Q4 2022 Bio Rad Laboratories Inc Earnings Call
[music].
Yeah.
Good afternoon, ladies and gentlemen, thank you for attending today's bio Rad fourth quarter and full year 2022 earnings result conference call.
My name is Tia and I will be our moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad.
I would now like to pass the conference over to your host Everett Charles with Bio Rad. Please proceed.
Thanks, Steve.
Good afternoon, everyone and thank you for joining us today.
We today, we will review the fourth quarter and full year of 2022 financial results and provide an update on key business trends for bio Rad with me on the call today are Norman Schwartz, our Chief Executive Officer, Ilan, Daskal Executive Vice President and Chief Financial Officer, Andy last Executive Vice President.
<unk> and Chief operating Officer, Simon May President of the life Science group and our Wright President of the clinical diagnostics group.
Before we begin our review I would like to caution everyone that we will be making forward looking statements about managements goals plans and expectations, our future financial performance and other matters. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties.
Included in these forward looking statements are commentary regarding the impact of the COVID-19 pandemic on bio <unk> results and operations and steps bio Rad is taking in response to the pandemic. Our actual results may differ materially from these plans and expectations and it is.
Difficult to predict the full extent of potential impacts dependent it could have in the future.
You should not place undue reliance on these forward looking statements and I encourage you to review our filings with the SEC, where we discuss in detail the risk factors in our business.
<unk> does not intend to update any forward looking statements made during the call today.
Our remarks will include references to non-GAAP financials, including net income and diluted earnings per share, which are financial measures that are not defined under generally accepted accounting principles investors should review. The reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release.
With that ill now turn the call over to <unk>.
CFO .
Thank you good afternoon, and thank you all for joining us before I begin the detailed fourth quarter and full year of discussion I would like to ask Andy last our chief operating officer to provide an update on bio rates global operations Andy Okay. Many thanks.
Good afternoon everybody.
As we enter Q4, we continued our focus on improving our supply chain situation.
During the quarter, some supply chain component constraints still consistent for a number of instruments.
But overall, we're less problematic and our primary focus was on production to meet demand.
As a result, we made solid progress on reducing our backlog in the quarter.
However, there was a resulting impact on product sales mix and.
And as expected, we still exit Q4, with an elevated backlog position.
<unk> life science and clinical diagnostic businesses.
Inventory levels remain high as we continue to source components to support demand, our manufacturing transition to Singapore backlog reduction and better secure supply continuity through the coming year.
While still high logistics costs showed improvements in Q4, although higher customer materials continued to consist from purchases earlier in the year.
Despite the product supply challenges experienced throughout 2022, we are extremely pleased with the level of customer support and willingness to work through our backlog with us.
As anticipated during the quarter the global effects of Covid on our business continued to diminish and in particular Covid related sales were roughly in line with our expectations.
Overall operations with <unk>, we're back to normal with the exception of China, where change in government policy from their previous zero tolerance policy led to a large increase in infection rates impacting a significant percentage of the country and our employees.
This also had a negative effect impact on demand for our routine diagnostic tests in China.
The fourth quarter also displayed continued strong demand trends across our portfolio and in particular, we were very pleased with strong placements for the recently launched <unk> 600, droplet digital PCR platform.
Initial adopters include customers at the cutting edge of oncology research and testing such as biotech ethics are.
Diagnostics company, which is developing a minimum residual.
Residual disease test per month more memorial Sloan Kettering cancer Center on the platform.
Also of note during the fourth quarter, we entered into an exclusive licensing agreement with <unk> to accelerate the development of next generation highly multiplex digital PCR assays for oncology applications.
As we enter 2023, we have now developed a strong pipeline across multiple customer segments for the <unk> 600, and in conjunction with our portfolio of many thousands of assays. We expect to see continued strong growth of our droplet digital PCR portfolio in 2023.
Q4 sales of our process chromatography franchise also displayed strong double digit growth and we are pleased with the continued performance of this business and adoption of the recently launched prepacked columns as well as increasing interest in our new via residence for new biological therapy.
Six in vaccines.
Looking towards 2023 overall demand remains strong and we continue to drive disciplined execution of our strategy.
While we still have some challenges in supply chain.
Primary activity is now on scaling production to reduce our instrument backlog and meet growing demand.
