Good morning. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Perkin Elmer second quarter 2022 earnings conference call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After our speaker's remarks, there will be a question and answer session. . Thank you. And I will now turn the conference over to Steve Willoughby, vice president of investor relations. Mr. Willoughby, you may begin your conference.

Thank you, Abby. And good morning, everyone. And welcome to Perkin Elmer's second quarter, 2022 earnings conference call. On the call with me today are Prahlad Singh, our president and chief executive officer and Jamie Mock, our senior vice president and chief financial officer. If you have not received a copy of our earnings press release or the 2 separate slide presentations we published this morning, you may find copies of them on the investor section of our website. Please note that this call is being webcast and will be archived on our website. Before we begin, I'd like to remind everyone of the safe harbor statements that we have outlined in our press releases issued earlier this morning and also those in our SEC filing. 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. 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, even if our estimates change. So you should not rely on any of today's forward looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non-GAAP measures during this call that are not reconciled to GAAP, we will provide reconciliations promptly. With that, I'd now like to turn it over to our president and chief executive officer, Prahlad Singh. Prahlad.

Thanks, Steve. And good morning, everyone. Clearly, we have a lot to cover today and I thank you for taking the time to adjust your schedules and join us to discuss our exciting news. Today marks one of the most significant developments in the 80-plus year history of Perkin Elmer. As you know, we have been executing a significant portfolio transformation over the last few years. Today, we've announced a pivotal agreement that accelerates this work and establishes us as a leading pure play, high growth, high margin, life sciences and diagnostics company with scale. in particular, we have reached a definitive agreement whereby we intend to divest our analytical food and enterprise service businesses to New Mountain Capital. We will become a company that has greater focus, less complexity, and extremely high recurring revenue mix, improved profitability and faster growth. At the same time with New Mountain Capital, the analytical and enterprise solutions business will receive increased focus and dedicated investment, which should accelerate its ability to reach its full potential. In addition to creating significant shareholder value, we believe this transaction will lead to superior service and outcomes for customers and increased opportunity for employees. More on this exciting transformation in a minute. As Jamie will touch on in more detail in the moment, we also announced earnings this morning. We had an outstanding quarter in Q2, which meaningfully exceeded our guidance on both the top and bottom line, despite various continuing macro pressures. This excellent operating and financial performance is a Testament to our employees resilience and the portfolio shift that we have been pursuing over the past few years. I'm also pleased to share with you that we are raising our full year revenue, organic growth and EPS guidance by a level above and beyond our…

Thanks, Prahlad and good morning everyone. While I won't go into detail on today's announcement as Prahlad covered it well, I do want to echo his sentiment that I think that this is a pivotal day in our company's history, and I'm excited to see both businesses blossom in the years to come. And thank you to our employees who have worked tirelessly to make the company what it is today and to make this transformation happen. As Prahlad mentioned, we had a fantastic quarter in Q2, despite continued adversities that in some cases where even a bit larger than we had anticipated a few months ago. I've said it before, but I think this really shows the power of how far we've come with our internal and external evolution over the past several years and how we can overcome unexpected challenges to a much better degree than the company may have in the past. During the second quarter, adjusted revenue of $1.23 billion was flat compared to last year. This included a 4% headwind from foreign exchange and a 10% contribution from recent acquisitions, which was in line with our guidance despite foreign exchange pressures. Organic revenue declined 5% year over year driven by a drop in total COVID revenues. On a non-COVID basis, our revenue increased 8% organically, which was above the 4 to 6% growth we were looking for coming into the quarter and with despite lockdown pressures persisting longer than we had previously expected. Our COVID revenues came in at $222 million, which was also above our $210 million guidance. The revenue upside in the quarter, along with solid adjusted operating margins of 32.7% help drive an adjusted earnings per share to $2.32, which was solidly ahead of our expectations. As we previously discussed, our capital…

. And we will take our first question from Dan Arias with Steve. Your line is open.

Congratulations on the transaction here. Jamie or Prahlad, appreciate the profile that you gave for 24 through 26. Maybe on the diagnostic side, are you able to give us some guideposts when it just comes to the underlying growth assumptions that you have for EuroImmun reproductive applied genomics? And then on the overall 10% organic goal, the slides have you at 10 plus in fiscal 23 for the new portfolio. So I'm just curious whether we should think about 10% being sort of the base jumping-off point for next year and then acceleration from there into that 24 through 26 period as you sort of layer in the investment, trying to just sort of understand the trajectory that you see as you enter this new phase of yours here.

