Q2 2021 Danaher Corp Earnings Call
Good morning, My name is Crystal and I will be your conference operator this morning.
At this time I would like to welcome everyone to the Danaher Corporation second quarter 2021 earnings results Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question at that time. Please press star 1 on you touched on the phone.
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I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.
Thanks, Chris.
Everyone and thanks for joining us on the call with US today are rider Blair, our president and Chief Executive Officer, and Matt Mcgrew, Our executive Vice President and Chief Financial Officer I'd.
I'd like to point out that our earnings release, the slide presentation, supplementing today's call and the reconciliations and other information required by SEC regulation G relating to any non-GAAP financial measures provided during the call are all available on the investors section of our website www Dot Danaher Dot com.
Under the heading quarterly.
The audio portion of this call will be archived on the investors section of our website later today under the heading events and presentations and will remain archived until our next quarterly call.
A replay of this call will also be available until August 5th 2021.
During the presentation, we will describe certain of the more significant factors that impacted year over year performance. The supplemental materials describe additional factors that impacted year over year performance.
Less otherwise noted all references in these remarks and supplemental materials to company specific financial metrics refer to results from continuing operations and relate to the second quarter of 2021, and all references to period to period increases or decreases in financial metrics are year over year.
We may also describe certain products and devices, which have applications submitted and pending for regulatory certain regulatory approvals or are only available in certain markets.
During the call, we will be making forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings and actual results may differ.
For materially from any forward looking statements that we make today.
These forward looking statements speak only as of the day. They are made and we do not assume any obligation to update any forward looking statements, except as required by law.
As a result of the size of the <unk> acquisition and its impact on Danaher is overall core revenue growth profile, we're presenting core revenue on a basis that excludes sales references to core revenue growth food safety sales and the calculation of period to period sales growth.
With that I'd like to turn the call over to Rainer.
Well, thanks, Matt and good morning, everyone. We appreciate you joining us on the call today.
We're very pleased with our strong start to the year with another terrific results in the second quarter, we saw broad based strength across the portfolio, which helped us deliver over 30% core revenue growth more than 70% adjusted earnings per share growth and outstanding free cash flow.
<unk>.
This well rounded performance is a testament to the positioning of our portfolio and our exceptional team who are committed to leading and executing with the danaher business system every day.
During the second quarter, we continued to strengthen our competitive advantage through significant high impact organic growth investment and enhanced our portfolio with strategic growth accelerating acquisition.
We prioritize innovation across Danaher and increased our production capabilities all of which we believe contributed to the market share gains in several of our businesses.
We also announced our pending acquisition of Aldebaran, which will expand our presence into the fast growing and important frontier of genomic medicine.
Putting it all together, we believe the combination of our leading portfolio and DBS driven execution differentiate danaher today and provides a strong foundation for sustainable long term outperformance.
So with that let's turn to our second quarter results.
Our sales were $7.2 billion and we delivered core revenue growth of 31, 5% with strong contributions from all 3 of our reporting segments.
Geographically high growth markets grew nearly 35% and developed markets were up more than 25%.
Revenue in each of our 3 largest markets North America, Western Europe, and China was up 30% or more in the quarter.
Our gross profit margin increased by 710 basis points to 69%, primarily due to higher sales volumes the favorable impact of higher margin product mix.
And the impact of prior year purchase accounting adjustments related to the <unk> acquisition that did not repeat in 2021.
Our operating profit margin increased to 27, 8%, including 775 basis points core operating margin expansion, primarily as a result of higher gross margin and continued lower operating expense as travel and other related costs remained below.
Pre pandemic levels.
Adjusted diluted net earnings per common share of $2.46 were up 71% compared to 2020.
We generated $1.8 billion of free cash flow in the quarter up over 40% year over year.
In June we announced our intention to acquire Al Dev, Ron a producer of high quality plasmid, DNA mrna and protein serving academic biotechnology and pharmaceutical customers.
The addition of <unk> will expand our capabilities into the important field of genomic medicine, where we're seeing the accelerated adoption of gene and cell therapy, DNA and RNA vaccine and gene editing technology.
We anticipate all that Ron will be accretive to danaher on multiple levels and we expect the business to generate $500 million of revenue in 2022 with more than 20% annual revenue growth and a strong margin profile.
We look forward to welcoming this incredibly talented and innovative team to danaher once the transaction closes.
In addition to announcing deals ever on acquisition, we also accelerated several organic growth investments across the portfolio.
1 of our core values at Danaher is innovation defines our future.
