Q2 2020 PerkinElmer Inc Earnings Call
Thank you operator, good afternoon, and welcome to the Perkinelmer second quarter 2020, <unk> earnings Conference call.
President and Chief Executive Officer, and Jamie Mock senior Vice President and Chief Financial Officer, If you've not received a copy of our earnings press release, you may get one from the Investor section of our website at Www Dot Perkinelmer dotcom.
Please note this call is being webcast live and will be archived on our website until August 11 2020.
Before we begin we need to remind everyone of the safe Harbor statements that we have outlined in our earnings press release issued earlier. This afternoon and also those interests you see filings.
Statements or comments made on this call may be forward looking statements, which may include but are not necessarily limited to financial projections or other statements of the company's plans objectives expectations were intentions.
He's matters involve certain risks or uncertainties. The companys actual results may differ significantly from those projected or suggested by any forward looking statements due to a variety of factors, which are discussed in detail on our SEC filings any forward looking statements made today represent our views only as.
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 other 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. The most directly comparable GAAP measures is available as an attachment to our earnings press release.
To the extent, we use non-GAAP financial measures. During this call that are not reconciled to GAAP in that attachment we will provide reconciliations promptly.
I'm now pleased to introduce the President and Chief Executive Officer of Perkinelmer Culottes thing a lot.
Thank you, Brian and good afternoon, everyone.
To start I could not be more proud of how we had spoken about a month might be obstacles that have faced dusty past few months.
We have proven to be a Brazilian responsive and HR an organization.
Individually and collectively the are all being presented with new challenges Big and small every single day.
I booking anymore.
I always have met these challenges by rallying and responding to it calls to action to how during the bilby pandemic.
As I mentioned on our fourth quarter call.
Improving lives is in booking most DNA.
It is more impressions RP.
The energy and purposes, but well read it throughout the organization during the second quarter was probably playbook I first the daily and I recognize the same fashion and the countless number of employees, who went above and beyond.
But it's too late night time sensitive discussions with hospitals healthcare systems and governments to determine the best way to quickly ramp up go but nine P.M. testing.
Rapidly scaling or that's good assembly to fulfill our Jim customer needs.
Fortunately delivering products to testing sites.
And then my colleagues demonstrated over and over again, the very fashion perseverance and purpose that underpins our culture.
Our strong second quarter results were truly a team effort and further reinforce the diversity of our business from a portfolio on geographic standpoint.
Jamie even speak in more detail about our second quarter performance. However.
Overall, we delivered very strong top and bottom line results despite severe macroeconomic headwinds.
Oh God forbid related sales contributed $196 million, 27% growth and on non core <unk> Oh go portfolio declined 14% organically diagnostics, excluding colder declining 20 person.
Discovery <unk> analytical solutions declining, 10% compared to the second quarter off last year.
In terms of profitability, we delivered the best quarter of profitability since the creation of the modern day, Perkinelmer 1999, with 28% adjusted operating margins.
And we grew our adjusted earnings per share.
Over 50% and <unk> adjusted free cash flow by well with 200 person compared to the second quarter of 29.
Looking at him or as an organization has dramatically transformed over the past here.
Not only did we undertake the largest organizational transformation in our company's history last summer.
But unbeknownst to Austin, we made the changes months ahead of the largest globally pandemic in over a century.
At the time the change was a conscious decision to better position bucking Alamo for the future.
We needed to become a more collaborative responsive and nimble organization.
We talked to progress would be iterative and it would take years before bearing ground food.
However, looking back the timing could not have been more ideal.
Our first half performance and Twentytwenty validates that the actions taken by the right decisions.
We've reduced that they promote cross functional collaboration and we've struck a chord with employees that has resulted in a lunching breakthrough innovations.
The fastest <unk> I've ever seen in my career.
Well I like could easily do so.
I haven't refrain from spending the Nexstar, we're talking to all our recent product introductions.
Because I know you have a lot of questions teed up for Q and <unk>.
But we have launched order doesn't new products and solutions to help gone back over to the first seven months of the are and we have several more overhead related products and solutions in the pipeline.
Additionally, we have launched cartoon noncovered products year to date.
Good well not the most significant being the next year on 5000.
True multi quadrant <unk> I see P.M.S., which delivers performance beyond high resolution I see P.M.S. and traditional <unk> core technology with phenomenon stability and unmatched matrix tolerance.
We also expanded our flagship cellular imaging portfolio with the launch of the Oprah Phoenix Las.
Rich marries up premium high confidence screaming system really fully automated liquid handling option and fraud imaging frame rate.
Allowing researchers to talk too fast response assays I'd be for cardiology Neurology research.
If you recall for my first quarter earnings call, one off a whole guiding principles doing the pandemic wants to utilize our expansive capabilities to join the fight against covert 19.
We remain committed to doing so.
We see the future covert diagnostics landscape slipping into two broad categories.
Diary Vida detection and immune insights.
There will be many different types of best that will be needed.
In response to that need we are actively investigating additional solutions to help on both fronts.
On the vital detection side. In addition to our full suite of PCR solutions.
We are looking to outboard wanting to scare and Eliza antigen testing as well as a desperate keep I know that brings together cold and flu.
We hope will be commercially available before the start of the flu season in the fall.
On immune insights, we believe that antibodies are only part of the story.
That has been increasing global related research into any.
Our cell mediated immune to deal with the past few months I. Some recent works to just but not all infected patients appeared to have a due to boost circulatory circulating antibody response.
As it is out you have somebody I season development that we hope will aid researchers and clinicians in understanding how the broader immune system may help them for protection.
