Q4 2022 Danaher Corp Earnings Call
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Good day, everyone. My name is Todd and I will be your conference facilitator. This morning.
At this time I would like to welcome everyone to Danaher Corporation's fourth quarter 2022 earnings results Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question during that time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question. Please press star two on your telephone keypad.
I would now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, Maybe you may begin your conference.
Good morning, everyone and thanks for joining us on the call.
With us today are Rainer Blair, our president and Chief Executive Officer, and Matt Mcgrew, Our executive Vice President and Chief Financial Officer.
I'd like to point out that our earnings release, the slide presentation, supplementing today's call and the reconciliations and other information required by SEC regulation G relating to any non-GAAP financial measures provided during the call are all available on the investors section of our website Www dot.
<unk> 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 February seven 2023.
During the presentation, we will describe certain of the more significant factors that impacted year over year performance.
Supplemental materials describe additional factors that impacted year over year performance.
Unless otherwise noted all references in these remarks and supplemental materials to companies.
Specific financial metrics refer to results from continuing operations and relate to the fourth quarter of 2022.
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.
Our 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 might differ materially from any forward looking statements that we make today.
These forward looking statements speak only as of the date that 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 Rainer.
Thank you John and good morning to all of you. We appreciate you joining us on the call today.
Our terrific fourth quarter results rounded out another great year for Danaher broad based strength across the portfolio drove nearly 10% core revenue growth strong earnings growth and free cash flow generation.
We're particularly pleased with the performance of our base business, which grew high single digits for the year and is now grown high single digits or better each of the last 10 quarters.
Our well rounded results this year would not have been possible without the hard work and dedication of our more than 80000 associates.
The team overcame global supply chain challenges logistics delays, COVID-19, driven lockdowns and inflationary pressures to reliably support our customers.
We believe the DBS driven execution, coupled with our proactive growth investments over the last several years contributed to meaningful market share gains in many of our businesses.
Now looking to 2023 and beyond.
We see a bright future ahead for Danaher, our portfolio is made up of leading franchises with durable business models and attractive end markets that benefit from outstanding long term secular growth drivers, we are well positioned financially with our strong free cash flow generation and balance sheet capacity, allowing us to actively.
<unk> strategic M&A opportunities.
So this unique combination of leading businesses and financial strength all powered by the Danaher business system differentiates us and reinforces our sustainable long term competitive advantage.
So with that let's take a closer look at our full year 2022 financial results.
For the full year, we delivered nearly 10% core revenue and adjusted earnings per share growth, including 8% core revenue growth in our base business.
We also expanded our core operating margins by 60 basis points and generated $7 $4 billion of free cash flow.
Our free cash flow to net income conversion ratio exceeded 100% for the 31st consecutive year.
Our strong financial results allowed us to continue our cadence of high impact growth investments throughout the year and.
In fact, our investments in research and development of more than $1 $7 billion in 2022 enabled us to accelerate innovation across banner.
New products, such as the Leica Microsystems, Mika Leica Biosystems automated advanced staining platform bond Prime and Hawks headquarters series portable meters are helping improve both human health and the environment, while enhancing our growth trajectory.
Our capital expenditures of over $1 billion included substantial investments to expand production capacity in our bio processing and genomics businesses.
These investments have been critical to support current customer demand, but they're equally important to support the long term growth opportunities and security of supply in these markets.
With several of our customers biologic therapies progressing through the regulatory approval process, we anticipate the size of our bio processing and genomics businesses to increase meaningfully here in the coming years.
Yeah.
Now, let's turn to our quarter results in more detail.
Sales were $8 $4 billion, and we delivered seven 5% core revenue growth.
Our base business core revenue growth was also seven 5% as our core revenue growth contribution from COVID-19 testing was neutral year over year.
Geographically core revenue growth in both North America, and Western Europe was approximately 10%.
We saw healthy demand across our major end markets with customer activity and funding levels largely consistent with the third quarter.
High growth markets core revenue was up slightly.
China grew low single digits, driven by robust demand in our life sciences instruments and acute care diagnostic businesses.
However, the reopening efforts associated with the ending net zero carbon policies and subsequent increase in COVID-19 infections resulted in reduced patient and testing volumes in our clinical diagnostics business.
We anticipate lower testing volumes to continue through the first quarter of 2023 before gradually recovering through the balance of the year.
