Q4 2022 Repligen Corp Earnings Call
Speaker 2: Good day ladies and gentlemen and welcome to the Refillogen Corporation's fourth quarter of 2022 earnings conference call. My name is Chuck and I'll be your coordinator. All participants will be in a listen only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero.
Speaker 2: Please know that there will be a question and answer session following the company's formal remarks. In order to accommodate all individuals who wish to ask a question, there will be a limit of two questions at that time. I would now like to turn the call over to your host for today's call, Ms. Sandra Newman, Head of Investor Relations for Replicin. Please go ahead, ma'am.
Speaker 3: Thank you, Chuck, and welcome everyone to our fourth quarter and year-end report. On this call, we will cover business highlights and financial performance for the three and twelve-month periods ended December 31st, 2022. We'll also provide financial guidance for the full year 2023.
Speaker 3: Revolgions, President and CEO Tony Hunt and our CFO , John Snodgress, will deliver our report and then we'll open the call up for Q&A. As a reminder, the forward-looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events.
Speaker 3: or results to differ. Additional information concerning risks related to our business is included in our quarterly reports on Form 10Q, our annual report on Form 10K, and the current report of Form 8K, which we are filing today, and other filings that we make with the Security and Exchange Commission.
Speaker 3: Today's comments reflect management's current views, which could change as a result of new information, future events, or otherwise. The company does not obligate or commit itself to update forward-looking statements except it's required by law.
Speaker 3: During this call, we're providing non-GAP results and guidance. Reconciliation of GAP to non- GAAP financial measures are included in the press release that we issued this morning, which is posted to our website and on SEC.gov.
Speaker 3: Non-GAP figures in today's report include the following. Revenue growth at constant currency, growth profit and growth margin, operating expenses, including R&D and SGNA, operating income and operating margin, income tax expense, net income, and earnings per share as well as EBITDA and adjusted EBITDA.
Speaker 3: These adjusted financial measures should not be viewed as an alternative to get measures but are intended to better enable investors to benchmark the applicant's current results against historical performance and the performance of our peers when evaluating investment opportunities.
Speaker 4: Now we'll turn the call over to Tony Hunt. Thank you, Sandra. Good morning, everybody, and welcome to our 2022 year-end report.
Speaker 4: We are really pleased with the way the year played out given the market dynamics and the bioprocessing industry, especially in the second half of the year, where we dealt with FX headwinds, changing order patterns, declining COVID vaccine demand and cost inflation.
Speaker 4: We finished the year close to 802 million in revenue driven by face business growth.
Speaker 4: Organically, our base business was up 35% in the quarter and 39% for the full year, while over organic growth for the company was up 4% in the quarter and 22% for the year.
Speaker 4: Our Q4 sales were especially impressive, given we essentially covered a $38 million drop in COVID-related revenue year over year with an increase in base revenue. For the year 2022, our overall business performance was outstanding, driven primarily by our filtration.
Speaker 4: and chronography franchises, which were up 23% and 45% respectively.
Speaker 4: Within each of these franchises, our base business was up over 50%.
Speaker 4: Overall, our results demonstrate our ability to continue to differentiate ourselves in the bypassing market, which has allowed us to consistently grow above the market growth rate.
As we progress through the year, our product mix did change that's COVID-19 revenues declined and this became one of the major drivers of margin performance in the fourth quarter, which I will discuss in more detail later.
Before moving into the discussion of our Q4 performance.
For 2023, I want to highlight some of our key accomplishments.
Curtis against our five strategic priorities in 2022.
Priority number one was advancing innovation.
Over the last few years, we have focused on increasing the pace R&D product launches to build on our foundation of disruptive and innovative technologies.
2022 was no exception with our R&D team delivering 10, new products during the year.
We launched four artisan systems, three infiltration and one in chromatography, giving us a complete set of systems with low hold up volumes.
Common software architecture.
We are now well positioned to sell our filtration and chromatography consumables and flow paths with these systems, increasing the recurring consumable stream for the company.
2023 will be about optimizing this portfolio to meet the needs of the mrna and cell and gene therapy markets.
The R&D team also delivered on an exciting and first to market downstream system, which we launched into the market in Q4.
The cross flow care July RPM system for RPM stands for real time process management.
<unk> customers the ability to measure monitor and control drug concentration not only in real time, but also in a fully automated way.
Yeah.
We also leveraged our appetite acquisition and developed and launched or affinity ligands and resins in 2022 three focused on AAV viral vector purification and one focused on monoclonal antibody fragment purification.
Finally, we completed the technical launch of our next generation large scale G. M. P. H F controllers, providing our customers with a more automated solution for ATF applications.
New products continue to have a very positive impact on our business products launched in 2021 and 2022 generated 7% of our revenues last year. We expect this number it's jumped up 14% here in 2023 for products launched since 2021.
Our second priority was to build out our market presence in cell and gene therapy and mrna.
2022 was a stellar year for us in cell and gene therapy.
Business grew over 50% of our top accounts scaled unimplemented Rutledge and technologies.
We finished the year with well over 20 accounts generating greater than $1 billion in revenues and over 350 active cell and gene therapy accounts.
We also made inroads in the mrna market building off the success, we had in mrna COVID-19 vaccine manufacturing.
Our portfolio is well positioned to capture share as this market grows and expands and you can expect to see additional rutledge and products hitting the market here in 2023, and the overall growth in cell and gene therapy, a 15% to 20% coming off very tough comps in 2022.
Our third priority was to integrate and support our fluid management acquisitions.
The fluids management acquisitions that we made in 2020 and 'twenty 'twenty. One are now fully integrated with support coming from the build out in 2022 of our Assembly center in Hopkinton mass on the build out of our Waterford Ireland site here in 2023.
