Q3 2022 PerkinElmer Inc Earnings Call
Yeah.
Okay.
Hi.
[music].
Ladies and gentlemen, welcome to the.
Okay, almost a quarter too early.
My name is granted that would be a motivator for todays call if you'd like to ask a question. During your presentation. You may do so pressing star one.
I will now hand, you over to your host Steve, Florida would be to vacate Steve. Please go ahead.
Thank you operator, good morning, everyone and welcome to <unk> third quarter 2022 earnings conference call on the call with me today are <unk>, Zhang our President and Chief Executive Officer, and Max Krakowiak, Our senior Vice President and Chief Financial Officer.
You have not yet received a copy of our earnings press release or slide presentation. 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 would like to remind everyone of the safe Harbor statements that we have outlined in our press release 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.
<unk> 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.
But the 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.
I'll now turn it over to our President and Chief Executive Officer, prolonged saying a lot.
Thanks, Steve and good morning, everyone.
Yes.
Excellent quarter in Q3.
Both financially and operationally.
Again exceeding the financial commitments, we have to provide it.
This consistency in our results is a testament to both the resilient and reliable execution of our teams.
And the significant transformation of the company over the last several years.
We have worked diligently to transform the company into an organization that functions at an exceptionally high level.
With strong operational and financial rigor.
While at the same time, strengthening our corporate culture, and making a positive impact in the communities, where we live and work.
I'm, especially proud that our team has continued to execute at a high level, while many individuals.
Internally and externally.
Extremely busy over the last 90 days.
Working through the necessary steps to ensure that the divestiture of analytical food and enterprise services business is accomplished with precision and on time.
As it pertains to the planned divestiture our teams are collaborating well.
Our new mountain capital has been a great partner that has been appropriately engaged to ensure a smooth transition.
We remain on track to complete the transaction in the first quarter of next year.
Then unveiled to the public and new corporate name.
Brand and identity.
Identity for the life Sciences and diagnostics business.
While businesses.
Space evolving.
The culmination of the closing of the divestiture and the rebranding of the remaining business.
It will mark the completion of the major portfolio transformation, we have undertaken over the last several years.
We are very happy with the strength of our balance sheet and will look to redeploy the nearly $2 billion. After tax proceeds received from the divestiture.
Two a combination of funding upcoming debt maturities opportunistic share repurchases and of course continued strategic and value creating M&A.
Upon the transaction closing, we will become a more simplified company with over 80% of our revenue recurring in nature.
Zero exposure to more cyclical end markets, such as industrial applied and environmental.
We expect the life sciences, and diagnostics business to generate 10% organic growth and.
And 30% operating margins following the divestiture with even stronger working capital dynamics.
<unk> for the outlook, we provided at the deal announcement last quarter.
I appreciate all the effort that is going into completing this transaction by many of our employees.
Who are demonstrating that the masterpiece by simultaneously executing flawlessly.
On day to day operations.
As evident in our strong third quarter results announced today.
As it pertains to our third quarter results I'm pleased to see the company again exceeded our initial expectations.
By generating 9% pro forma non core with organic revenue growth in the quarter.
I head up our 6% to 8% guidance.
While FX was again, a greater than anticipated headwind.
Business was able to mitigate the impacts.
Leading to pro forma adjusted EPS in the quarter of $1 51.
Solidly above 140 to $1 45.
Anticipating.
Max will provide more details later, but I was glad to see our life science business continued to show outstanding performance, but again growing in the double digits, while the significant headwind from China Lockdowns on our diagnostics business was in line with our expectations.
This strength leads us to again increase our pro forma non covered organic growth and pro forma adjusted EPS guidance for the full year.
All in all heading into the end of the we are performing at a very high level across our entire business.
Including those divisions that we intend to divest.
I'm looking forward to the first quarter of next year, when we expect to begin operating as a more streamlined and focused high growth.
High margin business that has leading positions in several attractive end markets.
Our new life Sciences, and diagnostics company will be dedicated to helping close the chasms between research in the lab.
And entering clinical trials.
And then from those trials to hopefully cures.
I believe that our focus on enabling customers to invent and developing the next groundbreaking therapeutic.
Effectively diagnose disease.
We can build on the impact we are already having on global house and can meaningfully improve the quality of life around the world in the years to come.
Our increasing contribution to global health has always been driven by the new innovations, we consistently bring to the market.
To meet and anticipate customer needs in an ever changing field of science and health care.
This innovative spirit was evident again over the last few months.
As we introduced a number of exciting new products across the business.
In our diagnostics business our ox.
And in the Tech franchise received FDA approval in late September .
T cell select reagent kit and related complete workflow.
This new workflow significantly increases the use of automation for a clinically superior T spot TB test for latent tuberculosis.
Dramatically, reducing the amount of manual hands on time required to complete the test.
I'm excited to see the impact that this even more competitive offering can have on this business over the coming quarters.