And we have made a significant commitment toward our research and development effort, increasing our research and development spend by more than 30% year over year to bring more impactful solutions to our customers.
At <unk>, we launched the Zena top 7600 high resolution accurate mass spectrometry system that enables scientists to identify characterize and quantify molecule at previously undetectable level, helping to advance the development of new buy therapeutics.
And precision diagnostics.
At Beckman Coulter diagnostics, we recently introduced the Dx a 5000 fit our cash.
Compact automation solution designed for small and mid sized laboratory that reduces up to 80% of the manual steps typically required for sample preparation.
These are just a few great examples of how we're continuing to invest for growth across danaher to support our customers and enhancing our competitive advantage through innovation.
Additionally, we're making substantial investments to expand capacity across our bio processing businesses and cepheid.
Near term these investments are supporting existing customer demand driven by both the market and meaningful share gain but they're equally important to support the long term growth of these businesses.
Where we see tremendous runway ahead, given the underlying structural growth drivers in the markets. They serve.
We expect our total capital expenditures across danaher to be approximately $1.5 billion in 2021, as we continue to invest in support of our customers' needs today and well into the future.
We believe the strategic combination of these organic and inorganic investments across our portfolio will reinforce our competitive advantage and accelerate our growth trajectory going forward.
Now, let's go into more detail on our quarterly results across the segment.
Life Sciences reported revenue increased 41, 5% with core revenue up 35%.
This growth was broad based with most of our major businesses and the platform delivering 30% or better core growth.
We continued to see strong demand for our bio processing solutions with combined core revenue growth of more than 40 percentage, Eva and Pall biotech.
Our non COVID-19 related bio processing business was up low double digits, where we saw robust customer activity and order rate.
Covid related vaccine and therapeutic revenues were consistent with the first quarter and exceeded $1 billion over the first 6 months of the year.
So I'd be remiss, if I didn't take a moment to reflect on site, but its a fantastic first year as part of Danaher.
We've established a new company with a new brand name added more than 1500 associates and made substantial progress in the transition to danaher.
All while maintaining world class support of our customers significantly ramping production capacity and growing revenue by more than 50%.
When we announced the acquisition, we talked about the strategic and value creation opportunities. We saw and we're excited to welcome such a talented and engaged team to danaher.
I think it's fair to say they've exceeded our expectations in every way and that's really a testament to the site team who've embraced danaher and the Danaher business system and continued to execute exceptionally in support of our customers.
Moving to diagnostics reported revenue was up 45% and core revenue grew 37% led by more than 50% core growth at Cepheid.
Beckman diagnostic.
Leica Biosystem each grew more than 30% as patient volume and clinical diagnostic activity approached pre pandemic levels around the world.
At Cepheid growth outside of respiratory testing was led by our sexual health and hospital acquired infection assays, particularly among newly acquired Cepheid customers.
In respiratory testing, we believe we continued to gain market share as expanded manufacturing capacity enabled the team to produce and ship approximately 14 million cartridges in the quarter.
As expected Covid only test accounted for approximately 80% of these shipments while our 4 on 1 combination test for COVID-19 flu a flu b and RSV represented approximately 20%.
This broad based performance across Cepheid was driven by the team's thoughtful installed base expansion over the last 15 months and is evidence of the significant value that it provides the clinician with the unique combination of fast accurate lab quality result, and the best in class easy to use.
Workflow at the point of care.
Moving to our environmental and applied solutions segment.
Reported revenue grew 15, 5% and core revenue was up 13%.
Revenue growth accelerated across both platforms with water quality up high single digits and product identification up approximately 20% in the quarter.
And our water quality businesses demand for analytical Chemistries and consumables was driven by improving activity across municipal chemical food and beverage end market.
Equipment order rates accelerated as customers got back up and running and began to invest in larger projects.
This acceleration reflected a broad based recovery with growth across most major geographies and.
And end market.
So with that as a backdrop for what we saw this quarter, let's spend some time going through trends geographically and across our end markets.
Looking at conditions around the world most major regions and countries have broadly return to or are approaching normal operations.
This is reflected in the strong results, we've seen across the U S Europe and China.
That said, we're mindful of the emerging COVID-19 variance driving further outbreaks and have taken action to help minimize the potential impact on our respective businesses.
And at this point, we've seen no material impact from recent variant or selective lockdown.
We saw positive momentum across our businesses with order growth trending above revenue growth. Most of our end markets have largely recovered with growth rate at or above pre pandemic levels as customers have adopted to.
The new environment.
In person commercial activity continues to rebound and we're seeing our teams spend more time on site with their customers a trend we expect to continue as we move through the year.
