Q2 2022 PerkinElmer Inc Earnings Call and Call to Discuss Agreement to Divest Analytical, Food, Enterprise Services Businesses
Earnings Conference call.
Today's conference is being recorded and all lines have been placed on mute to prevent any background noise.
After our speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one once again.
Thank you and I will now turn the conference over to Steve Willoughby, Vice President of Investor Relations. Mr. Willoughby you may begin your conference.
Thank you Ravi and good morning, everyone and welcome to <unk> second quarter 2022 earnings conference call on the call with me today are prolonged saying, our president and Chief Executive Officer, and Jamey mock senior Vice President and Chief Financial Officer.
You have not received a copy of our earnings press release or the two separate slide presentation. We published this morning, you may find copies of them on the investors section of our website. Please note that this call is being webcast and will be archived on our website.
Before we begin I'd like to remind everyone of the safe Harbor statements that we have outlined in our press releases issued earlier. This morning and also those in our SEC filings statements or comments made on this call may be forward looking statements, which may include but are not necessarily limited to financial projections or other statements of the company's plans objectives expectations or.
Intentions these matters involve certain risks and uncertainties.
The company's actual results may differ significantly from those projected or suggested by any forward looking statements due to a variety of factors, which are discussed in detail in our SEC filings.
Any forward looking statements made today represent our views as of today, we disclaim any obligation to update these forward looking statements in the future even if our estimates change. So you should not rely on any of today's forward looking statements as representing our views as of any date after today.
During this call we will be referring to certain non-GAAP financial measures a reconciliation of the non-GAAP financial measures. We plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release to the extent, we use non-GAAP measures. During this call that are not reconciled to GAAP, we will provide reconciliations promptly.
With that I'd like now like to turn it over to our President and Chief Executive Officer <unk> <unk>.
Thanks, Steve and good morning, everyone.
And I think we have a lot to cover today.
For taking the time to adjust your schedules and joining us to discuss our exciting news.
Today marks one of the most significant developments in the 80 plus year history of booking number.
As you know we have been executing a significant portfolio transformation over the last few years.
Good day, you've announced a pivotal agreement accelerates this work and establishes us as a leading pure play high growth high margin life Sciences, and diagnostics company with scale.
In particular, we have reached a definitive agreement whereby <unk>.
Tend to divest our analytical food and enterprise service businesses to New Mountain capital.
We will become a company that has greater focus.
Less complexity and extremely high recurring revenue mix improved profitability and foster growth.
At the same time with new Mountain capital.
Political and enterprise solutions business.
Increased focus and dedicated investment.
This should accelerate its ability to reach its full potential.
In addition to creating significant shareholder value. We believe this transaction will lead to superior service and outcomes for customers.
And increased opportunity for our employees.
More on this exciting transformation in a minute.
As Jamie will touch on in more detail in a moment, we also announced owning this morning.
We had an outstanding quarter in Q2, which meaningfully exceeded our guidance on both the top and bottom line despite various continuing macro pressures.
This excellent operating and financial performance is a testament to our employees' resilience and the portfolio shift that we have been pursuing over the past few years.
I'm also pleased to share with you that we are raising our full year revenue organic growth.
<unk> guidance by.
Higher level above and beyond our outperformance here in the second quarter.
While various pressures will likely always exist.
Increased highlight guidance highlights our confidence in our business and our ability to execute in the face of unanticipated challenges.
Now looking at slide two after transaction related slide deck.
With this agreement, we intend to divest our analytical food and enterprise services businesses.
Including one source to new mountain capital for a total consideration of $2 45 billion.
This includes $2 3 billion in cash upon closing and a $150 million of fuel future contingent consideration.
We expect to receive approximately $1 9 billion of net after tax proceeds.
When the deal closes in Q1 of 2023.
This transaction will result in the remaining life Sciences science.
Sciences, and diagnostics business, having a unique financial profile.
That is high growth high margin is.
Is less cyclical.
All while retaining significant scale.
It also further increases our flexibility and allows us to solely focus on these attractive end markets.
The new business that will be owned by new Mountain capital.
Consists of almost 6000 current employees.
And is expected to generate approximately $1 $3 billion in revenue this year.
I'm confident that a focused vision and growth plan will enable this business to flourish in the years to come.
By building upon its existing competitive advantages and re establishing leadership positions in some.
As part of this transaction.
We intend to transfer the <unk> brand name logo and other marketing elements to the new owner.
This should we expect will be an important asset give.
Given the long history and strong reputation in these markets in particular.
Prior to closing, which we expect to occur in the first quarter of 2023.
We expect to introduce a new brand name and stock ticker for the life Sciences and diagnostics business.
Until closing.
Businesses will continue to operate as they currently do under the bookings element, Maine and the existing enterprise will continue to trade under the PKI trigger.
Now moving to the life Sciences, and diagnostics business on slide three.
Our existing senior management team and myself will continue to lead.
I could not be more excited.
Not only for how we have gotten here.
But also for the significant potential of what we expect to achieve.
Upon the closing of this transaction, we will become a leading edge Science Force company fixated on driving new innovations for our customers.
