Revvity Inc (RVTY) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to this PerkinElmer first quarter 2005 earning results conference call. As a reminder, today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the Vice President of Investor Realtions and Corporate Communications, Mr. Dan Sutherby. Please go ahead, sir.

Good morning and welcome to the PerkinElmer first quarter 2005 earnings conference call. Today some of the comments we will make may be forward-looking. They are based on our view of the world as we see it today and, of course, that world can change. So we would ask that you interpret our comments in that light and refer to our factors affecting future performance included in our press release issued last evening and also the detailed risk factors and safe harbor provisions in our filings with the SEC.

With that, I am now pleased to introduce the Chairman and CEO of PerkinElmer, Greg Summe.

Thank you, Dan. Good morning, everyone. I appreciate you taking the time to join us today. With me today is Rob Friel, our Chief Financial Officer.

I will begin by reviewing the highlights of the quarter. Rob will then talk in more detail on the financial results. We'll break for questions and answers and then close the call.

Overall, we were very pleased by our results this quarter as our cash earnings per share of $0.19 was up 27% over the first quarter of last year and exceeded the FirstCall consensus estimate and our guidance for the quarter. Our first quarter revenue was $416 million, up 6% year-over-year, with organic growth of 4% for the quarter.

Our revenue growth and global productivity initiatives drove higher gross margins during the quarter and that enabled us to increase funding of our growth platforms through higher R&D and SG&A investments. As mentioned, in December we intend to increase R&D spending in 2005 by 20% and did so in the first quarter. We were pleased to deliver cash operating margins for the quarter of 10%, up 100 basis points over first quarter of last year.

On the growth front, in life and analytical sciences our genetic screening business continues to strengthen its position in neonatal screening in the U.S. Also this quarter we signed a collaboration with JN Macri Technologies to expand our capabilities in prenatal through providing kits for risk assessment of fetal anomalies during pregnancy.

This is an important addition to the panel of tests used to assess the risk for Down's Syndrome and other fetal abnormalities during the first trimester of pregnancy. This test can eliminate the need for unnecessary amniocentesis, which causes a high risk of miscarriage.

In biopharma, we were pleased this quarter to obtain a very strong validation of the capabilities of our proteomics and biomarker integrated platforms. Through our collaboration with Predictive Diagnostics and the Rush Medical Center, we achieved the discovery of blood biomarkers for Alzheimer's Disease. This collaborative study is the first study of its kind to describe a potential diagnostic test for Alzheimer's Disease from a blood sample.

The blood analysis was carried out using PerkinElmer's BioXPRESSION biomarker platform to identify patterns of proteins and peptides that distinguish Alzheimer's patients from those without clinical symptoms. Our discovery and screening platform includes the prOTOF 2000, which is our multi mass spectrometer and ProXPRESSION, which are carrier protein-based blood biomarker enrichment kits.

This study demonstrates the power of our suite of tools and technology for biomarker discovery and analysis, an important element of predictive medicine.

Also in biopharma we launched several important new products, including our Evolution P3, a liquid-handling automated pipetting system with modular dispensing technology. Modular Dispense Technology is a proprietary technology that enables rapid and automated dispense head exchange, which delivers breakthrough miniaturization and dynamic range.

PerkinElmer's MDT enables customers to rapidly select from numerous dispense heads and formats for 96 through 1536 well applications and provides a level of choice for optimizing assay protocols not possibly in any other system. Most competitors require dedicated systems to dispense 50 nanoliters. Ours covers the range from 50 nanoliters to 250 microliters with one instrument.

We've also launched a highly sensitive and advanced assay for improving performance and productivity in ultra-high throughput screening applications, our LANCE cyclic AMP product. This is an important cell pathway. This assay enables flexible sample formats, is easy to automate and facilitates simple conversion between 96, 384 or 1536-well plate formats.

Our OneSource service business delivered another strong quarter with solid business wins and double-digit revenue growth during the quarter. We have a robust pipeline of opportunities and expect this growth to continue.

