the bioprocessing side. But as you pointed out on the antibody side for proteogenomics, that's one of the fastest-growing markets or segments of BioLegend. And I think that's the opportunity that we have. So from a near-term perspective, that's what we would see. Anything else, Jamey?

Prahlad Singh:

Yes.

Prahlad Singh:

Yes. I mean Max I think BioLegend has had very good partnerships with Cytek as you are saying, the next genomics and several companies. And I think that's going to continue. There's no reason that's going to stop. But I think the one that you are pointing out that's in its initial stages and it's just beginning. So it's tough to sort of give any quantification or any more certainty around that. But obviously, it's a natural fit with the flow of cytometry Instrument Company, and that's the opportunity that they are trying to leverage.

Prahlad Singh:

Yes.

Prahlad Singh:

Thank you, Operator. In summary, this is a very exciting time for PerkinElmer. In many corners of the company, we are moving the needle, both in science and health care and we are pursuing important external collaborations that we've talked about today. With the global health care networks, governments, organizations and most reputable partners, key opinion leaders and influencers across our markets, but more importantly we feel like we have built a greater sense of purpose, energy and team work. I'm confident that 2022 will be an exciting year as we have all the pieces in place to drive towards our vision of being a champion for growth. Thank you for your time this evening, and have a great evening.

Operator:

Good day, and thank you for standing by, and welcome to the PerkinElmer's Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. . As a reminder, this conference is being recorded. . I would now like to hand the conference over to your speaker today, Stephen Willoughby, Vice President of Investor Relations. Please go ahead.

Prahlad Singh:

Thank you, Steve, and good afternoon, everyone. Reflecting on the third quarter of 2021, I can confidently say that our efforts, our investments and our business performance together truly reflected the essence and impact of the new PerkinElmer, a concept we introduced at our analyst meeting back in June. The operational improvements, recent acquisitions in life sciences and diagnostics, R&D investments in the food and applied markets, accelerated innovation across the Board and a ramped up focus on culture, employee engagement and technological innovation have collectively been bearing fruit. While there is still significantly more to come, I think between our very strong financial results and the additional color that Jamey, Peter and I will share with you today, we will further illustrate the immense incremental value we are delivering to all our stakeholders now and are positioned to do so well into the future. To stay on this idea for a moment, our ongoing portfolio transformation into higher-growth end markets continued during the third quarter as we closed on our previously announced acquisitions of SIRION Biotech and Immunodiagnostic Systems. We also announced and were able to fairly quickly close on our largest acquisition to date, BioLegend, 3 months ahead of schedule. I'll touch more on these great recent additions in a bit, but I'm thrilled to see the initial teamwork that is already occurring between these businesses and the rest of PerkinElmer. While collaborations are already underway, I expect there will only be expanded and turbocharged coming out of a company-wide innovation summit we are hosting in a couple of weeks. I'm very proud of how our now 15,000 employees around the world have continued to execute during the third quarter despite facing existing challenges and even starting to come across some new ones. While Jamey will provide more details in a bit, I'd like to highlight the 16% non-COVID organic growth we generated in the quarter, which was again solidly ahead of our guidance. Our COVID revenues came in close to twice our expectation as testing remained similar to the levels we experienced in the second quarter and our teams were again well supplied and ready to meet the incremental demand. This led to adjusted earnings per share in the quarter of $2.31, which was over 40% above our guidance despite the ongoing strong investments back in the business. Overall, we continued to see strong non-COVID demand trends across the business with double-digit growth in all major regions. So while we may be facing a few new headwinds, I feel the team is proactively responding and executing for our customers. Just as we have successfully done over the past few years, we're now up against numerous other pressures across our business and the global economy. While I'm pleased with our strong performance in the third quarter and excited about all our recent acquisitions, I wanted to spend a little more time today sharing some insight into 2 of the newer additions as we haven't had the opportunity to discuss them in greater detail with investors up until this point. First, I'd like to touch on Oxford Immunotec, which we closed back in March. As Steve mentioned, Oxford's Founder and CEO, Peter Wrighton-Smith, has joined us on today's call. As many of you may know, from its days as a stand-alone publicly traded company, Oxford is currently the #2 player in the latent tuberculosis testing market globally. And I think with some of our core capabilities and broader regulatory, distribution and service offerings, the business is well positioned to gain share in the years ahead. In terms of what's been happening since Oxford joined the PerkinElmer family earlier this year, I'm extremely pleased to share that it is on pace to exceed its revenue targets for this year and has been making great progress on rolling out its automation workflows around the world with an anticipated approval for this new workflow in the U.S. next year. I thought it might be helpful to share just some of the ways that 2 companies have been already been collaborating within the first 6 months of being under the same roof. I hope it will give you a feel for the synergy potential we both believe exists. With the help of our integration transformation office, which was set up last year, Oxford and PerkinElmer are already leveraging each other's capabilities in a number of ways, such as integrating our JANUS liquid handlers into Oxford's medium throughput automation workflow that is currently seeking and receiving regulatory approvals around the world, or Oxford's utilizing Nexcelom's Celigo cell counting instruments in its new high throughput automation workflow. In addition, Oxford is also already starting to leverage PerkinElmer's existing field service force to assist with the installation of these automation offerings. Oxford is now beginning to transition from being a developer and manufacturer of diagnostic kits to now offering customers fully automated workflows for TB testing. While it is still early and we have many other plans in process that will play out over the longer-term, those are just a few examples of the initial progress that we are quite excited about. Now I'd like to turn it over to Peter to share some thoughts on the business since becoming part of the PerkinElmer family and maybe some perspective on where he sees the business going in the coming years. Peter?

Prahlad Singh:

Thank you, Peter. I look forward to seeing the traction we make over the coming quarters. I also wanted to share with you more about our recent acquisition of Immunodiagnostic Systems, or IDS, which closed in early July and may have been a bit overshadowed by our analyst meeting and the announcement to acquire BioLegend. I want to make sure our shareholders know why we are so excited about IDS becoming part of PerkinElmer and what we believe it brings to the overall company. The addition of IDS is a great example of where we expect 1 plus 1 to equal at least 3 and hopefully more. Let me first tell you a bit more about the company. It's a developer and manufacturer of medium throughput chemiluminescence analyzers and assays that was previously publicly traded in the U.K. and have been going through an evolution of its assay menu over the last several years. By adding IDS, we have significantly enhanced our in-house chemiluminescence assay development expertise. This expertise will provide even more resources to support the development and launch of EUROIMMUN's high-throughput, random access chemiluminescent system, Accentis which we expect to introduce next year. Furthermore, by adding IDS's existing mid-throughput RA10 chemiluminescence analyzer and its current installed base to the business. Upon the launch of the Accentis platform, we will then be able to offer a spectrum of chemiluminescence systems and assays to our customers. Also, in just the first few months since the acquisition closed, we have started to leverage each other's commercial and distribution strengths. For example, at the recent AACC meeting in Atlanta, PerkinElmer diagnostics, EUROIMMUN, IDS and Oxford Immunotec, all jointly exhibited and met with customers in-person for the first time. And of course, the addition of BioLegend, which closed in mid-September and was the largest deal in our company's history has kept us busy to say the least. I'm happy that we were able to close the deal several months before the end of the year so that all teams and colleagues involved are ready to hit the ground running heading into next year. While BioLegend has been a part of PerkinElmer for only about 45 days, its financial performance has continued to remain extremely strong and hasn't missed a beat as part of this transition. This is a testament to the strong leadership throughout the BioLegend team who are doing a terrific job in running the business seamlessly for customers, while also working tirelessly to ensure a successful transition to the PerkinElmer family. However, I'm even more excited about the interactions and collaborations that are beginning to take place between the BioLegend team and the broader PerkinElmer organization. As I briefly mentioned earlier, I'm especially looking forward to our upcoming company-wide Innovation Summit that is planned for later this year at BioLegend's campus in San Diego. At this event, we'll bring together R&D, innovation, commercial and operational leaders and experts from across the company for several days to collaborate, strategize and just get to know one another. I can't wait to see all the impactful ideas and connections that come from this event. As it relates to innovation, in early October, we received U.S. FDA Emergency Use Authorization for our PKamp respiratory SARS-CoV-2 PCR assay, which provides for the detection of flu, RSV and COVID in a single assay, which we and others expect will play a larger role in testing during the coming winter months in the Northern Hemisphere. Additionally, our EUROIMMUN business recently received FDA Emergency Use Authorization for its quantitative COVID serology assay, which targets the S1 protein. These 2 new COVID assays add to our existing strong portfolio of serology, antigen and PCR assays, which are being used to -- in the ongoing fight against this pandemic. From a corporate responsibility standpoint, while the world of ESG is still an evolving place, I was enthused to see my colleagues effort at our recent company-wide global impact day held last month, where it was great to see over 350 different group initiatives take place, all led by our colleagues around the world. As you may recall, we outlined our initial ESG-related targets at our analyst meeting in June. And I'm delighted to see efforts already underway to work towards achieving them. For instance, we recently completed a new company-wide employee engagement survey, which we will use to ensure PerkinElmer continues to be a great place to work and a team, everyone is proud to be a part of. The initial results look very positive on all fronts of engagement, diversity and inclusion, and health and well-being perspective. But I'm quite sure there is always room for improvement. Additionally, in our recently released corporate social responsibility report, we have begun reporting under SASB, which has quickly been considered the leading industry standards platform. With PerkinElmer now adhering to this framework, we are building on our historical reporting against the carbon disclosure project, which aligns with the task force on climate-related financial disclosures. I'm confident we have good plans and initial targets in place, and I'm happy to see the company more formally rally around these efforts. In closing, while there always seems to be various external pressures we must face, such as the current semiconductor shortage, logistics bottlenecks and potential global tax reform, I'm proud to see our team continue to proactively navigate these challenges with agility, innovation and a unique and dedicated focus on the customer with strong global teamwork. This corporate character has allowed us to successfully mitigate the impact of these various challenges and provide the opportunity for us to continue to achieve and even exceed our plans, like we did here again in the third quarter. The end of the year is always a busy time filled with commercial activities, strategic and operational planning and both professional and personal commitments, and I expect it to be that way again this year, but I'm confident our teams are up for it. I'd now like to turn the call over to Jamey to provide more detail and perspective on our third quarter results and color as it relates to our guidance for the fourth quarter. Jamey?

Operator:

. First question comes from Derik De Bruin with Bank of America.

James Mock:

Mike, so yes, we are proud to have this renewed. The way I think about it is, while it's renewed for a year, really COVID is such a fluid environment, and we continue to work with the state that it's more like a quarter-by-quarter basis. So as you may know, if you read the contract, the state has the ability to cancel within 45 days. So we really only have line of sight to the next 90 days at this point. We also restructured it to take down the capacity to 40,000 tests per day. We also restructured the variable fees. So for the most part, it's a pretty steady base in terms of revenue irregardless of whether it's 20,000 tests per day or 40,000 tests per day, the revenue remains relatively stagnant and the fourth quarter is probably to the tune of about $90 million baked into our estimate.

Prahlad Singh:

Yes. Mike, let me just take sort of what the noise that we are hearing. I mean, it goes both whereas the situation in China, as you know, I mean, some news came out this morning around lockdowns in certain provinces and areas. So it continues to remain fluid. And I think -- but overall, for us, as we look at it, including in China, our end markets continue to remain strong, our backlog is the best that it has ever been and both from a China perspective and across, we continue to execute well. So mid-to-longer term, we continue to feel good about China. I think we just have to keep our eyes open and be vigilant about what happens vis-a-vis with the lockdowns that are taking place.

James Mock:

Yes, it's a little over 20%, Mike. And I would say Diagnostics led the way. DAS was still double digits, but DAS didn't go down as much last year, if you remember, it's a little bit of an easier comp from a Diagnostics perspective because much of the reproductive health and autoimmune testing shut down really in the second quarter last year, a little bit in the first quarter. By the third quarter, it started to come back, but I'd say it's a little bit of an easier comp on the Diagnostics side, but both businesses grew nicely and have for the last 3 quarters here.

Tycho Peterson:

Sorry to press a little more on the China dynamic. But I think one of the questions that's coming up is just on the tender front, right? We've seen Anhui and probably other regions, Sichuan, Yunnan, and et cetera, following similar policies. So is your view that the tender headwinds around the IVD market could expand nationally over the next year or 2? And what type of pricing impact do you expect? And are there offsets from your perspective with volume?

Prahlad Singh:

And Tycho, I think as we've shared in the past, we've already transitioned most of our reproductive health reagents, manufacturing in Taicang. So that transition has already taken place over several years, as Jamey pointed out, this is not something new. This has been -- and immunodiagnostics is a very small component of our overall revenue, so.

Tycho Peterson:

Okay. That's helpful. And then a follow-up on just guidance here for the fourth quarter, are you implying that instruments might be down sequentially? And then as we think about 2022, you obviously laid out the 2023 bridge at the Analyst Day. Have any of the underlying assumptions for 2022 change in terms of kind of non-COVID revenue growth in the 5% to 7% range?

Tycho Peterson:

Okay. And then on 2022?

Operator:

Our next question comes from Matt Sykes with Goldman Sachs.

Prahlad Singh:

Matt, this is Prahlad. So I'll let Peter talk specifically around Oxford and BioLegend and how that's panning out. But I think, overall, in most cases, what we have seen is around Horizon or Nexcelom, I think initially, when we started putting the story together, to where we are now. The more and more we get to know these companies and the more and more we get to know the technologies, it's easy for us to foresee that 1 plus 1 is definitely more equal -- more than 2. And probably in more cases, more than 3. Just take a look at Horizon and how SIRION fits into the bill, right? The licensing technology that allows us to bring the cell and gene therapy markets together. Going to our customers, being able to look at small molecule and biologics now at the same time, synergies from a commercial perspective, technology perspective, it continues to help bolster the story that we have seen. On the diagnostic side, with the addition of IDS while EUROIMMUN was working on Accentis as a big automated platform, the ability to leverage their RA10 platform, and at the same time, the several assays which they have already qualified now being able to do that both on a smaller platform and a fully automated platform. It gives you a much more expansive menu than what we thought we could leverage. So these are just a couple of examples, and I'll sort of ask Peter to talk specifically around Oxford and BioLegend. Peter?