From a best in class preclinical discovery franchise with significant breadth and expertise.
<unk> over to a leading diagnostic franchises that are developing next generation innovations to help diagnose the worlds still unmet medical needs.
As you see on slide three it has been quite the evolution of our portfolio.
Just the last four years.
Through intentional internal investments and strategic value, creating acquisitions, including a buyer legend acquisition last year.
We took important steps to shift the profile of the company over just the last three years.
The company has gone from generating only 60% of its revenue from our target markets.
Upon the closing of the sale of our applied food and enterprise services businesses.
Having a portfolio that is singularly focused on these highly attractive.
Less cyclical end markets with outstanding margins and a highly recurring revenue mix.
We expect an approximately 500 basis point uplift in gross margins. Once this transaction is complete.
US over the 60% range going forward.
This transformation has redefined the financial profile of the company and result in even greater opportunities for investment.
Will meaningfully improve how we serve our customers.
And bring new innovations to the market.
We expect to focus we achieved as a pure play will allow for even greater strategic operational decision, making and.
In a unified commercial approach to deliver for our customers.
Even better than we already are doing.
Additionally.
We will be able to align our internal and external investment priorities more closely.
To further capitalize on the strong market growth potential that we expect in the years to come.
We couldnt be more excited about the potential of this new more efficient structure.
Impact it will have on our ability to innovate and execute.
When even stronger degree than we already are doing.
So now moving to slide four.
As you see here, the new life Sciences, and diagnostics company will have its revenue fairly evenly split between the two segments.
With each having significant addressable markets.
It will also be balanced and diverse across geographies with approximately 45% of non covered revenues coming in the Americas, 25% coming from greater Europe , and approximately 30% coming from Asia of which approximately 18% is in China.
As we have been increasingly highlighting to you over the past two years.
Our life Sciences franchise is acutely focused on preclinical research and discovery solutions.
Which help our customers develop new scientific breakthroughs.
This business has grown significantly over the last several years.
Both to low double digit organic growth on average over the last three years.
And why are meaningful inorganic additions.
Good day.
Able to offer both our small molecule.
And increasingly a large molecule focused customers.
More complete preclinical discovery workflows.
Mitch we are rapidly building upon as we continue to bring new innovations to the market.
Our diagnostics franchise has also undergone a significant transformation over the last few years.
And has now nearly tripled in size as compared to 2015 on a non COVID-19 basis.
Diagnostics is focused on delivering highly sensitive.
Z to use assays that target specific disease states.
Greg we have a strong competitive position in markets with favorable underlying demand trends.
Our diagnostics business now has the size and capabilities to act as a platform to propel future additions, we may add overtime.
Allowing them to perform at an even higher level than what they are able to do on their own.
Two recent examples of this are our entry into the latent tuberculosis market.
And are beginning to offer a broad menu of chemiluminescence assays and related analyzers.
Put simply our more focused new company is to help close the chasms between new search and the clinic.
All the way to diagnosis and treatment.
Now moving to slide five let me provide a few additional specifics about what our life science business is.
What we are focused on today.
And at the high level very we see it going in the future.
Today Life Sciences is a greater than $1 $3 billion franchise growing in the low double digits organically.
Approximately 80% of this businesses is occurring in nature with the remainder being instrumentation.
I would note the $4 billion of instrumentation revenues shown on the slide does include related service revenue.
This cohesive business segment is focused on rapidly introducing new innovations.
<unk> intended to help our customers expedite their own preclinical development and scientific discovery.
Our leadership positions in reagents consumables instruments and software.
Complete workflow solutions, which enables our customers to make informed decisions.
More quickly by replicating a clinical experience in a preclinical setting.
This ultimately helps lower the R&D costs by shortening development times and driving higher success rates downstream.
We do this with market leading positions across our entire life Sciences business.
Such as preclinical imaging and detection cellular analysis.
Zero marker kits single cell and flow cytometry reagents and cloud based lab informatics.
We bring this broad and rapidly expanding consumable portfolio together with our market leading instrumentation to.
To help drive discovery across the spectrum of science.
With a strong focus in the areas of cell and gene therapy and single cell analysis in particular.
This business is at the forefront of new scientific discoveries that can have a profound impact on the medicines and therapies that are ultimately brought to market.
Which can help treat and save lives around the world.
Moving to slide six our.
Our diagnostics portfolio is comprised of leading franchises in specific markets.
That we believe have outsized growth potential.
Third we can have strong and durable competitive positions.
And drive an expected overall high single digit growth rate going forward.
As mentioned earlier this business has expanded significantly over the past few years.
Going from being singularly focused on reproductive health.
To one that now spans a number of important clinical diagnostic categories with number one or two market positions.
In areas, such as auto immune diseases, latent tuberculosis allergy and a variety of infectious diseases.
We also now have a much stronger position in next generation sequencing sample prep instruments.
Related consumables and our applied genomics business.
Our applied genomics franchise has seen its installed base of equipment.
Increased materially over the last two years during the period.
With our new streamline structure and increased focus within the company.
