Q3 2022 Danaher Corp Earnings Call
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My name is Shelby and I will be your conference facilitator. This morning.
At this time I would like to welcome everyone to Danaher Corporation's third quarter 2022 earning results conference call.
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Now I'll turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford You May begin your conference.
Thanks, Kelly good morning, everyone and thanks for joining us on the call.
With us today are Rainer Blair, our president and Chief Executive Officer.
Matt Mcgrew, our executive Vice President and Chief Financial Officer.
I'd like to point out that our earnings release.
Slide presentation supplementing today's call.
Our third quarter Form 10-Q, reconciliations and other information required by SEC regulation G.
Waiting to any non-GAAP financial measures provided during the call and additional materials are all available on the investors section of our website www Dot Danaher Dot com.
Under the heading quarterly earnings.
The audio portion of this call will be archived on the investors section of our website later today under the heading events and presentations.
And will remain archived until our next quarterly call.
A replay of this call will also be available until November 3rd 2022.
During the presentation, we will describe certain of the more significant factors that impacted year over year performance.
The supplemental materials describe additional factors that impacted year over year performance.
Unless otherwise noted all references in these remarks and supplemental materials to company specific financial metrics refer to results from continuing operations.
And relate to the third quarter of 2022, and all references to period to period increases or decreases in financial metrics are year over year.
We may also describe certain products and devices, which have applications submitted and.
Pending for certain regulatory approvals.
Or are available only in certain markets.
During the call we will make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future.
These forward looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings and actual.
Results may differ materially from any forward looking statements that we make today.
These forward looking statements speak only as of the date. They are made and we do not assume any obligation to update any forward looking statements, except as required by law.
With that I'd like to turn the call over to Ryan.
Well, thank you John and good morning to all of you. We appreciate you joining us on the call today.
So let's jump right in.
Our positive momentum continued in the third quarter with 10% core revenue growth and solid earnings and cash flow performance. This strength was across the portfolio with high single digit or better core growth in all three reporting segments.
We're particularly pleased with the consistent performance of our base business, which has grown high single digits or better for nine consecutive quarters.
Now these well rounded results were driven by our team's outstanding execution through a challenging operating environment.
They've done a terrific job running the danaher playbook to proactively reduce structural cost, while continuing to accelerate high impact growth investments.
We believe our ability to deliver meaningful innovation and reliably serve customers contributed to market share gains in many of our businesses.
Now during the quarter, we also announced our intention to separate our environmental and applied solutions segment to create a publicly traded company.
This new company, which will referred to as yes for now we will be well positioned in the most attractive areas of the water quality and product identification markets.
Yes will be comprised of outstanding businesses with strong ESG fundamentals durable business model and a very attractive financial profile, averaging mid single digit core revenue growth over the last five years.
With 55% recurring revenue today, and an adjusted EBITDA margin of approximately 25%.
Now as a Standalone company, yes, we will have greater opportunities to meaningfully deploy capital towards M&A.
And of course, yes, we'll have the danaher business system as its foundation, along with our commitment to continuous improvement that will support the same outstanding results.
As part of Danaher today.
Of course, we look forward to sharing more details here in the coming months.
As for Danaher. This separation will establish us as a more focused science and technology leader committed to innovation and making a profound impact on human health.
We've got a great lineup of leading franchises positioned and highly attractive life sciences, and diagnostics and market all United by a common set of durable high recurring revenue business models.
We remain focused on strengthening our portfolio and competitive advantage in these areas and we see tremendous opportunities to continue delivering sustainable long term performance.
So with that.
Let's turn our third let's turn to our third quarter results in more detail.
Sales were $7 $7 billion, and we delivered 10% core revenue growth, including eight 5% core growth in our base business.
Victoria testing contributed an additional 150 basis points to core revenue growth in the quarter.
Geographically, we continued to see strong demand across the developed markets. Despite current macroeconomic and geopolitical events.
North America core revenue was up high teens with all three segments, delivering double digit or better core revenue growth.
Core revenue in Western Europe grew high single digits with customer activity and funding levels remaining healthy.
High growth markets core revenues were up mid single digits.
In China, our teams effectively managed through ongoing COVID-19 headwinds to deliver high single digit growth in the quarter.
Our gross profit margin for the third quarter was 59, 8% and our operating margin was 26, 3%.