Particularly in the clinical diagnostics business, and we anticipate backlog will be normalized in the second half of the year.
Also in the back half of the year, we are planning for the introduction of two new platforms from our development pipeline.
<unk> continuum, and our second generation single cell platform.
The continuum represents the next generation droplet digital PCR system with an integrated workflow that is designed to be cost effective.
Our single cell application targets, the large single cell multi market.
With the Covid pandemic largely behind US, we do not anticipate any meaningful coverage related sales in 2023 and.
In addition, we continue to monitor the Russia, and Ukraine wall situation and potential for further sanctions and downside.
Thank you for your attention and I will now pass it back to Matt. Thank.
Thank you Andy.
Now I would like to review the results of the fourth quarter and full year.
Net sales for the fourth quarter of 2022 were $733 million.
Which is 0.3% decline on a reported basis versus $732 8 million in Q4 of 2021.
On a currency neutral basis, the year over year revenue growth was five 8%.
As expected Covid related sales continued to taper and were about $13 million in the quarter.
Year over year core revenue, which excludes COVID-19 related sales increased 10, 6% on a currency neutral basis.
On a geographic basis, we experienced double digit currency neutral year over year core revenue growth in the Americas and Asia.
While Europe posted a more modest increase primarily reflecting ongoing supply chain constraints for diagnostic products.
As Andy mentioned earlier, despite improvements in the supply chain. We estimate that we ended 2022 with an elevated order backlog of approximately $50 million of which we expect to retain about $30 million.
Sales over the life Science group in the fourth quarter of 2022 were $359 $7 million.
Compared to $326 6 million in Q4 of 2021, which is an increase of 10, 1% on a reported basis and growth of 16, 4% on a currency neutral basis.
The underlying life science year over year currency neutral core revenue growth.
Was 28, 1% and benefited in part from the reduction of order backlog.
The year over year growth was primarily driven by droplet digital Pcr.
Process chromatography and western blotting.
We also saw good growth for our <unk> products in part driven by the uptake of our new <unk> <unk> platform.
We continued to experience strong initial customer interest and demand for our recently introduced <unk> 600, <unk> system, and we expect a more meaningful revenue contribution from this platform in 2023.
Process chromatography, which can fluctuate on a quarterly basis again posted strong double digit year over year growth.
Excluding process chromatography sales the underlying life science business grew 14% on a currency neutral basis versus Q4 of 2021 and was partially offset by lower COVID-19 related sales.
When also excluding Covid related sales revenue growth was 27, 1% on a currency neutral basis.
On a geographic basis life science experienced currency neutral year over year core revenue growth across all three regions.
Sales of the clinical diagnostics group in the fourth quarter were $369 $6 million.
Compared to $404 9 million in Q4 of 2021, which is an eight 7% decline on a reported basis and a two 9% decline on a currency neutral basis.
Core clinical diagnostics year over year revenue, which excludes corporate related sales declined one 9% on a currency neutral basis.
Clinical diagnostics group revenue, which was primarily impacted by ongoing supply chain constraints, which delayed instrument placements across multiple platforms and the update of associated consumables.
On a geographic basis, the diagnostics group year over year currency neutral core revenue grew in the Americas and declined in Europe and in Asia.
In addition to supply chain constraints Asia Pacific sales were also impacted by Covid dynamics in China, resulting in lower volume of routine testing.
During the fourth quarter of 2022, we corrected to accounting policies and believe these changes are immaterial to our overall financials.
We determined that R&D expenses associated with developing and enhancing our cloud based capabilities.
Incurred during the years 2020 through 2022 should have been capitalized.
We revised our historical financial statements to reflect this correction and it will be reflected in our 10-K filings.
For full year 2022, the correction was about $5 million.
Or about 20 basis points headwind to gross margin and the benefit of about $8 million or about 30 basis points for operating margin.
The benefit for the full year adjusted EBITDA margin is $15 million or about 50 basis points.
By comparison, the 2021 full year gross margin headwind is estimated to be about $3 million.
Or about 10 basis points with an operating margin benefit of $11 million.
Or about 40 basis points, and adjusted EBITDA margin benefit of $15 million or 50 basis points.
Yes.
In addition, we corrected our policy on the timing of revenue recognition related to certain equipment that requires installation and we believe that it contributed $5 million to $10 million of one time revenue to the quarter.