Our gross profit margin for the fourth quarter was 59% and our operating margin of 27, 4% was up 100 basis points, including 105 basis points of core operating margin expansion.
This strong margin performance was enabled by the disciplined cost management productivity measures and price actions our teams implemented to help offset the impact of inflationary pressures across our business.
While there continued to be supply chain disruptions and cost pressures.
We saw modest improvement in component available availability again, this year and this quarter.
Adjusted diluted net earnings per common share of $2 87 was up six 5% versus last year and we also generated $2 2 billion of free cash flow in the quarter.
Okay.
Now before we get into the details of the quarter I'd like to point out some updates we've made in our financial reporting.
Due to changes in our organization, resulting from the significant growth of our life Sciences segment over the past several years, we have separated our former life science segment into two new reporting segments.
<unk> in total life Sciences, which include bio processing and our discovery and medical businesses are now reported as the biotechnology segment.
Our new life Sciences segment is comprised of the remainder of the businesses in our former life Sciences segment.
The diagnostics and environmental and applied solutions segments are.
Are unchanged.
Importantly, today's discussion reflect these changes.
So now let's take a look at our fourth quarter results across the portfolio and give you some color on what we're seeing in our end markets today.
Reported revenue in our biotechnology segment declined 1%.
And core revenue was up 4%.
And bio processing robust customer activity across monoclonal antibodies and cell and gene therapies and antibody drug conjugates or ADC drove another quarter of more than 20% growth in non COVID-19 revenue.
Total core growth in bio processing was mid single digits for the fourth quarter as customers continued to scale back their COVID-19 vaccine and therapeutic programs.
For the full year 2020 to core revenue growth in bio processing was high single digits, which included non COVID-19 revenue growth of more than 20%.
Looking to 2023, we expect customers to further reduce their COVID-19 related programs.
Vaccination and booster rates have been significantly lower than initially anticipated and the availability of alternative therapeutics has reduced the need for monoclonal antibody based treatments.
Light of these dynamics, we now anticipate COVID-19 related vaccine and therapeutic revenue will be approximately $150 million for the full year of 2023 down from approximately $800 million in 2022 and lower than our previous expectation.
$500 million.
Our non COVID-19 business has averaged more than 20% growth over the past two years.
Given these elevated growth rates, we spent the past several weeks speaking with our customers to better understand their planning assumptions for 2023.
And based on these discussions we anticipate non COVID-19 bio processing core growth will be high single digits for the full year 2023.
This includes low single digit core growth in the first quarter as customers repurpose inventory purchase for COVID-19 vaccine and therapeutic programs to non COVID-19 projects.
Now there is a bright future ahead for the biologics market and our leading bio processing business of <unk>.
Number of biologic and genomic based therapies in development and production continues to rise and we expect to see significant industry wide investments in research development and production capacity well into the future.
With our differentiated portfolio, which has the broadest and deepest in the industry across upstream and downstream applications are best in class scientific services and extensive global reach we're exceptionally well positioned to support our customers as they undertake this complex life changing.
Sure.
Now moving to our life Sciences segment reported revenue grew 8% and core revenue was up 13%.
Strength was broad based across instruments and consumables with all major businesses delivering high single digit or better core revenue growth.
Our life Sciences instrument businesses collectively delivered double digit base business core revenue growth led by Leica Microsystems, and Beckman Coulter life Sciences.
Demand remains solid across our major geographies and end markets and we're seeing good momentum in our opportunity funnel as we begin the new year.
Our genomics consumables businesses had another quarter of double digit.
Core revenue growth driven by strong demand for our plasmids, RNA and gene writing and editing solutions.
During the quarter IDT strengthened its next generation sequencing portfolio with the acquisition of Archer Dx Mgs assays.
These assays are foundational and researching novel cancer, fusions, and bring new capabilities, including an enhanced bioinformatics platform to expand itt's sweet of sequencing solutions.
Now moving to our diagnostics segment.
Ported revenue was up 3%.
Core revenue grew seven 5% led by mid teens growth.
Cepheid.
Radiometer grew double digits led primarily by demand for blood gas testing in China.
Leica Biosystems was also up double digits with growth across all major product lines and our digital pathology business. We saw record placements of the GT 450, <unk> best in class digital pathology slide scanner as customers are increasingly realizing the.
<unk> and clinical benefits of Digitization.
