Q2 2022 Danaher Corp Earnings Call
Speaker 1: The F F.
Speaker 2: Please stand by. Your program is about to begin. If you need audio assistance during today's program, please press star zero.
Speaker 2: My name is Gretchen and I will be your conference facilitator this morning. At this time I would like to welcome everyone to Danaher Corporation's second quarter 2022 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. If you'd like to ask a question during that time simply press star then the number one on your telephone keypad. If you would like to withdraw your question please press the pound key on your telephone keypad.
Speaker 2: I will now turn the call over to Mr. John Bedford by his president of investor relations. Mr. Bedford, you may begin your conference.
Speaker 3: Thank you, Gretchen.
Speaker 3: Good morning everyone and thanks for joining us on the call.
Speaker 3: With us today, our Ryner Blair, our President and Chief Executive Officer,
Speaker 3: and Matt McGrew, our Executive Vice President and Chief Financial Officer.
Speaker 3: I'd like to point out that our earnings release, the slide presentation supplementing today's call.
Speaker 3: the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call.
Speaker 3: and additional materials are all available on the Investor section of our website, www.dannerher.com
Speaker 3: under the heading quarterly earnings.
Speaker 3: The audio portion of this call will be archived on the Investor section of our website, later today.
Speaker 3: under the heading events and presentations.
Speaker 3: and will remain archived until our next quarterly call.
Speaker 3: A replay of this call will also be available until August 4, 2022.
Speaker 3: During the presentation, we will describe certain of the more significant factors that impacted your over your performance. If you can still have a fairly small effect then you can hear that you
Speaker 3: The supplemental materials describe additional factors that impacted your performance.
Speaker 3: unless otherwise noted.
Speaker 3: All references in these remarks in supplemental materials to companies specific financial metrics. and supplemental materials to companies specific financial metrics.
Speaker 3: referred to results from continuing operations.
Speaker 3: and relate to the second quarter of 2022.
Speaker 3: It all references to period to period increases or decreases in financial metrics.
Speaker 4: Are you over here?
Speaker 3: We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals.
Speaker 3: or are available only in certain markets.
Speaker 3: During the call, we will make forward-looking statements within the meaning of the federal securities laws. We will make forward-looking statements within the meaning of the federal securities laws.
Speaker 3: including statements regarding events or developments that we believe or anticipate will or may occur in the future.
Speaker 3: These four looking statements are subject to a number of risks and uncertainties.
Speaker 3: including those set forth in our FCC filings.
Speaker 3: And actual results might differ materially from any four looking statements that we make today.
Speaker 3: These four looking statements speak only as of the date that they are made.
Speaker 3: And we do not assume any obligation to update any forward looking statements except as required by law.
Speaker 3: With that, I'd like to turn the call over to Reiner.
Speaker 5: Well, thank you, John , and good morning to all of you. We really appreciate you joining us on the call today.
Speaker 5: So let me start with, we had a great quarter.
Speaker 5: In fact, our strong second quarter results rounded out a terrific first half of the year.
Speaker 5: Broad-based strengths across the portfolio drove better than expected revenue, earnings, and cash flow.
Speaker 5: And we were particularly pleased with the performance of our base business, which grew high single digits, and believe we gained market share in many of our businesses.
Speaker 5: Now these results are a testament to our team's strong commitment to executing in a challenging operating environment.
Speaker 5: They've done an incredible job leveraging the data or business systems to help mitigate supply chain constraints, manage inflationary pressures, and improve our competitive positioning with impactful new innovation.
Speaker 5: Our second quarter results also highlights the strength and resilience of the businesses that make up Dana today. Thank you. Thank you. Thank you. Thank you.
Speaker 5: Our portfolio is comprised of leading franchises, positioned in attractive end markets with strong, secular growth drivers, all united by a common set of durable business models. In fact, nearly 75% of our revenues today are recurring. The majority of which are consumables that are specified into highly regulated manufacturing processes, are more specific to the equipment that we supply.
Speaker 5: Now on top of that, our strong balance sheet and free cash flow generation positions as well to further enhance our portfolio going forward.
Speaker 5: We believe this powerful combination of our talented teams and the strengths of our portfolio, all powered by the Danter business system, differentiates Danter and reinforces our sustainable long-term competitive advantage.
Speaker 5: So with that, let's turn to our second quarter results in a little more detail. In a little more detail.
Speaker 5: Sales were $7.8 billion, and we delivered 9.5% core revenue growth, including 8% growth in our base business with strong contributions from all four of our operating platforms. $7.8 billion in our base business with strong contributions from all four of our operating platforms.
Speaker 5: COVID-19 testing contributed an additional 150 basis points to core revenue growth in a quarter.
Speaker 5: Geographically, core revenue and developed markets grew low double-vigias with broad-based strengths across North America and Western Europe .
Speaker 5: High growth markets were up mid single digits, including impressive high single digit growth in China.
Speaker 5: Our results in China significantly exceeded our expectations.
Speaker 5: which is particularly notable as lockdowns continued for longer than we anticipated.