Matthew Sykes:

Great. That's very helpful. And then just a specific question. Just DAS margins. You guys have made a lot of progress over the past 1.5 years. And you cited a couple of things with the improvement in operating margins for DAS, mix volume leverage productivity. Of those elements, which can we kind of perceive to be fairly durable? And where do you think the limit might be for increased margin expansion within DAS?

Operator:

Next question comes from Vijay Kumar with Evercore ISI.

James Mock:

Yes, it's a good question, Vijay. I think it's probably more towards the conservatism side. So I'd start by saying the end markets are terrific right now. All of them have been growing at least mid-single digit for us, many well north of double-digit. Our backlog has grown substantially this year and even over the last quarter. I think the little bit that we put into the fourth quarter here, you can call it conservatism, is 2 things basically, any impact from any potential supply chain disruption, which we can talk about more, but we haven't seen too much of today, and that includes transportation as well. And then anything that's going on around COVID lockdowns, particularly in APAC. So -- and we have seen pockets of it, particularly in our newborn screening business in places like the Philippines and Vietnam, where our screening has just been reduced. So those are the 2 factors that we put in. Otherwise, the end markets have been strong. We're not too concerned about it. The backlog is up. So hopefully, it proves to be conservative, but I think it's a prudent thing to do at this time.

Prahlad Singh:

I mean look, Vijay, I think we extensively talked about this at the Analyst Day and then even at the end of the last earnings call. I could not be more confident about the future of PerkinElmer than I am today. The end markets that we are playing in, the portfolio alignment that we have done around growth markets of life sciences and diagnostics, and the team and the talent that we have put in place, and that's executing on all cylinders. So there is no hesitancy on our part in saying that the future is very bright. And if you're asking specifically around 2022, I don't think we are doing guidance right now, but Jamey is there.

Operator:

Next question comes from Patrick Donnelly with Citi.

Prahlad Singh:

Yes. I mean you heard from Peter around Oxford, Patrick. I mean he elucidated pretty well. The technology synergies, the opportunities around service, commercial. And then I think the theme is the same across the Board, whether you look at Nexcelom or Horizon. The ability to be able to leverage our commercial presence, which is direct in more than 180-plus countries, which most of these companies do not have access to that are distributor manage. Then the second one is around technologies. The portfolio that we bring together around instruments, around service is much -- is very helpful for the acquired companies. And the third one, obviously, is around technology. As these discussions and interactions happen, I think Peter gave an example around a couple of them and even with BioLegend, we've become one of our primary source of raw material supply that we want from antibodies. So I think those are the 3 elements that I would point out to. And just to give you an example, and I think Jamey or I mentioned during our prepared remarks, we are having an Innovation Summit at the BioLegend campus in a couple of weeks, where our approach is around 3 verticals or 3 pillars

James Mock:

Yes. Sure. I mean, we certainly see it both on the disruption side. And I would say it's a little bit easier for us for mostly air versus any kind of water travels from a shipping standpoint. From a supply chain perspective, we've been all over. The team has done an amazing job. I think there was a very minor impact to the third quarter and our backlog obviously grew substantially as well. Inflation, we started to see it. We're looking at what we're doing around price and putting some things into effect right now. But we also had some good things to do. As you might remember, we've been talking about a refreshed procurement process. So we've been able to mitigate some of this. So it's certainly there, Patrick, and we're dealing with it. But we've got a happy medium here where we've got a good size from a scale perspective company, but also we operate very -- in a very agile fashion. So team has been doing a great job managing through it. We put a little bit of buffer into the fourth quarter here, as I mentioned, it will be a non-impact for us.

Operator:

Our next question comes from Brandon Couillard with Jefferies.

James Mock:

Yes. Thanks, Brandon. So gross margin specific to the fourth quarter, I would assume it comes down a little bit here, Brandon. So with COVID being $300 million in the third quarter, going down to $200 million in the fourth quarter, you'll see that come down a little bit. And then the core comes up, so we always have a bigger volume quarter in the fourth quarter. So I would expect gross margins to tick down a little bit. Tax rate for 2022, I think, is anybody's guess based on tax reform out there. So certainly, I think we guided to 21% this year versus a couple of years ago, I think we were 16% or something like that. And obviously, COVID has played a big role in that with greater income and higher tax jurisdictions. So I think our tax rate in 2022 is dependent upon 2 things

Joshua Waldman:

Just 2 for you. First, a follow-up on the non-COVID business. You obviously came in well ahead of your guide. Just wondered if you could provide more context on where all you experienced outside versus plan. Was this solely tied to kind of better-than-expected growth in non-COVID DX or did DAS also outperformed?

Joshua Waldman:

Got it. And then as we think about the longer-term guide you laid out at the analyst meeting in June, I guess, given the improved FY '21 outlook since that time, and it sounds like a higher level of expected cost synergies going forward, I mean, should we view this as positively impacting how you're thinking about the long-term targets? Or is it more just kind of a derisking of those targets?

Operator:

Our next question comes from Paul Knight with KeyBanc.

James Mock:

Sure. Yes. I mean, Paul, well, now life sciences makes up over 60% of DAS. So I'll start there. And in particular, our discovery business, both on a lot of the NPIs we've had in terms of our high content screening business, some of our in vivo products have been operating terrifically. On the reagent side, it's been strong across all regions. We've had a nice cadence of NPIs, different application areas in terms of oncology, and cell and gene therapy have been strong for us. So life sciences, those are a few of the areas. In the analytical and applied markets, Paul. So it's been more on the semiconductor side, I would say, chemicals and energy was pretty strong for us. And so we launched our Triple Quad. And so our ICP and ICP mass business has been extremely strong for us. But I think in general, the whole analytical technologies portfolio, we've had a better cadence of NPIs, which has been proving to benefit the DAS business. And so that's why I see continued strength there.

James Mock:

I believe so in the life sciences side, on the analytical technology side, I think particularly in spectroscopy, we've always had good share. Hard to say whether we're gaining a lot of share at this point.

Prahlad Singh:

Thank you, Norma, and thank you all for dialing in today. We are very excited and remain very excited with the trajectory on which the new PerkinElmer is embarked on and are very proud of the accomplishments that the team has achieved in the third quarter. And I'm very thankful to my 15,000 colleagues around the world for their continued hard work and contributions. I look forward to speaking to you all soon. Please stay safe and healthy. Thank you.

Operator:

Good day and thank you for standing by. Welcome to the 2021 Second Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Now I would now like to turn the call over to our first participant for today Mr. Steven Willoughby, Vice President of Investor Relations. Sir, please go ahead.

Prahlad Singh:

Thank you, Steve. Building off our June 24 Analyst Day, today represents another milestone in the transformation of the new PerkinElmer. The addition of BioLegend expands our presence in the attractive high growth antibody and cytokine market, enhances our content development capabilities across all PerkinElmer detection technologies and transforms our E-scale - our E commerce scale overnight. Personally, I couldn't be more thrilled to work with Gene and the team going forward. And I'm excited to see the impact the combined company can have on scientific innovation.

Prahlad Singh:

Thank you, Gene. I want to formally welcome you and your team to the PerkinElmer family. And as we've discussed over the last few months, as we've gotten to know each other. I'm so excited for what this means for both companies, and what the combined business is going to be able to do together in the years to come. I'm now on Slide 4. Let me tell you some more about BioLegend. It's a world class organization, propelled by a strong team top to bottom. The company has achieved leading market positions in a number of attractive high growth end markets, such as antibody development, flow cytometry reagents, proteogenomics, magnetic cell separation, recombinant proteins, cytokines and growth factors. These represent a total addressable market of approximately $6 billion, with areas of expertise that span from upstream research and immunology, oncology, stem cell research, neuroscience and infectious disease to downstream bioprocessing. It's more than 700 employees across the US and Asia Pacific Europe serve over 10,000 customers in 130 countries. The company also has a stellar track record of new product introduction launching over 1,000 NPIs annually in both new and existing markets. Moreover, all of its revenue is recurring in nature and its world class manufacturing and distribution capabilities translate to its very attractive incremental margin profile. Finally, what you'll come to recognize is that both PerkinElmer and BioLegend share a fierce passion and commitment to focusing on the customer. BioLegend mission is helping scientists accelerate research and discovery by providing the highest quality products at an outstanding value, along with superior customer service and technical support. But more succinctly said the BioLegend team is passionate about making a mark on the world and being legendary in their own right at pushing the boundaries of biological understanding.

Prahlad Singh:

Thank you, Jamey. As you get to better know BioLegend and its entrepreneurial team, I think you will find that by joining with PerkinElmer, it is creating a true antibody and life science reagent powerhouse that will have the scale to be able to accelerate scientific advancement, and new product innovation across the company and around the world. I believe this combination positions PerkinElmer as a best-in-class preclinical life sciences franchise, that is uniquely positioned to empower our external partners to deliver truly legendary discoveries over the coming years as the power of both companies' employees and assets come together under one roof. I expect that this heightened pace of collaborative innovation combined with our broad commercial reach will lead to faster overall growth for PerkinElmer, while having an elevated margin profile with immediate significant EPS accretion. Even more importantly, BioLegend's joining forces with PerkinElmer complements the value from the other life science businesses that have joined our company over the last few years, such as Cisbio, Horizon Discovery, and very recently, Nexcelom Bioscience, and SIRION Biotech. I couldn't be more excited for where I see us going in the future. I'd now like to turn the call back over to Jamey to discuss our 2Q results and updated guidance for the remainder of the year - remainder of the year. Jamey?

Operator:

Your first question comes from the line of Catherine Schulte of Baird. Your line is now open.

Jamey Mock:

Yes. Thanks, Catherine. So right now I think the primary driver is to expand the global reach. So you saw on the pages that BioLegend is currently concentrated roughly 55% in the U.S., our life sciences reagents business is more like 40% to 45%. So I think we can expand globally with our more than 500 sales and service folks across the globe. So that's the primary driver. And then we have many different opportunities with Cisbio, with NexION, with Horizon, with the diagnostic side. So we think that $100 million is very achievable, we discuss with the team over the last few days and months, I should say that we believe that it could be much more than that. But I think right now the primary driver that we're banking on is geographic region.

Jamey Mock:

Yes, I mean, it's a good question, Catherine, it's actually very difficult to pinpoint because it is extremely broad based, I mentioned that every geography across the globe is up almost equivalently, every end market is up, it's almost difficult to find a spot that we are concerned about. So, it's really - everything we have, I can't really highlight one for you, like science is a strong, applied is kicking back in, food is strong, reproductive health is doing extremely well, immunodiagnostics I mentioned EUROIMMUN being up strong double digits. And everybody is above the 2019 levels and many of these markets are now on an average two-year stack comparison, at least mid-single digit, if not double digit growth comparing the 2019. So life science as an example is up 10% on average over the last few years.

Doug Schenkel:

I'm going to start by building off of Catherine’s first question on synergies, but take a slightly different angle. It seems like there's a lot of synergies or at least some synergies to be had between BioLegend and some of the recently closed and pending acquisitions. I'm just wondering, if I'm thinking about these, right, and if so, with a more well-rounded portfolio, how you're feeling about what you have now in this category to essentially compete on level footing with some of the incumbents and essentially how much that plays into your overall synergy targets or potential for upside?

Doug Schenkel:

That super helpful, Prahlad. Thank you for that. Jamie, any chance - well - let me frame it this way, you gave us a 2023 revenue target for BioLegend. Any chance you would share any metrics that could help us get to how we should be thinking about 2021 and 2022? I know the deals not expected to close until the end of this year, and wouldn't be considered an organic next year. But it I think it'd be helpful for us frame investment kind of just layering it into our models. Anything you can share there?

Doug Schenkel:

Okay. Sorry about that.

Doug Schenkel:

And last one, recognizing, yes, this is an exciting and also the biggest deal Perkin’s ever done. And then, separate from that, you've been quite busy on the strategic pursuits all year, should we be thinking that at this point M&A is going to be limited to maybe smaller tuck-ins, at least for the foreseeable future, keeping in mind, what you're doing with this deal and then just, thinking about operational readiness as well.

Operator:

Your next question comes from the line of Vijay Kumar of Evercore. Your line is now open.

Prahlad Singh:

I think, I would put it in a succinct manner, Vijay, that once you focus on the science piece, it's the cost, it’s the quality and it's the service. Those are the three words that define BioLegend. And we've talked to customers throughout our due diligence process globally. And those three things are the shining light of the company. And that is what really excited us to the opportunity and I think that is the growth trajectory that the combined company is going to focus on.

Prahlad Singh:

No, that is ex - the mid-teens plus excludes the synergies, Vijay.

Jamey Mock:

Yes, Vijay, that math is accurate, so they're in the - we're in the 50% kind of EBITDA range. So operating profit might be a touch lower than that, but from an EBITDA perspective, it's in the 50% range. And I think that math should hold when you look at $0.30 accretion in 2022. And then we said greater than $0.50 accretion in 2023. So we'll see what kind of room for upside there is there, but that's what we're establishing right now as guidance.

Prahlad Singh:

Well, I mean, in general, our applied genomics business was down from a COVID standpoint, because we put up so many instruments last year, and obviously NGS surveillance is meaningful, but relatively small compared to broad base PCR testing and extraction, so significant for the applied genomics business, but not overall meaningful to the entire COVID revenue perspective.

Dan Leonard:

Thank you. So my first question 4on BioLegend and maybe this is one for Gene, if he's still on but for Prahlad and Jamey, I'm sure you can speak to it too. What do you think, I'm sure a number of companies were interested in BioLegend, when it was time for the company to sell, what do you think made PerkinElmer, a uniquely attractive place for Gene and his team to park the company?

Dan Leonard:

Thanks, Gene. And then just a clean-up question here on bridging to the new guide. I realize you didn't change your COVID expectation in the second half of the year from prior but I do think the back-to-school testing, when you had earlier was incremental since your last guide, so can you talk about, maybe it is that upside to the guide, is there any back-to-school testing for COVID in your - your new view?