In molecular diagnostics core revenue across Cepheid non respiratory test menu grew more than 20% led by infectious disease testing sexual health and hospital acquired infections.
Acceleration in growth this quarter was due in part to increased adoption of Cepheid non respiratory test menu across our nearly 50000 instrument installed base, which has doubled since 2020.
During the quarter Cepheid expanded there competitively advantaged test menu with the launch of the expert Xpress MVP.
We express MVP rapidly diagnosis three distinct health conditions.
That cause overlapping vaginitis symptoms in women using a single sample.
This addition to our sexual health portfolio enables physicians to quickly diagnose a patient infection and prescribe a targeted treatment regimen, reducing the need for multiple office visits.
This is a great example of how bringing accurate easy to use molecular testing closer to patients is improving healthcare outcomes and driving long term growth at cepheid.
In respiratory testing global PCR testing volumes continued to moderate.
But demand for Cepheid point of care PCR testing remained robust.
<unk> respiratory testing revenue of approximately $1 $1 billion in the fourth quarter significantly exceeded our expectation of approximately $375 million.
The respiratory season.
Got off to an earlier than anticipated start with a high prevalence of circulating respiratory viruses, notably COVID-19, flu and RSV, leading to both higher volumes and a preference for our 401 to test for COVID-19 flu a and b.
RSV.
Now based on discussions with our customers. We believe COVID-19 will enter an endemic disease state in 2023, and as a result expect to ship 30 million respiratory tests and generate $1 $2 billion of revenue for the full year.
As hospitals and health systems begin planning for their endemic testing needs. We are increasingly seeing customers consolidate their point of care PCR testing platforms onto Cepheid lean expert.
Our customers' preference for the gene expert for both respiratory and non respiratory testing as a result of the significant value. The unique combination fast accurate lab quality results and a best in class workflow provide clinicians.
The combination of these advantages.
Broadest molecular diagnostic test menu on the market.
And our leading global installed base creates significant opportunities ahead for Cepheid point of care solutions.
Moving to our environmental and applied solutions segment.
<unk> revenue grew 1% and core revenue was up five 5%.
Water quality core revenue growth was high single digits and product identification was flat.
At product identification, marking and coding was up slightly while packaging and color management was down low single digits.
Core revenue at video jet was up slightly due in part to a difficult year over year comparison as the business grew low double digits in Q4 last year.
In December Pantone announced Veeva magenta at the 2023 color of the year.
Color of the year and the billions of media impressions. It generates solidifies pan tons iconic brand and was one of the drivers of high single digit full year core revenue growth and X rites color standards business in 2022.
And water quality Hawk delivered the third consecutive quarter of double digit growth.
<unk> was also up double digits in the fourth quarter capping its 54th consecutive year of growth a remarkable accomplishment and a testament to the team's best in class execution and their commitment to continuous improvement.
During the quarter demand for analytical Chemistries and consumables remained strong across municipal and industrial end markets, but we did see a slight moderation of larger project activity at Trojan.
Throughout the year, our teams at Eas did a great job leveraging the danaher business system to overcome supply chain challenges and manage inflationary pressures.
They were at the forefront of identifying potential strength and quickly deployed DBS tools like daily management to work with suppliers and ensure production parts availability.
They also use visual project management to rapidly re engineered products and to reduce our reliance on hard to source electronic components.
Also strong price performance helped the team expand operating profit margins by more than 80 basis points in 2022, while continuing their cadence of growth investments.
We believe this outstanding execution paired with our proactive growth investments drove market share gains and enhanced our long term competitive advantage in both product identification and.
And water quality.
So with that color on what we're seeing in our businesses and end markets.
Let's now look ahead to our expectations for the first quarter and the full year.
Beginning with the first quarter of 2023, we are updating our base business core revenue growth definition to exclude the impact of COVID-19 related testing and the impact of COVID-19 vaccine and therapeutic revenue.
In the first quarter.
We expect core revenue growth in our base business to be up mid single digits.
We also expect total core revenue growth to decline mid single digits as a result of lower demand for COVID-19 testing vaccines and therapeutics.
Additionally, we expect the first quarter adjusted operating profit margin of approximately 30%.
Now for the full year 2023.
We expect high single digit core growth in our base business.
And we also expect total core revenue growth to decline mid single digits for the year as a result of lower demand for COVID-19 testing vaccines and therapeutics.