We had 50 basis points of core operating margin expansion driven in part by disciplined cost management productivity measures and price actions.
The operating environment remains dynamic across our businesses globally.
But we experienced fewer supply chain disruptions.
In the third quarter.
Logistics improved its freight costs began to stabilize.
We also saw a modest improvement and material availability those certain electronic components remained difficult to procure.
Now despite these challenges our teams have done an outstanding job, taking proactive measures and leveraging the DBS tool set to minimize the impact of supply chain constraints and inflationary pressures.
Okay.
Adjusted diluted net earnings per common share of $2 50.
We're up 7% versus last year.
We also generated $1 $7 billion of free cash flow in the quarter and $5 $2 billion year to date.
Yeah.
So now let's take a look at our results across the portfolio and give you some color on what we're seeing in our end markets today.
Our life Sciences segment reported revenue grew 4% and core revenue was up 8%.
Strength was broad based with most businesses achieving high single digit or better core revenue growth.
And bio processing robust activity levels drove over 20% growth in our non COVID-19 business at <unk> and Pall biotech.
As expected our customers continue to transition away from Covid, 19 vaccine and therapeutic program and into programs for other modalities.
We expect these trends to continue through the fourth quarter, resulting in high single digit core revenue growth in our bio processing business for the full year.
In September we hosted an investor day at <unk> to showcase our bio processing business and highlighted the tremendous long term growth opportunities, we're positioned for and biologics and genomic medicine, We also announced that we're bringing together.
All life Sciences as the Biotechnology group.
The combined portfolio has the broadest offering in the industry with end to end solutions across all major therapeutic modalities for monoclonal antibodies to emerging cell gene and mrna based therapies.
The biotechnology group will have unmatched global scale with the industry's largest commercial team, allowing us to further extend the reach of our best in class customer service.
We also believe focused innovation across the joint portfolio will ensure our products and solutions are aligned to best meet customers need around quality yield and cost.
With Pall life Sciences, and <unk> joining forces the biotechnology group is uniquely positioned to help our customers become more efficient and bring more life saving therapies to market faster.
Okay.
Moving to our life Sciences instrument businesses.
Collectively delivered double digit base business core revenue growth led by <unk> <unk>.
Microsystems, and Beckman Coulter life Sciences.
Funding levels remains strong globally, and we saw solid customer demand across most major end markets.
We continued our strong pace of innovation in life Sciences, with the introduction of Beckman Coulters biomass ingenious.
Genius is a cost effective easy to use sample preparation system that reduces manual transfers and hands on time and next Gen sequencing library construction.
This is a great example of how our investments in innovation are delivering impactful solutions to our customers.
Our genomics businesses had another quarter of double digit core revenue growth led by strong demand for plasmid RNA and next generation sequencing solutions.
This quarter marked <unk> first anniversary as part of Danaher, and we couldnt be more pleased with the team's performance.
Yeah.
Financially the results speak for themselves with more than 30% year over year revenue growth since the acquisition. The team has done a tremendous job embracing DBS tools and processes to meaningfully reduce lead times and increase capacity now.
Now this capacity is certainly supporting customers' needs today, but it is equally important to support I'll never on the long term growth outlook.
With a view towards the future. We're excited about the opportunities to collaborate across our genomics businesses and create unique solutions to help our customers accelerate the development and commercialization of mrna and other nucleic acid based therapies.
Moving to our diagnostics segment.
Reported revenue was up nine 5% and core revenue grew 13, 5% led by nearly 30% core revenue growth at Cepheid.
Leica Biosystems grew mid teens in the quarter driven by strength in core histology and advanced staining.
As customers seek to improve productivity within their labs, we're seeing strong early momentum for like its recent innovation bonds Prime a fully automated advanced training platform.
Second culture diagnostics delivered solid results with mid single digit core growth despite ongoing COVID-19 headwinds in China.
In molecular diagnostics core revenue across Cepheid non respiratory test menu grew approximately 10% led by double digit growth in virology and infectious disease testing.
In respiratory testing global PCR volumes have moderated.
The demand is still elevated for symptomatic testing at the point of care, where Cepheid is the gold standard cepheid respiratory testing revenue of approximately $875 million exceeded our expectations of approximately $325 million.