We now have a dedicated management and commercial team a growing portfolio of fluid management products that are synergistic with our system strategy and increasing awareness in the bioprocess community of our capabilities.
We expect to build off the 30% organic growth we saw in the fourth quarter for fluid management and the 17% organic growth. We saw for full year 2022, which was hampered by the destocking on the components side we.
We expect to deliver 20% plus growth in 2023. This revenue will continue to be recognized in our filtration franchise.
Our fourth priority in 2022 was to pursue M&A opportunities and strategic partnerships to expand our portfolio of Submarkets.
Following on the string of fluid management acquisitions, we signed two important strategic partnerships with D. R. S daylight solutions and pure light, which is now an ecolab company last year.
The D. R. S daylight deal it gives us another real time inline P. H E technology complements flow V. P X plus rutledge and in a leading position for advanced analytics and bio processing.
The pure light deal both extends our current partnership out through 'twenty 32, unexplained. So our relationship to include new ligands developed by appetite for Bob and Bob fragrance markets.
The RASM products that combine our NGL ligands with the pure like jet would be technology continued to do well in the marketplace.
The combination of our partnership with pure lies on the content generated through appetite and avocado has helped us to transform our ligand strategy over the last five years.
This puts us in a much stronger position to drive consistent high single digit growth in this portfolio. Once we get through the final phase of site Chiba reductions here in 2023.
And finally, our fifth priority in 2022 was to complete capacity expansion of three key facilities.
Our Assembly center in Hopkinton was completed in June and fully qualified in September .
This gives us an important foundation to support increased demand for parts and assemblies and the market ultimately supporting our system strategy with recurring consumable sales.
We also expanded capacity for H F Laci cassettes hollow fibers and systems at our Marlborough mass and <unk>.
So, California sites.
It's been a key part of our business plan over the last three years to build out dual manufacturing capabilities that provide our customers with a robust business continuity plan.
Over the last two years, we've increased our manufacturing capacity between three and nine fold.
Now have ample capacity for the next three to five years across the majority of our product lines.
Here in 2020 three we plan to complete the expansion of our customer application center in Waltham and spring, Our Waterford Assembly Center online further extending our dual manufacturing capabilities and fluid management.
In addition, we are in the process of bringing additional Lincoln capacity online in Hopkinton and opening up a new facility in our stone yet.
In Estonia for our rapidly growing systems business.
While our capacity investments will continue to impact our gross margins here in 2023 by 250 basis points.
We believe it's important to have the business continuity foundation in place as we pursue expanding our market share in bio processing.
Shifting now from our 2022 priorities are moving toward Q4 and full year business performance.
As reported today, we had another strong quarter with base organic business up 35%.
And overall growth of 4%, despite the $38 million Covid challenge in the quarter.
Within our franchises, our large scale opus chromatography columns, our filtration systems, our XL hei offline in our fluid management products were the major drivers of growth in base business performance for the quarter.
From a market perspective sales into gene therapy accounts were up over 35% in the quarter and over 50% for the full year reinforcing our position in this market.
Covid related revenues contributed approximately 13% overall revenues in the quarter.
Covid revenues were down approximately 20% sequentially from Q3, 2022 and down 60% versus Q4 2021, as our main COVID-19 vaccine customers lower third amount.
This ramp down in Covid demand in Q4, plus the increase in material costs and change in product mix, where we had a lower contribution from proteins and filtration products and a much higher contribution from chromatography and fluid management products accounted for 450 basis points of the total decline in our gross margin.
Both sequentially and versus Q4 2021.
For the year Covid Robbins your revenues were approximately 141 billion or 18% of our overall revenues.
We expect Covid revenues to continue to round down in 2023 to a range of $30 million to $40 million.
The majority of Covid revenues are expected to be divided between the first and fourth quarters of 2023.
Based on the anticipated drop of greater than $100 million and Covid revenues in 2023, along with the material cost inflation in manufacturing and the depreciation and occupancy costs associated with our new facilities. We will continue to see pressure on our gross margins.
We do expect gross margins to recover somewhat from where we were in Q4 last year and are guiding now to a 53% midpoint for 2023.
As our volumes increase and product mix shift to higher end of our higher margin products will expect gross margins to improve in the second half of 2023 can expand by 100 to 200 basis points in 2024.
On the orders front in the fourth quarter total orders were down 15%, while non COVID-19 business orders were up slightly versus Q4 2021.
Sequentially in Q4 versus Q3 base orders based business orders were also up slightly however, we were very encouraged by some positive signs in the quarter, we had our strongest order quarter for pharma in 2022 in Q4 as customer specified our products into late stage commercial processes. We.
Also saw a 25% step up in orders out of gene therapy accounts versus Q3.
For the full year total orders were down about 10% with base business orders up 15%.
The areas, where we continue to see order weakness is that the Cmos and OEM customers.
We saw some pickup in demand at the C. D malls in Q4, but this was offset by a weaker Q4 for ligands are so cheap or continues to ramp down their demand as anticipated on the components side of the fluid management business continues to work through elevated inventory levels that were built up during the pandemic.
We believe that the order challenges combined is confined to see demos and Oems.
And that this will continue through the first half of 2023 with the expectation that we will move back to a growth more than the second half of 2023.
So moving now to franchise level performance, our chromatography business delivered outstanding growth up over 75% for the quarter and 45% for the full year.
Growth was driven by increased demand for opus pre packed columns is wrestling availability improved, especially in the second half of 2020 two.
We also saw opus revenues and orders pick up significantly at cell and gene therapy accounts.
