Revvity Inc (RVTY) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q1 2009 PerkinElmer earnings conference call. (Operator Instructions). I would now like to turn the call over to Mr. Dave Francisco, Vice President of Investor Relations and Treasury. Please proceed.

Thank you, operator. Good afternoon. Welcome to the PerkinElmer first quarter 2009 earnings conference call. I'm Dave Francisco, Vice President of Investor Relations and Treasurer for PerkinElmer. With me today are Rob Friel, Chairman and Chief Executive Officer and Michael Battles, Vice President and Interim Chief Financial Officer. If you have not received a copy of earnings press release, you may get one from the Investor section or our website www.perkinelmer.com or from our toll free investor hotline line 1-877-PKI-NYSE. Please note that this call is being webcast live and will be archived on our website until May 14, 2009.

Before we begin, we need to remind everyone of the Safe Harbor statements we have outlined in our earnings press release issued earlier this afternoon and also those in our SEC filings. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future even if our estimates change so you should not rely on any of today's forward-looking statements as representing our views as of any date after today.

During this call we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly. I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel.

Thank you, Dave. Good afternoon. I appreciate you joining us this afternoon for our first quarter 2009 earnings call. We are quite pleased with our financial performance in the first quarter. Despite difficult economic conditions, revenue was flat organically and we were able to expand operating margins and generate very good cash flow.

The first quarter of 2009 marked the first quarter that our operating structure was aligned according to Human and Environmental Health. Our increased emphasis on these two attractive end markets coupled with our ability to provide a broad array of service offerings has allowed us to perform relatively well in the first quarter.

In addition, we continue to make good progress on improving operational execution both in the factory and in our front end organizations. Additionally, we expanded our portfolio of innovative products with significant product launches in the cellular analysis, newborn screening and analytical sciences area.

We also increased our commitment to advancing drug discovery and life sciences research in Asia with the inauguration of a center of excellence in Singapore.

I am also pleased to announce that we are strengthening our executive management team with the addition of Andy Wilson, who will be joining us as our new Chief Financial Officer in mid-May. I'm very pleased that Andy is joining us. Andy is someone I have known since the mid-90s when we worked together at Allied Signal. He brings some great financial experience starting out at KPMG and having worked at some very good companies like Pepsi, Allied Signal and Danaher. In addition, he has experience in business development and operations and most recently served as Corporate Vice President of Investor Relations. So brings a good breadth of experience including a strong knowledge of Wall Street.

I would also like to take this opportunity to publicly express my appreciation to Mike Battles for serving as acting CFO over the last couple of quarters and doing a terrific job overseeing the finance organization.

Turning to our market conditions in the first quarter, to summarize, several of our end markets performed a little better than we anticipated while in a few of our markets conditions have continued to deteriorate. Overall we did not experience any significant surprises relative to our expectations.

Looking at each of the segments, our Human Health business represented 41% of our revenue in the quarter and grew 3% organically. This business is primarily focused on developing screening and diagnostic tools and applications to fight disease earlier, provide medical insights more accurately, and create critical new therapies more quickly.

Within Human Health we serve two end markets; diagnostics and research, which represented approximately 23% and 18% of our revenue, respectively, in the first quarter. Revenue from our diagnostics business declined in the low single digits organically in Q1 with screening growing in the mid single digits and medical imaging down double digits. Increased revenue in our genetic screening business was driven by continued expansion of screening in both the emerging territories and western European countries and strong double digit growth from the Viacor business. This was somewhat offset by continued strict inventory management at the US state labs.

In our medical imaging business, the decline in revenue over last year was due to the difficult comparisons from the first half of 2008 as we added significant capacity early last year and was able to work off outstanding backlog, thereby growing well in excess of market rates. In addition, the current overall market demand for imaging systems is down in the medical area due to constraints on hospital's capital budgets and lack of financing availability. We continue to see increased penetration in the non-medical markets and are aggressively ramping up new programs in these areas but they still represent a relatively small portion of the business.

