PerkinElmer, Inc. (PKI) Q1 2020 Earnings Conference Call May 5, 2020 5:00 PM ET
Bryan Kipp - Vice President of Investor Relations
Prahlad Singh - President & Chief Executive Officer
Jamey Mock - Senior Vice President & Chief Financial Officer
Conference Call Participants
Dan Arias - Stifel
Vijay Kumar - Evercore ISI
Derik De Bruin - Bank of America
Steve Willoughby - Cleveland Research
Doug Schenkel - Cowen
Steve Beuchaw - Wolfe Research
Tycho Peterson - JPMorgan
Paul Knight - Janney
Brandon Couillard - Jefferies
Catherine Schulte - Baird
Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 PerkinElmer Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today to Mr. Bryan Kipp, Vice President of Investor Relations. Thank you. Please go ahead, sir.
Thanks, operator. Good afternoon, and welcome to the PerkinElmer first quarter 2020 earnings conference call. With me on the call are Prahlad Singh, President and Chief Executive Officer; and Jamey Mock, Senior Vice President and Chief Financial Officer.
If you have not received a copy of our earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com. Please note, this call is being webcast live and will be archived on our website until May 19, 2020.
Before we begin, we need to remind everyone of the Safe Harbor statements that we have outlined in our earnings press release issued earlier this afternoon and also those 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 only as of today. We disclaim any obligation to update forward-looking statements in the future, even if our estimates change, so you should not rely on any of today’s forward-looking statements as representing our views as of any 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 financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly.
I am now pleased to introduce the President and Chief Executive Officer of PerkinElmer, Prahlad Singh. Prahlad?
Thank you, Bryan, and good evening, everyone. Before I begin my prepared remarks, I want to extend my well wishes to everyone on the call. The world has dramatically changed since our last earnings call, putting every person, country and company to the test. However, times of great uncertainty can also bring great clarity of purpose.
Our guiding principles have been fourfold: first, to keep our employees and company safe; second, to utilize our expansive capabilities expansive capabilities to join the fight against COVID-19; third, to serve all our customers with excellence in a difficult environment; and finally, to emerge from this crisis as a stronger company.
To start, early in the quarter, our focus as a leadership team and organization shifted to ensure the safety of our employees around the globe. We recommended that our employees work from home in regions impacted by the virus, and we implemented health and safety protocols based on local and federal regulations and guidelines at our facilities where our team members continue to work tirelessly to serve our customers.
Additionally, we expedited the review of our crisis management and redundancy plans, so our employees, customers and partners can quickly respond to changes driven by the evolving pandemic.
I am humbled by and proud of our entire organization. Over the past few months, I witnessed our 13,000 employees go above and beyond to partner with colleagues, customers, governments and industry experts to do everything we could to make an impact and fulfill our mission of innovating for a healthier world.
Improving lives is in PerkinElmer's DNA. It is what impassions our team, and they rose to the challenge this quarter and developed over a dozen unique kits and workflow solutions to help fight against COVID-19.
At the same time, the team really stepped up to deliver a very good quarter, despite extreme macroeconomic uncertainty. The first quarter performance speaks to the diversity of our business, both from a portfolio and geographic business, both from a portfolio and geographic standpoint, and it highlights the resiliency and strength of our company.
Jamey will speak at length to our first quarter financial performance. But overall, we delivered solid top-line results, especially when considering that our China business, which accounted for over 20% of the total company revenue in 2019, was down 30% year-over-year. And when normalizing for the operating margin drag from the extra week, adjusted operating margins declined 25 basis points year-over-year, despite a $47 million top line shortfall relative to our initial guide.
From a free cash flow standpoint, the team executed well, delivering our strongest first quarter performance since 2017. And as a result, we were able to pay down debt during the first quarter, further strengthening our liquidity profile. Again, I'm inspired by both what we have been able to accomplish over the past several months, and all that we will be working towards in the months ahead.
Our people took a leadership role at the onset of this pandemic. We have been hard at work, developing and deploying our solutions to help hospitals, clinics, universities, governmental institutions and pharmaceutical companies test for COVID-19, screened for antibodies, research the virus, and discover therapies and vaccines.
Let me take a few minutes to elaborate on this. When the virus began spreading in China, we immediately mobilized our response. We have been providing solutions to leading institutes and several hospitals and Centers for Disease Control in China to help them conduct virus mechanism research and drug screening.
PerkinElmer also donated a number of pre-nat instruments, super flex instruments and extraction reagent kits to CDCs and hospitals in hard hit regions in China and coordinated with our distributors to form a charity donation alliance. It was our R&D team in Taishan, who led the development who led the development of PerkinElmer's new coronavirus RT-PCR assay, which received both CE Mark for virus testing in over 31 countries and FDA emergency use authorization in the U.S.
The team worked extremely hard throughout the Chinese New Year holiday to develop a highly accurate assay for the detection of COVID-19. Our efforts quickly expanded across the globe as our operations teams in Taishan, Turku, and Austin began ramping up capacity to manufacture our RT-PCR tests.
As of today, we have the capacity to manufacture and distribute over 2 million of these highly accurate diagnostic tests per month. Similarly, a few weeks after the news of the virus spread in Wuhan, our team in Baesweiler, Germany, began the development of development of the chemagic viral DNA/RNA 300 Kit H96, a specialized viral kit for automated extraction on the chemagic 360 instrument.