Large scale opus sales into these accounts were up more than 80% in the fourth quarter versus the prior year period.
Orders were also strong with opus demand more than doubling versus Q4 of 2021.
Although we saw a significant pick up in resin deliveries in the second half of 2022, the rest of the supply has softened here again in Q1 and remains tight.
While resin lead times have come down versus 12 months ago, they're still elevated which we which we expect will limit opus growth in the first half of 2023.
We expect supply to open up in the second half of the year as more capacity comes online.
Overall, we expect growth for our chromatography business in 2023 approximately 10%.
Our proteins franchise at a lighter quarter in Q4, driven by decreased demand from site Cheever.
The lower sativa volumes were partially offset by strong demand for NGL ligands, which we supply to purely overall our proteins business was down 8% for the year very much in line with our guidance through 2022.
In 'twenty to 'twenty, three we expect to see tepid demand to be down another 50%, which is in line with the contract we signed two years ago.
We expect the lower revenues will be offset by strength in NGL ligand demand growth factors and our appetite family of AAV Russel's overall, we expect proteins growth in 2020 three to be flat.
Our filtration franchise was down 10% for the quarter as this franchise absorbed $34 million after 38 million dollar drop in Covid revenues year on year.
However base filtration business was up 38% for the quarter driven by strength in systems, ATF and hollow fiber consumables.
H F had a stellar quarter and year driven by success in commercial processes and the continued focus on new accounts all bonds are.
Filtration systems business also had a strong quarter engineer as we are seeing traction with the new artisan skills developed and launched in 2022.
Other key highlights in the quarter included the launch of our cross flow Ars 20 filtration system for gene therapy, along with the launch of our GMP large scale controllers for AGL.
With an additional $100 million Covid challenge in 2023, we expect the filtration franchise to be down towards 12% overall, but up in the range of 10% to 20% for base filtration business.
Finally, our process analytics franchise had a softer quarter in relatively light year in 2022.
In the quarter, we saw fewer at year end dollars for capital equipment versus prior years.
Revenues for the year were up 11%.
The pipeline of opportunities has expanded in the fourth quarter and based on false friend, we expect 'twenty to 'twenty three growth to be in the range of 15% to 20% as we gained traction with our RPM platform and new products hit the market.
In summary, we expect 2023 will be a challenging year for our industry as we all work through Covid headwinds and Destocking challenges.
Despite these challenges I remain very optimistic about the by processing industry and our position in the marketplace.
Our investments support our commitment to stay ahead of demand and position ourselves to win share in new markets, including opportunities in mrna cell and gene therapy Biosimilars on the mobs market.
Our customers are also optimistic and we believe that the level of investment in drug development and scale out of it as high.
Spent a significant amount of time in Q4 and here again in Q1 visiting accounts.
Our customers are scaling that are investing on multiple fronts and is confirming the overall robustness of the markets.
As we look ahead, we expect our base business to deliver organic growth in the range of 12% to 16% in 2023 coming off 39% base organic business growth in 2022.
As we move through 2023, our strategic priorities will center on the following launching new products with a focus on advanced analytics systems infiltration completing the build out of our Assembly center in Waterford are application center in Waltham, making.
Making further inroads into mrna and cell and gene therapy markets.
Finally strategically managing key accounts, so we can accelerate adoption of our technologies, especially in large pharma.
We continue to be well positioned to buy a processing and that's expected turnaround as we progress through the second half of 2023 with a much more robust year for our industry in 2024.
And believe we have the right mix of differentiated products like business plan and team in place to continue to win share and disrupt this industry now I'd like to turn the call over to John for a portion of our financial performance.
Thank you Tony and good day, everyone.
Today, we are reporting our financial results for the fourth quarter 2022, as well as providing our financial guidance for the year 2023.
Unless otherwise mentioned all financial measures discussed reflect adjusted non-GAAP measures.
As shared in our press release. This morning, we delivered revenue of $186 8 million in the quarter and $801.5 million for the full year.
The highlight once again was the continued strength of our base business, which grew by 35% organically in the fourth quarter and 39% organically for the full year.
Within our base business, we saw continued strength in our gene and cell therapy business, which grew at 36% and 52% as reported for the fourth quarter and full year respectively.
Represented between 14, and 15% of total revenue for the year.
Well the total business in the fourth quarter organic revenue growth was 4% in constant currency growth was 5% for overall reported revenue was flat year over year.
For the full year organic growth was 22% constant currency growth was 25% and reported revenue growth was 20%.
FX headwinds for the quarter and full year were slightly greater than $9 million and $33 million, respectively, reflecting a five point headwind on our reported growth for both periods.
We expect these headwinds to remain through the first half of 2023 and overall, we expect foreign exchange to be a one point headwind for the full year.
Inorganic M&A had approximately one point of positive impact on our reported growth for the fourth quarter and nearly three points of favorable impact for the full year.
Digging deeper into our overall revenue performance are 35% base business organic growth in the fourth quarter was essentially offset by reductions in Cobra related revenue of $38 million.
For the full year period, the overall increase in base revenue of greater than $160 million more than offset the decline in COVID-19 related revenues from $49 million.
As it relates to 22 2022 regional revenue growth, we have a strong overall growth year in Asia, North America and Europe for.
For the full year overall increases from Asia rest of the World increased by 29% North America grew by 25% in Europe grew by 10%. Despite the significant COVID-19 headwind in the region.
Regarding overall revenue distribution by region for the full year of 2022 Asia represented 20% Europe represented 37% and North America represented 43% of our global business.
Now moving down our income statement.
