Hello, and welcome to the Q1 2024 Revvity Earnings Conference Call. My name is Carla, and I will be coordinating your call today. .

[Operator Instructions].

I will now hand you over to your host, Stephen Willoughby to begin. Steve, please go ahead. .

Thank you, operator. Good morning, everyone, and welcome to Revvity's First Quarter 2024 Earnings Conference Call. On the call with me today are Prahlad Singh, our President and Chief Executive Officer; and Max Krakowiak, our Senior Vice President and Chief Financial Officer.

I'd like to remind you of our safe harbor statements outlined in our press release 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 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 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 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. .

I'll now turn it over to our President and Chief Executive Officer, Prahlad Singh.

Prahlad?.

Thanks, Steve, and good morning, everyone. Following the company's transformation over the last several years, today marks the fourth quarter that we have reported our results as Revvity. And in 2 weeks, I look forward to celebrating with my colleagues, the 1-year anniversary of our new company unveiling.

I'm proud to look back on all that we have accomplished in such a short period of time, and I'm excited to continue to build on the great progress we have been making towards reaching our ultimate potential. .

We were extremely active during the first few months of the year as the team hit the ground running on a number of key initiatives, on which I thought I would provide some more insight this morning.

First, from a market perspective, while we have begun to have more constructive conversations with our pharma and biotech customers over the last 45 to 60 days, their actual spending has not yet begun to meaningfully pick back up. .

So while it is promising to see continued stability, and there are a couple of potential trends on the horizon, which could turn into tailwinds, given we have yet to see a meaningful inflection in actual order trends, we are currently maintaining our outlook for the remainder of the year. .

Revvity's uniqueness was on display through -- in the first quarter as our Diagnostic businesses have continued to remain strong and performed well. Our Immunodiagnostics franchise, which is by far the largest piece of our Diagnostics segment driving the low double digits in the quarter. .

Our newborn Screening business also continued to perform well with mid-single-digit growth overall, including double-digit growth outside of China. This helped to offset the significant declines that occurred as we had anticipated in our Applied Genomics business. .

The combination of these market environments led our performance overall to be better than we had anticipated with our organic revenue declining 3% ahead of our mid-single-digit decline expectation.

Given the trends we experienced over the last few months of 2023, which continued into this year, we entered 2024, accelerating our efforts to eliminate stranded costs from our recent transformation and offset the return of variable expenses, which were reduced last year. .

These cost containment efforts continued through the first quarter and will help us further optimize the organization moving forward.

Our newly formed enterprise operations team is making good progress on leading a number of initiatives to further streamline our business in the near term, while also setting us up to capitalize on more significant internal opportunities over the coming years, such as footprint consolidation, logistics optimization, vendor consolidation, and several very intriguing insourcing opportunities.

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Secondly, as part of this concerted effort to reach our full potential as quickly as possible, earlier this month, we realigned the management of a few of our business units. As part of these changes, I'm pleased to announce that Gene Lay, the founder of BioLegend, has now become the head of our overall Life Sciences segment.

As we have mentioned in the past, we have intentionally taken a more flexible approach to the integration of our acquisitions in order to benefit from the strengths and the opportunities each of them uniquely provides. .

With this change, we have cemented the reverse integration process we have been working through in our Life Sciences business since we acquired BioLegend 2 years ago.

This change in leadership is part of a broader streamlining of my direct organization and builds on the recently completed successful integrations of several acquisitions, including IDS, Oxford Immunotec and eXcelon. .

With these changes, we are now poised for tremendous internal collaboration and the company will be in an even stronger position to drive key initiatives going forward, including aggressively bringing new innovations to market, capitalizing on new go-to-market opportunities, making consistent progress on our key areas of operational focus, and advantageously deploying capital both internally and externally.

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For example, these organizational changes are intended to build an even stronger connection between our Life Sciences, Revvity Omics and Diagnostics businesses. I look forward to continuing the invaluable partnership Gene and I already have built as well as seeing the further progress that I expect will come from this evolution. .

From a financial standpoint, our strong focus on expense management during this current period of softer market conditions led our adjusted operating margins in the first quarter to be 25.5%, which is approximately 100 basis points above our expectations.

We are making good progress in a number of areas, and I expect our margins in both our Diagnostics and Life Sciences segments will continue to improve over the remainder of the year. .

The improvement in our Diagnostics margins will be a key factor in the years to come as we look to achieve our 75 basis points of annual margin expansion once organic revenue growth normalizes.

Despite already having near industry-leading operating margins for the company overall, in just our first year as Revvity, it has been great to see the successful impact our actions over the last few quarters are already having.

I'm confident in our ability to drive additional margin improvement over both the remainder of this year and in the years to come. .

Now that the majority of our divestiture and rebranding activities are behind us, I was also very pleased to see that our cash generation performance was again quite strong in the first quarter of the year. During the first quarter, we generated over $130 million of free cash flow for the second quarter in a row. .

While the first quarter of the year is typically the lightest from a cash flow generation standpoint, it was great to see such strong performance this quarter.