The reported gross margin for the fourth quarter of 2022 was 54, 4% on a GAAP basis and compares to 54, 6% in Q4 of 2021.
The fourth quarter year over year gross margin decline was mainly due to an unfavorable product mix, reflecting a higher percentage of instrument sales lower coffee sales and higher raw material costs associated with supply chain constraints.
Amortization related to prior acquisitions recorded in cost of goods sold was $4 4 million as compared to $4 7 million in Q4 of 2021.
SG&A expenses for Q4 of 2022 were $212 2 million.
Or 29, 1% of sales compared to $224 1 million.
Or 36% in Q4 of 2021.
The year over year SG&A expenses decreased mainly due to the stronger dollar normalized employee related benefits, but was partially offset by higher discretionary spend.
Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1 7 million.
Versus $1 8 million in Q4 of 2021.
Research and development expense in the fourth quarter was $66 2 million.
Or nine 1% of sales compared to $66 9 million.
Or nine 1% of sales in Q4 of 2021 and consistent with our targeted R&D investments.
Q4, operating income was $118 7 million.
Or 16, 2% of sales compared to $108 9 million.
Or 14, 9% of sales in Q4 of 2021.
Looking below the operating line the change in fair market value of equity Securities Holdings, which are substantially related to buy rate on a sheet of sartorius AG shares.
At $979 million of income to the reported results.
During the quarter interest and other income resulted in net other expense of $6 $1 million.
Compared to net other income of $7 $5 million last year.
Q4 of 2022 included $14 4 million charge associated with an investment environment.
Overall, we generated $16 6 million in interest income during the fourth quarter from our cash balance, partially offset by $11 7 million and interest expense related to our $1 2 billion notes.
The effective tax rate for the fourth quarter of 2022 was 24, 2% compared to 22, 8% for the same period in 2021.
The effective tax rate recorded in Q4 of 2022 was partially affected by an unrealized gain in equity securities and a tax rate reported in Q4 of 2021 was primarily affected by an unrealized loss in equity securities.
Reported net income for the fourth quarter was $828 million or.
Or $27.
78 diluted earnings per share.
Compared to a loss of $1 billion $572 million or a diluted loss per share of $52 54 in Q4 of 2021.
This increase from last year is largely related to changes in the valuation of the Sartorius holdings.
Moving on to the non-GAAP results.
Looking at our results on a non-GAAP basis, we have excluded certain atypical and unique items that impacted both the gross and operating margins as well as other income.
These items are detailed in the reconciliation table in the press release.
Looking at the non-GAAP results for the fourth quarter in cost of goods sold we have excluded $4 4 million of amortization of purchased intangibles and small restructuring benefits.
These exclusions moved the gross margin for the fourth quarter of 2022 to our non-GAAP gross margin of 54, 9% versus 55, 2% in Q4 of 2021.
non-GAAP SG&A in the fourth quarter of 2022 was 28, 5% versus 32% in Q4 of 2021.
In SG&A on a non-GAAP basis, we have excluded amortization of purchased intangibles of $1 $7 million.
In in vitro diagnostic registration fee in Europe for previously approved products of $2 $5 million.
Acquisition related benefit of $500000.
And 700000 of legal expenses as well as restructuring related expenses.
non-GAAP R&D expense in the fourth quarter of 2022 was nine 1% versus nine 4% in Q4 of 2021 in.
In R&D on a non-GAAP basis, we have excluded a small restructuring benefits.
The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 16, 2% on a GAAP basis to 17, 4% on a non-GAAP basis.
These non-GAAP operating margin compares to a non-GAAP operating margin of 15, 7% in Q4 of 2021.
We have also excluded certain items below the operating line, which are the increasing value of the sartorius equity securities and loan receivable of $979 million.
14, 4 million loss associated with an investment impairment and $1 $7 million loss on venture investments.
The non-GAAP effective tax rate for the fourth quarter of 2022 was 28, 1%, which is consistent with our full year tax rate guidance compared to 24% for the same period in 2021.
The higher rate in 2022 was driven by geographical mix of earnings.
And finally non-GAAP net income for the fourth quarter of 2022 was $98 5 million or $3 and <unk> 31 diluted earnings per share compared to $98 5 million or diluted earnings per share of $3 26 in Q4 of 2021.
Sure.