Including a patients T cell response cytokine levels for cellular damage.
Booking on my husband storied history of being at the forefront of innovation in the analytical tools industry.
Our teams are passionate about developing solutions that address unmet needs, our salt common customer pain points in the markets VLP.
We have an older and will always lead but science.
Specific to go but this has been no different.
From a I didn't beat even die Chung to our manufacturing groups in Turkey, and Texas do our scientists and look back.
Have you done full speed ahead with the confidence we have always had to not capabilities and technologies and never look back.
Each off all covered offerings spanning RT PCR high throughput out any extraction automation Liza and lot to slow based serology testing have proved might do for specialty and reference diagnostics labs clinics hospitals.
Pharmaceuticals, and biopharmaceutical labs, academia and government and research institutes in combating the pandemic.
Underlying our science is our customer focused approach that has only just the best of so man.
Our commitment to producing in delivering high quality go, but that's especially in light of shortages in bottlenecks in pockets around the board.
Has proven to be and will continue to be a differentiator.
In fact.
We are now live streaming aratana them time for the Liberty of Corbett test to increase transparency and allow testing centers to maintain maximum capacity.
And enable labs to rapidly this fall into evolving public health needs.
Having our own metaphorical clinical labs has also been a competitive advantage for bulk another mud during this crisis.
The book in a much genomics team has been instrumental in helping booking automobile at the forefront during the pandemic.
We have been able to respond more quickly to market needs. Because we are one of the only life Sciences and diagnostics company with a clear encapso to fight indoor new commercial testing lab.
Our lab in Pittsburgh allows us to they're going to sleep test, our full suite of solutions to better optimize them for our customers.
It also allows us to actively demo full workflow solutions.
No real time clinical setting for labs across the globe looking to scale.
And it affords us the ability to develop invalidate testing in house.
Combating Golden has energized our organization and enhanced our ability to deliver what our customers need in the most HIV, but signs they can trust.
Moreover.
So Brian liquidity, we have built up from new partnerships in the vehicle covert has opened doors to larger even more impactful opportunities to make a difference.
For example, governments around the world have chosen to partner with spoken to them on milestone collaborations such as our partnership with public health radios.
Your honor to work with them and your food the gratitude for the feedback they provided in the recent press release on the collaboration.
We have engaged in similar collaborations across the world setting up labs, the lighting around the clock support and swiftly deliberating instruments and reagents to video stop hospitals National Ministries of health network soft labs, and testing companies as well as steep health organization.
For example, we recently announced collaborations with summer for as well as it's a northwest labs fluids partnership for the state of fires or not.
You also teamed up with the Texas Department of State Health services, and the Georgia esoteric and molecular border Creed.
I thought you immune site and Lubeck, Germany, we received a visit from the Prime Minister of the region to learn more about that best systems automation solutions and software.
From dry food testing in Brazil, the labs in New Zealand working on those global footprint, how does make a global impact.
Again.
Much has changed at pumping them over the past year.
Why that is a lot of uncertainty in the warrant a focus and determination to help is resolute.
I'm humbled by and proud off our entire organization.
Our 13000 employees have and continued to go above and beyond.
To them I say thank you.
As I close my prepared remarks, I want to take a moment and make some general comments.
So I think oversight.
All living in a challenging an ever changing war.
But that is due to climate change importance, social justice issues or increasing constraints on global resources.
I've spoken to them or.
We need to do more to be a part of the solution.
We need to take a more proactive role.
To be better to do better.
Ask any book in other <unk> employee.
And they will tell you the same thing.
We do what you do because if you are passionate about helping people.
It's for Us know.
But it also extends beyond the individual had been views, helping our communities and our planet.
It was very timely that during the second quarter VW to our latest corporate social responsibility report.
Which put a stake in the ground for broken out as far as we entered an at all.
<unk> as a company meets touring even louder.
I invite you to lead this report and share your feedback with us.
Since we are all truly in this together.
We made the vote a better place.
With that I, just don't it over to Jamie to discuss our financial results in more detail.
Jamie.
Thanks, a lot and good evening, everyone to start I Hope you are all safe and doing well I would like to echo for a lot comments by thanking the global team at Perkinelmer.
We've all been through a lot of change over the past 18 months and our teams passion and dedication has been amazing.
So a big thank you to everyone.
Over the past three months I spend a disproportionate amount of my time, working with our segment leaders, especially within our applied in food businesses.
Understand our go to market strategy competitive advantages and future opportunities.
We evaluated the product pipeline strategy and profitability of these businesses and we identified significant opportunities that have me even more excited about the future potential of Perkinelmer.
We will be shirted democratized some of those learnings in future discussions with the external community.
But I wanted to take the time to reinforce that we have also been making a lot of progress on our non covered portfolio, which will position us well for the future.
On a related point, given our inability to get together and person due to the current environment.
We will post on our analyst day originally planned in September two it date to be determined in 2021.
That said, we recognize there have been a significant amount of time since our last analyst day, and our portfolio has dramatically changed.
Given this our hope is to host virtual webinars to walk through our end markets and product portfolios over the coming quarters.
Before I begin I want to remind people that our second quarter earnings call presentation has been posted on the Investor section of our web site under financial information.
As always I will begin my prepared remarks by highlighting the second quarter.
Then I'll provide some additional color on our served end markets and financial metrics.
And I will end with third quarter guidance as well as some updated full year details that will hopefully assist you in your own modeling.
At a high level, we're extremely pleased with our second quarter in first half results.
The team executed well, despite kobin related customer shutdowns severely impacting business activity in April and May.