This is a testament to the keen attention being paid by the team on all things that impact our cash flow, such as purchasing and inventory, improving collections, strong management of our payables and an otherwise tight focus on our spending.

We expect these positive cash flow trends to continue over the remainder of the year and be supplemented by additional meaningful inflows related to the divestiture that are due to us in the coming months. .

In addition to our better-than-expected financial performance in the first quarter, we also had an extremely robust first few months from an innovation perspective.

Starting in our Revvity Signals Software business, we launched 3 new SaaS-based offerings, two of which, Signals Clinical and Signal Synergy, enter us into new adjacent markets for which we have not previously served.

Our Signals business is off to a strong start this year by growing a better-than-expected high-single digits in the first quarter, and is well positioned to continue to perform well, both from a financial standpoint and an innovation standpoint over the remainder of the year. .

Also software-related, we launched our next-generation sequencing solution for newborn screening during the first quarter. This new optimized RUO workflow will build on our already strong market leadership position in newborn screening as the technology continues to develop. .

One initial success story of this offering is our recently announced collaboration with a large nonprofit research institute, RTI, thereby their groundbreaking early check research study for newborn screening will benefit from Revvity's genomic sequencing capabilities starting in May.

These are the types of cutting-edge collaborations with the world's leading scientists that Revvity excels at. .

Finally, we again had a strong quarter of innovation in our Life Sciences Reagents business. As our GMP reagent capacity expansion begins to fully come online, we launched a number of new GLP recombinant proteins in addition to several products incorporating our new next-generation UV dies. .

I'm also proud to announce that our BioLegend business was awarded several grants from the Michael J. Fox Foundation to become one of their main partners in helping to commercialize the profound scientific breakthroughs from Parkinson's disease that their impactful work is producing. .

So in closing, now that we are almost at 1 year since becoming Revvity, and having already crossed over the first anniversary of completing a significant divestiture, with those time-consuming activities now largely behind us, I see every day how the company is beginning to hit its stride.

We are making more profound advancement in our operating structure and our go-to-market strategy, which will both enable us to properly weather the current industry environment as well as set us up to accelerate our financial performance as more normalized demand returns, hopefully, starting in the second half of this year. .

I wanted to share that we plan to provide additional insight on our significant potential and the progress we are making at an Investor Day, we will host this November both in-person and virtually from our BioLegend campus in San Diego.

We look forward to being able to provide an even deeper dive on our key operational initiatives and the status of the transformation that has already occurred. .

We also plan to share more perspective on our new product pipelines and key strategic partnerships as well as how our capital deployments, both internally and externally over the last few years have set up the company for consistent industry-leading financial performance in the years to come.

We will communicate more details on this event in the coming months, but wanted to put it on everyone's radar screen now. .

With that, I'll now turn the call over to Max. .

Thanks, Prahlad, and good morning, everyone. During the first quarter, we continued to execute at a high level despite the continued challenges in the pharma/biotech industry.

As we face these headwinds, the strength of our Immunodiagnostics, newborn and software businesses allowed us to exceed our organic revenue expectations and also overcome some incremental FX pressure. .

As we've been discussing over the last several quarters, during this period of software, pharma and biotech spending, we have had a concerted effort on controlling those items that are more directly within our control, specifically our operational efficiency and our cash flow generation.

It was great to see both of these focus areas really performing well in the first quarter, with our adjusted operating margins of 25.5% being approximately 100 basis points above our expectations, and our $132 million of free cash flow being well over 100% of our adjusted net income in the quarter. .

As I begin to walk through our financials for the quarter, I wanted to remind everyone that 2023 revenues related to COVID were de minimis, and as such, we will no longer be referencing non-COVID revenue. Instead, I will focus my commentary in our disclosed results solely on our organic performance. .

Overall, the company generated total adjusted revenues of $650 million in the quarter, resulting in a 3% decline in organic revenue, which was above our expectations. FX was a modest year-over-year headwind, roughly 100 basis points, worse than we had assumed, and we again had no incremental contributions from acquisitions. .

As it relates to our P&L, we generated 25.5% adjusted operating margins in the quarter as we continued to focus on controlling our operational costs while accelerating the elimination of divestiture-related stranded costs, leading to stronger margins this quarter.

We incurred a favorable pricing impact of approximately 100 basis points in the quarter, and we continue to expect at least 100 basis points of favorable price annually going forward. .

Looking below the line, we had adjusted net interest and other expense of $11 million and an adjusted tax rate of 22.2%, both in line with our expectations. With an average diluted share count of 123.5 million for the quarter, this resulted in adjusted EPS in the first quarter of $0.98, which was $0.05 above the midpoint of our expectations. .

Moving beyond the P&L, as I mentioned, we generated free cash flow of $132 million in the quarter. I'm encouraged by the strong cash performance and diligent execution across all teams. We expect this momentum to continue given our recent AI-driven cash collection investments and an increased focus on inventory management.

In addition to this internally generated cash flow, we are anticipating some divestiture-related outflows from last year to be reversed and return to us in the coming months, further strengthening our balance sheet. .

