Revvity Inc (RVTY) 2002 Q1 法說會逐字稿

Please standby we are about to begin.

Good day everyone and welcome to this PerkinElmer first quarter 2002 earnings results conference call. Toady's conference is being recorded. At this time, for opening remarks and introductions I would like to turn the call over to the Vice-President of Investor Relations, Miss. Diane Basile. Please go ahead.

Thank you. Good morning and welcome to the PerkinElmer Q2 2002 earnings conference call. If you have not received a copy of our press release, you may get one by visiting our web site at www.perkinelmer.com on the firstcall netwotrk or from our toll free investor hotline 1-877-PKI-NYSE. As we discuss our earnings per share today, consistent with what we have done in prior quarters, we will focus on results on a continuing basis adjusted for a number of items. These results exclude non-recurring items such as one-time gains and restructuring charges and exclude the amortization of goodwill and intangibles, as we believe this provides the most useful comparative information for our businesses. Before we begin, we need to remind everyone of the following safe-harbor statements. The remarks that we may make about management's future expectations, plans and prospects may constitute forward-looking statements about the company's performance that involves risks and uncertainties. These forward-looking statements are only predictions and actual results or events may differ materially from those indicated by these forward-looking statements. We disclaim any intention or obligation to update any forward-looking statements as a result of developments occurring after the date of this call. Please refer to the documents filed by the company with the SEC, specifically our most recent reports on Form 10-K for the fiscal year ended on December 30th 2001, which identifies important factors that could cause actual results to differ from those contained in the forward-looking statements. I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Greg Summe.

Thank you, Diane and good morning everyone. Thank you for joining us today. With me today also is Rob Friel, our Chief Financial Officer. We appreciate you taking the time to join us on this PerkinElmer's first quarter 2002 earnings conference call. This morning I will talk briefly about our first quarter results and update you on progress in Q1 and talk about our plans for the rest of the year. Rob will then talk in more detail about the financial results by business units and then we will break for questions and answers and then close the call. First our financial results for the quarter. As you saw on our press release this morning, we reported revenue of $305 million on continuing operations basis and cash earnings per share of $0.01 for the first quarter. This quarter is the first time in 17 quarters that we did not meet or beat our earnings guidance and did not grow our earnings over prior year, so what happened? The global market for life science and analytical instruments and optical electronics surprisingly deteriorated, particularly in the business investment spending and I think you have seen this in all of our competitors' announcements. Many of our customers are being very cautious about capital spending until they see a sustained uptake in their customer demand. This short fall in revenue hurt on mix with more expensive instrumentation being slow and also with too much capacity in our production systems. We had to expand a significant amount of unabsorbed overheads. What are we doing about it? First, aggressively attacking our cost-structure. We announced restructuring actions earlier in the quarter designed to simplify our organization and take out overhead in our production capacity. Second, pruning out unprofitable product lines. We announced today our decision to exit both telecom components and entertainment lighting businesses. We will pursue a variety of sales and partnering options for these businesses, which is a further step forward in our strategy to focus the company on the life sciences market where human demographics and technology innovation will provide a strong platform for growth over the next several decades. Third, a more intense focus on driving new product introductions in sales force execution. We have a lot of products coming out with compelling productivity advantages to our customers, and we believe this will help stimulate the growth of our markets. Notwithstanding the sole markets, we continue to make our progress on a number of fronts through the quarter. The integration of Packard BioScience is well underway. The front-end sales and service team and R&D organization are now integrated and moving forward. We have rationalized three sites Montreal, [Bellsville, Gettysburg] and have realized productivity savings of 300 positions. The team is focused on driving R&D and sales execution going forward. And we have continued to invest in R&D. Our R&D investment across the corporation reads 7.3% of sales this quarter, a record high and is focused on our health sciences growth platforms. During the quarter we announced the Evolution P3 pipetting platform, which is a 96384-channel pipetter, flexible modular platform that integrates with plate readers, high throughput protein purification and molecular biology application. We also announced the partnership with NextGen Sciences for the launch of ProteinArray Workstation, and as you know we are one of the leaders in introducing the protein arrays to our hydrogel technology. This will be the first fully automated system to process protein arrays. We also introduced new products in genetic disease screening including a kit for type-1 diabetes and Neogram and tandem mass spec screening kit. And in analytical instruments we continued our Enhanced Security program for pharmaceutical customers; a number of our new and existing product lines have now achieved 21 CFR for 11 compliants. This includes out Total Chrome, chromatography data hammering software, SureID, which are our identification systems, SpectrumCFR, SpectrumOne, and NTS. In the optoelectronics business, we introduced a number of essential products in bio-medical application and continued to do well in digital imaging with the cardiac radiation panels and moving quickly into the introduction of NGO product line. I am now going to turn the call over to Bob who will talk about the financial results in greater detail, we will then go to questions and answers and I will then close the call.