Our environmental business delivered high-single-digit growth during the quarter. We also expect this momentum to continue on the strength of our products and demand for improvement in clear air and water and bioterrorism.

Optical electronics had a very strong Q1 with double-digit revenue growth overall and exceptional growth in medical imaging. We continue to drive innovation in our digital flat panel technology in the diagnostic and therapeutic end markets with our partners in these markets including GE Healthcare, Elekta, Siemens Oncology and others.

Our acquisition of Elcos, which is a specialty LED manufacturer, is going well. It's a strong technology company that principally serve the German market and we're enabling this team to quickly reach our worldwide customer base.

Fluid sciences revenueswere down slightly in the first quarter as declines in revenue from the semiconductor end markets offset growth in aerospace during the quarter. We're bullish on the end market prospects for aerospace and maybe you had the opportunity to see the-- that the A380 made its maiden flight yesterday.

We made continued progress this quarter on customer excellence, which is our initiative to make PerkinElmer the supplier of choice. We increased our investments in training and front end effectiveness and continued top-grading our sales and service teams worldwide.

Our key account management structure continues to gain momentum and has provided recognizable benefits to our customers, many of whom operate around the globe.

And finally, we continue to expand our business development pipeline. Our priorities are to acquire license technologies that strengthen our growth platforms, like maternal health or medical imaging.

I'm now going to turn the call over to Rob Friel, who will talk about our financial results in greater detail and then we'll move on to questions. Rob?

Thank you, Greg. This morning I'll provide some details on our revenue, costs and cash flow for the first quarter of 2005. Then I'll provide some guidance on Q2 and open up the call to your questions.

Before I get into the specifics, I want to clarify that whenever I talk about a particular measure being up or down, I am referring to an increase or decrease in that measure during the first quarter of 2005 compared to the first quarter of 2004.

Turning first to revenue, we reported revenue of 416 million in Q1, up 6% from 393 million. By segment, reported revenue growth was 13% in optoelectronics, 6% in life and analytical sciences and a decline of 5% in fluid sciences.

Contributing to this growth was the effect of a weaker dollar in Q1 of 2005 relative to Q1 '04, which we believe increased first quarter sales by approximately 2%. This foreign exchange impact by segment was 2% in LAS, 1% in optoelectronics with minimal impact to fluids sciences.

The impact of the Elcos acquisition, which we closed in early February, increased revenue in the quarter by 2.5 million. For purposes of determining organic growth, we add back sales for any acquired companies for the comparable quarter last year, thereby only including the incremental growth year-over-year. In the case of Elcos, this had a de minimus impact on the PKI overall organic growth rate for Q1 of this year.

Geographically, we experienced growth across all regions in the first quarter. Revenue in the Americas, which represented about 51% of total revenue for Q1, was up 4% on a reported basis. Revenue in Europe, which represented about 34% of our revenue for the quarter, was up about 8% and Asian revenue, representing about 15% of our revenue for the quarter, was also up 8% for the quarter.

First quarter 2005 revenue in health sciences, which represented 71% of total revenue for the quarter, increased 9% over the same period of 2004, driven primarily by strong growth in genetic screening, medical imaging, environmental and service.

Industrial sciences revenue in the first quarter of 2005 was flat compared to the first quarter of 2004, as growth in consumer electronics, aerospace and safety and security was offset by declines in semiconductor revenues. Excluding semiconductor revenues, which represented 4% of total PKI revenue in the quarter, industrial sciences revenue would have increased 3% in Q1 compared to the same period last year.

Gross margins was 41% for Q1, up 180 basis points due to the higher volume and productivity benefits, including the effects of certain site consolidations completed in 2004. During Q1, we saw nice gross margin expansion in LAS and opto, offset slightly by gross margin contraction in fluid due to the decline in the semicon revenues. On revenue growth of 6%, cost of sales were only up 3%, thus we converted 70% of the incremental revenue into gross margin in the first quarter.

Consistent with our previous guidance, we increased our investments in R&D during the first quarter to fuel our growth platforms, several of which Greg touched on earlier. Specifically, Q1 R&D of 24 million was up about 3.5 million or 17% from Q1 of last year, increasing 60 basis points to 5.7% of sales. All segments increased R&D in dollar terms and as a percentage of sales during Q1.