Moving on to the full year results.
Net sales for the full year of 2022 were $2 billion and $802 million, which is a four 1% decline on a reported basis.
Excuse me as compared with $2 billion and $923 million in 2021.
On a currency neutral basis full year 2022, net sales increased by 0.3% and when also excluding in 2021, a one time $32 million settlement for back royalties from <unk> sales in 2022 grew one 5% on a currency neutral basis.
Covid related sales for the full year, we're about $109 million.
Compared to $266 million in 2021.
Year over year core revenue, which excludes corporate related sales and the legal settlement increased seven 2% on a currency neutral basis.
Sales of the life Science group for 2022 were $1 billion and $347 million.
Excluding the 2021 legal settlement the year over year growth was two 7% on a currency neutral basis.
When excluding COVID-19 related sales and the 2021 legal settlement life science year over year currency neutral core revenue growth was 15, 2%.
The majority of the year over year core growth was driven by droplet digital PCR process chromatography, our Q PCR products and western blot.
On a geographic basis life science currency neutral full year core revenue grew across all three regions.
Sales of clinical diagnostics products for 2022 were $1 billion and $451 million.
Which is 0.4% growth on a currency neutral basis.
When excluding COVID-19 related sales clinical diagnostic year over year currency neutral core revenue growth was one 3%.
Which was impacted by supply chain constraints.
On a geographic basis clinical diagnostics currency neutral full year core revenue grew in the Americas and Europe , while sales declined in Asia, primarily due to Covid lockdowns in China.
As mentioned earlier the year ago comparisons for gross operating and adjusted EBITDA margin has been modestly revised due to our adoption of capitalized internal use software accounts.
The full year non-GAAP gross margin was 56, 6% compared to 57, 2% in 2021.
The year over year margin decline was driven mainly by product mix lower coffee sales higher logistics and expedited freight costs as well as higher raw material costs.
Full year non-GAAP SG&A expense was $805 4 million.
Or 28, 7% of sales compared to $824 million or 28, 5% in 2021.
The lower SG&A spend benefited from a strong dollar and more normalized employee related costs somewhat offset by higher discretionary expenses.
Full year non-GAAP R&D expense, sorry, R&D was $256 7 million or nine 2% of sales.
Versus $247 6 million or eight 6% in 2021.
And full year non-GAAP operating income was 18, 7% compared to 21% in 2021, largely due to the various impacts of our supply chain constraints during the past year.
Lastly, the non-GAAP effective tax rate for the full year of 2022 was 22%, which was consistent with our guidance range and compares to 21, 2% in 2021.
Moving on to the balance sheet.
Total cash and short term investments at the end of 2022 was $1 billion and $796 million.
Compared to <unk> $875 million at the end and at the end of 2021 and $1 billion and $856 million.
At the end of the third quarter of 2022.
The change in cash and short term investments for the third quarter of 2022 was primarily due to working capital and share repurchases.
Inventory at the end of Q4 reached $719 3 million from $685 9 million in the prior quarter.
The increase in inventory continues to reflect our supply chain constraints and is mainly due to carrying higher levels of raw materials.
As we anticipate further easing in our supply chain constraints in 2023, we would expect to lower inventory levels over the next eight quarters.
For the fourth quarter of 2022 net cash generated from operating activities was $79 7 million, which compares to $161 1 million in Q4 of 2021.
This decrease mainly reflects changes in working capital.
For the full year of 2022 net cash generated from operations was $194 4 million.
Versus $669 5 million in 2021.
These decrease also mainly reflects changes in working capital.
During the fourth quarter, we purchased 241000 shares of our stock for a total cost of $91 million.
Or an average purchase price of approximately $376 per share as we continue to be opportunistic with our share buyback program.
We still have a total of approximately $207 million available under the current board authorized program.
Full year share buybacks totaled 497000 shares for approximately $216 million.
In 2021, we purchased about 90000 shares of our stock for $50 million.
Adjusted EBITDA for the fourth quarter of 2022 was 21, 4% of sales.
Adjusted EBITDA in Q4 of 2021 was 19, 5%.
Full year, adjusted EBITDA, including the Sartorius dividend was $667 9 million.
Or about 23, 8% compared to 24, 6% in 2021.
Net capital expenditures for the fourth quarter of 2022 were $34 $7 million and full year Capex spend was $112 6 million.
