Q4 2022 PerkinElmer Inc Earnings Call
Speaker 1: Music
Speaker 1: The.
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Speaker 2: Hello and welcome to the Perkin Elmer 4th Quarter 2022 Earnings Conference Call. My name is Alex and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation you can press star 1 on your telephone keypad. If you'd like to withdraw your question you may press star 2.
Speaker 2: I'll now hand over to your host, Steve Fullipi, SVP of Investable Relations. Please go ahead.
Speaker 3: Thank you, operator. Good morning, everyone, and welcome to Perkin Elmer's fourth quarter, 2022, earnings conference
Speaker 3: All the call with me today are for a lot of things are President and Chief Executive Officer and Max Grecoyak are Senior Vice President and Chief Financial Officer.
Speaker 3: Before we begin, I'd like to remind everyone of the safe harbor statements that we have outlined in our press release issued earlier this morning and also those in our SEC filings.
Speaker 3: 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, or intentions. These matters involve certain risks and uncertainties.
Speaker 3: The company's 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 in our SEC filings. Any forward-looking statements made today represent our views as of today. We disclaim any obligation to update these forward-looking statements in the future.
Speaker 3: even if our estimates change. So you should not rely on any of today's forward-looking statements as representing their views as of any date after today.
Speaker 3: 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 we use non-GAAP measures during the call that are not reconciled to GAAP, we will provide reconciliations promptly.
Speaker 3: I'll now turn it over to our President and Chief Executive Officer Prahlad Singh. Prahlad?
Speaker 4: Thank you Steve and good morning everyone.
Speaker 4: Before I begin, I want to express my deep sorrow for our colleagues.
Speaker 4: along with their friends and families in Turkey and Syria following the recent earthquake.
Speaker 4: What you are having to go through is something no one ever thinks can happen. And I want you to know that fucking alone will be supporting you in any baby camp.
Speaker 4: Needless to say, the start of the year has been an eventful one and from a business perspective, we have hit the ground running after finishing 2022 on a strong note that played out right in line with our expectations from the start of the quarter.
Speaker 4: We continue to successfully navigate an evolving macro environment.
Speaker 4: particularly in China.
Speaker 4: while staying tremendously focused on executing our upcoming divestiture of our analytical and enterprise solutions business.
Speaker 4: which we expect to complete before the end of March.
Speaker 4: Amid these undertakings, we again exceeded our total adjusted revenue and adjusted EPS targets for the quarter.
Speaker 4: The continued high level of execution throughout a period of transition for the company is a testament to the team we've built.
Speaker 4: the processes we've implemented, and the quality of the businesses that comprise our new company.
Speaker 4: I couldn't be more excited for our future and the impact I expect us to have by helping our customers develop and deliver novel scientific breakthroughs that will have a profound impact on improving global health in the future.
Speaker 4: I would be remiss not to also thank all our colleagues who have spent a significant amount of time.
Speaker 4: And therefore, preparing for the upcoming split of the company.
Speaker 4: including those roughly 6,000 employees who will be part of the divestiture.
Speaker 4: I look forward to watching what the analytical and enterprise solutions business can accomplish in the years to come.
Speaker 4: And thank you for all your efforts and impact which have made getting to this point a reality.
Speaker 4: As it pertains to the future of our life science and diagnostics business, which is going to be renamed and rebranded in the months.
Speaker 4: Following the close of the digested jar.
Speaker 4: A significant amount of work has already taken place to prepare for this transition.
Speaker 4: I am eager to share with you and our employees more about the direction of the new company in the near future.
Speaker 4: As I have highlighted to you over the last seven quarters.
Speaker 4: The level of focus and material innovation that is now occurring within the company has meaningfully increased.
Speaker 4: This was again on display over the last few months as our new high throughput random access chemiluminescent diagnostic testing platform, the Accentus, received its CE mark and began initial commercial installations.
Speaker 4: While the test menu for this platform will continue to ramp over the next several years,
Speaker 4: It marked a multi-year effort of significant development.
Speaker 4: to bring this next generation platform to market.
Speaker 4: We will look to also bring this new system to the US market in the coming year.
Speaker 4: With the low and medium throughput platforms that were added with the acquisition of IDS in 2021, the
Speaker 4: The initial launch of the incentives now provides a complete portfolio of tele-luminous and analyzer platforms.
Speaker 4: Scanning all two ports.
Speaker 4: to support our full spectrum of customers.
Speaker 4: We were also excited to see an early January that the GAMT disorder was added to the rust panel for new bond streaming in the United States.
Speaker 4: This deficiency can result in severe intellectual disabilities if it goes undetected and untreated within the first few years of a child's life.
Speaker 4: And we continue to collaborate with KOS to support their research and pilot programs on this.
Speaker 4: With our Ionis platform for SMA and SCID screening receiving FDA authorization last quarter,
Speaker 4: The recent additions of Gantt and MPS2 are examples of the continuous innovation from our reproductive health business.
Speaker 4: allowing it to continue to grow despite well-known birthrate pressures over the last several years.
Speaker 4: In our life sciences business, we continue to bring innovation to the cell and gene therapy industry with the launch of Adino Associated Virus or AAV, Detection Kids.
Speaker 4: We should leverage our proprietary AlphaLISA technology and help researchers quickly and easily characterize.
Speaker 4: Why will vector particles being introduced?