In the research area, we provide a broad suite of products including reagents cellular analysis, lab automation and detection capabilities that are used to improve the drug discovery process. Our research grew in the low double digits in the first quarter. Our growth in this area was attributed to demand from recent new in the reagent area as well as cellular imaging and analysis products with enhanced imaging software.

We are also cycling up against a relatively weak Q1 2008. Within this business, we experienced strong growth in the academic and clinical labs with the pharmaceutical and biotech markets roughly flat. Unlike the overall economy, we believe the research market has stabilized and may potentially provide some upside later in the year as funding from the various government stimulus packages are directed in specific areas of research.

The Environmental Health business represented 59% of our revenue in the first quarter and contracted 3% organically. In the Environmental Health area, we provide a number of applications and technologies that improve and protect the surroundings and the environment in which we live. This business includes the environmental safety and security, industrial as well as laboratory services markets.

Our lab services business represented approximately 21% of our revenue and grew low double digits organically in the quarter. This was driven by very strong growth of our multivendor OneSource program where we added a number of new customers and continued to gain good momentum in penetrating markets beyond our traditional customer base. This strong growth from both OneSource and contract revenue more than offset the deferral of maintenance as some customers are prioritizing spending away from repairing instruments.

In addition to seeing good penetration outside our traditional end markets of pharmaceutical and academic labs, we also experienced strong growth in every geographic region of the world as recent increases reason in our service capabilities outside the US and Europe are paying dividends.

The Environmental markets represented approximately 17% of our revenue in the quarter and contracted in the mid-single digits organically. Private testing labs are reducing capital purchases in response to lower demand and tight credit markets whereas we are seeing increased spending from academic and government owned labs.

Another area of growth is our products sold in the production and analysis of renewable energy development. However, at this time it is still a relatively small percentage of our business.

Safety and security represented 14% of our revenue in the quarter and declined in the mid-single digits organically. Consumer product and food testing grew in the quarter due to increased testing demands for mercury, lead and pesticide testing as well as legislation requiring new testing requirements for consumer product safety applications.

More than offsetting this growth was a decline in our products that serve the pharma QAQC market as pharmaceutical companies have cut back investing in this area in the short term. In addition, our components in the gas monitoring and intrusion alarms are being negatively impacted due to the overall economic environment.

The industrial market which represented approximately 8% of our revenue in the quarter declined approximately 20% organically. These markets that for us principally include chemical, petro-chemical and semiconductor end markets are being severely impacted by economic conditions as these industries are facing both lower demand for their products as well as a need to preserve capital. I will now turn the call over to Mike to discuss the first quarter financial results in more detail and guidance for the remainder of the year.

Thank you, Rob. Good afternoon, everyone. I will now provide more details on our Q1 financial performance and guidance for Q2 in 2009 before we open the call for questions. Before I get into the details, I want to clarify that whenever I talk about a particular measure being up or down I'm referring to an increase or decrease in that measure during the first quarter of 2009 compared to the first quarter of 2008. To the extent that I use any non-GAAP measures, those numbers have been reconciled to a comparable GAAP measure in the financial tables of the press release or posted on our website.

As Rob discussed earlier, Q1 was another solid quarter of financial performance particularly considering the difficult economic conditions. Revenue was down 6% as compared to the same period last year. The unfavorable impact of foreign exchange net of acquisitions was 6%. Therefore, revenue growth was flat versus the prior year excluding these items. The remaining revenue analysis is presented excluding the favorable impact of foreign exchange and the favorable impact of acquisitions.

By segments, sales grew 3% for Human Health and declined 3% for Environmental Health. On a regional basis, the Americas grew low single digits, Europe declined mid-single digits and Asia grew mid-single digits. Within Asia we saw strong growth in China, India and Japan offset by continued pressure in key emerging territories where currencies remain weak.

Regions across the globe experienced similar trends within their respective end markets where, as Rob mentioned, innovative technologies, reagents, consumables and lab services all performed relatively well offset by poor performance in our more capital intensive product offerings.