Speaker 5: So now I'd like to take a moment to acknowledge our associates in China for their extraordinary efforts and commitment during such a challenging time.
Speaker 5: to the teams that managed the approvals necessary to reopen our facilities, the supply chain and logistics teams that kept parts moving, and the manufacturing associates who spent several weeks away from their families, thank you. Thank you for supporting the reopening effort, and most importantly, thank you for supporting our customers.
Speaker 5: This is such a great example of one of our core values, the best team win in action.
Speaker 5: Now, as we move through the rest of the year.
Speaker 5: We're keeping an eye out for further outbreaks in regional lockdowns.
Speaker 5: But we're currently seeing more normalized business operations in China and expect this positive trend to continue for the balance of the year. and expect this positive trend to continue for the balance of the year.
Speaker 1: Thank you. Thank you.
Speaker 5: Gross profit margin for the second quarter was 60.9%, and our operating margin of 28.4% was up 60 basis points, including 100 basis points of core operating margin expansion.
Speaker 5: Our strong margin performance was a result of disciplined cost management and the proactive measures our teams have taken to address the inflationary pressures we've seen over the last several quarters.
Speaker 5: We're also using DBS tools to execute price actions.
Speaker 5: And we achieved approximately 400 basis points of price increases in the quarter, a significant acceleration from our historical price realization.
Speaker 5: Adjusted diluted net earnings for common share of $2.76 were up 12% versus last year.
Speaker 5: We also generated $1.7 billion of free cash flow in the quarter and $3.4 billion year to date. We also generated $1.7 billion of free cash flow in the quarter and $3.4 billion year to date.
Speaker 5: Now let's take a look at our results across the portfolio and give you some color on what we're seeing in our end markets today.
Speaker 5: In our life sciences segment, reported revenue grew 6% and core revenue was up 7%.
Speaker 5: Strength was broad-based across the segment with high single digit or better-based business core revenue growth at each of our largest operating companies.
Speaker 5: In our bio-processing business, we continue to see record activity levels from early stage research to later stage development and production, which drove a combined four revenue growth rate of high single digits at CITVA and Paul Biotech.
Speaker 5: Our backlog and our order levels remain very healthy and as always, we're working closely with customers to ensure they have the right inventory levels to support their planned activity.
Speaker 5: We are seeing our customers continue the healthy transition away from COVID-19 vaccines and therapies and into previously paused and new programs for other modalities.
Speaker 5: As a result, we now expect COVID-19 vaccine and therapeutic revenue of approximately $1 billion in 2022 down from approximately $2 billion in 2021.
Speaker 5: Now that said, there's no change to our high single to low double digit core revenue growth outlook in our vial processing business for the year. As customers are accelerating their investments across all other major therapeutic modalities.
Speaker 5: This acceleration paired with improving price realization is driving more than 20% core revenue growth in our non-COVID business, up from the low double-digit growth we've seen historically.
Speaker 5: The biologics market remains very healthy, as evidenced by the increasing number of treatments in development and production.
Speaker 5: Today, there are over 1,500 monoclonal antibody-based therapies in development globally, which is up more than 50% from just five years ago.
Speaker 5: This is being driven by both novel molecules in development and the proliferation of biosimilars, which are helping to accelerate adoption in underserved markets as patents on higher volume therapies expire.
Speaker 5: There are also over 2,000 cell and gene therapy candidates in development today.
Speaker 5: A more than 10 fold increase over the last several years.
Speaker 5: Given this backdrop of such a significant and sustained increase in activity, we expect the growth rate in this market to remain very strong for many years to come.
Speaker 5: Now, as the complexity required to manufacture these life-saving treatments increases,
Speaker 5: Customers are looking to collaborate with us to help them solve their most challenging problems and assist them as they move from lab to production scale. And assist them as they move from lab to production scale.
Speaker 5: Cytiva recently announced a collaboration with Bayer to develop the industry's first modular end-to-end manufacturing platform for allogeneic cell therapies, which will help to improve the treatment of a broad array of diseases, including cancer.
Speaker 5: This collaboration is just another great example of how our scientific expertise and leading positions in upstream and downstream applications are helping these cutting edge therapies advance from the laboratory to the clinic. The follow-up mechanism team models we persuade them to equip and employ a standards and promote??, as moulded as Darth Vader's correspondent, the clinic.
Speaker 5: Our more instrument oriented life science businesses collectively delivered high single digit space business core revenue growth
Speaker 5: We're seeing a healthy funding environment and solid demand across most major end markets. And solid demand across most major end markets.
Speaker 5: PSIEX core revenue was up more than 10% in the second quarter driven by an acceleration of new projects at our biopharma, CRO, and academic research customers.
Speaker 5: We continued our cadence of innovation with the introduction of several new solutions that improve the accuracy and efficiency of genomics and proteomics research. of genomics and proteomics research.
Speaker 5: Notably, SyX introduced the Xenoswath VIA, an innovative software solution which doubles the number of proteins that can be discovered versus previous Swath approaches. Helping researchers discover more potential biomarkers and better understand the cause and treatment of diseases. And better understand the cause and treatment of diseases.
