Revvity Inc (RVTY) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2009 PerkinElmer conference call. My name is Thomas, and I will be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Dave Francisco. Please proceed.

Thank you, operator. Good afternoon and welcome the PerkinElmer third quarter 2009 earnings conference call. I'm Dave Francisco, Vice President of Investor Relations and Treasurer for PerkinElmer. With me on the call are Rob Friel, Chairman and Chief Executive Officer, and Andy Wilson, Senior Vice President and Chief Financial Officer. If you have not received a copy of the earnings press release, you may get one from the Investor section of our website at www.PerkinElmer.com, or from our toll-free Investor hot line at 1-877-PKI-NYSE. Please note this call is being webcast live and will be archived on our website until November 12, 2009.

Before we begin, we need to remind everyone of the Safe Harbor statements that we 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 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 to the non-GAAP financial measures we plan to use on 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 for PerkinElmer, Rob Friel.

Thank you, Dave. Good afternoon. I appreciate your joining us this afternoon for PerkinElmer's third quarter 2009 earnings call. Overall we are very pleased with our performance in the third quarter. Our results for the topline met our expectations and we believe our end markets are stabilizing as we are seeing some encouraging signs of sequential improvement. Our operating margins were better than we expected, resulting in us exceeding our EPS forecast. Adjusted operating margins increased approximately 50 basis points over the second quarter this year on virtually the same revenue base, despite increasing R&D as a percentage of sales by approximately 30 basis points. We have been committed to fueling our pipeline of new products, the technology and innovation will be a source of future growth.

In the quarter, we continue to make good progress in our diagnostics business. We received 510K certification approval for our new neonatal screening systems, and also launched our first child health screening kit. The new kit is the first commercially available clinical assay that can simultaneously measure and diagnose hormone imbalances. We also launched a series of product and service offerings in the research area, including the Columbus 2.0 High Content system platform, the EnSpire with luminescence, and the LANCE Ultra panel. These products are aimed at core markets and drug discovery and academic research focused on cellular imaging, stem cell related screening technologies and kinase reagent portfolio expansion for drug screening. We continue to deepen our customer relationships through our multi-vendor OneSource laboratory service business.

The success of this approach resulted in both new and expanded OneSource programs in the quarter, including the expansion of our OneSource agreement with a major pharmaceutical company, Boehringer Ingelheim, to cover more than 1,000 multi-vendor scientific [asset] at the company site in Germany. During the quarter, we also expanded our capability in advanced health screening and diagnostic technologies in developed territories with the acquisition of SymBio Life Sciences, and our investment in Surendra Genetic Labs. Through the SymBio acquisition, we will add diagnostic tests for infectious disease to our product portfolio, and also gain access to substantial manufacturing capacity, technical capability, and the well-established sales channel in China.

In the research market we solidified our position as a leader in radiochemicals research consumables through the purchase of certain assets from GE Healthcare as well as expanding our custom synthesis and radiotherapeutic products. These products enable researchers to quickly and accurately determine if potential new drug compounds are effective against their intended disease targets.

Before I turn the call over to Andy, I wanted to give an update on our guidance for 2009. Through the first nine months of the year, despite a challenging economic environment, we have been able to maintain our adjusted operating income as a percentage of sales flat versus a year ago. This is despite organic revenue down in mid single digits, and having increased our investment in R&D as a percentage of sales. This solid operational execution, combined with early signs of improving market conditions, gives us the confidence to raise both the top and bottom of the range on our adjusted EPS guidance.

I will now turn the call over to Andy.

Thanks, Rob, and good afternoon, everyone. I would like to now provide additional color on the third quarter financial performance, as well as provide guidance for both the fourth quarter and full-year 2009. After my prepared remarks, we will then open up call for questions.

Before we get into the financial details, I would like to clarify that whenever I talk about a particular measure being up or down, I am referring to an increase or decrease of that measure during the third quarter of 2009 compared to the third quarter of 2008. To the extent that I use any non-GAAP measures, those measures have been reconciled to the comparable GAAP measure in the financial tables of the press release, or have been posted on our website.

As Rob mentioned earlier, we are pleased with our financial performance in the third quarter, a solid earnings and cash flow performance despite the ongoing challenges in a difficult global economy. Revenue for the quarter was down 9% as compared to the same period last year. The unfavorable impact of foreign exchange was 2%, the favorable impact of acquisitions was 1%, and therefore organic revenue growth was down 8% versus the prior year. The remaining revenue analyses in my prepared remarks will be presented excluding the unfavorable impact of foreign exchange and the favorable impact of acquisitions.