Also contributing to the growth in the quarter was the fact that due to our fiscal calendar every five years we have additional days in our fiscal year, which was the case in the first quarter of 2009. Although it is difficult to determine the precise impact, we believe that these additional days may have added approximately 2% to the overall growth primarily based on our reagent, consumables and service offerings.

Regarding gross margins, we saw 170 basis points of expansion in the first quarter of 2009 driven primarily by the favorable impact of mix, as we experienced relatively good performance from our higher margin product offerings. Additionally, we generated strong productivity gains from our ongoing cost initiatives and restructuring actions taken early in the quarter related to direct labor in response to anticipated lower demand.

Research and development expenses were $26 million in the first quarter of 2009. Excluding the impact of foreign exchange, R&D expenses were up as compared to the prior year as we continue to invest in our strong pipeline of innovative products, applications and solutions.

Selling, general administrative expenses decreased by $2.4 million versus the prior year. Excluding the impact of foreign exchange, SG&A expenses increased as a percentage of sales compared to the first quarter of 2008. This increase was attributable to higher selling expense as compared to the prior year primarily related to our continued commitment in investing for growth particularly in emerging territories. In addition to the increase in selling expense, as mentioned in our January call, our pension expense is higher this year. Offsetting these increases were tight cost controls on G&A expenses.

During the quarter, we recorded a $7.8 million pretax restructuring charge primarily related to head count actions in an effort to resize certain businesses to match decreases in end market demand.

GAAP operating profit was $25.7 million in the first quarter of 2009 versus $33.4 million in Q1 of 2008. On a non-GAAP basis, adjusted operating profit was $48.4 million which was flat from the prior year and as a percentage of sales and represents an additional 70 basis points year-on-year to 11.2%.

Looking at expenses below operating income, interest expense net of interest income for the first quarter was $4.1 million as compared to interest expense of $5 million in the first quarter of 2008. This decrease has primarily led to lower interest expense -- lower interest rates.

In the quarter, we had an effective tax rate of 28% on a reported basis which was approximately 170 basis points higher than the prior year. This increase was due to a change in geographic mix of income year-on-year and we expect this rate to continue throughout the rest of 2009.

GAAP EPS from continuing operations for the first quarter of 2009 was $0.13 compared to $0.18 in the first quarter of 2008. Adjusted EPS from continuing operations including the effects of stock-based compensation was $0.26 for the first quarter of 2009, flat from the prior year. This is above the range of our guidance for the quarter of $0.21 to $0.23 and exceeds first call consensus estimates of $0.20.

Regarding share count, we ended the quarter with 116.5 million shares outstanding. In the first quarter of 2009, we repurchased 1 million of our shares in the open market. We have 8 million shares left in the current repurchase authorization.

Turning to the balance sheet, we continue to maintain a very strong financial position. We finished Q1 with $382 million of net debt which we define as short and long-term debt minus cash. We continue to maintain a strong liquidity position with $162 million of cash and approximately $250 million of undrawn availability under our revolving line of credit. We also have no mandatory maturities of debt until 2012.

Looking at the cash flow statement, during the first quarter of 2009, we generate operating cash flows from continuing operations of $18.8 million as compared to $24.9 million in the first quarter of 2008. However, we reduced the amount -- the drawn amount under our accounts receivable securitization facility by $10 million in the quarter due to the increased costs associated with this asset-backed securitization. While this is essentially a financing transaction, accounting standards require us to treat the net changes as operating cash flows. Therefore, our adjusted operating cash flows were $28.8 million in the first quarter of 2009 representing an increase of 16% over the same period last year.

Our continued focus on working capital performance has effectively mitigated the impact of external pressures on commercial terms due to the economic conditions. Accounts receivable exclusive of the reduction in the AR securitization facility provided approximately $30 million of working capital in the quarter. Working capital returns were relatively flat year on year.

In summary, we are pleased with our financial performance in the quarter given the global economic conditions and continued challenged in the credit markets. Let me now provide further detail on our guidance.