Adjusted gross profit in the fourth quarter of 2022 was $96 1 million a reduction of $9 2 million or 9% compared to the same period in 2021.
Adjusted gross margin of 51, 5% in the quarter was down from 56, 4% in the prior year fourth quarter.
Gross profit and gross margin levels were impacted by multiple factors in the quarter, including lighter volume leverage on our factories weakening foreign currencies less favorable product mix material cost inflation and the impact of facilities and depreciation related to capacity expansion is going what life during the quarter.
Of these multiple factors the largest driver of the decline in gross margins was the change in product mix, where we saw a significant drop off in hollow fiber filtration revenue directly related to COVID-19 demand.
<unk> decrease in protein a ligands sales due to lower site EBA demand.
Revenue declines in these product lines were partially offset by revenue gains from lower margin product lines like opus Prepacked columns fluid management assemblies and systems.
Adjusted gross profit for the full year 2022 finished at $456 9 million, an increase of $62 1 million or 16% and adjusted gross margin was 57% representing a decrease of 190 basis points year over year.
The factors highlighted to drive drivers for the fourth quarter performance are consistent for the whole year.
Now transitioning down the P&L to adjusted operating expenses.
Adjusted research and development expenses for the fourth quarter and full year, 2022, or five 9% and five 4% of total revenue respectively.
In 2022, we launched 10, new products and we continue to differentiate our products with best in class technologies across our franchises.
Adjusted SG&A expenses for the fourth quarter, and full year, 2022, or 23.5% and 22, 6% of total revenue respectively compared to the 22% level in the same 2021 periods.
Year over year dollar increases are related to continued investments in their commercial team and expenses being realized from facilities and depreciation those are capacity expansions, we're going live to support our business for long term growth.
Now moving to adjusted earnings and EPS.
Adjusted operating income for the fourth quarter of 2022 was $41 1 million compared to $55 9 million in the fourth quarter of 2021.
And adjusted operating margin in the fourth quarter of 2022 was 22%.
3rd% to 30% in the fourth quarter of 2021.
The reduced levels of operating income and margin are also related to the aforementioned product mix and inflation in the quarter.
Adjusted operating income for the full year of 2022 was $232 2 million, an increase of $17 million or 8% compared to 2021.
Adjusted operating margin for the full year of 2022 finished at 29% compared to 32, 1% in 2021.
Factors highlighted in our gross margin commentary were partially offset by lighter operating expenses as we finish the year.
During 2023, we plan to continue to invest in important product development programs and in commercial resources to support revenue growth, which has been paramount to our success over the last several years.
At the same time, we are actively managing our operating expenses. So that we can continue to deliver improving financial returns with operating margin gains as we progress through the year.
Fourth quarter of 2022, adjusted net income was $39 1 million or.
The decrease of $7 8 million or 17% compared to the 2021 quarter.
Adjusted net income for full year, 2022 was $188 6 million, an increase of $13 3 million or 8% compared to 2021.
Adjusted EPS for the fourth quarter 2022 was 68 cents per fully diluted share a decrease of 13 or 16% compared to 81 and the 2021 period.
Adjusted fully diluted EPS for the full year 2022 initiative $3.28, an increase of 22 or 7% compared to $3.06 for the 2021 full year period.
As it relates to capital expenditures the company invested $88 million in 2022, most significantly related to capacity expansion projects to provide business continuity and address our expectations for increasing demand.
More specifically 2022 included expansions of our hollow fiber flat sheet and systems manufacturing sites in Rancho, California in Marlborough, Massachusetts.
We also completed the build out and validation of our fluid management Assembly facility in Hopkinton, Massachusetts.
Other important capacity investments related to our proteins business and continued investments in our real estate platform.
Our cash and cash equivalents and short term investments, which are GAAP metrics totaled $623 8 million at December 31, 2022.
I will now transition to our 2023 full year guidance.
Our GAAP to non-GAAP reconciliations for our 2023 financial guidance are included in the reconciliation tables in today's earnings press release.
As previously mentioned unless otherwise noted all 2023 financial guidance discussed will be non-GAAP .
Please also keep in mind that our 2023 guidance may be impacted by fluctuations in foreign exchange rates.
Our current projection of a 1% headwind on full year sales and does not include the potential impact of any future acquisitions that the company may pursue.
We are setting our 2023 full year revenue guidance, a GAAP metric at 760 to 800 million representing reported growth in the range of minus 5% to flat and organic growth of minus 4% to plus 1%.
This revenue guidance includes base business revenue of $730 million to $760 million growing at 11% to 15% as reported and 12% to 16% organically.
Our guidance also includes COVID-19 related revenues of $30 million to $40 million a year over year reduction of $106 million at that point.
We are guiding our 2023 adjusted gross margin to the range of 52.5 to 53, 5% showing improvement from the Q4 2020 to low of 51, 5% and down 400 basis points at the midpoint versus 2022.
The gross margin headwinds that we experienced in Q4 will continue to impact us here in 2023.
We have optimized our manufacturing expenses, which we expect will offset approximately 50% or 150 basis points of the product mix implications, leaving facility and depreciation costs as the major headwinds on margins in 2023 at approximately 250 basis points.
We expect margins to improve with higher volumes as we move through the second half of 2023, and we expect to deliver further margin expansion of 100 to 200 basis points in 2024.
We are setting adjusted operating income guidance in the range of $176 million to $182 million.
We are guiding adjusted operating margins in the range of 22.5 to 23, 5% of sales.
We expect the impact of product mix.
Zero cost inflation and facilities and depreciation to drive an approximate 600 basis point decline versus 2022.
Optimization of manufacturing and operating expenses will offset approximately 25% of the product mix implications, leaving.