There were some signs of improving momentum in June but business activity across the globe has yet to fully normalized.
Revenue grew 12% to $812 million and included a 2% foreign exchange headwind and a 1% net acquisition tailwind.
Organic revenue increased 13% year over year, which is 1% better than what we had previously communicated.
That's cool I've mentioned earlier overall colvin related products contributed $196 million in the quarter.
Propelled primarily by our PCR tests are in a extraction solutions and Surajit kits.
Demand was strong across all three of these product lines with each contributing an excess of $50 million during the second quarter.
By business diagnostics, representing 52% of total sales increased 48% organically has strengthened our immuno diagnostics and applied genomics businesses more than offset a modest decline in our reproductive health franchise.
Discovery and analytical solutions, representing 48% of total sales declined 10% organically.
That's better than expected performance in our life Sciences business was more than offset by softness in food and applied markets.
On a geographic basis Americas grew low double digits Europe grew strong double digits and Asia Pacific was flat.
China improve sequentially, however growth remain negative as noncovered diagnostic demand was anemic due to ongoing clinical caution leading to loss prenatal and infectious disease testing.
And deferments, an autoimmune and allergy testing.
Operationally, we are extremely pleased with our performance adjusted operating margins expanded 790 basis points in the second quarter to 28.1%.
Led by business mix productivity and operating expense leverage.
Adjusted earnings per share for dollar 57 in the second quarter increased 57% year over year.
Looking further into the key drivers within our segments, let's start with our diagnostics business.
As mentioned in my earlier remarks, organic revenue increased 48% as robust growth in Europe, and the Americas drove the momentum.
With both regions generating greater than 50% organic growth.
Our applied genomics business led the way posting over 150% organic growth on broad based on minimum across all geographies.
And led by our nucleic acid extraction.
And liquid handling product lines.
Combined these product lines grew more than six times year over year as they have proven to be vital upstream solutions in automated high throughput cobot RT PCR detection workflows.
Meanwhile, Immunodiagnostics increased 60% organically with your own increasing over 30%.
Demand for our RT PCR answer all geographies was particularly strong across the globe.
The quality of our coven solutions and breadth of capabilities led to strong interest in perkinelmer assays throughout the quarter, including several prominent customer wins.
Reproductive health declined mid single digits organically, driven by lower treat newborn and prenatal testing across the globe.
Formats was consistent across all three major geographic regions.
If you recall, we experienced some stocking of reproductive health products at the end of the first quarter as certain customers in the U.S. in Europe built additional inventory as coven 19 started moving west.
Normalizing for the impact of stocking at the end of the first quarter, our reproductive reproductive health business would have been flat in the U.S. in Europe in the second quarter.
Turning to discovery and analytical solutions organic revenue declined 10% in the second quarter.
By end market, we experienced a low single digit organic revenue decline in life Sciences.
Pharma biotech was up low single digits, driven by strength and informatics.
Academic and government declined high teens.
Our one source enterprise service was nearly flat a strong professional services demand.
It was offset by billable business declines due to covert related pharma lab shutdowns.
Applied markets declined approximately 20% with all three major geographic regions experiencing double digit declines.
As customers dealt with ongoing shutdowns and funding delays.
Food declined over 20% due to muted demand in the Americas in Europe.
Asia Pacific Food rebounded sequentially, the flat led by our growth within our grain and milling and dairy franchises in China.
Meanwhile, industry on environmental safety declined high teens.
Since were generally consistent throughout the second quarter, which has a bit more cautious on the velocity of a rebound near term.
Order pacing in Asia Pacific in the second quarter was encouraging.
It is still too early to say, whether this momentum is here to stay.
Shifting to below the line items net interest and other expense for the first quarter was approximately $11 million.
And our adjusted tax rate was 19%.
Turning to the balance sheet, we finished the quarter with approximately $2 billion a debt.
And $219 million of cash.
Free cash flow was $122 million in the quarter and adjusted free cash flow was $127 million.
We achieved an adjusted free cash flow conversion of 72%.
Finally, we exited the quarter with a net debt to adjusted EBITDA ratio of approximately 2.3 times.
On half a turn since the beginning of the year.
Closing the books on the first have to 2020, we're extremely pleased with our performance, including 6% organic growth, 33% adjusted earnings per share growth and over 400% adjusted free cash flow growth.
Adjusted free cash flow conversion was 67% up from 17% in the first half of 2019.
We are encouraged by our accounts receivable progress to start the year.
The reduction in our DSO year to date has been a function of process improvements as well as due to more favorable terms associated with the cobot related demand.
Additionally, we consciously invested capital in inventory to start 2020.
We expect that expected the increased inventory levels should support our higher coded and non coven backlog as we transition to the back half of the year.
As I mentioned on our first quarter call. We remain steadfastly committed to returning our adjusted free cash flow conversion to the 85% to 90% range over the next two to three years.
For many reasons the first half of 2020 will no doubt be one to remember and again I could not be prouder of how the Perkinelmer team has together has come together and executed during these difficult times.
As we transitioned to the back half of the year I want to provide an updated view on modeling items that are less dependent on cobot impact scenarios.
We now anticipate 1% foreign exchange headwind for 2020.
Below the line items, we anticipate $44 million to $46 million and adjusted interest and other expenses.
The tax rate of approximately 18% and our share count averaged 112 million for the year.
We are assuming a tax rate at the higher end of our previous guidance as we now expect a greater mix of profits will come from areas with higher jurisdictional tax rates.
Turning to the third quarter 2020, we're forecasting reported revenue of 762 $860 million, representing 7% to 21% organic revenue growth, including a negligible impact from foreign exchange.