Although we exceeded our financial targets in the first quarter, we believe that there is continued economic uncertainty in many of our end markets. Therefore, at this time, we feel it is prudent to reconfirm our previously issued guidance for the full year of 2009.

For the second quarter of 2009, we don't see a significant change in our end markets but we are cycling up against more difficult comparisons in a few of our businesses. Therefore, we believe organic revenue growth will be down low to mid single-digits and adjusted earnings per share will be flat sequentially plus or minus a penny, which is consistent with current consensus.

In conclusion, we feel good about how we performed in the quarter. We believe that our financial performance was attributed to our ability to execute well while at the same time deepening our focus and increasing our investments in both Human and Environmental health. This included launching a strong pipeline of innovative products, applications and services, establishing collaborations and business development activities and launching customer-facing activities around the world focused on improving the health and safety of people and their environment.

Before I open the call to questions, since Q1 of 2009 is the first quarter in which we are now reporting under the new Environmental Health and Human Health business segments, as a convenience to our analysts and our investors, we have placed on our website under the Investor section, our historical quarterly segment results for 2008, where we provide the GAAP results as well as a reconciliation to the adjusted results for both Human and Environmental Health.

I would now like to open the call to your questions.

(Operator Instructions). Your first question will come from the line of Ross Muken with Deutsche Bank. Please proceed.

Good afternoon, guys.

Good afternoon.

On the diagnostic assets, could you dig in a little deeper on some of the trends you have seen in that business. And if you could talk about what you have seen in the reimbursed assays versus the nonreimbursed. And then in terms of on the cord blood side of things, it seems like that business is held in pretty well. I'm assuming it is performing as you expected. And in terms of as we exited the quarter, is the same level of kind of demand holding up as we head into Q2 as we saw? Is it sort of just a steady state?

Okay, so let me start off by talking about the -- I would say the systems business which is really sort of a newborn and prenatal screening. And I think what we are seeing there is in the US, it is sort of flat because as I mentioned there is continued pressure on the US state labs and their budgets. We think there is maybe another quarter of that. I think I mentioned in December, we were seeing some safety stock reductions. And we think that is probably another quarter of that and we start to see growth in the back half. But clearly there is a slow down in adding tests to the menu.

But we continue to see good growth outside the US, whether it is in Europe or in the developing areas. So I would say in those cases it is not so much versus reimburse versus nonreimburse it is really a function of geography. So from that perspective, I think the business will do well in the back half.

With regard to the cord blood, I think there are two things that are going on there. First of all as you mentioned, I think -- and there was some question about this, it seems to be fairly recession resilient up to this point. And I think it really speaks to the lack of penetration or the fact that it's penetrated probably in the higher economic arenas.

The other thing that is happening is I think we are doing a better job of understanding the fact that we can market cord blood as part of a much larger enterprise. If you look at really the buying factors that people consider when they are going to store blood for let's say 18 or 20 years. One of the major factors they look at is the financial viability of the people they are storing the blood with.

And I would say fortunately when you look at our competitors or you look at other people that are offering cord blood they have the tendency to be relatively small companies, in most cases private companies, and not very well financially capitalized. I think we have done a nice job recently of pointing that out and taking advantage of the significant financial strength that PerkinElmer has. And consequently, I believe we are taking share.

Thanks, Rob, on the service piece. Seems like there's a lot more interest there across the board as people have been delaying purchases, they are more I guess aware of keeping the existing boxes whether your own or not your own working at tiptop shape. Can you characterize the effect of the delayed purchasing versus share gain in terms of the impressive growth in that business?

Yes, I think that is a piece of it. Although, what I have to say is when we don't sell as much instrument or when we don't sell as much boxes there is a potential negative impact from the service organization. Because when we sell an instrument, we do get some follow on's revenue in our service organization whether it is training or validation and from that perspective.

So there is a little bit of a negative impact on the service organization when we don't sell instruments. But having said that, I think your theory is correct. As people hold on and stretch out purchases of new equipment, they are spending more on service.

