Revvity Inc (RVTY) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 PerkinElmer earnings conference call. I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr Dave Francisco. Please proceed.

Thank you, Stacy. Good afternoon and welcome to PerkinElmer's second quarter 2010 earnings conference call. I am 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 our 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 August 19, 2010.

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 any non-GAAP financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly. I am pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel.

Thanks, Dave. Good afternoon and thank you for joining us for the PerkinElmer second quarter 2010 earnings call. This afternoon I will briefly cover three topics, our financial performance in the second quarter, the trends we're seeing in our end markets and describe some of the progress we have made in advancing our strategic priorities.

Turning first to our financial results, we are quite pleased with our performance as we generated strong revenue growth of 14% and also expanded adjusted operating margins over 120 basis points. This resulted in adjusted EPS of $0.38, which represents a significant growth over our adjusted earnings per share in the second quarter of last year. Regarding our top line performance in the quarter, we saw broad based growth across all of our businesses and geographies. The more resilient elements of our business such as diagnostics screening, reagents and service continue to build off the strength we have seen in the last few quarters and performed well in the period. In addition, the end markets that were hit hard last year are experiencing strong growth and benefiting from both the economic recovery and easier comps.

In Human Health our businesses continue to benefit from global health trends driving the need for earlier and more accurate diagnostic and therapeutic solutions, in both the developed and developing regions of the world. In our diagnostics businesses newborn screening has experienced modest growth in the US and European markets, with much stronger growth outside the US and Europe. Although volumes are small relative to the base business. We believe our launch of the SCIDs pilot is an encouraging sign for adoption of the next set of mandated tests in the US market, and we continue to see significant opportunity in developing markets that are expanding their newborn screening policies. The growth prospects in prenatal continue to be very exciting. However, growth this quarter was negatively impacted by the start up of a large program in Q2 of last year. Additionally, the acquisition of Sym-Bio in September of last year added infectuous disease screening to our portfolio, and with the recent completion of our new manufacturing and R&D facility near Shanghai, we now have a regional hub of scientific excellence. This expanded footprint provides the base to leverage our position within China, as well as capture our share of the Chinese government's commitment to broader access to diagnostics services in the region.

Our medical imaging business is benefiting from the recovery and spending due to pent-up demand for diagnostic capital equipment in hospitals around the world. Additionally, we experienced strong growth from our efforts to expand panel usage beyond our well established medical applications into industrial imaging needs to diversify our customer base and grow in these adjacencies. We have good visibility in the demand patterns in this business and see strong growth for the balance of the year as the film that digital conversion resumes for X-ray technologies.

In the research market of our Human Health business, major pharmaceutical consolidations and site closures are continuing to challenge capital purchases, which are negatively impacting our high throughput screening and automation products. Offsetting this is increasing reagent spend amongst this customer segment and solid growth in the academic sector as we are seeing clinically relevant research migrating to academic institutions. In addition, some of this work is moving to lower cost regions. We had some key wins in southeast Asia as researchers turned to our leading imaging and detection technologies such as Operetta and ViewLux to further advance research in stem cells, yeast molecular biology and preclinical evaluations of potential diagnostics and therapeutics.

I am also pleased to note that earlier this year we announced the acquisition of VisEn, an invivo molecular cellular imaging technology company located in Bedford, Massachusetts. This acquisition broadens our imaging and reagent profiles through the addition of proprietary chemistries in the emerging and fast growing space of translational biomarker reagents. VisEn deepens our commitment to the drug discovery process by moving down stream into preclinical research, thereby enabling safer and more effective drugs brought to market faster. It also increases our offerings to academic research in areas such as cancer and cardiovascular disease.

In Environmental Health, the rapid rate of industrialization and globalization continues to put press on the environment and food supply chain. This is resulting in an increased number of unregulated contaminants and a growing need for standards, regulation, and analytical testing. Consequently, our analytical science offerings are see good growth as global testing demands continue to increase in volume and level of specificity. Our application expertise and tailored solutions support these growing needs for both the developed and emerging regions of the world.

As an example, we're seeing strong market demand for our new products for safety related applications within food, such as our Flexar UHPLC and our single quad and time of flight mass spec systems. In addition, we have had several key wins in China and southeast Asia for both environmental monitoring and food safety applications with large governmental customers. These customers are turning to us for necessary regulatory compliance knowledge, as well as the technology and solutions required to meet their needs. Our sensor components also experienced strong broad based demand with particular strength in safety and security, and in the industrial markets we are seeing a recovery as customers in this segment are rebuilding capacity after an extended period of limited capital investments. We experienced strong organic revenue growth in this end market which includes manufacturers of fine chemicals, polymers and semiconductor components.