Embedded in this guidance is $150 million to $200 million of coven related revenue.
Representing approximately 21% to 28% organic growth.
Partially offsetting inorganic demand drop of 7% to 14%.
Our non coven product lines.
In terms of adjusted earnings per share guidance for the quarter, we are forecasting a range of $1.18 to $1.53.
All of this is detailed in the second to last page of our second quarter earnings presentation.
In closing I'm extremely proud to be part of the Perkinelmer family, the energy and purpose that pervades throughout our organization propels us all to do better.
While we are operating from a strong foundation, we are improving every day.
I have no doubt that the upcoming years will be even more fruitful for all our stakeholders.
Operator at this time, we would like to open the call to questions.
Thank you as a reminder is asking question you'll need to press star one on your telephone to answer your question press the pound Keith Please send ball, we've compiled Kunaev Austin.
My first question comes from Vijay Kumar with Evercore you May proceed in your question.
Thanks for taking my question well best quarter since 1999, and now that came into my stuff a pandemic.
Congrats on a terrific execution here, maybe up you know I had two questions. One you know that seek your guide Jamie.
The noncore would revenue base I think the vantagesouth minus seven to minus 14.
The base business was down 14 in.
To Q and I think commentary from your peers would suggest that the base business is improving so I'm just curious on.
The assumptions around that minus 17 to 14, particularly at the high end a code revenues one for FY 200, it seems that sustainable ended CQ.
Curious about dots into full Q.
On on specialty on Naco diagnostics.
Great.
Thanks BJ for the question first off obviously, it's a very volatile environment. So dependent it could swing both our covidien noncovered revenues, but we've put a lot of time into looking at this and looked at the trends over the last three months, including the first three weeks of July.
Looked at our backlog and feel pretty comfortable with both ranges. So I'll address the noncovered piece to them. The minus 14% is similar to last quarter in the second quarter and while we saw some positive trends, particularly on the recurring side, where we see services and consumables upticking through the quarter instruments were a bit more lumpy, but backlog did grow.
In death, but we just think it's prudent sit in this scenario in this timeframe or there could be a scenario, where something happens and there's a setback. So while we did see improving trends through the quarter and continue to do so I think the low end of our range. We think it no worse than the second quarter and if you know the trends continue we would get to the mine.
On a 7%.
On the Covis side, the 150 to 200 inside the $150 million basically that's just adjusted for Surajit. So Surajit was as I mentioned in my prepared remarks little over $50 million, we're planning for that to be under $10 million in the third quarter and so the difference between 196.
And in 150 million is solely serology and we feel confident as we look at our shipments today in our backlog that aren't a extraction and PCR test will continue and then if you get to the high end, where it and in the midst of a lot of commercial discussions and those commitments could be coming but the the ramp of those in the timing of when.
They would happen is still in flux, but we do see the opportunity to get to the high end of 200 million and so that's how we derive the range around coven revenue.
That's helpful. Jim and then one for a lot.
You know thinking about sustainability of trend. So a couple of comments you made up for a lot in your prepared remarks, I think you mentioned something along the lines. If you know opening new doors.
In terms of relationships.
Just given the amount of placements you guys have done on nucleic acid extraction liquid handling I'm just curious whether that has any implications for a in a tender wins going forward and I think you also mentioned to coalesce flu combo test, perhaps a in a could you address a the pricing or how to think about opportunity for this.
Combo test thanks.
Thanks for Jay.
I think the way I would address or the first question around the extraction cuts that you know I think what are what has been fairly good.
Is that the number of installed base has obviously increased significantly this year and that bodes well for the other assays that are coming through the pipeline both gold and also non corporate related to infectious diseases and others. So.
So I think the longer term as customers get to using our R&D extraction kids and see the benefits that being on the magnetic be based solutions for wide worse is what other springboard, especially in high throughput labs, we are seeing a lot of traction on battle I think it'll be a quite beneficial for us.
Competitively in the longer on.
In regards to your question around the pipeline and the flu test et cetera. The V. I would look at it Richa is I would sort of de market in two parts. One is work flow to solutions around direct testing you know and that could be either he flew back test or a vital detection pooling.
Audit direct antigen test and the second one is around immune insights you know the base that we can look at what immune responses come out from a from from the human system and how how do we measure that they've got to corporate.
So I think while it's too early to opine on the pricing our focus is that to sort of put as many ways that we can in terms of detecting the disease. The the disease directly and also indirectly and then that's what our focus has.
Understood. Congrats again, guys I'll step back in queue.
Yeah. Thanks Roger.
Thank you. Our next question comes from Steve Willoughby with Cleveland Research You May proceed with your question.
Hi, Thanks, a couple of questions for you first on TCR test demand for lot or Jamie I know things are shifting quickly when we look back 90 days ago. Your one Q call.
It seems like you maybe downplayed the opportunity within PCR obviously it came in much better than expected can you maybe just provide a little bit more color on sort of what changed as it relates to that the demand for your PCR test and then secondly on Bcr prolonged when we look out how are you guys thinking about the sustainability in PCR test.
Emad, maybe even beyond the third quarter and then I have one quick follow up.
Sure, Steve I can give them and we look back 90 days you know the science on on the wires was still very evolutionary and I think you know, we along with others. We're still trying to figure it out hey, do we want to focus on the direct testing or was it all adds you more important and that's when you know been serology came about there wasn't.
Lot Spike in it and the TARP was that maybe this will tell us already quickly what the immune responses and people would get back to work.