As for capital deployment, we remain active in the first quarter. We repurchased $11 million of shares in the quarter and remained active in evaluating potential inorganic opportunities that are of interest to us. As a reminder, we continue to hold a significant amount of U.S.

treasuries, which are term match to the remainder of the $800 million bond we have coming due this September. We finished the quarter with a net debt to adjusted EBITDA leverage ratio of 2.7x. .

I will now provide some commentary on our first quarter business trends, which is also included in the quarterly slide presentation on our Investor Relations website. .

The 3% decline in organic revenue in the quarter was comprised of an 8% decline in our Life Sciences segment and 1% growth in Diagnostics. Geographically, we declined in the low single digits in the Americas, declined in the mid-single digits in Europe and declined low single digits in Asia, with China declining mid-single digits. .

From a segment perspective, our Life Sciences business generated adjusted revenue of $303 million in the quarter. This was down 8% on both a reported on an organic basis.

From a customer perspective, sales to pharma/biotech customers declined in the low double digits in the quarter, while sales to academic and government customers declined low single digits. .

Our Life Sciences instrument revenue was down mid-teens in the quarter, and our reagents technology licensing and specialty pharma services revenue declined high single digits. We saw delays in our pharma customers finalizing their budgets for this year and continued lower overall lab activity levels. .

As Prahlad mentioned, while we now do have more insight into what customers' budgets look like for this year than we did 90 days ago, and are observing pockets of more favorable trends, we have not yet seen this result in a meaningful improvement in underlying order rates outside of normal seasonality. .

Our Signal Software business grew high single digits in the quarter, which was a bit ahead of our expectations.

We continue to have very strong growth in our SaaS offerings, which bodes well for the long-term potential of this business, especially as we continue to bring new SaaS offerings to market as we have demonstrated with our multiple launches so far this year. .

In our Diagnostics segment, we generated $347 million of adjusted revenue in the quarter, which was flat on a reported basis and grew 1% on an organic basis. From a business perspective, our Immunodiagnostics business grew in the low double digits organically during this quarter.

This consisted of high-teens organic growth in China and high single-digit growth outside of China. The strong performance marks another quarter of above-market growth, which is driven by the uniqueness of the markets we play in as well as capitalizing on our strong menu and geographic expansion opportunities. .

Our Reproductive Health business grew in the low single digits organically in the quarter. This was driven by stabilization in our revenue Omics lab business as it has now anniversaried the contract completions and new project delays, which pressured growth last year.

Our Newborn Screening continued to perform well and grew in the mid-single digits in the quarter globally. .

Finally, as we had expected, the pressures our Applied Genomics business experienced in the latter half of 2023 continued into this year, resulting in this business declining in the mid-20s year-over-year. Clinical customers continued to absorb the instrumentation they purchased for COVID testing and our pharma customer spending remains subdued.

We expect our Applied Genomics performance to improve as the year progresses, and we continue to expect a high single-digit decline in the business for the full year. .

As it pertains to China specifically, as mentioned, our revenue in the country overall declined in the mid-single digits year-over-year, which was in line with our expectations.

This consisted of a high single-digit decline for Diagnostics in the quarter, with high-teens growth in Immunodiagnostics, offset by a significant decline in Reproductive Health.

Our Chinese Reproductive Health business faced incremental headwinds as birth rates came under more pressure related to the COVID lockdowns ending and the impact from the reopening wave. .

Our Life Sciences business in China declined mid-single digits, which was slightly better than we had anticipated. While there has been talk regarding additional stimulus, which could impact our industry, at this point, we have not yet seen this show up in orders.

Consequently, while we are ready to capitalize on any opportunities that could arise, we are remaining cautious as it pertains to our assumptions on the potential impact to our business this year. .

In regards to our outlook for the remainder of the year, we are encouraged by our Q1 results, but are maintaining our full year assumptions, which includes organic growth in the 1% to 3% range.

While feedback from our pharma partners is now more constructive, these insights are leading us to assume that the softer end market environment that we've experienced over the last 6 months will continue. .

Given how dynamic things have been, we will want to see clear signs of recovery before potentially making any adjustments to our outlook for the remainder of the year.

As a result, we expect the company won't return to positive organic growth until the second half of this year as we expect our organic revenue to decline in the low single digits in the second quarter. .

Given the increased fluctuation in currency rates over the last few months, we now anticipate FX to have a neutral impact to our revenues this year, down from our previous 1% tailwind assumption. This results in our full year revenue now expected to be in the range of $2.76 billion to $2.82 billion. .

Moving down the P&L, we continue to expect to hold our operating margins this year roughly flat at 28% as our recent cost actions are offsetting the return of some variable expenses.

We continue to expect our operating margins to be fairly similar in the second and third quarters and slightly below our full year average before improving sequentially in the fourth quarter. .

Below the operating line, we now expect a few moving pieces, which largely offset each other. First, we now expect our net interest and other expenses for the year to be approximately $60 million, down $10 million from our prior outlook.