Across life Sciences, we're seeing healthy demand in most of our end market led by Biopharma, where the pace of customer activity remains elevated.
<unk> funding levels are robust and the number of life saving biologic and genomic based therapies in development and production continues to rise and it is further augmented by the work around COVID-19 vaccines and therapeutics.
Today, there are over 1500 monoclonal antibody based therapies in development globally, which is more than 50% increase from just 5 years ago.
We also see over 1000 gene therapy candidates in development today, a 10 fold increase over the last several years as these technologies mature and therapies gain regulatory approval.
Given that many of these candidates are still in early stage research. We expect the growth rate of this market to remain strong for many years to come.
In addition to the growth in biologics and genomic based medicine. There is significant demand related to COVID-19, vaccines and therapeutics, both on the market and in development today.
Given the interest we're seeing from customers looking to address emerging variants and increased global supply as well as evolving vaccination guidelines globally, we expect to see durable growth in this segment of the Biopharma market for the foreseeable future.
At the current pace of vaccination, it's clear that vaccine demand will continue well into next year we.
We expect to recognize $2 billion in Covid related vaccine and therapeutic revenue in 2021, and anticipate entering 2022 with approximately $1.5 billion in COVID-19 related backlog.
These assumptions do not include the potential contribution from booster shot or an expansion of availability to populations under 12 year old.
Due to the level of uncertainty around each of these scenarios.
Given the growing numbers of drug.
<unk> developed and the increasing scientific sophistication required to discover and manufacture. These complex therapy customers are looking to partner with vendors, who can reliably supply them with solutions for their most challenging problems as they move from the lab to production scale or.
Our comprehensive bio processing portfolio and scientific expertise positions us well to do just that and we're confident our proactive investments in innovation and capacity will help us meet this growing customer demand now and far into the future.
And the clinical diagnostics market patient volumes are at or near pre pandemic levels in most major regions as patients are returning for wellness check routine screening and other elective procedures.
In molecular diagnostics, while PCR respiratory testing volumes in the U S have declined we're seeing persistent demand for cepheid testing at the point of care.
Outside of the U S, which makes up approximately half of Cepheid revenue, we continue to see strong demand for our testing and vaccination rates lag and emerging variants drive outbreaks.
Now as I mentioned earlier, we shipped approximately 14 million respiratory test during the second quarter up from 10 million shipped in the first quarter and we now expect to ship approximately 50 million test in 2021.
Looking ahead with the assumption that COVID-19 will be an endemic disease. We believe that the point of care molecular respiratory testing market will expand significantly from where it was prior to the pandemic and.
And given cepheid, leading positioning around speed accuracy and the ease of use workflow advantages. We believe will continue to gain market share.
Yeah.
The combination of these market share gains the expansion of Cepheid, a leading global installed base and the broadest molecular diagnostic test menu on the market creates significant opportunities ahead for broader utilization and demand for Cepheid point of care molecular testing solutions.
Yeah.
Moving to the applied market, we're seeing a continuation of the steady improvement over the first half of the year customer activity is accelerating in line with broader economic activity, which we see in healthy order rates for consumable and increasing investments in equipment.
Across municipal markets globally consumables demand remains solid as customers continue to test and treat water and instrument oriented project activity is accelerating with the improving funding environment.
Now, let's look ahead to our expectations for the third quarter and the full year.
We expect to deliver third quarter core revenue growth in the mid to high teens range.
We anticipate high single digit core revenue growth in our base business and a high single digit core growth contribution from Covid related revenue tailwind.
Additionally, we expect to generate operating profit fall through of approximately 40% in the third quarter and for the remainder of 2021.
For the full year 2021, we now expect to deliver approximately 20% core revenue growth.
We anticipate that Covid related revenue tailwind will be in approximately 10% contribution to the core revenue growth rate and in our base business. We now expect that core revenue will be up 10% for the full year on increase from our prior expectation of high single digits.
So to wrap up.
We've had a great start to the year and we see meaningful opportunities across danaher to build upon this outstanding performance on.
Our second quarter results reiterate the power of our portfolio and our exceptional team a unique combination that differentiate danaher today and provides a strong foundation for sustainable long term outperformance.
And with that back to you Matt.
Thanks Ryder that concludes our formal comments for so we're now ready for questions.
Thank you.
As a reminder, if you would like to ask an audio question. Please press star 1 on your Touchtone phone.
Your first question comes from the line of Tycho Peterson with JP Morgan.