And I think that's sort of played a role but you know the long and short offered as Steve that we expect direct testing the direct life is destined to be white to and expect sustained demand for not just in Q, but you know I'm pleased to the yard and that we look at it. So I don't think direct testing is going.
On a go away anytime soon.
I would just add anything Steve.
You know at the time of our last call remember, we had not made any shipments yet of PCR at that time.
So we were having some import issues at the time, so having the confidence to be able to ship that amount was still in question I would say and then the second thing is I think I workflow is terrific. So when you combine our in a extraction capabilities with our PCR technology and liquid handling I think that's resonated very well in the markets.
Yes.
So Jamie with that then you know if you were only shipping to PCR test for let's say two months out of the quarter.
And you did yeah, let's call it close to 100 million in revenue.
No.
It seems like the guidance for Threeq you as it relates to covert Tailwinds are we now assuming the PCR test makes up 150 million or so of that 150 to 200 million.
Yeah, that's right I mean as show at what I tried to mention in DJ. His question is that's a rolla G, which was a little over 50, obviously, please I'm in place for Sovaldi is going to be in the future. We believe we'll see.
So therefore that demand, we have taken down to less than $10 million and therefore, the PCR and Arnie extraction technology, which as you said was let's say $100 million is much more a bigger portion of the total 150 to 200.
Yes. The other quick follow up I had is just what are your whats your outlook or how are you thinking about demand overall in China, and if theres any nuances between different end markets in China in the back half the year. Thank you guys.
Yes, so china or improve sequentially for us so it was down over 30% in the first quarter.
And down about 14% in the second quarter, and we had hoped actually that it would get to flat at one point in the quarter here.
Yes, good get to flat and in fact built a little backlog as well. So we feel good about that diagnostics, though one from down 40% or roughly down 20% in the quarter. I think you know whether that's the second outbreak in June and Beijing that happened, but we're still not at the utilization levels of.
Having people comfortable going to the hospitals and clinics et cetera, it's still not at 100% level and hasn't returned to normal so as we look forward here.
We're hoping again not only get to flat as soon as possible and perhaps in the third quarter, but what we're planning on in the third quarter is down high single digits.
A low double digits as a whole for overall, China. So again, if it gets back to flat thatll be upside to our current range, but right now the way we see it is diagnostics is still a bit challenged it's probably going up tick a little bit, but that's what we're currently planning on.
Okay. Thanks very much.
Thanks, Steve Thank you.
Thank you. Your next question comes from Derik de Bruin with Bank of America. You May proceed with your question.
So Steve just took my China question. So now I got to me Gotta go to go to the second one here so.
Right.
Free cash flow guidance going back to 80% to 90% and also I just.
I just wanted to talk about your conference in the opening about having accelerated some programs and paying things picked up and you know I think one of the questions were all asking is sort of what does things look like for these businesses, they're getting these big help cobot tailwinds.
When things go back to normal can you opine a little bit on.
How you sort of see margins maybe in the overall impact to margins your post crisis, and what you need to do so if we get back to the freak. What do you did you get to the free cash levels you were talking about.
Sure. So you want to talk both margins and free cash flow. So margins, obviously, it's an unprecedented quarter we had.
Strong volume growth, we had great product mix, we had all the productivity programs that we had already been working on a largely in services in Dallas and euro immune tenants on top of that we had great opex leverage and so even though our opex was up it was still a good leverage.
So you know I think in terms of the sustainability of that I think it supports the overall thesis for Perkinelmer long term that when those things happen. We do have the ability to get to a mid twentys to high Twentys operating margin business.
But certainly this was an unprecedented quarter a margin expansion in the short term, but some of this will remain I mean, I think we are becoming more efficient I think the productivity programs are being put in place I think our volume and mix is changing over time, so it's difficult to say what it would completely snap back to in the very short term, but I think the long term this is proving.
The business can be.
As it pertains to free cash flow. We had you know one of our best quarters again, and certainly our best first half in a long time.
And that is you know there's couple of things in there a receivables we've been as you know and we've been talking about we're making a lot of process improvements on but we also did have a small benefit with regard with regards to Kobin terms, but I think you know receivables progress will continue to happen here over time, even in a normalized environment you can.
I see that we invested a significant amount in inventory and I think most half of that it's about our covert inventory and we think that having the product ready, which provide mentioned in his prepared remarks that we are tracking our turnaround time is enabling us to be ready for customers and when customers that need the product immediately and then the other half we always have a first half.
Build you know, it's probably a little bit more than normal due to the demand levels, but our co. Our noncovered backlog has increased.
So I do think that second half will you know our inventory levels should come substantially down and so yeah. We're still I think what we're saying Derek is that 80% to 90%. We're tracking you know there's a lot of good underlying progress here on receivables on our ability to manage our sai up it just so happens right now that our inventories require.
Prior to be high and to meet our customers demand.
We are focused on it and I think we feel confident that we can get to that 85% to 90% range in a couple of years and if it happens before that that's great.
Great and just one follow up you mentioned some of the point of care Allysa antigen tests are are you looking at those as sort of going on within you a.
Authorization or.
And then following up at those eventually going to more ft approved for out I'm, just curious because you haven't historically.
Don things in infectious disease market in the U.S.
From an FDIC standpoint, it's been more focus in China I'm, just curious on your longer term strategy at this sort of like some shift.
Yeah, I think all with specific Derek we continue to actively investigate that as a detection my part I think the key for US it's very important that the quality of our best should meet our threshold and no I mean, we would not Elisa test.
But that are in the low eightys are somewhere around on so if you have a test which has got that right and relative sensitivity that we would expect it to be then we would release at specific to covert.