As the U S market represents more than half of the global <unk> latent TB testing market.
One in which Oxford has historically been underpenetrated.
In our life Sciences business. In addition to regularly introducing hundreds of new consumables.
Antibodies and reagent kits each quarter.
Our recently launched the <unk> system and workflow from Exelon business.
This new system builds upon its existing highest revenue generating lines the silica amex.
The <unk> is unique in the industry as it combines image side can mitigate sell counting.
Allowing for scientists working in cell and gene therapy to perform both identification and valued viability work all.
All in one instrument.
This platform utilizes proprietary consumables that contain antibodies from our biologics business.
As well as user friendly software, resulting in simplified scientific workflow.
While also improving sell integrity.
This is made possible due to the less potential cell damage as a result of reduced manual interaction throughout the analysis.
Alongside positively contributing to the advancement of global helped by leading with science.
We also remain very focused on how the specific actions, we take and impact our people and our communities.
In our latest ESG report, which was published just yesterday.
Highlight the significant progress we are making in these areas.
Tom recently, signing on to support the UN global compact to increasing our commitment to reducing our scope one and two emissions by 50% by.
By 2032.
We are providing increased transparency is in areas such as our emissions.
Diversity.
Enhanced government policies.
I encourage you to read more in the report and on our new ESG dedicated website <unk>.
<unk> Dot <unk> dot com.
Moreover, it is encouraging to see several third party ESG rating agencies recognize our progress.
By recently, either upgrading or improving our various scores within their respective rating platforms.
In closing before I turn it over to Max I again want to thank all our employees for their dedication and strong execution over the past few months.
Which has continued to enable us to perform at a very high level.
This strong and consistent execution over not just the last 90 days.
But over the last several years.
During a time when there has been significant change occurring inside the company and around the world.
Has been what has allowed us to position both the business, we intend to divest.
And the remaining life Sciences, and diagnostics business on strong foundations.
Our future success.
I'm highly confident in our ability to continue to execute over the coming months.
As we complete the divestiture and look to redeploy the proceeds and the most value creating way possible.
All while achieving strong financial outlook, which we have outlined.
With that I would like to turn the call over to Max to provide more specifics on our recent performance.
And then uptake.
Outlook.
Max.
Thanks, Rod and good morning, everyone.
Like to start by saying, it's been a pleasure to meet many of you over the last couple of months and I look forward to connecting with many more of you in the near future.
As Phil highlighted we've had an active but productive last few months in which our teams have been able to continue to perform at a very high level.
This is evident in our strong Q3 performance. Despite continued macro pressures as well as the incremental activities. Many have undertaken internally since we announced our proposed divestiture back in early August .
From a high level, we had another terrific quarter financially as we again were able to meet or exceed our guidance across the board.
We generated pro forma total company adjusted revenues of 1.03 billion, which was at the high end of our expectations. Despite foreign exchange pressures clearly coming in greater than we were facing 90 days ago.
We were able to offset these incremental FX pressures with our pro forma organic revenue declining only 13%.
This was driven by the company generating 9% pro forma non COVID-19 organic growth, which was above our 6% to 8% guidance.
This growth includes an approximately 200 basis point headwind from significant pressures in some specific areas of our business in China due to the continued lockdowns in the region.
The double digit year over year decline, we experienced in our immuno diagnostics business in China was in line with our expectations.
These pressures were offset by continued strong double digit non COVID-19 growth in our diagnostics business outside of China, immuno diagnostics and.
And continued double digit organic growth in our data segment on a pro forma basis.
Beyond our organic growth the contributions from recent acquisitions added 8% to our total revenue in line with our expectations.
Strong year over year growth from biologic helped contributed to mid teens pro forma organic growth for our combined life science reagents portfolio overall in the quarter.
While COVID-19 related revenues have continued to decrease meaningfully throughout the year, we were able to generate $54 million in total revenue from these products and services in the third quarter, which was slightly above our expectation.
We continue to expect demand for our COVID-19 related offerings to the client sequentially and are assuming we reach our expected terminal run rate of $25 million per quarter of Covid related revenues starting here in the fourth quarter.
Finally, it shouldn't come as a surprise given what has occurred in the macro economy over the last few months, but foreign exchange was a 6% headwind to our total revenue in the quarter.
This impact was 200 basis points larger than we had projected in early August .
From a margin perspective, we saw nice volume leverage and stronger pricing realization, while managing expenses well, despite inflationary pressures continuing on a year over year basis.
This led to pro forma adjusted operating margins of 26, 3% in the quarter.
Along with the organic revenue upside. This resulted in pro forma adjusted earnings per share dollar 51, which was eight <unk> above the midpoint and <unk> <unk> above the high end of our expectations.
Moving beyond the P&L, we continue to see solid cash generation in the quarter with adjusted free cash flow coming in at $144 million.
We continued our deleveraging by paying down $58 million of debt in the quarter.
