Q2 2022 Thermo Fisher Scientific Inc Earnings Call
Good morning, ladies and gentlemen.
Welcome to the Diamond Fisher benches at 2022 second quarter Conference call. My name is Jacquie I will be your operator for today's call all lines will be muted done a presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star followed by one on your telephone keypad.
I would like to introduce our moderator for the call Mr. Raphael Johanna Vice President of Investor Relations. Mr. <unk>, you may begin the call.
Good morning, and thank you for joining us on the call with me today is Marc Casper our.
Chairman, President and Chief Executive Officer, and Stephen Williamson, Senior Vice President and Chief Financial Officer.
Please note this call is being webcast live and will be archived on the investors section of our website thermal Fisher dot com under the heading news and events until August 12 2022.
Copy of the press release of our second quarter 2022 earnings.
Billable in the investors section of our website under the heading financials.
Before we begin let me briefly cover our safe Harbor statement.
Various remarks that we may make about the company's future expectations.
Some prospects constitute forward looking statements for purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10-K, and subsequent quarterly report on Form 10-Q.
Are on file with the SEC and available in the investors section of our website under the heading financials SEC filings.
Well, we may I'd like to update forward looking statements at some point in the future. We specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward looking statements as representing our views as of any subsequent to today.
Also during this call we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.
We constantly Asian of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our second quarter 2020 to earnings and also in the investors section of our website under the heading financials. So with that I'll now turn the call over to Mark. Thanks.
Good morning, everyone and thanks for joining us today for our second quarter call.
As you saw in our press release, we had another excellent quarter.
We delivered outstanding financial performance, our core business is performing very well that strength is broad based across all our businesses.
As I reflect on the quarter I'm very proud of the team's great execution and the resulting share gains we saw across our business. Our ongoing success is propelled by our proven growth strategy and our PPI business system, which is a differentiator for us and enables operational excellence within the company.
See this in our second quarter results and increased outlook for the year.
So let me first recap the financials.
Revenue in the quarter grew 18% year over year to $10 97 billion.
Our adjusted operating income was $2 six 1 billion.
Our adjusted operating margin in the second quarter was 43, 7%.
We delivered another quarter of strong adjusted EPS performance, achieving $5 51 per share.
Let me now give you some color on our performance by end market.
Working with pharma and biotech we have X.
Performance in this end market delivering growth in the mid teens, we saw excellent growth across all businesses, serving these customers highlighted by our bio production and pharma services businesses.
We're continuing to benefit from our trusted partner status that we've earned over many years with our pharma and biotech customers.
In academic and government, we grow in the mid single digits in the quarter, we saw strong growth in biosciences chromatography and mass departure.
Turning to industrial and applied we grew in the low double digits for the quarter. We saw very strong growth in electron microscopy chromatography, and mass spectrometry, and our research and safety market channel.
Finally in diagnostics and healthcare revenue was 20% lower than the prior year quarter. In this end market core business saw strong growth led by immuno diagnostics microbiology during the quarter. The team continued to execute well to support customers COVID-19 testing needs.
Overall excellent performance across our end markets and as I reflect on this quarter's performance, we continued to deliver very differentiated core business growth.
This was driven by three factors the market conditions were good our team managed lockdowns in China extremely well and we had outstanding execution from our global team, resulting in meaningful share gains.
Let me now provide an update on the progress we've made in executing our proven growth strategy.
The investments we've made and are continuing to make across the company are fueling growth and generating strong returns.
Growth strategy has enabled another quarter of excellent performance.
A reminder of our strategy consists of three pillars developing high impact innovative new products, leveraging our scale in high growth and emerging markets and delivering our unique value proposition to our customers.
I'll start with innovation, we launched a number of new products across our businesses to further strengthen our industry leadership and enable our customers to accelerate scientific breakthroughs I'll highlight a few of these we have an outstanding American Society for mass spectrometry conference, where we showcased some instruments consumables and software to advance our.
<unk> work. These included the thermo scientific accelerant automated sample prep platform, which simplifies workflows for proteomics researchers by eliminating range or previously manual steps.
We also launched a cloud based thermo scientific already is software platform, which integrates functionality and data across multiple chromatography and mass spectrometry instruments to simplify application specific workflows, helping side to share information with each other and labs around the world and speeding the development of new diagnostics and therapies.
In addition, we launched the thermo scientific direct mask technology moat for our industry, leading to exactly what will be driving that commerce. This technology allows for the characterization of complex and large biotherapeutics, which were previously challenging to interpret.
In our Biosciences business, we launched the gift cost Etfs to Comcast <unk> protein that supports genome editing for applications such as car T cell therapy research.
<unk> therapies like part D are providing new hope in treating cancer.
And in specialty diagnostics, we launched the <unk> 2500, plus series in the U S high throughput instruments, our allergy and autoimmune diagnostics to help further approved lab efficiency. These.
These new products and many others will make a significant difference for our customers and drive future growth for our company.
Turning to our high growth and emerging markets, we're really thrilled with our teams progress you may remember that we called out China as a potential Q2 headwind because of the COVID-19, lockdowns in the country.