Continuing down the P&L, the charge of 194,000 for in-process R&D is related to the Elcos acquisition and is a non-cash charge required under acquisition accounting.

Selling, general and administrative expenses were 102.6 million in the quarter, an increase of about 7 million and up roughly 20 basis points as a percentage of sales.

Since Q1 of 2004, we have increased the number of selling and service people 6% across the company, with the majority of the increase in the fastest-growing regions of the world, like India and China. In addition, we have selectively added resources into some of our higher-growth product lines to support the market demand.

Amortization of intangibles of 7.3 million is 200,000 higher than Q1 of last year due to the amortization of intangibles related to the Elcos acquisition. For the full year 2005, the intangible amortization from the Elcos acquisition will increase total PKI intangible amortization to 30 million, up from the historical run rate of 28.4.

Operating profit for the first quarter 2005 was 36 million, up 19% from the 30 million in Q1 last year. Excluding intangible amortization and the in-process R&D charge, operating income in Q1 was 43 million or 10.4% of sales, an increase of 100 basis points from the comparable number in Q1 last year.

Below operating income, interest expense, net of interest income in Q1 of '05, was 7.8 million, down about 1.5 million from Q1 '04 due to the significant debt reductions during 2004. Other expense of 490,000 is primarily foreign exchange cost and is down from last year due to a one-time gain recorded in Q1 of '04.

The tax provision of 7.6 million for the first quarter of 2005 reflects a rate of roughly 28%, which is consistent with our full-year guidance and down from last year due to improved geographic distribution of income.

The net income from continuing operations in Q1 grew 39% from Q1 '04 to 19.8 million, resulting in a 36% increase in GAAP EPS from continuing operations to $0.15 from $0.11. Excluding intangible amortization, our EPS was $0.19 in Q1 '05, up 27% from $0.15 in the same period last year and $0.01 better than the FirstCall consensus of $0.18.

Now turning to our segment results, I will briefly describe our Q1 performance. All of the revenue that I will discuss is on a reported basis and includes the impact of foreign exchange and the acquisition of Elcos.

The LAS revenue in Q1 '05 was 264.8 million, up 6%. On a GAAP basis, LAS operating profit for the first quarter of 2005 was 22 million, up from 16 million in Q1 '04. Excluding intangible amortization of 6.6 million, LAS Q1 '05 operating income was 28.5 or 10.8% of revenue, up 170 basis points over Q1 of last year.

In genetic screening, which was about 11% of LAS' revenue in the quarter, revenue was up 11% as we continue to experience good growth in both neonatal and prenatal screening. We saw particularly strong penetration in the Pac Rim, where our growth exceeded 20% and where we have recently increased our investment there.

In the environmental and chemical product lines, which represented about 26% of LAS revenue in the quarter, revenue was up 7%. Strong ICP, gas chromatography and thermal analysis growth, particularly in China, drove the comparative increase. We continue to see U.S. and international governments funding initiatives to improve air, water and overall environmental quality, as well as address bioterrorism concerns.

Sales to the biopharma market, which were up 3%, represented 42% of LAS revenue in the quarter. While overall the biopharma market continues to be soft, several areas experienced strong growth, particularly our offerings in proteomics and cellular sciences.

Service, which represented about 22% of LAS revenue in the quarter, grew 10% as we continue to see good traction in our OneSource business. We continue to be pleased with the performance of the service business, as our customers increasingly see the value proposition where we provide solutions to increase productivity, reduce complexity and realize cost savings.

In optoelectronics, revenue for the quarter was 96.8 million, up 13%. Optoelectronics GAAP operating profit for the first quarter of 2005 was 12.8 million. Excluding intangible amortization and the in-process R&D charge, operating income was 13.6 million or 14% of revenue, up 120 basis points from Q1 '04.