Sure, Dan. There are two ways to look at it. One, as you've seen EuroImmun, they're historically grown in the low double digits, and they've pretty much beaten the deal model since we've acquired that. We do not see that stopping in the future. Obviously, because of the COVID situation in China, it has had some issues in the current quarter, but overall that growth trajectory, if you take China out, that continues to be there. So similarly, just as diagnostics has grown, it will continue to grow in the high single digits. And overall for the new company, you should expect this to be growing double digits in the future.

Okay. Appreciate that color. And then maybe just on the deploying of the capital that you expect with the proceeds, I mean, you guys have been pretty aggressive over the last couple of years, just in terms of transforming this portfolio. How quickly should we think about you being in the market for interesting assets that come into focus, just given the new prioritization here? Does the business need time to settle, so to speak, or do you think the 23 is a year where you could kind of keep your foot on the gas when it just comes to transforming the way that the business looks?

I think the way I would answer that question, Dan, is just go back and look at our past 2, 3 years M&A track record. We've done more than 10 deals over the last 24 months and that should be a proof point of what our strategies around M&A and it'll continue now. Again, just to remind and as you very well know, the kinds of deals that we do are very focused and very strategic, which tend to be founder owned company. So I think that's where our continued focus will be. And in our base plan, you should expect us to continue to be acquisitive. But more importantly, Dan, I think what this does, it gives us an opportunity to deploy capital and makes our balance sheet much more robust to do that.

We will move on to our next question from Derik De Bruin with Bank of America.

A couple of points. So I guess what's the implied EBITDA margin in the RemainCo?

EBITDA margin, yes you can see on the slide. Greater than 30% and our EBITDA normally tracks about 2% to 3% higher than that, Derik. So the reason why we put out 30% is for your modeling purposes. So let's just back up for a second here. This is a complex car valve. It's not a standalone business. There's a lot of allocated costs. That's why we said the business that is being divested is in the low to mid teens from an EBITDA perspective. And we want to at least give people some kind of modeling range here for 2023, which is why we said 30% plus. I think long term, this can be in the mid thirties for sure. We got to figure out the stranded costs that are in there, but in terms of whatever your modeling rate is, from our profit rate perspective, I would add probably 3% to that for EBITDA.

Great. That's what I was looking for. And just on the current quarter, what was the overall headwind on China that you saw in 2 Q and sort of like what's the embedded headwind since the lockdowns were lasting longer in the 22 guide?

Let me say it a couple ways here. So China in total I said was down high single digits. If we exclude the impact on the immunodiagnostics in China, China was actually up low teens or 13%, at an overall company level that had a 3 point organic impact to us. So Ex China IDX, we would've been up 11%, which I think speaks to the strength of the company. And as I mentioned in my prepared remarks, diagnostics would've been 7% excluding China. I think it is different than what we talked about last time on the call. I think while the economy's starting to emerge a little day in and day out, life is not the same and that is having and will continue to have an impact in the second half as we alluded to and as you just asked. And so therefore, we've been more conservative in the second half. So overall I think diagnostics, which was 0% for the quarter organically on a non-COVID basis is probably in the low single digits in the second half. So we've expected a tiny bit of improvement on China, but not very much. I think this will persist all the way through the second half is our running assumption. But from a big picture perspective, even with that said, we are raising the second half organic growth in our implied guidance by probably 1% to 2% to get to an overall 8% to 9% for the year. So I think it speaks to the portfolio. I think it speaks to the strength of what we've done. I think it speaks to the strength of the teams and how they're executing. So even with China being down in immunodiagnostics, which we think is temporary, the company's raising the overall guidance both in the year and in the second half. And we're long term, very confident that our China immunodiagnostics business is a terrific asset. And when COVID subsides and things reemerge, it'll be just fine.

And are you embedding anything into the guide for potential recessionary headwinds and purchasing delays? Have you seen anything to suggest that your customers have had some hesitation in buying particularly on the DAS side of the business?

We haven't seen any of that, Derik. I think the demand continues to be very strong. Our backlog is as healthy as ever. We are, on a quarter over quarter sequential basis, taking it back down to kind of what we think is a more normal run rate. So in the third quarter, we're obviously guiding 6% to 8% versus 8%. And so life sciences, which was mid-teens, we're taking down to low double digits just because that's why we think the long term outlook for that business is. For applied markets, we said we were low double digits in the second quarter. We're going to take that to high single digits because I just don't think that we can continue to bank on low double digits, but we haven't seen anything to state the opposite. And so therefore, we haven't seen any recessionary pressures. We're not really embedding any recessionary pressures. I think sequentially, that's what we're guiding to is a little bit more conservatism versus our 2Q run rate. But hopefully, that proves conservative at the end of the day.