Hey, good morning, Congrats on the quarter, Roger I think 1 of the debates around the stock still around the testing outlook in particular around 2022 perceptions. I know you came out on the first quarter and talked about this.
That he thought trends would be sustainable heading into next year can you, maybe just talk a little bit about what youre seeing in the field. How are you thinking about variance in the near term and what gives you confidence in the outlook for 2022, obviously youre more hospital, which TCR antigen. So we get all of those dynamics, but I think there's still some debate as to whether testing could drop off more significantly next year.
Thanks.
Sure Good morning, and thank you for that question.
Look as we think about the remainder of 2021 and how that sets us up for 2022, just a couple of things to sort of set the baseline here first of all we now expect to ship 50 million test.
In 2021.
For Covid, either COVID-19, only or foreign 1 and that's that we've taken that up from the $45 million.
Test guide before and the confidence that that we gained here is really through what we've seen as we've wrapped up as we've ramped up our capacity here and shipped 14 million cartridges in Q2.
Call. We originally expected to ship $11 million in Q2, 50% of that outside of the U S 50% of that inside the U S.
That really has given us the confidence that there's still plenty of demand for our solution at the point of care and here's why we're we're really not proceeding a slowdown currently in our testing demand and we're shipping everything that we're producing.
So while it's true that we see a lab core lab tests.
Trending downwards, we continue to see strength in the demand for our testing solution.
The other thing that we are considering here as well.
We're a bit concerned about some of the RSV brakes breakouts that we're seeing.
In the U S. But also elsewhere in the world, which makes us think that we will start seeing testing that skew more towards the 4 in 1 solution, which of course tests for RSV. In addition to flu a b.
And COVID-19.
So as we think about.
Where we sit today.
We feel comfortable that we will see.
50 million tests this year and we don't have anything that would indicate that our previous guide for $45 million a test in 2022.
Would be materially different we continue to see plenty of opportunity keep in mind, we've increased our installed base by 40% since the installation of since the beginning of the pandemic.
And of course have the largest testing menu.
With 30, plus test and outside the U S and 20 plus test.
In the U S. So we feel we feel strongly that that demand should be available to us once again because of that unique value proposition at the point of care.
Okay. That's super helpful. And then a follow up on I'll defer on I think you mentioned.
We spoke on the deal that you've been looking at this asset for about 5 years can you just talk a little bit about how you're thinking about synergies.
I know theres capacity expansion, that's coming online next year. So if you could talk to that and then I think to get to you know half a point of growth implied growth rate is closer to 35% GAAP.
On the greater than 20, but I'm just curious how youre thinking about the growth outlook in synergies with Paul on say keep on particular.
You know as we look at all that Ron we really see it as our entry into the genomic medicine market and are seeing it really as a stand alone in that regard specifically with plasma DNA protein and mrna and are really not looking.
Initially here at at synergies related to <unk> or Paul there's plenty of opportunity inside that scope to invest expand capacity in the existing product lineup as well as to globalize that the great majority of ELD ever on revenues are actually.
In the U S. So we see <unk>.
Right opportunities to globalize that Andy from a growth perspective, you know.
Like we said this is in 2022 going to be a half a billion dollar business growing at 20%, adding about 50 basis points.
Danaher is overall growth profile.
As well as adding 20.
EPS in year, 1 and 30% at 30.
In year 2.
And Tycho.
They had a little bit better growth historically than kind of that 20%, but I think again, just sort of from our perspective for that to be prudent from a planning perspective, that's sort of what we've laid out.
We've had a lot of success with that type of <unk>.
Setting up if you will force for acquisitions in the past, but sort of why we kind of come to there versus where they happened a little bit more historically hire.
Okay. That's helpful. And then just before I hop off Matt can you just comment on the bio processing order book I think you said about processing up 40% I assume that was revenues was what was the order book up.
It was north of 60.
Okay. Thank you very much.
Thanks Tycho.
Your next question comes from the line of Derik de Bruin with Bank of America.
Hey, this is Mike Ruskin on for Derek.
My question.
Yes.
Couple of quick ones just to clarify on the Covid contribution for the fiscal year. It sounds like Youre still youre, saying, 10%, which was roughly unchanged from prior but youre seeing a lot more cartridges coming out the.
The 4 in 1 solution should have.
Some better pricing.
If you go on to that versus the the Covid only and the Covid boxes doing better on the order book is strong. So are there some other moving pieces there or is this just some some uncertainty back half of the year just want to reconcile that.
Yes no.