Depreciation and amortization for the fourth quarter was $35 $5 million and $137 3 million for the full year.
Moving on to the non-GAAP guidance for 2023.
While the supply chain constraints have created more than anticipated challenge. During 2022, we believe that it is transitory and does not change our thinking about our 2025 financial outlook.
We expect that our backlog back order dynamics will continue to normalize.
And as I mentioned earlier, we assume to recover in 2023 about $30 million of the order backlog from 2022.
We are guiding a currency neutral revenue growth in 2023 to be between six and 7%.
Starting in 2023, we do not anticipate breaking out COVID-19 related sales as its contribution becomes immaterial to our overall revenue base.
When excluding the 2022 COVID-19 related sales, we estimate currency neutral revenue growth in 2023 to be between 10 and 11%.
The life Science group year over year currency neutral revenue growth is expected to be between 8% and 9%.
When normalizing for 2022 Covid related sales, we expect to be between 16, and 18% currency neutral year over year revenue growth for the life Science group.
For the diagnostics group, we estimate currency neutral revenue growth of about 5% as we expect supply chain constraints to normalize in 2023.
When excluding Covid related sales, we expect revenue growth between 5% and five 5% for the diagnostics group.
Due to the elevated order backlog during 2022, we realized about 1% price improvement, which was below the inflationary trends in our overall cost.
For 2023, we assume price increase realization between one five and one 8% mainly within the life Science group.
Full year non-GAAP gross margin is projected to be about 57% in the first half of 2023 and improving to 58% towards the end of the year as we cycle through higher material costs embedded in our inventory and we expect our logistics costs to <unk>.
Normalized.
Full year non-GAAP operating margin is projected to be approximately 19, 5%.
We estimate the non-GAAP full year tax rate to be between 22 and 23%.
Capex is projected to be approximately $180 million as we plan to complete our ERP implementation in Asia as well as capacity expansion to support our multiyear growth strategy.
Finally full year adjusted EBITDA margin is expected to be about 25%.
And now I'll turn the call over to Norman for a few remarks Marlin.
So thank you Elon I guess I would say that.
After three pandemic influenced tiers is really encouraging to see signs of returning to a what I think of as a more normalized business environment as you might imagine everybody here is really looking forward to putting the challenges at the last few years behind us.
And I guess I would add that the muscle building and improvements that we made as a result during this time I think we will continue to be valuable for us going forward.
So I think about the the macro view, a little bit, even though China and Russia.
You mentioned and as Sandy mentioned earlier continue to be a little bit challenged.
It would appear that most of our markets around the world will be strong in 2023.
Supported by a kind of a solid funding environment around our targeted market.
I think overall, we are certainly pleased with the progress that we're making on our strategic initiatives.
And I think it's fair to say, we have a robust pipeline of products in development to support our ambitions.
Going forward so.
We're continuing also to to evaluate opportunities to add to our portfolio.
<unk>, so what to look forward to.
Operator that concludes our prepared remarks, and we'll now open the line to take your questions.
We will now begin the Q&A session.
To ask a question. Please press star followed by one or you touched on key pad.
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We will pause briefly to allow questions to generate in Q.
The first question comes from the line of Patrick Donnelly with Citi. Please proceed.
Hey, guys. Thank you for taking the question.
Alon, maybe first Andy as well just on the guidance.
Pretty healthy lifestyle number that 16 to 18 ex the Covid can you just talk about the growth drivers there how much of that maybe some of that backlog catch up.
And also maybe just the pacing across the year, obviously, a lot goes into co branded comps that would be helpful. Just to get your perspective about the right way to think about that piece and again, maybe some of the growth drivers that play into it.
Yeah, Hi, Patrick Thanks for the question. So as we look at 'twenty three revenue overall, let me let me just break it down between the three business areas.
So overall I would say this.
The strategic drivers for revenue growth from Miami.
System without digital PCR platform.
Process chrome.
Continued growth in that platform area.
We will take out the benefit from new PCR products that were launched during.
During the past year, and we've got some more coming during 'twenty three.
I think our focus on Biopharma penetration, where we're largely under represented still is.
He is also a very significant driver as we look to our growth in life science and as a backdrop, we see life science funding broadly.
A positive.
And in all regions of the World.
And so that's a general story on life science as I look to the clinical business.