However, this will be offset by a modestly higher-than-expected tax rate, which we expect to still round to approximately 20%. .

Our average diluted share count, we still assume will be 123.5 million shares this year. For the second quarter specifically, we expect our below-the-line items to be similar to what we have just reported in the first quarter.

This results in our adjusted EPS guidance for the year remaining unchanged in the range of $4.55 to $4.75 as the $0.05 outperformance here in the first quarter is largely being offset by the increased FX headwinds we are now facing. .

In closing, the company has performed well over the first several months of 2024 despite a continued challenging end market. We did a great job executing on those items that are more fully in our control, such as managing our expenses and driving strong cash flow.

When combined with our success in bringing significant innovation to the market, the improvements we have made on both our transformation initiatives and key processes across our organization are positioning us extremely well to deliver differentiated performance in the years to come. .

With that, Operator, we would now like to open up the call for questions. .

[Operator Instructions].

Our first question comes from Michael Ryskin from Bank of America. .

I want to ask one big picture, one sort of qualitative, and then I'll follow up, drill in with a little bit more specifics. So in terms of how the quarter played out, it seems like there's still a decent number of surprises.

You talked about Reagents coming out a little worse, pharma and biotech being a little bit worse, but then China was a little bit better, Diagnostics was better. So it just seems like there was a lot of moving pieces.

I know we're still operating in a pretty volatile end market environment, but how do you feel about your confidence in terms of predicting growth going forward, in terms of the visibility? Is this something that you anticipate will improve? Is this just -- is this temporary? Or is it something a little more inherent to the business mix as it is?.

Mike, I think it's a great question. As both myself and Max said in our prepared remarks, overall, I would say that the market has stabilized. Obviously, our Diagnostics business has done -- continues to shine in light of that. But you'll got to break it down into pieces.

You are right on the Reagent side, the Life Sciences, but we had some licensing comp, which pressured things. But excluding that, our core reagents were down only mid-single digits. .

We did see a slower start to the year as customers delayed their finalizing their budgets and lab activity that continues to have some pockets of volatility.

However, given the trends that we have seen now in March and so far here in April, we feel much more optimistic and have not changed our assumption for the full year and continue to expect core reagents to be up in the mid-single digits. .

On the Diagnostic side of the business, yes, Newborn Screening was pressured in China. But outside of China, Newborn Screening actually grew in the double digits. Software business continued to be better than our expectations. So I think, all in all, you are right that there are quite a few moving pieces.

But as you said, at a high level, the differentiation of our portfolio actually shines in markets like this where there is pressure some place else, something else picks it up. So overall, we feel pretty good about where we are. .

Okay. That's helpful. And then the follow-up, I do want to drill in exactly into that, Life Science business, the reagents, pharma and biotech. I mean there's a lot of overlap between that, but it seems like that was an area that was a little bit weaker than you thought.

And it sounds like it was a little bit weaker than what we've seen from some of your peers reporting. Your mix is a little bit different there. I mean BioLegend alone is a good chunk of that reagents business.

But anything in particular you want to call out there?.

You talked about the licensing comps.

Could you provide some clarity on that? How that's going to phase as you go through the rest of the year? And just what gives you confidence that, that business can reaccelerate, pharma and biotech and reagents specifically?.

Yes, Mike, I mean, I don't have too much further to add on to what Prahlad already mentioned.

I guess if you were to break it down a little bit further, if you look at our performance of the reagent business between academic and government and pharma/biotech, academic and government still grew in the quarter for us from a reagent perspective, which is predominantly the BioLegend portfolio.

I think when you look at pharma/biotech, it really goes back to some of Prahlad's comments around, it was just a slower overall start for the year. We have seen good progress through March and April, and we're confident in our full year outlook. .

Our next question comes from Matt Sykes from Goldman Sachs. .

Prahlad, maybe big-picture question for you on capital allocation.

If you kind of look back to over the past couple of years, the acquisitions that you've made that you're now integrating, given what you know now about the environment, both on the capital equipment and just pharma/biotech, is there anything you would have done differently in terms of those acquisitions in the [Technical Difficulty] business? Or do you feel like a better position -- the business position today is just a macro-related issue and that they should start outperforming going forward?.

It's a good, great question, Matt. I mean, I think if you look at the acquisition that we did, majority of our acquisitions were in Life Sciences reagents related to biomolecules and large molecules and cell and gene therapy.

And I think the longer-term trend that if you look in the marketplace, that is where a majority of the investment is going to go. As you pointed out, there are some headwinds in the market right now, but we are very confident in our strategy about the acquisitions that we have made. .

Again, going back, what it has done is it has put us in a place where 80% of our revenue is coming on a recurring basis. Life Sciences, Software and even in the Diagnostics area where we play, we have a portfolio that we feel is very differentiated. And I think it is going to serve us well. .

Got it. And then if I could just kind of understand a little bit better the dynamics behind the instruments. I know that in Life Sciences, a mid-teens decline might have been a little bit better than expectations.