Within opto, medical imaging revenue was about 31% of total opto revenue for the quarter and grew over 20%. This growth was driven by our digital X-ray technology, which goes into both diagnostic and therapeutic end markets, including radiotherapy, as well as other applications such as non-destructive testing.

Specialty lighting revenue was about 35% of total opto revenue for the quarter and was up 4% compared to Q1 of last year, excluding the impact of the Elcos acquisition.

Growth in our Cermax Xenon light engine business was partially offset by lower photo flash sales into single-use cameras, which is being negatively impacted by both lower demand for single-use cameras and an increase in recycling of the flash modules.

Sensors revenue was about a third of opto's revenue for Q1 and was up 9%, driven by growth in our general industrial as well as safety and security end markets.

Turning to fluid sciences, Q1 revenue was 55 million, down about 3 million from Q1 '04 or 5%. GAAP operating profit was 6.8 million and, excluding intangible amortization, operating income was 7 million, down 190 basis points from Q1 of last year.

During the quarter, the aerospace segment of fluid sciences, which was about 63% of the revenue, was up 8%, with solid contributions from both our OEM business and repair and overhaul. Favorable end market trends continue with revenue passenger miles and load factors increasing 7 and 8% respectively in the quarter. In addition, we continue to see robust build plans forecasted from the major OEMs such as Boeing and Airbus.

The semiconductor business, which represented about 23% of fluid sciences revenue in the quarter, was down about 4 million or 22% to Q1 '04, as this business continues to experience soft end market demand.

Turning now to the balance sheet and cash flow, during the first quarter of 2005 we generated 13.5 million of operating cash flow, down from the 26.6 in Q1 of last year. The favorable effects of higher income during the quarter were more than offset by the timing of certain accruals in Q1, specifically payroll and VAT accruals.

Free cash flow, which we define as operating cash flow less capital expenditures, was 9 million in Q1 '05. Our working capital turns continue to improve and were up 0.2 turns to 4.9 as we drove improvements in both DSO and inventory days over Q1 '04.

Debt levels were virtually unchanged in the quarter and our cash balance was down by 13 million, essentially the cash we paid for Elcos.

Now let me briefly discuss Q2 2005 guidance and then open the call to your questions. In summary, our guidance for the second quarter is similar to what we experienced in Q1 of this year and the guidance we gave for the full year -- revenue growth of mid-single digits, 100 basis points operating margin expansion and strong EPS growth.

By segment, we believe LAS can do a little better in Q2 than they did in Q1, growing organically at the mid-to-high end of our forecasted range of 4% to 6%.

While opto had a strong Q1, growing organically 10%, we still believe that the mid-to-high single digits is the appropriate guidance for the full year and, given the temporary softness in the specialty lighting area, our Q2 revenue guidance assumes mid-single-digit growth in optoelectronics.

Our assumption for fluid sciences is that aerospace will continue to do well, however semicon will remain soft. Consequently, we are forecasting another quarter of mid-single-digit revenue decline.

For EPS, excluding intangibles, we are forecasting $0.23 to $0.24, which would be growth of 15% to 20% over the $0.20 we did in Q2 last year. With the estimated impact of intangibles of $0.04 per share, GAAP EPS is forecasted to be in the range of $0.19 to $0.20.

For the full year 2005, our guidance for EPS continues to be $1.05 to $1.10, which would translate to a growth rate of 15% to 20%.

And with regard to cash flow, we believe we will continue to generate strong cash flow and are forecasting free cash flow for this year of at least 165 million or $1.25 per share.

I will now open the call to your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] John Harmon, Needham & Company.

Just a couple of questions, please. I was wondering if you could give your usual LAS breakout by instruments and reagents and consumables? Sorry if I missed it.

And my second question is you-- you repaid a smaller amount of debt than you had in recent quarters. Have you essentially hit a stop in the amount of debt that you can easily repay? Thank you.

Hey, John, with regard to the split of LAS revenue, as I mentioned service was up 10%, instruments actually grew 6% in the quarter and reagents and consumables was up 5%.

With regard to the debt, as you mentioned, we didn't pay a lot of debt off in Q1. We have continued to pay debt here in Q2 and, in fact, already this quarter we've reduced our outstanding term loan by $20 million.