Operator:

Next question comes from Derik de Bruin from Bank of America. Your line is now open.

Derik de Bruin:

Sorry, mute - I am sorry, my mute button was on. Sorry about that. Hey, a couple of questions on the first one on the guide for - on the guide for the third quarter. Adjusted EPS of the $1.62, the Street was around $1.71 and that's sort of where we were at. And the COVID number is actually a little bit higher in the third quarter in terms of regarding in terms of modeling. I'm just curious, are there any incremental expenses or cost communist, I'm just sort of curious about the margin outlook for the back half of the year.

Derik de Bruin:

Okay. And on BioLegend, are you comfortable with the 2022 consensus members as we sort of think about accretion? And where we should go? I just - sort of looking at where our consensus expectations are right now?

Derik de Bruin:

I got to try.

Operator:

Your next question comes from Matt Sykes of Goldman Sachs. Your line is now open.

Prahlad Singh:

Yes, thanks for that. I'll start and then the teams here with me - so, feel free to chime in as well. But it's a beautiful facility. I think it's one year, two years old. So, - and it's got four significant buildings here, I'd say there's ample room for capacity growth for many years to come. So, - right and I don't think there's a lot of investment required, so every year there might be a little bit of CapEx, but I don't think it's substantial in the grand scheme of the overall investment strategy for the company. So, long story short, beautiful facility, tremendous distribution capabilities, tremendous technology capabilities, and a lot of room to expand even within the existing footprint.

Prahlad Singh:

Yes, I think a large portion of the free cash flow is going to go to de-levering, for sure. So, I think we're in a great spot right now. I think we're still generating a significant amount of cash, over 100% of our net income. So, as we look at - as I mentioned in my prepared remarks, we think we can de-lever within 18 to 24 months. I think any acquisitions would be very material in the grand scheme of things and will knock us off our de-levering path here.

Josh Waldman:

Just one on China and then one on BioLegend. I guess, first on China, I wondered if you could talk to how that region performed versus expectations in the quarter? And maybe provide a bit more color on kind of trends you're seeing there within kind of the non-COVID business? And then as you look forward to the second half, any change in your outlook there?

Josh Waldman:

Then on BioLegend, just wondering if you could provide more color on the revenue synergy opportunities you see. I guess, are there examples where you see the combined organization expanding share at current key accounts? Or is it more of an expansion, I guess, either geographically or it's a new accounts story? And then also I believe the company was selling through many of the major channels, is there opportunity to pull some of that business direct?

Jamey Mock:

No. I think it’s fair. Yes.

Daniel Macek:

This is Daniel Macek on for today. Thanks for taking the questions. So first, realize you probably don't want to get too far ahead of yourselves here, but I'm wondering if outlook or at least maybe the internal conversation for durable COVID revenues and out years has changed at all. I know you said $100 million, obviously, what that would imply a steep drop in 2022, I would assume expectations are more gradual there, just thinking about in the context of, well, peers are bringing down COVID testing numbers, but layering in things like back-to-school testing emerging variants, and then obviously the potential for this thing to pick back up seasonally just wondering if you have any thoughts there?

Daniel Macek:

All right. That's very helpful, thanks. And then just kind of pivoting here to Oxford. I think that most of BioLegend stuff - got finished, so I just wanted to know how implementation has been there and what type of growth rate you're seeing and then expecting from that business?

Operator:

Next question comes from Jack Meehan of Nephron. Your line is open.

Jamey Mock:

Yes. So first, on the geographic split. I forget what page summarizes being covered, so it's a page 4 of the deck we sent out Jack, so you can see 55% North America, 25% European and Rest of the World and 20% Asia Pacific. In terms of margins, I will repeat what I said to the prior question that, yes, on an EBITDA basis the overall margins are in the 50%-ish range, adjusted operating profit is probably close to that, you know, call it mid-40s. So I think overall that kind of bridges. And then your question around financing and tax is that what you said Jack, yes can you just clarify?

Jamey Mock:

So yes. So from a financing perspective, you know, primarily we're super excited that the team was willing to take 40% equity, I think it shows their commitment to the company, their excitement for the company, their excitement for what the combined entity can do, so that's that takes care of 2.2 billion or roughly 40% of the overall consideration when you factor in their cash as well. We have a bridge fully committed at this point. So, we're fine from a financing perspective, we don't anticipate using that, I think in advance that we will take out permanent debt. I think it'll be relatively low cost, at this point and we're pretty excited about that which provides a good amount of VPS accretion at this point. And then from a tax rate perspective based in the State of California, so a little bit higher state tax, but overall, that's already embedded into everything that I've given to you. the last thing I say is that, the rating agencies have, you know, we've reached them and they should be out today, but we fully expect to remain investment credit rating here at this point.

Jamey Mock:

Yes. So, if you look at last year, first as the comparison, the second quarter was the easiest comparison and DAS got, I think it was down low single digits in the third and fourth quarter here, so from a comparables perspective that will naturally, but from a growth perspective I think it's continued to be extremely strong. So life sciences now makes up over 60% of the DAS business. There is no reason to believe that DAS slows down, maybe from a comp perspective, it gets a little bit more difficult, but overall, I mentioned cannabis is starting to sell again so that's encouraging, the imaging business and food quality - food safety is growing nicely. Our applied business, I think that's been a testimony to the MPIs, the organic investment we've made. So I mentioned the semiconductor business and our NexION 5000, which is extremely sensitive, is terrific for smaller wafers and fabs. Our new IR product is going well. So I think if you remember and step back for the applied markets value creation story is much more of an organic investment belief. And we've been investing in R&D, we've been up ticking the R&D, and I think that cadence of new product introduction is encouraging and so we expect that to continue to perform well in the second half year.

Tycho Peterson:

Just a couple of cleanups on BioLegend, the C&E FDC risk here, vertical integration that you're developing your own antibodies, and then putting them in your own tests, actually the FDC has been scrutinizing a lot of health care deals lately?

Tycho Peterson:

Okay. And then was there any COVID bumps in their revenues over the past year, or if we think about next year that $380 million, how much of that might be tied to COVID?

Prahlad Singh:

None.

Prahlad Singh:

Yes, we have Craig Monell here who's the Head of Product Strategy & Commercial Operations here, take over.

Tycho Peterson:

Okay. And then on the pipeline?

Tycho Peterson:

Okay. And then maybe last one for Prahlad. I know, it sounds like M&A, maybe on pause here for a little bit after this deal. But can you talk to your ability on the integration side you've got a lot on your plate with Horizon, Oxford, SIRION, Cisbio, Nexcelom and now BioLegend. Can you just maybe talk to your bandwidth and how you're thinking about integration here?

Operator:

Thank you for participating in the question-and-answer session. Now I'm going to turn the call back to Mr. Prahlad Singh for some closing remarks. Sir, please go ahead.

Operator:

This concludes today's conference call. Thank you all for joining. And you may now hang up.

Operator:

Good day and thank you for standing by. And welcome to the Q1 2021 PerkinElmer earnings conference call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. . I will now like to hand the conference over to your speaker today, Bryan Kipp, Vice President of Investor Relations. Please go ahead.

Prahlad Singh:

Thank you Bryan and good afternoon everyone. I would like to begin by welcoming Steve Willoughby as our new Vice President of Investor Relations. We are excited to have him join the team. He brings a wealth of industrial knowledge, deep research and analyst experience. And as many of you know, Steve's industry surveys always seem to have a real-time finger on the pulse of market trends. We are looking forward to his insights and expertise as we continue to grow and transform PerkinElmer into a veteran class life sciences and diagnostics organization.

Operator:

. Our first question comes from Dan Leonard from Wells Fargo. Your line is now open.

Prahlad Singh:

I think, you know, Dan, we are seeing strong comeback from all the markets and across the board. I don't think it's as much pent-up demand as the markets just coming back and it's coming back strong. And we have seen this across all regions. So I wouldn't categorize this as pent-up demand.

Prahlad Singh:

I would say that again, Dan, just to remind, right, if you look back at our track record, most of the deals that we have done have been opportunities where we spent a lot of time. They tend to be more strategic and more partnerships resulting into acquisitions. So we are not clearly in the auction space. So it hasn't impacted that much either on the upside. But I think, I would say generically, if you look at it, the market is still ready hot and companies still that have a COVID tailwind are demanding a premium.

Vijay Kumar:

Hi guys. Thanks for taking my question. And congrats on a good print here. Jamey or Prahlad, maybe on the guidance here. You guys did 10% of the base off of a minus 3% comp. I guess the back half implied is about high singles, right, to get to your annual of 11%. Now that we have to Q1 out of the way, 2Q of high teens,. I think implied back half is high singles. One, is my math correct? And if it is correct, then I think your back half comps are pretty easy, down with singles, so was there any timing element from first half to second half? Or is this perhaps some conservatism baked into second half?

Vijay Kumar:

Got it. That's helpful. Prahlad, one for you, on the COVID testing side. There has been a lot of nervousness around how the environment around testing could change quite rapidly. Maybe talk about the visibility that you have in the 2Q code assumption? And does your annual guide bake in any upside from antigen revenues or perhaps any OUS tenders, if you will?

Vijay Kumar:

Fantastic. Thanks guys.

Operator:

And thank you. And our next question comes from Doug Schenkel from Cowen. Your line is now open.

Jamey Mock:

No. I think that's there. Hi Chris. How are you doing? I think as we just come into the quarter here, like I said, I think we feel confident in the high teens guide here. It is a little lower on a stack comparison. Again, nothing to read into that. I would say that we are confident in the guidance we are giving and continue to see a good outlook here.

Jamey Mock:

Yes. I think it's probably both, Chris. As you mentioned, we have been, really over the last two or three years, put a lot of incentives, a lot of processes into place to fundamentally change our free cash flow. That said, the first quarter is normally one of the weakest. So there's a lot going on in this particular quarter. I would say, we have had a lot of prior year accruals in this quarter. But the benefit that we are getting is, you can see in the receivables line,, we got about $170 million free cash flow benefit there, even when sales were, from a sequential standpoint, relatively flat. So we did collect on a lot of the past dues that were in the fourth quarter and our DSO has improved substantially. But in terms of going forward, I mean we remain very confident in the processes we put in place and the fact that will be above 85% moving forward, perhaps this year is going to be a little bit better. But there's a little bit from a couple of customers that we collected on. But overall, I think we have got fundamental improvements in place here.

Mike Ryskin:

Hi Thanks guys. Thanks for taking the question. This is Mike, on for Derek. A quick question for you, Prahlad. You mentioned India in your prepared remarks. And obviously, tragic situation that's going on there in recent weeks and months. But I was wondering if you can go into a little bit more detail on that? You obviously have a relatively large exposure there because of EUROIMMUN and Tulip and just the legacy business. Are you seeing anything in terms of the impact on operations? Are you seeing, is it backing into your outlook for the rest of the year? just sort of what's the latest on that?

Jamey Mock:

Yes. The only other thing, Mike, I mean in terms of exposure, in total India is a little bit more than $100 million. So it's not a substantial exposure for any particular quarter. EUROIMMUN, you mentioned does not really sell a lot in India. Tulip does obviously. But it's not an enormous exposure here.

Jamey Mock:

Yes. I mean, obviously as COVID ramps down, it will impact our margins, our margin profile here in the second half of the year. We have always been transparent about that and we remain steadfastly committed to the 23%-plus that we laid out in 2023. So I think the best way to look at it is, if you look at the end of this year, go back to a more normal comparison, looks to be a little bit of COVID in there. There's going to be some amount of durable revenue here. But go back to the fourth quarter of 2019 and add some growth rate to that from a profit perspective and we will steadily march towards 23%-plus and we have got all the productivity programs in place to do it.

Operator:

And thank you. And our next question comes from Tycho Peterson from JPMorgan. Your line is now open.

Jamey Mock:

Yes. I mean, I don't think there's much to read into in academic government. As you know, Tycho, our exposure to it is small. So whether it's customer classification or what have you, I am not sure we have it perfectly classified between pharma biotech and academic government. So overall, I would say life science has performed better than what we expected. So if you factor in the extra week, I mention that discovery was up low double digits, informatics was up high single digits. The extra week really affected our enterprise business. So we were quite pleased with the performance and we are pretty bullish on the outlook in life sciences here.

Prahlad Singh:

So U. K. and California labs was your first part of the question?

Prahlad Singh:

Yes. So U.K. is now it's just the Wales lab. IT5 is still in there. That has been extended through first quarter 2022. It's a nominal impact per quarter. So we have got that in there. California, we have got obviously extending or going all the way through October. And we are probably taking down the run rate on that a little bit starting in the third quarter. But in general, we still have a fair amount of revenue related to the COVID labs. Overall, though, Tycho, in general, we raised COVID guided by $50 million which was the beat that we had in the first quarter.

Tycho Peterson:

Okay. And one last one before I hop off. The 30% growth in food, I guess tough comps. Can you maybe just touch on that? What's driving it?

Tycho Peterson:

Okay. Thank you.

Matt Sykes:

Thanks for the question guys. My first question is just a little more general. Just as you mention your three assets you are scaling up generate about 25% growth. And I am just wondering, given the free cash flow you are generating, your balance where it is, is scaling up additional assets over the course of the year a limiting factor for you guys as you guys think about capital deployment? Or are you able to divide and conquer and staff up to, you are comfortable you can take on more?

Matt Sykes:

Great. And just my follow-up, just on going back to DAS. You mentioned in the presentation that you had strong backlog in all three of the end markets. Could you provide any additional color in the end market, particularly strong backlog or any particular product lines where you guys see a strong backlog developing?

Jamey Mock:

I think we have seen across the board they are very strong.

Matt Sykes:

Great. Thanks very much guys.

Operator:

Thank you. And our next question comes from Josh Waldman from Cleveland research. Your line is now open.