But could you just characterize instrument demand, whether it's in Life Sciences or Applied Genomics in terms of the stabilization that occurred during Q1? Or did things actually incrementally get worse in terms of demand? And what is your outlook for capital equipment demand and the impact on revenue over the course of the year, whether it's phasing of growth over the year or stabilization versus recovery? Just would love to kind of get your view on instrument capital equipment demand as we trend through '24.

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Yes. Matt, so as we look at the instrumentation for the rest of the year, we are still basically assuming across both Applied Genomics business as well as our Life Science instrumentation business that it will be down mid- to high single digits for the full year. That was consistent with our previous outlook.

I'd actually say for the first quarter, it was an improvement versus what we were anticipating heading into the period. So it was encouraging to see that uptick. And when you really look at the assumptions for the rest of the year, we aren't assuming a recovery in the market.

It is kind of assuming a steady-state environment from what we are facing today. And that's, again, consistent with our assumptions we had 90 days ago. .

Our next question comes from Patrick Donnelly from Citi. .

Prahlad, I just want to follow up on Mike's question on the reagent piece. Can you just talk a little bit more about what you saw in the quarter, how things trended specifically on BioLegend, just what the growth was there? And then what the expectations are in 2Q? I know you called out the licensing headwind in 1Q.

Just trying to get a sense for what this business could look like 2Q and going forward as we work our way through the year here?.

Yes, Patrick. I mean, again, starting with, as I said earlier, right to Mike's question, we expect our core reagents business to be up mid-single digits for the year. And I think also, the trends that we saw in March and April make us optimistic to keep that profile.

As I mentioned, we had licensing comps, which pressured this, excluding that, the reagents are down mid-single. I think the way I would take it is that some of the budget finalization that happened with our pharma/biotech customers, typically, they would happen in December.

But I think that sort of bled into January and the release of the budgets happen a little later into the year than as it typically happens. .

And I think that's where we saw some initial volatility. But again, March and April, it has come back to where we would have expected it to be. So hopefully, that gives you a bit of a flavor of how we relate that. .

Okay.

And just maybe just the trend on how to think about it for 2Q and the year?.

Yes. For the second quarter, Patrick, we do expect the core reagents business to return to positive low single-digit growth in the second quarter. And then in order to get to the mid-single digits growth for the full year, you can do the math in the back half. .

Yes. Perfect. And then maybe just quickly on the biopharma conversation firming up in the last 2 months, to your point, Prahlad.

Have you seen this before in the last 1.5 years? I'm just wondering if you're seeing some false starts where things sound good and then they tightened back up? Or is this one of the more encouraging signs you've seen over the past few quarters and you feel that visibility is improving?.

Yes, Patrick. I think there is more solidity to the conversations, and I think that's more encouraging trend than what we have seen earlier. But as Max said earlier, I mean, they haven't yet converted into orders, so it's not clearly at a point where we can say there's an inflection.

But I think the discussions are much more solid and much more prolonged. So that's probably a flavor around what the encouragement that we have on the order trend for the Life Sciences instrument side. .

Our next question comes from Andrew Cooper from Raymond James. .

Maybe just first, you had a lot of news in terms of Software in the quarter.

Maybe just high level, how big do you think that business can get over the next few years? And how much of that growth relies on sort of additional new rollouts versus what you've now launched out there in the market today in terms of getting to that long-term business?.

That's a great question, Andrew. I think we are very positive on our Software Signals business. And as you pointed out, we had several launches in the year.

And I think, as I've said earlier, the product launches that happened in our Software business are a direct correlation of the user group and voice of customer meetings that we have at least twice a year in different continents. So basically, it's direct output of what our customers asks are and that's why there is a solid trend related to it.

The expansion that we had with Signal Clinicals, it takes us outside of the preclinical environment to support customers on the analytics and the data that is generated from clinical trials. .

In addition, these are SaaS-only, so that gives a more longer-term certainty around the revenue. And we've seen good initial traction with that. Similarly on Signal Synergy, which was launched in mid-April, that connects the data back for our customers between the pharma and the CRO. Again, this is something that I've talked about earlier.

There is always -- one of the biggest needs for our pharma customers is the unstructured form in which the data comes through. This product helps them transfer unstructured data, provide the analytics and visualization that our customers are looking for.

So pretty promising launches, and I think they will continue to be -- launches that'll come through from our Signals portfolio simply because we are -- we have taken a modular approach as to how we bring our product profile into the customers. .

Yes. I think if you look at it long term, Andrew, I think we've already come out with the LRP growth assumptions for our Software business. It's high single digits to low-double-digits growth per year. It's what we are expecting here in 2024.

And so depending on how long you're trying to model out, you can get to how big this business is, given that it's roughly a $200 million business for us today. .

Fair enough. That's super helpful. Maybe just one kind of on some of the numbers here. You called out free cash flow normally weakest in the first quarter, but obviously, pretty strong here.

There's some divestiture kind of inflows that are a little bit more onetime in terms of not repeating in '25 maybe, but should we think about higher each quarter for the rest of the year from here? And maybe on a normalized basis, is that same seasonality still what we should expect on a go-forward basis as well?.