A higher prevalence of circulating respiratory viruses combined with advanced purchases by customers in anticipation of a more severe respiratory season in the northern hemisphere led to both higher volumes and a preference for our 401 test for COVID-19 flu a flu b.
And RSV.
Now, we're starting to see our customers consolidate their point of care PCR testing platforms onto Cepheid gene expert.
The gene expert provides significant value to clinicians with a unique combination of fast accurate lab quality results and the best in class workflow.
Customers are also increasingly interested in opportunities for broader utilization of Cepheid, leading Testament.
Our opportunity funnel for non respiratory tests has increased significantly this year and we see opportunities to continue gaining market share moving forward.
Moving to our environmental and applied solutions segment reported revenue grew 5% and core revenue was up 10, 5%.
Water quality was up mid teens in product identification grew low single digits.
Product identification, marking and coding was up low single digits and packaging and color management.
Mid single digits.
Video that was up low single digits in part due to a difficult year over year comparison.
The business grew low double digits in Q3 last year.
Now during the quarter, we saw strength in food and beverage as well as the consumer end market.
And water quality, Tim treat and Hawk each grew high teens during the third quarter.
Demand for analytical Chemistries and consumables remained solid across our major end markets.
Municipal and industrial project activity was broadly consistent with the first half of the year driving solid equipment growth.
Now last week at West check the annual wastewater Tradeshow.
Water quality team highlighted several solutions that are improving the efficiency and sustainability of the water treatment process.
<unk> ultra low range chlorine analyzer.
Raises the industry standard to parts per billion chemical detection levels, helping customers extend the membrane life of their treatment systems and reduce maintenance costs.
At Trojan innovative solutions, such as Trojan, UBS, Cigna, and Trojan UV 3000, plus reduced environmental impact by treating water with ultra Violet light instead of traditional chemical disinfection method.
Every day over 1 billion people benefit from water treated by Trojan.
So these are just a few examples of how our water quality platform and supporting customers day to day mission critical water operations, and making a positive impact on the world.
So with that color on what we're seeing in our businesses and end markets lets now briefly look ahead at expectations for the fourth quarter and the full year.
In the fourth quarter, we expect to deliver high single digit core revenue growth in our base business.
We expect a high single to low double digit core revenue growth headwind from COVID-19 testing, resulting in a core revenue growth being flat to down low single digits in the fourth quarter.
Additionally, we expect our fourth quarter adjusted operating profit margin of approximately 30%.
Now for the full year 2022, there is no change to our previous guidance of high single digit core revenue growth in our base business.
We now expect high single digit overall core revenue growth, which is up from our prior expectation of mid single digits. As a result of our strong COVID-19 testing performance in the third quarter.
We continue to expect operating profit fall through of approximately 25% for.
For the full year.
So to wrap up.
We're very pleased with our third quarter results, our well rounded performance.
He is a testament to our team's commitment to innovating and executing in support of our customers.
These results also reinforce danaher strength.
And durability.
Our differentiated portfolio is well positioned in attractive end markets with long term secular growth drivers in our business models are resilient with nearly 75% of our revenue today.
Being recurrent.
So putting it all together the strength of our portfolio and balance sheet combined with our talented team and the power of the proactive application of the Danaher business system provides an outstanding foundation for delivering sustainable long term results.
So with that I'll turn it back.
Back over to John .
Thanks, Brian our Shelby that concludes our formal comments and we're now ready for questions here.
Thank you at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.
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Once again that is star one to ask a question, we'll pause for a moment to allow questions to queue.
We'll take our first question from Derik de Bruin with Bank of America.
Hi, good morning, Thanks for taking the question wondering Gary.
Okay.
So obviously, there's a lot of questions on the bio processing market given.
One of your competitors in that market was talking about inventory stocking yesterday.
<unk>.
The sector can you just sort of elaborate on what you are seeing a little bit more detail.
<unk> seen inventories.
Also.
We've gotten the question you are talking about high single digit growth for the full year. I think you had commented high single to low double digit prior quarter. So can you sort of walk us through the dynamics are you still looking for like a $1 billion in Covid vaccine for this year.
A lot more color on what's going on that's going to be.
Given how sensitive is your guidance. Thanks.
Okay. Thanks Derek.
Let me get right after that question here so.
First of all let's let's talk about 2022 and I'll certainly.
<unk> about the inventory.
Topic here as well.