Additionally, we expect our full year adjusted operating profit margin of approximately 31%.
So to wrap up 2022 was another terrific year for Danaher.
Our team successfully executed through a challenging environment to reliably support our customers and deliver outstanding financial results, all while investing for the future.
As we look ahead, we believe the combination of our talented team differentiated portfolio of businesses and strong balance sheet. All powered by the Danaher business system positions danaher to outperform well into the future.
So with that I'll turn the call back over to John .
Thanks, Ryan or that concludes our formal comments Todd we're now ready to open up the line for questions.
Thank you Sir.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.
If you would like to remove yourself from the question queue. Please press star two.
Once again to ask a question please press star one.
We'll take our first question from Derik de Bruin with Bank of America.
Hey, good morning, and thank you for taking my question.
Derek Good morning, Hey.
So a couple of questions to start I guess, the first one would be.
Just on the inventory situation in sort of like how we should think about that working through and just sort of your expectations on the bio processing front on the non COVID-19 bio processing just some sense of timing is this a <unk> phenomenon just general thoughts there.
Eric.
As it relates to the inventory situation.
Let's think about sort of our Q1 guide here.
The starting point and the context for that.
We expect.
For our overall guide.
To have.
Our base business growth of mid single digits.
And we expect Covid testing, including now vaccine in therapeutics.
We have high single digit and low double digit headwinds, giving us.
That decline of mid single digits.
In the.
In the first quarter now, let me come back to the base business because of course, that's where your question resides.
Yes and.
Once more we have to be clear that we have now excluded vaccine and therapeutic.
Revenues from the base business right.
No.
Our mid single digits.
Base business is down from the comparable low double digit core growth. We saw in Q4 and most of 2022 and that's due mainly to bio processing ex COVID-19.
To dig into that a little bit, but also because we are expecting lower patient volumes here in China.
Zero Covid policies are and so that's.
What's happening there in that phase business in Q1, now if we look.
Dig in a little bit deeper into bio processing.
We anticipate that our non COVID-19 bio processing business will be low single digits and that's really for two reasons, one we're coming off of 30% growth.
In Q1 of 2022, but we're also working through.
<unk>.
Inventory pockets that we spoke about that were related primarily to COVID-19 programs and we do expect Q1 to be an inflection point there that we worked through the majority of that in Q1.
And then after that.
To see.
<unk>.
Got it okay, and I have to ask the obligatory analytical instrumentation demand <unk> demand coming off of some really strong growth. This year, what are your sort of expectations on instruments.
I would expect you would see.
Some slowdown in the back half of the year is embedded in your numbers.
I think that reflects our perspective.
We saw low double digit plus core.
Core growth in our instrument businesses here in 2022, and believe that we definitely took share there and frankly, our funnels are still very strong here going into the new year, but as we look to the total year, we would expect that low double digit plus to moderate.
Moderate too.
The more normal growth of mid single digit plus.
Certainly towards the back end of the year.
And what's embedded in sort of like an overall pricing expectation just this quarter give a sense of.
As you know.
In the fourth quarter on pricing Derrick we came in over 400 basis points with the team is really executing very well.
That represents roughly where we were for all of 2022 as we look forward then into 2023.
We continue to expect some cost pressures there.
<unk>.
We will look to have pricing.
Two to 300 basis points, probably closer to 300 basis points.
Derik that's for total Danaher, not just yes, yes instrument okay.
Got it got it like that.
Okay I think.
I think that will get back in the queue I've got some other ones, but I need to digest and stuff. So thank you I'll get back in queue. Thanks. Thanks Derek.
Yes.
Thank you. Our next question comes from Rachel that install with J P. Morgan.
Good morning, Rachel.
So first up just on China. So you mentioned that you're expecting some softness there can you just dig a little bit deeper how much of the softness on that one is going to be pressured there and then what do you expect for China and for the year as well.
So as I mentioned, China is.
And of course, everybody knows coming out of the zero Covid.
Lockdowns and that's affecting patient volumes here and we saw that in December in particular and have taken that as an indicator for how we should think about the first quarter.
In China, which we expect to be down.
Round high single digits here.
In the first quarter, but then moderating.
As you know.
The Chinese population gets through sort of the various infection waves that are expected and we expect that patient volumes and improve.
Throughout the year and.
And we're expecting low single digits for the full year in China.