Speaker 4: Additionally, we signed a collaboration agreement in December with a leading global biotechnology company to identify novel AV vectors aimed at crossing the blood brain barrier.
Speaker 4: Working in conjunction with Professor Grins Lab at the University Clinic, Hydealburn.
Speaker 4: Our in-house team of Vider Vector experts in Munich, Germany.
Speaker 4: Our task is developing a novel generation of gene delivery vectors.
Speaker 4: for treating a growing population affected with neurodegenerative diseases.
Speaker 5: Let's go.
Speaker 4: high unmet clinical need, and social challenge underpinning this collaboration is an illustrative example of just how much we have transformed our life science portfolio over the past few years.
Speaker 4: We are not only increasingly aligned with rapidly evolving and attractive fields like cell and gene therapy.
Speaker 4: But we've positioned ourselves to be uniquely focused to help accelerate these advancing fields forward. We've positioned ourselves to be uniquely focused to help accelerate these advancing
Speaker 4: In addition to continuing to invest in our R&D, we are also significantly focusing on internally developing our people.
Speaker 4: In the fourth quarter, we launched three new employee resource groups.
Speaker 4: centered on supporting our Hispanic employees, our veterans, and our employees with disabilities.
Speaker 4: We also started several employee networking groups to help employees with similar interests.
Speaker 4: get to know one another and communicate across the company.
Speaker 4: These are both great examples of the change in culture that has been occurring as a company recently.
Speaker 4: which I expect to even further accelerate as we enter the next exciting phase of our corporate journey.
Speaker 4: While Max will share more details with you in a bit, it was encouraging to see our life back in
Speaker 4: resulting in 9% non-COVID organic growth for the full year.
Speaker 4: This was despite an approximate 300 basis point had been
Speaker 4: from the lockdowns in China negatively impacting our immunodiagnostics business, which we have assumed in our most recent guidance.
Speaker 4: At this point, we have continued to see an impact from the change in COVID policy in China.
Speaker 4: and assume that we will not see our immuno diagnostics business there return to normal until the second half of 2023, which will have a big tough an impact on our overall expected growth for the year, particularly in the first half.
Speaker 4: As it relates to COVID, we have been a significant player in the response to the pandemic with both lab-based PCR and the several government lab contracts we've participated in.
Speaker 4: The testing mandates now ending in most areas around the world.
Speaker 4: It has recently resulted in a swift and dramatic decline in the demand for lab-based PCR tests.
Speaker 4: and supplemental lab capacity.
Speaker 4: While Max will provide more detail, we have decided to completely remove all COVID revenue from our guidance for the year and let what we expect to be minimal related revenue be
Speaker 4: provide modest upside to our official guidance.
Speaker 4: A significant change from up to iron expectations.
Speaker 4: Despite these two impacts, we are looking for 2023 to be another very strong year overall and one that will set the new company off on a great foundation to build upon in the years to come.
Speaker 4: As we execute on our transformation and the future accretive capital deployment opportunities it provides. Again thanks for watching and have a great day.
Speaker 4: We will unlock the full scientific, operational and financial potential of our life science in diagnostics business.
Speaker 4: resulting in a best in class culture.
Speaker 4: market-leading innovation
Speaker 4: and talk to your shareholder at once.
Speaker 4: Our business is in an excellent position today with tremendous additional opportunity right in front of us that we are going to capitalize on.
Speaker 4: With that, I'll now turn the call over to Max.
Speaker 6: Thanks for the live and good morning everyone.
Speaker 6: As Prahalak mentioned, we are nearing the completion of our planned investiture of our Applied and Enterprise Solutions business to New Mountain Capital, which we expect to wrap up before the end of March.
Speaker 6: Following the deal closure, we will continue our work to rebrand the company with an expectation on unveiling our new identity within the next few months.
Speaker 6: And so then, we will continue to refer to the life science and diagnostic business externally as Perkin Elmer, just as we do today.
Speaker 6: With that said, we're very excited to share with you our new name, identity, and mission when the time comes.
Speaker 6: As it pertains to the divestiture, our teams across both businesses are working extremely hard to ensure a smooth transition and I am grateful for everyone's continued efforts as we work towards a close over the coming weeks.
Speaker 6: While there has been and will continue to be a lot of work involved, I'm even more confident that this decision will maximize the long-term potential of both businesses and I look forward to seeing it come to fruition.
Speaker 6: Once the deal is closed, we expect to set aside a sizable portion of the after-tax proceeds to prepare for our upcoming debt maturities over the next 18 months, with an initial $500 million coming due this September .
Speaker 6: This will still leave us with ample capacity to pursue additional capital deployment activities as they arise, such as continuing our track record of finding strategically important and accretive acquisitions. With these proceeds and the cash we expect to generate, we will have more than $2 billion of additional unencumbered cash available to deploy over the next three years without taking on any new debt.
Speaker 6: We expect our future organic and inorganic investments will only further bolster the strong medium-term financial outlook we have previously provided.
Speaker 6: As it relates to the fourth quarter, we saw strong performance despite continued challenges from disruptions in China, and we were again able to exceed our revenue and adjusted EPS targets.
Speaker 6: While most of my commentary in the fourth quarter referred to just our life science and diagnostic segments, which I'll refer to as continuing ops, I thought I'd first start with a brief look at the combined company's performance, including the businesses that are intended to be divested.