See the Lockdowns were very severe.
I am so proud of the way the team responded the powered through demonstrating the relevance of our offerings submit the crisis and delivered over 20% growth.
That was the result of a very strong core business the benefit of deep relationships, we have with our customers and our support for local COVID-19 testing.
So overall it was a great quarter and wasn't that clearly demonstrates our growth strategy continues to deliver outstanding results.
The third pillar of our growth strategy is our unique customer value proposition are.
Our capabilities enable our customers' ability to achieve their own goals for innovation and productivity.
Be the best partner for our customers, we continue to enhance our capacity and capabilities. Let me share a couple of examples at our flagship facility for cell culture Media and Grand Island, New York, We just completed the capacity expansion to support customers' research drug development and production applications.
On the chemicals business.
Where we have our primary continental European distribution Center for lab chemicals, we just completed a major expansion of the facility to support the strong growth that we've been deliberate.
I've had the opportunity to visit both sites a number of times and it's really exciting to see the ongoing strength in customer demand that's driving the need for this investment.
These are just a few reflections on the way, we're supporting our customers by further strengthening our capabilities and value proposition.
Now turning to capital deployment I'd like to share some of the other steps we've taken to further strengthen our customer value proposition and build our future.
We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. We are very pleased with the performance of the PPD acquisition. The business is performing very well delivering strong core revenue and earnings growth.
In may at our Investor Day, we increased the revenue synergy outlook by $100 million.
To $250 million in year, three and the cost synergies in that year by $25 million to a $100 million.
And the synergy opportunities continue to be incredibly exciting.
I just had a chance to meet with the clinical research commercial organization and I'm. So impressed with the team and the opportunity that they see for enabling the success of our customers going forward.
The combination of capabilities is really resonating with customers and we're seeing strong momentum in the business and.
All of this is needed to business performance well ahead of the deal model the.
The acquisition of PPD is another example of how our capital deployment strategy is creating customer and shareholder value.
Turning now to an update on our ESG initiatives, we released our latest corporate social responsibility report. This report details our progress and disclosures for all of our key ESG initiatives and is a great example of how we are continually working to enhance our reporting and disclosure is an internationally recognized reporting standards. It's great.
To see the progress detailed in the report and also reflecting the progress we've made through our commitment to ESG over many years.
For this quarter I'll highlight the progress we continue to make on our goal to reduce our carbon footprint.
As part of our efforts, we continue to transition to renewable energy and solid onsite rooftop solar power at key locations to reduce our consumption of electricity produced with fossil fuels were also working with our suppliers on their climate performance goals, which will ultimately have an impact across our value chain.
As a leader in ESG, our commitment to progress is ingrained in everything we do.
We look forward to updating you on our progress as we go forward.
Now I'd like to review, our updated 2022 guidance at a high level and then Steve I will take you through the details.
We are meaningfully raising our full year guidance, we're increasing our revenue guidance by $700 million to $43, one $5 billion, which would result in 10% reported revenue growth over 2021.
And we are raising our 2022 adjusted EPS guidance by <unk> 48 to.
To $22 93 per share.
This higher outlook, primarily reflects the strength of our core business and additional contribution of COVID-19 testing revenue, which are more than offsetting the increased foreign exchange headwinds demonstrating how well we operate with speed and scale to enable our customer success and navigate dynamic.
Macro environments.
So to summarize our key takeaways from the second quarter.
Outstanding results in Q2 highlights the benefits of our proven growth strategy, our PPI business system and our extraordinary team our businesses are performing very well and we're gaining market share. The PPD acquisition is generating strong returns, we're really well positioned to continue to differentiate ourselves for all of our stakeholders.
And the team is doing an excellent job navigating the dynamic times, we're living all of this isn't able to raise our outlook for 2022 and further solidify farm incredibly bright future with that I'll now hand, the call over to our CFO Stephen Williamson Stephen.
Thanks, Mark and good morning, everyone. We delivered another excellent quarter. In Q2. This included 13% core organic revenue growth $630 million of COVID-19 testing revenue.
$5 51 of adjusted earnings per share and over $1 billion of free cash flow.
Revenue in Q2 was $913 million higher than we've incorporated in our previous 2022 guidance with $640 million driven by ongoing strength in the core business.
And $400 million from testing.
Partially offset by a $110 million due to higher headwind from foreign exchange.
Similar to last quarter the strength in the core was broad based across businesses and end markets.
From a geographic lens $200 million of the beat was from China in our previous guidance, we had assumed a $200 million of headwinds from the Lockdowns in China, and we offset all of that half from strong local core growth and half from local testing supports a great achievement by our China team.
Our PPI business system enabled us to generate very strong pull through on the revenue beat in adjusted EPS for Q2 was 52 <unk> higher than included in our previous guidance.
So Q2 was a continuation of our excellent financial performance track record. Let me now provide you with some more detail beginning with our earnings results as I mentioned, we delivered $5 51 of adjusted EPS in Q2.
GAAP EPS in the quarter was $4 in 'twenty two.