I think the way to think about the Covid tailwind as we sort of took up the number for the full year, Mike and I think what I would kind of talk or think about that is that most of that is the $200 million better cartridge performance that we saw here in Q2 sort of rolling through for the full year. So if you think about the COVID-19 contributions.
We're up to.
$200 million versus where we thought we would be all of that is just going to be sort of rolling back the Q2 beat through to the full year.
The COVID-19 side as far as the 4.1 goes as we think about the contribution kind of going forward. We still think Q3 is probably going to be pretty close to what we saw here in Q2, which was you know 80% of that was Covid only 20% was the foreign 1.
Given what Ryan said.
What we saw last year as well.
But what Ryder set around the RSV sort of outbreak here that we're seeing in the south.
We think we might have a little bit of a different or more of a respiratory season than we did last year.
So sort of as we move forward, we were sort of thinking Q4 that split moves more to a kind of a 50.50 60.40, we will see where it comes out but something more like that in the fourth quarter.
Okay. Thanks, and then could you comment a little bit on.
The instrument trends in some of the automotive markets I didn't get a clean <unk> number if you could just talk a little bit about what youre seeing in lcm's markets as far as base business recovery.
Sure.
We are if we start with the topic of.
Customer activity.
These analytical market.
They're really at or very near pre pandemic levels.
With the underlying recovery well underway and we're seeing that customers adapting readily to new work environment that we're in.
There were its still necessary or are fully back to normal where the infection rates are really low.
So that that manifest itself in better order rates, our funnels are stronger.
See higher instrument and service sales keep in mind.
<unk> over over 30%.
Core growth here in Q2, just as a marker.
But really all of our major life science operating companies were at or over 30% core growth for the quarter. So we're seeing some very nice.
Momentum there.
And if you look at the 2 year growth stack there were.
Really at or very near to pre pandemic.
Growth rate a lot of this is driven by more customer activity, but we also have to say on our instrument areas and is a place where we have been accelerating R&D investment and we've seen great traction for some of our new product introductions I mentioned, the science seen a top but we've also introduced the 7500 and at Beckman life.
As we introduce the side of flex benched up sales order. So those are all things that contribute to what we think is a is outperformance here in the instrumentation market.
Mike just to give you a sense outside of life Science is just overall equipment was up north of 20% and consumables were north of 30. So just to give you a sense of that that's not all that different from what we saw elsewhere as well.
Okay, Great..1 last quick 1 if I can squeeze it in I think you called out Capex of 1 billion on a half of the year, that's a pretty nice step up even with even with such even the numbers I'm just wondering how much of that is specific to.
More cartridges for Cepheid for Covid or more on the bio processing side and.
Is this a fair jumping off point for 2002 on beyond.
Thanks.
Yeah, So I think Mike normally even inclusive of Cepheid.
But we'd probably be more like $850 million in capex. So I think you can kind of size the delta on that 1 billion and a half with that.
I would say that the preponderance of the increase that Youre seeing there is gonna be at Cepheid and <unk>.
As well as it Paul.
On a bio processing so those would be the 3 big ones that will be sort of driving that increase.
I suspect you'll see that obviously this year I suspect we might be at that.
Something in between those 2 numbers, maybe you were at the higher end of that number the $8.51 billion on a half as we head into next year, but I think over time that probably does start to come down.
Such as we you know as we've talked about we've been pulling forward a lot of the capacity increases that we were already planning.
For all of those businesses just given the demand now plus the longer term secular growth drivers. So.
This is sort of more of a pull forward is the way I think about it and I think you'll have a little bit of a a bolus here for a couple of years, and then probably come back down to a lower landing level.
Fantastic. Thanks, so much.
Thanks, Mike.
Your next question comes from the line of Vijay Kumar with Evercore ISI.
I'm wondering VJ.
Good morning, Ryan and team congratulations on that on a solid print this morning.
Maybe 1 on vaccines and our bioprocess sing right now.
The commentary around backlog exit backlogs stepping up for the year in light of <unk>.
It feels like.
Maybe.
On the order.
Conversion, maybe that's stepping down in back half.
And and.
Is that the right way and this is just more of a timing thing that we're thinking about it on on the vaccine side. When you think about the revenue cadence.
And then ex ex vaccines when you think about base bio processing, we just had a major.
In Alzheimers drug approval on.
I'm curious what it does to either industry growth or perhaps on your business.
Okay.
Well, let's start with bioprocess and how to think about that.
So.
Just to level set we expect to do and for vaccines and therapeutics. This year $2 billion in revenue and that second half is going to be consistent with what you saw on the first half and so the activity level remains elevated and any detail that.