<unk> and depreciation cost as a significant headwind on operating margin in 2023 of approximately 300 basis points.
Adjusted other income.
As expected to be $10 million of income for the year.
And we expect 2023 adjusted income tax to be approximately 20% of adjusted pre tax income.
We are guiding to adjusted net income to a range of $149 million to $154 million with.
With adjusted EPS guidance in the range of $2 61.
$2.69 per fully diluted share.
Our adjusted EPS guidance assumes 57 2 million weighted average fully diluted shares outstanding at year end 2023.
Adjusted EBITDA is expected in the range of 213 to 219 million with depreciation and intangible amortization expense is expected to be approximately $36 million and $29 4 million respectively.
Adjusted EBITDA margins are expected to continue to be strong and we were guiding to a range of 27% to 28% for the year.
Now shifting to capital expenditure plans, where we expect to spend $60 million in 2023 with the focus on four primary expansion projects, which Tony covered earlier.
We expect year end cash and cash equivalents, a GAAP metric to be in the range of $670 million to $680 million with our Capex investments again being funded by cash generation from our operations.
This completes our financial report and guidance update I will now turn the call back to the operator to open the lines for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And your first question will come from Jacob Johnson with Stephens. Please go ahead.
Hey, good morning.
Maybe Tony just to start.
On the third quarter call last year, you talked about 16% to 20% base business growth.
The 12 to 16 this morning.
<unk> kind of change in terms of the demand you're seeing and where they are the end markets or is this just building in some conservatism and perhaps you could still end the year closer to that 16% to 20%.
Yeah, I would say that you know where we were in.
At our Q3 earnings call and where we were at the beginning of the year versus now it's changed a little bit and I think the main area, where it's changed is in our chromatography business. So we were expecting much higher growth coming from chromatography and in 2023 based on resident availability from the main players in our industry.
That's softened in Q1, its actually softened over the last six to eight weeks and it really has slowed down what we can do in the first half of the year because it's outside our control.
We've had conversations we know that capacity is coming on customers have to accept kind of manufacturing from the new facilities and that's really probably the biggest.
Driver in terms of the first half slower traction on resin availability, but I would say chicken by the <unk>.
The one thing that's the difference between where we were in November and where we were in January versus where we are today.
Okay. Thanks for that Tony and then just maybe on the on the processing side. Yeah. I think that was a key focus at your Investor day, and the girl into the system strategy you have.
Seems like that's a real opportunity for you all over the next five years, but it does seem like it's a bit softer this quarter. So could you maybe kind of square that didnt near term performance there versus the long term opportunity.
Yeah loved this business you know when you look at the funnel of opportunities that we have and the activity that we have in the marketplace. That's really high the need for outline in line technologies.
Wouldn't be any higher so I just think that there's some conservatism at the customer level in terms of the dollars they want to spend in and the approval process of getting everything kind of pushed through for approval on these capital equipment purchases, we like what we launched.
With the RPM system in in Q4, we got some orders in December which was very encouraging we're doing a lot of demos of the technology. We think this is the foundation piece that allows our customers to go from bench top care to wise, all the way up to our artisans kids using the <unk>.
Knowledge from our analytics business to be a major differentiator versus.
Other products that are in the marketplace, so well yes.
You know last year was lower in terms of overall growth.
Don't think it's that much different Jacobs done a lot of other companies who have you know.
The analytical products quality control products that are in the marketplace and so I think it's a function of that.
I would say about our analytics business is we don't you know that is orders that come in in the quarter shipped in the quarter. So it's not like any of the other franchises, where you might be operating 234 months ahead with an order book.
Got it thanks for taking the questions Tony.
Thanks for taking my question.
The next question will come from Dan <unk> with Stifel. Please go ahead.
Good morning, guys. Thanks for the questions Tony I know parsing through the quarters on an outlook is difficult, but just on the first half of the year versus the second half of the year split you're right now for 23 does the base case sort of assumed some improvement in Q U that lends evidenced to the to the idea that the destocking phenomenon.
Siding and that resin availability at maybe getting better again or really should we just be thinking about <unk> and <unk> similar with <unk> being improved in the quarter.
I personally think it's it's more Q3 improving.
So second half of the year being better than the first half of the year. The piece down that I found really encouraging was that on our when we looked at our pharma orders in Q4 right. It was.
Highest quarter, we had in orders in all of 2022 was in Q4 for pharma.
When you look at the book to Bill It was nicely over one so that's actually really encouraging and if you look at pharma for the year for Rutledge and we were also over one on a book to Bill.
Where are the places where we see the challenges are at the C. D. M O level. So I think at the C. D. M. O's begin to bounce back and we definitely saw some improvement in Q4, but not enough for me to say Hey, that's going to you know how much does it continue Q1 Q2.
So looking.
Looking at it right now I would say, it's second half of the year stronger than the first half of the year. The other thing to remember is our co. Our COVID-19 revenues are going to be pretty much in Q1.
Evenly split in Q1, and Q4 with very little revenue in in Q2, and Q3, So base business I would expect we would see orders definitely beginning to pick up in Q2.
But I think from a revenue point of view, it's the second half of the year.
Yes, okay.
Okay, and then John maybe on the Op margin 22, 5% to 23 five it feels like in order to land at the midpoint of 23, you you should be or we should be thinking about a step down from <unk> to <unk>, rather than being flattish as a jumping off point for the year, which I think is maybe the way that you were describing things at the end of the.
Is that right and then you called out mix as a factor I'd also feels like it's a little bit of a deviation just given that it felt like more of a volume thing at a leverage thing at the end of the year rather than a mix a mix phenomenon. So can you just add some color to the moving pieces.