Combined with a stronger market positioning over the last few years.
Applied genomics is well positioned to bridge, our life Sciences and clinical diagnostics franchises.
To help drive new innovation and growth across the company.
Including the support of select areas in the clinical development of therapeutics.
As you can see our immuno diagnostics franchise represents the largest piece of our overall diagnostics business.
With an estimated $1 $1 billion in revenue this year.
With our reproductive health businesses, representing roughly half a billion dollars in annual revenue.
And our applied genomics business expected to be around $400 million in revenue this year.
Which is up significantly from before the pandemic.
And now on slide seven.
Transformed company will have tremendous benefits for all Australian holders.
For our customers.
It will mean that we can now better and more quickly respond to their unmet needs by using our scale to drive scientific collaboration across our organization.
Leading to novel solutions and offerings.
We will have the flexibility to respond to our customers in the most efficient manner possible.
Walking side by side with them to develop new scientific breakthroughs in drug discovery translational medicine and disease detection.
For the employees. The transformation will result in increased managerial focus that is properly aligned to drive growth and achieve our respective goals.
We will also be able to deploy our internal and external investments and a more focused way.
By doing so the even stronger financial profile of the new life Sciences and diagnostics business.
Lead to new opportunities for internal collaboration.
New growth accelerators, and a greater ability to develop our people.
I think this combination sets up the future for our employees extremely route.
And will further enhance our ability to attract and retain excellent talent.
Now moving to slide eight.
The company did create as a result of this transaction is well positioned to deliver outstanding sustainable value creation for shareholders.
It will have a meaningfully improved financial profile that is just extraordinary.
In addition to higher top line growth and a highly that current revenue mix.
We will have gross margins that are expected to be up approximately 500 basis points from previous levels.
Leading to best in class operating margins.
With the ability to expand operating margins in the future.
Even faster rate than we had been projecting historically.
We will also be a stand out company as a result of our scale.
To have as attractive of a financial profile as we will have.
With more than $3 billion of annual revenue.
It makes for a combination that is extremely there.
Both significant size and high performance.
We expect to be able to grow EPS in the low to mid teens and have additional upside from our track record of successful capital deployment.
This transformation into a pure play life Sciences, and diagnostics company takes us into a whole new spectrum from a financial perspective.
Additionally, with the $1 9 billion of net proceeds we will receive.
In a recent aggressive deleveraging.
It makes our already well managed balance sheet that much more robust.
Providing us the ability to continue to rapidly invest on our areas of focus.
And positions us well to begin appropriately deploying capital meaningfully.
Sooner than we had previously anticipated.
Turning to slide nine let's talk about the valuation of the remaining life Sciences and diagnostics portfolio.
Following the transaction our company will have a compelling revenue growth rate in the double digits.
Largely in line with our new higher value peers.
We will have stronger margins and differentiated scale with total revenues that well exceed the average of our peers.
We currently paid trade at a one turn discount to the core tools peer group.
Despite a similar financial profile.
Post close we will have a best in class financial profile that deserves the higher multiple to reflect it.
Moving to slide 10.
Overall I believe this transformation will have tremendous benefits for our new standalone businesses.
Our shareholders are.
And our customers.
Upon closing, we will become a company focused on serving extremely attractive markets.
With a first class financial outlook for our customers.
The output of today's announcement is the culmination of all the effort to.
The termination and excellence that all our employees have shown over the past several years.
And I could not be more excited for everyone involved.
Finally.
I am pleased to welcome Dr. Michelle Macmurray seats to our board of directors.
A medical Doctor and molecular biologist by training.
Michelle's experience and expertise across a broad spectrum of public and private draws.
Including currently leading bio the world's largest biotech association.
We will bring a very unique perspective to our company, which will be invaluable as we enter this next stage in our corporate journey.
With that I will now turn the call over to Jane to walk you through our current financial performance in more detail.
And provide specifics as it relates to our outlook and updated guidance.
Jamie.
Thanks, Bill and good morning, everyone, while I won't go into detail on today's announcement as prolonged covered it well I do want to echo his sentiment that I think that this is a pivotal day in our company's history and.
And I am excited to see both businesses blossom in the years to come.
And thank you to our employees, who have worked tirelessly to make the company what it is today and to make this transformation happen as Phil mentioned, we had a fantastic quarter in Q2. Despite continued adversity that in some cases, where even a bit larger than we had anticipated a few months ago.
I've said it before but I think this really shows the power of how far we've come with our internal and external evolution over the past several years.
And how we can overcome unexpected challenges to a much better degree then the company may have in the past.
During the second quarter adjusted revenue of 123 billion.
Was flat compared to last year.
This included a 4% headwind from foreign exchange and a 10% contribution from recent acquisitions.
Which was in line with our guidance despite foreign exchange pressures.
Organic revenue declined 5% year over year, driven by a drop in total COVID-19 revenues.
On a non COVID-19 basis, our revenue increased 8% organically, which was above the 4% to 6% growth we were looking for coming into the quarter.
And was despite lockdown pressures persisting longer than we had previously expected.