Youre thinking about is purely related to comp.
Now more broadly speaking speaking really for total Danaher, the Q2 Q3 prior year step up.
Over 1000 basis points right. So if you keep that in mind I think that characterizes.
The activity level appropriately, we continue to see strength in vaccine and therapeutic orders, Matt just talked about it with tyco, 40% plus on the revenue side in Q2, 60%, but on the order side. So the activity level remains very.
High and we expect that this will continue which is why we're confident in talking about 1 billion and a half dollars of backlog for 2022, which sitting here on July 20th looking forward is a good place for us to be and it gives us as you think about 2022, you know a number of quarters.
We continue to strengthen that so theres a great deal going on in the vaccine and therapeutic space keep in mind.
Goal out that we've seen has been primarily a developed market story, we're starting now to see some of the emerging market vaccine manufacturers kicking in and ramping up there theres 3 in China to say an example, another 1 in Russia of course, several more and Theyre just starting.
Moving to kick in so we expect that all to provide you know really some sustained strength for some period of time.
Jay maybe just set up a 100000 foot view just to kind of think about.
That in each of the last 5 quarters in biotech.
The bookings have been higher than revenue and that was also true in Q2, just to kind of you know, there's all kinds of numbers in comps and everything else.
Fixed step back.
Just kind of keep that in mind as we as we head into the second half.
Now coming back to your Alzheimer drug question with agile home. So first of all we cant comment specifically on on any particular driver, but we're absolutely delighted to see that science in the pharmaceutical industry is making progress on this.
On disease, Alzheimer's as you know a flipped so many around the world and there's a real need for a solution at this point. It's early days as you know there's quite a bit of discussion around the efficacy of the drug.
Size of the target population reimbursement and a number of other questions, but I might say that you know this is 1 drug there are several others that are in late.
Stage.
Qualification and approval processes and so we do see here.
Indication of Alzheimer's disease, becoming more and more relevant for.
For monoclonal antibodies.
Obviously early to say what impact it has but we can say that with the breadth of our portfolio the capability of our team and the penetration that we have on the market. It's fair to say that were represented on all of those projects and are confident that we can supply those should there be a enel.
On elevated need.
That's helpful Rainer.
Matt 1 quick 1 for you appreciate you kind of simplify the numbers a lot of numbers flying around Florida.
Orders above revenue for 5 quarters, I think that's straightforward.
Margins for.
Assuming mixes.
The mix impact for 'twenty 2.
Any any comments on margins for incremental margins for fiscal 'twenty..2 is the expenses come back.
VJ I'd love to have the Crystal ball for 'twenty, 2 for you, but I'm on.
I'm, just still hoping to get a get some insight into the second half frankly, I mean, you know.
We are.
You know like you said besides the mix we are starting to as we as we got into the quarter. I mean, we had a pretty good fall through here in the quarter again, but.
We are starting to see activity resume a little bit, especially late in the quarter.
A little bit more travel activity, a little bit more kind of people doing person in person things and so.
Think it's in my mind, it's a question of there's 2 things.
When do the costs come back because I do believe we will have some costs come back.
And how fast that happens so it's just really kind of balancing those 2 and I think there is still enough uncertainty out there.
It's difficult to pin that down I'm, hoping that as we get into the fall.
Here.
We get a little bit more.
You know a bit more color on that and hopefully be able to provide a little bit more when we talk about 'twenty 2.
Later in the year, but just.
Fortunately I think it's a little early force to think about it but yes.
Yes.
That's where we are today.
Understood. Thanks, guys.
Your next question comes from the line of Scott Davis with Melius research.
I've got afternoon guys.
Good morning.
You've got I mean, I was really surprised I thought you might mentioned labor and logistics costs and some challenges there particular end up cash.
Is there a meaningful impact on margins more broad based on E&S, if so and just leave it at there yeah.
Yeah.
It's it's a it's a fair point Scott I mean, we have definitely seen it I think again similar to the travel sort of as we've moved through the quarter. I think we are definitely seeing inflationary pressures here in supply chain pressures I would say that right now for us it is modest.
We were able to manage through it on some of that with with better price on our side and some of it just being able to on the on.
On the daily work, if you will from a DBS perspective, but we are definitely seeing that we are seeing it.
Resins, and plastics and metals.
Again, not a huge part for us, but we do see it where that happens I think the 2 biggest pieces for us Scott our freight is definitely an issue fewer cargo flights obviously.
It means it's a little bit more expensive to move things by air.
I think as.
Everybody has read and saw electronics, particularly in the supply chain around the chips globally has been.