Including retiring our remaining $50 million of variable rate debt.
Resulting in a two four times leverage at the end of the quarter.
So far in the fourth quarter, we have Opportunistically retired an additional $45 million of our $1 3 billion of shorter duration debt.
Upon complete retirement of the shorter term debt over the next few years, we will have approximately $3 2 billion of debt outstanding at an average fixed interest rate of two 6% with a seven year average duration.
I'd now like to provide a bit more color on the performance of our businesses and what we are seeing in end markets in which we participate.
From a geographic perspective, our 9% non COVID-19 pro forma organic growth in the quarter was led by low double digit growth in the Americas, while both Europe and Asia Pacific grew in the high single digits.
China was flat overall, but grew in the low double digits, excluding the immuno diagnostics business, which was impacted by Covid lockdowns.
When looking at our businesses, starting with our discovery <unk> analytical solutions segment total pro forma revenue was $633 million in the quarter.
This was up 23% year over year and represented 61% of our total revenue.
Organically the segment grew 12% on a pro forma basis with double digit growth from pharma being partially offset by relatively flat performance from academic and government customers.
We continue to see strong double digit growth in our preclinical discovery business driven by strong growth in our imaging portfolio and as I previously mentioned, our overall life Sciences reagents portfolio grew in the mid teens year over year on a pro forma basis.
Our informatics business continued to show strong organic growth and was up nearly 20% year over year.
The applied analytical and enterprise services business that we intended events grew in the low double digits, while our remaining life science business grew 14% organically overall in the quarter and is on pace for strong double digit growth for the full year.
Our diagnostics segment generated $399 million of total revenue in the quarter, which was down 39%.
And represented 39% of our overall total revenue.
Organically the business was down 33% due to significantly lower COVID-19 volumes year over year. However, on a non COVID-19 basis. The business was up 5%, which included an approximate 500 basis point headwind impact from the China Lockdown pressures that we faced in the quarter, primarily in our immuno diagnostics business.
As previously mentioned the lockdown related headwinds, we faced in China remained significant.
These pressures that were in line with our expectations, resulting in our immuno diagnostics business in the country being down in the mid to high teens year over year organically.
Outside of China, our immuno diagnostics business grew in the mid teens organically, excluding COVID-19 and improvement in the low double digits. It was up in the second quarter.
These geographically differing rates of growth combined to result in low single digit non COVID-19 organic growth for our immuno diagnostics business overall in the quarter.
Our reproductive health business grew in the high single digits on a non COVID-19 basis in the quarter as we saw strong growth in Europe and solid growth in both the Americas and Asia Pacific Despite.
Despite continued pressures on global birth rates the high single digit organic growth. We saw in the quarter continued to be driven by a combination of new product introductions ramping up.
Along with further geographic expansion in our newborn screening business.
While still relatively small on an absolute basis, our prenatal screening business continues to also benefit from significant year over year growth from vintages, which is the only non NGA space and ITT offering on the market.
And our applied genomics business, we saw mid single digit non COVID-19 organic growth against a greater than 50% year ago comparison.
This business, which provides instruments and kits that are used in DNA sequencing sample prep work and other liquid handling has now grown at an upper teens rate on average over the last three years.
It continues to benefit from strong non COVID-19 demand from our pharma customers success from recently introduced new products and likely some continued share gains.
We look forward to the upcoming commercial launch before year end of our recently introduced biofuel Mgs sample prep system, which we expect will help bring more automation to an even broader set of potential customers.
In total the life Sciences, and diagnostics business that will become the new company. Once the divestiture is finalized grew 8% organically, excluding COVID-19, which also included a 300 basis point headwind from lockdown related pressures on our immuno diagnostics business in China.
Looking ahead to the final three months of the year, we continue to remain in a very good position. Despite the macro concerns and currently expect no change in our previous outlook for the fourth quarter beyond the incremental FX pressures we are facing.
We are expecting 8% to 9% non COVID-19 pro forma organic growth in the fourth quarter, which includes our assumption that we will continue to encounter material year over year declines in our immuno diagnostics business in China due to lockdown related impacts.
We expect this to result in 9% overall non COVID-19 pro forma organic growth for the full year.
For just the life Sciences, and diagnostics business, which will remain once we complete our planned divestiture, we are expecting approximately 8% non COVID-19 organic growth in the fourth quarter, which includes an expected 200 basis point headwind from lockdown related pressures in China.
For the full year this translates into approximately 9% organic growth of the business that will remain which includes a 300 basis point headwind from the China Lockdowns.
We continue to expect $610 million of revenue from Covid for the full year with $25 million expected in the fourth quarter as I mentioned earlier with.
With all of our recent acquisition now fully in our organic growth base, we expect zero M&A contribution in the fourth quarter and anticipate M&A to contribute seven points of pro forma growth for the full year. The same impact we've been expected since the beginning of the year despite incremental FX pressures.