I think it's important to reiterate that overall, we're seeing very strong customer demand in bio processing and we expect to finish 2022 with high single digit core growth.
Now that splits up in a number of sections. So let's start with the non COVID-19 bio processing.
Growing well over 20%.
And we continue to see that and the underlying fundamentals here are the funding is there the clinical trials continue to progress. The pipeline is strong we're seeing product move into commercial production from phase III.
And this is really accelerated across all modalities such share monoclonal antibodies, but yes, we're even seeing cell and gene therapy starting.
To gain their approvals.
Additionally, pricing is above historical levels, which is driving some incremental growth. If you will on top of the underlying demand in the non COVID-19 areas.
Now as I mentioned in my prepared remarks.
Customers do continue to move away from Covid related projects and I don't think Thats, a surprise to any of US that's something that we have been speaking about for some time.
And in fact, we can confirm that that is happening.
Thank you.
It also reconciles with what we're seeing in the marketplace. We're seeing that vaccines are uptake is relatively slow people are unsure of the current vaccine inventories will address the newest variance so theres a bit of uncertainty there I think in the public get to where we go.
From a vaccine perspective and that reflects naturally.
What we have seen here.
With customers starting to move.
Move to the other modalities and drive the projects that they had had an old forward and for us that manifest.
Here in for the full year that we see $800 million of Covid revenues.
<unk> processing as opposed to the $1 billion.
We had been talking about previously so we do see.
Yes.
Customers moving away from these COVID-19 projects and driving their energies their efforts and their financial resources into the other projects and that helps explain why we see the larger part of the business.
Following at well over 20%.
Now.
We are not seeing significant stocking, but we do see pockets of stocking, particularly there were there were large COVID-19 related either therapeutic or a vaccine programs. So those players that.
Heavily invested in large programs here.
Those players that in fact have higher inventory.
Then is normally the case, having said that those large players also are those which are best positioned to redeploy those inventories to other projects. So we do expect.
Inventory burn down with those players here in the coming quarters.
So that's the inventory situation.
Sure.
Derek and then as it relates to <unk>.
Some of the other points here.
We continue to be and I just wanted to reaffirm the high single digit growth.
High single digit here year to date and Thats, how we see ourselves in bio processing, concluding the year.
Got it and the order book growth in the order book for Bioprocess and can you elaborate again on the non coffee growth there.
Sure sure Derik so for Q3.
Orders are down.
Over 20%.
As expected.
And I think Thats, a number which bears some commentary in context.
First of all we're coming off of order comps that are well in excess of.
50% in the prior year and so it's important to take.
In order to be able to rationalize these numbers that sometimes are viewed in isolation.
With the right context, the three year order stack.
Is over 20%.
And I think something that is perhaps not as well known and that bears. Some conversation is we and many others have meaningfully reduced our lead time.
And we've done that through capacity investments, we've done that through productivity investments, we've been able to do that because the supply chain has become more secure.
That's a pretty significant impact.
On the order placement cadence of our customers.
So just just to mention an example here if lead times.
So from 52 weeks, which has been the case in some product categories in the marketplace.
To 12 weeks.
Customers fundamentally changed their order patterns to give you a sense of that.
If a customer.
I wanted to order over time or bio reactors.
The order all four bio reactors at one.
If there is a 52 week lead time, but if it's a 12 week lead time, they would order one bio reactor and then follow up with other orders.
In the future. So what we're seeing right now is really the normalization of the marketplace coming from a red Hot pandemic fueled time of constraint and long lead times for orders.
Amped up significantly.
Significantly as the order rates ramped up significantly.
By chain now normalizing.
And customers adjusting their order cadence and then yes of course.
But volumes are down that's expected we've been talking about that but.
But we also see the strength of the non COVID-19 market and keep in mind that's a.
Much larger market and.
And currently it is growing at well over 20%.
There is.
Backlog to be burned down there because previously COVID-19 had been prioritized so.
The orders the orders.
<unk> negative to repeat but not unexpectedly and can be seen in the context.
The market that is now readjusting and Derek you had asked about the non COVID-19 as well, yes. So if you think about the book to Bill there in the quarter. It was essentially one point.
Essentially I'm sorry, what.
Essentially one one point okay.
Got it thank you and.
Just one final question do you still expect to take significant price across the portfolio next year.
We continue to think about price as a lever for us.