On the top line, our Q2 reported revenue grew 18% year over year. The components of our Q2 reported revenue increase included 3% organic revenue growth of 19% contribution from acquisitions and a headwind of 4% from foreign exchange.
Turning to our organic revenue performance by geography.
The organic growth rates by region are skewed by the COVID-19 testing revenue in the current and prior year in Q2, North America grew in the high single digits Europe declined in the low double digits Asia Pacific grew in the low double digits with China growing over 20% and rest of world declined low double digits.
With respect to our operational performance adjusted operating income in the quarter decreased 3% and adjusted operating margin was 23, 7% 530 basis points lower than Q2 last year.
Adjusted operating margin was slightly higher than we'd anticipated in our prior guidance for Q2, reflecting how our growth strategy and PPI business system enable us to continue to manage dynamic times.
In the quarter, we achieved strong price realization to effectively address inflation, while also driving strong productivity and positive volume leveraging the core business. This was more than offset by the expected impact of incorporating PPD into our financials lower testing volumes and continued strategic investments including investments.
And our colleagues.
Moving on to the details of the P&L total company adjusted gross margin in the quarter came in at 43, 2% 740 basis points lower than Q2 last year for the second quarter. The change in gross margin was due to the same drivers as loads for our adjusted operating margin.
Adjusted SG&A in the quarter was 16, 1% of revenue a decrease of 190 basis points versus Q2 2021.
R&D expense was approximately $360 million in Q2, representing growth of 6% over the prior year quarter, you can see the benefits of our prior R&D investment not differentiated core organic growth rate and the exciting new products that mark outlined. Moreover, the continued investments, we're making in R&D helping to fuel.
An even brighter future.
Looking at our results below the line for the quarter. Our net interest expense was $112 million approximately flat to Q2 last year our adjusted.
Adjusted tax rate in the quarter was 13%. This was a 100 basis points lower than Q2 last year, driven by our tax planning initiatives.
Average diluted shares were $394 million in Q2, approximately $2 million lower year over year, driven by share repurchases net of option dilution.
Turning to cash flow and the balance sheet year to date cash flow from continuing operations was $3 7 billion and free cash flow was $2 6 billion.
Our capacity and capability investments continued to progress well and our year to date net capital expenditures were $1 1 billion.
We returned over $150 million to shareholders through dividends in the quarter and this reflects a 15% dividend increase we announced in February .
We paid down $1 $85 billion of commercial paper in Q2 and ended the quarter with approximately $1 9 billion in cash and $30 3 billion of total debt and leverage ratio at the end of the quarter was two three times gross debt to adjusted EBITDA and two two times and a net debt basis.
Concluding my comments on our total company performance adjusted ROIC was 16, 6%, reflecting the strong returns on investment that we are generating across the company.
Now I'll provide some color on the performance of our four business segments. Let me start with a couple of framing comments with scale and margin profile of our COVID-19 testing revenue varies by segment and the testing revenue was significantly higher than the prior year quarter that does skew some of the reported segment margins as.
As I mentioned earlier, we're executing strong pricing realization across those segments to address higher inflation.
And as we outlined at the beginning of the year, we're referring to are quiet PPD business as our clinical research business and that provides some laboratory products and Biopharma services segments.
So moving on to the segment details starting with life Science solutions Q2 reported revenue in this segment declined 7% inorganic organic revenue was 5% lower than the prior year quarter. In Q2, we delivered very strong growth in our bio production business. This was offset by lower revenue in the genetic sciences business driven by the moderation.
Testing revenue versus the year ago quarter.
Q2, adjusted operating income in life Science solutions decreased 23% and adjusted operating margin was 43% down 800 basis points year over year in the quarter, we delivered strong productivity, which more than offset by unfavorable business mix and strategic investments, we're making across the segment.
In the analytical instruments segment reported revenue increased 9% in Q2 and the organic growth was 13%.
The strong growth in this segment this quarter was led by electron microscopy, and the chromatography and mass spectrometry businesses.
Q2, adjusted operating income in this segment increased 23% and adjusted operating margin was 21, 4% up 250 basis points year over year.
During the quarter, we delivered strong volume pull through and productivity that was partially offset by strategic investments.
Turning to specialty diagnostics, and Q2 reported revenue declined 11% and organic revenue was 8% lower than the prior year quarter.
In Q2, we saw strong underlying growth in our immuno diagnostics and microbiology businesses.
As our healthcare market channel.
This was offset by lower COVID-19 testing revenue versus the year ago quarter.
While Q2, adjusted operating income decreased 1% in the quarter adjusted operating margin was 22, 1% up 220 basis points from the prior year quarter in.
In Q2, the impact of lower testing volume was more than offset by strong productivity enabled by our PPI business system and positive business mix.
And finally in laboratory products and Biopharma services segment Q2 reported revenue increased 55% organic growth was 10% and the impact of acquisitions was 48%.
During Q2, we had strong growth in the research and safety market channel and in the pharma services and laboratory products businesses.
PPD, our clinical research business is performing very well and continues to exceed our expectation during the quarter. It grew slightly higher than the rest of the segment contributing $1 $72 billion of revenue.