So I think we'll continue to pay off debt. I think it'll be a little bit more measured between debt payoff and, hopefully, some business development activity, but I think the plan for the full year is to continue to-- for the cash that we don't use in the business development activity to take down our debt.

Darryl Pardi, Merrill Lynch.

The 8% growth in Europe, that was in reported terms, correct?

Yes.

So up kind of low-to-mid-single digits in local currencies?

Yes, that's correct.

Could you discuss what end markets were-- or kind of discuss what the growth was in Europe across your businesses, where you're seeing strength? Most suppliers in Europe had a pretty weak Q1. You guys were somewhat of an anomaly.

Yes, we actually saw growth across all 3 businesses. We had positive growth across all 3 businesses in Europe. LAS was up about 3% on an organic basis, opto was up about 3%, and fluid, of course, which is relatively small in Europe, was up 5%.

Okay. In the digital-- I'm sorry, in opto, at this point what's the mix of the specialty lighting business between the flash for disposal cameras and other consumer electronics and applications?

It's about 30%-35% of-- You're saying how much of the flash is of specialty lighting? (multiple speakers).

No, no, no. How much-- how much of specialty-- How much of specialty lighting is the flash for disposables versus other applications?

I would say that flash for disposal -- and, of course, it's continuing to decline here -- is probably, for the year a $20 to $25 million business.

Okay. Okay. A few more states besides California have indicated their intent to go to a 30-plus screen. Are you-- what's the status of those from your standpoint? Are you receiving RFPs from them? Are there orders in place with Florida and Mississippi and some of these other states?

I think-- yes. The short answer is yes. There's a number of states -- Florida, Texas, others -- who are coming down the pipeline in terms of rolling out broader-based tandem mass spectrometry screens.

And I would say we're active with-- with all of those states. And it's difficult for me, Darryl, to really comment beyond that, just because of the status of those-- of those discussions, both in-- both from their perspective and ours.

Okay. It's a discussion right now rather than an order?

Well, I would say it's a process. When you say discussion, discussion implies-- there is a tendering process, let's put it that way, that goes on with all the states and so you have to work your way through the tendering process and there are various-- various steps and phases in that tendering process.

That's fair. And just-- in digital imaging, are you-- I know you're working with some non-health-care OEMs.

Yes.

Are you beginning to see sales from that-- from those customers?

Yes, we do. We see some sales in the non-destructive-testing arena. I would say by far and away the bulk of ours are in-- are in the medical. Really it's medical imaging and that's what drives it.

And it's a-- it's-- that market is growing very rapidly and so that's been taking up most of our capacity, actually. And the business was always really designed around medical imaging. So it's the medical imaging business that proves out. The volumes all drive around medical imaging and I think, ultimately down the road, there become other applications that come into play because the scale of the business gets larger and, therefore, the cost per units get lower and it opens up additional applications.

So the non-destructive testing is up and alive and going forward, but by far and away the bulk of it is in diagnostic and therapeutic imaging.

[OPERATOR INSTRUCTIONS] Paul Knight, Thomas Weisel Partners.

Can you talk about where you are and, I guess, even where the pharmaceutical industry might be with this cash repatriation issue? I mean, are the rules now clear that what can be done or what are we-- what's-- what's the typical treasurer waiting for?

Why don't I turn that over to Rob? I mean, we did take-- we did account for $100 million of repatriation in the fourth quarter. There are some, I guess, technical clarifications that are still pending and with that, I'm going to turn it over to Rob.

Yes, I think that's right, Paul. Basically, when they passed the bill, there were some technical clarifications that needed to be cleared up before, I think, a number of companies will fully repatriate. We, in the first quarter, brought back 100 million. Because of this technical glitch, there's probably another 70 or 75 that will come back when that technical correction bill is passed.

And then, in our case, we'll look to do up to 500 million total toward the end of the year. So the plan, as we've talked about before, was to take the cash on hand out. That's about 175 million and, as we said, 100 of that's come back. And then the remaining 325 or so will come back, probably in Q4 if we decide to put some debt overseas.