Great. That's helpful. And then just a follow up you mentioned that western Europe with 10% core during the <unk> can you just talk about your expectations for Europe . This year have you seen any softness related to old budget constraints on your conversations with customers there.
Yes, I would tell you if we think about non COVID-19.
We continue to see good demand in Western Europe , we have seen the cycle time of deals so that period of time between lead capture and capturing the order.
Extending here in the fourth quarter, and we would expect that to continue as.
As you think about western Europe , including Covid headwinds, we would expect that to be flat here in the first quarter.
And then up low single digits, but once again that includes some COVID-19 headwinds.
Helpful. And then final question for me just around Bioprocess, saying can you just walk us through kind of the order book and how book Cabela's trended within bio processing, given some of the puts and takes there.
And getting us to that low single digits in first quarter and rounding out the year at high single digits on the non Covid side.
Sure so as it relates to orders and I've talked about this in the past as well as book to Bill in fact, we don't we don't really look at book to Bill for the bio processing business because it may not be the best way and we don't think it is the best way to really understand the underlying health of the business.
Particularly given the extended lead times that we had here in the prior period.
So we've been looking at orders really on a two to three year horizon to take out.
The lumpiness as well as the extended lead times and and over the last three years actually both orders and revenues have grown at a mid single teens average rate.
Now from a current trend perspective in.
In the fourth quarter, our order rate improved by over 500 basis points sequentially.
But was still down mid teens woods.
As expected as customers continue to adjust for our shorter lead times now to be clear our full year 2023 guide anticipate Q1 being the low point.
At low single digits for the bio processing non COVID-19.
Core growth and that also takes account.
Two any inventories that nicely.
Some of our Covid program customers, which are now being repurposed or working with those customers to repurpose that inventory. So whatever these order dynamics.
Our revenue forecast for bio processing non COVID-19 in first quarter low single digits, we expect that to be the low point.
The inventory.
Work off or burn off and then move forward to what is high single digits bio processing.
Non COVID-19 core growth for the full year.
Helpful. Thank you.
Thank you. Our next question. Our next question comes from Vijay Kumar with Evercore ISI.
Good morning, Ryan. Thank you for taking my question P. J.
Fantastic. So I had my first question on that.
We're processing here just duval.
Clarify some of these numbers here.
I think a couple of months ago, Brian that I think the expectations were for base by approximately anywhere from high singles to cans.
When you look at that high singles.
Low end of the range.
Did anything change.
And when I think about the cadence.
Throughout the year I think first half is <unk>.
We're in the mid single digits.
And would imply second half and double digit <unk> is there any risk out there in the back half.
Gives you the visibility in the back half acceleration that bioprocess.
Thanks P J.
So.
As.
Early as at J P. Morgan Conference, we did talk about.
The bio processing.
Ranging from high single digits to mid teens range.
And.
As I mentioned, then and now.
Firm now we have spent the last several weeks talking to our customers to understand their planning assumptions for the year.
And the clear message is under flying demand remains robust and unchanged.
We continue to see monoclonal antibodies cell therapy, and gene therapy activity continued to be strong and we're even seeing more work on mrna on the back of its success.
With Covid vaccine.
So while the demand is remaining solid.
Customers are actually not anticipating a step up in activity. So activity remains strong and as we've seen in prior quarters, but theyre not anticipating a step up.
Versus what we've seen here in the last couple of years and so as you look at the two three even four years stacks here, we've seen mid teens growth CAGR for bio processing.
Non COVID-19.
So coming back then if you take our high single digit.
Bio processing non Covid full year guide on the back of an approximately 30% comp from 2022.
Right in the mid teens range, both on a two and a three year basis.
So we think thats, especially strong in light of the fact that in Q1, we do expect to burn off some inventory and we will start with low single digits.
In fact, if we had assumed the mid teens. So the higher part of the range for 'twenty three that that actually would have implied an acceleration.
Of demand to over 20% on a two year stack in and frankly, that's not just that's just not supported by our customer discussions so.
As we think about burning off these inventories you asked about the confidence in the later part of the year and that confidence is based on our discussions with customers.
Backlog that we have the continued.
Continued order activity that we see and that has improved over prior periods.
So we feel very good about the high single digits non COVID-19 bio processing growth for 2023.
And maybe just to give you a bit sorry.