Speaker 5: On our genomic businesses, customers are making significant investments in the development of cell and gene therapies, DNA and RNA vaccines, and gene editing.
Speaker 5: IDT had its 10th consecutive quarter of double digit core revenue growth led by robust activity and next gen sequencing and gene writing and editing.
Speaker 5: I'll then run.
Speaker 5: through more than 20% while also making significant progress on the capacity expansion projects needed to support their long-term growth outlook.
Speaker 5: Now moving to our diagnostic segment.
Speaker 5: reported revenue was up 9.5% and core revenue grew 12.5%.
Speaker 5: led by nearly 30% growth at Cepheid.
Speaker 5: Our other diagnostic businesses, including Beckman Culture Diagnostics, Radiometer, and like a biosystems, collectively delivered mid-single-digit core revenue growth, despite headwinds from the COVID-19-related shutdowns in China.
Speaker 5: In China, our diagnostics core revenue was flat year over year. Light access and patient volumes.
Speaker 5: slowly improved as the quarter progressed with a more pronounced recovery in June .
Speaker 5: Patient volumes remain slightly below normal levels, but we expect continued recovery as we progress through the remainder of the year.
Speaker 5: Now outside of China, patient volumes across hospital and reference labs held up well during the quarter and remained at or above pre-pandemic levels despite recent outbreaks of emerging COVID variants. Despite recent outbreaks of emerging COVID variants.
Speaker 5: Our diagnostics customers continue to face skilled labor shortages and are increasingly seeking to improve automation and productivity within their labs.
Speaker 5: This quarter, Leica Biosystems introduced its next generation fully automated advanced staining platform, Bond Prime, to help address these needs in the pathology lab.
Speaker 5: Bond Prime facilitates a continuous pathology lab workflow and delivers the high resolution Thank You.
Speaker 5: with an industry-leading average turnaround time of only 90 minutes.
Speaker 5: Now, as I mentioned earlier, core revenue growth at Cepheid was up nearly 30% in quarter. At Cepheid was up nearly 30% in quarter.
Speaker 5: Low teams growth across our non-respiratory test menu was led by sexual health, hospital acquired infections and virology. There will be another pana center.
Speaker 5: In respiratory testing, strong global demand persisted for Cessia's point of care assays, and we believe we continued to gain market share. Respiratory testing revenue of approximately $750 million in the quarter exceeded our expectations of approximately $400 million.
Speaker 5: The spread of highly transmissible COVID variants and greater incidents of other respiratory infections, such as RSV and flu, led to both higher testing volume and a preference for our 4-in-1 combination test.
Speaker 5: As a result, our four in one test for COVID-19, flu A, flu B and RSV represented about 50%
Speaker 5: of the 16 million respiratory cartridges shipped in the quarter with COVID-only tests accounting for the remaining 50%.
Speaker 5: Now, as COVID-19 shifts to an endemic disease state, we're seeing more customers begin to consolidate their point-of-care PCR testing platform onto the Cessia GeneXpert.
Speaker 5: This preference for the gene expert, both within hospitals and across healthcare networks, is evidence of the significant value, the unique combination of fast, accurate lab quality results and an easy to use, best in class workflow provides clinicians.
Speaker 5: In addition, as our customers begin freeing capacity from respiratory testing, they are increasingly interested in discussing opportunities for broader utilization of CESI's leading point of care molecular testing menu.
Speaker 5: Now moving to our environmental and applied solution segment.
Speaker 5: Reported revenue grew 6.5% and core revenue was up 10% with double digit core growth at water quality and mid-single digit core revenue growth at product identification.
Speaker 5: In water quality, chemtree, trojan, and hawk, each grew double digits during the second quarter. In water quality, chemtree, trojan, and hawk,
Speaker 5: Robust growth in our analytical chemistries and consumables was broad-based across all major end markets.
Speaker 5: Equipment sales remain strong with healthy levels of project activity at both industrial and municipal customers.
Speaker 5: At product identification, marking and coding was up high single digits, and packaging and color management grew mid single digits.
Speaker 5: Videojet was up high single digits led by North America where food and beverage sales were particularly strong.
Speaker 6: Are you a team?
Speaker 5: are leading the charge and writing the newest chapter in the DBS playbook.
Speaker 5: to counter the supply chain and inflationary pressures we're seeing every day. They've been re-engineering products to reduce our reliance on hard-to-source electronic components and using daily management to work closely with suppliers to ensure production part availability. to ensure production part availability.
Speaker 5: These efforts, along with our accelerated price actions, are also helping improve our margin position.
Speaker 5: We saw the impact on our results this quarter with more than 100 basis points of core operating margin expansion at EAS.
Speaker 5: Our strong performance also highlights the resiliency and the durability of the high margin recurring revenue business models that make up our EAS portfolio.
Speaker 5: With that color on what we're seeing in our business and end markets.
Speaker 5: Let's now briefly look ahead at expectations for the third quarter and the full year.
Speaker 5: In the third quarter, we expect to deliver high single-digit core revenue growth in our base business.