Covid revenues came in at $222 million, which was also above our $210 million guidance.
The revenue upside in the quarter, along with solid adjusted operating margins of 32, 7% helped drive an adjusted earnings per share to $2 32.
Which was solidly ahead of our expectations.
As we've previously discussed our capital deployment. This year is focused on deleveraging and we paid down another $350 million on our term loan in the quarter, leaving only $50 million remaining this is the only variable rate debt, we have and will complete the repayment in Q3.
We ended the quarter with a leverage ratio of two three times net debt to EBITDA, which is flat with where we stood a quarter ago. We also generated $74 million of free cash flow in the quarter.
I would now like to provide some additional color on the performance of the business during the quarter before wrapping up with some updated thoughts on the environment. We are currently operating in and our outlook for the remainder of the year.
Starting with our discovery <unk> analytical solutions segment, which generated $661 million of revenue in the quarter. This was up 29% year over year and represented 54% of our total revenue.
Organically the segment grew 13% with sales to pharma biotech customers remaining robust and growing in the mid teens organically.
The strong growth we saw in pharma was driven by continued robust demand in our preclinical discovery and research business and strengthen our informatics franchise.
Sales to applied market customers grew in the low double digits organically, while revenue declined in the mid single digits organically to academic and government customers, which represent approximately 6% to 7% of our total revenue.
Turning to diagnostics the segment generated $569 million of revenue in the quarter, which was down 20% year over year and represented 46% of our total revenue.
Organically the segment declined 19%.
While on a non COVID-19 basis, our diagnostics business was flat organically.
Excluding lockdown related pressures in China, our diagnostics business grew 7% in the quarter.
As previously.
Lee mentioned Covid related revenues totaled $222 million down from $365 million a year ago.
As we highlighted on our call our last call. Our Covid revenues. This quarter included approximately $100 million.
Of noncash deferred revenue related to our California testing lab contract coming to an end in may.
Our applied genomics business, which consist of various instruments kits and other consumables for <unk> sample prep continuing to show strong performance and grew mid single digits organically on a non COVID-19 basis in the quarter.
Note that this was against an extremely different year ago comp as well, but as we highlighted in the past few quarters, we've expected growth rates in this business to begin to moderate as we go throughout the year.
And our immuno diagnostics franchise, we did see headwinds from Lockdowns in China, which persisted longer and to a greater degree than we had anticipated.
While the most severe lockdowns have subsided.
<unk> economic activity does not yet appear to have returned to normal.
So while we've seen more acute needs being addressed such as in our reproductive health business. Some of our immuno diagnostic solutions have continued to be pressured.
We now expect this to continue to be the case until the normal day to day routines re emerge.
On a non COVID-19 basis, our immuno diagnostics business declined in the mid single digits overall organically.
Outside of China. This business continued to perform extremely well and grew in the low teens organically excluding COVID-19.
Our reproductive health franchise grew in the low single digits on a non COVID-19 basis in the quarter as new products and menu expansion helped offset flattish birth rate trends in the U S.
And continued declines in other regions, including China.
We are seeing strong uptake for our new preeclampsia offerings, and our non NGF and IPG offering <unk> continued to show very good growth, albeit off a relatively small base, though.
From a.
Traffic perspective are 8% non COVID-19 organic growth in the quarter was led by the Americas.
Each grew in the low double digits, while Europe was up in the high single digits.
The Pacific was up 4%, while China declined in the high single digits.
Now moving onto our current view of the macro environment and its impact on the remainder of the year.
As you saw with the 8% non COVID-19 organic growth we posted here in <unk> demand continues to look very healthy and we are now raising our full year non COVID-19 organic growth outlook to a new range of 8% to 9%.
Up from our previous outlook of 6% to 8%.
As it pertains to Covid as you might recall approximately half of our Covid related revenue last year came from the labs, we operated on behalf of government agencies.
Both of those main labs have now fully closed with the California lab closing in May as the contract ended.
Going forward, our Covid revenues are expected to be primarily derived from our various related products, such as RNA DNA extraction instruments and kits.
Automation liquid handling and related consumables and service on these instruments and of course, our portfolio of diagnostic tests for the disease.
So as we look ahead, we continue to expect PCR related testing demand to continue to drop off and.
And after generating $532 million of Covid revenue in the first half.
We are now looking for approximately $610 million of total COVID-19 revenue for the year.
As a reminder, this includes the noncash deferred revenue related to the California contract that was fully recognized in Q2.
We continue to expect a 7% contribution from recent M&A and now see foreign exchange as being a minus 3% headwind to total revenue this year.
This resulted in our total revenue for the year now expected to be a range of $4 six zero to $4 $64 billion.
Yes.
In terms of adjusted earnings per share for the year, we are increasing our guidance to a new range of $7 80 to $7 90.
Which includes our outperformance here in Q2, and a more favorable outlook for the remainder of the year than we had previously assumed.
For the third quarter, we are projecting total revenue to be in a range of 1.0 to 10 to $1.0 billion to $3 billion, which consists of non COVID-19 organic growth of 6% to 8% and M&A contribution of 8% and minus 4% headwind from foreign exchange and approximately $50 million of total COVID-19 revenues.