Our team foresaw the growing bottlenecks in the market and quickly scaled production to address customers' demand for extraction reagents. The current production capacity for our nucleic extraction kits exceeds 3 million tests per month.
Nearby, in Lübeck, Germany, the EUROIMMUN team sprung to action as well, developing their own RT-PCR test, the euro real-time SARS-CoV-2, as well ELISA assays for the detection of IgA and IgG antibodies against COVID-19. Both the RT-PCR test and ELISA assays are CE Mark, and both have been submitted to the FDA for EUA approval.
We are firm believers that leading with science wins. EUROIMMUN took a deliberate approach with its serology test development. Through their own research and collaboration with scientists and large university hospitals, EUROIMMUN focused on developing antigens for the S1 domain of the spike protein, instead of the full-length nucleocapsid N1 protein, because the S1 domain displays the lowest homology to the other members of the coronavirus family. As a result, cross-reactions with other circulating coronavirus are virtually excluded.
To give you a glimpse of some of the data on the S1 domain serology assay, two weeks ago, researchers at the University of Hamburg, highlighted the high specificity of the EUROIMMUN ELISA assay during a press conference. The hospital screened 1,122 samples with the EUROIMMUN IgG Elisa. Within the cohort of employees at the hospital, specificity was at least 99.7%.
The EUROIMMUN team has been working non-stop the past few months. The team has successfully scaled manufacturing of its RT-PCR test and S1 protein ELISA assay.
Today, EUROIMMUN has capacity to manufacture over 2.5 million ELISA tests per month and the team has plans to further scale production over the coming weeks to address growing customer demand.
And we are not stopping here in terms of diagnostics, our teams in China and India are working together to develop a rapid lateral flow test for COVID-19 detection. In India, Tulip has received approval from local regulatory body to manufacture and sell a total antibody IgM plus IgG plus IgA detection rapid test in human serum, plasma or whole blood. The team in China is also looking to leverage the Superflex chemiluminescence platform for point-of-care serology testing.
In our Discovery & Analytical Solutions segment, we are enabling several existing and new large pharma customers to study the disease, discover therapies, and develop vaccines by providing our imaging and detection solutions. We are supporting clinical studies by helping qualify existing drugs as potential therapies to fight COVID-19 with our new signals medical review template. We have over 100 research and screening reagents within our discovery portfolio that aid in deciphering the virus infection life cycle through adaptive immunity to understanding the basis of viral pathogenesis.
And our applied organization created a fast and reliable method using our Spectrum Two FT-IR spectrophotometer to determine the ethanol and isopropyl content of hand sanitizers according to WHO and FDA-approved guidelines. The first order came from Puerto Rico, where an alcohol distillery has pivoted to ramping up hand sanitizer production lines.
These are just some of the numerous ways we are innovating and going above and beyond to combat this pandemic, and I encourage you to go to our website and social media handles for an even more complete picture of how PerkinElmer is helping.
Our organization continues to work tirelessly to serve our customers. There is still plenty of business happening. The environment is clearly more difficult, but we are doing everything we can to make it easier and get them the products and solutions they need.
Over the past three months, we have learned a lot about ourselves, our capabilities and our potential. The improved cross-segment and regional collaboration validates our efforts last year to streamline our organization and drive better collaboration, both internally and with our customers and partners.
We are launching products at a more rapid speed. We are learning to implement virtual work styles and becoming more digital. We are empowering our leaders to lead. Real time, we are seeing how we can truly support a better tomorrow, both in a COVID and non-COVID world.
In closing, our employees continue to amaze me. It is thanks to them that we are able to make a difference from personally delivering instruments to customers, training them and getting their testing lab up and running at all hours of the night. Producing and shipping masks to fellow employees in the field at our own labs and manufacturing sites, finding new ways to collaborate and communicate virtually, are working around the clock to help keep our facilities as clean and safe as possible. The passion, dedication and teamwork happening across the globe is remarkable. I hear new stories of these heroes every day, and that's why I will close my remarks by once again thanking all of our 13,000 employees.
With that, I'll now turn it over to Jamey.
Thanks, Prahlad, and good evening, everyone. I want to echo Prahlad's well wishes to you and your families, and I want to give additional airtime to employees. I'm extremely proud and humble to be part of the PerkinElmer family. Our colleagues around the world rallied together and worked tirelessly to develop solutions to help stop the spread of this pandemic and get product out the door. As Prahlad mentioned, we are improving and evolving as a company each day, and I have no doubt that we will emerge from this crisis as a stronger company.
Before I begin, I want to point everyone's attention to our first quarter earnings call presentation, which has been posted on the Investors section of our website under Financial Information. As always, I plan to begin my prepared remarks by highlighting the first quarter, then I'll provide some additional color on our served end markets and financial metrics.
Typically, I end my prepared remarks with updated guidance commentary. However, due to the fact that we withdrew our annual guidance in the earnings press release issued earlier today and the ongoing forecasting challenges associated with the current unique environment, I will not be providing updated full year guidance. Instead, I will provide some context and additional details that will hopefully serve to assist you in your own modeling efforts. And as visibility improves, we hope to provide you with a more substantive update later in the year.