And we think that lever is available to us next year as well we have taken the necessary steps to do that.
Our over 400 basis points here in the quarter.
That's up from 300 basis points in the first half of the year, we expect the fourth quarter to be similar.
And we're going to try and keep that momentum going here in the new year as well.
And that commentary is overall, Derek but I don't think that would be any different for bioprocess.
Great numbers.
Okay. Thank you.
We'll take our next question from Scott Davis with Melius research.
Hey, good morning, guys. Thanks, Scott Thanks.
Scott.
Yes.
Go back a little bit to Cepheid are there costs I would imagine that cost was not a main focus when you were supplying just extreme demand for quite the last couple of years, but just are there costs or is there a playbook where cost can come out of.
Of the business and kind of give you a little bit of a tailwind on the margin side, while growth kind of stabilizes.
So we have as you suggested invested significantly in order to drive.
We'll be able to supply.
And demand here during the pandemic.
And watch very carefully where our capacity needs to be one two of course serve the needs of the pandemic, but also to fuel the growth in our non COVID-19 testing business.
That continues to grow very well here you saw.
The very strong growth, we had in COVID-19, but not to be underestimated the very nice 10% growth in non covered off of a very strong comp in the prior year so capacity for us is.
An area of great focus and we're able to adjust that capacity up and downward both in terms of.
Units of capacity, but also cost.
We need so that is a relatively flexible.
Level lever for us.
And we will continue to adjust that lever up or down both from a capacity perspective, as well as a cost perspective as required.
So that's helpful.
We can go a little bit bigger picture, how Brian or when you think about the M&A funnel.
How wide is the lens.
You guys, obviously have a lot of big focus on cell and gene therapies and such but.
When you think about your lens today versus perhaps where it was even when you started.
The role Reiner I mean is it is it as wide and kind of broadly and.
Different health care.
Yes.
Areas or is it more narrow towards or cell and gene therapy. This is kind of what I'm asking.
I would characterize our lens as broad.
And not limited to cell and gene therapy, we want to have a profound impact on human health Scott we've talked about that here now for some time and that that allows us a very large space.
In order to identify.
<unk> investment opportunities capital deployment opportunities and as such our funnel is as wide and deep.
And very active.
Always.
Okay. That's helpful. I'll pass it on thank you guys and best of luck.
Thank you.
Thank you we'll take our next question from Vijay Kumar with Evercore ISI.
Good morning Vijay.
Ryanair and congratulations on a.
Good steady print shared this morning.
Just maybe back.
On the vaccine question appreciate all the color.
And I know given that we don't have the order numbers I know what's your.
What you implied by the lead times coming down, but just maybe to put a finer.
And that is your outlook for bioprocess, including vaccines at things I think Danaher expected high singles for 'twenty three.
Has that changed and I think.
Prior expectation was half ago enough vaccine revenues for next year has that changed.
P. J as you can imagine we're very focused on delivering the fourth quarter here and the full year, but.
So we think about 'twenty, three and I say that because theres a lot of data points to collect here in the fourth quarter as well in such a dynamic.
In such a dynamic environment and so as we as we think about the bio processing business.
For 2023.
We still think that there.
There is room for $500 million.
Covid opportunity.
In order to support the needs of the population the varian.
To replenish expired sell by dates and all the things that you can think about.
But of course, that's a number that we watch very closely.
Importantly, we we think that the non COVID-19 business, which of course will again proportionately be a much larger part of the business will continue to be very robust funding levels are there the number of modalities that continue to grow and the pipeline is broad.
Our own project activity and early mid and late stage.
Very strong.
So we do not have a different view on 2023 for bio processing today, but of course, it's a fluid situation and we continue to watch all of that and we'll update in January .
When we speak again.
That's helpful. Ryan and just sort of clarify any change here that sensitivity would be on the vaccine side, but not on the base.
Correct.
That's correct that's the way we see it for sure today.
And all.
I mentioned, just a minute ago to Derek that.
In 2022, we were expecting a $1 billion.
Covid vaccine and therapeutic revenue.
We've taken that down to $800 million it is.
Of course, offset by the non Covid business, so that we deliver that high single digits here in 2023 of the bioprocess.
And then looking forward to 2023, we would see that going from 800 million to $500 million.
I appreciate the color.
Mac, but one quick one for you.
On current FX rates and I think you know.