Despite the 8% decline in organic revenue, we feel good about our top line performance in the quarter. Excluding the medical imaging IDS businesses, both of which are keeping pace within their respective markets but whose markets are at a different point of the cycle, organic revenue declined at a low single digit rate in the third quarter, supported by very solid growth in reagents. By segment, organic revenues declined by 7% and 8% in human health and environmental health respectively.

On a regional basis, organic revenue in the Americas declined at a mid single digit rate, Europe declined at a low double digits, and Asia declined low single digits. Within the Asian region, China grew at a double digit rate, offset by a soft demand in a number of emerging territories across southeast Asia.

From an end market perspective, PerkinElmer's human health business presented 41% of our total revenue in the quarter. Within human health we serve two end markets; diagnostics which represented 24% of total revenue, and research which represented 17% of total revenue. Organic revenue from our diagnostics business declined at a mid single digit rate in the third quarter, as continued strength in our screening business was offset by expected declines in our digital imagining business.

Genetic screening organic revenue grew at a high single digit in the quarter, driven by expansion of over neonatal and prenatal screening platforms, with broad based growth experienced across all major geographies. Additionally, our cord blood business delivered mid single digit organic revenue growth in the third quarter, and we continue to be encouraged by the resiliency of this business despite a difficult economy. As expected, our digital imagining business' organic revenue was down over 30% in the quarter, as we continued to see a deferral of spending for high-end systems due to financing, capital budget and inventory constraints.

Our continued focus on broadening our offerings through new OEM partnerships has delivered a number of key wins year-to-date. However, due to the long lead time required to design these components into systems, we do not expect any material benefits from these initiatives until 2010.

In the third quarter, organic revenue in our research business declined in the high single digit rate, as the business cycled up against very difficult comparisons from the third quarter of 2008. Demand for our broad suite of reagents and low end instruments was encouraging, as customers continued to spend on basic research. However, this growth was more than offset by delays in high end instrument orders, primarily in Europe. We expect demand for our low end instruments and reagents to remain stable, while demand for high end instrumentation, particularly in the US, will be impacted by the timing of stimulus spending which we now believe will shift into 2010.

The environmental health business represented 59% of our total revenue in the third quarter. Within environmental health we serve four end markets; laboratory services, environmental, safety and security and industrial. Our lab services businesses represented approximately 22% of total revenue in the third quarter and organic revenue grew at a mid single digit rate. OneSource, our customer-focused multi-vendor offering, was a key contributor to this growth, as the team was successful in capturing share and expanding services, ultimately strengthening our relationships with key customers including Boehringer Ingelheim, which Rob mentioned earlier. In addition to OneSource, we were encouraged to see demand for traditional service offerings improve throughout the quarter.

The environmental market represented approximately 17% of total revenue in the third quarter and organic revenue declined low double digits, though we did see a significant sequential improvement in the second quarter. We continue to see constrained capital spending due to economic conditions and tight credit markets, particularly affecting our smaller customers. Offsetting this decline was strong growth in China, a result of stimulus monies which targeted environmental infrastructure. Additionally, on a global basis, we saw strength in the development, production and usage of renewable energy technologies within this market where our high end UV technologies are used.

The safety and security market represented approximately 13% of our total revenue in the third quarter and organic revenue declined at a high single digit rate. New regulations in food and consumer safety, including the recently enacted Food Safety Act of 2009, continued to create opportunities in these key markets. We believe these regulations and the corresponding need for increased inspection, testing and tracking of contaminants will drive increased demand for our products both now and in the future. Within our components offering, we saw significant demand in our thermopile sensors, a result of the global focus on H1N1. This performance was offset by continued weak demand in fire detection and intrusion alarm sensors.

Our industrial market represented approximately 7% of our total revenue in the third quarter and organic revenue declined over 20%. These markets, which include chemicals, semiconductor, and petroleum refining, continue to be sharply impacted by weak industrial spending.

Turning to our financial performance, adjusted gross margin was up approximately 20 basis points in the third quarter, driven primarily by the impact of a favorable mix shift into reagents, consumables, and new higher margin product introductions, as well as the impact of cost containment initiatives taken during the year in response to anticipated lower demand. Adjusted research and development expenses were $26.8 million or approximately 6% of revenue in the quarter, up 70 basis points from the prior year. As Rob mentioned, we continue to invest in the development of innovative new products, applications and solutions for the key end markets that we serve. Adjusted selling, general and administrative expenses decreased by $9.5 million versus the prior year. SG&A expenses were up as a percentage of revenue by approximately 30 basis points as compared to the third quarter of 2008, as cost containment initiatives and lower compensation costs were offset by higher pension expense and the higher -- the impact of lower volume.