Sorry, just to give you a bit of kind of numbers too because I know we've talked about this a lot recently, but just so that we kind of repeated here. If you look at bio processing ex COVID-19 growth rate over the last four years inclusive of our 23 guidance.
You have seven 8% type growth in 2020, as we are sort of moving into and away from the core bioprocess and doing more COVID-19 work and then in 2021 and 2022, we grew ex COVID-19, 20% plus in each of those two years and so now this year in 'twenty three the high single digit guide is sort of kind of an <unk>.
<unk> barbell, if you will but if you look at kind of high single digits to start in 2000 and high single digits as we get through the last of Covid in 'twenty, three with 20% and 25%.
Growth in the middle in 'twenty, one and 'twenty two that's sort of the period that we're looking back and over because I don't think you can look at just any one period or quarter, given everything Reiner said that happen in 'twenty, one and 'twenty two with the extended lead times and what was happening with Covid.
So that we're all on the same page on sort of the numbers historically on how we have sort of arrived at that mid teens growth rate in discussion with our customers, who say hey look if you look back over the last three or four years. My demand is about the same my order pattern is going to be slightly different but my and demand is about the same.
That's helpful color and perspective, and then one last question here for me.
Matt This is Hugh.
The high single digit guide for Bioprocess and implies like the non bio processing.
75% from Danaher revenues, that's also up high singles.
That's a strong number.
Any.
Confidence here I think there's been some concerns around capital order trends. So what's the order books shaping up for instruments and margins here, 31% step down from Q4.
Given the high single digits I would assume on the pricing commentary of volume leverage and pricing contribution should be pretty strong. So maybe if you could just comment on the non bio processing high single digit assumptions and margin assumptions.
Let me take margins and I think we sort of cover the high single digits, maybe reiner can kind of wrap it up on bio processing.
Sorry.
<unk> crossing.
Non bioprocess processes I'm, sorry, so COVID-19.
And then the X by pricing the other diagnostics I mean, Oh, I'm sorry I'm.
Im sorry.
Okay everything outside of bio processing got you. So let me let me start with the margin question first so I think that's that's one that's topical here too. So if you think about margins for the full year and then I can kind of touch on 'twenty, one our Q1 as well.
Margins were talking about kind of 31% adjusted margin.
And that's going to be a bit lower than we were in 'twenty three on the margin if you will.
With the biggest factor is going to be the volume leverage like you alluded to there were going to lose call. It $3 $2 billion of Covid headwinds in the year 700 million from the vaccines and therapeutics as we go from call. It 800, a little over 150 or a little under $1 50.
And then we're going to have $2 $5 billion of testing.
Falloff as as is.
We think we get to a more endemic state on Cepheid testing and so the margin profile on that stuff on the bark on the headwinds is basically the fleet average I would say that probably falls through at 40%. So it kind of in line with our with our normal fall through but that volume is pretty meaningful at $3 2 billion as you talked about so.
We will offset some of that high single digit core in the base business is going to be a $1 billion seven and change let's call. It.
Falling through 35% to 40%, but just not enough to fully compensate what's happening with with our COVID-19 headwinds here. So I think you combine that.
Volume with.
Sort of an overall macro backdrop Vijay that.
I still want to be prudent here from a planning perspective, as we head into the year I want to see how the inflation supply chain kind of progresses through the year, China is still a bit of an unknown on how that bounces back in.
I'd like to start the year with a cost structure thats in the right place and let's see how some of these things sort of play out as the year goes on.
We'll obviously try to do better, but that's sort of kind of thinking about the margin for for the year and really the only difference between Q1 and Q2 from 31% and for the full year in sorry in Q1 is FX in the first half in the first quarter, we will have a $225 million FX headwind in Q1.
And so I would say that the same drivers if you will for the full year or for Q1.
That's helpful Matt.
And then BJ just coming back to your question regarding.
The base business without biotechnology.
Growth here for 2023.
We talked about life science instruments going from the low double digits.
Or to the mid single digit plus here as we expect that to moderate during the course of the year, but in our life science businesses. We also have our genomics businesses, which are growing at double digits. So when you look at our under the new definition life Sciences business, so that would be the instrument businesses and genomics businesses.
We expect high single digit growth.
For the year.
As it relates to our diagnostics business without Covid testing.
We also expect high single digit growth there if you think about the growth and Leica Biosystems radiometer.
And as patient volumes normalized supported also by solid growth at Beckman.