Speaker 5: We expect a mid-single digit core revenue growth headwind from COVID-19 testing resulting in low single digit core revenue growth overall. resulting in low single digit core revenue growth overall.
Speaker 5: For the full year 2022, there is no change to our previous guidance of high single-digit core revenue growth in our base business.
Speaker 5: and mid-single digit core revenue growth overall. Given our strong second quarter performance, we now expect operating fall through at the high end of our previously communicated range of 20 to 25 percent.
Speaker 5: for the full year.
Speaker 5: So to wrap up.
Speaker 5: We're really pleased with our strong second quarter and first half performance.
Speaker 5: Our results are a testament to the team's consistent execution in a dynamic operating environment and to the durable, balanced position of our portfolio today.
Speaker 5: Looking ahead, our team's commitment to executing with the Danaher business system, our differentiated portfolio of businesses serving attractive end markets, and our strong balance sheet all position Danaher to continue delivering sustainable long-term performance.
Speaker 5: So with that, I'll turn the call back over to John .
Speaker 1: you
Speaker 3: Thanks, Ryder.
Speaker 3: That concludes our formal comments.
Speaker 3: Gresham, we're now ready for questions.
Speaker 2: At this time, if you'd like to ask a question, please press the star and one on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one to ask a question. We'll take our first question from Derek Dubuant from Bank of America. From Bank of America.
Speaker 7: Remande the ritual.
Speaker 7: Hey, thanks for taking the question. This is Mike Risken on for Derek. I like Mike.
Speaker 7: A couple of quick questions. One, on the COVID versus non-COVID bioprocess you talked about, really appreciate the clarity on the reduction in COVID, but then fully offsetting that with non-COVID strength. I want to ask, on the non-COVID bioprocessing, your higher expectations for that, how durable do you think that is in the future years? Is that growth rate in those businesses sustainable for 2023 and beyond, or are we seeing a little bit of a catch up in 2022 just due to some of those projects being
Speaker 7: but on hold the last couple years. Hmm.
Speaker 5: Thanks Mike. I mean, I think the way we see it is the following way. Let's level set on 22 here where in the COVID business.
Speaker 5: We see revenues going from 2021 to 2020 to 2021 billion.
Speaker 5: The non-COVID business, as you suggested, has accelerated here as customers are moving to non-COVID modalities and all sorts of them, very broad-based, and of course, on the margin price end up helping that as well. So we would expect, you know, certainly for 23 to continue to see elevated levels of non-COVID activity, probably above the low-double digits that we have seen historically.
Speaker 5: Too early to say if it stays up, you know over 20%
Speaker 5: But certainly elevated in 23 versus what it's been historically
Speaker 7: Are you seeing any stocking or any change in purchasing patterns by any of your customers, in particular CDMOs? That's related to the buy process, but then just overall anywhere across your portfolio.
Speaker 5: So we have very, very close relationships as a result of, what we've just all passed through here in the last 18 months with all of our customers, we conduct regular surveys. And while there is the one or the other customer that has canceled a large project, which by the way, is not that unusual, right? In this business project, sometimes fail, even at late stage, cynical trials.
Speaker 5: I would say generally speaking, we see healthy inventories across the sector and don't see any major pockets of build up.
Speaker 7: Okay, thanks.
Speaker 7: And then one last one, if I could squeeze it in, the feeling better about the operating margin fall through for the rest of the year, just to clarify, is that the effect of the beat in 2Q, or is there anything else going into that in terms of pricing, supply chain, COVID contribution, sort of like what changed there?
Speaker 5: Yeah, I mean I think certainly Q2 is helpful, right? I mean if you think about sort of where we ended up in the beat that gave us a lot of latitude to offset some of the FX headwinds, but you know I think if you think about what we're seeing in the businesses pricing is...
Speaker 5: is holding in very well, kind of a couple hundred basis points better than we did here in Q1. You look at the supply chain, I think we've done a really good job of managing that plus driving the pricing. So if you think about where we're at from a price cost perspective, we like where we're at. I mean, each of our segments was positive on the margin side here during the quarter. So I do think that as we sort of go forward.
Speaker 8: that we've got our arms around the price cost and feel pretty good.
Speaker 7: Great, thanks so much.
Speaker 2: We'll take our next question from VJ Kumar from Evercore ISI.
Speaker 9: Good morning, B.J. Good morning, Brainard. Congrats on a terrific print here.
Speaker 9: Maybe one in a simplistic question on the guidance here, Ryner, two Q of revenues B by 650 basis points. It looks like by a processing, your orders are strong, instruments are strong, execution coming in about what the annual guidance is, we've created anything going on in second half or is this so-and-so given the macro.
Speaker 5: I think we feel, continue to be, you know, really comfortable with our full year guide here. We've talked about the base business being high single digit here for some time and, you know, we saw that play out here throughout the quarters and we don't see any reason whether that is, you know, demand and, you know, the orders development or the backlog position that would give us pause as it relates to the high single digit.
Speaker 5: base business guide that we have. Now as we talk about COVID testing, I think you as many and all of us, continue to do our best in terms of forecasting what might be happening and testing at any given moment. But as we go forward with testing, I think our perspective that, you know, Q3 in particular is sort of the slowest respiratory testing quarter of the year, you know, is important to note.