And also as we look at the future, the new company allows us to avoid some of this macro uncertainty.

And we'll take our next question from Vijay Kumar with Evercore ISI.

And congratulations on the transactions here. Had 2 margin related questions. Jamie, maybe, the first one for you. The EPS bid in the quarter was very healthy. Gas margins came in well above and I look at the guidance. Revenues, maybe up 50 basis points at the midpoint, EPS up almost 8%. Your COVID revenues really didn't change a whole lot. Below the line seems fairly consistent. I'm wondering what the Delta is. Did anything change on the accounting front here that would explain the magnitude of the EPS raise?

No, I think if I understand your walk Vijay. A lot of moving pieces here. So I think you covered most of them. Foreign exchange is a little worse, but it doesn't really hurt us too much at the end of the day because we're pretty well hedged in Europe, operationally. Obviously, COVID was a little bit better, but I think the big thing that is different here, Vijay is we are much more confident in the profitability on the second half. And I think that was a question coming out of the last discussion that we had. We were probably conservative in what we put in from an inflation and freight and when we think pricing would kick in. But we're raising the profitability both in the second half and obviously with the 30-ish cent beat in the second quarter that proved very healthy. Some of that was California, but being a little bit better than what we thought, but a lot of that was great. The team is doing a fantastic job, mitigating cost actions, particularly on the freight side, but also on the inflation side. I think we've seen both stabilize and our productivity measures kick into place. And while we knew it was coming on from a pricing standpoint, we finally started to incur some of that price increase that we saw on the second quarter. And we think that will continue to snowball here as we get into the second half. So I think it's really just that maybe what you're missing there is just an increase in the rate profitability in the second half as well, if I understood your question correctly.

And just sorry to clarify that, Jamie. There was no- I guess the question I got was how is the legacy divested assets being treated from an accounting perspective? Is this being held for sale accounting?

Oh yes, nothing, no. Nothing is going into discuss as the deal was closed early this morning. So that doesn't impact any of the results that you're seeing nor our guidance for the rest of the year, because we are still operating as a standalone company. Now, come when we close the third quarter, we will have discontinued operations accounting, and therefore reporting. But that said, we're trying to give you a picture of what the consolidated company would look like for the remainder of the year.

Understood that's helpful. And Prahlad, one for you. I think the prior operating margin target of 26%, I think the deck had 30% operating margins. If I assume the base LSDX at 30% for fiscal 23, just one, is that 30% for 23 or 24? And then if I assume double rate margins for the divested business, I'm getting to something like 25%. So is that prior 26% target still relevant or perhaps that's changed given some of the strand costs here?

Let me answer the first part and maybe Jamie can take the second path. So the 30% plus operating margin that we are talking about is off the bat in 23. So that's not a 24 number, Vijay, that's a 23 number. In fact, if you look also on the top line of this company, even including COVID, if you look at the top line, this business has already grown 8% over the last 3 years and it continues to split operating margins in that range. So off the bat, we expect this to be a 10% growth and a 30% operating margin business at close.

And 30% next year, it's, as Prahlad mentioned, 2023 number. And Vijay, we wanted to get some modeling guide out there and yes, it does have stranded costs. And as I mentioned in my earlier remarks, it's difficult to ascertain what that total amount is yet. We feel very comfortable with at least 30%, it's not really coming off the overall 26% that you're talking about, but it is a different size company and there will be stranded costs that we will have to work through both in 2023, probably a little bit less in 2024 and by 2025, I would assume we're back to normal, but absent that, the 26% is still fully in intact here.

And we'll take our next question from Catherine Schulte with Baird.

I guess first for the new life sciences segment. Can you just talk through the end market mix post divestiture? And then maybe give us an update on BioLegend performance in the quarter?

Yes, maybe I talk about the end market mix. So our life sciences business is in general, I think maybe 80% to 85% pharma biotech, 15% academic government, something like that. I'll check it, but that's roughly, probably right. And then as you break down the full business, both end markets, we said we were 60-40, large molecule, small molecule. So that kind of gives you a little bit about the end market mix, Catherine. In terms of BioLegend, which is the second part of your question, they had a fantastic quarter. Overall M&A contribution as a total company came in line exactly where we thought it would be at 10% overall contribution. BioLegend and the teams continue to integrate well, they're growing double digits, and everything seems to be going very well. I don't know what more I would say. Anything else you've got?