Lastly in our service business, one source continues to grow significantly by increasing the scope of its offering within its major pharmaceutical accounts. This customized solution provides customers with the ability to drive overall laboratory productivity and reduce costs into the lab's utilization of assets in the corresponding work flow. Additionally, as a result of the integration of our lab services business with our analytical sciences business, we are seeing increasing pull through opportunities for our instrumentation through this channel.

As we look to the back half of the year, we expect the level of organic revenue growth that we have experienced in the first half to continue into the second half, and unlike the first half where the growth and Environmental Health was stronger than in Human Health, we expect our growth in the second half will be more balanced with both businesses growing high single digits. Based on this organic revenue outlook, we have increased our adjusted EPS guidance to $1.49 to $1.54, and while the results and momentum for the first six months are clearly influencing our decision to increase our guidance, more importantly as a progress we have made against our strategic priorities of increasing the growth profile of the Company through leveraging adjacent markets and geographic expansion, as well as establishing a framework to drive higher profitability. As we look ahead we believe that our end markets possess attractive long-term growth profiles and we are very well positioned to continue to benefit from these trends. Now let me turn the call over to Andy who will walk through our financial performance in more detail.

Thanks, Rob, and good afternoon, everyone. I will now provide some additional details on our second quarter results and after my prepared remarks, I will open it up for questions. Before moving 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 in that measure during the second quarter of 2010, compared to the second quarter 2009.

As Rob mentioned earlier, we're pleased with our financial performance in the second quarter delivering strong revenue and earnings growth over the prior year, as well as strong cash flow in the period. Revenue for the second quarter increased 14% as compared to the same period last year. The unfavorable impact of foreign exchange was 2% and the favorable impact from acquisitions was 2%. Therefore, organic revenue increased by 14% versus the prior year. The remaining revenue analyses in my prepared remarks will be presented net of the favorable impact of foreign exchange and the favorable impact -- unfavorable impact of foreign exchange and the favorable impact of acquisitions.

By segment, organic revenue increased by 6% and 19% in the Human Health and Environmental Health segments respectively. By geography organic revenue in the Americas was up mid-teens, Europe was up high single digits, and Asia grew at a high teens rate. Within the Asian region, organic revenue in China grew over 20%. From an end market perspective PerkinElmer's Human Health segment represented approximately 40% of total revenue in the quarter.

Within Human Health we served two end markets, diagnostics, which represented 24% of total revenue and research, which represented 16% of total revenue. Organic revenue from our diagnostics business grew at a mid-single digit rate in the second quarter with our medical imaging business delivering another strong quarter, due in part to the expansion of our panel offering into industrial applications. In the second quarter, organic revenue in our research business increased at a mid-single digit rate. We're encouraged by the strength we're experiencing in academia, driven by a robust demand for our high end Operetta cellular imaging systems and our low end Inspira plate readers, as well as the corresponding pull through of our alpha reagent portfolio. As Rob mentioned, this strength was partially offset by continued pressure on capital spending principally within pharma.

The Environmental Health business represented 60% of our total revenue in the second quarter. Within the Environmental Health business we served four end markets, laboratory services, environmental, safety and security, and industrial. Our lab services business represented approximately 21% of our total revenue in the second quarter and organic revenue grew in the mid-teens. One source, our comprehensive multi-vendor offering continued its momentum, delivering significant organic revenue growth in the quarter as the business continues to expand the scope of its service offerings.

The environmental market represented approximately 19% of total revenue in the quarter with organic revenue increasing in the high teens. Continued expansion of environmental testing regulations and pent-up demand due to weak capital spending amongst labs in the prior year were the primary contributors to this performance. Our inorganic portfolio continues to gain broad market acceptance, particularly in the area of toxic metal detection and the analysis of water. Additionally, we saw strong growth in China driven by the impact of the continued step up regulatory enforcement measures, particularly related to contaminant analysis of the region's main rivers and air pollutant analysis in its larger cities.

The safety and security market represented approximately 12% of total revenues in the second quarter with organic revenues increasing in the high teens. As Rob mentioned, we experienced strong growth in the quarter from our new Flexar UHPLC, as well as our single quad and time of flight mass spec systems for safety related applications within food, pharma and a nutriceuticals. Also in the quarter, we saw continued strong demand for our thermal pile sensors, despite a difficult year-over-year comparison driven by the response to the H1N1 virus in the prior year. Our industrial markets represented approximately 9% of total revenues in the second quarter and organic revenues increased by over 20%. We were particularly pleased to see increased demand from many our chemical and petrochemical customers, which we believe is a sign of renewed capacity expansion, a result of both the cyclical recovery and the extended period of delayed capital investment.