Speaker 5: And then of course as you go into Q4, Respiratory Season, picks up again. And so we would expect to see that as well. And as I talked about there in my prepared remarks, you know, we took up that COVID testing number to about $2.5 billion here from around 2.2. So we would also say, you know, it's important to think about China here. China recovered very well for us here in the second quarter after an unexpectedly long.
Speaker 5: shutdown and we continue even today to see the sort of more limited spot shutdowns throughout the country. So we continue to watch that but fundamentally expect the second half in China.
Speaker 5: to be more constructive than it was here in the second quarter.
Speaker 9: That's helpful commenter, Viner, maybe one from a group here. Given increments were at north of 40% in 2Q, you know, I think the guide implies back half, getting back to 25. Any incremental inflation or effects impacts here in the back half that's dragging second half incremental is back to 25% and I think in the past.
Speaker 9: Mac you said LRP incremental should be 35 to 40% is that 35 to 40% applicable for a fiscal 20, or are any any sense to ideas be through.
Speaker 8: I'm sorry, was that fiscal twenty-three, you said?
Speaker 8: Yes, one A for the two-part question, one back. Yeah, correct. Yeah, and the point, yeah. Yeah, so I mean, maybe just, let me just be clear, reiterate kind of what we said for the full year, I can give you a little bit of color on Q3. Hopefully that sort of gets you where you need to be because I think, so let me recap what we said in the prepared remarks. Like Ryan or just that, we reaffirmed high single digit core growth in the base business and overall kind of mid single digit core growth, inclusive of that.
Speaker 8: Like we talked about a little bit earlier, Q2 out performance gave us the ability to fully offset all of the second half at X headwinds, so you'll see that in sort of the margins. Q2 out performance gave us the ability to fully offset all of the second half at X headwinds, so you'll see that in sort of the margins.
Speaker 8: 400 million of incremental FX here since April , talking about a billion three, almost 5% for the full year from a revenue perspective. So no doubt that the second half will have, that FX will have an impact worse than it even did in the first half. Cool.
Speaker 8: But despite that additional aspects had been, we expect to be at the high end of the range that we talked about earlier, and 20 to 25% from a ball through perspective.
Speaker 8: So, you know, just kind of give you that color of where we think we'll be here in the second half, inclusive of that action.
Speaker 8: And then for Q3, revenue is going to be down $200 million year over year, and that is all due to FX headwinds. So if you think about it, we're going to have, call it $400 million of FX headwinds, couple hundred million dollars of core growth and acquisitions, but net net, we're going to be negative here in the year. And from a, I realized.
Speaker 8: From a modeling perspective, it sort of fall through in a negative environment isn't all that meaningful. So I think maybe the easier way to think about where we're thinking about for Q3 is we're expecting our EBITA margins to be about 30% in the quarter. To be about 30% in the quarter.
Speaker 8: And so hopefully with that, and then the full year frame, on 20 to 25%, you can kind of, you know, it frames a little bit of what we're thinking about for sort of the back half from a margin perspective. Hopefully that's helpful.
Speaker 8: That's helpful, Matt, and sorry, on 23, it's 35 to 40. Sorry. Is that still the right number to look at? Yeah, I think, you know, barring any additional FX headwinds or something, who knows what could happen out there these days, but, you know, barring anything else, barring FX or some sort of other macro event, yeah, I think that's right. 35 to 40 on our base business is a good way to think about margins as we head into 23. We've talked about in the past how...
Speaker 8: You know, our margin profile has re-rated from 30 to 35% to 35 to 40 and there's no changes to that.
Speaker 9: That's helpful perspective. Thanks again gentlemen. Thanks BJ.
Speaker 2: Our next question comes from Scott Davis from Melius Research.
Speaker 5: Nice go. Take good morning guys.
Speaker 10: Up.
Speaker 8: Now that we're on the topic of FX, Matt, is FX more of a concern on, I mean, is it more of a translation issue for you guys, or is there a certain level where the competitive dynamics start to get a little wonky in some of the businesses where you move and product around from? From the
Speaker 8: dollar-based regions to non-dollar-based.
Speaker 8: No, I think it's more the former. I mean, it's really what we're seeing now, Scott, is just.
Speaker 8: It's not just the euro, right? I mean, I think that's kind of the key. Yeah, that's the one that gets a lot of the headlines with sort of going to parity. But we really are seeing a breadth of FX headwinds globally that is sort of impacting things as we think about Latin America, we think about Southeast Asia, we think about even China. It's starting to hit us in places where we just, we don't have a cost base, but we've got some revenues. That's a little bit different than maybe in the past but it's a little bit more euro.
Speaker 3: contracts kind of renewed it to get the price is that is there I mean you'd be step up and price you had quarter to quarter here sequentially was was notable and is that some of that just a function of time and of time and
Speaker 3: And is that kind of the standard in some of the businesses particularly around diagnostics? Yes.