Jamey Mock:

No. I think the second part, I mean in general raising overall 11% from the prior guide of 5% to 7% has all quarters kind of rising tides here. So not just the first quarter beat. The first quarter we guided low single digits, came in at 10%. So that obviously contributes to some of it but not all of it. So we are anticipating improved performance 2Q through 4Q. In terms of the end markets, I mean like Prahlad mentioned, it is across the board. There is not an end market that didn't perform better than our expectations. So maybe I will just give a little bit more color on that. When we originally guided, we thought DAS was going to be flattish to nominal growth. And we thought DX would kind of be in the mid single digits which kind of got us to our low singles. On DAS hitting 6% versus flattish, life sciences, as I mentioned just to Tycho's question, was significantly better than we kind of anticipated there. And both food, but particularly food safety, which I talked about as well as applied MPIs, our Triple Quad, has done extremely well. Our new IR has done extremely well. So all of this contributed to the beat in DAS. If you move to diagnostics, I would say largely immunodiagnostics and applied genomics drove the beat here. So I mentioned in the prepared remarks that EUROIMMUN did great, particularly in China. So I would say, in China, we are now above 2019 levels. Tulip did extremely well in the quarter as well. Applied genomics continued, I would say, the brand increase with JANUS, as attributed to COVID has now started to filter off into non-COVID revenue as well. And then reproductive health was still a little bit better, largely in genomics testing, I would say. So again across all end markets, we saw significant improvement versus our original expectation and it should last throughout the year.

Jamey Mock:

Yes. So there's no revenue in the first quarter, Josh. But I would say that the commercial activity, we are cautiously optimistic that it is upticking again. So we have been involved in more discussions, more potential orders here. So hopefully starting in 2Q or certainly by the second half of the year, we will land some of the orders and revenue. But in the first quarter, it was nothing and then right now it's immaterial in our overall guidance.

Jamey Mock:

Thank you.

Tom Peterson:

Hi guys. This is Tom, on for Catherine. Congrats on a strong print. I am wondering if you could just get into your makeshift COVID testing by geography? Just any geographic trends to call out, particularly in Europe, given some country specific COVID pressures?

Tom Peterson:

Got it. And then just a follow-up on China. I think you said over 50% in the quarter. I think that last year 1Q down somewhere in the ballpark of 30%. So just wanted to get a sense as to how you are thinking about the recovery in China? Any trends to call out? And thoughts for the remainder of the year?

Tom Peterson:

Great. Thanks guys.

Daniel Brennan:

Great. Thanks for taking the questions. Maybe the first one on COVID. Just obviously, there's tremendous amount of uncertainty on how this will ultimately play out this year and next. But is there any sense to how we think about the durability of your business as the pandemic slows? I apologize if this was raised earlier in the call? But I am just trying to get a sense of beyond 2021, what kind of lasting benefit you think PerkinElmer will play within COVID testing? And then I have a follow up.

Daniel Brennan:

Got it. And then maybe just within diagnostics, obviously very strong, ex-COVID as well. Just could you speak to the overall environment just more broadly? How much that's related to Perkin-specific initiatives and kind of success. And how much is the overall environment improving as a back up in diagnostics? Thank you.

Prahlad Singh:

The only thing I would add is, largely China has been much stronger than we thought would come back here, Dan.

Operator:

Thank you. And we have a follow up question from Patrick Donnelly from Citi.

Prahlad Singh:

In fact, the number one thing is, it's obviously a strong rebound from what he had seen in 2020 and we expect the testing levels to continue to exceed than 2019. They have seen double digit growth in Q1. The T-cell piece that the team has launched there, that is seeing good traction, early on around vaccination deployment to measure immunity. And in the automation is opening up some doors with early wins. So those are the three factors I would point out in terms of seeing good traction for Oxford. And the deal integration is going very well. The teams have jived very well. There are lots of doors that they are opening for each other in regions around the world.

Jamey Mock:

Yes. So Patrick, on the industrial side, I will start there. I mean a lot of this was due to the bounce back in China. It's a lot stronger than we anticipated. I would say, if you look across the sub segments of industrial, semiconductor across the globe continues to be the strongest. I would say, Americas is decent from a decent growth rate perspective. EMEA had a little bit of a difficult comp. The first quarter of 2020 has been strong. But I mean, the outlook in general should steady uptick but China really bounce back more than anybody else. I would say, in environmental, we see it largely an APAC and EMEA. China, again for APAC. But EMEA has continued to be extremely robust. And Americas still nominally positive here.

Operator:

Thank you. And I am showing no further questions. I would now like to turn the call back over to Prahlad Singh for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating and you may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. And welcome to PerkinElmer Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session I'll now hand the conference over to your speaker today, Bryan Kipp, Vice President of Investor Relations.

Prahlad Singh:

Thank you, Brian and good afternoon everyone. A year ago, I started my prepared remarks talking about how 2019 was a seminal year for PerkinElmer. And I had no doubt that the positive changes we had completed would become increasingly apparent to external stakeholders in the quarters and years ahead. Looking back now, it is hard to believe how much has changed in such a short period of time. From where we stand today, looking back on 2020, we are a more collaborative and cohesive organization.

Operator:

Thank you. Our first question comes from Vijay Kumar with Evercore ISI. Your question, please.

Jamey Mock:

Thanks Vijay. There's a few questions in there and we're excited for Bryan as well. So I'll start with COVID. As it pertains to the guide, obviously, we said at least flat year-over-year and I'd say predicting the course of COVID has not been easy, nor do we anticipate it to be easy over the next 12 months. There are certainly some variables that could make it more than this. Let me talk about it in a couple ways. One is the sequence through the year, which gets to your question about $500 million in the first quarter, and then the labs versus kind of the rest of COVID revenue piece. So in terms of the sequence, obviously, we have much better visibility, certainly to the first quarter and the first half. And our assumption in this guidance is that the vaccine kicks in and that the second half's revenue and testing come down substantially. And you can see that by evidence that almost 50% of the revenue is here in the first quarter. So we feel like that's a conservative assumption, but one that we are confident in. As it pertains to the split between core versus labs in 2020, core made up approximately 80% of the revenue. And we're predicting that that'll make up approximately 60% of the revenue. And conversely, the labs, which made up about 20% of the revenue in 2020, will step up and be a greater contributor in 2021, to be about 40%. So I think we're assuming that starting in the first quarter here, we're expecting the testing levels on the core to come back down and the level of instruments that we sell, et cetera, to kind of match what we saw probably in the third quarter. And then as it pertains to the labs, we've got a couple variables at play. First is in the UK, our contract only is valid through the end of March. So we're not yet sure whether it'll be extended beyond March, we haven't been told yet. We're obviously talking to them about that now. So this guidance assumes that the UK finishes at the end of the first quarter, and there is no revenue assumed in the end in the second quarter and beyond. And then California, as you've seen is a slow and steady ramp. So it's public information. We've ramped from almost no testing at the beginning of November. And now we're probably about 20,000 tests per week. But there's numerous sites throughout the state of California that they're trying to bring into the program. And so - but those are slow and steady. So we expect California to ramp up here, but it's not nearly as fast as we think. And so therefore, we've taken a pretty conservative assumption in the first half here as well, and then it tailors back down in the second half as well. So overall, a lot of variables in play Vijay. We're trying to set a floor here that says we think we can be at least flat. It's very much front end loaded here. And there's certainly some potential for upside here. And our supply chain can certainly deal with it as we've done in 2020. Well, non-COVID. So on the non-COVID side, the first quarter, I think the comp is a minus 3%, not a minus 7%. The rest of China was the one that was impacted the most. I think China was down over 30% in the first quarter last year, the rest of Europe and Americas was quite strong in the first quarter, which pended to down 33%. So if you look at our 1% to 3% guidance here in the first quarter that embeds the extra week, which is the equivalent of probably two percentage points, so it's more like a 3% to 5% Guide. And we've seen a slow and steady uptick here. So second quarter of last year was where we troughed, we hit I think minus 14% on the quarter book, third quarter, we hit minus 6%. This past quarter, we hit minus 3%, with a couple of difficult comps in there. So we continue to see this trend up. As it pertains to the five to seven overall for the year. Obviously, we'll probably see the largest growth from an organic growth rate perspective in the second quarter due to the comp and then it'll start to normalize in the back half of the year.

Jamey Mock:

Thanks Vijay.

Derik DeBruin:

Hi, good afternoon.

Derik DeBruin:

Hey. So I want to ask on the margin progression, so how should we think about the decremental on the operating margin for 2021? And I know that it's at the at Tycho's conference, you put out some targets for the 2023 outlook. So I'm just curious and sort of like, can you sort of talk about the margin progressing going forward? And they are - and what the impact is of the recent acquisitions? And I know Oxford's not - and what sort of Oxford considered like have an impact on the margins? It's just I'd love to get your general thought on near term and the longer-term margin profile. Thank you.

Derik DeBruin:

Great, thanks for the input. I'll get back in line.

Operator:

Thank you. Our next question comes from Dan Arias with Stifel. Your question, please.

Jamey Mock:

Yeah, I mean, I'm not sure I would say today's a normal environment. I think people are starting to live in a new normal environment. But I think right now, it's still I wouldn't say, the completely robust environment. That doesn't mean we feel confident that the long-term prospects are much faster from a growth perspective coming out of 2020, then going into 2020. And so - but we've seen a steady, as I mentioned earlier Dan that we've seen the steady increase quarter-over-quarter. So if you - as I mentioned, we went up about six points each quarter and three points in the fourth quarter. But if you normalize some things, probably a little bit more. And so overall, we feel very confident that the five to seven is an achievable number here. And we're - could there be a scenario that this is better than that? Yes. We - I mentioned in my prepared remarks that we're not banking on any pent-up demand. But we can go through the end markets, and we feel like five to seven is an appropriate guide at this point in this market environment.

Dan Arias:

Okay, but just to be clear, it does look like you're - you exited the year with a DAS backlog that's good. You're seeing some improvement in food safety demand that makes you think that maybe overall the food businesses is trending in the right direction. And then on the diagnostic side, it sounds like on the ImmunoDx business on the non-COVID side of that you're approaching normalized, right. I mean, so for lining up the thing that seemingly could take you higher, it feels like there are a couple of elements here that suggest that that could actually take place. Is that true?

Dan Arias:

Okay. Bryan, good luck. Don't be a stranger.

Operator:

Thank you. Our next question comes from Tycho Peterson with JP Morgan. Your question, please.

Prahlad Singh:

So you want that?

Prahlad Singh:

And Tycho, the serology and on the antigen test. On serology, our assumption right now is we've got QuantiVac CE-Marked and we are going to submit it for an EOA from EUROIMMUN and we've got a couple of T-cells options - T cell options that we are looking. Obviously, one is from EUROIMMUN and there'll probably be - assuming Oxford closes, we have that option, too. So I think in the post vaccine world, we see a role for it. We've not made a big assumption around that in the numbers that we forecasted, as of now. On the second one, on the rapid antigen test, if you recall, in the fall, in fact, during the CEO series that you had done, we had talked about the fact that we would come out with one, when we feel that it's probably of the same quality comparison as we have on the RT-PCR. And at this point, we feel pretty comfortable that we have something that we might come out with which is probably at par or if not best of - best in standard in terms of what's out there. So few weeks more to go. And that should that should be something we'll be able to share.

Prahlad Singh:

No, I think there's both organically future menu build out on those ourselves, and also adding other components to it from a detection capability perspective for our customers, NGS and things to that effect and adding kits on that side. So there's a lot of work going on that from an R&D perspective Tycho.

Prahlad Singh:

I think it'll get back to growth in the first quarter, but I think, I don't know -

Tycho Peterson:

Okay, thank you.

Operator:

Thank you. Our next question comes from Steve Beuchaw with Wolfe Research. Your question, please.

Bryan Kipp:

Thanks Steve.

Prahlad Singh:

Sure, Steve. So on Vanadis, I think we've got two to three publications that are coming out in the first half of this year. I think there was one that came out at the - close to the end of last year. So you've got a good pipeline of publications coming out. And again, I'll reiterate what I have said earlier Steve, we continued to be very confident on Vanadis. We've got a very strong pipeline. Our challenge really right now is being able to ship, install and train. So maybe it's probably in the next couple of quarters, we will start seeing that coming into play. On the second question around how do we - on adding more menu to our installed base or incremental installed base we have put in, I think, again, there we are going with a three-pronged approach. One, organically what we develop through EUROIMMUN or through our Turku and Taicang labs. Second, partnering with other companies that have got approved molecular assays that are out there. And third, obviously, is the M&A and acquisition targets. So that number two and number three are in place, Steve, and hopefully, we'll have something more to announce in the second half of the year.

Prahlad Singh:

Yeah.

Dan Leonard:

Thank you. So two parter, on the COVID assumptions, I think I might be helpful to understand if the component of your PCR, RNA extraction business how much of that is equipment versus consumables as we make assumptions around durability? And then just to clean up, can you offer out the China growth rate in the quarter and what you expect, broad brushstrokes to look like in '21?

Prahlad Singh:

China.

Jamey Mock:

China was down mid-teens in the fourth quarter. So if you go through the progression of the year down to 33%, in the first quarter, and it got a little bit better throughout the entire year. But then, - and then as we go into the next year, our assumption is that it is high single or double digit for China throughout the year here starting in the first quarter.

Dan Leonard:

Okay, thank you.

Steve Willoughby:

Yes. Hi. Thanks for taking my questions. And good luck, Bryan. Jamey, I was wondering if we could just circle back one more time on the - some of the assumptions as it relates to COVID. I guess, first you talked about how the State of California has asked you to increase capacity in that lab there. So I presume that that would also mean that you're - basically the minimum amount of revenue you should expect to receive from that contract should increase in the first quarter versus what you saw in the fourth quarter. And then in the UK, I believe your - larger of your two labs didn't open until the beginning of December and that has continued to ramp up we believe. So should both California and the UK contribute meaningfully more in revenue COVID revenue in the first quarter versus what you saw in the fourth quarter?

Steve Willoughby:

Can I ask a follow up on that, Jamey, just how are you guys thinking about that UK contracts going beyond March? I mean, if there's any way to ballpark if you think that continues or not.

Jamey Mock:

We don't have it in our guidance at all.

Steve Willoughby:

Thanks very much.

Operator:

Thank you. Our next question comes from Doug Schenkel with Cowen. Your line is open.