We now expect FX to be a 7% headwind to pro forma growth in the fourth quarter, which is a few hundred basis points more of an impact than we had assumed three months ago.
This brings our full year assumed impact from FX to now be 5% up from our prior 3% expectation.
This guidance leaves the fourth quarter to have expected total pro forma revenue and the one six to $1 $7 billion range and $4 five 9% to $4 600 billion for the full year.
Moving to below the line items, we continue to expect $104 million of net interest and other expenses for the full year with $25 million expected in the fourth quarter.
Additionally, we expect the 20% tax rate this quarter, leading to an estimated tax rate of 21% for the full year unchanged from our prior outlook.
In terms of pro forma adjusted EPS, we are raising our full year guidance to a new range of 789 to 791, which accounts for our outperformance in the third quarter and includes no change to our prior assumptions for the fourth quarter outside of the incremental FX pressures I discussed.
The fourth quarter pro forma adjusted EPS is expected to be in the range of $1 65 to $1 67.
All of this guidance as detailed on the second to last page of today's earnings presentation that is on our new investor website.
In closing, while macro uncertainties still remain I feel great about how we are positioned as a company moving forward.
We've consistently shown our ability to perform and execute at a high level. Despite unexpected challenges and are confident in our ability to work towards a smooth closing of our proposed divestiture and to achieve our full potential thereafter.
There is an incredible opportunity in front of us at Perkin Elmer we.
Have the team.
We know how to execute and we are hungry to help define the future of life Sciences, and diagnostics, while continuing to deliver long term value to our shareholders, we couldnt be more excited.
With that operator at this time, we would like to open up the call to questions.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star one.
Keep him now.
Maybe Brian can I ask your questions. Please ensure you're fully some new to so clearly.
We have our first question comes from Dan Davis from Stifel. Your line is now open.
Good morning, guys, Max obviously, a lot of moving parts on Cogs. These days so on the gross margin profile.
Are you feeling about the 60% level that you talked about post spin or that you guys talk about post spin just given that it looks like youre more like the mid <unk> right now.
And then on the op margin line to 30, 30% target at 30%.
Just curious how the allocated cost piece influences the ability to get there post spin do.
Do you think that happens more towards the end of the year, where can that be at that level.
Or to <unk> following the completion of the deal.
Yeah, Hey, Dan sorry.
So I think maybe starting with the first question on the gross margin I would say, we're very confident in the ability to be at sort of the 60% plus range coming out of the gate in terms of the remaining business.
You think about the gross margin level, we had in the third quarter coming in at the mid 50 <unk>.
Remember too that has the mix of the Aes business, which you are divesting, which is dilutive to the overall company mix and so again, we feel very confident in the 60% plus gross margin exiting the divestiture.
And then on the overall operating margins and the way I would think about the 30% is that is what we will achieve in the first 12 months post deal closure, obviously, theres a little bit of timing noise with when it will close here in Q1.
In the first 12 months to 30% is what we're targeting for the overall company.
Okay helpful. Maybe on diagnostics, what's the current thought on just the recovery of <unk> Dx in China, how that.
Might shake out.
And then when we think about next year.
Much does the 10 plus percent organic target depend on a rebound there to start <unk> 23 per lot I think last quarter. You said that you expect to be at the 10 plus level. After the close so just checking to see whether you think the diagnostics business is expected to sort of be in a place that allows that to happen early in the year. Thanks. So much.
Yes.
Thanks, Dan Good morning, I know again, I think on both of them as we've talked about the immuno diagnostics business.
It is performing well outside the Lockdowns X showing now, but even in China. It is pretty much. It was in line to the expectations that we had in park corridor.
As to what it would do.
And the assumption that we have made and I think it's declining high single is what our assumption is for the fourth quarter and we expect it to be in that range.
Going into next year, obviously, one is naturally the comp would be much easier for the ex China business, but.
Overall, just you know with the NPS that we have in place coming autumn reproductive health applied genomics the health of the applied genomics business in China coming out of the Lockdowns, we feel pretty good about the numbers, but we have a diagnostics tool.
Thank you.
We have our next question comes from Darren <unk>.
From Bank of America.
Hey, good morning, Thanks for taking my question.
<unk>.
Just can you sort of talked about.
It's bouncing around a little bit this morning, but can you talk a little bit about just through some of the dynamics, particularly in Europe that you're seeing right now.
And also just generally preliminary thoughts on FX headwinds for next year and interest expense I know you're paying down some debt, but just some general guidance. So we can help triangulate our EPS numbers.
Yeah, Hey, Darrin, so starting with the Europe question. So.
So in the third quarter, we saw Europe .
Performing for the remaining business was in the low double digit range and that was with both <unk> and life sciences relatively around the same level I think as we look towards Q4, we.
We anticipate still I think strong performance in our life Sciences business diagnostics had a really strong third quarter across all.