A challenge for us as well so again haven't seen a material impact I do believe that as we move forward into the second half.
That probably does not abate, if anything might step up a little bit.
Clearly a challenge here for us, but so far we're going to work through it.
With.
With some hard work and a little bit of price in some P. T V.
Just to follow up on them at times like this really make looking at things like on time delivery kind of wonky in hard to even think yeah.
Can you still use that metric with any real sense of confidence or since orders are so high.
We don't compromise.
Uh huh.
The core value customers talk we listen in on our focus on.
Quality delivery and cost remains our north star.
And we drive our processes and with that anybody who is associated with that starting with our what we can control internally, but also our supply partners, who have been stepping up to the plate supporting us here and making the necessary investment, but we're not going to compromise on on time delivery and meeting or exceeding our customers expect.
Patients.
Well, that's good to hear well congrats guys and congrats on a great start Rob Reiner and your CEO tenure I'll pass it on thanks, Scott, Thanks, Scott and Kevin.
Your next question comes from the line of Doug Schenkel.
Good morning.
Hey, good morning team.
I just.
On a go back and try to kind of take a different angle on some of the questions regarding durability of.
Growth when it comes to you on.
All things post Covid.
So on Cepheid.
You know that there was an earlier question on the outlook for testing volume in 2022, as you've noted before Youre gene expert installed base increased by about 40% since the beginning of the pandemic. You've also previously talked about your efforts to be as smart as you can.
Where do you place boxes essentially the goal has been to as much as possible pull forward placements.
Especially in areas of the World, where he may have been under indexed in an effort to make sure that these instruments are used durably over the long term.
Was wondering if you could share some specific data on how youre, having success with newer accounts driving utilization of these boxes for non COVID-19 purposes, and Additionally is it possible that there are some new assets coming over the coming quarters that might move you into additional test in categories, but also boost your confidence in the outlook.
Durability.
I ask because right before the pandemic got going we had picked up on some signs that there were some notable advancements being made on assay development initiatives, including some of those talked about in the past by old Cepheid management, which would greatly increase the Tam for the company.
I think a lot of lingering concerns about this category would be further sewage bye.
Combining.
What we saw in Q2, which was really strong.
With the outlook for assay menu expansion and some positive signs in terms of what's going on with newer accounts.
Yeah.
Thanks, Thanks, Doug and I think you're onto a.
Strong point here, which is and we saw this in Q2, but just to level set for everybody here on the phone once again.
We've increased our installed base here since the beginning of the pandemic by 40% plus.
And that put thousands of instruments into places where they haven't been before and we've tried to do that very strategically always of course wanting to help with the COVID-19 pandemic in the near term requirements and needs, but also looking beyond that to see whether those care settings would be able to use the menu that we.
Have available today and the 1 that of course, we develop every day in order to launch new assets and we have seen that starting to play out in places where perhaps the COVID-19 need is not as strong and particularly at new customers.
And that's manifest in for instance, in our sexual health or hospital acquired infections assays, which are up 30% plus.
Here in the second quarter.
And provide us with you know on additional tell a pillar of strength and so we're very pleased with that and we expect that to continue here as we not only make progress in the U S. But in the rest of the world. So very important point the menu is gaining traction and we're starting to see that play out here.
Here.
In the second quarter and expect that to continue to be the case going forward now as it relates to new assays. Please know that we are working on new assays every day and you can expect us over time to continue to broaden that lead in menu breadth as well as depth Oh.
Over over time, so that's absolutely a part of.
Our daily activity here.
Okay Super helpful and then hopping over to really the Paul on the <unk> side of the equation.
As we've talked about it a few times.
The expected backlog heading into 'twenty 2.
It was 1.5 billion.
The potential for upside I think seems pretty clear specific to COVID-19.
There is still some investor uncertainty with regards to what happens if demand were to slow in this category.
Our basic but important question is if demand were to slow for COVID-19.
Covid related products and services in this category is it fair to say that you are comfortable that there was enough demand more broadly across biopharma.
Essentially compensate for that I mean, our thinking has been this has been an area where.
There just hasn't been enough good supply of products and services and that's presented you with a fantastic opportunity to basically solve that problem. Even if the COVID-19 demand were to slow, presumably youre still going to be able to essentially reallocate these products and services for other purposes is that a fair way of thinking about things.
I think so and before we move on to the non COVID-19 strength out there, but to reiterate in relation to that backlog number that we talked about what assumptions are in that and which assumptions are not in that number so in that $1.5 billion.
Backlog.