I think longer term, we have a point of care at best strategy in the U.S. that SBB.
Great. Thank you.
Thank you. Our next question comes from Tyco Peterson with JP Morgan You May proceed with your question.
Hey, Jamie just a clarification on the gross margin comment can you quantify how much of the step up with the cobot testing accretion versus the cost cutting measures for Twoq I didn't hear you quantify that in response to Eric's question.
Yes, so overall mix.
Tyco. So we grew gross margins about 600 basis points and I would say mix made up 85% to 90% of that so even ex the mix impact we expanded gross margin by 50 to 80 basis points.
And that was on our productivity programs, but mix certainly in total notches covert related but in total probably made up 85% to 90% of that increase.
And then on the Threeq you outlook for the non covered based business just give a little more color on what you're picking everything in an academic recovery for example, and making sure question.
Just a little bit more color by end market might be helpful. Yes sure.
So I think in total.
In the 7% to 14% range at a high level, we have diagnostics, which was down 20% in the second quarter Exco bid in a minus 10% to 20% range and I'll talk about some of the end markets.
And then das which was down 10% obviously.
In a minus 5% to 10% range. So let me just hit some of the end markets underneath there. So reproductive health I think continues to tick up a little bit when I think we mentioned that it was down mid single digits, where it kind of planning on down low single digits.
China utilization, particularly on prenatal is not yet at 100% normalization that's reproductive health.
Immunodiagnostic in applied genomics down kind of high double digits I think it will remain down double digits and you know that's just a function of one to people feel comfortable coming back to a C physicians and hospitals and whatnot, but we expect a little bit of uptick there.
Moving to the Das side life Sciences, which was down low single digits. We think probably go rose low single digits or in the second quarter. We were buoyed by a strong informatics business enterprise was flattish and discovery was down I don't anticipate informatics to be a strong, but I think discovery will pick up and we're seeing that in.
Some of the consumables business and our backlog in our tenders as well as the enterprise business as more labs returns. So we expect looking at like kind of moved from down low single digits to upload single digits. Again. This is on the high end of Iran status.
Applied markets in food again was down I think 20% and.
On the low end of our range, obviously that remains at that level and but we are expecting it to start picking back up we had a bit of backlog growth, but that you know we would expect to pick up but it would still be down double digits, even in the high end of our range, which is down 7%.
But I think simplicity is down 5% to 10% for das in down 10% to 20% for Jeff.
Excluding cool Okay. That's helpful. And then just one for a lot on the antigen test you you mentioned I assume that uses some of the tour lateral flow technology, but can you just talk about you know the thought process. There we've seen a lot lower quality antigen tests coming to the market. So I'm just curious why you're entering and how you think about you know need New awards antigen testing versus PCR.
While the time thanks.
Yes, Tyco times.
I'm not saying that we are going to I'm, saying that we are evaluating it and you're absolutely right that are you know no be why we actively investigated the focus for US is that we would only launch at the quality my thought threshold and two lip is one aspect from maybe would develop it just like on the best of our product portfolio of every being able to leverage I keep.
Well if these from across different sides and companies. We've got competencies him capabilities are on this in China and Europe too. So we would be leveraging sandy even be would come out it would warrant it would only be if we get does sensitivity and specificity revenues.
The high end.
Okay. Thank you.
Thank you. Our next question comes from Dan Arias with Stifel. You May proceed in your question.
Afternoon, guys. Thanks, maybe just on the reproductive health side, obviously, it's a it's a tough selling environment for your vantages franchise right now, but can you just sort of level set us on expectations and then what's going on in Europe, and then just thinking ahead, there where does all of this have the values study with women and infant shaking out is that data that.
And still show up at the end of the year or is it best to to sort of thinking that as a 2021 thing.
Yeah. So thanks, Dan the Brinavess.
The program itself. It continues to progress very valid or the funding continues to be stronger. Obviously go over it has resulted in installation delays in of the funding for us is stronger than in the installations generally.
Our being held up right now in terms of the tests become can you do that run smoothly and the demand is high the challenge for us. So both in terms of publishing the study and a and getting the installations are in place is that the market shifts in terms of coverage or.
I would say freeze or or or travel restrictions et cetera, but I think as as that starts to lose in an open up a b installations will pick up I will say that I don't think we expect the installations to be anywhere I know up to 55 and 2020 as we had projected but.
But we're very hopeful that as as a regions opened up in Q3 in Q4, but Ah we will be able to filling the pipeline that you have seen.
Okay, Thanks, and just maybe going back to covert on serology.
Prolonged does the data that you're generating suggests that you realize that they can be used to provide information on neutralizing antibodies and then just thinking about commercialization to what extent are you able to maybe bundle. The Surajit has and then maybe some of the other thing that you're working on with the PCR test since its obviously in pre tied to.
Man it sounds like some of your larger diagnostics competitors at least on the European side as I have adopted that strategy. So just curious whether that's something you're able to use and drive volume there.
Yeah do your first question Ben I think you know the indication of serology, our understanding of the signs as I said earlier is evolving every day.
I think you know if I went to looking at Crystal ball I would say that we expect the epidemiology studies around serology to continue and for it to provide a better understanding of the immune response and as vaccines come into play it will drive broader immune insights testing and that's rest on all as you've been playing out yet.
In terms of funds being able to put it together I mean, there examples as you saw that Sonora Quest Raviv venture you've done bolt said on the GE MPC our testing so I would say that it is larger and larger customer bases, we are seeing traction around our total solutions.
Sit on collection devices, Oh extraction kids PCR offset all energy I think would be the challenge as off now that's an LNG is to some extent taken aback seat and most of the focus continues to be on direct vitesse detection.