Yes. Look, I mean, from a cash flow perspective, there will always be some quarterly notes to some extent just given business activity.

I think as you look at this year, though, the second and third quarter, I would anticipate to be probably lower than the fourth quarter, but we're still maintaining our overall expectation this year to be greater than $475 million of free cash flow conversion. .

Our next question comes from Josh Waldman from Cleveland Research. .

One for Max and one for Prahlad. First, Max, can you talk a bit more on the drivers to the op margins coming in better than expected? I mean, it sounds like it was supported by cost efforts and I assume organic upside.

I'm curious, how much of the cost benefit was onetime in nature? And I guess what would you need to see to start to pull up your margin outlook either for the year or longer term?.

Yes. So I think if you look back at what we had mentioned for the outlook for this year, we had mentioned that, from a margin profile perspective, our operating expenses for the full year were going to be very similar kind of quarter-over-quarter off of our Q4 exit, and that's kind of what you saw here in the first quarter.

And again, that's just a function of us taking permanent cost reduction actions to offset the variable expenses that we knew would be coming back this year. And so I don't think that outlook has changed where the upside was in the first quarter was really more on the gross margin side. .

Again, as you look at the seasonality or I guess, the phasing over the rest of this year, the gross margin rate will uptick as we go throughout the year based on volume, which is what gets you to that then 28% operating margin for the full year. .

And I think when you look at in terms of what could push us above the 28% for the full year, it's going to be a combination of just better volume or on the gross margin line, again, as our operating expenses will be relatively flat over the course of the year. .

Got it. Okay. And then, Prahlad, a couple on China.

Within the Life Science segment, curious, any trends you've seen, positive or negative, on the reagent side as the quarter played out and then here into April? And then within instrument, curious, have you seen any sign of stimulus showing up in the funnel or customer activity?.

And then I guess, lastly, on the Diagnostics side, curious if there's any change in how you're thinking about China Dx for the year? And within that, any change to what you're seeing from a pricing dynamics, anything like VBP or local competition showing up? Or is pricing in China has been fairly stable?.

I'll try to remember all 4 or 5 of the questions that you've got in there, Josh. I think the reagent side pretty much played out on the Life Sciences side as we had expected.

And to your second question around the stimulus, as some of our peers have mentioned, there has been talk and discussion about it, but that's not something that we are banking or assuming in any of our assumptions so far. .

On the Diagnostic side of the business, as we've pointed out earlier, we are going to continue to have some volatility related to VBP. And the price declines that we have laid out, that is assumed in our LRP. On the Reproductive Health side, as we mentioned, that birth rates declined more than 20% in the latter half of 2023. .

So we do expect that softness to continue through 2Q, but as most of you know, we expect that to change in the second half of the year given that it's the year of the dragon in which we have traditionally seen a noticeable increase in the number of babies born, which run through the first quarter of next year.

And to some extent, we have already started seeing some signs of this occurring from our prenatal business in China. So there is an indication that the birth rate trend in China is going to improve a bit in the second half of the year. I think I got most of them. .

Yes. And maybe just one other piece to add just, I guess, from an overall numbers perspective, our outlook on China for the full year has not changed. Again, the first quarter was mostly in line with our expectations. And for the full year, we are assuming China to be roughly flat for the full year. So there's no change to that assumption. .

Our next question comes from Doug Schenkel from Wolfe Research. .

Just a couple of quick cleanup questions on guidance. I just want to make sure we understand all the moving parts. So just starting on revenue, you reiterated full year organic revenue guidance and Q2 was guided about as expected. Yet you acknowledge biotech and pharma demand has yet to rebound as maybe hoped. So I think that's a relative bad guy.

What's the good guy specifically? What's getting better than what you expected relative to where we started the year?.

And then turning to margins, coming into the year, you had guided Q2 and Q3 operating margin to be about in line with the full year guidance target. I think you actually said Q2 might be even a little bit below that. Just doing the math there, I think it implies Q4 operating margin will be in the low 30s, I get to 31%.

Is that math right? And if so, can you just help us with what makes you confident in that type of ramp given we're starting at 25.5% coming out of Q1?.

Yes. So I'll work backwards to your questions there, so maybe starting on the margin one. I mentioned it to Josh's question earlier, but really, the margin story or assumptions we had coming to you are unchanged. Operating expenses are going to be flat.

And as we move throughout the year, it is just a volume dynamic moving up our gross margin percentage. In terms of the quarterly phasing that you had mentioned, yes, that's probably about right if you do modestly lower second and third quarter operating margins that would imply a fourth quarter, that's around 30.5%, 31% OM.

And again, that's kind of consistent with our business practice and our business seasonality as the volume steps up sequentially as we go throughout the year. .

I think when you look at it on an organic growth perspective, I think, to maybe use your own words, yes, we were -- everyone was hoping that margins had recovered -- the markets have recovered more strongly here in the first quarter, but that's not what our guidance had assumed.