In terms of adjusted earnings per share guidance for the quarter, we are forecasting it to be in the range of $1 40 to $1 45.
All of this guidance as detailed on the second to the last page of today's earnings presentation that is on our investor website.
In closing as you can see with our strong quarterly results and increased outlook for the remainder of the year. Our total company is performing extremely well and exceeded expectations despite incremental challenges.
This performance and resiliency will only be further bolstered as we become a pure play life Sciences, and diagnostics company over the coming year.
As Phil had mentioned I think this new company will be uniquely positioned to respond to customer needs.
To provide even more opportunities for all our employees.
And result in a highly desirable financial profile.
With that operator at this time, we would like to open the call for questions.
Thank you I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and will also give us a moment to compile the Q&A roster.
And we will take our first question from Dan <unk> with Stifel. Your line is open.
Hey, good morning, guys congratulations on the transaction here.
Jamie or prolonged I appreciate the profile that you gave for 24 through 26, maybe on the diagnostics side are you able to give us some guideposts when it comes to the.
The underlying growth assumptions that you have for your immune reproductive applied genomics and then on the overall, 10% organic goal.
The slides how you at 10 plus in fiscal 'twenty three for the new portfolio.
So I'm just curious whether we should think about 10% being the sort of the base jumping off point for next year.
And then acceleration from there into that 24 through 2006 period, if you sort of layer in the investment trying to just sort of understand the trajectory that you see as you enter this new phase of yours here.
Jordan I mean.
Two ways to look at that one as you've seen euro immune there historically grown.
The low double digits and they are pretty much speaking the deal model things, we've acquired that we do not see that stopping in the future obviously because of.
The COVID-19 situation in China. It has had some issues in the current quarter, but overall the growth trajectory. If you take China out that continues to be there. So.
So similarly, just on diagnostics has grown and will continue to grow in the high single digits and overall for the New company you should expect this to be growing double digits in the future.
Okay I appreciate that color and then maybe just.
On the deploying of the capital that you expect with the proceeds I mean, you guys have been pretty aggressive over the last couple of years just in terms of transforming its portfolio. How quickly should we think about you being in the market for interesting assets.
That come into focus just given the new prioritization here.
Does the business need time to settle so to speak or do you think the 23 of the year, where you could kind of.
Keep your foot on the gas when it comes to transforming the way that the business looks.
I think the way I would answer that question. Dan is just go back and look at our past time in our past two three years M&A track record, we've done more than 10 deals over the last 24 months and that should be a proof point of what are our strategies around M&A and as we continue now again just to remind you.
As you very well know the kinds of deals that we do are very focused on very strategic which tend to be found on our company. So I think that spread of our continued focus will be and in our base plan you should expect us to continue to be acquisitive.
But more importantly than I think what this does it gives us an opportunity to deploy capital and makes our balance sheet much more robust to do that.
Abbey.
Excuse me, yes, we.
We'll move onto our next question from Derik de Bruin with Bank of America. Your line is open.
Hi, good morning.
Good morning, Dan.
Hey, so a couple of points, so I guess, what's the implied EBITDA margin.
The remain co.
EBITDA margin so yes.
Yes that does.
Slide greater than 30% and our EBITDA normally tracks about 2% to 3% higher than that Derek. So the reason why we put out 30% is for your modeling purposes. So, let's just back up for a second here.
This is a complex carve out it's not a standalone business Theres a lot of allocated cost. That's why we said the business that is being divested is in the low to mid teens from an EBITDA perspective, and we wanted to at least give people some kind of modeling purpose range here for 2023, which is why we said 30% plus.
I think long term this can be in the mid <unk> for sure. We've got to figure out the stranded costs that are in there, but in terms of whatever.
Modeling right is from an op profit rate perspective, I would add probably 3% to that for EBITDA.
Right.
That's what I was looking for.
And just the current quarter what was the overall headwind.
On China that you saw in <unk> and sort of like what's the embedded headwind since the lockdowns are lasting longer for.
23 <unk>.
22 guide.
Yes.
A couple of ways here, so China in total I said was down high single digits.
If we exclude the impact on the immuno diagnostics in China, China was actually up low teens or 13% at.
At an overall company level that had a three point organic impact to us So ex China IDEXX, we would've been up 11%, which I think speaks to the strength of the company and as I mentioned in my prepared remarks diagnostics would have been 7% excluding China.
I think it is different than what we talked about last time on the call.
While the economy is starting to emerge a little day in and day out life is not the same and that is having and will continue to have an impact in the second half as we alluded to and as you just asked.
And so therefore, we've been more conservative in the second half.
So overall, I think diagnostics, which was zero percent for the quarter organically on a non COVID-19 basis is.
It's probably in the low single digits in the second half. So we've expected a tiny bit of improvement on China, but not very much I think this will persist all the way through the second half as our running assumption, but from a big picture perspective, even with that said we are raising the second half organic growth in our implied guidance by probably 1% to 2%.