Thank you, Greg and good morning. If you will turn to page 4 of the press release, I would like to give you some details on our first quarter results. Revenue for the quarter $305 million, 9% below Q1 of last year and I will go into this in more detail within the discussion of segment results. Cost of sales in the quarter was $174 million or 57% of sales, up from 55% of sales in Q1 of last year, due to decreased production and lower capacity utilization especially in our fluid electronics, unabsorbed manufacturing overheads depressed our gross margins. In addition, within our life sciences business, we experienced an unfavorable mix shift within our instrument sales as products sold into the academic research market grew. Our higher end systems sold to pharmaceutical and biotech companies declined. R&D expenses increased to $22.3 million, up 100 basis points year-over-year, to 7.3% of sales. We remain committed to maintaining R&D spending during the year to drive our topline growth as well as continue to focus our investments in the health sciences market. SG&A increased to $99.3 million in the quarter, which is up from last year but this includes the Packard acquisition. ProForma SG&A is down sequentially $4 million as we have already instituted a number of actions to reduce the combined SG&A structure of the two businesses. Cash operating income of $9.5 million is down $33 million from Q1 last year due to the lower volume unfavorable mix in life sciences and the higher SG&A. Other expenses were down year-over-year due to the lower interest expense and foreign exchange losses. Cash net income from continuing operations was roughly $1 million and cash EPS was $0.01 per share. Weighted average of diluted shares outstanding was $128 million, up over last year due to the shares issued for the Packard acquisition. Before turning to the segment results, I would like to draw your attention to two other items. During the quarter we redeemed a 9 and 38% Packard note with a face value of $118 million, which are to mature in 2007. The call premium resulted in extraordinary charge of $0.03 per share, net of tax. In addition, during the quarter we adjusted the value of our inventory in optoelectronics business due to the significantly lower volumes we are experiencing. And this charge is included in our GAAP results found on page 6 of the press release, we excluded these charges form our cash earnings for the sake of comparison of operating income between periods. If you would now turn to page 5 of the press release, I would like to review our results by segment. In life sciences, revenue for the quarter was $117 million, an increase of $48 million or 69% over Q1 last year. While formal with Packard we were flat year-over-year when we go on an organic basis, adjusting for the impact of foreign exchange. Genetic disease screening which makes up about 20% of our life sciences revenue grew 11% organically in the quarter while our drug discovery tools business contracted 3%. Reagents in consumables which represent 60% of revenue was up 4% in the quarter and instruments sales were down 10%. Within drug discovery tools, sales to academic research organizations were up slightly in the quarter while sales to biotech and pharmaceutical customers were down. In particular, sales to US pharma were down double digits in the quarter as we see those customers being very cautious with their capital spending. The lower sales to big pharma also had a negative impact on our gross margins as they normally purchased the more sophisticated higher margin instrumentation. Operating income increased in the quarter to $12.8 million from $10.5 million, but as percentage of sales operating margins contracted about 400 basis to 11%. On a ProForma basis, operating margins contracted 300 basis points, with the major driver that is being mix shift between the instrument models, which resulted in lower gross margins in the period. In optoelectronics, revenue for the quarter was $73 million, down from $121 million in Q1 2001. Adjusting for businesses divested during last year, revenue was down $24 million or 24%. Keep in mind that these year-over-year comparisons are still for fairly robust market conditions that existed in the first half of last year. Telecom components and semiconductor markets were both down over 50% year-over-year and lighting is down 35% year-over-year. On the positive side, sensors grew 8% in the quarter although revenue was 24% down; factory production was down 35%. This is due to the fact that in Q1 last year we built inventory during the period as we were anticipating higher revenue in the following quarter. In contrast, this year we produced less than we sold in the quarter thus reducing inventory because we expect these margins to remain sharp in the short term. The lower production volume has reduced factory capacity utilization with our optoelectronics to about 50% compared to about 80% in Q1 of last year. While we have been aggressively reducing costs we have been unable to eliminate the fixed overhead costs as quickly as the