Speaker 5: So I would tell you it really does vary around the businesses. Absolutely. We have contracts out there that have notification periods. Those notification periods and the way we manage contracts with 100% visibility to when we can proactively move those prices is a big part of our pricing standard work.
Speaker 5: And in all businesses, including diagnostics, we have been able to move pricing in the right direction, talked about the 400 basis points here in Q3. And as we think about, sort of the second half, the first half between first quarter, second quarter was about 300 basis points, let's call it. And that's a good placeholder here, I think, for the second half as well. Now, as you come to some businesses where.
Speaker 5: Contract terms are longer, let's say. As a result of rates and other types of inflationary pressures, we are able to talk about other types of fees and upcharges that are not directly related to price. And that ends up providing us with the requisite uplift as well. And that ends up providing us with the requisite uplift as well.
Speaker 3: That's helpful. Good luck, Pasha Ram. Thank you guys. Thank you.
Speaker 5: And next question comes from Dan Brennan from Taiwan. Morning Dan. Great thing. Good morning. Thanks for taking the questions. If I wanted to discuss a little bit about the last downturn and what we're beginning to see happen now, obviously the companies.
Speaker 11: dramatically different.
Speaker 11: No Ford of no dead doll and you've got all these great structural growth businesses that you've kind of taken on and are growing
Speaker 11: particularly across all the bio pharma areas. In the last downturn you were down 12% in 09, but again, such a different business. Maybe while we don't know what the magnitude and duration of the moving pieces are, what the slowdown and the recession, if we enter one, will entail, clearly you're preparing for a bunch of different scenarios. I'm hoping you can just maybe help us think about a framework for down in here. This feed right now has you growing, call it like 7% or so on the base for next year. Can you give us a sense of how we should consider the different businesses faring?
Speaker 11: as the economy slows here across LSDX and EAS and it's mid-single digit, a reasonable downside case to think about or a low single, just anything you can help us frame. And again, we don't know what the downturn will look like, but you're in a better position than we are to give us a sense of higher businesses will do.
Speaker 5: Sure Dan, first of all I think you hit it on the head. We are a very different company today than we were in 2009. And some of that you already saw in 2020 where even as the country and the world shut down, we only had one negative quarter and ended up being obviously very positive for the year, even in 2020. But let's talk about the why here first. I mean the portfolio transformation that was purpose driven.
Speaker 5: has made Danaher far more resilient today than ever before.
Speaker 5: And let's talk, let's tease out why that is. I mean, first of all, you know, over 40% of our portfolio, well over 40% is in biofarmer, genomics, molecular diagnostics, and all of these are supported by very, very strong secular growth drivers. And you heard me talk about those in the prepared remarks with the number of, you know, therapeutic projects that are in the pipeline that drive so much value creation and activity in our industry.
Speaker 5: You know, we also see, you know, population increases, access to medical care increasing. So when we think about patient volumes around the world, we see those continuing to increase. So also, you know, from a diagnostic perspective, we're very well positioned. You think about EAS, you know, the positioning there is water is becoming scarcer, unfortunately more polluted and requires more testing. The food supply is under pressure.
And so PID is very much involved in these kind of macro drivers as well. So we feel that from a portfolio perspective, it's nearly purpose built for the world that we're in and the pressures that we live under. Now you add to that, 70% of our revenues or I should say over 75% of our revenues are recurring. And most of those are captive, meaning they're specced in or they're specific to our equipment and instruments. So we're very much involved in these kind of macro drivers.
along with these super durable business models, razor blade and high service levels. So that's a very different kind of business that once again, I'd say it's purpose built for these type of things. Now you add to that our scale.
And our DBS led execution where even in tough and choppy times, we're able to focus on what matters, which is our customers and executes in that environment.
On top of the strength of our balance sheet.
You know, we we we actually see these challenging macro environments as opportunities So rather than battening down hatches here and having our head down. We're focused on executing
continuously improving and taking advantage of the opportunities that the crisis can offer us. And so as you think about our balance sheet position today, less than 2x net debt to EBITDA, we're well positioned there for sure. And so looking ahead, should a recession be there, or should the times get choppy, we're looking to get to the other side of that even stronger than we would end that? To enter that.
Now as we think about our 2023 guide, which I think is what part of your question was trying to tease out, we feel good about our mid-single digit plus.
positioning there where for the long term, which we have talked about in a number of occasions. And when you unpack that a little bit, we see bio processing could be up, you know, high single digits, and that's consistent with what we've spoken of. And that's consistent with what we've spoken of.
And as you look at bioprocessing, there we continue to think that the non-COVID business is going to be growing very strong. You saw what we're doing here in the second half of the year with growth rates well over 20% in non-COVID. And then we've also de-risked the discussion here relating COVID related therapeutics and vaccines. We see $1 billion of revenue in 2022. And that's down from $2 billion in $21.
And we probably say 500 million for 2023. So, 2020...
One, two billion, 2020, two, one billion.
and 2023, 500 million for COVID-related vaccine. And having said all that, we still see our biotechnology business growing at high single digits.