<unk> to get to an overall, 8% to 9% for the year. So I think it speaks to the portfolio I think it speaks to the strength of what we've done I think it speaks to the strength of the teams and how they're executing so even with China being down and immuno diagnostics, which we think is temporary the company is raising the overall guidance both in the year and in the second half and we are long term.
Confident that our China immuno diagnostics business is a terrific asset and when Covid subsides and things reemerge it'll be just fine.
And are you embedding anything into the guide for <unk>.
Potential recessionary headwinds.
Purchasing delays and are you seeing anything to suggest that your customers are.
IPad had some hesitation in buying particularly on the DIY side of the business.
We haven't seen any of that Derek.
The demand continues to be very strong our backlog is as healthy as ever.
We are.
On a quarter over quarter sequential basis, taking it back down to kind of what we think is a more normal run rate. So.
In the third quarter, we're obviously guiding 6% to 8% versus 8% and so life Sciences, which was mid teens, we're taking down to low double digits, because thats why we think the long term outlook for their businesses.
Slide markets. We said we were low double digits in the third in the second quarter, we're going to take that to high single digits, because I just don't think that we.
We can continue to bank on low double digits, but we haven't seen anything to state the opposite and so therefore, we haven't seen any recessionary pressures went out and really embedding any recessionary pressures.
I think sequentially.
What we're guiding to is a little bit more conservatism versus our <unk> run rate, but hopefully that proves conservative at the end of the day.
So as we look into the future the new company allows us to avoid some of this macro uncertainty.
Yes. Thank you thanks.
Thanks, Eric.
Okay.
And we will take our next question from Vijay Kumar with Evercore ISI. Your line is open.
Hey, guys. Thanks for taking my question and congratulations on the transactions here I had two margin related questions.
Jamie maybe the first one for you.
The EPS beat in the quarter, a very healthy gas margins came in well above and I look at the guidance.
Revenues, maybe up 50 basis points at the midpoint.
He is up almost 8% cobalt revenue really didn't change a whole lot.
Below the line teams fairly consistent and I'm wondering what the Delta if anything changed on the accounting front here.
That would explain the magnitude of the EPS raise.
No I think if I understand your walk there Vijay.
A lot of moving pieces here. So I think you've covered most of them foreign exchange a little worse, but it doesn't really hurt us too much at the end of the day, because we're pretty well hedged in Europe operationally, obviously COVID-19 was a little bit better.
But I think the big thing that is different here BJ is we're much more confident in the profitability on the second half and I think that was the question coming out of the last discussion that we had we were probably conservative in what we put in from an inflation in freight in when we think pricing would kick in but we're raising the profitability in both in the second half and obviously with the.
Thirtyish scent bead in the second quarter that proved very healthy some of that with California, being a little bit better than what we thought but a lot of a lot of that was rate. The team is doing a fantastic job mitigating cost actions, both up particularly on the freight side, but also on the inflation side I think we've seen both stabilized and our productivity measures kick into place and why.
We knew it was coming on from a pricing standpoint, we finally started to incur.
Some of that price increase that we saw in the second quarter and we think that will continue to snowball here as we get into the second half. So I think it's really just that maybe what youre missing. There is just an increase in the right profitability in the second half as well if I understood your question correctly.
And just to.
To clarify that Jamie there was now I guess the question Terry block width.
How does the legacy divested assets being treated from an accounting perspective is this comps or is it being held for sale accounting. So that's all right.
Yes, nothing no.
Nothing is going into disc ops as the deal was.
Closed early.
Early this morning.
So that doesn't impact any of the results that youre seeing nor our guidance for the rest of the year because we are still operating as a standalone company now come when we closed the third quarter, we will have discontinued operations accounting and therefore reporting but that said we're trying to give you a picture of what the consolidated company would look like for the remainder of the year.
Understood that's helpful and pull up one for you I think the prior operating margin target of 26%.
The deck at 30% operating margins I assume.
The base.
<unk> is about 30% for fiscal 'twenty three.
One is at 30% for 'twenty three 'twenty four and then if I assume double digit margins for the domestic business.
Getting to something like 25% with that prior 26% target is still relevant or perhaps that change given some of the stranded costs here.
Let me answer the first part and maybe Jim you can take the second part so.
The 30% plus operating margin that we're talking about is off the bat in 'twenty three so thats not a 24 number of Richard that's a 23 number in fact, if you look also on the top line of this company, even including covered if you look at the top line. This business has already grown 8% over the last few years.
Continues to split operating margins in that range. So you know.
Off the bat, we expect this to be a 10% growth and 30% operating margin business at close.
Yeah and on the 30% next year to 2020 as Bud mentioned 2023 number and Vijay we wanted to get some modeling guide out there and yes. It does have stranded costs and as I mentioned in my earlier remarks. It is difficult to ascertain what that total amount is yet we feel very comfortable with at least 30%.
It's not really coming off the overall, 26% that youre talking about but it is a different size company and there will be stranded costs that we will have to work through both in 2023, probably a little bit less in 2024 and by 2025 I would assume are back to normal but.
Absent that the 26% is still fully.