And market, maybe that a little bit slower here in the fourth quarter, but I think overall, we are not seeing anything that is a major concern in Europe .
And then moving over to your comment on interest expense for next year.
The interest expense is.
Although we are paying down some debt I think the important thing to note is that the.
The debt that we will be paying off will be at a very low interest rates. So the $1 3 billion that we have coming due over the course of the next two years. The interest expense is less than 1%. So there. Although there will be some benefit I don't think it would be something that would equal really material.
And then on your last question for FX for next year right. Now we are impacting FX to have about a 3% headwind to 2023 revenues.
Got it thank you.
Any.
Are you still expecting to take I mean, what was the price realization in the quarter.
I can't take price next year.
Yes, so I think for the third quarter on pricing we were pleased with the results. So maybe a couple of dynamics. There. So one if you remember in the first quarter I think we did 75 basis points in the second quarter. We did about 150 bps in the third quarter, we saw more than 200 basis points from a pricing and kind of in line with what we had expected to see.
We do anticipate that again kind of stepping up here in the fourth quarter as we've talked about it takes a while for all of your annual contracts to renew and then we do expect to have elevated price performance again.
2023, Yes, I think this is one of the areas that we've been most pleased with our ability to operate operationally execute this year and we expect it to continue for next year.
And then I apologize there was there a second question in there as well.
Now that we've been thank you.
Yes.
Thank you.
We have our next question comes from Jack Meehan from Nippon Research Jackie Your line is now open.
Yeah.
Thank you good morning.
Wanted to follow up on Eric's first question and just talk.
Got any updated thoughts on the speed at which you will redeploy proceeds after the spin just trying to think about newco EPS in 2023. It sounds like M&A is your preference, especially given the fixed rate debt at low interest rates.
Is an ASR or something you would consider to offset some of the spin dilution.
Yes.
So let me take the one on the broader strategic level, Jack as <unk> said, we will continue to be.
Diligent on how we deploy capital as it comes through and you know we'll continue to look at the three combinations that we've talked about earlier.
So being opportunistic on share buybacks on paying down debt and on the M&A side again on the M&A side. Our number one focus is to ensure a smooth close to the transaction that we've announced and ensure the integrations that we have ongoing on the acquisitions that we have made are complete which too big they are already there.
And then look at opportunistic deals that we can do that would fit.
So any gaps that we might have on our portfolio.
That trend is not going to change and I think we will continue on desktop.
The second part to your math.
I don't know if you want to address specifically, an ASR or is that something you would consider.
Alright.
Yes, I think I think as Bob mentioned I think the priority for capital deployment after paying back the short term debt over the next two years is going to be from an M&A and organic investment standpoint, which we do have other areas that we are very excited about I mean, obviously, we'll continue to watch what's going on with the market, but I don't think the share buyback or ASR is the primary focus of capital to deploy.
<unk>.
Fair Okay.
And then.
The follow up just on bio legend.
My math based on the M&A contribution in DHS. It looked like it had a nice sequential step up in revenues. So I was wondering if you could just talk about.
Maybe any quarterly dynamics and how that business is performing.
And then again Jack I think until you can get from US is the same our life Sciences reagents business overall did very well, including bio legend all of it.
Strong low double digit growth overall.
It continues to perform in life in line with our overall regions growth business that we are seeing at mid teens from a pro forma both perspective and continues to do well could not be happier with that acquisition.
Teams performed by general executing on all fronts.
Thanks Chuck.
Okay.
Thank you operator.
Thank you.
Our next question comes from Josh Wolfson from Cleveland Research, Josh Your line is now open.
Morning, Thanks for taking my questions. A couple for you on remain co I think you'd said remain co grew 11%.
Ex the China Lockdown headwinds.
And that was.
I think that was with a softer academic end market can you remind us remain COSE exposure to academic and government and any color on how remain co performed in those accounts and then as we look at the think about the comp set up for 'twenty three in light of a softer academic I mean does that change the dynamic as presumably those accounts start to come.
Back online more fully.
Yes, so I think speaking maybe overall to the academic and.
Government portfolio that we will have for the remaining business it'll kind of be a high single digit percentage of the overall company.
And then to answer your second question.
How does it impact of 10% for next year I think look there's obviously puts and takes across the portfolio, but I think again, we feel confident in our ability to hit 10% plus organic growth next year, and I think thats part of the assumption.
Got it thanks, and then will be helpful to hear you talk through how synergies are tracking across the five to six or so acquisitions you've done in the last two years I guess any examples you could point to that suggests you've seen improved customer adoption. Because these assets are now within the PKI.
That form and then how that's being considered in your I.
I guess, 10% plus organic growth guide for remain co and 'twenty three.
Yes, Hey, John .
This is for a while but I think the question to answer to your second part of the question is that the.
The number that we have put out 10% organic growth includes synergies because all of the acquisitions acquisitions and now pretty much integrated and I gave two examples of.