Q2, adjusted operating income in the segment increased 55% and adjusted operating margin was 12, 5% to 10 basis points higher net prior year quarter.
In the quarter, we drove strong productivity and also saw the benefit from acquisitions. This was partially offset by strategic investments and unfavorable business mix.
Yes.
Let me now turn to our updated 2022 guidance and as Mark outlined we are raising our full year revenue guidance by $700 million.
To $43, one 5 billion.
We're also raising our core organic revenue growth outlook from 9% to 11%.
On the bottom line, we're raising our adjusted EPS guidance for 2022 by 28 to $22 93.
The increase in revenue guidance is driven by three elements of.
$750 million increase in the outlook for the core business.
$500 million higher assumed COVID-19 testing revenue.
And a $550 million decreased to reflect the recent changes in FX rates.
Let me provide you some color on each of these elements starting with the $750 million increase in the outlook for the core business.
This reflects the strong performance in Q2.
And $100 million increase in the core organic outlook for the second half of the year net second half raise reflects higher price, we put in place to offset higher inflation versus the previous guidance.
As I mentioned previously the increase in core revenue guidance raise for the full year outlook for core organic revenue growth from 9% to 11%.
This is very strong growth performance, reflecting excellent commercial execution and strong share gains.
In terms of October 19 testing revenue assumption the $500 million increase for the year includes the $400 million beat in Q2 and $100 million increase in the assumption for Q3.
This reflects an assumed glide path from Q2 to an endemic run rate level in Q4 that.
That continues to be scenarios, where testing demand could be higher than this level.
And should that be the case, we are well positioned to support customer needs and as we did in the first half of the year will flow the benefits of that through our P&L, but for now we thought it was prudent to continue to take a derisked approach to the outlook.
In terms of FX, we have incorporated current rates into guidance and we now expect FX to be a year over year headwind of $1 billion to $5 billion on revenue of about three 2%.
The FX headwind on adjusted EPS in 2022 was increased by 31.
To $84 <unk> for the full year or three 3%.
The 31 cent change includes a 34% headwind in the second half of the year, but that previous guidance.
In terms of profitability, we expect to deliver $110 million more adjusted operating income up to $700 million raise in revenue guidance.
This reflects strong pull through on the higher core in testing volume additional price offsetting inflation and the impact of the headwind from FX.
We now expect full year 2022, adjusted operating margin to be 25, 2%.
In terms of adjusted EPS, a stronger outlook is enabling us to raise the 2022 adjusted EPS guidance by <unk> 28.
From $22 65 to $22 93.
Further building on an already very strong outlook for the year.
So to recap on the guidance change, we continue to execute really well and were able to more than offset the significant FX headwinds effectively manage inflation and still raise our full year outlook. This demonstrates the power of our proven strategy and our PPI business system execution.
Let me now provide you with a couple of other details on the 2022 guidance.
<unk> clinical research business is now expected to deliver $6 $8 billion of revenue in 2022.
Which represents 12% core organic revenue growth on a full year basis for this business up 1% from our previous guidance.
We now expect the business to contribute just over $2 to adjusted EPS in the year of <unk> from our prior guidance.
Our guidance now assumes net interest expense of approximately $460 million for the year.
We're assuming an adjusted income tax rate of 13, 2% in 2022 slightly higher than the prior guidance.
We continue to assume net capital expenditures of approximately $2 five to $2 7 billion.
And free cash flow of approximately $7 billion.
Our guidance still assumes $2 5 billion of capital deployment, which is a $2 billion of share buybacks will be completed in January and $475 million of capital returned to shareholders through dividends.
And we continue to assume the full year average diluted share count will be between $394 million and 395 million shares.
And finally I wanted to touch on phasing of the P&L to help you with your modeling.
Think about the revenue dollars in Q3 and Q4, we expect Q4 to contribute contributed just under 52% of the second half total.
And looking at adjusted EPS on that same basis, we expect the second half total to be waited a couple of percentage points more to Q4 than the revenue.
To conclude we delivered another excellent quarter and a great position to achieve our 2022 goals with that I will turn the call back over to Ray.
Stephen Operator, we're ready for Q&A.
Absolutely.
Order to allow everyone in the question.
To address the German Fisher management team.
Please limit your time on the call to one question and only one follow up.
If you have additional questions. Please return to the queue.
I can press star one to ask a question.
Your first question comes from the line of Jack Meehan with me from research.
You May proceed.
Thank you good morning.
Hi, Joe.
Good morning.
So you know versus the analyst day at the end of May a lot has transpired on the macro environment. We see this morning GDP officially declined again for <unk>. So it'd be great to hear just your latest thoughts on macro sensitivity for thermo Fisher.
And if you'll humor me as we sit here in July just any thoughts on positioning for 2023, how that might fit in versus the three year CAGR as you talked about a couple of months ago.
Yes, so Jack.
I guess, the first thing is business performing extraordinarily well right we have broad based strength.
As I look at the companies that have reported we've done very well from a topline perspective, so I feel good about how we're performing.
<unk> performance was very good.
Think about what are we seeing in our business, we're seeing very strong spring alright.