Speaker 6: On a combined basis, including continuing ops and discontinued ops, we generated total adjusted revenues in the fourth quarter of $1.09 billion, which was solidly above the high end of our guidance.
Speaker 6: Non-COVID organic growth for the combined businesses was 8% in line with our guidance, while an FX headwind of approximately 5% and COVID revenues of $31 million were both slightly favorable to our expectations.
Speaker 6: As expected, there was no inorganic contribution from recent acquisitions.
Speaker 6: In relation to the P&L, our combined company adjusted operating margins were 27.3% for the quarter.
Speaker 6: We continue to see a benefit from our recent initiatives within our supply chain, operational expense management, and again delivered strong pricing performance as we realize more than 200 basis points of positive impact in the quarter.
Speaker 6: Despite some modest non-operating expense pressures and a slightly higher tax rate, we were still able to generate $1.70 of adjusted EPS for the combined company, which was 4 cents above the midpoint and 3 cents above the high end of our expectations.
Speaker 6: Moving beyond the P&L, we generated $112 million of adjusted free cash flow in the quarter, which was pressured on a year-over-year basis by our significantly lower COVID revenues.
Speaker 6: the divestiture and deal related costs, and the timing of tax payments.
Speaker 6: These dynamics are expected to continue in 2023 as COVID continues to roll off and we complete the divestiture and other activities related to the rebranding of the company.
Speaker 6: We continued our plan D leveraging by paying down another $53 million of debt in the quarter, bringing the full year debt reduction to nearly $600 million.
Speaker 6: This resulted in our net leverage finishing at 2.7x at the end of the year.
Speaker 6: So far this year we've already opportunistically paid down for the 30 million of shorter duration debt and continue to be well-positioned from a capital structure standpoint ahead of our upcoming damn??? garbage. That's the church.
Speaker 6: Upon complete retirement of this shorter term debt over the next two years, we will have approximately $3.2 billion of debt outstanding at an average fixed interest rate of 2.6% with a 7-year average duration.
Speaker 6: I would now like to provide some commentary pertaining to our fourth quarter and full-year business trends.
Speaker 6: To give some perspective on what the company will look like going forward, all of my following commentary will only pertain to our continuing operations, which consist of our life science and diagnostics business and excludes our applied enterprise solutions businesses.
Speaker 6: Our life science and diagnostics business generated 8% non-COVID organic growth in the quarter, which was in line with our expectations.
Speaker 6: For the full year, our life sciences and diagnostics business grew 9% organically, excluding COVID, which includes a 300 basis point headwind from the China Lockdowns.
Speaker 6: So I'd say it was a very strong year overall.
Speaker 6: Geographically, our life science and diagnostics business grew in the highest single digits organically excluding COVID in all major regions in the quarter, including the Americas, Europe , and Asia Pacific, with China growing in the low single digits overall.
Speaker 6: For the full year, Americas and Europe both grew in the low double digits organically, while Asia grew in the mid-single digits, with China being down in the low single digits year over year.
Speaker 6: From a segment perspective, our life science business, which is currently being reported as our DAS continuing operations business for the time being, generated adjusted total revenue of $347 billion in the quarter.
Speaker 6: This was up 9% year-over-year and represented 47% of our continuing ops total revenue.
Speaker 6: Organically, the business grew 13% with mid-teens growth from pharma and high single-digit growth from academic and government. From a product perspective, our life science research reagents, assays, and pharma services represented approximately 54% of our total life science business in 2022, including acquisitions and lab-tr orphanedaha.org.
Speaker 6: and grew in a low double digits organically in the quarter and for the full year.
Speaker 6: Our insurance and related services was represented approximately 31% of our life science revenue in 2022. Also grew in the low double ditch in the quarter, which finished off an exceptional year with approximately 20% organic growth.
Speaker 6: Finally, our informatics business, which represented the remaining 15% of our life science revenue in 2022, grew in the mid-teens organically in the fourth quarter, also finishing off an outstanding year of approximately 20% organic growth.
Speaker 6: Moving to our diagnostic segment, we generated $394 million of total revenue in the quarter.
Speaker 6: This was down 44% year-over-year and represented 53% of our total continuing ops revenue.
Speaker 6: Organically, the business was down 39% year-over-year due to the $31 million of COVID revenue we generated being down significantly from the $336 million in the year-ago period.
Speaker 6: On a non-COVID basis, the diagnostics business grew 4% in the quarter and 5% for the full year.
Speaker 6: When excluding our immunodignastic business in China, our diagnostic segment generated high single digit non-COVID organic growth in 2022.
Speaker 6: While the pressures in China remained significant in the fourth quarter, the impact was largely in line with our expectation of our immunodagnostic business in the region being down in the high single digits year over year. The impact was largely in line with our expectation of our immunodagnostic business in the fourth quarter.
Speaker 6: Excluding China, our Mudo Diagnostic's business continued to perform very well and grew in the high teens organically year over year in the quarter, excluding COVID, and was up mid-teens organically ex-COVID outside of China for the full year.
Speaker 6: So to look at it another way, when including the impact from lockdowns, our immuno-diagnostic business was still up approximately 10% in the fourth quarter ex-COVID and grew low to miss single digits for the full year overall.
Speaker 6: On a non-COVID organic basis, our reproductive health business declined slightly year-a-year in the fourth quarter, but was still able to deliver mid-single digit growth for the full year.