GAAP operating profit was $26.4 million in the third quarter of 2009 versus $43.1 million in the third quarter of 2008. On a non-GAAP basis, adjusted operating profit was $54.6 million versus $64.2 million in the third quarter of 2008, which as a percentage of sales represents a decline of approximately 90 basis points year-over-year to 12.5%. This decline is due primarily primarily to the incremental R&D spend in the quarter that I referenced earlier.

Interest expense net of interest income from the quarter was $4 million as compared to $5.3 million in the third quarter of 2008. This decrease was primarily due to lower interest rates on outstanding debt balances. In the quarter we had an effective tax rate of 25.8% on a reported basis, as a continued unfavorable resulting from the shift in the geographic mix of income was offset by the timing of favorable tax settlements.

GAAP EPS from continuing operations in the third quarter of 2009 was $0.14 compared to $0.35 in the third quarter of 2008. Adjusted EPS from continuing operations was $0.30 in the third quarter of 2009, down 12% from a year ago. Regarding share count, we had 116.6 million average diluted shares outstanding in the quarter, which was essentially flat on a sequential basis.

Turning to the balance sheet, we finished the third quarter with approximately $426 million of debt, which we defined as short and long term debt minus cash. This reflects a sequential increase in net debt of $54 million, the result of the funding of strategic acquisitions in the quarter offset by strong operating cash flow performance. At the end of the quarter we had approximately $151 million of cash, and approximately $210 million of undrawn availability under our revolving line of credit, with no mandatory maturities due until 2012.

Looking at our cash flow performance for the third quarter of 2009, operating cash flow from continuing operations was $35.7 million as compared to $22.3 million in the third quarter of 2008, representing a 60% increase over the same period last year. This increase was attributable to lower working capital and the timing of payroll and tax payments. Although we expect this favorable timing impact to reverse in the fourth quarter, we expect operating cash flow to be on plan for the second half. Working capital turns were essentially flat year-over-year.

In summary, we are pleased with our financial performance for the quarter, particularly given the continued challenges in the global economy. We expect continued solid growth in the fourth quarter across many of our end markets, including screening, service and food and safety testing. We are seeing early signs of stabilization across all of our served markets, however we expect the organic revenue performances of the medical imagining, research, environmental industrial end market to be fairly consistent with what we experienced in the third quarter. As a result, we expect our total organic revenue to decline mid to high single digits in the fourth quarter, and our full-year organic revenue performance to decline mid single digits.

Regarding adjusted earnings per share, we expect a continued favorable sales mix and an improved foreign currency environment in the fourth quarter. Additionally, we expect our distribution of income to be generally consistent through the remainder of the year, and therefore we are estimating our effective tax rate to be 31% in the fourth quarter of 2009. Bringing all of these factors together, we now estimate our full-year adjusted earnings per share for 2009 to be in the range of $1.23 to $1.26, with adjusted earnings per share for the fourth quarter expected to be in the range of $0.39 to $0.42, which is at the high end or slightly above the guidance range provided on our last earnings call. Once again we are pleased with our financial performance in the quarter. Despite a difficult global economy, the organization has executed well, delivering revenue that was in line with our expectations, adjusted earnings per share that exceeded the top end of our guidance, and a strong operating and free cash flow performance.

That's the end of my prepared remarks. I would now like to turn the call back over to Dave.

Thank, Andy. Operator, at this time we would like to open the call to questions, please?

(Operator Instructions). Your first question is from the line of Peter Lawson from Thomas Weisel Partners. Please proceed.

Hi. I wonder if you can kind of walk through the digital imagining business, that seemed to be the only business that seemed to get worse quarter-over-quarter. How far do you think that business can drop, and what are you thinking about for Q4 for that business?

So I would say I think the end market for that business actually seems to be stabilizing a little bit. And we are actually seeing some increased bookings for 2010. The reason why we are seeing a significant drop from Q2 to Q3, and I think we talked about this a little bit, is it really has to do really more with the ordering patterns of our customers where they took more product in the first half of the year and less in the back half of the year. So while there was a decrease in the revenue, there actually is a stabilization in the end markets there. We are actually thinking now, in 2010, probably mid 2010, we might see -- actually start to experience some increases in revenue in that business.

Thank you. And then, the incremental R&D spend, what drove that?