Our guidance had actually assumed that it was a relatively stable -- consistent outlook for what we saw in the fourth quarter, which is what played out here in the first quarter, and we expect to play out for the rest of the year. So I don't know that it necessarily got worse in terms of what our guidance assumptions were. .

Okay. That's super helpful. And one, I think somewhat related follow-up. Applied genomics, I think that accounts for roughly 1/4 of Diagnostics. Hopefully, I'm not too far off there. That was down, I think, mid-20s in the quarter. If it weren't for that headwind, I think that means Diagnostics would have grown 5%, 6% mathematically.

As we kind of think about things getting better as the year progresses, my guess is that's a big part of the math that makes you feel better about an acceleration in the second half in that business, essentially just annualizing some of the headwinds that you're fighting through right now specific to Applied Genomics, is that right?.

That's exactly right. And I would say as we get going throughout the rest of the year for Applied Genomics, it will improve from the first quarter. The fourth quarter will be its worst performance from an overall organic growth perspective.

But when you look at multi-year stacks, although it's still improving in a discrete organic growth for the second through fourth quarters, the multiyear stack, we are actually assuming a little bit slower than the multiyear stack we had in the first quarter, which gives us confidence in terms of the rebound for that business for the rest of the year.

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Our next question comes from Vijay Kumar from Evercore. .

Prahlad, just on the second quarter, I think you mentioned organic is down low singles. And I think reagent are expected to be up.

So what drives that low singles, right? If reagents improved sequentially, is there some timing of VBP impact? Like when is VBP supposed to hit? Did we see any impact in Q1?.

Vijay, I think on the VBP question, what we've said, we've assumed mid-single-digit price declines on an annual basis, and that's what we continue to see. So it's not a sudden swing that we are seeing, but we're just seeing a leak on the pricing. And that's what we've assumed and what we've shared earlier.

I think if the Life Sciences reagent are going to improve sequentially from the Q1 to Q2, the instrument side of the business is still pressured. And I think that's what's assumed in our low-single-digit guidance and hopefully, it will be better. .

Yes. I think maybe just to add more specifics to it, Vijay, in terms of what's changed in Q1 to Q2. To your point, reagents will get a little bit better as well Applied Genomics per my response to Doug.

Really, what we're not assuming repeats in the second quarter, I think, is the robust growth we saw in both the Newborn business and Immunodiagnostics outside of China, they both continue to grow low double digits, mid-teens, respectively.

And so I think we're just being a little bit more conservative in the assumptions for those in the second quarter. .

Understood. And then a follow-up to that, Max, on China, down mid-singles in Q1 -- sorry, did we see that 500 basis points of pricing pressure in Q1? Or is that something that's supposed to come in the back half? And I think your guidance for China is up low singles for the year.

So what drives that back half? Is that just a comp issue or perhaps timing of VBP?.

No. I mean I don't think there's discrete quarterly timing around the pricing there, Vijay. It's kind of a consistent pricing headwinds that we face over the course of the year. So I don't think there's anything specifically there to call from a corporate perspective. .

Our next question comes from Jack Meehan from Nephron Research. .

I wanted to ask about pharma and biotech maybe through a different lens.

I know you're not seeing improvement in orders at this point, but is there any commentary you can share across the different businesses? I'm curious if some of the more production-oriented businesses like a surprising discovery or SIRION are doing better than the lab-oriented areas?.

I think I would say that we see maybe from a general commentary perspective, the pressure is still more on the higher-ticket items around the single cell imaging and analysis, but probably not as much on the lower-ticket item.

So again, it continues to be a CapEx story around instrumentation, and I think that's where the pressure was assumed and that continues to be there. .

Okay. Got it. And then on -- I was just curious, operationally with Spotfire, I know there was some disruption that was caused back in March.

How are things going there? I know it's a small business, but just -- how's the customer impact? How is that going?.

Yes. I mean, Jack, as you know, and as we have reported, we quickly got an injunction -- received an injunction, which essentially maintains the previous status quo as the litigation plays out. And to your point, any initial customer inquiries and questions have died down significantly.

And at the end of the day, we still have an agreement in place into the next decades with renewals beyond that. .

Our next question comes from Catherine Schulte from Baird. .

Maybe just one more on pharma. Last week, Roche mentioned that it had removed about 20% of the molecules in its pipeline over the last 3 quarters. And that doesn't seem like a dynamic that's been weak to them.

So I guess, where do you think we are in this pipeline reprioritization across large pharma? And when do you think the dust settles there?.

Yes. Catherine, I think the pipeline realignment is happening, and it will continue to happen. I mean from our perspective, just as we look at preclinical research and discovery, both on the small molecules and on the biomolecule side, and as I've pointed out, the funnel has to be broad enough at the beginning for it to narrow down.

I think as they realign their portfolio, they will continue to optimize cost measures as they go further into development from preclinical research and into clinical. But in order to get into development and clinical, they have to have a broad enough funnel. .

So I think mid- to longer term, we don't see that having much of an impact on our business. I think the key will be how do we continue to help our pharma/biotech customers continue to optimize and make it more efficient for them to bring candidates from discovery into development. .