Synergies that we are already seeing on the on.
On the technology front in my prepared remarks, the silica system that mix alone launched has <unk> antibodies that are attached to it. The other one is if you look at the T spot approval that we got from the FDA. The automation component that has around it as the liquid handling capability et cetera that comes from the legacy parking on my apply genome.
Mix business.
So those are two really you know near term examples of real life. Examples of how the integration is already it's not a work in progress anymore, it's actually in in motion and it's being executed as we speak.
Got it I appreciate it guys.
Yes.
Thank you Josh.
We have our next question comes from Kathleen shortly from Baird. Catherine Your line is now open.
Hey, guys. Thanks for the questions.
First now that the Covid side of their business has moderated what are you seeing in terms of early signs of your customers shifting that capacity the noncore that application.
And how do you view, what that tailwind could look like for the non Covid diagnostic side 23 is currently testing for their lines down.
We'll come back out again.
I think the way I would look at the covered portfolio right I think again it will be it will continue and then again my speculation is that as good as anybody's on this it continues to be sporadic in nature and it continues to be regional in nature. For example, you have the sporadic lockdowns in China.
Now that I think over the next couple of quarters will continue to be deployed.
Post schools opening all post vacation in Europe , you saw slight sport.
In that so I think as we go forward the $100 million baseline that we have assumed for 2023 will essentially be a combination of what we provide in terms of our imaging portfolio PCR instruments and then the combination of all of their office.
And then I think the 100 million numbers the baseline that you would assume for 2020.
Okay got it and then for China can you talk a little bit about what your overall growth expectation is for the fourth quarter and I know in the past you have not been impacted by any volume based pricing initiatives are tender processes.
Neil you're seeing on that front in China, primarily on the diagnostic side.
Yes.
Katherine maybe to answer the question of our expectations for China here in the fourth quarter. So again, China is the one region, where we had seen the pressures from the immuno diagnostics business, but overall for the remaining business in China for the fourth quarter, we are expecting about high single digit growth.
Obviously, if you then normalize it for the IV FX headwinds, which we have assumed a negative high single digits here in the fourth quarter.
China would be even better than that excluding that portfolio, but I think we are very confident of what we're seeing in our in our China business and the team continues to perform very well.
And to your second question Katherine I think we have not yet seen pricing based pressure, but it's not going to be too far eventually it will start showing up as we've talked earlier.
It's more on the routine testing that you are that people are seeing pressure on tenders, but I think eventually it will get there, but on the con side to that I think the lower.
More matched pricing model will bring more people into testing so the overall volume growth will hopefully.
Hello.
Take care of any impact that you would have some pricing.
Okay, great. Thank you.
Yes.
Thank you.
We have our next question comes from Liza Garcia from UBS. Your line is now open.
Great. Good morning, guys. Thanks, so much for taking the question.
I guess first off sticking on the topic of China.
And kind of thinking about.
Maybe for China in China can you update.
Kind of where you sit with the diagnostic business.
And localization of manufacturing and kind of how that is ramping I know that you had a facility in Beijing that came on this year.
Yes.
So on the reproductive health side outside of Shanghai, you pretty much have transferred most of our products that are manufactured develop.
In China for China, the local products have an NPA approvals. It was in Beijing was on the euro immune side of the business, whereas you had started transitioning products for China in China, I would say, probably 35% to 45% of our portfolio for China.
Is now manufactured in China, and hopefully the rest of it will be done in 2023.
Great Super helpful. And then maybe I missed but I haven't heard any backlog commentary I would love to kind of just.
Get some if you could just maybe speak to the backlog and kind of the trends you're seeing there and kind of how it gives you some maybe some context <unk> and whether it can give you any early read into 2023.
Yes, so from a backlog perspective, I would say overall, we are still at an elevated level versus historical.
Historical perspective, and as we continue to kind of work through some of the supply chain challenges that picture really hasn't changed as much quarter over quarter. Obviously is a supply chain picture gets better we will continue to burn through that backlog, but I think we feel very confident with the setup. We have from a backlog perspective, and we didn't see any sort of significant erosion in the third quarter.
Kind of business as usual.
Great. Thanks, a lot guys.
No.
Thank you.
Our next question comes from Matt right.
Goldman Sachs.
Now open.
Hey, good morning, guys. Thanks for taking my questions, maybe just to start on reproductive health.
Organic growth in the quarter, obviously, the birth rates consistent headwind going forward, but can you maybe talk about some of the trends youre seeing in reproductive health driving that high single digit organic growth and then any update on <unk> in terms of installed base growth for that instrument.
Sure, Matt I think.
One of the drivers of growth for your productive health is the one you pointed out in the latter part of your comment which is around this.
Even though as Mac said it starts off a small base.
Continued growth is obviously favorably impacting reproductive health. We've also talked a lot about the new <unk> that we continue to launch so menu expansion geographic expansion continues to help us. Despite the pressures that we have from both rates and I think even on the <unk> side I would say.