And then I might have missed this earlier, Greg, but most firms, like yesterday, were kind of all saying, almost unanimously, pharma demand seemed to be bad in January, improving quite a bit in March. What's your color on that?

Well, I don't know that we get into the blow-by-blow, week-by-week, Paul. I would say pharma is not really any new news. I mean, pharma had issues, really, going back to the first quarter of 2002, if you recall, and that's when I think pharma began to run into some significant challenges and that has just continued. So there isn't really, from our perspective, anything different in 2005 than there was in 2004 or even 2003.

I mean, I think it's-- pharma's going through an industry restructuring where they're moving away from the blockbuster model to more a specialized medicine model. That is going to take some time.

There are clearly certain priorities within pharma that will receive more funding than others do. And so I think you see some mix shifts within it, but there are large, wealthy customers that continue to spend a lot of money on both R&D -- and continue to look at boosting their R&D because it is the path out for them -- and continue to spend a lot of money on-- on CapEx.

So I would say we just haven't seen a difference in '05 between-- '04 and '05.

Okay. Thanks very much.

[OPERATOR INSTRUCTIONS] Steven Salamon, Infinium Capital.

Just actually following on that, I was wondering if you can give a little bit of an outlook for the biopharma? I think actually the organic growth in biopharma relative to your history is pretty good in the context of other peers having relatively weak quarters. So if you could talk a little bit about what contributed to that and what might contribute going forward.

And I guess, also, I assume that some of this is coming about as a result of some of the alliances that you've put together in the proteomics area. Can you just comment on your thoughts in terms of criteria for alliances versus actually going out and making acquisitions?

Yes, So, I think, look, in the biopharma area our results this quarter are consistent with the way our results have been unfolding throughout the four quarters in 2004. Continue to pick up a little bit of momentum and I think the momentum is principally driven around new products that we've introduced into the market place and our focus on where we think the growth areas are within the pharmaceutical market place.

So it's really kind of, if you will, a growth-platform-driven strategy that says we think these are the areas that are going to be important to solving the pharmaceutical problem going forward and, therefore, we're putting a disproportionate amount of investment in it.

When we look at it from a business development side, so our priorities follow on from that, which are to say what technologies or products are out there that help strengthen our growth platforms and then we look at whether licensing, partnering or acquisition is the right way to step up into it. And I would say the biggest differentiator is whether we think we have to kind of own that technology or whether licensing it and partnering with more people enables us to get a broader, more complete solution out quicker as opposed to trying to own every component or every piece in a system.

So I think it really gets back to how critical we think it is in terms of the overall solution and what value we add as to whether we'd say we have to acquire it versus licensing and partnering. And certainly licensing and partnering is faster, as well -- a little more complex to manage as you go forward.

Right. Can you-- can you point to some specific new products? I know you mentioned a couple earlier in the call, but are there a couple of new products that were-- that you can point to that are—(multiple speakers_?

Well, I think it's just-- it's really been across the board and it's not all been this quarter. It's been last quarter, it's been the quarter before, it's been the quarter before that.

So it's everything from even products going back as far as the prOTOF, which continue to gather momentum in the market place. There's a wide range of reagents that we've introduced in the market place, I think, that continue to pick up-- pick up momentum. There's a variety of product in and around the environmental space that-- our ICP product line continues to do very well.

So there's a-- I would just say, Steve, across the board and I spiked a couple of them out this quarter but, I mean, it's-- I think across the board and we expect that to continue going forward into the year.

And, gentlemen, at this time there are no further questions. I'll turn the conference back over to you for any additional or closing remarks.

Great. Well, thanks-- thanks, everyone, for your questions. We feel very good about our progress in the first quarter and are optimistic about our prospects for the balance of 2005.

We believe our strategy of focusing on execution while increasing our investments in our growth platforms positions us well for this year and beyond. So thanks for your time today and your interest in PerkinElmer. This call is adjourned. Have a great day.

Thank you. That does conclude today's conference. We would like to thank you all for your participation and have a great day.