Turning to our financial performance, adjusted operating margin was up 120 basis points in the second quarter due primarily to volume leverage and productivity, offset by unfavorable mix in the period. GAAP operating profit was $42.6 million in the quarter, versus $38.2 million in the second quarter of 2009. Adjusted operating profit in the quarter was $65.8 million, versus $52.5 million in the same period a year ago. For the second quarter, we had a GAAP tax rate of 15.8%, versus a previously communicated tax rate of 27%. The lower rate is primarily a result of the tax treatment associated with our acquisition of the remaining 50% interest in MDS Sciex, which was consummated earlier this year. On a non-GAAP basis, our adjusted tax rate was 26.3%, which was approximately 70 basis points better than we anticipated and the result of the geographic mix of profits. GAAP EPS from continuing operations in the second quarter of 2010 was $0.46, compared to $0.20 in the second quarter of 2009. Adjusted EPS was $0.38 in the second quarter, up 36% from the prior year and our weighted average diluted share count was approximately 118.3 million shares.

Turning to the balance sheet, we finished the second quarter with approximately $405 million of net debt, which we define as short and long-term debt minus cash. This reflects an increase in adjusted net debt of approximately $26 million as compared to year end. At the end of the quarter we had approximately $216 million of cash. Looking at our cash flow performance for the quarter, operating cash flow from continuing operations was $69 million, as compared to $40.2 million in the second quarter of 2009. As you may recall in the second quarter of 2009, we terminated our accounts receivable and securitization facility and repaid the outstanding balance of $30 million. This resulted in an unfavorable impact to operating cash flow in the second quarter of last year. Working capital turns improved by approximately one half turn on a year-over-year basis. In summary, we're pleased with our financial performance for the quarter driving strong revenue and earnings growth, as well as solid cash flow generation. Before I discuss the details of our financial guidance let me highlight additional items in the quarter.

First, our margin improvement initiatives continue to gain momentum that we're clearly in the early innings of this multi-year project. Our efforts to date streamline our logistics processes had a positive impact on our gross margin performance in the quarter, helping to offset a somewhat negative shift in product mix. We also undertook additional restructuring actions to further align our cost structure with our long-term profitability goals. These actions were targeted primarily at site consolidation and general cost rationalization. Second, we booked two gains in the quarter, one related to the acquisition of the remaining 50% of the MDS Sciex joint venture and the other related to an asset sale completed in the period. Lastly, I am pleased to report that we completed the divesture of our flash business during the quarter. Now let me discuss our 2010 guidance and provide some further detail.

As Rob mentioned earlier, we continue to see positive trends in many of our served markets and we now expect organic revenue growth to grow in the high single-digit range for the full year, and expect the third quarter of 2010 to grow at high single digits as well. Regarding adjusted earnings per share, restructuring actions taken in the second quarter will provide some benefit in the back half of the year will be offset by additional costs to integrate recent acquisitions, such as VisEn. As a result, we now estimate our full year adjusted earnings per share for 2010 to be in the range of $1.49 to $1.54, versus our previous guidance of $1.43 to $1.48 which represents year-over-year growth in the range of 17% to 21%. Additionally, we estimate our adjusted earnings per share for the third quarter to be in the range of $0.33 to $0.35. Once again, we're pleased with our financial performance in the quarter, as well as the progress we made on our strategic initiatives. This concludes my prepared remarks. I will now turn the call back over to Dave.

Thank you, Andy. Stacy, at this time we would like to open up the call to questions please.

Thank you. (Operator Instructions) Your first question comes from the line of Ross Muken with Deutsche Bank. Please proceed.

Good afternoon, and congratulations on a phenomenal quarter.

Thank you.

As you look across some of your more cyclical businesses and you think about kind of how they have developed in terms of the recovery and the type of order activity you have seen now coming into the third quarter, in terms of the magnitude of the snap back, I know there were some relatively favorable comps in a few of these businesses from last year, but still better follow through than we have seen in a lot of other places. As you think about what's driving it and if you could sort of tease out maybe specific end markets, where you have seen more substantial kind of snapback than we would have thought, any sort of color on that would be helpful.

So I would say when you look at the environmental side, as you said, we have seen good growth there. I think part of that is clearly the recovery. I think part of it also is that during 2009 I think we talked about at the time, we continue to invest in the businesses and our view was it was not going to be a long term downturn, and so consequently we invested through 2009 and consequently, I think when it snapped back we were in a very good position to take share. So, I think that's what we're seeing in the second quarter and early indications for the third quarter is that's continuing, and that's really given us the confidence to talk about high single-digit growth through the remainder of the year.