Speaker 6: Favorable trends in Europe were offset by softness in Asia and a slowing birth rate again in the Americas as global population growth pressures continue.
Speaker 6: These macrodynamics are masking the solid progress we are making with menu and geographic expansion, driven by our recent new product introductions and commercial execution.
Speaker 6: Our applied genomics business also declined slightly year-over-year on a non-COVID organic basis in the quarter. However, for the full year, the business grew organically in the high single digits, excluding COVID, resulting in a high-teens cager over the last three years.
Speaker 6: While this market is likely going through somewhat of a demand adjustment from an instrument perspective, given how many were sold over the last three years.
Speaker 6: We continue to feel very good about our new products in this area as well as our improved market positioning and consumables.
Speaker 6: Now as it pertains to our outlook for 2023, we expect it to be another strong year financially, while we also work through managing the transition with the divestiture and rebranding as a new company. All of the forward-looking guidance commentary I'm about to provide only pertains to our remaining life science and diagnostics company and excludes the businesses that are soon to be divested. That's all, everybody!
Speaker 6: I would also note for your modeling purposes that we have provided some additional historical performance metrics as it pertains to the life science and diagnostic companies, quarterly, non-COVID organic growth performance during 2022 and a reconciliation document that can be found on our investor website.
Speaker 6: First, as it pertains to COVID, while our performance in the fourth quarter was still in line with our expectations, we did see a significant soloing in global demand at the year came to a finish.
Speaker 6: This fall, and COVID-related demand has even more dramatically accelerated so far here in 2023, and we now expect COVID to represent less than 50 basis points of our overall revenue for the year.
Speaker 6: While we will continue to report what our actual COVID revenue is each quarter this year, given the uncertainty of PCR testing over the remainder of the year and the immaterial contribution we now currently project, we felt it would be prudent to just completely take it out of our assumptions for the year and let it be modestly incremental to our stated guidance.
Speaker 6: For our non-COVID business, we anticipate another very strong year for our continuing ops, life science and diagnostic business by expecting 9% non-COVID organic growth this year. This is driven by our assumption for low double digit growth in our life sciences business and high single digit growth and diagnostics.
Speaker 6: As we have previously commented, there continues to remain significant uncertainty as it pertains to the timing and magnitude of the potential rebound in non-acute diagnostic testing demand in China, which so far quarter to date we have not seen meaningfully improve.
Speaker 6: While some may project that non-COVID diagnostic testing demand could rebound more significantly in the short term, we are continuing to assume that our Udo Diagnostic business in the region does not normalize until starting in the second half of the year.
Speaker 6: through to normalize more quickly or significantly than this, it would present upside to our current assumptions. Consequently, we are expecting our overall immunodignastics to grow in the low-double digits in 2023, excluding COVID.
Speaker 6: Lastly, we are not assuming any revenue contribution from recent acquisitions, and that effect is currently expected to be neutral to our total year revenue.
Speaker 6: This results in our expected total 2023 revenue to be approximately 2.94 billion.
Speaker 6: With our updated expectation for now having zero COVID revenue in our guidance for the year, and despite it historically carrying a very favorable margin profile compared to the rest of the business.
Speaker 6: I'm proud to share that we still expect to average 30% operating margins in 2023 at our life science and diagnostics business.
Speaker 6: Our ability to overcome this approximate 100 basis point operating margin headwind further reinforces the power of the underlying business and our ability to execute during this period of transition.
Speaker 6: We are assuming approximately $90 million of net interest and other expense this year, which is benefiting from the assumption of some additional interest income starting in the second quarter, but is also being negatively impacted by a significant year-over-year increase in our pension expense throughout the year that is primarily driven by higher interest rates.
Speaker 6: As for taxes, we continue to expect that the new company will start with an approximate 20% tax rate that we believe we can work to improve in the years to come.
Speaker 6: Our diluted chair counts should stay relatively stable at around 126.5 million average shares outstanding.
Speaker 6: This all results in us expecting a just EPS this year of $5.5.
Speaker 6: I note this guidance includes approximately 45 cents of combined headwinds from the removal of all COVID revenue in our guidance compared to our previous $100 million expectation.
Speaker 6: and the increased pension expense we are forecasting.
Speaker 6: to give you some perspective on the financial power of our lifetime and diagnostic solutions, or to move the product to have the fore.
Speaker 6: This guidance implies that lease mid teens underlying year-over-year EPS growth when excluding COVID completely in both years.
Speaker 6: In terms of phasing, we expect our non-COVID organic growth to be fairly consistent throughout the year when taking Euro-O-Comp into account.
Speaker 6: So on a two-year average basis, we expect our non-COVID organic growth each quarter this year to be around the 9 percent we are expecting for the full year.
Speaker 6: From an EPS perspective, given our elevated prior year Q1 constant 13%, which is our most difficult comp at the year, we expect operating lever cheering on Q.
Speaker 6: Additionally, our one-two operating margins will continue to be pressured by the impact of continuing off-to-counting rules until we close the divestiture.
Speaker 6: Moving to below the line, we will also not materially benefit in the first quarter from the increased interest income we anticipate once we receive the divestiture proceeds. And finally, we expect our Q1 adjusted tax rate to be slightly above our full year average rate.
Speaker 6: Constantly, we expect the first quarter to represent approximately 19 to 20% of our full-year adjusted EPS.