Jumping in, we are pleased with our first quarter results. The team executed well, even though market conditions began to deteriorate in China shortly after our fourth quarter call. And these pressures cascaded across the globe, as we progress through the quarter. Overall, we estimate that COVID was a net $46 million headwind on revenues, as $19 million of COVID-related tailwinds in the quarter were offset by $65 million of COVID-related pressure.
Meanwhile, the top line contribution from the extra week in the first quarter came in at the low end of our previously disseminated range. However, our assumed extra week of operating expenses were also lower, resulting in adjusted EPS results closer to the lower end of our prior guidance range.
Organic revenue decreased 1% year-over-year as solid demand in multiple markets was more than offset by COVID-related shutdown impacts in China. Adjusted reported revenue grew 1% to $653 million and included a 2% foreign exchange headwind and a 3% net acquisition tailwind.
By business, Diagnostics, representing 39% of total sales, declined 1% organically, as strength in our applied genomics business was more offset by modest declines in our immunodiagnostics and reproductive health franchises. Discovery & Analytical Solutions, representing 61% of total sales, also declined 1% organically, as strength in life sciences was more than offset by softness in food and applied markets. On a geographic basis, Americas grew mid-single digits, Europe grew double digits and Asia Pacific declined double digits, with the entire decline stemming from the impact of COVID-19 in China, which was down over 30%.
Operationally, we are extremely pleased with our performance, especially given the lighter overall top line revenue. Adjusted operating margins declined 100 basis points in the first quarter to 15.3%, driven by an extra week of labor driven by an extra week of labor expenses, offset by cost controls.
As Prahlad mentioned, adjusted earnings per share of $0.67 declined 3% year-over-year and came in only $0.03 below our guidance $0.03 below our guidance despite the $47 million topline shortfall. Normalizing for the extra week impact, we estimate adjusted EPS would have been up over 1% year-over-year.
Looking further into the key drivers within our segments, let's start with our Diagnostics business. As mentioned in my earlier remarks, organic revenue declined 1% as robust growth in the Americas and Europe was offset by double-digit decline in China.
Our applied genomics business led the way, posting over 20% organic growth on broad-based momentum across all geographies and led by our liquid handling and nucleic acid extraction product lines.
Demand for our automated nucleic acid isolation systems and RNA purification kits nearly doubled year-over-year as these are vital upstream solutions in our in our COVID RT-PCR detection workflow.
Meanwhile, immunodiagnostics declined mid-single-digits organically with EUROIMMUN increasing mid-single-digits. Demand in China for our immunodiagnostics portfolio was anemic during the quarter, as patients deferred autoimmune, allergy, and infectious disease testing.
Outside of China, our immunodiagnostics business performed well, growing over 30% in the Americas and Europe. Reproductive health declined mid-single-digits organically, driven by lower newborn and prenatal testing in China. Newborn testing in the Americas and Europe were both up high single-digits, though both regions appear to have benefited modestly from some pre-COVID shutdown stocking.
In terms of menu expansion, two states recently began screening for spinal muscular atrophy using our proprietary NEO MDX solution. While the revenues to-date have been minimal, we're excited about the long-term potential of this offering.
Turning to Discovery & Analytical Solutions, organic revenue declined 1% in the quarter, as the strength in Europe was more than offset by declines in Asia-Pacific. By end market, we experienced high single-digit organic revenue growth in pharma/biotech, propelled by our enterprise, discovery and informatics product lines.
Demand was robust across major geographic regions despite China declining low single-digits. Our discovery, screening, and research reagents, as well as our enterprise service business led the way, growing double-digits.
Meanwhile, the applied markets declined low double-digits, as high single-digit declines in the Americas, and over 20% declines in Asia-Pacific more than offset low single-digit growth in Europe.
Fluid declined mid-teens and industrial and environmental safety declined low double-digits. Overall, applied orders trends in January were solid, up high single-digits. However, conditions steadily deteriorated as we progressed through the quarter. March orders were down over 20% year-over-year.
While we continue to have a solid backlog and early signs point to order acceptance delays, not cancellations, our teams are pivoting digitally to improve funnel velocity and lead generation. So, we are trying to benefit as our customers start to contemplate reopening plans and operations after COVID-19.
Shifting to below the line items, net interest and other expense for the first quarter was approximately $10 million and our adjusted tax rate was 17%.
Turning to the balance sheet, we finished the quarter with approximately $2 billion of debt and $195 million of cash. Free cash flow and adjusted free cash flow for the quarter was $40 million. We achieved an adjusted free cash flow conversion of 53%, which was the strongest first quarter performance since 2017.
Finally, we exited the quarter with a net debt to adjusted EBITDA ratio of approximately 2.7 times.
As mentioned earlier, we withdrew our previously disseminated 2020 guidance in the earnings press release issued earlier today. However, I want to provide updates on modeling items that are less dependent on COVID impact scenarios. We now anticipate a 1% foreign exchange headwind for 2020.
Further below the line items, we anticipate $46 million to $49 million in adjusted interest and other expenses, a tax rate the range of 17% to 18% and our share count to average $112 million for the year. We are assuming a higher tax rate compared to our previous guidance as we now expect a greater mix of profits will come from areas with higher jurisdictional tax rates.