Alright in terms of the macro obviously when you read the papers or wherever information source lots of lots of challenges in the world.
In the last quarter, we articulated some of them and how we factored some of that into the thinking for or our outlook.
So what do we what do we think about sensitivity of this company is incredibly well positioned to navigate whatever the world throws at US right in the industry in and of itself as attractive as loss sensitive economically than many.
We are very well positioned within it and we have tremendous momentum.
When I think about if we see a downturn and we're not seeing the signs of warm, but that doesn't mean that there won't be one.
We have the benefit of a track record of dynamic.
Navigating dynamic times and exiting those periods really incredibly strong industry leader, we benefit from an experienced management team and incredible team around the world.
Proven growth strategy, and our PPI business system, which gives us great operational discipline.
As you know we've taken a number of actions over the last few years to strengthen.
Our position in the end markets we serve.
Today relative to the recession in the great financial crisis, we have less industrial exposure as a reminder, about 30% of our revenue going into the last recession was industrial today.
About 13%.
And in our form of biotech is much larger and that has been the least economically sensitive of the end markets that represents just under 60% of our revenue and when I think about our mix where more servicing consumables oriented.
And then we were then than it was 65% of our revenue today is 82% of our revenue so.
The company is performing well our end markets are good.
Great and then my second question is on capital allocation. So it looks like it was a relatively quiet quarter here, though I know you're always very active internally.
Great to get your thoughts on the deal pipeline do you think it's getting more interesting with some of these macro challenges around the world.
And given PPD is strong performance here out of the gate just thoughts on adding more zero exposure to the business.
Yes, so from a capital deployment perspective.
I really wanted to do the deeper dive on the progress of PPD and we did a large acquisition in December and the first thing we have to demonstrate is that we are great owners and operators of the businesses that are part of the family and that's always our number one priority of that business performed great.
And we have an active pipeline and when I think about <unk>.
<unk> have come in and many and many sectors that creates opportunities right. So we're actively engaged as we always are and are well positioned to capitalize on the M&A opportunities that will be out there in the landscape. So thank you Jack.
Thanks Mark.
Thank you.
The next question comes from the line of Patrick Donnelly with Citi. You May proceed.
Good question Doug.
Mark maybe one on the bio processing business.
Continues to be a source of strength for you guys. Among others can you just talk about the performance this quarter for that business. It seems like it accelerated for a few players across across the industry and then secondarily inside that bio processing piece on.
On the Covid vaccine side are you still kind of a obviously you've derisked it a little bit last quarter, I think you lowered it by $600 million for the year, maybe just updated thoughts on that front along with the core bioprocess piece.
Patrick Good morning, Thanks for the questions. So when.
When I think about bio processing I always like to frame it in the context of.
And how we serve pharma and biotech right. The market one level is very attractive we have a leading presence.
And we're really well positioned to serve those customer base, you've seen us deliver a really strong growth when I think about production or bio production. As a reminder, we have two major activities.
We feel we have within our company, we have our bio production business.
Which is the leading presence in cell culture media and single use technologies in the rapidly growing purification resins business.
As well as our pharma services business, which is both drug substance and drug product for biologics and you see us play with monoclonal antibodies viral vector cell therapy plasmid sterile finished all part of that so it's a large proportion of our total presence in serving pharma and biotech.
Outstanding quarter right when I look at.
Both across the services business and bio production.
When I looked at how others have done and reported I feel very very good about our performance and the outlook here is really positive why do you think about your question on the Covid vaccine therapies.
Our outlook for the year is 1 billion five is the same as it was in Q1, we did just over $400 million in revenue in Q2, which was right in line with our expectations that brings us to a little bit over $900 million.
At the halfway point of the year. So we feel good about.
Our role in supporting our customers' activities in vaccines and therapies and that's part of our core revenue growth. So over time when there is less demand for those capabilities, we will transition that well.
Two other other applications, which we do all the time.
That's really helpful. And then maybe just on the pricing pricing side, I know Stephen kind of talking about that being a key bridge to raising the guidance in the back half I think you'd previously discussed maybe two times the normal and pricing to combat inflation can you just kind of update where we are in the pricing side any pushback from customers.
Maybe just what those conversations have been like obviously pricing power has obviously been.
A great thing for you guys over the years.
Getting to be the highest level, we've seen so maybe just talk a little bit about the pricing side. Thank you Mark.
I'll start with the customer comments, Stephen I'll go through the through the just thoughts.
We're incredibly transparent with our customers and our partner to enable their success. So we've had very constructive discussions and we've operated with transparency and has allowed us to get the appropriate level of pricing.
Yes, it better in terms of the setup on pricing back to kind of a normal year for us about a half a percent a percentage point of net price across the whole business.
For the first half of the year, we've been running.
Slightly north of double that that high end of that range and the additional pricing we put in place is really to offset.
Higher inflation that we're seeing.
Largely energy costs in Europe , because we think about the change in guidance.
And that change in guidance.
There's really no its slightly higher revenue and no impact on adjusted operating income or adjusted EPS, but low pressure on margin, which is a reason why the the overall margin came down from the guidance from our last guidance.