Diagnostics once again without Covid testing high single digits, and then as it relates to Eas, we would expect that now to normalize after having.
I had just banner.
Growth here in the last couple of years to be more low to mid single digit growth probably skewed more to mid single digits for the year.
That's extremely helpful. Thank you guys.
Thank you. Our next question comes from Scott Davis with <unk> research.
Hey, good morning, guys Scott good morning.
Yeah.
Lots of detail already discussed here, so I'll try to go back to a little big bigger picture what.
What assumptions are you guys using for kind of labor and material inflation for 2023 I assume this has mitigated a little bit from the high labor inflation, you've had the last couple of years, but curious on your view there.
Yes, Scott I think when I think about price cost kind of back to that two to 300 basis points of price we have been positive on price cost last year.
Year here, and probably a little bit more so I think we.
That guide of two to 300 basis points would keep us at positive price cost we are seeing.
I would say that we're seeing some things.
From a supply chain pressure come down freight lanes is probably the one of the biggest one that I can think of from a cost perspective.
I would tell you that other parts of the supply chain, we probably are seeing.
Availability be better, but not necessarily seeing costs come down yet.
So I think we're sort of still in that two to 300 basis points of <unk>.
Price to help offset what is still out there, but there are early signs that things, maybe maybe maybe turn.
Is that price, Matt is that pretty much already out in the system or is that still to be.
Hey, guys.
It's out it's yes, it's already out there.
Okay, and if we need to and then we did.
We need to we can go for more as we've done here Scott and you saw that as we built through the year this year.
And can you guys remind us what are the remaining steps you need for the Es separation is there any kind of upside are you getting that done on the early earlier than planned.
Ron.
To say that it's easy to do but there is quite a bit of work to get through it's Scott I mean, we've got.
We're still in the early early days of the audits getting the audit is done.
And after that we've got a lot of work obviously to do in a whole work stream of people who are working on it.
Think we are still very much on track for Q4, the ability to do something here in Q4 anything earlier I think just between the audits the work that remains and the.
The tax ruling it just it just takes time for these so.
Don't think thats probably.
Our base case scenario for US right now Scott and I still think Q4 is the way to think about it.
Okay I'll pass it on thank you guys and best of luck in 'twenty three.
Thanks Scott.
Thank you. Our next question comes from Dan Brennan with Cowen.
Great. Thanks, Dana Thanks for taking good morning, Ryan Good morning, Matt. Thanks for taking my question here.
Maybe first one would just be on China I know there was a question asked earlier.
But just wondering some peers have commented that obviously there is a headwind right now as the <unk>.
Covid rates a spike.
But that as the year plays out you could see China actually turned out to be stronger than maybe you were anticipating the appears we're anticipating excuse me given the benefits on the economy show kind of what what are you assuming in that low single is that do you think youll give me some cushion in there or just how do you how do you contemplate China playing out for the year given.
Given the change of policy.
Dan So I mean, the near term just to recap is in fact.
We saw particularly in our diagnostics business lower patient volumes.
Related to the hospitals in China being overwhelmed with.
Covid infected patients.
And.
We expect that to continue here in the Q1, it's currently.
Lunar new year holiday.
We expect.
Infection spread.
Here in the next.
30 days or so and then over time.
That would start waning reducing.
It's kind of unknown as to how many other waves followed that but we do believe that during the course of the year.
Especially as it relates to our business patient volumes start recovering we've seen this again and again after severe lockdowns of large cities in the previous years.
And so we expect that to be pretty resilient and that's why we end up then with a full year.
China Guide low single digits now could there be upside.
Potentially there is.
Clearly some pent up demand in the Chinese economy.
It just depends now on how quickly.
People can get back to work and some normalcy returns to the markets in general So we think from where we sit today low single digits for the full year is a good way to think about it.
And of course, we'll continue to update as we go through the year here, but it's a good starting point and there may be some upside should in fact that pent up demand.
Be released here in 2023.
Great and then and then just on the M&A environment. We've heard from some commentary in recent weeks that there seems to be a more willing seller environment, maybe just a reflection of macro and interest rates. So there seems to be maybe more folks coming to the table.
How would you characterize obviously, it's impossible to time M&A.
But how would you characterize the current environment and just any color.
<unk>.
The outlook, whether it be from private targets our public targets.
Obviously I'm sure.
All the remaining businesses.