Really it's a continued growth of quality controls.
Continued share gains in immunology hematology business.
<unk> had some recent wins there and we've got a.
Growing demand pipeline.
I would say also continued growth in Asia Pac.
And in particular kind of recovery in China more in the second half of 2023.
Backlog reduction will be a feature in more of a first half of the year.
And I think it was mentioned in our script that.
Clinical is probably drop that the larger of the backlog challenge as we enter 2003, but we have a really clear line of sight now.
Q4 was still a bit challenging for us.
And growth will kind of improved through the year.
For the for the business overall.
So I think that that's pretty much wrap up cotai, we're looking at 2003.
Okay.
That's very helpful. And then maybe to your point there in terms of early in the year, a little bit of a supply chain a little bit on China can you just talk about the impact you saw in <unk>. It seemed like the diagnostics piece clearly some headwinds both in shipment delays and probably China, maybe just talk through I guess, what you saw there in terms of the impact.
And then the expectation how much of that lingers into <unk>.
Particularly maybe the China piece.
Way to think about that.
Yes.
No.
As we've mentioned before the ability to overcome the supply chain constraints in our lifetimes.
It's much easier than the clinical side of the business and that did persist for us through Q4.
And then.
In Q4 in China with the change in government policy that reflect that kind of basis represented about supply chain challenge as well as some demand drop off so so China didn't really perform quite as expected for us.
In Q4.
As we got into Q1.
Really our focus is on production.
Improvement in volume our instrument platforms to meet the backlog burn down and growing demand.
And so it's less a component issue for US now on the clinical business. It is much more ramping the volume of production as we go and we believe that's a first half phenomenon for us.
Okay, and if I can sneak one more in for alarm maybe on the margin piece.
Nice numbers here this year thinking.
Thinking about 'twenty three and then just the path continue to pass through some of the targets.
Laid out at the at the Analyst Day last year can you just talked about I guess the key levers you have in 'twenty three and then similarly, as we think about that EBITDA moving towards bigger than 28% number in 2025.
The levers that are still left to pull in some of the restructuring probably comes into play this year, but it would be helpful. Just to talk about the moving pieces. This year and then again the confidence as we work our way towards that 28%.
Sure. Thank you Patrick I appreciate the question.
So if you look at the challenges that we.
<unk> in 2022, and we think about 2023, specifically around supply chain constraints and the impact on <unk>.
Elevated cost of raw materials, specifically in.
And higher logistics cost.
So as ending Andy mentioned earlier, we believe it's going to continue to improve in that.
Part of our thinking in terms of if you think about the gross margin improvement.
The improvement of gross margin throughout 2023.
Specifically in the second half of it.
And.
And then when you think about the.
<unk>.
The other internal initiatives that we are in terms of productivity and efficiencies.
In terms of the restructuring that we that we completed.
And in the move to Singapore that is in the final phases of traditional manufacturing footprint. So all of these initiatives.
We will also contribute.
Towards the achievement of the 2025 calls in and Thats kind of what keeps us the con.
Confidence level that the challenges that we went through 2022 are more transitory, we'll continue to somewhat to some extent into 2023.
But it does not change our thinking about the 2025 model and the targets that we laid out back in the Investor day.
And obviously that comes greater portfolio top line kind of growth drivers that <unk>.
In terms of yes.
<unk>.
As you are aware of.
Alright, Thank you guys I appreciate it.
Thank you.
The next question comes from the line of Dan Leonard with Credit Suisse. Please proceed.
Hello, Thank you for taking the questions.
My first question on the 2023 sales guidance I guess, how important are those second half product launches you mentioned that continue in the second generation single cell instrument. How important are they to the 2023 sales outlook or are these more 2024 drivers.
Yes, thanks, Dan it they're not a material contributor in 'twenty three this Israeli staging.
<unk> revenue.
Sure.
Ambitions so that.
Introductions to the market, but not material contribution.
Understood.
Andy possibly you could give an update on the Singapore manufacturing transition.
Yes happy to do so the plant is up and running.
And Singapore across all the product lines.
We're very pleased with the plant coming up to speed.
I would say that the other key consideration here is that we still have our French plants operating and that is more than our initial plan.
At this point in time box.
We've kept them open because of the back order reduction.
The challenges that we have and so we're keeping our plants opened through the first half at the end of Q2.