Got it okay. Thanks, very much yeah.
Thank you. Our next question comes from pattern Chunking with Baird. You May proceed with your question.
Great. Thanks, so much the question. Its first can you just walk us through where you are kind of manufacturing capacity standpoint on astrology, PCR and extraction kicks today and what are your plans in terms of expanding capacity further as we navigate the rest of here.
Yeah. So in all cases, we are highly scalable and on manufacturing multiples of what we have previously disseminated in terms of our capacity I.
I think this is Brad the benefit though are the breadth of octave capabilities and having a broad geographic footprint in all the parts of the wall, but then it's in Asia Europe, Our North America comes to bear. We've also put very strong supply redundancies in place Soviet not sort of dependent on any sort of supply.
Flyers et cetera, or any particular country or region.
At this point, we do not see.
Supply to be a constraint in fact I as you probably as you probably saw as you've talked about earlier.
I'll be quick turnaround times on our website and you can like you know you can life tracked a us it's live streaming in terms of our capability to provide turnaround time to our customers.
Okay, Great and then you know as we think about how you're getting pretty incredible incremental margins on this call. The testing business. What's your thought process in terms of letting that drop through versus using that to maybe accelerate some strategic investment.
Yeah, I mean, Katherine I think we are biased to invest and so actually some of the spending levels in the first half in second quarter or not at the levels by choice. It's a levels. Because you know you can travel or you can't get a third party service et cetera, So I think it.
We look into the second half of the year, we are going to step up our investment in areas like R&D.
Digital investments as well so information technology, some peep, there's some pockets of.
The port of the organization, where we want to invest with some.
Additional people.
So I think we will continue to spend and probably invest a little bit more than we happen of course will always monitor the outlook, but I think one of our guiding principles has been to emerge from this as a stronger company and I think we're fortunate enough to be able to reinvest back in the business and we plan on doing so.
And especially around R&D accounts, and I think you know some of the.
You know investments that we didn't want to make in the first half of the I'd be couldn't just because of where they address travel restrictions or availability of scientists to come to the bench. So I think that definitely and given the the pipeline and the NPR pipeline that we are talking about that's better you will be when you continued to invest incrementally.
Okay, and maybe just last one from me going back to Jamie is coming on on emerging as a stronger company. After that we stepped back and think about help heartlessly strategic rationale in ALS.
Well session, that's really an opportunity to grow it.
Doesn't it seems like once we emerge from coal bed and those tailwinds upside should be in a much stronger position from a U.S. adoption perspective than you would've been up call that had never happened. So is there any way you can help us think about just how much of an accelerator coal that has been in terms of the U.S. adopt.
Not that portfolio longer term.
So the three ways to look at the right one cuts in the V. I would look at it did in terms of B. The relationship so the emerging relationships I feel establishing that goes customers.
That has become significantly stronger or is that it's a institutions such as mail orbit the lodge reference labs.
I think the second aspect is the familiarization, albeit the science aspects, so funeral immune and would be the work flow that that but the team has been doing in Lubbock.
That has significantly improved and it has also allowed us to leverage the relationships to provide a beacon to our current pipeline of products that are commercially available and was what's coming into the future as we've talked about earlier right I'm getting our random access platform. A accent is that would be out from euro immune.
Oh hopefully.
By the end of the Euro only 2021, given some co address trains.
The adoption of that is the bad here for the adoption of dot is going to be much slower.
Given what we have done around covered with our customers. So you know that's one minnesota to quantify to some extent as to what the benefit all fall.
Good for a wide longer term to the company as a whole.
Great. Thank you.
Thank you. Our next question comes from Steve Beuchaw with.
Wolfe Research you May proceed with your question.
Hi, good afternoon, and thanks for the time here Oh ask one for prolonged one for Jamie and then I just go back in Q.
The one for Perclot is it if we reflect a little bit on the experience that we've had with Sirona energy on some of the learnings.
For the clinical trial data that we've seen out of some of the vaccine studies.
It seems like T cells have gained more and more attention at least in the clinical community, but it's not clear to me necessarily how much demand. There is for broader so outside of vaccine clinical trials or T cell reactivity assessments can you speak to that in the extent to which outside of clinical trials or those types of assay as might be.
In demand and then for Jamie Yes, there's been some focus on margins on the call, but can we just jump out like sorry to ask at this far but you know three and four years and see what is the margin trajectory of this company look like relative to what you thought seven or eight months ago I would imagine there's been some discovery of structural.
All cost savings and you flagged on the call or in Q1 eight earlier that there is a path to mid twentys or maybe even higher margins, you know, which makes a lot of sense on some amount of time, but can you speak to whether you think that's you know within the next four or five years or is that a longer term view I really appreciate all the help here. Thank you.
Yeah.
Let me start with the easier one and then Jimmy can take [laughter] I think a I think sees a the aspect on PCTEL I did the T cell response, I think it's a little too early to tell them in my opinion I think one would have to look at the total response, you know whether it's humid a lot in eight response on how how how.
To how to look at it.
But but but the more germain laid to think of it is that immune insights are going to be important and that's where sort of we are trying to focus on as to what aspects and what avenues do we need to look at.
So I think.
But it's something odd TBD, our are yet to come.
Yeah, that's for the margins, Steve I mean night, it's difficult to give a exacttarget here in three to four years, and we said we'd come out with our analyst day and that's when we were hoping to launch what our outlook is for margin in the next three years. Obviously, we as you mentioned, we have had a lot of learning. So I went to what I would say without.