At the margin line and then the flexibility that you might or might not have on the call.
Excellent.
Sure.
Yes, So I think the first part of your question was around operating margins and kind of the the stepping off point into 2023 from 2022.
Yeah, I think we'll start on the kind of the lower end or slightly below guidance in Q1, and then we'll build on that as we move through the through the full year getting back to that.
Hopefully you back to the midpoint of that range of 53%, but.
Hopefully between that 52, and a half and 15th or excuse me 20.
Sorry, 'twenty, two and a half in 2023, 5% level. So that's where I'd start it if you look at the gross margin I can give you a bit more color there Dan.
It's really two overarching themes that we're looking at here.
The first one is the most significant year in the quarter and the fourth quarter, which was material cost as a percentage of our overall revenue increasing.
And I'll break that down a little bit further for you.
And then also the higher facilities and depreciation costs, and we're seeing related to our capacity expansions and business continuity work that we've been doing.
I'll give a kind of a comp a sequential comp Q3.
<unk> 22 to Q4 'twenty two we finished Q3 22 at 57% Q4 'twenty two was about 51, 5%. That's a decline of about 550 basis points. So when we break this down a little bit on the material cost side cost inflation.
Materials coming from our suppliers.
Cost us about 150 basis points of market decline Q3 to Q4, Dan and then product mix.
Volume was up was another decliner at about 300 basis points. So those were the two primary components about 450 basis points on the overall materials side, and then the facilities and depreciation related costs.
We're about 100 basis points of decline in the fourth quarter. So that gives you the breakdown.
Yeah, Okay. Thanks, very much John .
Yes.
The next question will come from Puny, Sudan with S V. B Securities. Please go ahead.
Yeah, Hi, Tony John Thanks for taking the questions. So first one just given on the top line.
John I'm wondering if you can provide us a what's the base business growth for the first quarter should be not sure if I heard that.
And then you know do you still stand by your long term base business ex Covid growth of.
20% and the 2027 28.
Our revenue estimate of $2 billion.
Yeah, Let me, let me take that one puneet I think so.
So long term absolutely we believe in our company and our products and how we're doing in the market and how differentiated we are I think.
2023 is a unique year everybody in our industry has to kind of get through the year and yeah. We don't have guidance for Q1 on base business growth.
We are saying is 12% to 16% organic growth for the year and obviously as we go through the year outlook comments on exactly what happens in Q1, H one versus H two.
But this is kind of a unique year I think don't forget that.
You know, even though 2022 is finished we grew 39% organically with our base business that is so far ahead of where the industry has been growing so I think there's a lot of goodness a lot of momentum that the company has built up over the years. This can be a challenging year guys.
We're gonna be in that 12% to 16% range I said, what the challenge is really on the chromatography and but medium long term, we love what we're doing when we love our products, we'd like the position we have in the market and we don't see any reason why we can't grow 20% plus.
For the foreseeable future with the exception of 2023 as we work through these headwinds.
Got it Okay. That's helpful and then on.
On the gross margin side, John but just wondering if there was any pricing pressure that you're accounting for and Tony maybe just on product obsolete and a product exploration.
Write downs that C D M o's might be taking there just.
Could you elaborate a bit more on that and.
And if I could just squeeze in on.
P. A T question there was a large acquisition in the space.
P E T at least.
So wondering how D. R S.
Daylight solutions position is positioned versus the sort of light.
Light scattering capabilities that were acquired recently by a competitor. Thank you.
Yeah, So maybe I'll start with the waters acquisition of y.
Great Company, Great technology know them pretty well.
You know I think laser light scattering key technology in our industry.
When I look at what we're doing with our.
With our C technologies and with Drs.
We're really in a in a in a good position in terms of inline technologies right. I think it's I think when you look at what we have you can put fluffy PX in line in a manufacturing setting you can we will be able to put the drs daylight technology in line and our or our stride.
<unk> is more around you know getting to inline monitoring real time monitoring as opposed to quality control testing our offline monitoring so I think that piece.
You know.
Is kind of how we view it where we're more on in line a company in terms of the question on.
Absolutely not.
Yes.
I'm sorry.
I know this is.
And obsolescence.
Yeah, Yeah, Yeah, I was going to answer it so obsolescence, we're not seeing that as an issue right and.
I think it's it's really the inventory buildup in our customer level that just has to work through it.
And then John can answer the question on margin.
Could you repeat the question on margin just want to make sure I got it yeah. John just pricing are you seeing a you know a decline in pricing or pricing impact and what's the pricing assumptions that you have for 'twenty three.
Wondering if there's an impact from that and gross margin. Thank you.
Yeah, we are.
Not been seeing pricing.
Back of significance, we did finish 'twenty, two with with just above 5%.
Rice achievement as we as we indicated.
Indicated we were we were gunning towards so that that wasn't a major issue for 2023, and we definitely have raised prices again, working with our customers with the intent to cover inflation and we expect for 2023 that we should be able to get 2% to 5% price achievement.
This year.
Thanks, guys.
Yeah. Thanks Puneet.
The next question will come from Mark Massaro of its with JMP Chase. Please go ahead.
The next question will come from Liza Garcia with UBS. Please go ahead.
Hey, guys. Good morning, Thank you for taking the question.
Hum.
Oh in gene therapy.
Are those accounts it seems like over 20, now doing a million gout generating $1 billion on the order book feels pretty good.
Can you maybe talk to kind of how to think about the cadence across 2023 and your assumptions for the growth there it seems a little bit kind of lower than me.
But at the moment and I know, obviously tough comps, but it was great to dig in there.