I think the other thing that is happening is people come under pressure from a productivity perspective. They really look at service as an opportunity to reduce their costs inside the lab and really focus their expenditures now on things that can help them develop new products.

Lastly on the guidance. You guys had a really nice quarter here. You kept the guidance. I know the end market environment is still a bit challenging but given the fact that the 2Q guidance quarter-over-quarter at least from an EPS perspective looks to be at least flat. What are you seeing or which specific businesses are you most intently focused on that keep you reserved? Obviously industrial is an obvious one, but aside from industrial to keep you a bit more reserved from being a bit more aggressive on the guidance?

I would say when we think about our markets and we alluded to that,. I think genetic screening stable, continues to do well. I think biodiscovery is probably stabilizing and maybe provides a little bit of an upside depending upon the funding of the stimulus packages. I think service continues to do well.

I would say that the one that concerns me most of all is medical imaging. And I think we continue to see -- we thought that was going to be flattish in the first half maybe a little bit of pickup in the back half. And I think I continue to be concerned about the recovery of that business fundamentally being driven by the lack of financing and also the continued pressure on hospital budgets. So I would say that's the one I'm most concerned about.

Great, Rob. Congratulations. It was a good quarter in a tough environment.

Your next question comes from the line of Isaac Ro with Leerink Swann.

Hi thanks for taking the question. On the environmental testing marketplace, could you give us the sense of any new regulations that you are seeing that may be incremental this year or maybe perhaps next year as related to the stimulus package? Just trying to figure out how the regulatory environment is working in your favor.

There was a new regulation that was passed. I think it was February 10th that increases the testing requirements on consumer products. It was passed in the United States. And so we are seeing some benefit from that. With regard to the stimulus, I think there is a number of things both in whether it is US -- they have got -- I think it is $13 billion going after energy efficiency; some $94 billion on environmental; some $32 billion going into materials and food. So I think there's a number of things in addition to the some $120 billion that's going into health care.

So I think there are a number of things in the US where we can see some benefit for. And then a number of the other areas, whether it's -- China has got a fair amount of money going into health care energy efficiency and infrastructure improvements as well as the European countries. So, I think there are a number of opportunities out there for us. I think the real question is whether it is a 2009 benefit or whether it's a 2010 benefit.

Can I venture a guess, if it later this year or early next when you see the next real pickup.

I think in some areas we will see probably in the fourth quarter. I think probably in our cellular imaging area where we seem to be getting a fair amount of traction. At least some of the grants that have been written. So, if that funding comes out early fourth quarter, we could see some benefit. I would say we haven't factored any of that in our forecasts or in our guidance. So I think that would be an upside.

Okay and then lastly, I think the last couple of quarters there has been talk of the genetic screening business in the US having some pressure due to state dollars being held up. Has that changed at all in the last 90 days and how does it look going forward?

No, I think we are still flat in the first quarter, and as I mentioned previously, I think it probably goes another quarter and then I think probably in the back half we start to see some opportunities to grow again in the US. But having said that, we continue to see pretty good growth outside in Europe in the developing areas.

Great. Thanks so much.

Okay.

Your next question comes from the line of Derik De Bruin with UBS. Please proceed.

Hi. Good afternoon. We have heard a lot about inventory destocking from some companies, and could you just walk us through what exactly you're seeing this and what's going on? And more importantly, do you think that the current economic experience that we are seeing right now will prompt the customer -- a fundamental change in the way customers manage their inventory going forward?

I would say the area where we saw the destocking was really more in the genetic screening area, where generally -- depending on the lab they would probably keep 60 to 90-day supply of reagents. That's probably the area we saw it. We started to see it in 2008. I would say late third quarter, early fourth quarter of 2008. And as I mentioned, I think probably come sort of middle to the end of the second quarter we will start to see that bottom out.

Other than that in other areas we really haven't seen that phenomena from the standpoint of a stocking problem. Keep in mind some of our reagents on the biodiscovery side are radioactive or radiochemical so the shelf life is not that long. So we've got that benefit.

Right. That's true.

So I would say other than in the genetics screening area, we haven't seen a significant impact from destocking.