Your assumptions on pricing for next year, how should we think about incremental margins were about 23.
For 'twenty three.
Yes.
Hi.
Okay.
Can I go ahead and ask that we get through Q4 here and see where it is if I had the gas on the FX margins today, I would have been wrong, a quarter ago and wrong a quarter before that so.
We'll give you a full update on 'twenty three I mean, I think you've seen where the margins have gone to you know that we're going to have a.
FX headwind next year on the topline of probably call. It $800 million. So you can probably start there I would say that the fall through on that is probably going to be pretty typical 35% to 40% fall through now it could be a little bit better or worst depending on where that revenue actually comes in from a mixed perspective, but that's probably the best I can give.
You know what we know with the rates are but from a full margin perspective, I will have to wait until we get to below it closer to our guide in 'twenty three.
Understood. Thanks, guys.
We will take our next question from Dan Brennan with Cowen and company.
Good morning, Dan Thanks for the questions.
If I may just Brian I know on the last call and it was already addressed the bioprocess information, but when you look more broadly.
We see a lot of mixed signals on the on the macro last call you had suggested.
All in organic mid single and if you factor in the Covid roll off low single digits like any any any updated thinking on how you think about that I know you've already addressed the bioprocess topic just wondering.
The other parts of the business.
Those are playing out right now.
Okay.
Thanks, Dan.
No.
I think we are.
Still in that in that ZIP code here, specifically, if we think about our base business.
Without testing, so our business without Covid testing.
For 2023.
See that as mid single digit plus.
And of course, we're watching Theres a lot of headlines in western Europe and emerging markets.
But to date, our our business momentum does not indicate.
Any dramatic slowdown here and so we think mid single digit plus.
Today's point of view.
The base business is the right way to think about it and.
You know as we as we go forward here and Matt mentioned this of course, we're looking at all the data points daily here and then in January we'll update you at the end, but from today's perspective mid single digit plus for the base business and then as it relates to Covid testing, we do still anticipate that step down the experts that we speak with.
Our customers.
Still think that Covid is endemic by the end of 'twenty three.
A 24 and that will step down there from.
Where we've been here close to 60 million tests.
To about 30 million tests.
Or the $1 $2 billion roughly of Covid revenues.
And then lastly, I'll say the FX situation is very dynamic we've been talking about that.
And I think Matt covered that as well.
Great. Thanks, and then and then just maybe one more follow up.
I don't want to.
Kind of continue to readdress bioprocess, but I'm just wondering you talked about bringing in lead times dramatically, which suggest the customers aren't going to need to order as far in advance.
Right, because you've got them down significantly.
Peer yesterday talked about inventories at 12 months versus six months and I know you addressed inventories and one of your prior questions, but can you just speak to if there is one more time and I apologize just on the base business I believe you've done a better job from prior conversations about maybe managing and kind of avoiding some couple of ordering just kind of what do you see broadly.
On the inventory side for your base business can kind of how does that kind of impact your outlook for today's bio production business as we look forward to 'twenty three thank you.
Sure.
We have been as a result of the pandemic, even closer than traditionally working with our customers to understand their production plans and to ensure that.
They are not.
<unk> stocking at the expense of.
Others would need the product and what was a time of constrained here for.
For the last.
18 20 months.
So as a result of that we feel as though we are.
Well positioned to understand the inventory situation.
Two regular surveys with our customers.
And as a result of that.
We don't believe that there is a general overstocking in the market.
Having said that we do think there are pockets where.
Inventories are high.
And those are based on customers ultimately changing their production plans in other words canceling.
Orders, specifically for Covid and so the large COVID-19 players.
But does that being for vaccine production or whether that be for therapeutics production.
Have larger inventories and those will likely exceed six months of inventory.
I think it's important to note that those large players have many programs and theyre able to redeploy that inventory so.
In most cases.
Theyre not tailor made solutions for any specific molecule and can be redirected.
And burned down using.
The use for other modalities or other.
Their programs at the same modality. So we do see that the market is currently resetting itself as I mentioned, a red Hot pandemic era of constraint with long lead times to one where lead times and supply chain disruptions are starting to normalize and then add to.
That the cancellation of some COVID-19.
Vaccine or therapeutic plan, just because of the uptake hasn't been the same or the variance have rendered them.
<unk>.
Not usable for that for that application so.