Speaker 6: With that, I'd like to turn it back over to Polarod for some closing remarks. For a lot.
Speaker 6: I could have put on for some closing remarks. For a lot. Thank you, Max.
Speaker 4: 2022 was clearly another strong year for parking Melbourne.
Speaker 4: But if you take a step back and look at the past three years
Speaker 4: Our focus was always to emerge from COVID as a stronger company.
Speaker 4: We believe that chapter has been successfully completed.
Speaker 4: for both the analytical and enterprise business.
Speaker 4: as well as our new light science and diagnostics business.
Speaker 4: Within those three years, our rapid and significant response to the COVID pandemic enabled more than 10 acquisitions.
Speaker 4: Fast-checking the transformation of our company to higher group and higher margin areas.
Speaker 4: Additionally, we embarked on this significant undertaking of splitting the company into two distinct businesses.
Speaker 4: And yet, through all that, we've consistently executed on our financial targets.
Speaker 4: which is a testament to our employees and the children we have created.
Speaker 4: Looking forward, 2020 will be no different as our teams arise to the challenge of finishing the 1992 Final We respiratory
Speaker 4: rebranding our company and continuously executing against our financial commitments.
Speaker 4: We are in an excellent position today and our future is very bright.
Speaker 7: with that
Speaker 4: Operator, we would now like to open up the call for questions.
Speaker 2: Thank you. As a reminder, if you like to ask a question, you can press star one on your telephone keypad. If you like to withdraw your question, then you may press star two. Please ensure you're unmuted locally when asking your question.
Speaker 2: Our first question for stay comes from a Derek DeBron of Bank of America. Derek, your line is out open. Please go ahead.
Speaker 8: Hi, good morning. Thank you for taking a flash.
Speaker 8: So just Max just to clarify something so your your full-in interest expense guide includes I'm just sort of what are you assuming in terms of interest interest
Speaker 8: interest income on the incremental just trying to make sure that 90 million you're guiding to is an all-in number is where like at UC it or if there's some potential upside of that depending on the interest rates.
Speaker 6: Yeah, hey, Derek. So for your question.
Speaker 6: Yes, it is an all-in number.
Speaker 6: So right now we're going to be probably putting aside somewhere between 800 and 900 million of the after-tax proceeds into treasuries that will match up with the short-term debt that we have on our books. We've got the $500 million no-coming due in Q323 and then we've got another 800 million coming due in Q324. And so our assumption is that that 8
Speaker 8: 900 million will initially go there's a chance for upside but that is an all-in number there. Thank you for your clarity and when you look at the China progression in immunodignafus to sort of thinking about.
Speaker 8: the one half the B2F's expectations. I appreciate the color on the overall commentary on the business. But can you just sort of walk through how you're sort of seeing that flow through the model?
Speaker 4: So maybe just to go back there, when we've seen China, our assumption right now is that it will be overall, China for us will be double digit or growing above our company average growth rate for 2023.
Speaker 4: And you know, our assumption right now is it will come and come more into the second half of the quarter rather than the second half of the year. And the first quarter what we are assuming is China IDX will be worse than what we had approximately in the fourth quarter of 2022.
Speaker 8: Okay, great. And then just one final time, a pricing assumption for 2023.
Speaker 6: Yep, so from a pricing standpoint there, we're assuming at least 100 bits of pricing contribution in 2023.
Speaker 9: Great. Thank you very much.
Speaker 9: Thank you very much. Yep.
Speaker 9: Yep.
Speaker 2: Thank you. Our next question comes from Patrick Donnelly of City. Patrick, your line is out open. Please go ahead.
Speaker 10: Good morning, guys. Thank you for taking the questions. Maybe following up on Derek there on the China piece.
Speaker 10: For a lot, I was encouraging to hear you guys talk about one Q being consistent with that, call it 9% for the year, given the China headwinds up front, COVID coming out of the model, obviously. Can you just talk about, I guess, it seems like you have good visibility into one Q being at that level. When China comes back in that back half, what have thought that would accelerate growth? Can you just talk about, I guess, the cadence throughout the year, why the back half wouldn't be stronger?
Speaker 4: If China, right now, the way we was used, that it comes back to a normal growth rate in the second half of the year.
Speaker 4: You know, obviously, whether if it comes back faster or is more significant, you know, earlier than that, that would be upside to the model. You know, and also, if the stimulus continues to sort of, you know, show its impact earlier, then that might be upside. So I think we've just been prudent in our guidance.
Speaker 4: seeing what we have seen in the first month of the quarter when posed just before the spring festival. And it's been only a week since people have started coming back from the spring festival. So I think I would just say we are being cautious in our guidance.
Speaker 10: and continue to watch it closely. And then maybe on the margins, I certainly understand one key being a little lighter just given some of the continued off-species. Can you start about again, I guess, how we think about that throughout the year and then?
Speaker 10: Particularly near term, obviously not asking for 24, 25 guidance just yet, but it seems like as those stranded costs come out, I wouldn't see any reason why we wouldn't be kind of 100-difts plus in the near term, just naturally as those come out. Can you just talk about, I guess, how that progresses in terms of the model? Again, the exit rate should be a little bit higher than...
Speaker 10: I would think the near term years skew on the upside of some of those strand of cost come out, but it would be helpful just to get a sense for what those look like as we work our way through the model here.