Yes, so selling gene therapy, great year last year, no doubt about it.
But like every other business, we have right. We saw orders slowed down in the second half of the year I think what people forget is that 50% of our cell and gene therapy revenue comes from <unk> <unk>.
So we're timing in calling out that C. D. M O order books being really light and it's got to pick up so when you think about our cell and gene therapy drug.
And any upside in cell and gene therapy is going to come from the <unk> coming back to where they were in the early parts of 2022.
Great. Thanks, and then maybe just new product introductions and how to think about the cadence for this year. Its probably 10. This year that was in the nine.
To 12.
Great to kind of dig in there.
I understand a little bit better kind of what you're hoping for.
Yeah. So one of the big things we've been doing for the last three plus years is really focused on increasing the cadence of bringing new products to market and as I said in my prepared remarks, right. We had a we had a really good year.
Your last year's 77% of our revenue came from products launched in 'twenty, one and 2022.
And if you go to this year you add in the product is going to get launched this year overall the product spend launched 2021 2022.
In 2023 will be around 14%.
That's exactly what we want to see right, where we're investing at a level of 5% into R&D five 5% and you can see based on on the traction we're getting in the marketplace with our new products were more than covering the cost of running R&D at the company. So we're really thrilled with.
How well our R&D programs are going the products that we have in the portfolio and it's exactly what you would want from a disruptive innovative company like Rutledge and that our R&D products are actually gaining traction and they become a catalyst for growth. So maybe back to two I think on a shovel was preneed.
Our our Jacob about where are we standing behind you know long term growth. This is where the extra 5% or 7% is going to come from on an annual basis, it's going to come from what we're doing on the R&D side and that's why it's so important to us to continue to even in a tough year like 2020.
Three maintain our investments in R&D to get the products out because they are the stepping stones and foundation for the next five plus years.
Great. Thanks, guys.
The next question will come from Matt Larew with William Blair. Please go ahead.
Hi, good morning.
Obviously, the biggest top line Delta Athletic Covid chromatography, and Tony you called out and going from 45% in 'twenty, 2% to 10% and 23.
But maybe if resin the bill but it was not a problem what would look like in other words, what does the demand look like at this point is.
The issue more on customers or with our customers check stepped out of the new products are you still waiting on the raw material availability and availability and then the product that can be accepted by customers.
Yes, so maybe a quick a quick synopsis of how we manage our chromatography business with Prepacked columns. If you went back five years ago, Rutledge and was procuring resins for.
<unk> to Pac into our chromatography columns. So the interaction was directly with the suppliers of resins, but we made a conscious decision really in 2018 2019 to really move away from Rutledge and procuring to the customers shipping us.
The resin are having a drop shipped from the supplier.
So it's not our conversation are our interaction with the main players on the restaurant supply, it's actually our customers, they're not getting the resins fast enough and so we have a quite a large order book and if we were if there was no limitation on resin.
I think we would be right around that 25% Mark.
In terms of growth and so when you're at 10 right in and you just.
Don't resin supply start coming in at the pace that it was even coming in in Q3 and Q4 is definitely disappointing it's outside our control and therefore, you know we know capacity is coming online we've had those conversations with the various players, but I think there is an acceptance piece that also happens where people have to quantify it.
In our new manufacturing.
<unk> location, so that it starts to get use so I do think it's going to improve as we go as we go through the year, but it's definitely more.
Much lower than we were anticipating even back in January .
Okay. That's helpful and then John just on the.
Phil depreciation headwind I guess as we think about how that should pace throughout the year and then 'twenty four 'twenty.
21, and two were Capex couple of years, you talked about $60 million or 24.
I presume that should begin to moderate.
Back half, but just as we're building out our gross margins. If you could help us think about one half.
Again understanding the comments to Dan's question about op margin tapping a low in Q1 and building from there any of that show up particularly on the depreciation side would be helpful.
Yeah sure. So the $60 million of Capex that we mentioned is a 23 number not a not a 2004 number.
Just to be clear on that one.
As we look at the facilities and depreciation costs.
They will I would say from a from a gross margin modeling perspective, maybe you start at the lower end of the overall gross margin at the beginning of the year and then scale. It up as we go through the year that would be my recommendation for the current time, but I think the most important piece on our.
Depreciation and.
And facility costs is that it's a fixed cost right and so as our volumes increase right margins are going to improve so we've made this big investment as everybody knows over the last three years to build out.
Capacity to give us dual manufacturing capacity and business continuity plans. So this is going to pay off as we go through the next few years and margins will improve.
And I think even the second half of 2023 should improve from the first half of 2023. So that's.
None of the scaling that we talked about in the layering in.
Lighter first half better second half.
Okay, alright, thanks for the questions.
The next question will come from Brandon Couillard with Jefferies. Please go ahead.
Hey, Thanks, good morning.
John on the mixed dynamic could you just stack rank the segments.
Highest gross margins are the lowest gross margin aside from the Covid world.
What exactly are the mix in <unk> and 'twenty, three where those calls.
In 2023.
So the declining the declining revenue.
Declining revenues from the much of the Covid related volume was high margin.
Filtration right. So it's all a fiber it's flat sheet filtration, which are really high margin products for us the consumable components.
We don't give specific margins for every product Brandon but.
I can tell you those are very high contribution margin products, and theyre coming and being replaced with opus being replaced with systems and fluid management products that are coming in at a lower pace and we think we've got facilities built out Tony and I talked about earlier as we start the pump volume through our facilities.
Cost will get spread out better and we'll gain margin traction overtime, but.
I can tell you. The you know the opus margins, you've known that for a long time are a bit lower than the others, and then systems and fluid management or a bit lower.