revenue has declined. Consequently in this quarter optoelectronics had expenses of $9 million of unabsorbed factory overheads. At $73 million of revenue, optoelectronics had too much infrastructure to be profitable. As a result we have taken the following actions. First, we functionalized the organizational structure and completely eliminated the lay out management. Second, we took a structuring charge to close two sites and reduced our work force by 300 employees. Third, as Greg discussed, we put our telecom components business and entertainment lighting business under strategic review. And fourth, we are focusing our R&D and sales effort around the bio-medical applications and other higher growth end-markets. Turning to analytical instruments, revenue in the quarter was $115 million down 11%, adjusted for the sales of IRS radiation testing business and foreign exchange. Global market softness continued in Q1 with several key market segments showing sluggish demand. Pharma customers, a significant area of focus for instruments are spending selectively on drug discover while new QA-QC investments have been cut. Chemical markets also remained soft as customers continue to delay spending. Environmental markets are showing some growth as spending on bio-terrorism is increasing and there are some early signs of a rebound in the semiconductor market as customers upgrade their analytical capabilities to support the expected upturn. Service revenue, which represents about 30% of AI's revenue, grew 2% in the quarter while instrument sales declined 16%. Operating income in the quarter was $5 million or 4.5% of revenue, down from 11% in Q1 of last year. The significant lower instrument sales depressed gross margins in the quarter, as did pricing pressures particularly in the inorganic product line. Total income from continued operations for the company in the quarter $9.5 million or 3.1% of sales. This is a reduction of $33 million from Q1 2001. However reported sales decreased only $30 million. This apparent disproportionate drop in operating income relative to sales is due to 2 factors. First of all, the $30 million reduction in sales is a net number. There we have $15 million decrease in revenue from existing businesses, which reduced operating income by average gross margin of 45% partial offsetting this top line decline was a $20 million in revenue from the net of acquisitions and divestitures. This $20 million of revenue generated incremental operating income of less than 15%. Therefore the net decline in operating income was $20 million on the $30 million reduction in revenue. The second factor was that unused capacity left about $10 million of unabsorbed overheads, which reduced operating income in the quarter. Some of the actions discussed earlier are aimed at both reducing this overhead and driving revenue growth. Page 6 of the press release reconciles our adjusted income to GAAP income. As you can see the major components are the $10.7 million restructuring charge, the $23.5 million inventory adjustment, intangibles amortization of $6.9 million, and a net gain of $500,000 associated with acquisitions and dispositions. While we do not publish our balance sheet with our press release, I would like to review cash flow. Free cash flow in the quarter was approximately negative $15 million before restructuring payments. This compares with negative $5 million last year and our plan of breakeven before restructuring. Restructuring payments in the quarter was $23 million associated with the Packard integration and cost reduction activities in optoelectronics and analytical instruments. The components of operating cash flow in the first quarter was as follows: cash net income was $1 million, depreciation and amortization was $17 million, working capital was flat in the quarter as a result of maintaining flat inventory even on a lower volume. Capital expenditures were $14 million and asset monetization was 17. The big driver in the quarter was that accrued expenses were down $35 million, as during the first quarter we pay a number of items that are accrued throughout the prior year. For example, sales commissions, bonuses, and the funding of employee savings and benefit plan. Before we open the call to your questions, I want to talk about our guidance for the rest of the year. Given the volatility and lack of clear visibility into a number of our end-markets, we are reluctant to give specific guidance on future EPS. We have earned a number of scenarios internally based on the number of different market projections. In addition, we have reviewed the cash EPS projections of the [_____] analysts who cover the company. At this time, we are comfortable with the range for the full year as reported in first call which is $0.36-0.50 cash EPS. While we recognize that this is a fairly wide range for the year, given the economy environment we believe it would not be prudent to try to narrow it at this time. As we progress through the year, we will update the guidance in future course. Now let me open the call for your questions.