Speaker 6: Yeah, hey Patrick. So the way I would think about it from a margin perspective in 2023 is if you go back to what we mentioned on the call, we are implying sort of a mid teens EPS growth year when you strip out COVID from both periods.
Speaker 6: implied in that mid-teens EPS growth is obviously the 9% organic growth and then we are expecting about 100 basis points of margin expansion year over year on a non-COVID basis. So we are already to see about maybe 40% of that comes through the gross margin expansion about 60% of that comes through operating expense leverage. So we feel good about the margin expansion we expect next year.
Speaker 2: Thank you. Our next question comes from Josh Waldman of Cleveland Research. Josh Shall I know if I'll open please go ahead.
Speaker 11: Good morning guys, thanks for taking my questions. A couple for you.
Speaker 11: First, wondered if you could provide an update on biologist and maybe what the business grew here in Q4. Curious that it was impacted by China lockdowns and thus maybe represents potential outside of the model and then just curious what you're assuming for that business within that 9% non-COVID guide for 23. Yeah. Josh showed.
Speaker 4: You know, overall, you know, our life sciences business are continued to grow very well, our reagents business, and it grew double digits for the year. We did not see any material change in the trend in 3Q or 4Q in our reagents business in China or any place else. You know, bioregiant and our overall life sciences reagent business continues to do very well, and we expected to continue to grow double digits.
Speaker 11: that these accounts are slowing spend anything leaving you more cautious on output.
Speaker 11: spend anything leaving you more cautious on outlook within the Zen Market.
Speaker 6: Yeah, I would say first from just a materiality standpoint, right? I mean, the biotech or smaller accounts, I think you're more referring to are only less than 5% of overall revenue. So even if we were to start to see some noise there, it's not overly material to the company. I think that's one piece of context I would say first.
Speaker 8: You know, second in terms of sort of the split between applied genomics versus the life science is business, we are seeing a little bit of a slowdown in applied genomics. As we mentioned in our prepared remarks, you know, we do think there's a little bit of saturation just from the amount of instruments that have been placed over the past three years. You know, that might continue a little bit here in Q1. Well, will you expect by the end of the year applied genomics?
Speaker 12: open please go ahead. Good morning, thanks for taking the question. So I guess if we could start on talking about the Informatics business, it's just been a bit since the last DA's deep dive. I think it was like 2020. So how do we think about the right growth trajectory for that business?
Speaker 8: given the 20% that you guys are going to encourage this year. Hey, Liza. So I take first, you know, we've been very pleased with the performance of our informatics business, not only really in 2022, but over the last couple of years, it's had about a, you know, a mid-teens cager. I would say that is sort of, you know, our normal, I would expect long-term growth rate.
Speaker 8: The only point I would call out with informatics is, you know, there are some, you know, timings overnuals, etc. so at times the growth rate can be lumpy, but I would say overall, we are, you know, very pleased with the performance. I don't think 20% is the go forward growth rate. I do expect that to come down a little bit here in 2023, but we are very happy with the performance of that business.
Speaker 12: Awesome. Thank you. And then I guess just talking a little bit into like the reproductive health, you know, I guess a little bit softer this quarter, but with the birth pressures, but you know, you did have the, you've highlighted the FDA marketing authorization for for skidness and how, how should we think about that and kind of if you could provide any qualitative kind of.
Speaker 4: update on Vanadis, that would be great. Yeah, Liza. So I think, you know, on reproductive health, on birth risk, continue to unfortunately have pressure in 2022.
Speaker 4: But I think as you pointed out, we continue to have new reagents going through approval. You know, while we got the approval, there are two new indications of this orders, as you know, that got approved by the rest panel, which I had in my prepared remarks, and PS2 and now GAMP. So our menu expansion opportunities continue to bolster.
Speaker 4: the reproductive health business. The thing is that as it gets approved by the rest panel and the FDA, states pick them up for adoption in their menu panel on a sequential basis. So, some of them might come into play in 2023, the first half, some in the second half. So, the states have the mandate based on their own
Speaker 4: own flexibility as to when they want to bring out. Vanitas continues to do well. And I think as we've said, it grew more than 75% commercially last year. And we continue to put in new installations. The value proposition that it brings to the table is gaining more and more traction with our customers now, more so in the US.
Speaker 5: athetic.
Speaker 2: Thank you. Our next question comes from Dan Arias from Speedful. Dan, your line is now open, please go ahead.
Speaker 10: Morning, guys. Thanks a bunch. Prahlad or Max, I hate to put too fine of a point on it, but the return to normalization for your immune in the second half of the year, is that to say getting there by year-end, or is that more like you think you improve through mid-year and you can get back to normalization at some point in 3Q or 4Q? I mean, I'm sure you're not interested in giving growth rates by quarter, but it would just be…
Speaker 10: helpful to get a sense for the shape of the curve sort of to Derek and Patrick's point. Just given that it does seem like that's the biggest swing factor here for growth in 2023.
Speaker 8: Yep, hey Dan. So the way I would think about it is when we look at the your own business in China and the ramp throughout the year, as we mentioned in the prepared remarks, your Q1 will be still a little bit of a headwind. We do expect it to be potentially even worse from a growth rate perspective than what we saw in Q4, which is approximately high single digits.