But thats kind of active management of the of the pricing to offset the additional inflation.
Helpful. Thanks, Patrick.
Thank you.
Your next question comes from the line of Derik de Bruin with Bank of America.
You May proceed.
Great. Thanks for taking the question. This is Mike Ruskin on for Derek.
Mark I wanted to follow up on a lot of your comments in the prepared remarks, you really seem to emphasize share gains again this quarter in the core business is doing really well in a number of different segments. So curious if you could provide a little bit more color on some specifics on where youre seeing the biggest.
Sure wins versus your peers is it in.
Core chromatography and mass spec and AI.
Or in the channel or by processing portfolio was just talking about just sort of what's working well and what's allowing you to take that sure.
Thank you.
Give on individuals.
Pieces of the business would be helpful.
Sure Mike Thanks for the question so when I think about the.
13% core growth.
<unk> thousand 14% core growth for the first half.
Really strong momentum.
In the business.
And very broad based right. So that's exciting and when I look at how the industry is reporting with Ferring.
Very well so I'm proud of the team's efforts so some of the highlights Jia.
Geographically the team has done incredibly good job in China.
One months.
And market, leading pharma biotech growing incredibly quickly right with mid teens growth. So thats. Another plans and then the way you framed it from the business perspective, you'll analytical instruments doing very well, it's great to see the 13% growth in this segment great performance in electron microscopy.
In cartography mass spectrometry, our channel is performing well pharma services.
Then.
It doesn't.
It's in the core our PPD acquisition has performed very well, we've obviously had the benefit of seeing a couple of them.
Industry participants reported that businesses is going well and to be candid.
Its pretty much broad based comment there as I haven't mentioned either as larvae I didn't say something to stop doing well as is the team is really humming right now.
Okay, Great and then for the follow up if you look at.
This year has trended sort of what you're implying for the rest of the year, but you are guiding for the rest of the year for <unk> diagnostics.
Still going to be a little bit of a cliff as we go into next year, a little bit of a reduction in Cobra diagnostics in 'twenty two 'twenty three just given what you were able to accomplish in the first half of the year.
But the base business is doing incredibly well and you're now guiding to 11% core business. So you've got your multiyear target of 7% to 9% all right.
If we're using this year as a jumping off point is there any reason to think that next year shouldnt be squarely in that range as well.
Despite the comps.
For the Covid diagnostic Delta between $2 5 billion. This year to the run rate next year I'm, just trying to do the bridge between the base and Nicole the diagnostics of where that puts the model.
So Mike I guess, a few thoughts on 2023.
And obviously.
Im looking forward I actually I'm enjoying every day some of that but when we get to January I'll be looking forward to giving you the.
I'll give you the update on sort of what we think for the year.
All the details.
What we don't know.
Nobody knows.
Is what's the macro environment right is that.
It wasn't like the first half of this year.
The nominal rate or is it different and so we will appropriately.
Set the context for 2023.
When we when we get there, but I think there are a couple of things that are worth saying at this point in time to at least help you think about it.
No one is.
The core business right, it's going to be larger right. We're growing the business faster this year than we had outlined in the in the long term model. So that means the jumping off point to 2023, as we will have a bigger business in that cohort that drives earnings power and all of those things we will.
Have an appropriate growth range based on how we see the world at that point in time, we'll figure that out when it gets closer.
And then Steve maybe you want to comment.
On an FX.
The movements have been the norm Hudson and you might want to frame how to think about that for next year I feel great about our core business.
Yes, I think look in FX rates, if they stay the same as they are now that will be kind of an additional year over year headwind next year at $600 million about 40 suggested EPS and I think about the mix of currencies.
With James obviously that could change as we go through the year, but it's something to watch out for in corporate.
Yes, Michael.
I think about the 7% to 9% growth.
The long term sort of average we worked through so it can vary in any given year is this year, obviously is the bottleneck and it can be within it it can be different just depends on.
The measure we use is are we delivering really good performance right and it's going to be in the context of working environments.
That's going to wait till January .
Thanks for the questions very appreciate it thank you.
Thank you.
The next question.
It comes from the line of Rachel Barnes with Jpmorgan you May proceed.
Great. Thanks for taking the questions and congrats on the quarter and my first question is on China growth of over 20% in the quarter was very impressive if I get some of that was driven by Covid testing. So can you just breakout what what they call their contribution versus core growth in China and then what are your latest expectations for China for the year given some of the headlines we've been seeing about additional.
Opt outs.
Yes, so when I think about.
The business in China, the cumulative excellent job right now, they're really difficult circumstances.
Shanghai.
Regions basically.
Get the business to really incredible performance through June so very proud of that.
We had good growth in the core business.
Much better than we expected.
And a nice chunk of the overall core will drive that Covid testing was in supporting the local activities. So the team did a really good job there we don't sell our assays in there, but we do sell our instruments and our reagents to support local.
Local demand. So we had four strong core growth and a meaningful response in China actually larger than we typically have in China for coal for.
For corporate testing.
The way I think about the outlook.
<unk>.
Is it should be a good market in the second half of the year I have no doubt there'll be some level of COVID-19 disruption.