Jamey Mock:

Yeah, so two things. One is that Horizon is basically - we said, nominally accretive here, so you have a lot more OpEx cost as a result of that. I said, overall, gross margin, we're assuming is flat. And then we're going to uptick our R&D and selling and marketing and some of our digital investments here, Doug. So I think we're using some of that profitability this year to invest in the OpEx line and continue to improve the outlook from a growth rate standpoint.

Prahlad Singh:

Sure Doug. I think the way what we've done and the reason it has worked for us so far is we have always integrated our acquisitions, right rather than heavy or light or appropriately. And I think maybe I can talk a lot more around Horizon than on Oxford, because we haven't closed on Oxford. But as you think through it, right, if we give you one example, Horizon has a group of strategic account managers with pharma that are very well penetrated, and a lot of the business flow through comes from them. So in this case, for us, it's more of a reverse integration, just to give you an example, where we can build on that core competency that Horizon has around strategic account managers, specifically in pharma and biotech, and use them and add our assays and imaging and detection portfolio and discovery portfolio to that back. So for us, what is more critical is to look at the opportunity that - look at the target that we are integrating and see where there are opportunities, and most of our focus right now has gone around commercial synergies and technology synergies. And obviously, Jamey and I both have talked earlier about the whole aspect around how we bring in our automation expertise, for example with Oxford. So that will play a role. That doesn't mean that we don't have the cost synergies or the corporate opportunity of - the cost opportunities around corporate costs. But for us, the focus is primarily around commercial and technology synergies.

Matt Sykes:

Thanks for taking my question. And congrats again, Bryan. Well deserved. I just wanted to - just one question for me just on the DAS division. Obviously, Life Sciences had a good fourth quarter. I just want to get it the sustainability of enterprise and discovery within that. And if that is sustainable, how should we think about food and applied kind of coming up the curve as they recover? And how is that kind of fit into your guide for the year?

Matt Sykes:

Great, thanks a lot.

Brandon Couillard:

Hey, thanks. Just a high-level question for Alan, do you think about just capital deployment priorities obviously, you're thrown off a lot of free cash flow, you've already done two deals, sort of about your bandwidth to absorb another acquisition right now. You'd expect to sort of take a pause or s you absorb the Oxford and Horizon, and then just your appetite for share repurchases this year.

Jamey Mock:

And on share repurchases Brandon, we assume in our outlook here that we're going to keep it flat year-over-year.

Operator:

Thank you. Our next question comes from Jack Meehan with Nephron Research. Your question, please.

Prahlad Singh:

Sure, I think from 2020 perspective, obviously, the pandemic did have an impact on genetic testing, not for us for the industry as a whole. But it has started coming back. And also keep in mind, Brendan, that most of the team there was focused on ensuring that the California and the UK labs get up and running. So our focus had shifted, because they sort of are the nucleus of ensuring that these labs, take off and we execute flawlessly. From a reproductive health perspective, our assumption I think going into it is low single digits for the year. We continue to see - we've seen continued pressure on birth rates for the past few years. But again, as I've said earlier, that's not sustainable. So our assumption on that is probably flat to low single digit decline on birth rates, but compensating that with menu expansion, and some of the new NPIs that we've talked about. Ion being one of them, I think, SMA and DMD, right. So that's sort of our thinking around reproductive health.

Dan Brennan:

Great, thanks for taking the question. Bryan, best of luck with the new role. So really, it's a two-part question on testing, if you don't mind, just how are you thinking about the impact of rapid antigens just on PCR in your franchise as you look out? And then two well, I know, there's a very wide range of outcomes with the vaccine and kind of what happened to testing, but any, any way to think about like kind of guideposts as we cycle past even '21 and the '22, just given how big of a part of a business it is, obviously, symptomatic testing may come down, but you could have a lot of screening, that takes up the slack, just kind of wondering, just some early thoughts about just kind of a range of outcomes we might contemplate. Thank you.

Dan Brennan:

Great, Okay, Prahlad thank you very much.

Operator:

And ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Have a good night.

Operator:

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the Third Quarter 2020 PerkinElmer Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session At this time, I'd like to turn the conference over to Mr. Bryan Kipp, Vice President of Investor Relations. Sir, please begin.

Prahlad Singh:

Thank you, Brian. And good afternoon, everyone. Our 13,000 employees continue to go above and beyond, and our year-to-date results further reinforced that reality. As I have previously mentioned, improving lives is in our organization's DNA. It is what impassions our team. I remain humbled by and immensely proud of how everyone within PerkinElmer has rallied together throughout 2020. While the guiding principles that we outlined at the onset of the pandemic remain on North Star, keeping our employees and company safe, utilizing our expansive capabilities to join in the fight against COVID-19, serving our customers with excellence during this difficult period and emerge from this crisis as a stronger company. We are also actively positioning the organization for what a post COVID-19 world might look like. The environment will undoubtedly be different from the future we imagined a year ago. Over the past 12 months, we have expanded into market adjacencies, built new business lines and dramatically enhanced our commercial relationships.

Operator:

Our first question or comment comes from the line of Vijay Kumar from Evercore ISI. Your line is open.

Jamey Mock:

Yeah. Thanks, Vijay, and hope you're doing well. So generally speaking, I'd say we're taking a similar approach entering the fourth quarter, as we did when we entered the third quarter. We've looked at order trends. We've looked at our backlog, which has grown versus when we entered the third quarter, and we feel very comfortable with our guide, and I'll kind of break it down non-COVID versus COVID. So non-COVID, we are seeing the market improve, but the exit rates are not quite as fast as they accelerated at the end of the second quarter. However, if they continue, we think we'll be at the high end. And if they don't continue or if something happens, they'll be at the low end. It's also worth noting, Vijay, that in the fourth quarter of 2019, we had two very material product lines growth for us. Cannabis was quite substantial in the fourth quarter. We're assuming no cannabis revenue in the fourth quarter of 2020, as well as informatics was substantial in the fourth quarter last year. So if you exclude those two, we think we'd probably be better by three points. So instead of down 4% to 6%, we'd probably be down 1% to 3%. So DAS came in minus 3% in the third quarter. It will probably be in the same vicinity due to those comps. However, if you exclude those comps, DAS would be positive in the fourth quarter. And then Diagnostics ex-COVID revenue was down 11% or 12%. And we've seen it start an uptick over the last few months. And so we are assuming that, that will be down high single digits. So that kind of explains non-COVID. It is closer to low - minus low single digits, but we have those two comps. From a COVID standpoint, you asked the question specifically on California. Yes, it is in the number at about $50 million to $75 million. The way we derived the $350 million to $450 million is the base business was $288 million in the third quarter. We're assuming the base business is mostly in that range, call it $250 million to $300 million, and then we're adding an extra $50 million to $75 million for each of the California labs and the UK labs, which overall gets you to the $350 million to $450 million. I think all of this is worth noting that none of this assumes any significant block down, obviously, COVID positivity rates are going up across the world. And right now, we are not planning on any significant lockdowns in any of this guidance. Should they happen, it could have material upside to our COVID revenue and material downside to our non-COVID revenue. But in general, that's how we kind of thought about the guidance, Vijay.

Prahlad Singh:

It's a very good question, Vijay. I mean I think the way I would look at it, obviously, we have been giving a lot of thought to it. Over the past few months, where I personally have focused my attention on and maybe that will sort of throw some light into how we are thinking of it, right? As I talked about, the team has been focused on the three guiding principles extremely well, that allows me to focus most of my efforts on positioning the company for the future. And we sort of - I'm looking at it from three primary areas, right? Number one is innovation. I mean, looking at opportunities across the organization, both on COVID and non-COVID, but fundamentally driving innovation in a very different way and three key areas that I'm focusing on. NPI acceleration, focus on quality and disruptive ideas. And this is where we are having regular reviews, deep dives and what the cadence of NPIs will be over the next 2 to 3 years? And what I can tell you confidently that it will be no doubt very strong. There are lots of exciting things that we are building upon the strength that we have now, the muscle that we have exercised through COVID, we need to now expand that into new and adjacent markets. The second one around capital deployment, right? We are in a great position. We have firepower now. And over the past year, we have gained share and expanded our presence in new markets, as you mentioned, around molecular diagnostics. So we are actively looking to deploy this capital to further bolster both on the diagnostic side and on the life sciences franchises, so that we can layer additional capabilities that enhances our current positions in the market. Let me give you an example, right? As we look at - from a disease target characterization, we have a leading position with high content screeners and in vivo imagers. Cell selection and separation tools would go hand-in-hand with the imaging and detection capability that we have, that would allow researchers to investigate which cells have changed in a population versus the subcellular level. So additional these tools around cell detection, separation or manipulation is a natural adjacency for us. So that's an example that we would continue to bolster our efforts around capital deployment. And the last one is on the people front. I've been focused on building an organization that has the diverse talent and deep bench stream. Over last year, if you recall, we combined our commercial teams from DAS and DX, the United R&D. Now our focus is how do we take these opportunities within commercials and bring that under one umbrella. How do we focus on the alliances and partnerships that we have built across the globe because of COVID? So those are the three focus areas that we have - that I personally am putting my attention on. And that's why we feel confident about the future.

Operator:

Thank you. Our next question comment comes from the line of Dan Arias from Stifel. Your line is open.

Prahlad Singh:

Yeah. No, great question, Dan. And let's start with the reproductive health, right? As you said, we don't expect the current birth rate pressures to be a headwind of this magnitude for the foreseeable future. We expect that this will moderate at some point as conditions normalize. But outside of that, just like I gave you the example of EONIS during my prepared remarks, that is a particular segment where we can bring that product portfolio into the molecular diagnostics arena because it uses the same workflow that is currently being used for COVID, right. You use the same PCR, you use the same liquid handling, and you use the same extraction components that are already in place now at all these installed base. And as we look forward to the menu expansion around reproductive health, Dan, most of the new disorders that are either being looked at or thought off from the RUS panel as an example, DMD, SMA, they are all molecular based. So again, the methodology or the technology is moving away from immunoassay to molecular diagnostics, which sort of matches well with the new and expanded installed base that we have put together across the globe. Similarly, as we look on the immune side, immunoassay side, there are several other new immunodiagnostic assays that we are either working on in-house or also looking at inorganic opportunities. Now moving on to the autoimmune and allergy side that comes from the EUROIMMUN portfolio, right. Autoimmunity, as I have said, the rate of detection of autoimmune diseases is not slowing down, and we've started already seeing signs of recovery of that even in China. And I think we'll continue to expand that portfolio by bringing in a new platform that we've - that we have named Excentis And that should be out probably sometime in the next year. Adding - continuing to add to that portfolio is going to be an important factor for our growth. The one place where we will see some pressure in the short-term is around allergies. And that's just because people are being very productive, wearing masks, and that's the portfolio that we see a pressure on it. So sort of there are various ways that we are looking at expanding our portfolio around the installed base that we've already built today with our extraction portfolio, Dan.

Prahlad Singh:

Yeah. I mean we have put more than 1,000 units that have been installed. Now while these labs are focused on COVID, they're also aware that - look, we have put this infrastructure in place. Now we've got to be able to put plans in place to leverage this installed base and competency that we have set up beyond COVID. So absolutely, the partnerships, those that we have announced and several that we have not announced. Those customers are already discussing with us, hey, what else can we put through this - what else can we put through this workflow. And again, in fact, this has gone to an extent that in Jamey's team we are now establishing a function around alliances and partnership, that will be focused solely around these efforts of taking this forward.

Operator:

Thank you. Our next question comment comes from the line of Derik De Bruin from Bank of America. Your line is open.

Prahlad Singh:

Yes. Sure. Hey, Derik, hope you are doing well. So I mean, I think we're, in general, coming off fairly reasonable comps this year to start with. I think life sciences, we've seen a continued uptick throughout the year. I mentioned in my prepared remarks that the Discovery business is now positive, and I think we will continue to see that moving forward here. Informatics, we think, is still a strong grower heading into 2021, OneSource. So the life sciences business, we expect, A, you should have relatively easy comps; and B, is we're starting to see the spending and that's probably 55% to 60% of the DAS business. So feel good about that. Food, we will not have the cannabis issue year-over-year. So cannabis in 2018, if you remember - or 2019, I guess, if you remember, was $25 million. And this year, it's next to nothing. So we will not have that comp issue. And in fact, depending upon where the election goes and where it's funding levels are, that might start to rebound again. And in addition, food and if it starts to open up a little bit, it's hard to understand what will happen with processors and restaurants and whatnot, but at least we will have already kind of lived through probably the significant shutdown. And then industrial and environmental has been relatively stable and steady. I don't anticipate a big snapback or whatnot. But I think you've got life sciences, it should be an easy comp. But I think life sciences has; A, an easy comp and should be growing nicely, particularly Informatics. Food will not have a difficult comp anymore and should start to uptick industrial and environmental as well. The only thing I'd say on DAS, in general, is we do have a fair amount of NPI. So Prahlad mentioned it earlier, he's been holding weekly reviews with all of our segment leaders. We are up ticking our R&D. It's up 10% in the third quarter. We plan to further uptick in the fourth quarter. So there is a cadence of improved NPIs coming out that should bode well in 2021 and beyond for the DAS business.

Derik De Bruin:

Got it. And thinking about the - it's an interesting comment. I mean, one of your competitors in the RNA extraction space was sort of maintain the fact that automated sample extraction is - it was a headwind for them. It seems like you're certainly benefiting from that one. Can you talk about the dynamics of that market? And also, just how you're sort of thinking about the evolution of - there's more people going to like heat, lay bile, sample preps and RNA extraction free going on with it. So like how do you - once again, it goes to the sustainability question that Vijay was asking about. How do you sort of think about your RNA extraction business going, and market share shifts and things of that nature?

Derik De Bruin:

Great. Thank you. I'll turn back in the queue.

Tycho Peterson:

Hey, thanks. I'm going to take the other side and actually ask on some of the COVID tailwinds. And maybe start with the two labs, California and the U.K. I know you talked about 40,000 samples to start in California. Can you just remind us where those could go from a capacity standpoint? I think, I read California could get up to 150,000 tests. I'm just trying to take forward a little bit into 2021. And then separately on the respiratory - multi analyte respiratory panel, how much of the volume do you think goes to that versus the stand-alone PCR test? And then when do you think also serology starts to pick up again?