Speaker 8: And so as you think about the ramp over the course of next year, I would think of or this year, excuse me, I would think about it in the context of the two-year average stack should continue to get better each and every quarter So Q1 to Q4, and I think we've given all those, you know prior year comps in previous calls year throughout 2022
Speaker 8: And then I would expect sort of that the full year growth rate of that year immune business to be in the low double digits low teens which is sort of the historical growth rate We've seen from that business Yes, okay that is helpful And then maybe on margins and M&A you've been pretty upfront here about having this extra dry prouder that you think you can
Speaker 4: depends on the opportunity dance. So it's tough to give a specific response to the question because it depends. As I've said earlier, we continue to be very active. We continue to look at opportunities.
Speaker 4: that are in our sweet spot, which is more a founded entrepreneur on companies. Depends on what the opportunity is, is probably the best way to respond to the question. You know, to give you an example, if it's a breakthrough technology, if it's a breakthrough technology like a grandadish, you know, we would do it.
Speaker 10: But generally, if you look at the deals we have done, that should be a pretty good precursor of the deals we will do. Do you think that if the revenue trajectory were one that Vatat has right now, that would still be something you would be interested in?
Speaker 4: Yeah, depends on the technology. So that's why I said that. I believe the shortest answer would have been it depends.
Speaker 5: Okay, that's good. Yeah.
Speaker 2: Thank you. Our next question for today comes from Jack Meahan of Neffron Research. Jack your line is now open. Please go ahead.
Speaker 8: Thank you, good morning. One of the asks, so the 505 EPS guide for continuing ops is trying to bridge this to NUCO. Can you provide latest thoughts on potential for trap costs versus the cost that are going to get allocated to spin? And it's how close to this.
Speaker 6: 505 to what new coEPS will click. Yep, Jack the way I would think about it is the 505 guidance includes the impact of continuing off-saccounting headwinds that we're going to have in the first quarter, or really, you know, the first couple months until the divestiture closes. And then for the remainder of the year, yes, that, you know, condops accounting will more less-indistinct-will.
Speaker 6: And then one business question, within diagnostics, the applied genomics business.
Speaker 6: So understand the COVID headwind there, but I guess the non-COVID also down low single digit in the quarter. Can you just talk about what you're seeing, I guess, from like, you know, there's obviously been a lot of instruments placed throughout the pandemic. Do you think there could be some hangover to start 2023?
Speaker 6: Yes, I think I mentioned that earlier as well in one of the responses. I do probably anticipate that to continue here in the first quarter, but I think as we look over in the full year for applied genomics, we probably expect it to be slightly down from this year on a non-COVID basis. So in 2022, it was high-sync.
Speaker 9: tonight of Keybank. Poverty is now open. Please go ahead. Hiya, Prahlada. Is the, are the advances in spatial biology and faster flow cytometry? Is this accelerating? Do you think the market for biolegend or closed systems kind of keeping it where it's been? So, what's your opinion on?
Speaker 4: able to now deploy globally with the channels that we have access to that BioLegend didn't have.
Speaker 4: So I think the growth trajectory over the next foreseeable future just is in terms of providing the commercial footprint, the infrastructure, the capabilities and competencies of overall Perkin-Elmer, rather than one particular area of growth. And then last...
Speaker 4: and we will continue to add growth trajectories to our portfolio, given that we will have a robust balance sheet and we'll have an even more robust balance sheet post-the-diverstiture.
Speaker 2: Okay, thank you. Thank you. Our next question comes from Max Masuchi from Cohen. Max, your line is open. Please go ahead.
Speaker 2: Okay, thank you. Thank you. Our next question comes from Max Masuchi from Cohen. Max, your line is open. Please go ahead.
Speaker 9: Hi, thanks for taking the questions. First one, there's a jam of publication released last week. It was supporting broader use of rapid whole genome sequencing for infants, and which today I believe is included in around six state Medicaid policies in the US. So...
Speaker 9: It'd be great to hear just generally your latest outlook for new reimbursement wins for newborn screening in the US this year. If that's changed at all.
Speaker 4: Max, as you know very well today, you know, the way that newborn screening is done.
Speaker 4: that the state's pay for it, right? It's not reimbursed. It's sort of it's not a private insurance or an insurance reimbursement plate. And I think, you know, the way our view of this is, is that going forward
Speaker 4: Newborn screening will continue to be mandated by the states and by the Newborn screening law. In terms of rapid genome sequencing as you said for Newborns.
Speaker 4: that is going to be an area of interest for us and for others. There are certain regions where we are playing a role in it, but I think it will continue to be more esoteric and specialized for the foreseeable future. The cost.
Speaker 4: The turnaround and the speed and the scale and magnitude by which newborn screening is done by the state labs today is unmatched and it can continue to be so. That's great. Very helpful color. Final one for me.
Speaker 9: Nice to see the strong organic growth in the life sciences continuing operations. It would be great to hear some additional detail around the growth that you saw in the quarter for the legacy life sciences reagents business versus biologians and then sort of where we are in terms of.
Speaker 6: Realizing the operational syner gam between Bio Legend and the legacy part and reagent systemsyes, maybe I'll answer the first question on the growth rate and I' let for lot to talk about the syg're Max. So from again, from an overall reagent standpoint, in both the fourth quarter and the full year we've performed at a low double digit.
Speaker 6: I would say that was pretty consistent across all our reagent portfolios. There's not one shining star versus another. So I think we were pleased overall with our reagents growth across everything from BioLegends, SysBio, some of our legacy reagent product lines, etc. It was strong growth overall for everybody.