Okay. What about the second portion of it? Just a matter of people working through inventories and then they'll reorder? I'm just wondering if it's just going to be -- ?

I think it depends if they can be successful with holding lower safety stock in this environment I think maybe they go up a little bit more but we probably won't return to the levels of safety stock that we were previously. I think if you look at previous recessions and other industries that occurs, when people sort of are able to manage their inventory dawn to a level and they to manage their inventory down to a level. And they don't lose fill rate and they are able to maintain their operations. Then I don't think we will see it go back up, maybe a little bit. But I don't think we will go back to the levels that they had prior to the downturn.

Great. Thanks. The gross margin expansion was impressive particularly since you launched a record number of new products to pick on. Can you just give us a little bit more color? I know some of it you said was mix but how sustainable this is going forward?

Well, I think the new product side of things is fairly sustainable. I think we are seeing good traction in a number of the new products that are out there. And as you mentioned, one of the goals with the new products is not only to get new features but also to improve the gross margin on that. So I think that's repeatable.

I think the margin mix will really depend on going forward. One of the benefits we saw this quarter is the fact that our service and reagent business was very strong and the instruments was down. If you look at our split; service grew, our reagents and consumables grew, and our instruments was down. I think that's driving a lot of the mix.

Hopefully going forward that won't always be the case. Hopefully we will get some continued growth on the instrument side. So I would say I think on the new products it is repeatable. I think on the reagent and instrument mix. I don't know that we will have a strong -- a growth differentiation going forward as we had this quarter.

What were the instruments down in terms of organically?

Instruments were down about 7%.

And finally, on your discontinued operations is there any update on your plans?

No plans. The books have been out for another couple weeks now. We have got a fair amount of people interested. We just started discussions about value and due diligence. So I think that continues to go on as planned. Thank you very much.

Your next question comes from the line of Quintin Lai with Robert W. Baird. Please proceed.

This is actually Justin for Quintin. What was the FX for the quarter?

The FX from a revenue perspective?

Yes, from topline?

It was 6%. It was 7%, 7% for FX and 1% help from acquisitions.

Is that evenly split between Environmental and Human Health or is it more weighted on one side?

It is more weighted on the environmental side.

You said you purchased about a million shares. What was the average repurchase price for that?

$14 a share.

$14 a share. All right. One last question, you said that you saw research stabilizing. What are you seeing exactly that led you think that it is stabilizing? Are you looking at stimulus in the back half of the year or are you starting to see quota activity on a more normal basis?

I would say it is more of the latter.

The latter?

I would say what we are seeing from our customers is a stabilization of order patterns. I think we mentioned this last call. I think when you look at the pharmaceutical industry they have been going through a fairly difficult time for some time with whether it is generics or drugs coming off patents. Our belief is they have adjusted their spend rate almost irrespective of what's happening from an economic perspective. We are actually seeing some stabilization both on the instrument as well as the reagent side in biodiscovery.

Thanks. That's very helpful. One last question. The US was up organically and Europe was down which is counter to what a lot of your competitors have said? Can you provide a little more color on that?

I think part of that is being driven by our medical imaging business which was down fairly significantly and a lot of that goes into Europe. I would say the other thing is, depending -- when we talk about Europe we include Eastern Europe. Eastern Europe was down quite significantly, I think largely because of the FX things that Mike talked about in the emerging territories; the fact that their currency has been devalued quite significantly.

All right. Thanks, guys.

There are no further questions in queue. I would now like to turn the call back over to management for any closing remarks.

Thank you. So going forward we will continue to manage the current economic environment through a dedicated focus on cashflow, driving service, consumables and reagents revenue, and containing noncustomer related costs while continuing our investment in high growth areas, innovation collaborations and employee development.

As experienced in the first quarter, I believe that this is a balanced approach which will provide us with a strong foundation to maintain our market leading position now, grow when the economy recovers, and become an even greater contributor through improving the health and safety of people in the environment.

This concludes today's call. Thank you for joining us. Have a great day.