As we stressed on our last earnings call, we remain steadfastly committed to returning our adjusted free cash flow conversion to the 85% to 90% range over the next two to three years. We continue to execute on the roadmap laid out last year, building processes to improve our conversion in a prudent manner, while balancing growth and profitability. The progress seen throughout 2019, and now into the first quarter of 2020, gives us confidence that we are on the right track.
Turning to the second quarter of 2020, we are forecasting reported revenue of $610 million to $720 million, representing a 0% to negative 15% organic revenue growth, including a foreign exchange headwind of approximately 2% versus the comparable prior period. Embedded in this guidance is approximately 8% to 15% of COVID-19-related revenue growth, partially offsetting an organic demand drop of 15% to 23%. And in the terms of adjusted earnings per share guidance for the quarter, we are forecasting a minimum of $0.65 per share. All of this is noted in the second to last page of our first quarter earnings presentation.
In closing, I want to end where I started. I couldn't be prouder of our PerkinElmer team. Employees all over the world are joining hands to support the fight against COVID-19. We are on the frontline, supporting our customers during an extremely difficult operating environment. At the same time, we are building collaborative proficiency and processes to emerge from this crisis as a stronger PerkinElmer.
Operator, at this time, we would like to open the call to questions.
Thank you, sir. [Operator Instructions] I show our first question comes from Dan Arias from Stifel. Please go ahead.
Good afternoon guys. Thanks. Prahlad, on the EUROIMMUN assay, can you just speak to the path for the tests getting into the market in the way that you'd like it to? I mean, the performance of the assay looks pretty good, but obviously, you're up against some big players with big distribution capabilities. So I guess when we think about your comments on test differentiation, your own manufacturing levels, what are your expectations? What are the labs saying on test choice? And then to what extent are you constrained by the number of EUROIMMUN instruments that might be in the market?
Yeah. Thanks, Dan. I think you pointed out some very good things that I think it is good to elaborate on. When we started developing the assay at EUROIMMUN, our focus was around picking something that we would expect to have a high level of specificity. And we focused -- I mean, there were two domains that one could go after, right? Antibodies are produced against the NVS proteins. We focused on the S protein, which, as you probably know and that there are two functional domains, the S1 and the S2. The S1 has a much lower sequencing homology to other coronaviruses, and that means that there is less risk of cross-reactivity than the -- and that's why we focused on that.
In terms of availability, I think our capability, as you saw, we got the EUA approval yesterday. And in fact, we had this validated at the FDA's center. So it has been validated by the FDA. In terms of the installed base, the largest antibody study that's going on right now at Beaumont in the country is using our automated workstation. And it can be used on all open-ended workstations, and there are thousands of them in the United States and across the globe. So I think I helped the three questions that you had, right?
You did. Can I just ask, maybe, a follow-up? I mean the expectations for 2Q. Does that assume that you'll be supply-constrained in any way? And what is the thought process around getting to the point in production where maybe you're building inventory and it's not just about how many tests you can get into the market? Thanks.
Yeah, Dan. Hey, it's Jamey. I'll talk about the second quarter guide. So I'm going to leave out DAS and some of the products there, because the bulk of our revenue is going to be tied to diagnostic products. And I'll talk to serology and then PCR and RNA.
So, talk a little bit around the current production capability of 2.5 million tests per month right now. We forecast that, that could be as much as $10 million per month by the end of this month. So I think about half of our guidance should come from the serology test, revenue guidance that is.
PCR has been limited to date. We've had some restrictions that are now behind us, and product is starting to flow, but we don't anticipate it will be as much as the serology side. And then on the RNA extraction, we just put that into perspective, we've -- our revenue and our volume is up 20x versus last year. And that has been flowing well and will continue to flow, so we're at 3 million extraction tests per month. And so, the PCR and RNA portion should make up about 50% of the revenue as well.
Thank you. Our next question comes from Vijay Kumar from Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking my question and congrats on a good print here relative to peers. I guess, Jamey, back on the 2Q raw guidance. Organic, down 15% to flattish. That's almost in line with one of your peers, Thermo, have they guided through. Maybe talk about what would cause you to come in flattish versus -- and what kind of scenario bakes in the minus 15%, right? And even now, when I look at the COVID contribution here, 8% to 15%, what are you assuming for the low and high-end for the contribution? Thank you.
Yeah. Thanks for the kind words, Vijay. So we put a lot of thought into our guide and looked at it in many different ways and have continued to look at it throughout the month of April as well and looking at all the recent trends. So maybe a little bit of elaborating on the 15% to 23% down.
So what's different? So on the 15% down, we are assuming a mild reopening in Americas and Europe, and the 23% down assumes no reopening. So you basically just have a little bit of recurring revenue that goes throughout the quarter. The way you get to 0%, is you take the high end of our COVID range. So, obviously, the 15% there, and you add it to the minus 15% on the rest of the book, and that gets you to zero. And then the down 15% is the 23% down on the organic demand, offset by maybe 8% on the COVID revenue.