The U S has done around the corner and we tend to have more real time data.
Bob said trends in the U S are sticking back upwards. So I would say those are the three drivers that are going to believe impacting the reproductive health segment.
And then Max maybe.
Okay.
Max maybe just an.
Overall customer inventory levels.
In life Sciences, I'm sure shelf life kind of mitigate some of this maybe talk about any kind of customer level customer inventory levels.
You see.
You saw in this quarter and moving forward.
Yes, I mean, I don't think we've seen anything thats out of the ordinary again, our life Sciences business in the third quarter grew mid teens and we continue to be excited about what we're seeing from an order perspective, but overall I don't think were seeing anything abnormal from a from a customer inventory level.
And also Matt computer Green I remember, we've talked about this right.
Percent of our revenue is a regular run rate business for remain co. Now these are all wires and assays and best So it's not that customers are going to keep a whole lot of inventory for those products. So it really does not it becomes a moot issue for us going forward.
Alright, thanks for the color.
Yes.
Thank you.
We have our next question comes from <unk> Kumar from Evercore ISI.
<unk> Your line is now open.
Hey, guys. Thanks for taking taking my question.
And congrats on the steady pretty fair for that maybe my first one for you.
So I appreciate all the color on the outlook for the base business confidence in double digit organic for fiscal 'twenty three.
What is the right base in fiscal 'twenty two.
When you think about.
Year to date trends in the base business and the implied Q4 guidance I think we got good sequencing billing.
B back of $600 million of Covid is $2 7 billion to rate base or I think in the past you've spoken about.
$100 million of sustainable code revenues is that baked into that $2 seven or maybe just give us some.
Some color on what is the right number.
Yes, Vijay so from a base business perspective, let's first start with the 2022 results I think overall for 2022 for the base business, our guidance implies 9% organic growth and that is with a 300 basis point headwind from our <unk>, China business. So if you normalize for that.
Our remaining business is growing low double digits for the <unk>.
2022 in terms of the modeling for next year. So if you take the $3 three what I would do it has backed off the $600 million of.
Covid and then add back the $100 million for the current run rate so that should get you to about two eight for your base.
That's helpful and then maybe one on margins here CQ.
Assuming <unk> is the right run rate given minimal COVID-19 revenues.
We get to a remain co <unk> margins of 31 four.
And I think you've noted 30 plus confidence for fiscal 'twenty three is the delta between 30, and 31 plus dis synergies.
Yes, so I'd say Vijay there is a couple of dynamics in play there and maybe first just to correct. One point I Wouldnt say theres minimal COVID-19 levels. In Q3, if you sort of quarter is $100 million you get to about $25 million a quarter versus the $54 million that we did in <unk>. So it's still elevated from a COVID-19 standpoint in terms of the <unk>.
Margins for I think what Youre asking is basically how do we think about the continuing ops margins versus the margins that we expect for the remaining business going forward and I would say, there's really two dynamics do you need to consider one is because of disc ops reporting we are required to keep all shared costs and continuing ops that extra cash.
Cost of the continuing ops P&L is burdening.
The second piece is that again in <unk>, we had elevated COVID-19 and I think for the full year of 2022, we've got $600 million of Covid, which is not the COVID-19 expectation. We will have for next year and I think we've been pretty consistent saying in the past that COVID-19 is an elevated gross margin versus our normal company average and so those are two variables.
You need to consider but overall, we are very confident in the 30% margin that we will have in the <unk>.
First 12 months post deal closure.
Sorry, just to clarify the 31, 4% in Q4 remained coil SPX operating margins that includes trying to cost.
And in theory. It does because again if you think that is what I mentioned with the discussed reporting rules. We are required to keep the extra shared costs and continuing ops P&L and.
And so yes, you can think of it similarly to stranded costs, it's not the exact dollar amount, but yet the concept is the same.
Thank you guys.
Thank you.
Our next question comes from Patrick Donnelly from Citi. Thank you.
<unk> is now open.
Hi, This is Jason on for Patrick maybe just a follow up on gross margin.
It sounds like you expect to continue to have elevated price performance in the fourth quarter next year. So just curious what you're seeing maybe on the input cost side than anything to flag across the supply chain or logistics there.
I don't know that I'd say J Tahoe I'd say, there is anything to necessarily flag I think we've seen somewhat of a steady state quarter over quarter from from inflation product standpoint, I think also we've been consistent in the past, saying that the inflationary pressure, we're seeing on the divested business is much greater than what we are seeing on the life science and.
That's not to say it doesn't exist on our life Sciences diagnostics side, but it's not at the same level of materiality.
And then look I'd say from a from a gross margin productivity standpoint, you're absolutely right we are seeing.
