PerkinElmer, Inc.

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. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again. 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 two 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 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, 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, an 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 a 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 outperformance here in the second quarter. While various pressures will likely always exist, the increase to our guidance highlights our confidence in our business and our ability to execute in the face of unanticipated challenges. Now, looking at slide two of the transaction-related slide deck, with this agreement, we intend to divest our analytical food and enterprise services businesses, including one source to New Mountain Capital for a total consideration of $2.45 billion. This includes $2.3 billion in cash upon closing and $150 million of future contingent consideration. We expect to receive approximately $1.9 billion of net after-tax proceeds when the deal closes in Q1 of 2023. This transaction will result in the remaining life sciences and diagnostics business having a unique financial profile that is high growth, high margin, is less cyclical, all while retaining significant scale. It also further increases our flexibility and allows us to solely focus on these attractive end markets. The new business that will be owned by New Mountain Capital will consist of almost 6,000 current employees and is expected to generate approximately 1.3 billion in revenue this year. I'm confident that a focused vision and growth plan will enable this business to flourish in the years to come by building upon its existing competitive advantages and reestablishing leadership positions in some. As part of this transaction, we intend to transfer the PerkinElmer brand name logo, and other marketing elements to the new owner, which we expect will be an important asset given the long history and strong reputation in these markets in particular. Prior to closing, which we expect to occur in the first quarter of 2023, we expect to introduce a new brand name and stock ticker for the life sciences and diagnostics business. Until closing, both businesses will continue to operate as they currently do under the Perkin-Elmer name, and the existing enterprise will continue to trade under the PKI trigger. Now moving to the life sciences and diagnostics business on slide three, which our existing senior management team and myself will continue to lead. I could not be more excited not only for how we have gotten here, but also for the significant potential of what we expect to achieve. Upon the closing of this transaction, we will become a leading-edge, science-first company fixated on driving new innovations for our customers. From a best-in-class preclinical discovery franchise with significant breadth and expertise, crossing over to our leading diagnostic franchises that are developing next generation innovations to help diagnose the world's still unmet medical needs. As you see on slide three, it has been quite the evolution of our portfolio over just the last four years. Through intentional internal investments and strategic value creating acquisitions including our BioLegend acquisition last year. We took important steps to shift the profile of the company over just the last three years. The company has gone from generating only 60% of its revenue from our target markets to upon the closing of the sale of our applied food and enterprise services businesses, having a portfolio that is singularly focused on these highly attractive, less cyclical end markets with outstanding margins and a highly recurring revenue mix. We expect an approximately 500 basis point uplift in gross margins once this transaction is complete, putting us over the 60 percent range going forward. This transformation redefines the financial profile of the company and results in even greater opportunities for investment that will meaningfully improve how we serve our customers and bring new innovations to the market. We expect the focus we achieve as a pure play will allow for even greater strategic operational decision making and a unified commercial approach to deliver for our customers even better than we already are doing. Additionally, we will be able to align our internal and external investment priorities more closely to further capitalize on the strong market growth potential that we expect in the years to come. We couldn't be more excited about the potential of this new, more efficient structure and the impact it will have on our ability to innovate and execute to an even stronger degree than we already are doing. So now moving to slide four. As you see here, the new life sciences and diagnostics company will have its revenue fairly evenly split between the two segments, with each having significant addressable markets. It will also be balanced and diverse across geographies, with approximately 45 percent of non-COVID revenues coming in the Americas, 25% coming from greater Europe, and approximately 30% coming from Asia, of which approximately 18% is in China. As we've been increasingly highlighting to you over the past two years, our life sciences franchise is acutely focused on preclinical research and discovery solutions, which help our customers develop new scientific breakthroughs. This business has grown significantly over the last several years, both through low double-digit organic growth on average over the last three years and via meaningful inorganic additions. Today, we are able to offer both our small molecule and increasingly our large molecule-focused customers more complete preclinical discovery workflows. which we are rapidly building upon as we continue to bring new innovations to the market. Our diagnostics franchise has also undergone a significant transformation over the last few years and has now nearly tripled in size as compared to 2015 on a non-COVID basis. Diagnostics is focused on delivering highly sensitive, easy-to-use assays that target specific disease states where we have a strong competitive position in markets with favorable underlying demand trends. A diagnostics business now has the size and capabilities to act as a platform to propel future additions we may add over time, allowing them to perform at an even higher level than what they are able to do on their own. Two recent examples of this are our entry into the latent tuberculosis market and are beginning to offer a broad menu of chemiluminescence assays and related analyzers put simply a more focused new company is built to help close the chasm between research and the clinic all the way through to diagnosis and treatment now moving to slide five Let me provide a few additional specifics about what a life science business is, what we are focused on today, and at a high level, where we see it going in the future. Today, life sciences is a greater than $1.3 billion franchise, growing in the low double digits organically. Approximately 80% of this business is recurring in nature, with the remainder being instrumentation. I'd note the $0.4 billion of instrumentation revenue shown on the slide does include related service revenue. This cohesive business segment is focused on rapidly introducing