And to the second part of my question, from an end market perspective, is there a certain customer base you feel like you're leveraged to where you saw more substantial order pickup or revenue pickup than one would have expected, and what pieces of the business, if there are any, do you feel like you're not seeing an acceleration in?

The growth we have seen has been pretty broad based, even within the geographies. Andy talked a little about that. I don't know that I would spike out any particular area. When we looked across the board, food, water, we talked about some of the safety and security applications. It has been pretty broad based. I don't know that I would spike out anyone in particular. I think it is -- and even from a geographical perspective our US markets were up mid teens and Asia was up a little bit more than that, but anything you would spike out?

No. I think it was very broad based. I think as I went through my remarks I talked about everything being up. I think if you look at some of the businesses that were down fairly significantly last year, there could have been a little bit of a pent-up demand, so I think that contributed to part of the very significant organic growth we saw in the third quarter, but I think the order patterns we're seeing now seem to support the high single-digit growth rate for the second half.

Right. As we think about contribution margin, maybe more so on the environmental business, we had a pretty sequential -- large sequential tick up in revenues, but the EBIT was slightly above kind of Q1 levels relative to the revenues. Is it more of a mix shift in terms of some of the industrial and spectroscopy instrumentation or process instrumentation where it just lower margins, so it sort of skews the mix? What was the driving factor?

I think that's right. I think you see that in the gross margins that because the environmental area, which has tendency to have lower gross margins. With that being up some 19% and the Human Health side not being up as strong, that does provide a little bit of negative mix. The offset to that on the operating side, though, is they have a tendency to carry a little lower operating expenses, and the other thing is interesting enough is that mix actually helps us on the tax rate because what we find is those businesses have a tendency to be produced in the areas that drive a lower tax rate. So, although we get a little bit of a negative mix on the operating side, we actually make up a good portion of that on the tax rate.

And just finally, you have done a real nice job on sort of a lot of these nice technology and business expansion tuck-ins on the M&A front. How would you characterize the environment that you are seeing now in terms of deal flow and valuation? Markets have obviously been a bit volatile and that's not always easy, but you have been able to consistently have a deal or so a quarter of consequence announced. How are you feeling about the pipeline?

I think we still feel good about the pipeline. I would say probably in the last couple of quarters we have seen increased competition in a number of the deals, but I would say I think that the whole key, as you pointed out, is to have a robust pipeline, and I think we feel good with the pipeline going forward, and we continue to feel good about our ability to do these deals on a continual basis and just sort of bolt them onto the portfolio.

Great. And congrats again on the great quarter.

Thanks, Ross.

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

Good afternoon. We would like to offer our congrats as well.

Thanks.

Reporting here at the tail end of the reporting season, your other peers have talked about -- some of them have talked about Europe and some of it is -- some saw slowing. Looked like it was a pretty solid quarter for you and based on your guidance the outlook is good. I guess give a little -- could you give us a little bit more color on what you are seeing in Europe and maybe the split between government and non-government spending?

So, our European business was up high single digits. It trailed the other regions, but still pretty good growth. So, I would say what we're seeing from a government perspective is probably a little bit of slowing on the diagnostics side of our businesses. I think there is a little bit of hesitation and concern about budgets. I think on the commercial side we continue to see pretty good growth. I talked a little bit about the medical imaging up take and I think a lot of that goes into [YORP], and I think that's driving some of our European growth. So, I would say probably on the government side it is a little slower, but on the non-government side we're seeing good growth.

Great. And then with respect to China, another real strong quarter of demand in China, where do you think that the Chinese are with respect to build out of some of their things like environmental and safety monitoring?

I would say generally, I think across China we're still in the early innings of what I think will be fairly long-term robust growth here. So, I guess I would say, as I said before, just early innings and a lot more to do and a lot more to go. Whether that is on the environmental side, whether that is on the diagnostic side or whether that is the biopharma side.

I think as you probably know, if you look at China, the regulations they're putting in place are very similar to the regulations that are put in place in the US and Europe, and again being early days there is a lot of runway there.

Thank you for that. And then just a quick question on guidance, Andy. What are you expecting for the full year tax rate on a pro forma basis?

The cash tax rate -- or the GAAP tax rate 27%.

And then for the pro forma tax rate to get to your 149 to 154?

That's the 27. The GAAP tax rate is $0.26.

Okay. Thank you.

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

Good afternoon.

Good afternoon.

Hi, I guess you got rid of your flash business or you divested that. Can you give more details on that and I guess are you still looking to divest other things in the portfolio?