And that leads you then with COVID testing. And we've talked about that at length. We speak to our customers about that. They still think that COVID goes in damage at the end of 23 beginning of 24.
And we still think our framework of about $1.2 billion of COVID testing revenue in 23, which is roughly around 30 million tests, is the right way to think about it.
So when you put all that together,
And we feel very good about the way we're pushing position here from a core growth perspective Think mid single digit plus on the base business
And then, you know, from a COVID headwind perspective, think, you know, low single, mid single headwind, overall giving you, you know, a solid low single digit 2023.
Thanks, Reiner. Maybe just one quick follow up then, just as it pertains to China. Could you just flush out a little bit, obviously the quarter progressed better than expected. You gave some color about the DX drag continuing. How do we think about implicit in your full year guide, like what is China expected to do and are you expecting or baking in a completely normal kind of absent diagnostics for the back half?
For a normal year, we would see China in the low-double-digit, low-teens kind of growth. We'd say for the full year this year, and view of what we've seen in the first half, high single digits is the way to think about China, which we consider to be strong growth and view of some of the macro challenges that China is facing today.
Great, thank you.
Like that.
Next, question comes from Jack Mehan from Neffron.
Good morning, Jack.
Good morning. First question I had is on bioprocessing. So just to follow up, the 1 billion updated COVID guide for the year, can you just provide how much was in the first half and then the assumption for the second half. Could you just talk about what you're assuming related to boosters or government contracts, just how you build up to the billion dollars?
So, just to repeat here, Jack, for everybody, 2021, $2 billion of revenue, 2022, $1 billion of COVID-related vaccine and therapeutic revenue. I think it's fair to say that that trails off here towards the second half of the year, getting you to, you know, for that 2023 run rate that I talked about, about, you know, we're at $500 million for the year. So...
Some of this stuff is lumpy, so it can go back and forth. And that's the general down draft. You may be just to put some numbers to it. I'd say it's Colin.
a little over 500 in the first half.
And then, you know, a little, around 400 or so, a little under in the second half, you can see that that's sort of the magnitude of the drop.
to get to the building, you've got it.
Got it. Yeah, that's been turned
In terms of boosters and annual shots, look, as you know, the public health official discussion there continues. Our belief is that, you know, it is likely that there's going to be a regular vaccination schedule. It remains to be seen what the uptake of that vaccination will be. But if it is, you know, on the order of what flu vaccination is in the country, you know, the kind of numbers that we talked about for 23.
perhaps a little bit less, you know, much longer term is probably the order of magnitude in endemic vaccination regime.
That makes sense. And I also had to follow up on China. So you grew high single digits. The guide was for down mid to high single digits. And that was despite the fact the lockdowns were longer than expected.
I guess my question is simple. How did you pull it off? Can you just talk about instruments versus consumables? Just what kind of the shape of the quarter looked like? Well, first and foremost, this is about a team stepping up to the plate and executing. Our associates...
were ahead of the game proactively working with the various levels of government. Municipal province and sometimes even national to ensure that we get the necessary approvals very, very quickly in order to be able to open up our facilities again.
At the same time, our supply chain associates were prepared and ahead of the game understanding what it would take to make a quarter, the raw materials that needed to be available, the shift size that needed to be available, and the number of shipment hours that they had in order to work through it. And then we have to say, our manufacturing associates literally lived in the plants. Literally lived in the plants. We built showers. They had caught.
We had food and clothing brought in, as well as the necessary services to what needed to come back out in order to facilitate what is nothing but extraordinary execution with the highest level of commitment. And as you think about that, whether it's instruments or whether it is consumables, it was across the board. Those things that were manufactured locally, I just talked about those people in the plants.
But also those things that were imported and had the risk of being stuck in the ports as you sort of unwind the congestion that's associated with the shutdown. Our people were at the front of the line making sure that our goods got in first and got to the customers, were installed, were signed off, and are in use today. Didn't write notes for mí ?š
Very nice. Thank you, Reiner.
Thanks, Jack. Our next question comes from Rachel Vazindal from JP Morgan.
So, first off on COVID testing, so those obviously came in higher than expected, but I'd like to really dig into the mix of fluid versus standalone. So, you were anticipating 10% of the four-in-one test this quarter and 90% standalone, but that sounds like it came in about 50-50. So, that mix has increasingly been skewed towards the four-in-one product in recent quarters. So, thinking about that mix shift moving forward in the back half of the year and then what's the mix that's anticipated in that 30 million.
or so that we think, we do think it'll be kind of skewed a little bit more like it was last year. So like Reiner said too, just to give you some context, I mean, Q3 has historically been the slowest respiratory quarter of the year. And as we sort of talk to our customers, I think that's their expectation as well. That as we get into the summer here, it does typically become sort of the slowest time and then picks back up in the winter. As we get into Q4, I would say that that mix assumption will be more like the 50-50 that we saw.
here and that we saw last winter as well. So I think if you think about Q4, we're talking about $525 million revenue, maybe 11 million tests or something along those lines and a split of 50.