So we had a lot of experience that we looked at in China. I would say, for the most part, that gave us a lot of good information on how the rest of the world will operate with two subtle differences. The first is in immunodiagnostics. Immunodiagnostics makes up a large percentage concentration in China. So it's probably about 35% of China revenue. In the rest of the world that's less than 15%, and that's important, because we saw immunodiagnostics get hit outside of, obviously, EUROIMMUN serology tests that are COVID-related.
The second big difference is around reproductive health. So in China, reproductive health was down 40-plus percent. And that's because newborn screening was at 65% utilization versus the historical trends, because people avoided going to hospitals. And prenatal testing was at a 30% level. So we don't anticipate that will happen in the rest of the world. It will still be down some, but we don't think the rest of the world will be as impacted as China was in the first quarter.
So again, we've been looking at many different things. We looked at our China experience, we looked at the orders that we've seen through April, we feel very confident in the guide. And so ex-COVID, it's probably down 15% to 23%. The big difference is the reopening in June or not. And then the COVID revenue, I kind of talked through on Dan's question in terms of serology versus PCR versus RNA.
Okay. This is helpful color. Just one maybe on the operational side and free cash flow side. It was quite remarkable on the margin. Just maybe can you walk us through on the cost controls? Is there’s something that you guys could increment cost actions after you saw some of the China trends sort of rough? How should we think about the margin trajectory here to your rate, maybe fixed versus the variable cost structure of the business? Thank you.
Yeah. So I mean, I think we have a highly variable cost base with numerous levers to pull, and I'll talk about the first quarter in a second here. But just broadly, there's three categories of costs. The biggest portion is labor. And, obviously, we want to protect our workforce. So there's other ways to control that cost, one around hiring freezes, you can have merit increase freezes, you could actually have pay reductions and hour reductions, benefit reductions. So -- but that's one category of cost that we can control.
The second is mostly related to products, and that is highly variable. You either have the product or you don't. The only other part that I would put in there is maybe freight, so we work with our customer’s like that.
And then the third part is indirect. So travel and entertainment, third-party services, utilities, supplies, et cetera and that is where we have clamped down significantly. And every dollar is precious right now, and we've raised authority levels to really control that spend. But I’d say all three categories are highly variable. So to your point on the first quarter, yes, as soon as we saw China unfolding in February, we started to enact quite a few measures, which helped, obviously.
I would also say there's probably a couple of one-timers in there that helped with our cost control. But certainly we enacted several measures. We did not touch our workforce. But overall, that should benefit us heading into the second quarter that we get a full benefit of those cost controls and others, if we want to look at.
Thank you. And our next question comes from Derik De Bruin from Bank of America. Please go ahead.
Derik De Bruin
Hi, good afternoon.
Derik De Bruin
Hey. So I guess first question, and pardon me, forgive me if I missed this, but your access to labs with the OneSource, are you in -- I'm just sort of curious in terms of what you're seeing in terms of number of lab shutdown. And you're not a big academic and government player, but I'm just sort of wondering what your thoughts are on sort of like colleges, university and spending in that end market? And just market? And just sort of how you are thinking about those markets opening up?
Derik, on the OneSource side, right, I think what we are starting to see that some of the large pharma we are starting to engage and they have started sort of putting plans in place for us to get back. And we've started seeing engagement there. You want to talk about the academia?
Yes. I mean the only other thing I'd say on service first is -- I mean the enterprise side, I think is holding in better than just the core service. We do have some access throughout the Americas more so than Europe. But in general, enterprise holds up a little bit better.
In terms of academic, luckily, it's a small percentage of our revenue base, but it is down and mostly closed. And I would anticipate that for the most part is closed throughout the entire second quarter guide here.
I mean, even in China, even though some of the academias are coming back, they are still sort of starting to enact safety measures and new ways of working Derik. So, it hasn't really started.
Derik De Bruin
Great. So, this may be an unfair question, but I'm going to ask it anyway. So, apologies in advance. But everybody is benefiting. There's a lot of testing going on. And I think one of the biggest questions we're getting from investors right now is what's the sustainability, like if you sort of look at going -- exiting in Q4 going into 2021, what do you think -- or what are you planning for right now in terms of demand for molecular testing, demand for serology testing?
The number one question I'm getting is like, is this something that is sustainable throughout the year from these companies that are benefiting? Is it -- does it fizzle out? Does it last until there's a vaccine? I really appreciate all of your thoughts on the sustainability of this, because obviously, the sustainability has a lot tied to do with like how markets return to normal.
Yes. I mean, it's a very -- I'm not going to say it's a fair or unfair question, Derik, but it definitely is a very interesting question that we brew and spend a lot of time thinking.
The one benefit that we have is that we've got 13 sites across the globe. And the things that we focus on right now are globe. And the things that we focus on right now are sustainability of supply chain, second level suppliers, redundancy, how do we ensure that if there is an infection at a particular site that there is another site up and running. And that's why you will see that we've got RT-PCR coming in from different sites.
There was an issue earlier regarding shipment from China, which is now resolved. But that's where our focus really is on that, how do we have a sustainable, long-term, multi-pronged approach for availability of products from different sites and different regions.
And this is where our geographic footprint is coming to floor. We can now manufacture product at different sites that can be used regionally. And I think that's the way we are thinking as we continue to significantly ramp up capability and availability of products over the next several months.