<unk>.
Understood. Thanks, guys.
Thanks Vijay.
And we will take our next question from Catharine <unk> with Baird. Your line is open.
Yeah.
Hey, guys. Thanks for the questions first.
First for the new lifestyle segment can you just talk through that and the market mix post divestiture and then maybe give us an update on biologic performance and recorded.
Yeah. So I'll talk about the end market mix, So our life Sciences business is.
In general I think maybe 80%, 85% pharma biotech, 15% academic government something like that I'll check it, but thats roughly probably right.
And then as you break down the full business. Both end markets. We've always said we were 60 40 large molecule small molecule.
Is that kind of gives you a little bit about the end market mix Kathryn.
In terms of biologics, which was the second part of your question. They had a fantastic quarter overall M&A contribution as a total company came in line with exactly where we thought it would be at 10% overall contribution biology, and the teams continue to integrate well they're growing double digits.
And everything seems to be going very well.
I don't know what more I would say Doug Thank you noga.
The trends Catherine for these businesses.
The bigger question really what we're looking at.
<unk>.
<unk> earlier question. It is not a cyclical business you know from our research discovery and preclinical perspective, it allows us to largely avoid the macro uncertainty and given our focus typically on large pharma and biotech.
Insulate the business from those uncertainties.
Yes, Okay got it.
Maybe for your kind of prior 2023 outlook, you talked about $70 plus cents of EPS.
Where does that stand now in terms of newco.
Well, let me talk about it as overall framework first and then we can talk about newco.
So in general we feel as positive about how the company is operating as we ever have so as you know Catharine, we said we'd hit high single digit organic growth next year absent some large economic condition changed that we still feel excellent about that we said, 26%, which is what I talked about on bjs operating margin that is.
Which is what I answered with the JV still feel great about that I'd say, the only wildcard is foreign exchange and it has been severe so maybe that is a minor impact on the overall year, but overall I think the way. The team is operating is terrific and we wouldn't change any of that guidance overall.
In terms of remain co.
Wanted to make sure I understand the question. So what we're really trying to put out some markers here that says hey look at remain co should be growing 10% plus.
And this year.
Let's say remain co is $3 $3 billion, we put on the chart take out $600 million Covid revenue grow that 10% then add $100 million back for Covid durability that should give you some modeling.
<unk> here feel great that at a minimum including a lot of stranded costs that we should be at least 30% operating profit.
And so we feel great about that financial profile and over the next two years is that stranded cost comes out we see no reason why this business shouldnt be in the mid <unk> from an operating profit perspective, you will take a couple of years to work through that but.
I think it has a terrific financial profile ahead of it.
Alright, great. Thank you.
Thanks Catherine.
And we will take our next question from Josh Waldman with Cleveland Research. Your line is open.
Hey, guys. Thanks for taking my questions.
First just a clarifying question on the divestiture are you selling the entire analytical instruments business, including for example, like <unk> that touches lie.
Our life Science and Dx.
Yes, yes.
Yes, we are yes, we are not we will have a <unk>.
TSA back with.
New mountain capital to be able to get those to be able to purchase those instruments and use in our life sciences and diagnostics business, but they will.
One the capabilities related to <unk>.
Got it.
And then a follow up on Dan's question I guess.
Where do you think that that divestiture leaves gaps in the portfolio that youll target within organic investments.
I guess asked another way I mean, where do you think the most opportunity from an M&A standpoint.
Within the new company.
No Josh that would be not dissimilar to what we've talked about what this gives us now as an opportunity to continue to build on the scale that we have on the life Sciences and diagnostics side. So you should expect us to continue to be in the fairway that we have played in over the last I would say 24 months look.
At opportunities in challenging therapy, and continue to build our portfolio both on the life Sciences and diagnostics side.
Okay, and then lastly on I guess existing.
Deals that you've done I mean can you talk to the performance on recent deals I know you reiterated the 7% M&A impact, but curious how other recent acquisitions.
Now in the organic comp are performing versus expectations and then maybe how those acquisitions are contributing to the organic outlook and margin outlook for 'twenty, two and 'twenty three.
Yes, again, Josh as Jamey pointed out earlier, we continue to.
See strong performance from all our inorganic acquisitions that have been done recently, including bio legend, which is now as you know we talked about earlier as part of our total life Sciences reagents growth story, which is in low double digits overall, and it's a piece of a broader portfolio. So overall all our acquisitions are doing.
Well in <unk> <unk> and.
We had 10% M&A contribution which was in line with guidance. Despite the FX headwind that we saw in the quarter.
Yes, I would just add I think on a pro forma basis, Josh this entire year. The basket of acquisitions you are talking about would grow mid teens, which is terrific and in line with what we're talking about here. So as you look to 2023, obviously that does help with the step up in the remain co company here the life Sciences and diagnostics company moving forward since all of these <unk>.
That's her in there that's why they are a major contributor to this business being with arc to us having confidence that that can grow over 10% here.
Got it helpful guys I appreciate it.
Thanks, Josh.
And we will take our next question from Liza Garcia with UBS. Your line is open.