We are confident that the strength of this market and its fundamentals.
Paying very very strong biologics.
And all of the modalities that we've talked about are very underpenetrated in the market and it is a matter of.
Getting the penetration.
Launching the new products in the pipeline that will continue to drive the growth of this market.
Spite, the reset that we see going on in the supply chain.
Great. Thank you.
We'll take our next question from Dan Leonard with Credit Suisse.
Thank you so my first quite Dan Ryan.
Hello.
Good morning, I was hoping you could elaborate on trends in China across your different op codes. I think you said growth was high single digits in total with flagged some weakness in diagnostics. So just wondering if you could offer more color by by Opco. Thank you.
Sure.
As you just said just to level set you see high single digit growth here in China.
Both for.
Q3.
And we anticipate a similar level in Q4 and.
And Thats really broad based strength there.
Let me start with diagnostics, where we did see.
Patient volumes.
Impacted by these rolling shutdowns, so zero Covid policy shutdowns that youll likely reading about.
China, and so that affected pace.
Patient volumes and you think of those as being 90% to 95% of what they were.
In 2021.
And.
We're working through those.
And continue to see China as really.
Very strong market.
Now lastly.
The rest of our business continues to be very very strong as you think about life science instruments.
As you think about Eas.
As you think about the.
Diagnostics the other diagnostics companies, we continue to see robust.
Demand, there and as patient volumes normalize, which we expect to happen.
Sometime in the next year.
We're confident that China continues to be.
Really strong growth lever here for the future.
And Dan just to give you some context, I mean life Sciences, and Eas were both up high single digits in the quarter and diagnostics wallets, while it did struggle a little on the patient volumes I mean, it was still up mid single digits.
I appreciate that color and Matt just a quick follow up can you talk about the impact of higher interest rates on the business do they change at all how youre managing the balance sheet or your capital allocation priorities.
I don't think so from.
From a balance sheet perspective, we don't really have we've got no variable sort of debt so that doesn't really impact us.
I'm trying to think I mean, it might happen.
Sparks here or there from from things like currency swaps that we've done in interest income, but I mean, those are pretty minor.
I don't think we think of capital allocation in a different way I mean, I think we still sort of go through the same processes from an M&A perspective, and a return perspective and interest has always been a component of that so.
I don't think it really changes all that much on how we're thinking about either a running the business the balance sheet, given where we're at on fixed sort of mostly fixed staff here.
I don't think it really impacts us on on or thinking about doing something different than what we do which is allocate capital towards M&A largely so.
Great. Thanks for all that color.
We will take our next question from Nick <unk> with Barclays.
Good morning, Luke.
Alright, guys. Thank you again for the question.
So I wanted to talk about the instrument growth it looks like another big quarter for <unk> and LMS. This is following very strong first half of the year can you just give us a sense of where all the demands coming from is just like a new facility build out are these from upgrades and then how does this how to think about this from a comp perspective, how you guys are thinking about it for next year.
So just to level set our life science instrument business grew.
Low double digits in Q3, and as you pointed out this was really led by by Leica Microsystems Sykes.
Beckman Coulter in life Sciences.
With some very very strong results and I think the strength of that comes from.
Two areas.
The first is the end markets continued to be very strong so, especially pharma.
Crows in academic research continues to be well funded.
We're seeing strong buying behavior there.
Especially towards.
Instruments.
That.
Provide the necessary answers here in the research and Thats really the newest generation of instruments and that that brings me really to the second pillar of the strength that we've seen there which is our continued innovation performance there.
With all of the operating companies.
Really leaning in and launching leading edge really pushing science further.
Instruments and I'll give you some examples assai extra Zeno top.
7600, and the Triple Quad 7500 at LMS, you have the Thunder wide field imaging system, and we talked about the Mika launch which is.
Doing extraordinarily well and then we just talked about the <unk> launch here.
Beckman life Sciences so.
We're really seeing strength from a funding perspective, and we believe that on top of that we are outperforming because of the innovation.
The strength that we've shown here launching a number of great solutions now from a comp perspective.
We really do think that the strength in the market.
Its sustained.
We expect that to be the case in the fourth quarter and in 2023 like I said, we'll talk about that more in January but we don't have reason to believe here.
That this will be significantly different.
Alright, that's helpful.
And then when Youre thinking about.