Thank you. Today's question and answer session will be conducted electronically. Anyone wanting to ask a question may do so by pressing the * key followed by the digit 1 on your touchtone phone. Once again, that is *1 on your touchtone phone. We will pause a moment to assemble our roster.

We will take our first question from Paul Kelly with Merrill Lynch.

Good morning. Couple of follow-on questions, Greg, can you tell me what percent of optoelectronics the two business units that are under review, percent of revenues they comprise?

About 5%.

About 5% of the opto unit revenues or you are talking about the total firm revenues.

No, it's about 5%. It's about $15 million now, obviously, last year that was a much higher number than what it is. And part of the issue with telecom is that the market has been dramatically reduced and we have a fairly significant cost structure attached to that business; the same as some of the entertainment lighting but particularly the big fix cost structure in the telecom business.

And eliminating or disposing of those two units would do what to the cost structure? If you can sort of quantify how that would help improve the profitability or put the rest of the unit on a profitable footing?

Paul, this is Bob. What I will say is in this quarter those two units lost about $4 million and I would say for the year they are going to lose $11-12 million range.

Okay, and would you have any timeframe to reach a definitive decision on what to do with these two units, Bob? What would you do to act on the review?

Ya, I think we will be definitive in the second quarter about the units and ending transpire was certainly have been before the end of the year but, we, there's range of options that we are looking and we would be working on them fairly quickly.

Okay. And Greg, what do you see now that we had this uniformly across the suppliers into the life sciences research market that spending by commercial customers particularly big US pharma has been very soft on both instruments and consumables. And we have actually modeled that as being flat to perhaps down over the course of the year. What are your expectations for those products into that market segment over the balance of the year?

Well, it's very difficult to forecast that, Paul, because it depends on a lot factors, obviously, nobody forecasted it coming in the first quarter. At least they did not forecast it accurately. So I would say our expectation for, say, the life sciences broadly, is to be up little more positive than we have been as we go throughout the year. And I am not sure I want to speculate a lot more on that, I mean it's, we do see a lot of opportunities to sell products and to improve the sales of the products in that market place. We have a very significant amount of integration activity on our sales force in the first quarter. So what effect did it have on our sales, I don't know, it's difficult to say it out. When you strip it away, a lot of our competitors are coming in the same sales levels we did, but we had a tremendous amount of disruption, if you will, in the sales organization. So I know that it would have some impact. I just don't know what it is.

I have seen a uniformly negative 15% to as much as 30% year-over-year into commercial customers in those product lines. And as I go here with what our expanse was in the first quarter?

We were down in the 7-8% range, I think, in the pharmaceutical in the first quarter.

And just one follow-up question on the analytical instrument group, I know you have been anticipating that that group would move back into positive territory as the economy has improved globally and as you hit softer comparisons in the second half of the year. Is that still same to be within reach or perhaps at a lesser level of profitability or growth, I should say, than previously forecast?

The push out that deferrals in the capital spending in the first quarter hit that business hard because of a QC deferment. We do still see strength in the environmental sector. We have had a number of new products continue to come in that business, we continue to prune. I am not going to give you a specific revenue number as we go forward, I would say from a cost structure on an earnings basis we are being very conservative in our outlook in terms of making sure where the business is going forward. The service business continued to grow, did grow, in the first quarter and we are going to continue to build on that part of the business as well. So, if I can give you very specific number on revenue by quarter, I would but it wouldn't have any, wouldn't be any better than any body else. And we are doing as just; working on our cost structure and our execution plan to recognize the environment we are in and when the capital expenditure recovers, which will recover, and when you think about the economy there's still strength in the consumer side and certainly in the government spending side and if that continues to take up some of the capacity within a chain, we will be able to do it and then we are doing our part by trying to drive new products out there that make it more compelling proposition for the customers to buy.

Okay, Thank you.

Yeah, you are welcome.

We are going next to Paul Knight with Thomas Weisel Partners.

Hi, Paul.

How are you, Greg? What's the status of the two pending asset sales?

Our detection systems is working through kind of final stages of review, our regulatory review, where that's been and so we think that will close in the second quarter. Fluid sciences business is in final stage with couple of final stage buyers and so we think that will be in Q2 or early Q3, of course.

And [L3] they had already announced that they signed the agreement, right?