Thank you. Our next question comes from Steve Willoughby from Cleveland Research. Please go ahead.
Good evening. Hi everyone. Two things for you. I guess first, Jamey, just so we're all on the same page. The commentary you provided as it relates to the second quarter and EPS of at least $0.65. Just to be clear, in a worst-case scenario situation and organic revenue was down 15%, do you still feel comfortable with that $0.65 number?
Yes, that's right. Steve, it ties -- yes, the $0.65 is tied to the low end of our guide or the down 15% overall. Or I think I quoted $610 million of revenue. And I'd encourage you to kind of look at a first quarter 2020 to second quarter 2020 comparison. So in the first quarter, we generated just about $650 million of revenue. So we're down $40 million on the revenue line, but there's a significant mix shift moving forward that we anticipate more COVID-related revenue that gets a gross margin uplift overall.
So that helps, overall, offset the volume decline. And then to the earlier question on cost, obviously, we get a full quarter of cost control versus the measures that we enacted in the first quarter. So, overall, we're down $40 million on revenue, but only down $0.02 on EPS, and it does tie to our low end.
Okay. And then, secondly, the serology test. It was commented, you're able to make 2.5 million a month right now, but potentially could ramp that up to 10 million by the end of the month. The incremental COVID related revenue that you talked about of 8% to 15% tailwind, is that assuming the 2.5 million run rate or does it also include ramp it up to 10 million for the month of June?
No, that includes some kind of ramp, whether it gets to exactly 10 million or not. It's kind of in the range here. But, yes, that assumes it's certainly a ramp from the 2.5 million.
Okay. Thanks very much.
Thank you. Our next question comes from Doug Schenkel from Cowen. Please go ahead.
Hey. Good afternoon. I'm going to build off of that last question. And then, I just want to come back to a couple of quick guidance cleanup questions. So, following up on the earlier questions on serology testing. It definitely looks like a very good assay, and you should be commended on moving so quickly.
That said, there's now some very high throughput, high-quality solutions available from major automated immunoassay platform companies. Coincidentally, we just did a call this afternoon with the CEO of one of these major companies. And he confirmed pricing per test is well below $10 per test, I think, actually below $5 per test, actually.
And he noted that they have an installed base of thousands of instruments that can do tens of thousands of tests per week with plans to produce nearly 100 million tests per month. And that's just one of the big guys. So with that in mind, what's the sweet spot for the EUROIMMUN tests? And how are you going to price relative to Roche, Abbott and the Beckmen's of the world?
Yeah. Hey, Doug, this is Prahlad. I think, the way we -- our focus is on differentiation around the science. That's why, when we went with the S1 spike protein and looking at IgG, if it is proven that IgG does confirm immunity, our IgG test will be more useful than other dual or tri antibody tests.
Especially if you're comparing it to an early IgM response or an IgA, I'm not sure it gives full value around immunity if it is proven. And that's why, the way we look at it, having an S1 spike protein, which is developed around mammalian cell line, gives a very high degree of specificity, which is what the same large labs and customers are looking for. And that's why our focus has been, hey, rather than have IgM, IgA, IgG on an end capsid protein, we have got to focus on something that provides a high degree of specificity around the disease immunity. And that's where we are going.
Okay. Prahlad, so…
Yeah. I would just go back to the automation point, too. I mean, there are thousands of systems that are open out there to use our product. In addition, the workstation that EUROIMMUN provides is a high throughput solution, and many companies are picking it up along the way here, Doug.
Yeah, understood. No, again, it's a good assay, and it can run on a lot of platforms. It's just and again, I think there's probably enough demand for almost everything in the near-term. It's just – you look at companies like Roche and their test is IgG, and they're talking about close to 100% specificity, and they got a lot of capacity, and I think they are pricing closer to zero than $10 per share. So that's kind of the root of the question.
So the other part of my question was your pricing assumption there. Are you – we've heard you guys are pricing closer to $20. I don't know if that's true. But is there an expected change in pricing moving forward?
That is not the assumption. I'm not sure where you got that number.
That's very high, Doug.
Okay, okay. That's great. And then just very quickly on guidance. It appears just given some quick math, and I might be wrong, but it appears you're assuming operating margin in the mid-teens in the second quarter. Is that right? And then is, kind of, the answer to how you get there, just the answer to the last question, just think about what you did in Q1 and think about some rationalization and some improvement in mix, and that's how you get there.
You got it. That's right.
Okay, all right. Thanks again. Really appreciate it.
Thank you. Our next question comes from Steve Beuchaw from Wolfe Research. Please go ahead.
Hi, thanks for taking the question. Thanks for the time here this afternoon. I wanted to ask, first, more of a zoom out strategic planning question. The operating environment that you're contemplating for the next year or so, it's going to be unique in that some of your customers in the government and academic space are going to have to make decisions about how they allocate funds. How do you think about across academic, food, environmental, the big buyers of product that our government affiliated, how they allocate funds and how that might look different relative to 2019 or recent history?
I think, Steve, the way we would look at it, it is dependent on the end market segment that you are looking at, right? That on food, let's just take that as an example, there are certain aspects of food testing and quality that will become more pertinent and important as you look at food supply chain.