You called out the supply chain right and things are starting to get better can you talk about where youre seeing the biggest relief in your end markets or businesses.
And where youre still seeing things constraint and not getting better.
Sure.
So I think the first place where youre starting to see.
Some of the pressure.
Dissipates in the logistics area.
These capacities.
Ramped.
We're starting to see greater availability.
We're also starting to see.
Freight rates come down specifically, if you think of container freight.
Those in particular have come down quite significantly.
That of course is helpful.
The global businesses that we have.
At the same time, we do see.
<unk> pressure on.
A more limited set of electronic components.
With the Danaher business system call. It we've been able to really knock down 80% of the.
Issues, there and I think with that able to continue to take share because of the availability of our solution and with 20%.
And it's still an countermeasure mode, and and I would say that that number continues to get smaller.
Every day, but they are still on the electric and electronic component side.
Some some tightness here.
And then lastly, I would just say what is still the same as labor continues to be tight.
That is the case.
Practically everywhere we operate.
And so that that's a constraint that we would expect to see it get better here over the over the next 12 months to 18 months, but currently we still see that as an area to watch out for.
Okay. Thank you.
We will take our last question from Patrick Donnelly with Citi.
Good morning, Patrick I appreciate Hey, Ryan how are you.
Ann.
Maybe just one you touched on China, but maybe on Europe .
Macro concerns kind of popped up there had there over the last couple of quarters can you just talk about what you are seeing again across the different op goes there.
Range in terms of your expectations or any elevated concern because we work away even into 'twenty three with some of the kind of power rationing in things that are happening there maybe just your exposure any customer conversations how are you feeling in that region.
Hum.
Well, starting with Q3 here just to level set we had high single digit growth in Western Europe , and we would expect that.
Comparable here going into the quarter, our funnel has continued to be strong.
And I would say that we're starting to see.
Deal velocity slow a little bit. So it is clear that people are starting to think about where they are going to invest their cash at least for Q3 and Q4, we're still seeing robust demand and robust funding.
<unk> said that in view of everything we read in the news as to you. We continue to watch that very closely.
And to see whether that sustains.
Going forward into 'twenty three.
Of course, where we're going to talk to you about that again in January .
As it relates to our own exposure, specifically as it relates to energy.
We continue.
For many reasons to take a very close look at our energy consumption. So also from a sustainability perspective.
But now, particularly.
This becomes an area of focus for Europe and in fact, we do not have a lot of heavy manufacturing so energy intensive manufacturing in Europe , its mostly light assembly.
And we have taken measures to ensure.
Energy supply continuity through the appropriate backup systems.
Then in the event of.
Will fuel rational rationing, whether that's gas or oil or otherwise.
We also have contingency plans there to ensure that we're able to reduce our demand.
Still <unk>.
<unk> mission critical capabilities, including manufacturing should that become the case so.
Yes, it's something that we are.
Work closely focused on two we've taken measures in order to ensure that we have supply and can provide supply continuity and then lastly, we also have the contingency plans.
Should the situation deteriorate.
Patrick This is Matt we did a kind of a bottoms up analysis plant by plant company by company.
Even factoring in higher costs that we can help that we might see here over the winter and into next year. I mean, this is a very very manageable number.
It's just not a big number.
Okay, that's good to hear.
And then maybe just a follow up on <unk> question, I guess, just kind of wondering in terms of the visibility you guys have I know the backlog has been elevated order growth was really strong, particularly on <unk>.
There's kind of this is there a pull forward or maybe just talk a little bit about again the visibility you have what the backlog looks like currently.
And just how durable some of our bench strength and it's been elevated for for a while now so just trying to get a handle on comfort level the.
The strength there. Thank you.
So as you suggest the backlog is elevated that.
Due to two factors the strong demand that I referenced earlier, that's really broad based.
Pharma.
<unk>.
And so forth, but also because there has been.
Over the over the last 18 months, some supply constraints around electronic components.
So we we see demand remaining strong across the board.
For all of these research applications that I referenced.
And as a result of that we also see that in our order rates and backlog position in.
And not just here for Q4, but also going into 'twenty three.
Great. Thank you guys.
It appears we have no further questions at this time I will turn the program back over to our presenters for any additional or closing remarks.
Thanks Shelby.
We're around all day for questions and follow ups.
The rest of the day.
Thanks, everyone.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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