The trends, Catherine, for these businesses- the bigger question really what we were looking for, to the Derik's earlier question, it is not a cyclical business from a research, discovery, and preclinical perspective. It allows us to largely avoid the macro uncertainty and given our focus typically on large pharma and biotech, it insulates the business from those uncertainties.

Okay. Got it. Maybe for your kind of prior 2023 outlook, you talked about $7 plus of EPS. Where does that stand now in terms of NewCo?

Well, let me talk about it as overall framework first, and then we can talk about NewCo. So in general, we feel as positive about how the company is operating as we ever have. So as you know, Catherine, we said we'd hit high single digit organic growth next year, absent some large economic condition change that we still feel excellent about that. We said 26%, which is what I talked about on Vijay's, operating margin, that is, which is what I answered with Vijay. We still feel great about that. I'd say the only wild card is foreign exchange and it has been severe. So maybe that has a minor impact on the overall year. But overall I think the way the team is operating is terrific, and we wouldn't change any of that guidance overall. In terms of RemainCo that's maybe, I'm wanting to make sure I understand the question. So what we're really trying to put out some markers here that says, hey, look, RemainCo should be growing 10% plus, and this year, let's say RemainCo is $3.3 billion we put on the chart, you know, take out $600 million of COVID revenue, grow that 10%, then add a $100 million dollars back for COVID durability. That should give you some modeling numbers here. Feel great that at a minimum, including a lot of stranded cost, that we should be at least 30% operating profit. And so we feel great about that financial profile and over the next 2 years is that stranded cost comes out. We see no reason why this business shouldn't be in the mid thirties from an operating profit perspective. It'll take a couple years to work through that, but I think it has a terrific financial profile ahead of it.

We'll take our next question from Josh Waldman with Cleveland Research.

First, just to clarifying question on the divestiture. Are you selling the entire analytical instrument business, including, for example, like LCMS that touches life science and DX?

Yes, we are. Now, we'll have a TSA backed with New Mountain Capital to be able to get those- to be able to purchase those instruments and use in our life sciences and diagnostics business, but they will own the capabilities related to LCMS.

Got it. And then a follow-up on Dan's question, I guess. Where do you think that divestiture leaves gaps in the portfolio that you'll target within organic investments? Or I guess, asked another way, where do you think the most opportunity from an M&A standpoint exists within the new company?

Josh, that would be not dissimilar to what we've talked about. What this gives us now is an opportunity to continue to build on the scale that we have on the life sciences and diagnostic side. So you should expect us to continue to be in the fairway that we have played in over the last, I would say, 24 months, look at opportunities in cell and gene therapy and continue to build up portfolio both in the life sciences and diagnostic side.

Okay. And then lastly on, I guess, existing deals that you've done. Can you talk to the performance on recent deals? I know you reiterated the 7% M&A impact, but curious how other recent acquisitions that are now in the organic comp are performing versus expectations, then maybe how those acquisitions are contributing to the organic outlook and margin outlook for 22 and 23?

Yes. Again, Josh, as Jamie pointed out earlier, we continue to see strong performance from all our inorganic acquisitions that have been done recently, including BioLegend, which is now, as you know, we talked about earlier, it's part of our total life sciences reagents growth story, which is in low double digits overall. And it's a piece of our broader portfolio. So overall all our acquisitions are doing well, including BioLegend and we had 10% M&A contribution, which was in line with guidance despite the FX headwind that we saw in the quarter.

I would just add, I think on a pro forma basis, Josh, this entire year, the basket of acquisitions you're talking about would grow mid teens, which is terrific and in line with what we're talking about here. So as you look to 2023, obviously that does help with the stepup in the RemainCo company here, the life sciences and diagnostics company moving forward since all of these assets are in there. That's why they are a major contributor to this business with us having confidence that they can grow with over 10% here.

And we'll take our next question from Liza Garcia with UBS.

Congratulations on the transaction. I'm not sure if I caught it, but just wondering if you guys could maybe touch on- I know it's kind of a little bit less for you guys, but pricing and kind of what you saw and your expectations kind of for the balance of the year for you guys.