Jamey Mock:

40,000. I think the state we're working with them. By the end of the quarter, it might be at something like 80,000. And then in the first quarter, be ready for 150,000 at some point during the first quarter.

Tycho Peterson:

Okay. And then on serology, when do you think that starts to pick up again? Is that mid-next year? Or what's your outlook there?

Tycho Peterson:

Okay. And then shifting gears, you're - I think the only company we've heard from so far that's still negative in China. Can you just - and obviously your levered birth rates and other factors there. But can you just talk on when you think China may return to growth for you?

Jamey Mock:

Yes, I would agree. And then on the DAS side, Tycho, I mean, we've already seen life sciences turn positive in China. Food and Applied has been kind of down low single to mid single. So I would anticipate by the first quarter of next year that - with easier comps and continued uptick. And we have seen an uptick, particularly in industrial and environmental, that it has steadily grown throughout the year that I think we turned positive in DAS and Diagnostics will be influenced by the things that Prahlad talked about, but birth rates obviously matter. Allergy is a bigger share in China for EUROIMMUN. And if everybody is wearing a mask, there's a little less allergy uptake there. But DAS would turn positive and Diagnostics, we'll see. But the long term...

Jamey Mock:

That's a great question on the - you're speaking specifically to DAS, though, Tycho?

Jamey Mock:

Yes. Yes, DAS has been under pressure for two reasons. One is, you'll see in the quarter, we're probably down 500 basis points or something like that. And about half of that is both of them are conscious decisions. On the OpEx side, it's about half of that, and we've increased our R&D. We've mentioned earlier that we want to get ready for our analytical portfolio, our life sciences portfolio, our food portfolio. So we continue to increase R&D. We continue to work on our sales and marketing channels, particularly on food. I've mentioned that in the past that we had some work to do there, and people in general. So about half of this is a conscious decision on OpEx that should be fine, and we're making that investment now. And as soon as the volume upticks, we should be okay. Similarly, on the gross margin line, which is probably the other half, we've made a decision, which was part of the 4 principles that Prahlad outlined earlier, to keep our employees safe, and we've had no layoffs at any of our plants across the globe. So even as the volume has declined, we've had unfavorable variances due to the factory overhead and whatnot haven't laid anybody off. And so therefore, as the volume comes back, we think that the workforce will be ready, and we're just seeing a little bit of short-term unfavorable variances.

Operator:

Our next question and comment comes from the line of Steve Beuchaw from Wolfe Research. Your line is open.

Prahlad Singh:

Okay. On the first one, Steve, I think it's a good question, right? But there are some other discussions going on, then there are some other partnerships that we have across the globe, which we haven't publicly announced because of our partner's request. So I think alliances such as these, take a larger importance during times of crisis and pandemics like that when states and governments sort of get into action and gear. But I think what these alliances forge are longer term partnerships. And our focus really is on how do we do these, I mean California, as I said in my prepared remarks, right, within eight weeks, we've done what should have taken 18 months. So the focus is really how do we execute flawlessly on these and build on it beyond that. But really, what we are not - our strategic intent is not to become a reference lab, that is not something that is part of our strategy. We are doing this. Because we've got a three decade-old relationship with the state of California, and this is building on that partnership around lab and labs. So I think that's the way I would look at it. To your second question around the split between antigen and R-TPCR. Our belief is that RT-PCR is the gold standard. The level of detection that you get, and especially when you look at our kit with the lowest level of detection, you could think of it from a perspective of moving on beyond a singular test to pooling. And research shows that there's a 10% - 10-fold increase in the level of - limit of detection of a COVID diagnostic test, and it's expected to increase the false negative rate by 13%. So there is data out there that by having an important, highly accurate, sensitive test is going to continue to play a role. Having an antigen test, which is in the high 80s or even if it's early 90s, the impact of false negative, especially for pandemic and flow for infectious diseases that are so contagious, does have an impact. And I think the viral loads may be missed by those assays. Did you have another question?

Prahlad Singh:

Yes. See, so I think what I've talked earlier about is looking at the immune insight, right? And I think on that, we are looking both at the quantitative antibody testing and a neutralization assay as an example. But the idea really is that investigating T cell responses for cellular immunity, I think we think that it's going to be important. And hopefully, we'll have a couple of COVID-related products in the pipeline that we can talk about more over the next few months. To your second question around how big or what the impact of serology? I think it's - my guess would be as good as yours. And honestly - and the reason I'm saying that is because the crystal ball on that is really based on the impact and how important it being a partner for vaccine vaccination and vaccine will be. So I think it will gain importance and more relevance as we move from where we are today to vaccines and then beyond that for epidemiological testing. That's where I think serology will have the biggest impact.

Operator:

Thank you. Our next question or comment comes from the line of Doug Schenkel from Cowen. Your line is open.

Jamey Mock:

So the answer to your question is that, yes, we will definitely benefit from the installed base that we have put in place. If you are asking us to give an estimate on what our EPS is going to be in 2022, Doug, I'm not going to give you that. I don't know...

Jamey Mock:

Yes, for a couple of reasons. For our install base, the additional markets that we're playing in, the customer base that we have. But also, we've generated a lot of free cash flow on back to Prahlad's earlier points, we are spending a lot of it on innovation, capital deployment. So I think it increases the flexibility of the company. So I think we were already on that trajectory, but I think this should - to answer your question directly, further boost our ability to at least meet that, if not beat that, for sure.

Prahlad Singh:

Yeah. I don't think I said anything about free cash flow going down. So to put 74% into perspective, Dough, we've made a conscious decision, much like we do every year on the non-COVID side to build inventory, but we built $120 million of inventory, which is exactly 25% of our net income. So absent the inventory build to which probably two-thirds of that is COVID related, we would be at 100% free cash flow year-to-date. And - that was because we look at the backlog, and we've got a substantial backlog walking into next quarter. And we think it's the right thing to do to have the COVID products available. And we think that the non-COVID side will see an uptick as well outside of informatics and cannabis. So we think we're in shape. And actually, one more thing, just to further put a point on that. I mean the COVID related free cash flow conversion year-to-date, while it will be wonderful in the future, is actually a drag. So if you think about $0.5 billion of volume, there's still a couple of hundred million and I assume 30 to 60 days payment terms, there's probably a couple of hundred million dollars of that on the balance sheet in terms of receivables. We built $80 million of inventory. So we basically eroded much of the net income on the balance sheet and working capital. But that will prove to be future excess cash and none of this includes the $200 million that we funded to outfit the California lab that we believe we will collect in the fourth quarter.

Prahlad Singh:

That's right.

Prahlad Singh:

Thank you.

Prahlad Singh:

Thank you, operator. Again, thank you for your questions. As I said at the beginning, I'm gratified and I'm proud of the organization and how everyone has valued together. We really feel very confident that we are leading with science, and that is clearly resonating. I have no doubt that we emerged from this crisis as an even stronger company. Thank you for supporting PerkinElmer, and I look forward to providing further updates on our fourth quarterly earnings call.

Bryan Kipp:

Good afternoon, and welcome to the PerkinElmer Second Quarter 2020 Earnings Conference Call. With me on today’s call are Prahlad Singh, President and Chief Executive Officer; and Jamey Mock, Senior Vice President and Chief Financial Officer. If you have not received a copy of our earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com. Please note this call is being webcast live and will be archived on our website until August 11, 2020.

Jamey Mock:

Thanks, Prahlad and good evening, everyone. To start, I hope you are all safe and doing well. I would like to echo Prahlad’s comments by thanking the global team at PerkinElmer. We have all been through a lot of change over the past 18 months and our team's passion and dedication has been amazing. So a big thank you to everyone. Over the past three months, I spent a disproportionate amount of my time working with our segment leaders, especially within our applied and food businesses, to understand our go-to-market strategy, competitive advantages and future opportunities. We evaluated the product pipeline strategy and profitability of these businesses. And we identified significant opportunities that have me even more excited about the future potential of PerkinElmer. We will be sure to democratize some of those learnings in future discussions with the external community, but I wanted to take the time to reinforce that we have also been making a lot of progress on our non-COVID portfolio, which will position us well for the future. On a related point, given our inability to get together in person due to the current environment, we will postpone our Analyst Day originally planned in September to date to be determined in 2021. That's said we recognized there have been a significant amount of time since our last Analyst Day, and our portfolio has dramatically changed. Given this, our hope is to host virtual webinars, to walk through our end markets and product portfolios over the coming quarters.

Vijay Kumar:

Thanks guys for taking my question, and wow, best quarter since 1999 and that came in the midst of a pandemic, congrats and a terrific execution here. Maybe I have two questions, one, on the 3Q guide, Jamey. The non-COVID revenue base, I think the ranges are minus 7% to minus 14%. The base business was down 14% and 2Q I think commentary from your peers would suggest that the base business is improving. So I'm just curious on the assumptions around that minus 7% to 14% particularly at the high end. COVID revenue is $150 million to $200 million, it seems it's sustainable in the 3Q. I'm curious about that’s in the 4Q on especially on COVID diagnostics.

Vijay Kumar:

That's a helpful, Jamey. And then one for Prahlad, thinking about sustainability of trends a couple of comments, you made, Prahlad, in your prepared remarks. I think you mentioned something along the lines of opening new doors, in terms of relationships just given the amount of placements you guys have done on nucleic acid extraction, liquid handling. I'm just curious whether that has any implications for tender wins are going forward. And I think you also mentioned a COVID plus flu combo test. Perhaps, could you address the pricing or how we think about opportunity for this combo test? Thanks.

Vijay Kumar:

I understood. Congrats again, guys, I'll step back in the queue.

Steve Willoughby:

Hi, thanks. A couple of questions for you, first on a PCR test demand. Prahlad or Jamey, I know things are shifting quickly, when we look back 90 days ago, your 1Q call, it seems like you maybe downplayed the opportunity within PCR. Obviously, it came in much better than expected. Can you maybe just provide a little bit more color on sort of what changed, as it relates to the demand for your PCR test? And then secondly, on PCR, Prahlad, what we look out how are you guys thinking about the sustainability in PCR test demand maybe even beyond the third quarter. And then I have one quick follow-up.

Jamey Mock:

I would just add two things, Steve. At the time of our last call, remember, we had not made any shipments yet of PCR at that time. So we were having some import issues at the time. So having the confidence to be able to ship that amount was still in question, I would say. And then the second thing is, I think our workflow is terrific. So when you combine RNA extraction capabilities with our PCR technology and liquid handling, I think that's resonated very well in the marketplace.

Jamey Mock:

Yes, that's right. I mean, that’s so, I would try to mention in Vijay's question is that serology, which was a little over $50 million, obviously, time and place for serology is going to be in the future. We believe. We'll see. So therefore that demand, we have taken down to less than $10 million and therefore the PCR and RNA extraction technology, which as you said, was, let's say $100 million is much more a bigger portion of the total, $150 million to $200 million.

Jamey Mock:

Yes. So China improves sequentially for us. So it was down over 30% in the first quarter and down about 14% in the second quarter. And we had hoped actually that it would get the flat at one point in the quarter here. DAS didn’t get to flat and in fact, built a little backlog as well. So we feel good about that diagnostics though went from down 40% roughly down in 20% in the quarter. I think, whether that's the second outbreak in June in Beijing that happened, but we're still not at the utilization levels of having people comfortable with going to the hospitals and clinics, et cetera. It's still not at that a 100% level and hasn't returned to normal. So as we look forward here, we're hoping again, that'll get to flat as soon as possible and perhaps in the third quarter, but what we're planning on in the third quarter is down high-single digits to low-double digits as a whole for overall China. So again, if it gets back to the flats, that'll be upside to our current range. But right now, the way we see it as diagnostics is still a bit challenged, it's probably going to uptake a little bit, but that's what we're currently planning on.

Operator:

Thank you. Our next question comes from Derik DeBruin with Bank of America. You may proceed with your question.

Jamey Mock:

Sure. So you want to talk both margins and free cash flow. So margins, obviously, it's an unprecedented quarter we had, strong volume growth we had, great product mix we had, all the productivity programs that we had already been working on largely in services and DAS and EUROIMMUN, and as on top of that, we had great OpEx leverage. And so even though our OpEx was up, it was still a good leverage. So I think in terms of the sustainability of that I think it supports the overall thesis for PerkinElmer long-term that when those things happen, we do have the ability to get to mid-20s to high-20s operating margin business. But certainly this was an unprecedented quarter of margin expansion in the short term, but some of this will remain. I mean, I think we're becoming more efficient. I think the productivity programs are being put in place. I think our volume and mix is changing over time. So it's difficult to say, what it would completely snap back to in the very short term. But I think the long-term, this is proving what the business can be. As it pertains to free cash flow, we had one of our best quarters, again and certainly, our best first half in a long time. And that is, there's a couple of things in there. Our receivables we've been – as you know when we've been talking about, we're making a lot of process improvements on. But we also did have a small benefit with regards to COVID terms. But I think, receivable as progress will continue to happen here over time, even in a normalized environment. You can see that we invested a significant amount in inventory. And I think most half of that it's about our COVID inventory. And we think that having the product ready, which Prahlad mentioned in his prepared remarks that we are tracking our turnaround time, is enabling us to be ready for customers and when customers that need the product immediately. And then the other half, we always have first half built. It's probably a little bit more than normal due to the demand levels, but our non-COVID backlog has increased. So I do think that the second half will our inventory levels should come substantially down. And so, yes, we're still, I think what we were saying, Derik, is that 80% to 90% we're tracking. There's a lot of good underlying progress here on receivables, on our ability to manage our SIOP. It just so happens right now that our inventory is required to be high and to meet our customer's demand, but we're focused on it. And I think we feel confident that we can get to that 85% to 90% range in a couple of years. And if it happens before that, that's great.