What that'll be when it'll be where it will be hard to know, but just given the zero corporate policies will be bumps in the road.
We will get through that period.
Actively.
There could be some headwinds there, but nothing that we see at this point in time in China, It looks very strong.
Thank you here and then can you just give us an update on what you're seeing for earlier stage work in Biopharma and just given some of the funding concerns pressuring the smid cap biotech customer right now that's a small percentage of your revenue and but still just any any dynamic in Colorado and youre seeing in that market would be helpful. Thanks.
Yes, so Rachel thanks for the question.
<unk> has been very strong.
One of the questions.
And our investors and analyst asked the question.
I ask the team about our their patterns trends anything that is jumping out and it's actually been broad based strength we've seen good good.
Good growth in all of the various <unk>.
Sub segments within the customer base. So I feel like the momentum is strong orders were strong Theres always company specific challenges right. There will be companies that have bad data.
That report out of our company, that's going through a patent cliff or whatever.
We help those companies navigate those times, we helped to drive productivity and.
Accelerated innovation those things, but we continue to see strong momentum in pharma biotech.
Yeah.
Thanks for the questions.
Thank you.
The next question comes from the line of Matt <unk> with Goldman Sachs. You May proceed.
Thanks for taking my questions and congrats on the quarter Occupancies.
Just my first question Mark when you announced the PPD acquisition last year due to the part of the rationale is due to your large pharma customers wanting to reduce the number of trusted partnerships, they had and given where more than half a year on from the close the deal and where potentially facing a tougher economic environment, where cost savings might become more important have you been able to capitalize.
On expanding these relationships and could you share any specific examples in partnership expansions with large pharma as a result of the addition of the PPD business.
So Matt Thanks for the question one of the things.
Sure.
That's just been phenomenal.
The speed.
Which we have been able to.
Get meaningful authorizations that look clearly synergy work meeting the benefits of bringing the combination together.
We have had several of the larger clients that have worked historically very closely with us.
Already.
Select us to do business with them in clinical research.
We've had meaningful.
Wins there. We're also seeing some really interesting momentum in some of the smaller companies as well. So it's not just the large ones that.
That concept.
Leveraging the existing relationships.
The partner status is working really well and I think it was really cool.
We were able to increase our synergy outlook by $100 million back in May.
Really just to that point was just six months after the close of its a big number.
The team is not stopping there or they are focused on closing business building a very large.
Authorizations backlog backlog and growing the business incredibly strong for our for the long term. So I think it's very positive.
We've earned a lot of trust over many years and we're going to help our customers.
To develop the medicines and do that cost effectively.
And rapidly so that.
They can really benefit patients. So it's very exciting times in terms of our clinical research program.
Great that's great to hear Thanks, and then just one last question just any commentary on demand in the European region, just given some of the challenges.
Listeners may be facing there have you seen any change in demand from customers across your business within Europe .
Okay.
Yeah, So Matt Thanks for the question So Europe actually.
Had a good quarter right and if.
So how do you say that with Sterling.
Digits effectively we had a very significant COVID-19 testing comparison so.
<unk> that the core business.
<unk> grew very strongly actually so.
The demand has been good and we saw really good market conditions and our production of the research and safety market channel will be examples of businesses that really well in Europe . So.
So what I saw in Q2 was strongest obviously lots of challenges in Europe , when we put that sentence.
Thermo Fisher comment or an industry comment.
With pressures on energy prices.
And certainly lots of challenges with the war in Ukraine.
Europe will clearly be lumpy from a global economy perspective, but.
But given our mix of business, which is very similar to the company average we have a very large pharma biotech presence in Europe .
When you take out the Covid testing it represents a little under 20% of our revenue I think we will navigate that well.
Sure.
Thank you.
The next question comes from that area.
You May proceed.
Good morning, guys. Thank you Stephen maybe just back on the pricing topic.
Hey, guys.
How much of the pricing plan that you have for the year has been implemented at this point can we think about sort of the percentage of the portfolio, where you have success.
Successfully pushed an increase through versus what might be left for the back half.
Yes, Dan Thanks for the question. So we've been very active on pricing.
From midway through last year. So it's not just this year thing and we've been appropriately adjusting as we've been seeing the impacts of inflation change and it's Mark mentioned before it's kind of how do you bring our customers whether they're at the same time that we're pricing appropriately given the economic challenges that are around in.
And I think appropriately navigating so when I think about that we're going to be dynamic as we go forward. So.
We will figure out what the markets look like what the inflation looks like and adjust appropriately as we think about the second half of this year and then going into 2023. So it's kind of a constant work in process is the way I view it.
Yes, I mean, the teams are actually done in a very good job so far and we'll continue to navigate network.
Okay I appreciate that.
Just as a follow up maybe Marc on your follow up to Jacks question on sort of the end market Pie chart. How does the I am curious how the applied science business looks for you at this point and would you draw any distinction between.
The growth that you're seeing or that you think youll see for industrial versus applied just knowing that those two tend to get lumped together a lot I mean do you think the coupling those students are useful thing and all of the deal.
Yes.
Okay and in terms of the industrial and applied.