Yes. It's just been a regulatory review to this period of time but I think there is a sort of a read through plan to satisfy that.

The other question is: entertainment lighting business. Does that include the entire cinema stage show lighting or what is that?

Yes, it would include all those from the stage and studio and cinema based lighting.

What is the largest part of your optoelectronics group now? Medical, dental lighting.

I would say the medical, dental lighting and of course flash, which is a variety of applications form aerospace to research to photography.

Is photography getting better or what's going on at photography.

I think photography is starting to get better. One of the things in photography is there are a couple of stages in the distribution chain. So we have been tracking our call inventory posters because it goes to manufacturers, it goes to distributors, it goes to retailers and so we have been watching that inventory be taken down through the chain and so we think we would start to see some beginning of uplift in that from a booking standpoint. The part of optoelectronics business that's doing the best is the sensor business and that was in high single digits growth in the quarter.

Okay. How is the post-consolidation of Packard, [_____] going, is that, they are also done...what's going on, is this business picking up? Or is sales more productive, I guess, is the answer?

No, I think it is. The integration of Packard was a big undertaking, we had to completely reengineer the whole front-end sales organization in terms of territories, product lines covered, compensation systems, reporting systems etc, and all that's done through. We hit it very hard, very quick to move through it and that's in place, I think, the organization has settled down and the organization is more and more excited about the breadth of product to take out there. So we see a lot potential, sales opportunities and none of the enthusiasm has gone from that at all. It is quite the reverse. There is a lot of opportunities to push step forward.

Great, Thank you.

Welcome.

Our next question comes from [David Hegger with Kennedy capital].

DAVID HEGGER]: Thanks. I wondered, first, if you could run through some of the main balance sheet items and also if you can hit on inventory days and DSOs and then I will recite question #2.

DAVID HEGGER]: May be run to cash and accounts receivables and so forth at that level and on the main balance sheet items.

All right for me. Going from 586 at the end of the year to 654, so it's up $68 million and it steps up about a hundred, cash is up about $32 million. Our receivable balances are down about $20 million, 297 at the end of the year to 277. Inventory is down quite significantly from 242 to 219, but of course it's, as I mentioned previously, a $23 million adjustment. So, if you add that back from an operating perspective, it was flat but from the pure balance sheet perspective it's down very significantly. Payables also are down from 143 to 120 and I think we have done a pretty good job in that in the later part of the quarter of stopping the supply or the purchases to react to the lower volume and of course to offset that is you have a lot of payables. So for total working capital, again on a balance sheet basis is down about $20 million but it's fundamentally the write-off, so I would say from an operating perspective it was effectively flat.

DAVID HEGGER]: Okay and then looking at optoelectronics business, in the press release it says there is an operating loss of about $5 million indicated about $ 4 million of that was from the 2 businesses that you are putting under strategic review which still a slight loss for the remaining business. How do you see that going forward, do you think without the two businesses under review that they can get back to an operating profit pretty quickly?

I think we do. I think it is two things as I mentioned we are or did take a restructuring charge, so we are going to continue to take some cost out of their largely on the administrative and structure side. We are trying to reduce the amount of physical size that we have because one of the areas that hit us hard in the quarter was the unabsorbed factory overhead fundamentally because we are operating in a number of sites. And then we need to get the volume up. We are hopeful that, as you look into the later part of the year, two of the big drivers to the organic drop have been those two businesses. Clearly telecom components are down about 90% in the quarter. So I think the combination of rationalizing some of the product lines and improving our costs and hopefully getting some growth on the revenue standpoint, we should be able to return optoelectronics to profitability.

DAVID HEGGER]: Okay, thanks a lot.

We will go next to [Edward Johnston] with [Herald Brown & Company].

EDWARD JOHNSTON]: Hi, good morning. Greg, on the sale of fluids you say Q2 or early Q3. Was that for an announcement or was that for a close?

That's for a close.

EDWARD JOHNSTON]: Okay. Based on can we expect an announcement in the second quarter you had alluded to that in the fourth quarter 2001 conference call, are you still comfortable with some sort of an announcement will come about in the second quarter?

We are still working against that plan.

EDWARD JOHNSTON]: Okay, great. And the use of the proceeds may be Bob, you can comment against the use of the proceeds. What you intend to do with them assuming you got a price for July, can you get in cash?