Okay.

And then could you just talk through your expectations for pharma and biotech for the second quarter? And when do you think we could see a return to growth in that end market?.

Yes, as a reminder, too, we don't necessarily give outlooks on an end-market basis. And so, look, I think as you can hear from our executives that assuming a general change in the overall end market for pharma/biotech as we go throughout the course of this year. So that's probably the best insight I can give you on that question. .

Our next question comes from Dan Brennan from TD Cowen. .

Maybe just on Immunodiagnostics, solid first quarter, again, comps do get more difficult as we go through the year.

Can you just walk us through maybe the Q2 expectation and the outlook for the second half? And anything we should be considering, anything notable whether new products or pricing that support the outlook?.

Yes. I think as you -- as we look at the outlook for IDX, to your point, it was another strong first quarter here. We continue to expect the business to continue to perform well, even both in China for the rest of the year as well as outside of China.

And so our expectation is that for the business for the full year, it's still going to grow in the high single digits. It's multiyear stack, they're still in line with our LRP.

And it's really a combination of both the geographic expansion of our Immunodiagnostics portfolio, but then also the wave of innovation and menu expansion that we've been driving for the past couple of years. .

And just to add to what Max said, U.S. continues to also be a very good growth driver for us for the Immunodiagnostics business. I know we tend to talk about China, but U.S. for us is probably the fastest grower for our Immunodiagnostics business. .

Got it. And then maybe just one on costs. You had a lot of comments in the prepared remarks on new programs, it sounded like, or maybe some emerging programs to take costs out, talked about stranded costs.

Can you just elaborate a little bit? Like it sounds like maybe those impacts are going to come after '24? Maybe we'll learn more at the Investor Day, but just kind of any impact in '24 baked in from some of these additional focus on costs? And if not, kind of how do we think about the magnitude of upside beyond?.

Yes, it's a great question. So I would say from a cost perspective and really our operating margin initiatives, there is the short term and the long-term bucket. I think when we've talked about short term really for 2024, it's the structural actions we've been taking to remove the stranded costs really in relation to our SG&A functions.

And so that has worked, has already mostly been done in the fourth and first quarter here. It's baked into our assumption for the full year.

I think then when you look at it long term, it's a lot of the topics that we had mentioned in our prepared remarks this morning, really around in-sourcing, freight lane optimization, vendor consolidation, rooftop consolidation. And so those will continue to be areas that we're focused on executing over the next couple of years.

It's part of our playbook for our LRP operating margin expansion. And so that's really probably the way I would think about those 2 different cost actions. .

And our final question comes from Luke Sergott from Barclays. .

Great. I just want to follow-up, Prahlad, on what you just talked about from the U.S. and IDX being the fastest grower. I mean, this has kind of been the long-term thesis here on EUROIMMUN in general. And so can you just talk about what's driving the accelerated growth here? How big the U.S.

is now as a region for EUROIMMUN? And do you guys think that you are close to the critical mass when thinking about the menu or the menu expansion needs to really start to drive share gain here?.

I think if you look at our Immunodiagnostics business in the U.S., it has grown at a 20% CAGR since the acquisition. And I don't think we have really gone to where we would say that we have reached close to critical mass so that it would plateau out. It's gone from being 5% to nearly 15% of our overall Immunodiagnostics business.

But there is still a lot of growth that we have to cover in the U.S. And I would say that we are still in the early phases of growth that this business is going to see over the next several years in the U.S..

And it is all a direct correlation of how many products that we can get onto the panel and get through the FDA approval process into the U.S., and the team is working very hard and diligently on that. .

All right. Great. And then just another follow-up here on the Diagnostics side from -- you guys came out with the automated tuberculosis testing.

Can you talk about any recent tenders that you've won, any that are coming up throughout the rest of this year? And then I guess, how does the new automated system compared to the quantiferon and the liaison?.

It's a great question, Luke. Again, we don't talk on specific tenders, but I'm happy to talk about the launch that we just did and announced at any -- it was even at a current show that's going on. There's a complete workflow that has a specialized liquid handler added to it.

It builds on the T-SPOT Select, which has added now chemagic extraction and cell counting ability. So I think the workflow that this product uses, the benefit is that it uses all our other offerings, too, including silica cell counting, the EUROIMMUN reader, which will eventually connect it also the EuroLabs software in the future.

It essentially reduces our hands-on time by 50% versus the current existing T-SPOT Select. And it has a reduction of approximately 80% in technician touch points. So this was one of the major hurdles that T-SPOT Select was facing in the market in terms of hands-on and technician time, and the intent really is to significantly eliminate that.

And now if you combine for day 1 and day 2, it essentially has lesser total hands-on time versus the competitor's product offering that you talked about. .

We currently have no further questions. I will hand back to Steve Willoughby for final remarks. .

Thank you, Carla. Thanks, everyone, for your time this morning. We look forward to touching base with everyone over the coming weeks. Have a good day. .

This concludes today's call. Thank you for joining. You may now disconnect your lines..