Prahlad Singh:

Yes. I think COVID specific direct, we continue to actively investigate that as a detection method. I think the key for us, it's very important that the quality of our test should meet at that threshold. And I mean, we would not release a test, that are in the low-80s or somewhere around that. So if we have a test which has got the right relative sensitivity that we would expect it to be, then we would release it specific to COVID. I think longer, we will we have a point of care test strategy in the U.S. that is TBD.

Operator:

Thank you. Our next question comes from Tycho Peterson with JPMorgan. You may proceed with your question.

Jamey Mock:

Yes. So overall mix, Tycho. So we grew gross margins about 600 basis points, and I would say mix made up 85% to 90% of that. So even, it has the mix impact, we expanded gross margin by 50 to 80 basis points, and that was on our productivity programs. But mixed, certainly in a total, not just COVID related, but in total, probably made up 85% to 90% of that increase.

Jamey Mock:

Yes, sure. So I think in total in the 7% to 14% range at a high level, we have diagnostics, which was down 20% in the second quarter ex-COVID in a minus 10% to 20% range. And I'll talk about some of the markets and then DAS, which was down 10%, obviously in a minus 5% to 10% range. So let me just hit some of the end markets underneath there. So reproductive health, I think continues to tick up a little bit, so when I think we mentioned that it was down mid-single digits, we're kind of planning on downloads single digits. China utilization particularly on prenatal is not yet at a 100% normalization. So that's reproductive health. Immunodiagnostics and applied genomics down kind of high double digits, I think it'll remain down double digits and that's just a function of when the people feel comfortable coming back to see physicians and hospitals and whatnot. But we expect a little bit of uptick there. Slipping into the DAS side, life sciences, which was down low single digits, we think probably go rose low single digits. In the second quarter, we were buoyed by strong informatics business. Enterprise was flattish and discovery was down. I don't anticipate informatics to be as strong, but I think discovery will pick up. And we're seeing that in some of the consumables business and our backlog and our tenders, as well as the enterprise business has more labs returned. So we expect looking at a lifetime to kind of move from downloads single digits to upload single digits. Again, this is on the high end of our range that is. Applied markets and food, again, was down I think, 20% and on the low end of our range, obviously that remains at that level. And, but we are expecting it to start picking back up. We had a bit of backlog growth, but that, we would expect to pick up, but it would still be down double digits, even in the high end of our range, which is down 7%. But I think the simplest way is down 5% to 10% for DAS and 10% to 20% for DS excluding COVID.

Prahlad Singh:

Yes, Tycho, thanks. But I'm not saying that we are going to, I'm saying that we are evaluating it and you're absolutely, right. There are – while we actively investigated the focus for us is that we would only launch it if the quality met our threshold. And Tulip is one aspect from there, we would develop it just like on the rest of our product portfolio, where have every been able to leverage our capabilities from across different sites and companies. We've got competencies and capabilities are on this in China and Europe too. So we would be leveraging. So in the event we would come out, it would only be if we get the sensitivity and specificity levels at the high end.

Operator:

Thank you. Our next question comes from Dan Arias with Stifel. You may proceed with your question.

Prahlad Singh:

Yes. So thanks, Dan. The Vanadis as a program itself it continues to progress very well. The funnel continues to be stronger, obviously COVID has resulted in installation delays. The funnel for us is stronger and the installations generally are being held up right now. In terms of the tests, they continue to run smoothly. And the demand is high. The challenge for us, both in terms of publishing the study and getting the installations are in place, is that the market shift in terms of COVID – I would say, freeze or travel restrictions, et cetera. But I think as it starts to loosen and open up the installations will pick up. I will say that I don’t think we expect the installations to be anywhere up to 55 in 2020 as we had projected. But we are very hopeful that as regions open up in Q3 and Q4 that we will be able to fill the pipeline that we have seen.

Prahlad Singh:

Yes. To your first question, Dan, I think, in the case of serology, our understanding of the science, as I said earlier, is evolving every day. I think if I were to look in a crystal ball, I would say that we expect the epidemiology studies around serology to continue and for it to provide a better understanding of the immune response. And as vaccines come into play, it will drive broader immune insights testing. And that’s where serology will play a larger role. In terms of us being able to put it together, I mean, there are examples as you saw with Sonora Quest, where we’ve done both serology and PCR testing. So I would say that it is larger customer basis. We are seeing traction around our total solutions, whether it’s around collection devices or extraction kits, PCR or serology. I think the challenge as of now is that serology is to some extent taken a back seat and most of the focus continues to be on direct virus detection.

Operator:

Thank you. Our next question comes from Catherine Schulte with Baird. You may proceed with your question.

Prahlad Singh:

Yes. So in all the cases we are highly scalable and our manufacturing multiples of what we have previously disseminated in terms of our capacity. I think this is where the benefit of – the breadth of our capabilities and having a broad geographic footprint in all three parts of the world, whether it’s in Asia, Europe or North America comes to bear. We’ve also put very strong supply redundancies in place. So we are not sort of dependent on any sole suppliers, et cetera, or any particular country or a region. At this point, we do not feel supply to be a constraint. In fact, as you probably – as we’ve talked about earlier, we put turnaround times on our website and you can live track – it’s live streaming in terms of our capability to provide turnaround time to our customers.

Jamey Mock:

Yes. Catherine, I think we are biased to invest. And so actually some of the spending levels in the first half second quarter are not at the levels by choice. It’s a level because, you can’t travel or you can’t get a third-party service, et cetera. So I think as we look into the second half of the year, we are going to step up our investment in areas like R&D, digital investments as well, so information technology. There’s some pockets of the organization where we want to invest with some additional people. So I think we will continue to spend and probably invest a little bit more than we have been. Of course, we’ll always monitor the outlook. But I think one of our guiding principles has been to emerge from this as a stronger company. And I think we’re fortunate enough to be able to reinvest back in the business and we plan on doing so.

Catherine Schulte:

Okay. And maybe just last one for me, going back to Jamey’s comment on emerging as a stronger company after this. If we step back and think about how part of the strategic rationale around the EUROIMMUN acquisition was really the opportunity to grow its U.S. presence. And it seems like once we emerge from COVID and those tailwinds subside, you should be in a much stronger position from a U.S. adoption perspective than you would have been if COVID had never happened. So is there any way you can help us think about just how much of an accelerator COVID has been in terms of the U.S. adoption of that portfolio longer-term?

Catherine Schulte:

Great. Thank you.

Steve Beuchaw:

Hi, good afternoon and thanks for the time here. I’ll ask one for Prahlad, one for Jamey, and then just go back in queue. The one for Prahlad is, if we reflect a little bit on the experience that we’ve had with serology, some of the learnings for the clinical trial data that we’ve seen out of some of the vaccine studies, it seems like T cells have gained more and more attention at least in the clinical community. But it’s not clear to me necessarily how much demand there is for broader, so outside of vaccine clinical trials T cell reactivity assessments. Could you speak to that? And the extent to which outside of clinical trials, those types of assays might be in demand. And then for Jamey, there has been some focus on margins on the call. But can we just jump out, like, and sorry to ask it this far, three and four years, what is the margin trajectory of this company look like relative to what you thought seven or eight months ago? I would imagine there’s been some discovery of structural cost savings. And you flagged on the call or in Q&A earlier that there’s a path to mid-20s, or maybe even higher margins, which makes a lot of sense on some amount of time. But can you speak to whether you think that’s within the next four or five years, or is that a longer-term view? I really appreciate all the help here. Thank you.

Jamey Mock:

Yes, as for the margins, Steve, it’s difficult to give an exact target here in three to four years. And we said, we’d come out with our Analyst Day. And that’s when we were hoping to launch what our outlook is for margin in the next three years. Obviously, as you mentioned, we have had a lot of learnings. So what I would say, without giving an exact number, I’d say we’re even more confident in our margin expansion opportunity. I mentioned in my prepared remarks, how much time we’ve spent in the analytical and food business and all segments for that matter. But I think the margin expansion value creation opportunity there is substantial. I think it is a three to five-year play, some short-term actions, but certainly over the course of our MPI cadence, what we’re doing with procurement, what we’re doing with skew rationalization. I think it will be rather substantial. So, I did mention mid-20s and maybe that’s in three to four years. But I don’t think we want to sign up for anything at this point. And again, we’re still learning here, but I would say we are even more confident in that approach.

Operator:

Thank you. Our next question comes from Doug Schenkel with Cowen. You may proceed with your question.

Jamey Mock:

You nailed. It was about half that. And I think I would expect the gross margin line to come down about 200 basis points sequentially versus the prior quarter. And that is mostly mixed, both non-COVID and COVID. So the non-COVID book coming back up a little and the COVID book coming down a little bit at the midpoint to your point. As well as some sub business mix with a little less informatics in the third quarter versus the second quarter, so half of this probably comes down through the gross margin line. And then you’re right, the other half comes in through incremental investments and everything I mentioned to Catherine’s question in terms of R&D, digital, people continuing to invest and emerge stronger here.

Prahlad Singh:

Yes, I think – let me put it this way, Doug. As of now, our capacity is greater than the demand. And we feel very good about where we are, because what we are realizing that customers aren’t coming back to us from some of our competitors, because they realize that we provide a full workflow solutions with collection media, extraction kits, extraction units, PCR and fully validated workflows. And I think that’s the benefit that we are seeing from our customers. And I think that’s where we feel that as we progress and we see sustained demand we are very well pleased with the solution that we bring to direct antigen testing.

Prahlad Singh:

Yes.

Dan Brennan:

Great. Thanks for that. Thanks for taking the questions and congrats on the quarter. Just wondering if you could share a little insight on the liquid handling, kind of the robotic market. We haven’t dove in too much there, but obviously you’re a leader there and it’s harder to diligence because, there’s not as much information. So just give us a little color on maybe, size of that market, any color on kind of instrument placements in the quarter and kind of how we think about the opportunity going forward for COVID.

Jamey Mock:

The only thing we said, Dan was that it was up 6x year-over-year here in liquid handling.

Jamey Mock:

Okay. I think Dan, we’re trying not to get into exact numbers here to walk through and be able to be off of and whatnot. So I think we’d like to keep everybody focused that the overall franchise is doing well and that the diagnostics opportunity across all of our product lines is doing well, so selling together.

Prahlad Singh:

I’m happy to tell you that we feel that our RT-PCR and extraction pricing remains consistent. And I think that’s the level of detail we want to share. There has been some decline in serology, modest, but it’s not for us. I think the whole serology market has seen a decline. But I think we want to stay away from getting into specific pricing.

Prahlad Singh:

I think we are seeing success in both markets, both in the U.S., Europe and OUS also in Asia. So we are seeing a broad penetration across countries in all continents.

Jamey Mock:

Thanks, Dan.

Prahlad Singh:

Thank you for your questions. Again, I’m proud of our entire organization and how everyone has rallied together. Our breadth of capabilities puts us in a unique position to help combat this pandemic. We are focused on leading with science, and that is clearly resonating. I have no doubt, we emerge from this crisis as an even stronger company. Thank you for supporting PerkinElmer. And I look forward to providing further updates on our third quarter earnings call. Thank you.

Operator:

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.

Prahlad Singh:

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

Operator:

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

Prahlad Singh:

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. And we focused -- I mean, there were two domains that one could go after, right? Antibodies are produced against the NVS proteins. We focused on the S protein, which, as you probably know and that there are two functional domains, the S1 and the S2. The S1 has a much lower sequencing homology to other coronaviruses, and that means that there is less risk of cross-reactivity than the -- and that's why we focused on that. In terms of availability, I think our capability, as you saw, we got the EUA approval yesterday. And in fact, we had this validated at the FDA's center. So it has been validated by the FDA. In terms of the installed base, the largest antibody study that's going on right now at Beaumont in the country is using our automated workstation. And it can be used on all open-ended workstations, and there are thousands of them in the United States and across the globe. So I think I helped the three questions that you had, right?

Jamey Mock:

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 going to be tied to diagnostic products. And I'll talk to serology and then PCR and RNA. So, talk a little bit around the current production capability of 2.5 million tests per month right now. We forecast that, that could be as much as $10 million per month by the end of this month. So 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. And then on the RNA extraction, we just put that into perspective, we've -- our revenue and our volume is up 20x versus last year. And that has been flowing well and will continue to flow, so we're at 3 million extraction tests per month. And so, the PCR and RNA portion should make up about 50% of the revenue as well.

Vijay Kumar:

Hey, guys. Thanks for taking my question and congrats on a good print here relative to peers. I guess, Jamey, back on the 2Q raw guidance. Organic, down 15% to flattish. That's almost in line with one of your peers, Thermo, have they guided through. Maybe talk about what would cause you to come in flattish versus -- and 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.

Vijay Kumar:

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 on the cost controls? Is there’s 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.

Operator:

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

Prahlad Singh:

Hi, Derik.

Prahlad Singh:

Derik, on the OneSource side, right, I think what we are starting to see that some of the large pharma we are starting to engage and they have started sort of putting plans in place for us to get back. And we've started seeing engagement there. You want to talk about the academia?

Prahlad Singh:

I mean, even in China, even though some of the academias are coming back, they are still sort of starting to enact safety measures and new ways of working Derik. So, it hasn't really started.

Prahlad Singh:

Yes. I mean, it's a very -- I'm not going to say it's a fair or unfair question, Derik, but it definitely is a very interesting question that we brew and spend a lot of time thinking. The one benefit that we have is that we've got 13 sites across the globe. And the things that we focus on right now are globe. And the things that we focus on right now are sustainability of supply chain, second level suppliers, redundancy, how do we ensure that if there is an infection at a particular site that there is another site up and running. And that's why you will see that we've got RT-PCR coming in from different sites. There was an issue earlier regarding shipment from China, which is now resolved. But that's where our focus really is on that, how do we have a sustainable, long-term, multi-pronged approach for availability of products from different sites and different regions. And this is where our geographic footprint is coming to floor. We can now manufacture product at different sites that can be used regionally. And I think that's the way we are thinking as we continue to significantly ramp up capability and availability of products over the next several months.

Steve Willoughby:

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 and organic revenue was down 15%, do you still feel comfortable with that $0.65 number?

Steve Willoughby:

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 that you talked about of 8% to 15% tailwind, is that assuming the 2.5 million run rate or does it also include ramp it up to 10 million for the month of June?