I think it is just fueling the opportunities we see in some of the attractive areas. So some of it is going into genetic screening, and some is going into the research area, and then obviously some of the analytical sciences area. So it is pretty broadly spaced across the Company. But it is largely in areas where we see growth opportunities. The other area that I would spike out is -- with the acquisition of AOB, we have been increasing our investments in the mass spec area.

Okay. Thanks for taking the questions, Rob.

Your next question is from the line of Quintin Lai from Robert Baird, please proceed.

Hi, guys. This is actually Jeff in for Quintin. Last quarter you guys gave a little bit of a sequential improvement as you talked from Q1 to Q2, you saw a little bit from January, February, March get a little better, then all the way through July. How do you see that coming into now, and if you can provide a little color on each end market as we stand.

You mean throughout the quarter? I would say we saw some consistent improvement. July and August was a little bit difficult because you're dealing with the summer months, but I would say as we got through the quarter we continued to see a little bit of an improvement throughout the quarter. I think that speaks to a little bit of the optimism we have relative to a stabilization and some early signs of improvement in the end markets.

All right. And then some your competitors have provided a sneak peek into 2010. As we go up against easier comps and your end markets continue to stabilize, could you provide any color on your thoughts regarding when the return to organic growth next year? And also you are taking a lot of costs out of OpEx this year, how should we look at that ramping up as growth returns to top line?

I would say with regard to 2010 we are right in the midst of that right now, we are in the process of putting together our 2010 plan, so it is probably a little early to call when the turn occurs. Our plan would be to share with everyone our 2010 forecast and guidance in January. With regard to the cost ramp up when growth returns, I would say while we tried to model that out, and there will be clearly some increase in costs associated with the higher volume, keep in mind as we've done restructuring this year, and we've done some restructuring in Q1 and some restructuring in Q3, that when you look at 2009 you have a partial year benefit for those restructuring actions. So I would say helping to offset the potential increase of costs associated with the higher revenue in 2010 will be the full year benefit of the actions that we have taken this year.

All right. Thanks a lot.

Your next question is from the line of Ross Muken, Deutsche Bank. Please proceed.

Rob, in some of the key end markets where we did see some sequential improvement that are more cyclical in nature, what were some of the specific sort of end customer segments that showed signs of life? And what -- particularly on industrial side, what specific customer segments are still sort of showing no order activity or your backlog is pretty bare?

I would say on the environmental side, we clearly saw some improvements in sort of air and water monitoring, particularly in Asia. We saw an improvement in our products that go into biofuels. We have actually seen a pickup in those areas. I would say on the industrial side, the ones that continue to lag, I would say a lot of the industries that Andy mentioned previously, which is right around the chemicals and polymers and the petrochemicals, I would say those are the ones that still seem to be lagging a little. But clearly on the environmental side, fairly broadly based we saw an improvement sequentially.

Okay. And in terms of the diagnostic business that's more sensitive to sort of state and federal budgets, or I guess more government-related funding, what is sort of the outlook there? And as we turn the page to 2010, a lot of the same challenges exist for a lot of the different regions. So what is sort of your thought process on how that business is going to perform in the face of some of those challenges?

I think we have been fairly fortunate in the areas that we sell into have not been impacted by the cutbacks in state funding. And so if anything, there may have been a lag in people -- the state's uptake of additional screening. But as far as cutbacks, we really haven't experienced that. So I think our view of the screening business going into 2010 continues to do quite well. As Andy mentioned, it was up high single digits this quarter and I think it continues on that track. We are seeing good adoption, particularly in some of our other areas like prenatal screening. So I think we are still fairly bullish on those end markets as we go into 2010.

And just quickly on the research business, remind us -- I know you had some new product launches I think last year, or you were coming up against some weak comps in the year prior that made that a particularly strong quarter. What is that -- what are the different factors that is impacted that research number, and then how does the comp compare in Q4?

Well, in the third quarter of 2008, our research business was up 17%. And to your point, there were some new product introductions that came out, so we knew we were cycling up against some difficult comps. Actually in Q4 as well, we had a pretty strong quarter. We were up 9% in 2008. So while it is less than Q3, it is still a pretty good comp. I think Q4 should be a better from a biodiscovery -- or from a research perspective, because I think we continue to get sort of new products out and get good traction in those end markets.

Right. Thank you. Rob.

Thanks.

Your next question is from the line of Rob Hawkins, Stifel Nicolaus. Please proceed.

Good afternoon. Could you spend a little time on OneSource? Where are you guys seeing the resurgence there in that growth, and is it signaling any particular end market in terms of improvement that might, I guess, precede maybe some instrument sales?