new innovations that are intended to help our customers expedite their own preclinical development and scientific discovery. Our leadership positions in reagents, consumables, instruments, and software provide complete workflow solutions which enables our customers to make informed decisions more quickly by replicating a clinical experience in a preclinical setting. This ultimately helps lower their R&D costs by shortening development times and driving higher success rates downstream. We do this with market-leading positions across our entire life sciences business, such as preclinical imaging and detection, cellular analysis, biomarker kits, single-cell and flow cytometry reagents, and cloud-based lab informatics. We bring this broad and rapidly expanding consumable portfolio together with our market-leading instrumentation to help drive discovery across the spectrum of science with a strong focus in the areas of cell and gene therapy and single cell analysis in particular. This business is at the forefront of new scientific discoveries that can have a profound impact on the medicines and therapies that are ultimately brought to market, which can help treat and save lives around the world. Moving to slide six, our diagnostics portfolio is comprised of leading franchises in specific markets that we believe have outsized growth potential, where we can have strong and durable competitive positions and drive an expected overall high single-digit growth rate going forward. As mentioned earlier, this business has expanded significantly over the past few years. going from being singularly focused on reproductive health to one that now spans a number of important clinical diagnostic categories with number one or two market positions in areas such as autoimmune diseases, latent tuberculosis, allergy, and a variety of infectious diseases. We also now have a much stronger position in next generation sequencing sample prep instruments and related consumables in our applied genomics business. Our applied genomics franchise has seen its installed base of equipment increase materially over the last two years during the period. With our new streamlined structure and increased focus within the company, combined with our stronger market positioning over the last few years, Applied Genomics is well positioned to bridge our life sciences and clinical diagnostics franchises to help drive new innovation and growth across the company, including the support of select areas in the clinical development of therapeutics. As you can see, our immunodiagnostics franchise represents the largest piece of our overall diagnostics business, with an estimated $1.1 billion in revenue this year, with our reproductive health businesses representing roughly half a billion in annual revenue, and our applied genomics business expected to be around 400 million in revenue this year, which is up significantly from before the pandemic. And now on slide seven, our transformed company will have tremendous benefits for all our stakeholders. For our customers, It will mean that we can now better and more quickly respond to their unmet needs by using our scale to drive scientific collaboration across our organization, leading to novel solutions and offerings. We will have the flexibility to respond to our customers in the most efficient manner possible, working side by side with them to develop new scientific breakthroughs in drug discovery, translational medicine, and disease detection. For the employees, the transformation will result in increased managerial focus that is properly aligned to drive growth and achieve our respective goals. We will also be able to deploy our internal and external investments in a more focused way. By doing so, the even stronger financial profile of the new life sciences and diagnostics business will lead to new opportunities for internal collaboration, new growth accelerators, and a greater ability to develop our people. I think this combination sets up the future for our employees extremely well and will further enhance our ability to attract and retain excellent talent. Now moving to slide eight. The company we create as a result of this transaction is well positioned to deliver outstanding, sustainable value creation for shareholders. It will have a meaningfully improved financial profile that is just extraordinary. In addition to higher top line growth and a highly recurring revenue mix, we will have gross margins that are expected to be up approximately 500 basis points from previous levels, leading to best-in-class operating margins with the ability to expand operating margins in the future at an even faster rate than we have been projecting historically. We will also be a standout company as a result of our scale. to have as attractive of a financial profile as we will have with more than $3 billion of annual revenue makes for a combination that is extremely rare, having both significant size and high performance. We expect to be able to grow EPS in the low to mid teens and have additional upside from our track record of successful capital deployment. This transformation into a pure-play life sciences and diagnostics company takes us into a whole new spectrum from a financial perspective. Additionally, with the 1.9 billion of net proceeds we will receive and our recent aggressive deleveraging, it makes our already well-managed balance sheet that much more robust. providing us the ability to continue to rapidly invest in our areas of focus, and positions us well to begin appropriately deploying capital meaningfully sooner than we had previously anticipated. Turning to slide nine, let's talk about the valuation of the remaining life sciences and diagnostics portfolio. Following the transaction, our company will have a compelling revenue growth rate in the double digits, largely in line with our new higher value peers. We'll have stronger margins and differentiated scale with total revenues that well exceed the average of our peers. We currently trade at a one-turn discount to the core tools peer group, despite a similar financial profile. Post-close, we will have a best-in-class financial profile that deserves the higher multiple to reflect it. Moving to slide 10. Overall, I believe this transformation will have tremendous benefits for our new standalone businesses, our shareholders, our people, and our customers. Upon closing, we will become a company focused on serving extremely attractive markets with a first-class financial outlook for our customers. The output of today's announcement is the culmination of all the effort, determination, and excellence that all our employees have shown over the past several years, and I could not be more excited for everyone involved. Finally, I'm pleased to welcome Dr. Michelle McMurray-Heath to our Board of Directors. A medical doctor and molecular immunologist by training, Michelle's experience and expertise across a broad spectrum of public and private roles, including currently leading BIO, the world's largest biotech association, will bring a very unique perspective to our company, which will be invaluable as we enter this next stage in our corporate journey. With that, I will now turn the call over to Jamie to walk you through our current financial performance in more detail and provide specifics as it relates to our outlook and updated guidance. Jamie?