We obviously continue to see good momentum.
We have a good position in serving semiconductor materials science, those or had been strong.
The applied markets funding has been defined so.
Yes.
Sector continues to be good as obviously.
Global macroeconomic concerns, but generally.
<unk> continued to be strong.
We do have a different mix than we were much smaller in terms of the percentage of the total with a different mix.
Raw materials science.
Mix than we did back back in the last recession.
Yeah, Okay, great. Thanks, Dan.
Thank you.
Your next question comes from the line of Qunar.
Add to that.
Securities You May proceed.
Good morning, Mark.
Thanks, Mark and congrats on the quarter.
Two brief questions for me first one on analytical technologies that was obviously very strong in the quarter, 13% growth I think in last quarter, you did 12%.
You had pointed to a strong backlog going into the quarter as well.
Just wondering sort of how sustainable is that into the second half given that these are instruments and not sort of consumables and services that you've highlighted as being a larger part of the business but.
And anything on the on the analytical instruments, you could share on the strength.
It would be really helpful.
So puneet.
Had very strong performance in the quarter.
Bookings were very strong as well so it gives us.
That's encouraging in the second half.
Also have a very large backlog Greg so.
So that also gives us some visibility to the second half as well.
It gives us the confidence and the very strong outlook, we have for the year from a core perspective so.
The signs are very good.
We're launching some amazing technology that makes a huge difference asml's. This year I think given our receivable a deeper dive that normal.
Really affecting the workflow across a number of key applications for mass spectrometry.
Fantastic in terms of the feedback and the momentum in our business.
The same thing is true in our electron microscopy business is very strong. So so I think we're very well positioned going forward.
Got it Okay, and then Mark a high level question for you.
A bigger important question, we get from sort of investors.
Around capacity expansion.
Thermo has.
Expanded capacity across multiple business lines and across PPD as well as single use sites in agreement with the terna and such.
Are these sites and the production capacity is sort of fully operational.
In 2022 time frame and delivering to the level that you expect them to deliver or this is more of a 2023 years of 2024 timeframe of when you see them coming fully online because it obviously requires hiring folks and getting them fully facility fully ramped up so asking that because we get questions around capacity.
The expansion that overcapacity, but on the flip side when I look at it.
It's will.
When rates meaningfully higher revenue for you when the capacity comes online fully so just wondering how to think about that in light of the 11% guide that you have today in the 7% to 9% longer term. Thank you.
Great. Thanks for the question so.
We picked a couple of really specific examples this quarter to highlight.
Take the example of Grand Island and deal.
And those capacity expansions or demand has been so strong for so long that we need to expand our capacity just to be able to support our future growth rates.
It's a different type of example, which is to deliver great results year in year out at some point you expand your network to facilitate the growth strategy.
Other of the expansion sales.
Sure.
Adding new capabilities, they've been coming online this year and will continue to come online next year. So it's a mix and it's exciting in terms of the momentum we are really we brought on new programs.
In our <unk>.
We'll finish that was really the enabling return a relationship expansion outside of Covid and that's really a 2023.
For example, when we have another a number of other examples like single use technology.
That we've been bringing online and will continue to grow.
It's a mix, but feel good about.
Blend of investments and how those two low growth strategy going forward.
Thanks, Tony.
Operator, we'll take one more question.
Absolutely.
The next question. Your final question comes from the line of Telecom.
Thanks, Dan with Morgan Stanley You May proceed.
Hey, guys. Thanks for the time, maybe I'll sneak in a two parter here at the end.
Beyond just the translational headwind from FX Mark.
Do you see any signs of the strength of the dollar is beginning to.
On customer mines, specifically in Europe , and Japan, and then Steven on the quarter over quarter sort of dip in gross margins roughly about 430 bps or so can you just help us out what that bridge looks like between the wind down versus FX versus other dynamics. Thank you.
So on the FX and customer impact the movements have been very rapid and relatively recently, so there hasnt been.
A lot of customer.
Discussion is really about where the rate is going to settle in and it's also going to depend a lot on what the.
Alternatives are if everybody is U S based cost company than it is what it is if you have different where are we producing where others producing you get into some of those dynamics. So far it's been a non issue and we've dealt with this in fact I pulled out a playbook from what we had in the years past, where we we had rapid moves in the rates and when the head and neck.
Keep edinburg.
Yes.
The gross margin the gross margin came in exactly where I thought it would so kind of in line with our <unk>.
The expectations I.
I think that on a year over year basis, I think a lot of people are missing the impact of PPD system at a 400 basis point impact on margin profile and the rest really since the change quarter over quarter and year over year.
Is it related to the mixing business in terms of testing versus of the core and an element of pricing to offset inflation that also puts a little bit of pressure on margins.
Peter.
Great. Thanks, Dan.
Thanks, guys.
Thanks, Sarah let me wrap up so as you heard this morning.
Really an excellent first half of the year, we're on track to deliver another outstanding year with great momentum and that sets us up for a very bright future as always thank you for your ongoing support of Thermo Fisher scientific thanks, everyone.
That concludes the conference call.
You may now disconnect your lines.
Okay.