Post the EAA spin Eas excuse me are candidates for M&A, but just how would you characterize kind of the interest level by.
By your business. Thank you.
So our.
Perspective on M&A remains unchanged here first of all our funnels continue to be very active.
As you know our balance sheet.
It's now at one five turns.
Is in great shape.
We're starting to see in the marketplace.
Some recognition and.
I'll, even say some acceptance of the lower valuation levels that we have now seen for a good period of time.
And I would say it is.
Early days.
But the environment for M&A continues to improve.
And as you know in the past when there has been these kind of situations danaher has been able to to deploy capital.
In a really value, creating way and of course, it's our intention to do that.
Here.
And in the future as well.
Great. Thanks, Brian Thanks, Matt.
Thank you our next question.
I'm sorry, our last question will come from Patrick Donnelly with Citi.
Good morning, Patrick.
Hey, good morning, Roger Thanks for taking my question.
Maybe one on <unk>.
Back to the diagnostics business on SAP.
Can you just talk about the non COVID-19 piece, what youre hearing from customers in terms of utilization usage, particularly those who bought instruments. During COVID-19. Obviously you saw the installed base.
Over a couple of years, there would love just some perspective in terms of what Youre seeing as Covid comes down a bit.
The respiratory comes down here shortly what the expectations are there.
I mean.
Patrick we're very encouraged by what we're seeing as you mentioned.
Over 50000 instruments placed more than double than we've had.
Well into the mid <unk> and the number of tests.
Now as you can imagine here in the fourth quarter and sort of the beginning of the first quarter, our customers have been busy with respiratory testing.
About that but we're very encouraged by the fact that even in the fourth quarter, we saw that non COVID-19 testing growing at over 20% and I think thats indicative of a couple of things first of all we were very strategic in how we thought about placing.
Our instrument.
In the sense that we really stayed at the point of care with customers that would be able to standardize their larger idms around.
Gene expert architecture as well as leverage subsequent to the pandemic brought a broad testing menu that we offer and we continue to see that not only do we continue to see that but we see continued consolidation.
Point of care molecular testing onto the gene expert platform, which is likely also another driver for us seeing the continued.
The adoption of the non respiratory menu so very positive outlook here, we're encouraged and it's still kind of early days.
Okay. That's helpful.
And then maybe just a follow up on Dan's capital deployment. One there can you just refresh us on kind of how you think about leverage ratios.
The current rate environment changes your perspective as all of US at all in terms of what size deal you guys would look at.
Yes, Dan Patrick.
Patrick.
I mean from a leverage perspective, we've been I think a couple of times in our history, we got too a little bit over 4% I mean, I think we've always said we.
Don't.
Have much of an appetite to be rated any lower than we are for sure.
So I think thats sort of the outer boundaries of what.
Kind of think about but we kind of we've been all over the place historically, we don't really have a target of two or three years, just sort of moves around with the deal activity and we sort of take our time to I mean as far as the current rate environment I don't think it changes that for US I think we still think about sort of returns in the <unk>.
Same way that we did with we've been doing this a long time, we've been in rate environments. Like this before we've been in environments that are worse last 10 or 12 years, obviously it at close to zero was a very different time, but.
I don't think we have fundamentally any changes here.
Given given where we're at.
Alright, Thanks, Matt Thanks, Brian .
Thank you at this time I would like to turn the call back over to John Bedford for any additional or closing remarks.
Well first of all thanks again, everybody we are.
Thrilled with the way we closed out 2022.
And.
We see a strong 2023 ahead with all the numbers, maybe just a quick recap for 2023, we see our base business.
Growing at high single digits.
And in the first quarter, we see that base business.
Despite the fact that we're working off some biotech and bio processing inventories at mid single digits.
Now we've talked at length about COVID-19 testing and vaccine therapeutic headwinds.
I think.
They are real.
But despite those headwinds we feel great about the important role that we played in the pandemic keep in mind, we have reinvested COVID-19 related cash flows to create lasting annuities with acquisitions and breakthrough innovation.
I'll further strengthening our balance sheet.
And so we exit the pandemic much stronger than we entered.
Higher growth and higher margins in our base business.
So with that we thank you for the call.
Wish you all the best for 2023.
Thanks to everybody.
For follow ups I'll bet.
Okay.
This concludes today's call. Thank you for your participation you may disconnect at anytime.
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Glenn.
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