Thanks, So much for squeezing me in guys congratulations on the transaction.
I'm not sure if I caught it but just wondering if you guys could add.
Touch on I know, it's kind of a little bit less for you guys, but.
Pricing and kind of what you saw in your expectation kind of for the balance of the year for you guys.
Yes sure. Thanks.
I couldnt be more proud of the team for what they've done on pricing.
A lot I think we've talked about this in the past a lot of effort went into really build this muscle in a much stronger way for our company.
It took a little while to get through some of the backlog we saw it in our backlog in the first quarter, although we didnt recognize a ton of price we started to really see it come through here, particularly in the I'd say last month and a half of the second quarter, which is part of the EPS beat in the second quarter. We see continued in our future backlog here, so that price impact and contribution to our <unk>.
Company should continue to increase in both in the third quarter and again in the fourth quarter.
And I think more importantly, I think the lasting impact.
Our focus on price I think has gotten much stronger and I think it will bode well for the years to come.
Great.
Let's just touch a little bit.
And kind of what youre seeing in supply chain as well I know obviously it kind of has it impacted you guys, but if youre seeing any changes there and kind of your expectations for the year on that that would be great as well.
Yes, I would say in general things have stabilized if not gotten a touch better.
And when you combine that with the actions. Our teams are taking that's what's really driven our confidence in the increased profitability versus our prior guide both in the second quarter, obviously, but more importantly, we've taken up the second half from a profitability standpoint as well.
So we continue to buy advanced purchases of inventory and you can see a little bit of usage on our balance sheet for that.
Freight in general, we're not having any shipping delays or anything versus where and we have had that in prior quarters. So I would say its gotten better and you combine that with our the actions. The teams are taking an eye.
I think the outlook looks promising here.
Great. Thanks, so much.
Thank you.
And we will take our next question from Jack Meehan with Nephron Research. Your line is open.
Thank you good morning.
Wanted to ask on the transaction just as Youre thinking about the businesses that you're divesting enterprise services, specifically just given there is overlap in the customer base with Biopharma services I guess just the <unk>.
Between divesting that versus holding on to it would be helpful.
Yes Jack.
Good question from our perspective, when we look at where we are today. This is probably the best path for most value creation for both companies.
We see some we see some overlap on the enterprise side as you said, but there is not much overlap from product that goes from life sciences, or our diagnostics business to the two through one source of truth that chamber.
As you know is mostly service focused.
What it does now is it allows us to singularly put more focus around the market trends in life Sciences and diagnostics.
And honestly it gives a lot of simplicity and reduces the complexity both for our employees and investors and how they look at the company.
Is there anything else I would just add that there is a lot of synergy between our enterprise services business named one source plus our core Sibneft services business that is being sold in conjunction with our analytical technologies business. So it did make sense to pair those together.
Great and then two clarifications for Jamie just first whats your updated target for bio legend in 2022.
And then can you break down the $222 million of Covid sales between the service lab and everything else that would be helpful.
Yes.
[laughter] bio legend is doing very well, we're very pleased but I don't think we're going to give single point estimates anymore. I think we want people focused on the fact that this is a $700 million life Sciences reagent portfolio, certainly biology is half that so.
We're excited about the promise of that combined collective capabilities. So I think we're going to come off giving here's an exact dollar for biologics.
In terms of the second part of your question Jack.
And the $222 million I think labs was maybe $150 million to $160 million of that in the remaining or everything else I mentioned in my prepared remarks in terms of everything else that we sell is probably 75 ish or $70 $70 million.
Super Thank you.
Thank you.
Okay.
And we will take our final question from Paul <unk> with Keybanc. Your line is open.
Hi, <unk> you had mentioned taking a conservative view on China rest of the year. What are you seeing in terms of shutdowns or they've seems to have been.
Getting better but.
If you could kind of give us.
Update on things.
Our ear outlook.
In them.
Thanks, Paul I think the way to think of it as Jamie mentioned earlier on.
The Q&A session things are improving but it's not really totally back to I would say, 100% normal. So we've started seeing people know and this is <unk>.
People coming out going to see their physicians going to hospitals for testing the newborn screening side has come back and I would say that's the piece that has come back it's more around the autoimmune and allergy. There are still some sporadic shut downs that you see and even where things have opened up people are still hesitant to go to physician.
Our two hospitals.
And for those testing and I think that will gradually come back over the next several weeks or months.
Okay, and then the Covid, Jamie you were guiding to what in <unk>.
$50 million.
Okay in the third quarter.
And then we get to our kind of normal we've always said $100 million COVID-19 durable revenue. So the implied <unk> guidance is about $25 million.
Okay. Thanks.
Thanks, Paul.
And ladies and gentlemen, this concludes our question and answer session. Today at this time I will turn the call back over to Mr. Steve Willoughby for any additional or closing remark.
Thank you Abbe and thank you everyone. This morning on short notice. We appreciate your questions and we look forward to speaking you with you all again next quarter.
Have a good day.
And ladies and gentlemen. This concludes today's conference call. We thank you for your participation and you may now disconnect.