Great, thank you. And then on biotech funding concerns, so obviously there's been a number of concerns about the potential slowed on in biotech funding, leading to smaller funnel at earlier stage biotech companies as they try to rationalize candidates to conserve cash. And see flagged a number of stats on the positive pipeline for monopole antibodies, solides, therapies, et cetera, and the prepared remarks. So can you just walk us through? Have you seen any impact or shift in demand from that of smid biotech customer segment as a result of these funding concerns?
And then how should we think about, you know, let's say that we face a prolonged constrained funding environment for these mid-biotax. At what point do you think that could really start to impact that phase two, phase three, part of the pipeline where, you know, it starts to become more meaningful from a volume perspective, which is obviously the main driver of that bioprocessing business. Thank you.
Thanks, Rachel. You know, Rachel, as you just suggested, the majority of these biotechs are either preclinical or in the very early stages of clinical. And it's really important to note that our business is driven by what's happening in phase three and ultimately commercialized drugs. Over 75% of our business is in that later stage. And so then as you go upstream from that.
that has less of an impact. And now getting specifically to your point, we really haven't seen much of an impact of the biotech funding crunch here affecting the customer activity levels that we have. And frankly, we do look at the biotechs and the proposals that they are pursuing, whether there's proof of concept and data. In our sense is that...
the good projects and where the data is solid and convincing and proof of concept is given, they are continuing to attract funding. So.
We think that today's cash positions in the biotechs
the quality of the projects that they are pursuing, as well as the funding environment still providing funding to those that are able to provide data is continued to be quite positive and is not impacting our business. Now of course, to your longer term question, we just have to see that the biotech area.
is a cauldron of innovation.
That's where the risks are taken. That's where the out of the box thinking oftentimes occurs. And you know, that's where, you know, the Genentechs and the Amgens and others started and many more that are huge public companies today. So we of course longer term will want to see that, you know, the funding continues to support that kind of innovation environment. But today we are not concerned about what we see here for the next, you know, call it 18-24 month.
Our next question, or last question comes from Patrick Donnelly from Citi.
Hi Patrick, good morning. I'm Patrick. Good morning.
Hey, Ryan, how are you? Thanks for taking the question. Maybe another one just cleaning up on 23. You know, really appreciate all the color you gave. It sounds like with all the moving pieces in terms of the COVID headwinds.
we'll probably shake out maybe a little more low single than the mid single for 23. I'm just trying to figure out, I guess, with all the mix changes again being a little less COVID, more heavy on the core, what the right way to think about the incrementals is. It sounds like Matt earlier was talking about getting back to that 35, 40%, but just wanted to circle up in terms of the moving pieces again, given the mix shift. I assume FX will still be a bit of a headwind in the first half. It's still a bit away, but we'll see what the dollar does. Can you just talk through, I guess, that margin structure as we work our way into 23?
It's difficult right now, given how dynamic things are, especially with the FX and inflation and supply chains. But I think where we are from an execution perspective here in the court where we think we'll be...
If we don't have any, you know, we might have some FX I'd win, but let's see where that ends up. But if we don't have any extra, you know...
new headwind that show up. I just think the normal BCM of 35 to 40% is the place to be. I mean, the COVID testing, like you've seen, I mean, it's more or less at the fleet average. We've talked about how we sort of intentionally did that. We price it exactly the same as we price flu. So it's not as if it's a, it has a huge, you know, outside, necessarily impact. So I still think the right place to be from a margin perspective is that ball through 35 to 40%.
on low single digits, but you know, I think given that we're going to grow that base business mid-single digit plus with that sort of fall through, I still think you'd see even in that low single digit environment, I still think we drive EPS growth.
Okay, that's helpful, man. I appreciate that. And then, Ryan, are you touched a little bit on the M&A landscape? You know, obviously I don't think there's any doubt. You guys, you have the capacity and the balance sheet is healthy. I think the questions are more around, you know, are the sellers ready? Or are our valuation still kind of resetting in boardrooms? What are the conversations like for you guys again? It seems like your appetite is certainly high to your point. You know, macro uncertainty tends to favor you guys. You reduce the intensity a little bit of...
panic out there sometimes and sellers can hit the bed. So can you just talk about conversations of people starting to warm up a little bit or is it still a lot of kind of pointing back six months and maybe we bounce back, maybe we don't, what are the conversations like?
Well, the 52-week high is not moved out of the window entirely, but I do think it's fair to say that people are understanding that we're entering into a new environment here, that there's a change of the cycle here. We see COVID tailwind dissipating, many were riding that way. Higher interest rates are real for everyone. And then of course, the foreign exchange rate issues that Matt was talking about.
and end market focus as well as then of course, you know, premier assets in that particular area along with the right valuation. So if you noted our balance sheet, we're primed here and look at the market with opportunity.
you
Great, thank you guys.
Thank you guys. Thank you.
And that is all the time we have for today. I would turn the program back over to our speakers.
Thanks, Gretchen, and thanks everyone for joining us today. We'll be around all day for follow-ups.
Thanks, Chris, and thanks everyone for joining us today. We'll be around all day for follows. Bye.
This does conclude today's program. Thank you for your participation. You may now disconnect. Have a great day.
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