That's in addition to the $2 billion that were shipping this year that includes all of the <unk>.
Through vaccines, whether those are approved in the U S and Europe or elsewhere as well as those in late stage trials, which you can imagine we're very close to so that's absolutely a part of how we're thinking about that and it includes these emerging market vaccine that I was talking about but what it doesn't include.
<unk> is a booster shot and we know from Israel, We know from the U K, we know from China that those countries are now moving to booster shot, but we have not assumed that to be a part of our our numbers here nor have we included.
On the younger kids 12, and under in a Max vaccination schedule, which you can imagine on a worldwide basis is a pretty big number. So we've kept that out and we think that that's an appropriate assumption now as we look to the non COVID-19 demand, which has consistently been in the low double digits here.
With the 1 or the other quarter, perhaps even above we feel very confident that the number of projects in the pipeline, we talked about it over 1500 monoclonal antibodies in the development pipeline over 50% more than just 5 years ago, and then you add a.
Related to that.
Gene and cell therapies, and genomic medicines, where you have over a thousand projects.
Projects in the pipeline.
Which is you know.
Order of magnitude more than just 5 years ago, we feel quite strongly that the capacity utilization will remain very robust here for the mid and long term.
Alright, guys. Thank you very much.
Thanks, Doug.
Yes.
Thank you and your last question will come from the line of Dan Leonard with Wells Fargo.
Hi, Dan.
Hello.
2 if I may the first 1 on bioprocess thing.
We're still hearing about supply shortages in the market for filters and such when do you think we're going to see more of an equilibrium when supply catches up with demand and is there any change in your thinking on customer inventory dynamics around stocking and such.
So let.
Let me start with this I think that in general there is a strong supply of filters as you mentioned, perhaps single use.
Products and such in the market.
And and that there might be pockets, where you know there are some shortages, but I think I would prescribe those to individual type product shortages as opposed to a broad based shortage as the industry and particularly Danaher has continued to ramp capacity with some of the investments.
We made so I think that what the industry has been able to do as a company the growth here and continue to support that now as it relates to your inventory question.
Here, we have been.
Very very rigorous and our interactions with our customers, who who we've asked and encouraged to give us their orders as early as possible to give us the visibility that we need to ensure that they they get what they need and as such we don't believe that there is.
Pockets of inventory that are sitting here in the industry you can never ignore that there might be 1 or 2 places that perhaps that might be the case, but it's really not material in the overall size of the industry. So we think that the industry is tight on supply.
Everybody is working through it with each other.
With our customers with a great deal of visibility, but of course also with our suppliers that we mentioned earlier, who have also had to ramp up to support us in the value chain.
Okay. That's helpful color and then my follow up question is similar to V. Jay's earlier on the margin side.
Could you perhaps maybe.
<unk> the expense base today, when you have these COVID-19 sales tailwind to a world where there's tailwind might abate. There are there any expenses that go away or just maybe the rate of expense increase starts to moderate thank you.
So I think maybe.
Maybe the way to answer that as you know today, we've been sort of seeing in the last I guess 5 quarters, our <unk> has been kind of 50%.
And as I look forward and think about the expenses coming back and it's not just COVID-19 I would I would say, it's kind of broadly speaking across the business.
We think it's going to start to ramp here in the second half and be in the sort of 40% fall through and Dan If you think about.
Where we've been more historically.
It's probably been more like 35% and so I think what we'll see is that the expenses in here and here again the uncertainty on the timing is what I'm still not sure on but I think what we'll see is that you know that that expense base will come back a little bit more closer to that normal longer term, 35% and part of.
That is not.
Not only.
Are we we're sort of we're sort of seeing the benefits I think of the investments that we continue to make and we have been making.
And innovation and kind of go to market and I think.
With that if you think about today, our base business on a 2 year stack.
For this year is going to be 6% to 7% core growth, which is a 100 basis points plus where we were in 2019 and so I think the investments that we're making.
Are paying off on the growth side, I think both Ryan and myself are inclined to want to try to keep making those.
Investments, while recognizing that we're going to have some costs that come back as we get back to the office and we start to travel again, so maybe Dan on the way to bridge it would be 50% today I think it probably is a little bit more like 40 in the second half and over time I think it probably is something more like 35% if I had to guess.
That's helpful. Thank you very much.
Okay.
We have reached the allotted time for questions I would like to turn the call back over to Mr. Gugino for closing remarks.
Thanks yourself, thanks, everybody for joining us this morning.
We're around all day for questions.
Sure.
This concludes today's conference call you may now disconnect.
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