The flash business, as Andy said, we completed it in the second quarter. We actually sold it at a slight gain. I think we probably got something around one times revenue.

Okay.

And given what the growth prospects in the business, we thought that was good. I would say at this point right now there is nothing we're actively looking at to sell, but of course we're always questioning and challenging the portfolio.

Okay. As the markets are rebounding are you seeing any pressure from pricing, particularly in the analytical instrumentation business and just going back to the gross margin question, I would of thought it would of been a little bit stronger this quarter just given the volumes there. I am just wondering is -- you said it was mix, but is also some sort of pricing element in there?

I would say generally speaking we almost always see pricing pressure in the analytical instrument space. So, I would say that's an area that comes under fairly constant pricing pressure. Now, in some of the other areas of our business we get some positive price, but I would say the areas where we continue to run up against pricing pressure is the analytical instrument space. We've talked about in the past of medical imaging. Obviously the volume goes up there, we contractually give pricing concessions there. So, I don't think price was a significant impact on the gross margins in this quarter because the balance -- it might have been slightly negative, but not significantly. The biggest contributor through the flat gross margins on the higher volume was the mix, and as I mentioned previously, when you have environmental going up 19%, and Human Health going up around 6%, the percentage swing is putting pressure on the gross margins.

Talking about Human Health, on the diagnostic side, so claiming US and Europe a little bit I would say softer or coming up against good growth in the emerging markets, what's your split between developing countries for that business and the established markets?

It is still probably less than 15% of the total business. It is still relatively small. That's really the goal here is to get that to a bigger percentage of the business.

Are you still seeing good demand on the core blood side?

We are. Cord blood grew mid single-digits in the quarter and continues to do -- continues to perform well.

Okay. And I think that I will get back in the queue. Thanks.

Thanks.

(Operator Instructions) Your next question comes from the line of Paul Knight with CLSA. Please proceed.

Hi, it is Jonathan Palmer for Paul Knight. First I want to follow up on one of Quintin's questions regarding China, with the center now open, how big is that market now and where do you see it maybe one to three years out?

The total diagnostic market in China is I think $1.8 billion. Now, obviously we don't serve that entire market, but I think for our adjustable market it is probably in the couple hundred million dollar range, so we see a lot of runway in our business in China in the diagnostic area is less than $50 million. In the environmental side, I think it is a larger market, but specifically on the diagnostic side I think it is a huge runway there for us relative to our addressable market and of course the other thing we're looking at is expand about further from what we do today. So, today we do a lot of newborn pre-natal and starting to move into infectious disease and I think there is opportunities even going into other areas to expand our addressable market because we have, I think, a very good capability there in China.

And how big is Perkins business in China today?

About $130 million in revenue.

Great. Thanks. And then one quick follow-up here. With all of this biopharma consolidation, where are we relative to that in terms of the research division and I guess how do you see that trend playing out with service as well?

So, I would say on the instrument side, it is putting pressure, as I mentioned, but when you look at our research business, if you just isolate the instruments that is go into biopharma, it is a relatively small piece of the business, much larger reagents piece of our business and then increasingly a larger piece of our business is going into academic research, as we mentioned earlier, that we saw very good growth there. So, it is hard to tell when we come out of the pharma consolidation, but like I said, that was -- we had a difficult quarter there, and I think it is going to be at least for the next couple quarters, but our strategy around that is to focus in on the reagent side, focus more on the academic side and then of course the service area, which continues to grow very strong, because despite the consolidation I think they're still looking to outsource a lot of that work and because of some of the benefits they see in the productivity side.

Great. Thanks for taking my questions.

We have a follow-up question from the line of Derik De Bruin with UBS. Please proceed.

Hi, more on the gross margin. Just a question, do you expect the same type of mix issues to persist into Q3 and into Q4? Q4 you normally have a pretty big quarter as the volume growth. Can you give us a little color on the gross margin trends you're expecting?

We should see year-over-year gross margin improvement in the third and fourth quarter. Again, we had 19% organic growth and environmental and we're saying those are both going to be more high single digits, so that mix is going to shift a little bit, and I think we will see some of that improvement flow through.

Right. Thanks.

At this time I would like to turn the presentation back over to Mr Rob Friel for closing remarks.

Thank you for your questions. In summary, we're obviously pleased with the progress we made this quarter. We continue to increase the growth profile of the Company, as I mentioned, through geographic expansion, leveraging our market adjacencies and investing in innovative technologies and service. I look forward to discussing our progress against these priorities during our third quarter earnings call. Thank you for participation in today's call and continued interest in PerkinElmer. Have a great day.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.