And then finally cloud SaaS clocks.
<unk> continued to grow capacity in Singapore facilities. So at this point well, we just had some kind of small diversions I would say.
In the past year.
Understood and my final question this might be related Alon I think you mentioned it would take eight quarters to normalize inventory.
It takes so long and is there any opportunity to normalize sooner.
So generally speaking then.
First of all in our 2023.
We plan to have a lower inventory level than 2022 at justice.
We set ourselves.
Some of the procurement the procured raw material.
It was done for instruments that and components that we last longer than the next four quarters and on purpose. We wanted to have some elevated level of raw material.
And I do not see any risk of any write offs for those since these are all for instrument buildup. So.
That was kind of.
Part of our thinking.
In terms of kind of the long term plan.
That's the reason that it will take probably eight quarters to normalize.
As you can imagine despite effect that.
No.
Component availability.
Became kind of.
<unk> is in terms of availability, but it's not yet back to kind of a normalized level and we still have some challenges there and maybe Andy you want to.
Just kind.
Kind of a carryforward effect from keeping the clinical plants open on two sides of the world as well.
Two to three quarters longer than anticipated just some double down on inventory that we have at <unk>.
Through so.
So thats another contributory factor.
Got it thank you.
Thank you Dan.
Thank you.
The next question comes from the line of Brian <unk> with Jefferies. Please proceed.
Hey, Thanks, good afternoon guys.
Just a question on the full year growth outlook to make sure I got this right that we take out kind of the COVID-19 headwind assuming that goes to zero you talked about core growth.
In the double digits, 10% to 11% for the year, which is ahead of your.
LLP that you laid out at the analyst day, you were talking about the level of confidence.
That level of growth.
Where in the portfolio you may have been a little more.
<unk>.
In terms of your expectations.
Sorry, Simon here.
Broke up a little bit at the end I'm sorry.
I mean, we.
Haven't fairly diligent process for building our plans for the year.
Bottoms up by region by product profile Eric area.
But the macro is the macro trends for us.
<unk> robust.
On a fully global crisis.
Portfolio areas of growth that we've highlighted before very consistently performing.
I think 22 didn't quite we didn't quite reach our initial growth expectations fully realized growth expectations. So you've got a little bit of a comp benefit there too a.
A little better benefit coming through.
<unk> elevated back order that we're taking into 'twenty three so so when we look at <unk>.
Growth aspirations, which portions of the portfolio, we expect to.
<unk> got new product contribution.
But from products launched within 2002, and some new ones in particular areas of the portfolio. This year.
We feel we've got a good a good growth trajectory for the business going forward.
Got it.
On the digital PCR business.
Any changes in the competitive landscape that you're seeing in the market and the <unk> launch.
<unk> launched their system.
And then any updated stats on that segment that you could share with us in terms of the instrument versus consumable mix, where that stands today and maybe the end market mix maybe between Biopharma diagnostics.
Diagnostics research or what that looks like now.
Yes. This is Simon as we think about the digital PCR business overall, I will say, we're pretty pleased with the growth trajectory that we saw throughout 2022, we're pleased with the new product introductions.
Compound that with the burn down that we've started to see.
The order backlog, we feel good that we've got some momentum as we come into 2023.
And we've talked previously about the market dynamics, yes, thats emerging competition that we see is a double edged sword.
Expanding the addressable opportunity, but it's also something that I would say very seriously.
Are some of your earlier comments have mentioned, we're excited about the <unk> 600 launch of the initial let's say that we're seeing with that and when you blend the capabilities of that platform with the assay capabilities. We have secured access to with new probe. We believe we're going to be able to access segments of the market.
Way that we would always able to do it when we can be best in class in terms of performance. So we think we've got a lot of momentum.
We also continue to feel very good about the mix between instruments.
And consumables as we head into 2023, and we see a lot of data points out in the market as well and I think from our viewpoint and that's just really corroborated.
Good we felt about the performance in 'twenty, two and how particularly bullish we are coming into 2023.
Okay, Tom and while I've got you.
The new pro licensing oncology concept for the ETR, what's the timeline for commercialization of that and then we've also had a couple of other partnership announcements recently with high Tech on the Star Bright.
<unk> is another one that element bioscience RNA library prep kits.
Are any of those material revenue.