Giving exact number is I'd say, we're even more confident in our margin expansion opportunity I mentioned in my prepared remarks, how much time, we've spent in the analytical and food business in all segments for that matter, but I think the margin expansion value creation opportunity. There is substantial I think it is a three to five year play some short term Max.
But certainly over the course of RMP I cadence, what we're doing with procurement, what we're doing with skew rationalization I think it'll be rather substantial so.
I did mention mid twenties, and maybe that's in three to four years, but I don't think we want to sign up for anything at this point and again, we're still learning here, but I would say we are even more confident in that approach.
Okay really appreciate all the color there thanks, a bunch and every night.
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Thank you. Our next question comes from Doug Schenkel Cohen you May proceed with your question.
Hey, guys, sorry, good afternoon, and thanks for taking my questions. Just a just a couple of quick ones are the first is just as a guidance cleanup question. It appears your or third quarter guidance implies that you expect operating margin to decline.
About 300 to 400 basis points sequentially, despite similar sequential revenue numbers.
Could you provide a bit more detail on on what drives that I'm guessing. It's a combination of change in mix and a reflection of some of the opportunistic investment in long term growth initiatives that you talked about.
You nailed it [laughter] is about half that and I think.
I would expect the gross margin line to come down about 200 basis points sequentially versus the prior quarter and that is mostly mix both non covidien covitz other noncovered book coming back up a little and the covert book coming down a little bit at the midpoint to your point.
As well it some sub business mix with a little less informatics in the third quarter versus the second quarter. So a little half of this probably comes down through the gross margin line.
And then you're right. The other half comes in through incremental investments and everything I mentioned to Catherine's question turns R&D digital people continuing to invest and emerged stronger.
Okay Super helpful. The second one is and I think this is a prolonged question.
I'm, just you'd be willing to provide I get more detail on your PCR revenue assumptions moving forward.
Specifically when I'm thinking about here is one of those one of your peers, who also produces.
Non automated PCR cats produces well there they're driving a produced 10 million tests per week on the automated diagnostic system vendors are expected to wrap manufacturing meaningfully by the next flu season.
So just with those two examples in mind I'm just wondering if you could just share a little bit more on how you expect your our revenue due to evolve over time not like are you expecting to maintain share do you expect to gain share <unk> or is this really just as simple as you know you're you're going to sell as many as you can pretty.
As for the foreseeable future.
Yeah, I I think.
Let me put a best friend, Doug as of now you know our capacity is greater than demand.
And we.
Feel very good about very VR, because what we are realizing that customers are coming back to us from some of our competitors because they realize that we provide if we work flow solutions.
You know collection media or extraction kids extraction units are PCR and fully validated workflows and I think that's the benefit that we are seeing from our customers and I think that Smith, we feel that as we progressed NVC sustained demand Oh, we are.
Very well placed with the solution that we bring to detect vantage investing.
Great. Thank you.
Huh.
Thank you. Our next question comes from Dan Brian would you be asked you May proceed with your question.
Great. Thanks for thanks for taking the questions and congrats on the quarter I'm. Just wondering if you could share a little even cut on the liquid handling kind of robotic market, we have and dove into much there, but obviously are leader there and it's hard to due diligence 'cause.
There's not as much information so could you just a little color on maybe you know size of that market any color on kind of instrument placements in the quarter and kind of how we think about the opportunity going forward for coven.
Our new tests, being particularly strong and especially our John This product line has seen a lot of demand and the second quarter and the ongoing demand continues to be strong.
Yeah, I don't know if the I'd break it down specifically two product lines around automation.
The only thing we said Dan was that it was up six six a year over year here in liquid handling.
More color on that Jamie like six ex me how much of that.
109 years, so marine in the quarter I know you gave some color on PC reaction, but how much namely a bad and kind of how do we think about that implicit in kind of looks like I think Dan we're trying not to get into exact numbers here to walk through and be able to be off of and whatnot. So I think we'd like to keep everybody focus that.
The overall franchise is doing well and that diagnostics opportunity across all of our product lines is doing well so selling together.
Got it Okay, and then maybe just a couple other related one just on kind of sticking with Cowen. If you don't Marine is could you share any insight at all on pricing since its hard fresh cut back into a you know kind of share of market and as Doug mentioned, there's just a lot of capacity out there, but the revenue contribution really matter.
<unk> obviously the branded players are in the Twentys may become less sort of made to players are in the teens any any help you can give us on piece your pricing and then any color also about Oh U.S.U.S. mix in terms, you PCR and extraction businesses. Thank you.
I'm happy to tell you that you feel that our RT PCR and extraction pricing remains consistent.
And I think that's the level of detail we want to share.
There has been some decline in serology, a modest but it's not for US there I think the whole the whole ER serology market that seem to decline, but I think we want to stay away from getting into specific pricing.
And in terms of U.S.U.S. is it just follow along your geographic split or are you kind of having more success in one market or the other.
I think we are seeing success in both markets. Both in the U.S., a yara I know and I know U.S. also an issue. So we are seeing a.
<unk> penetration across a across.
Countries and all the continents.
Great. Okay, hi, Thank you very much.
Thanks, Dan.
Thank you.
Now like turn the call back over to prolong Singh for any closing remarks.
Thank you for your questions again, I'm proud of our entire organization then how everyone has rallied together our breadth of capabilities puts us in a unique position to help combine this pandemic.
No. We are focused on leading that signs and that is clearly resonating I have no doubt we emerged from this crisis as an even stronger company.
Thank you for supporting poking at Tomorrow, and I look forward to providing for the updates on our part corner awnings call. Thank you.
Thank you ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.
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