The common sense right now would be to pay down the debts. We do have some commercial paper that we took out when we refinanced the Packard debt. So the intention would be to pay off the debt.

EDWARD JOHNSTON]: Okay, great. Thanks very much.

Once again, it's *1 for questions, *1 if you would like to ask your question. We will go next to Carissa Marino with Goldman Sachs.

Thanks a lot. Would you mind providing a breakout of your existing debts?

Sure, this is as of the end of the quarter. Commercial paper was 219, the zeros were 487, and the 2005 notes were 115 and we have $3 million of miscellaneous short-term debts basically in overseas locations. That should add up to about 824 and then cash was a 170.

Okay. At these levels what is the quarterly debt service required, in terms of cash assets?

In the $6-7 million range.

Okay. Asset amortization is $17 million, what does that relate to?

That relates to a number of buildings that we have sold that were no longer necessary. For example, if you recall, at end of the year last year we moved our analytical instrument business from Germany to Singapore, we sold the German facility and also we talked about some consolidations that we did in the analytical instruments with regard to our regional standards, we had some buildings that we owned principally in the U.K. that we sold that are longer needed. They represent the proceeds fundamentally from those real estate sales.

Okay. An then in terms of the life sciences, maybe I am missing something here, but in your initial press release if you would figure you mentioned the Packard integration as one of the causes of the lower than expected revenue growth. But I didn't see it in this press release, is that kind of sense of relative impact of Packard versus weak end-markets different and could you just walk me through how much each of those factors is responsible for the shortfall?

You know, Carissa, this is Greg, it's very difficult to separate those two factors out. All we know is that from an organization's standpoint really starting at the end of the year we went through both sales organizations and did an evaluation sort of a high-low ranking, if you will, then combined the two organizations and therefore redefined territories for people, changed products for people, and of course we have changed compensation systems because there are two different compensation systems coming into it. We moved very quick on that and that was in place by the middle of January and then, of course, there are a lot of details to work out which took us February and part of the March timeframe to sort of clarifying, sort of history on powders and so forth and so on. So all that is complete, everything is running hard and it's just very difficult for us to separate it out, if we were zero and all of our competitors were plus 10, we would say the impact is 10% because we don't see any weakness on the product line side, in fact, we see a lot of strength on the product line side. The fact is, we came in organic at zero, a lot other competitors are at zero so I don't know, may be we would have been up a couple of percent without the distraction. It's just a guess at this point.

Okay. And then in terms of opto, I didn't quite get what you were saying about the factory capacity utilization changing 50% compared to 80% for something else and if you could release that to kind of, with opto 17% sequential decline in revenue but then $14 million drop in operating profit sequentially.

I think there is a point that I was trying to make there, Carissa, is that if you look at the revenue drop and I am just looking at year-over-year it was 24% but actually if you look at the production so the amount of the units that we put through the factory was actually significantly higher than that, it was more like 35% and because in Q1 of last year we were building inventory because of a growing market, whereas in this quarter we are shrinking inventory because we are concerned about demand. And of course what's driving your overhead absorption is not your revenue but your production through the factory. So the point was that our production through our factory was down 35%, so that if you think about your overhead, your fixed overhead, at this time last year I was at 80% of my capacity across the sort of global factory footprint of optoelectronics, and in Q1 of this year, I am in only a 50% of my capacity. Obviously, that's a lot of overhead that gets stranded. And therefore that's what is significantly depressing the gross margins of the optoelectronics business. And obviously there are two ways to fix that, you take your overhead down or you get a revenue loss, we are trying to work aggressively both those angles.

Okay, Thank you.

Welcome.

Mr. Summe, we have no further questions at this time. I would like to turn the call back over for any additional or closing remarks.

Thank you operator. As we stand back from the quarter, you know, we are very disappointed with the weak sales and therefore an overextended cost structure. But we have a very strong organization and excellent technology franchise, good operating processes and we are taking strong actions to resize our cost structure. I am quite confident that we will be able to work our way through these soft markets to deliver the financial returns our investors have come to expect. And we look forward to posting you on this progress. Thanks for your time and have a great day. The call is adjourned.

That does conclude today's conference. We thank you for your participation. You may disconnect at this time.