Yes, sure. Thanks Liza. I couldn't be more proud of the team for what they've done on pricing. I think we talked about this in the past, a lot of effort went in to really build this muscle in a much stronger way for our company. It took a little while to get through some of the backlog. We saw it in our backlog in the first quarter, although we didn't recognize a ton of price. We started to really see it come through here, particularly in the, I'd say, last month and a half of the second quarter, which is part of the EPS beat in the second quarter. We see it continued in our future backlog here. So that price impact and contribution to our company to continue to increase both in the third quarter and again, in the fourth quarter. And I think more importantly, the lasting impact and our focus on price, I think, has gotten much stronger and I think it'll bode well for the years to come.

Great. And if you could just touch a little bit on kind of what you're seeing in supply chain as well. I know obviously it kind of hasn't impacted you guys, but if you're seeing any changes there and kind of your expectations through the year on that, that would be great as well.

I would say in general, things have stabilized if not gotten a touch better. And when you combine that with the actions our teams are taking, that's what's really driven our confidence in the increased profitability versus our prior guide, both in the second quarter, obviously, but more importantly, we've taken up the second half from a profitability standpoint as well. So we continue to buy advanced purchases of inventory and you can see a little bit of usage on our balance sheet for that. And freight in general, we're not having any shipping delays or anything and we have had that in prior quarters. So I would say it's gotten better and you combine that with the actions the teams are taking. And I think the outlook looks promising here.

And we will take our next question from Jack Meehan with Nepron Research.

Wanted to ask on the transaction, just as you were thinking about the businesses that you were divesting, enterprise services specifically, just given there was overlap in the customer base with biopharma services. I guess just the thought between divesting that versus holding onto it would be helpful.

Yes, Jack, I mean it's a good question. From our perspective, when we look at where we are today, this is probably the best path for most value creation for both companies. We see some overlap on the enterprise side, as you said, but there is not much overlap from product that goes from life sciences or a diagnostics business through one source or through that channel. That, as you know, is mostly service focused. But what it does now is it allows us to singularly put more focus around the market trends in life sciences and diagnostics. And honestly it gives a lot of simplicity and reduces the complexity, both for our employees and investors in how they look at the company.

I would just add that there is a lot of synergy between our enterprise services business named One Source plus our core services business that is being sold in conjunction with our analytical technologies business. So it did make sense to pair those together.

Great. And then two clarifications for Jamie. Just first, what's your updated target for BioLegend in 2022? And then can you break down the $222 million of COVID sales between the service lab and everything else? That would be helpful.

Yes. BioLegend is doing very well. We're very pleased, but I don't think we're going to give single point estimates anymore. I think we want people focused on the fact that this is a $700 million life sciences reagent portfolio. Certainly, BioLegend is half that. So we're excited about the promise of that combined collective capabilities. So I think we're going to come off giving, you know, here's an exact dollar for BioLegend. In terms of the second part of your question, Jack, the $222 million, I think, labs was maybe $150 million to $160 million of that and the remaining- everything else I mentioned in my prepared remarks in terms of everything else that we sell is probably $75-ish or $70 million.

And we'll take our final question from Paul Knight with KeyBanc.

Prahlad, you mentioned taking a conservative view on China rest of year. What are you seeing in terms of shutdowns? They seem to have been getting better, but if you could kind of give us update on things and your outlook in that market.

Thanks, Paul. I think the way to think of it, as Jamie mentioned earlier and during the Q and A session, things are improving, but it's not really totally back to, I would say, a hundred percent normal. So we've started seeing people coming out, going to see their physicians, going to hospitals for testing. The newborn screening side has come back. I would say that's the piece that has come back. It's more around the autoimmune and allergy. There are still some sporadic shutdowns that you see. And even where things have opened up, people are still hesitant to go to physicians or to hospital for those testings. And I think that'll gradually come back over the next several weeks or months.

Okay. And then COVID, you were guiding to what in 3 Q?

$50 million in the third quarter. And then we get to our kind of normal, we've always said $100 million COVID durable revenue. So the implied 4 Q guidance is about $25 million.

And ladies and gentlemen, this concludes our question and answer session today. At this time, I will turn the call back over to Mr. Steve Willoughby for any additional or closing remarks.

Thank you, Abby. And thank you everyone this morning on short notice. We appreciate your questions. We look forward to speaking with you all again next quarter. Have a good day.

And ladies and gentlemen, this concludes today's conference call. We thank you for your participation and you may now disconnect.