Steve Willoughby:

Okay. Thanks very much.

Operator:

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

Prahlad Singh:

Yeah. Hey, Doug, this is Prahlad. I think, the way we -- our focus is on differentiation around the science. That's why, when we went with the S1 spike protein and looking at IgG, if it is proven that IgG does confirm immunity, our IgG test will be more useful than other dual or tri antibody tests. Especially if you're comparing it to an early IgM response or an IgA, I'm not sure it gives full value around immunity if it is proven. And that's why, the way we look at it, having an S1 spike protein, which is developed around mammalian cell line, gives a very high degree of specificity, which is what the same large labs and customers are looking for. And that's why our focus has been, hey, rather than have IgM, IgA, IgG on an end capsid protein, we have got to focus on something that provides a high degree of specificity around the disease immunity. And that's where we are going.

Jamey Mock:

Yeah. I would just go back to the automation point, too. I mean, there are thousands of systems that are open out there to use our product. In addition, the workstation that EUROIMMUN provides is a high throughput solution, and many companies are picking it up along the way here, Doug.

Prahlad Singh:

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

Doug Schenkel:

Okay, 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 appears you're assuming operating margin in the mid-teens in the second quarter. Is that right? And then is, kind of, the answer to how you get there, just the answer to the last question, just think about what you did in Q1 and think about some rationalization and some improvement in mix, and that's how you get there.

Doug Schenkel:

Okay, all right. Thanks again. Really appreciate it.

Steve Beuchaw:

Hi, thanks for taking the question. Thanks for the time here this afternoon. I wanted to ask, first, more of a zoom out strategic planning question. The operating environment that you're contemplating for the next year or so, it's 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 across academic, food, environmental, the big buyers of product that our government affiliated, how they allocate funds and how that might look different relative to 2019 or recent history?

Steve Beuchaw:

Okay. Much appreciate it. And then one for Jamey. I wanted to follow-up on a topic that has some up in Q&A, and it relates to the margin trajectory. I think another way to look at it that might be helpful would be if you could compare and contrast what the margin structure looks like. Feel free to pick whether it's fixed cost, variable cost or whatever you think is the right metric. I think about what it looks like now versus your prior cycles that were challenging, whether it might have been the 2008, 2009 cycle or some of the challenges that all of the space saw in China, maybe in the 13% to 15% range. How is the cost structurally really different such that we should model it different? Thank you.

Operator:

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

Prahlad Singh:

Yes, Tycho, the issue around China earlier was not serology. It was related to RT-PCR. So, I just wanted to clarify that because all the serology comes out of Lübeck in Germany. And even the RT-PCR, it's resolved, both governments have worked very hard to make that and we are very thankful to both the U.S. and Chinese government to help facilitate this to happen. So, that issue has been resolved. And the second question was--

Tycho Peterson:

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

Operator:

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

Prahlad Singh:

It's a very good question, Paul. First off, when we look at the various studies that have shown sensitivity, we have seen sensitivity data that's greater than 94%, three weeks post onset, including 100% in our EUA approval data. But I think the point really is, what you are mentioning is, when people talk about these metrics, the reality is that these should be ranges and not discrete. For a true comparison, there are several factors that need to be consistent. The assays being compared are, right now, different. Some are total antibody. And ours, for example, is only IgG. The number of tests performed on each one of them are not consistent. They range from 10 samples tested to 1,000-plus sample. So in a 10 sample study, if you have one sample, that represents 90%. But in a 1,000 sample study, one sample represents 99.9%. So this -- and also the studies are performed at different days post infection. We would expect an antibody response to be much more variable early on and more robust three to four weeks out. More importantly, most of these studies were not independently validated. Ours was validated outside by the FDA. The same cohort of patients are also not used. So in any comparison, you have to use the same cohort. If one of the cohort of patients are on average delayed in antibody response that completely changes these numbers. So, I guess it's a long-winded way of saying, Paul, that it's difficult to make comparison. We believe the best folks to make these comparisons will be independent bodies and the market itself, as our customers are intimately aware of all these points. Done on the trends, and frankly, in a lot of cases, they have already spoken, both to us and outside in terms of their preference for a highly specific IgG based test.

Jamey Mock:

Yeah, Paul, I'm not sure. I mean, I think certainly, if you put in the E&P producers for oil and gas firms, that's obviously troubled by low oil prices. But if you take chemicals and energy broadly, a lot of companies can actually benefit from a low oil price. So if you think about plastics or reusable bags, in this environment, nobody can use it until you have to produce more. So actually, chemical and energy, which might make up about 40% to 50% of our industrial business, actually hand in -- held in there pretty well in the first quarter. So I don't think -- I think it depends on the mix within chemicals and energy. But, obviously, I think, yeah, there is going to be some trouble with maybe some of the E&P firms.

Brandon Couillard:

Hey thanks. Jamey, you mentioned operating cash flow is pretty good, especially for 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 through your CapEx plans for the year?

Brandon Couillard:

Thanks for clarification. I believe you said in your prepared remarks, mask orders in March were down 20%. Was that specifically for applied and…

Brandon Couillard:

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

Operator:

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

Jamey Mock:

Thanks for the question, Catherine. Hope you're doing well. So yeah, the immunodiagnostics actually in China was over 40% down in the first quarter. I'd say it's back – it's not normal levels. Our immunodiagnostics business is growing mid-teens in China. It is not back to those levels. But basically, the way I will answer that question is we're assuming flattish growth in the second quarter in China and APAC. And I think immunodiagnostics is kind of back to similar levels.

Prahlad Singh:

Yeah. So Catherine, this is Prahlad. On the lateral flow, which we've received approval for in India, right now, India is not allowing export of any COVID-related products out of the country. So that's going to be focused more from an emerging marketplace. The other work that we have ongoing in Taicang and in Beijing, that probably upon development we might bring to the markets outside of China.

Operator:

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.

Operator:

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

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 PerkinElmer’s Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference may be recorded. I would now like to turn the conference over to your speaker today, Mr. Bryan Kipp, Vice President of Investor Relations. Please go ahead, sir.

Prahlad Singh:

Thank you, Bryan, and good evening, everyone. I'm pleased to report that PerkinElmer had a strong finish to 2019 with reported revenue in the fourth quarter increasing 6% year-over-year and adjusted earnings per share growing 14%, beating both the top and bottom line of our previous guidance. Our revenue in the fourth quarter was $806 million representing organic growth of 5%, and our adjusted earnings per share was $1.35.

Operator:

And our first question comes from Catherine Schulte with Baird.

Jamey Mock:

Yes. Thanks, Catherine. I'll take this one. So, I think, if you back out the extra week, it's more like 4% to 4.5% in the first quarter, which is down versus everything -- every quarter in the year 2019 we reported 5% organic growth. So, it's a similar comp throughout the year. I think, there's two things largely that are affecting us in the first quarter. First is genomic testing. If you remember 2019, we started off very high, particularly in the sequencing part of that business. And so that had a great first half and a little bit softer second half due to the consolidation. We expect that to continue into the first quarter, so that probably half a point of organic growth by itself, what we're planning on in the first quarter here. And the second area is applied genomics. Similarly, when I mentioned on robotics and automated workstations that had a stronger first half, weaker second half, we're expecting that to continue into the first half here. And so, those two things really are the only difference between our 5% organic run rate that we saw throughout the year, including the fourth quarter and walking into the first quarter here.

Prahlad Singh:

Yes. Catherine, this is Prahlad. So, I think our exposure to the DTC market is not much. Most of our relationships there are pharma and on the newborn screening side. The thing that we're just going through is the consolidation piece that we -- as we pointed out earlier, by the end of Q1 that should be resolved. So, we don't -- we, at this point, don't see that as our exposure to DTC is not too much.

Dan Arias:

Maybe just on Vanadis since Prahlad touched on it and we were just out there. What kind of revenues are you thinking that the placements and utilization will yield for 2020? And then along those lines, can you just sort of talk to the visibility that you have when you think about the labs that will get you there? Is there a volume trajectory that you feel confident about at this point, or is it still kind of fluid in terms of what the ramp will look like?

Dan Arias:

Okay. So, it sounds like that's a TBD on the forecast for Vanadis?

Dan Arias:

Okay. And then, just secondly, Jamey, if I just think about the top-line guide, and I take out the half point or so that you're getting from the extra week, that's 5% organic at the midpoint, which is in line with 2019, which is a year where you had some organizational issues, and then either one-off or maybe somewhat unlikely to repeat elements. And then, I think at the end of this year, you should also be getting a little bit of juice from Meizheng. So, I guess, how much of the outlook for 2020 on the organic side is conservatism to start the year versus maybe something that's underappreciated about either the DX ramp or the factors that are at play in DAS?

Operator:

Our next question comes from Derik DeBruin with Bank of America. Your line is open.

Jamey Mock:

Yes. It's always difficult to tell, Derik, but I don't think we saw much. In terms of life sciences, actually it was a little soft in the Americas in the fourth quarter. Applied markets hung in there in the fourth quarter. So, maybe there's a little bit off there. But I’d say, it's difficult to tell and overall nothing out of the ordinary here.

Prahlad Singh:

Yes. And maybe I'll take that. So, Derik, we are in the process of developing a PCR and an antibody assay. PCR is generally a frontline assay during an outbreak, and we are making strides. But, we do have to take it through the CFDA, which is now the NMPA approval process. And they are working with us and with the several other entities to get a frontline testing assay out. Again, most of the focus right now is doing it more from a CSR perspective, just to make sure that we have an assay that we can use for testing. What's the commercial impact of that, I would say at this point is unknown.

Jamey Mock:

Yes. I mean, like we've been saying, we see a lot of room for continued expansion and profitability here. And I don't think 22% was ever a stopping point. We see that ultimately over time getting up into the mid-20s. How much can be done in the year 2020? We think, 100 basis points ex the extra week is pretty healthy clip coming off 170 in 2019. To your point, I mean, we guided in 2019 120 to 150 and ended up beating that at 170. So, could there be upside to the 80 basis points that we're guiding? Sure. But, I think we're more focused on long term and putting programs in place to get this to the mid-20s.

Vijay Kumar:

Jamey, if I could just touch on the margin question. Extra week incremental revenues, can you walk us, like what why margins would be down? I would have thought the extra revenues benefited margins?

Vijay Kumar:

Quarter and for the year; I’m just curious why incremental revenues have lower margins?

Vijay Kumar:

Got you. And then, maybe just a follow-up on that theme, the extra math. One on Vanadis, is there -- are you guys in a position to compete for tenders in Europe? And related to that extra week, the $10 million to $15 million is sub 50 basis points on the topline. Shouldn't it be just -- if you did week or 53, something higher than what they implied on the extra week as?

Prahlad Singh:

Vijay, for the first part of your question, yes, we can and are starting to participate in tenders in Europe.

Prahlad Singh:

Well, I think, what we are assuming basically is 22 to 27 installations. So, some of it is in Europe, some is in Asia and some is in the U.S. We are not sort of focusing on which particular tender, Vijay, we could win or which we wouldn't win.

Operator:

Thank you. Our next question comes from Steve Beuchaw with Wolfe Research. Your line is open.

Jamey Mock:

Yes. I think, overall, we think reproductive health ticks up a little bit. So, we've got Vanadis that should kick in some, genomics testing that gets reported in there that should kick in some. I don't -- we are not anticipating any good news on birthrates. We think we've continued to see significant issues, particularly in China. We expect that to continue. We have a lot of good APAC expansion that I mentioned earlier in my prepared remarks around the Philippines and Japan and Vietnam. So, that has a little pressure. So, net-net, there is probably a little bit of upside to reproductive health year-over-year. But, we're definitely planning on birthrates impacting us, and we'll see where geographic expansion gets us.

Jamey Mock:

Yes. I mean, cannabis this year performed extremely well. We're thrilled with the team, the solution that we bring. Pralhad mentioned that it was $26 million in revenue, which was off a $10 million base. That kind of incremental contributor is difficult to predict. And we are not banking on that in this guidance. We expect it to go up still at a double-digit rate, but to go up another $16 million just feels like a significant planning assumption that we're not. It could happen, but that's not what we're banking on right now. So, the market still seems great. We'll see how it states for a while. I think there's couple more that'll come on line in 2020. But, I don't think we're going to bank on that kind of incremental contributor this year.

Tycho Peterson:

Hey, thanks. Sorry to go back to the 1Q guide. But, you mentioned backing out the extra week you guess would have grown 9% to 12%, $0.75 to $0.77. That's still below consensus. I would have thought with the recent reorganization efforts, you would have at least been able to guide to consensus. So, can you talk about if there are other offsets other than the extra week that are kind of weighing on EPS in the first quarter?

Tycho Peterson:

Okay. And then, a couple of quick clean-ups. It sounds like the Vanadis installed base went down, it was 19 last quarter and now you're saying 18. Was there something, did the customer return or why did it go down?

Jamey Mock:

Maybe, Tycho, what we were saying was in 2018, we delivered 10 systems. In 2019, we added 18 systems to get to 28. Next year, we're guiding somewhere in the 22 to 27. So, we’re taking a methodical approach to increase our placements every year and be prudent on how we roll out these systems.

Jamey Mock:

No, no. I mean, look, we hope that it's mid-teens. I think, we've been consistent in saying that we're going to budget a year at 12% going forward. That's what we planned in initial deal model. Throughout the first two years of having EUROIMMUN in the PerkinElmer family, it's grown mid-teens both years, maybe it does again. So, we've always been consistent in saying, we'd like to plan this at about 12%, based upon terrific product introductions, geographic expansion, including the U.S. And we just think 12% is a good operating assumption.

Jamey Mock:

No, not as much. Actually, Tycho, we're expecting that to persist into the first quarter. So, some of the pressure we saw in the second half of 2019, we're expecting to persist. We keep seeing things push to the right here from a demand perspective, and we're not banking on that that will change in the first half year. Naturally, when you get to the second half, you get a different comp. If it's better than that, we're happy. But right now, our operating assumption is that we're going to continue on with the growth rates we saw in the second half of 2019 into the first half of 2020.