Around the diagnostics side, you might continue to see funding related to COVID products, at least over the time horizon you are talking of. On the life sciences side, there’ll be a significant amount of funding moving into infectious diseases. And that's how we are pivoting, whether it's around our informatics business or even as companies ramp up vaccine production capabilities, our OneSource comes into play there. So I think the diversity of our portfolio and our footprint allows us to pivot our offerings and also our competencies based on where the market goes.
So, yeah, I mean, that doesn't mean that everything will have an opportunity. There will be some product lines that will see some pressure depending on where funding goes. But I think, hopefully, and fortunately for us, we've got enough irons in the fire that we will be able to address our customers' needs based on the funding.
Okay. Much appreciate it. And then one for Jamey. I wanted to follow-up on a topic that has some up in Q&A, and it relates to the margin trajectory. I think another way to look at it that might be helpful would be if you could compare and contrast what the margin structure looks like. Feel free to pick whether it's fixed cost, variable cost or whatever you think is the right metric. I think about what it looks like now versus your prior cycles that were challenging, whether it might have been the 2008, 2009 cycle or some of the challenges that all of the space saw in China, maybe in the 13% to 15% range. How is the cost structurally really different such that we should model it different? Thank you.
Yes, I mean, I would break it down between the gross margin line and the OpEx line. I think the gross margin line; we have a very different portfolio. So, less instruments drop out than in the past. And so -- and we probably have more recurring revenue that keeps our gross margin line higher during this time period. So, that's kind of the gross margin line.
On the OpEx line, Steve, the way I think about it in the downturn is it's a choice. I think most of this -- when you're thinking about incrementals, it's what do you need to invest to grow on the R&D line or in your sales force.
I think on the OpEx line, it is more of a choice around what do you want to do with your labor force, what do you want to do with R&D, what do you want to do with your indirects. And like I said before, I think we have a highly variable cost base that can flex pretty well in any environment.
Thank you. Our next question comes from Tycho Peterson from JPMorgan. Please go ahead.
Thanks. Prahlad, you commented on the serology export issue out of China earlier. Are you able to just comment on how much of a headwind that was? And then you also mentioned pre-COVID stocking in the Diagnostics business, can you quantify that?
Yes, Tycho, the issue around China earlier was not serology. It was related to RT-PCR. So, I just wanted to clarify that because all the serology comes out of Lübeck in Germany. And even the RT-PCR, it's resolved, both governments have worked very hard to make that and we are very thankful to both the U.S. and Chinese government to help facilitate this to happen. So, that issue has been resolved. And the second question was--
I didn't catch it.
Pre-COVID stocking. You called out pre-COVID stocking in your prepared comment.
Yes, that's right. Yes. So, as the rest of the world kind of saw what was happening in China, we saw a little bit of stocking both in our EUROIMMUN business, which is why EUROIMMUN's European revenues were up over 30%. We don't think that's a sustainable growth rate. We think it's more in the kind of low double-digits. So, there was probably $4 million, $5 million of stocking in EUROIMMUN.
And then in reproductive health, both in Europe, again, I think labs were trying to get ahead of the risks that if they were shut down, they needed some amount of supply. So, reproductive health had $2 million to $3 million of stocking in it as well.
That said, there was push-outs as well. So, we -- what I talked about in my script, in my prepared remarks, I said $46 million overall. At a high level, that is solely China. So, the $46 million or $47 million headwind is literally just China, 20% of the business, down over 30% versus up mid-single-digits.
There were COVID tailwinds of $19 million; I think I said, which was $11 million of actually COVID product, plus the stocking that I just talked about. But then there was $19 million of push-outs as well.
India was probably the most dramatic. So, as the borders of India shut down, we probably lost $7 million or $8 million of revenue at the end of the quarter that we couldn't ship in. But then it also started to hit Europe and Latin America, as well as the Americas at the end of the quarter.
So, while most of that is noise, both the COVID had tailwinds from a revenue standpoint, as well as the stocking plus the pushout that all nets out, and really the big picture here is, China was the difference. So, that was about a 7% organic swing for us and that's really the story here.
Thank you. Our next question comes from Paul Knight from Janney. Please go ahead.
Good evening, Talking to the sensitivity of your EUROIMMUN ELISA test, and obviously, it's -- with the specificity close to 100 as well. I mean, how do you think that is comparing to what is out in the field? It seems strong. But love your color about that data readout on that high sensitivity and specificity.
It's a very good question, Paul. First off, when we look at the various studies that have shown sensitivity, we have seen sensitivity data that's greater than 94%, three weeks post onset, including 100% in our EUA approval data. But I think the point really is, what you are mentioning is, when people talk about these metrics, the reality is that these should be ranges and not discrete.
For a true comparison, there are several factors that need to be consistent. The assays being compared are, right now, different. Some are total antibody. And ours, for example, is only IgG. The number of tests performed on each one of them are not consistent. They range from 10 samples tested to 1,000-plus sample. So in a 10 sample study, if you have one sample, that represents 90%. But in a 1,000 sample study, one sample represents 99.9%. So this -- and also the studies are performed at different days post infection. We would expect an antibody response to be much more variable early on and more robust three to four weeks out.