And just to add to that, Bioligen has a really strong dream and the leadership there has worked with the Puccino-Rima team in terms of identifying, exploring and now executing unsinurgistic opportunities.
And it's not just around commercial and operational, but also around technology and how do we continue to close the gap and the bridge between life sciences and diagnostics. So I think on all front, the teams are fighting on all cylinders there. Could not be more happy with that.
Great. Thanks for taking the questions.
Great. Thanks for taking the questions.
Thank you. Our next question comes from Dan Leonard from Credit Suisse. Dan, your line is now open. Please go ahead.
Great, thank you. Appreciate you taking COVID revenue out of your forecast, but curious.
Have your views changed at all on the non-COVID pull-through opportunity from instruments placed during COVID?
all on the non-COVID pull-through opportunity from instruments placed during COVID.
Joe, that's a great question. I would say not really. In the reason why I said that is, look, is we enter the sort of the fourth year of the pandemic.
You know, we now believe that customers have already largely transitioned sort of their underutilized You know, former COVID capacity to other areas. So we think we've already started to kind of see this pull through And it's kind of already occurred in it's in our base And we also think that's kind of why our applied genomics business has grown on a high-team keg or over the past three years Including high single digits this year and then you know over 50% in
2021. Understood. Max, my follow-up, I'm trying to better understand the EBIT margin bridge from the 32% plus in Q4 to the 30% guidance for 2023, both for Remain Co. I know there's some COVID revenue in Q4, but not overly material. So.
What are the other drivers of the walk down from that 32 to 30? Yep. Look, I'd say it is heavily, the walk down is predominantly COVID. The one thing I'll say about the COVID mix that we had in Q4 was a very favorable.
product mix. And so I know historically we've quoted that you know COVID incrementals are sort of above our company gross margin. I think in the fourth quarter it was an outside margin mix related to our COVID products. I think once you normalize that for the fourth quarter you're a little bit closer to sort of a 30% operating margin exit rate for continuing ops.
which then if you then factor in, you know, next year in the 100 basis points of margin improvement, you know, the mass sort of works out. But it was a significant pullout of COVID here from a margin perspective in the fourth quarter.
Okay, got it, that makes sense. Thank you. Thank you. Our next question comes from Matt Sykes of Golden Sachs. Matt, your line is now open. Please go ahead.
Thanks, good morning, thanks for my question. Maybe just to clarify, just following up on Dan's last question on margins, just if we focus on diagnostics, you did 28.7 in the fourth quarter and that was significantly lower COVID revenue than you've done in the past. So should we see that 28.7 just for diagnostics as being closer to the lower end, trapping, as we kind of look out to 23, understand that there's some...
Our life sciences business should be above the company average. Diagnostics will be slightly below. And then you'll have about two to three points of headwind just from our corporate expenses. So I think that's kind of how I would think about the markets for 2023. Got it. Thank you. And then just Max, post the debt paydowns going into 24. How are you thinking about sort of a target?
net leverage prior to any acquisitions. Like what's your comfortable range to be in sort of on an ongoing basis? Yeah, I think it's a great question. So we are definitely committed to remaining investment grade. And so I think that's what you'll see sort of reflected in our comfort from a leverage perspective. That's probably... we remind you that we values and touched thinking through. Alright?
And so for that, there's been a lot of discussion on China as it relates to the diagnostic sentence business. But you also flag some of those tailwinds related to the potential stimulus. So can you just give us some color on what's assumed within your guidance for China's stimulus tailwind? And then how do you think work in position to benefit from that? And then, you know, I'm signing. How long do you think that that stimulus benefit could play out for?
Yeah, Rachel good morning. You know, it's on the stimulus. It's been only a week since folks have come back from this spring festival.
So, you know, right now our assumption is that if any, you know, if we expect the stimulus to see strong growth or propelling strong growth, that will be upside to our current assumption. But I would say that we have just heard quite a bit of discussion around it. I think the actions on that will be something that we look forward to seeing.
is 9% on a two-year stack versus 13% in the prior year. So that will find more like a 5% organic growth in one queue, or kind of how should we think about that on that stack commentary? Thanks.
stack versus 13% in the prior year. So that will find more like a 5% organic growth in one queue or kind of how should we think about that on that stack commentary. Thanks.
Hey Rachel, I think that's exactly the right way to think about it. That average 9% stack in Q1 would imply something in the mid-single digit range for Q1.
Great, and then last, click one for me, just your up commentary. So you guys grew high, single digits, X, COVID. During 4.2, and Europe , what's your most encouraging? But can you just talk about how is conversations with customers evolve the past few weeks? And sounds like things have gotten better just from the energy crisis, you know, less severe winter than anyone was expecting. So what's your kind of outlook for Europe for the year as well? Thank you.
Yeah, I think for Europe what we've implied is that the growth rate for 2023 should be a little bit less than I think what we're saying from a company average standpoint. So something in the mid to high single digits is probably our assumption right now for Europe . And qualitatively Rachel, what you said is pretty much what's playing out. So.
Great to hear if that's it for me. Thank you guys.
Thank you. Our final question for today comes from VJ Kumar from Evercore, ISI. VJ, your line is now open. Please go ahead.
We can probably just wrap up now. Thank you everyone for your time and your questions this morning. We look forward to speaking with everyone again next quarter. Thank you. Thank you for joining today's school. You may now disconnect your lines.