Revenue contributors in 2013 this part of it.
Broader strategy.
Monetize more of the content you have in the portfolio partnerships.
I wanted to think about any of those as being material in 2023, I think we're going to have a pretty significant emphasis on assay development around new probe being 23, I mean, we've already got a lot of oncology content in the digital PCR franchise it generates.
The revenue for us already and I think thats going to be a meaningful extension over time from 2020 for Rome, which similarly with the <unk> agreement that you mentioned, we've got best in class performing dies with stopped growing.
In addition to pushing direct portfolio was certainly wide open to partnerships there with the partnership with <unk> is going to serve us well over time, but again not meaningful in 2023.
Okay last one.
John .
As you mentioned.
$5 million to $10 million onetime revenue benefit in the fourth quarter.
What's the operating.
That is the operating income line.
So Brendan.
On average kind of the gross margin benefit so it's not anything higher or lower.
<unk> for the gross margin and it is a one time for.
For the fourth quarter of between five and 10 million as I mentioned.
Thank you very much thank.
Thank you Brendan.
Thank you.
The next question comes from the line of Jack Meehan with Nephron Research. Please proceed.
Thank you good afternoon.
I wanted to start with M&A.
For Norman just based on what Youre seeing now and if you look out for 2023, do you think tuck in deals or more or less likely and something more transfer transformative either for you or you on just latest thoughts on balance sheet.
Willingness.
We're using equity as part of the deal.
Yes, so so.
Yes.
Yes, we're kind of encouraged by what we see for 2023, if you think about.
Rising interest rates.
I think slowed other people's down a little bit.
We certainly see opportunities out there, whether they would be more tuck in or.
Or more transformational I think thats.
That's certainly.
I mean, we'll see what we manage to.
To find.
We're.
Hope to do something a little larger.
Done a number of these smaller tuck ins, especially these kind of.
Yes.
Technology.
Additions to the portfolio.
I think we're looking now for something with.
The top line and our bottom line.
And Jacob Ed in terms of.
The mix between equity and debt.
Our preference is again to try and maximize the debt capacity.
And maybe even you can call it a little bit stretching gate. If historically, we were discussing around three <unk> gross leverage.
We'll try to be then above that so long that we maintain our investment grade level.
And.
That.
Can provide us kind of a nice size opportunity to target a nice size opportunity.
Great.
Then just wanted to.
Ask you a little bit more about potential for backlog flush in 2023. So you talked about $50 million of elevated backlog and I think I heard you say you think you can capture $30 million of that it's just smaller than I would've expected when I look at the inventory balance.
Year end up about $150 million year over year.
So I was just curious like your line of sight into that and any color on is it mostly life sciences.
Yeah, So Jay maybe one comment from my side, maybe that is also related to the fact that it will take us about eight quarters in all four quarters to normalize that.
Inventory level.
So we did procure on purpose.
In certain components longer term kind of capacity.
And probably that explains the reason for the higher elevated then.
The kind of normalization in capturing kind of the order with local innovated order backlog during 2023.
Okay.
And then final one for you Ilan and maybe also for Andy the margin target of 19, 5%. So after the new accounting in 2022, I think Thats 80 bps of expansion year over year, if I look over multiple years in the past you've done over 100, a year maybe even.
Better than that I know there are some dynamics with COVID-19 in supply chain, but is there anything notable you would call out for y.
The trend lines or little below.
Historical levels.
It's a good question Jack I mean.
Some of the challenges obviously from 2022.
We'll continue.
In part of 2023, so there is still a headwind when you think about.
The higher cost of material that we have to flush through the inventory cycle and that has an impact on gross margin, obviously and it's a fall through to the to the operating margin.
I think thats kind of the main item that we have to kind of work through during 2023, and that's again. The reason that we do believe that it still transitory and that is exactly the basis for our thinking in terms of.
Still.
Confirming the 2025 target model.
Because by that by that time, we believe that those stores that those issues will no longer be there.
Sounds good thank you.
Thank you Jen.
Thank you.
Again to ask a question please press star one.
There are no additional questions at this time I will now hand, it back to the management team for closing remarks.
Thank you for joining today's call we will be at the Citi Conference in early March and hope to see some of you there and as always appreciate your interest and we look forward to connecting soon.
That concludes today's conference call. Thank you you may now disconnect your line.
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