Continued good traction from a pricing perspective, and then we've also got productivity initiatives that are ongoing well across logistics and freight that are starting to bear fruit here and so I think we're feeling pretty confident with the gross margin performance of the remaining business.
Got it that's helpful. And then maybe just a follow up on China, you mentioned you might be expecting another few quarters of Lockdowns.
And then another kind of a 100 basis point headwind in the fourth quarter. So $4 23 in that 10% number are you baking in any assumptions for prolonged knockdown in the air.
Okay.
Well I think.
From our perspective, we are assuming for business to start getting back to normal.
In China with the Lockdown slowly easing down.
I think the obvious thing would be from a comp perspective, it will be a very easy comp to overcome.
Thats all.
Thats assumed in the guidance there.
Thank you.
We have a final question from Ms <unk>.
From Cowen <unk> co. Your line is now open.
Hey, thanks for taking the questions.
So the California prenatal screening program kicked off.
On September 19.
Shortly out there we did see a motion for preliminary injunction from some companies that were excluded but just be great to hear some high level thoughts around.
Your experience with the California prenatal screening program. So far and then just any expectations for how the program could contribute to reproductive health growth.
Hey, good morning, Max So yes. The program went live in California for US early October I would say look.
The injunction doesn't really impact on existing business that things could always change, but we are just in the process of currently starting to ramp up.
And in terms of the impact as we've talked about in all the way to look at dentistry and measure the performance of our reproductive health business of which branded listen prenatal as a part of and we expect that to continue to show a healthy growth trend.
So doing well, but it's just in its early stages of ramp up I guess, that's the way I would think of.
Okay, Great and then.
Can you just maybe give us some sense for how many of the silica and that shall counters are placed in the field or just how many of those customers are logical adopters of the pls bench top system and then.
No.
Whether you do consider that the <unk> launch a meaningful new driver.
Biologics antibody evidence.
Yes, Im actually continued to sell both obviously the <unk> is a significant upgrade to adopt <unk> as a significant upgrade to the amex product, which is out there as I mentioned earlier the benefit of it as it does both these cytometry and sell counting while maintaining.
The viability of.
Of the cells and it also allows us the opportunity to attach biologics antibodies to it along with the software that goes with it.
In terms of.
How many units and how many numbers of Mexico be Alexa that I really don't.
Exact number that I can share with you.
And then I think the way I would measure it has continued to look at the performance of our overall life sciences business, rather than a particular product <unk> is been a great acquisition, it's probably been one of our biggest success stories and how smoothly. The integration has gone and the way. The teams have worked across in terms of combining it.
But the total workflow that we present to our customers. It has been a homerun for us.
Great. Thanks for taking the questions.
Yes, Matt.
Thank you.
Thank you.
With our next question comes from Rich Hill.
And then from J P. Morgan Thanks Toni.
Your line is now open.
Perfect. Thanks for squeezing me in.
So just first off on putting in attack rate to hear that you guys got.
With our T cell select so can you just talk about if that was really in line with your expectations for timing and then how material could that.
It will be.
Good morning, Rachel.
Again, what was approved by the FDA in terms of timing.
You had expected it to come in the mid to late summer and that investment where it ended up.
I think in terms of the impact it does is that obviously as you.
Probably no use represents slightly more than 50% of the global latent TB testing market.
So from a revenue perspective, it will be very beneficial, but while the clinical superiority of the Oxford test is known it did require more labor to produce a result.
So what it does now is now with this approval in addition of the workflow.
It allows for much more efficient.
Workflow to be in place.
And then I think working with our partner in the U S which is quest.
We look forward to this becoming making it much more competitive and much more automated in the U S marketplace.
Great and then just a follow up on some of the earlier questions about capital deployment, you guys said that M&A is going to be one of the main priorities.
So let's take that picture. So can you just spend a minute talking about how private valuations have been in that M&A market and then I'll, let Greg.
<unk>, just what type of elaborate when you guys stretched heal on.
And other bromine cow post divestiture and to accomplish that.
How many do you plan to do you think.
Yes, Richard I think we will continue to be investment grade, let's start there. So that's not going to change in terms of the valuations on the private side I mean, as you know very well the kinds of deals we do they do not happen overnight and we tend to be much more.
<unk> founder entrepreneur kinds of companies and I would say that they really have not that hasn't really been much change in the expectations for potential targets in that space.
Those generally do not tend to be in a hurry to sell off their businesses.
And it does take time.
Again, we are.
Not in a rush you there will continue to be very diligent and very strategic in the acquisitions that we will.
But we will bring to the table so.
I would say that we haven't seen much meaningful <unk>.
Change in anything versus what it was I would say two three quarters ago is probably the best way to answer your question.
Thank you.
We have no more further questions from the line I would now hand, thanks to Steve Willoughby for closing remarks.
Thank you. Thank you everybody for your time and your questions. This morning, we look forward to speaking with you again next quarter and happy voting take care.
Okay.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for Tony You May now disconnect your lines.