So I would say the area in service -- we saw in a couple areas this quarter. First of all, we did see -- and I think Andy alluded to this -- we did see a recovery in billable service, which has been down the last couple of quarters. So we are viewing that as maybe a potentially positive sign that people are back to sort of repairing their instrumentation. So that was a nice signal in the third quarter. We continue to see good opportunities on the outsourcing side. We have mentioned the -- the win in Boehringer Ingelheim, and that was a fairly significant contract for us. We are still seeing the pharmaceutical companies look to outsource. I would say the other area is -- and this is an initiative we started probably about 12 months ago -- it is branching into other industries outside of pharmaceutical. And I would say the last area -- clearly we are seeing increases in our relocation service offering. And clearly with the consolidation that's going on in pharmaceutical industry, there's a lot of opportunity for factories being consolidated to use our relocation service.

Just to follow on that, just where you are seeing the repairing starting to happen again? Is that typically a signal for -- ahead of people buying replacement instruments again?

I don't know. I think it is probable a little early to make that call.

All right.

Quite frankly. You see it for a couple of quarters, but I think that's a little premature.

All right. I will jump back in queue.

(Operator Instructions). Your next question is from the line of Derik De Bruin, UBS. Please proceed.

Hi. This is Dan for Derik. Rob, in the panels business you had talked about taking out some costs in the back half of the year that you thought were necessary. How successful were you in doing that, and then what were the impacts to the margin?

So I think the group in medical imagining has done a very good job managing costs. And we have done it through the restructuring that we've taken in the third quarter, as well doing furloughs and trying to manage the costs very well. So even with the significant revenue declines that we have experienced in that business, we are still operating at operating margins in excess of the corporate average. And I would say the other point is I think the organization has done a terrific job in improving the yield through the factory. So we are seeing both cost reductions as well as productivity improvements. That's really contributing to some -- some very good profitability coming out of that business, despite the big decline in revenue.

Got it. And then in Asia, outside of China it looks like things were pretty soft. Is there anything you can say about some of the other geographies, India and some of the surrounding areas?

I think India was okay, particularly after the election, I think we are seeing some strength there, sort of early days. I would say the other thing we did see softness was in Japan. And what we believe may be happening is with the election there, that they're re-looking some of the stimulus money, and it seems to be potentially shifting from the life sciences area to energy and those types of areas. So we are keeping an eye on that. But I would say Japan was a little weak for us.

Okay. And then just finally, can we get an update on what your thoughts are for the reintegration of the specialty lighting business for it not to be sold off before you anniversary that.

I would say our assumption still is that business will be sold by the year, so it is probably premature to start talking about how we would be reintegrating that. I think we are still fairly confident that in fact will close before the end the year.

Okay. Thanks.

Okay.

Sir, your next question is from the line of Isaac Ro, Leerink Swann. Please proceed.

This is actually Jodi in for Isaac. Thanks for taking our questions. First of all, on diagnostics, how do you feel about the range of acquisition opportunities you have there? And do you have a preference geographically between US, Europe or elsewhere to help further your global footprint?

So I think we feel pretty good about our pipeline in that area. I would say it is both. It is both technologies and products that we continue to look to expand our offerings, and it is also geographic. As you saw, we did two deals that were probably more geographically oriented to get us into India and China. Although having said that, as I mentioned it did add some product extensions to us in infectious disease. So we are really looking at it from both perspectives. And I think we have a pretty good pipeline there. And we continue to see opportunities to expand our capabilities in our diagnostics business.

Okay. And then, medical imagining -- what's your level of visibility in rebound today versus six months ago? I believe GE said this quarter that their orders are still down high single digits, which is slightly better sequentially. We wonder if that is what you were seeing as well.

Yes. I think sort of I implied earlier that I think we are seeing some improvement, some slight order take-up here. And so I think our view is that we probably hit bottom, and that we are starting to come back here a little bit. I think Andy mentioned the fact we also continue to feel like we are making good progress on the nonmedical markets. And so that will be coming online probably in 2010 as well. So I think we are, I would say, cautiously optimistic that we will start to see some recovery in that business. Probably not significant in Q4, but probably in the 2010 time frame.

I see. Thank you.

Okay.

Thank you for your questions. I would now like to turn the call over to Mr. Rob Friel for closing remarks.

Thank you for your questions and continued interest in PerkinElmer. We feel confident that the strategy we set at the beginning of the year to balance cost controls in the short term, while investing in the innovative solutions for our customers, and building greater capabilities will position us to be even stronger when the economy recovers. This concludes today's call. Thank you for joining us. Have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.