More importantly, most of these studies were not independently validated. Ours was validated outside by the FDA. The same cohort of patients are also not used. So in any comparison, you have to use the same cohort. If one of the cohort of patients are on average delayed in antibody response that completely changes these numbers.
So, I guess it's a long-winded way of saying, Paul, that it's difficult to make comparison. We believe the best folks to make these comparisons will be independent bodies and the market itself, as our customers are intimately aware of all these points. Done on the trends, and frankly, in a lot of cases, they have already spoken, both to us and outside in terms of their preference for a highly specific IgG based test.
Okay. Thank you. That’s the -- it just seems like well above typical readouts we've been seeing. And then the last question would be, when the analytical instruments part of the business, do you think that some sectors like energy are permanently impaired and you're having to rethink about what a growth rate is in that particular -- so those niche markets out there?
Yeah, Paul, I'm not sure. I mean, I think certainly, if you put in the E&P producers for oil and gas firms, that's obviously troubled by low oil prices. But if you take chemicals and energy broadly, a lot of companies can actually benefit from a low oil price. So if you think about plastics or reusable bags, in this environment, nobody can use it until you have to produce more.
So actually, chemical and energy, which might make up about 40% to 50% of our industrial business, actually hand in -- held in there pretty well in the first quarter. So I don't think -- I think it depends on the mix within chemicals and energy. But, obviously, I think, yeah, there is going to be some trouble with maybe some of the E&P firms.
Thank you. I show our next question comes from Brandon Couillard from Jefferies. Please go ahead.
Hey thanks. Jamey, you mentioned operating cash flow is pretty good, especially for first quarter of the year. Could you speak to how you're managing working capital in this environment? Are you extending payment terms at all? And have you revised through your CapEx plans for the year?
Hey, Brandon, yeah. So, yeah, we were quite encouraged by the first quarter progress here. In all categories, I think CapEx is relatively flat, but that's kind of was our operating assumption coming into the year, and that's what you saw in the first quarter here.
In terms of inventory, we always have a first quarter build, and the only thing that was a little bit accelerate or accentuate that, I should say, this quarter because we had about $40 million or $50 million of volume drop out of it. So we'll adjust our plans and recover there.
But I think to your point, the biggest point is around receivables, where we've been putting in a lot of work, particularly on the process side in terms of invoicing accuracy, working with customers, et cetera.
To the question as to whether we're seeing customers who want to extend terms, the answer is yes, and we’re working with a handful of high-quality customers. But I don't think it's a very long -- I don't think that will last for a long time. We worked with a few in China; but overall, past dues are in good shape here.
Thanks for clarification. I believe you said in your prepared remarks, mask orders in March were down 20%. Was that specifically for applied and…
Yeah. That was specifically for applied. Yes. Yes, that was 20% down specific to applied markets.
Okay. In case you can speak to DAS overall for either March or April, perhaps?
Yeah. I mean, I think, in general, if you think about this down 15% to 23%, there are three areas that I think will hang in on the better side, and that will be life sciences, reproductive health and applied genomics. And I think three areas that will be on the tougher side, which is applied markets, which is why I commented on it. Food in the core immunodiagnostics business, excluding, obviously, what EUROIMMUN does with serology. So I won't give exact ranges, but you can imagine life sciences, which makes up over 50% of the DAS business was better than down 20% in March.
Thank you, sir. Our last question comes from Catherine Schulte from Baird. Please go ahead.
Hi, guys. Thanks for the question, and thanks for all you and your team are doing to help combat this virus. I guess, first on immunodiagnostics, you talked down 30% in China in the first quarter. What has the recovery look like in that business so far? And how long do you think it takes to return to growth there?
Thanks for the question, Catherine. Hope you're doing well. So yeah, the immunodiagnostics actually in China was over 40% down in the first quarter. I'd say it's back – it's not normal levels. Our immunodiagnostics business is growing mid-teens in China. It is not back to those levels. But basically, the way I will answer that question is we're assuming flattish growth in the second quarter in China and APAC. And I think immunodiagnostics is kind of back to similar levels.
Okay. And then you talked about -- you talked about developing a rapid lateral flow test in China and India. Is that something you plan on bringing to the U.S. or Europe? Or is that more of an emerging marketplace?
Yeah. So Catherine, this is Prahlad. On the lateral flow, which we've received approval for in India, right now, India is not allowing export of any COVID-related products out of the country. So that's going to be focused more from an emerging marketplace. The other work that we have ongoing in Taicang and in Beijing, that probably upon development we might bring to the markets outside of China.
Okay, great. Thank you.
Thank you. This concludes our Q&A session. At this time, I’d like to turn the call back to Mr. Prahlad Singh, President and CEO, for closing remarks. Please go ahead, sir.
Thank you, operator. Thank you all for your questions. Again, I'm proud of our entire organization and how everyone has rated together over the past few months. We delivered very good first quarter results despite the macro uncertainty, and our improved liquidity profile should better position the company in the months ahead.
While there are still a lot of unknowns, the breadth of our capabilities puts us in a unique position to help combat this pandemic. We are leading with science and that is clearly resonating. I have no doubt we emerge from this crisis an even stronger company. Thank you for supporting PerkinElmer, and I look forward to providing further updates on our second quarter earnings call. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.