Clearly then.
Filtration stuff.
Specific filters and consumables.
Got it and then Tony I used.
Talking about the M&A pipeline.
And as.
Company valuations.
Right.
All right.
Where in the portfolio.
<unk> got some.
Through bolt ons, Yeah, you broke up.
I got it just to the question I would say M&A pipeline is pretty similar in.
2023, as we saw in 2022.
We continue to be active in the sense that where we have lots of lots of different companies that we're talking to.
Think our pace of M&A Brendan is is not going to be too dissimilar to what we've seen over the last four or five years I think we had a big pickup in 2020 2021 during Covid, where we we were systematically building out our fluid management business, but I think a deal a year pace is probably.
<unk>.
A good assumption.
And so your second part of that question I do think that the multiples have come down a little bit.
But it's all in the either the holder.
Thanks.
The next question will come from Matt Hewitt with Craig Hallum. Please go ahead.
Good morning, Thank you for taking the questions maybe for the first time I'm trying to piece two different comments that she made together first you were talking a little bit about the resin availability and likely something that some of the inventory issues.
And then also the fact that obviously those resins are acquired by your customers and then shipped to you.
Does that create or length then.
The inventory channel issues that you've kind of been facing over the past couple of quarters, where the.
The customers are having to turn through inventory I mean does this kind of exacerbate that problem or is it a completely different issue.
I think it's a different issue, Matt I think it's more that if I if I looked at the last two or three years and I'm certain that.
The major resin suppliers would give you this exact same view.
Think the demand is exceptionally high I think customers are placing orders.
Six to nine months out.
That has not come in whereas the rest of the industry has as capacity has come online. So that's the one area in our industry, where it really hasn't.
It's come down a little bit in terms of lead times, but not enough to change the order pattern or the length of time. It takes for those resins to get a procured and delivered whether its directly to the customer or drop ship to us.
Got it and then obviously you both had a lot of capacity the last couple of years.
Yeah.
As far as hiring plans are concerned are you feeling like.
You're in a pretty good place from a head count standpoint, or do you anticipate needing to fill some more roles given the demand that you are anticipating in the back half of the year and into 24. Thank you.
Yes, I would think that on that on the head count piece.
We've been even even during the days of Covid, we tried to be pretty prudent about where are we hired what we hired which facilities and as we went through Q4 and again here in Q1, we continued to optimize right, where we're looking at where the demand is flawed.
What head count we need to support the forecast that we have for the year and we've done a lot of that optimization over the last couple of months.
Understood. Thank you.
Thanks, Matt.
The next question will come from Connor MC Namara with RBC capital markets. Please go ahead.
Hey, guys. Thanks for taking the question I appreciate it.
If you just if you just look at the guidance that you're giving it's about a 4% cut relative to what you were talking about in Q3's by my math, that's about $25 million in sales. So is there any way to break that out how much of that is the inventory destock at the customer level versus the resin impact versus anything else.
Yeah, I mean, I think as so there's a one point of FX right. So I think depending on how we all do the math, it's somewhere between 3% and four points versus what we were talking about it in January timeframe I think the majority of that is really coming from from.
Chromatography, and and I would say it's kind of.
The rest of it is just dispersed across the other business Theres no one business, where I would look at it and say.
It might be 1% lower 2% lower than we were thinking overall, so but the main the main difference were where we were in January versus where we are now is chromatography.
Got it. Thank you and then just.
Longer term.
Margins.
If you get towards that 27 28.
Targets of $2 billion.
Where can gross margins go longer term can you get back to the high fifties or should we be thinking about longer term kind of in the mid fifties gross margin.
I would say that.
Obviously.
Challenging to give you exact numbers on where we think margins are going to be five years from now, but I think.
Between the investments that we've made capital investments we made in 2021, especially in 2022 and there is some finishing off work we have to do in 2023, that's pretty much gives us capacity all the way out to that 2027 time frame.
So our expectation that margins are going to grow up our expectations next year is that we can add 100 200 basis points over onto our gross margin line and maybe after that it becomes 50 50 basis points or whatever it is 50 to 100 basis points, just hard without knowing what the product mix and what M&A is we might do over.
The next few years to give an exact number but it will definitely March up Conor.
Got it thanks for that Tony I appreciate it.
The next question will come from Justin Bowers with Deutsche Bank. Please go ahead.
Hi, Good morning, it's a saab speaking on behalf of gentlemen, just two quick questions. So firstly, you mentioned cell and gene therapy business growing significantly in 'twenty, two a little slow down as well and also a 25% step up in gene therapy during Q4, which indications in cell and gene therapy are you gaining traction and as you look at 2023 and 2024.
How are you thinking about the growth rates in these modalities.
Yes, So I don't think you know when I made the commentary I Wonder if my comments on pharma in Q4, clearly that was also.
Impacting cell and gene therapy in a very positive way the challenge as I said is that half of our cell and gene therapy business coming from <unk> and while we definitely saw a pickup in Q4, it's it needs to continue to increase as we go through the next few quarters. So while.
We're calling 15% to 20% for cell and gene therapy overall market growth could actually be higher than that but that's just because we have a lot of customers sitting on inventory right. So they're using the products and they're developing products and getting them through phase one phase two I think long term cell and gene therapy with mrna all bundled in.
Is probably going to be drawing 20% to 30% on average.
In the out years, but it's just this is just a unique year because of destocking at the CD MAU level.
Yeah.
Alright. Thank you so much for the color appreciate it and just lastly, which areas of material cost inflation were greater than anticipated and does the guide contemplate that they stay elevated at these levels in 2023 or is there like some relief at some point in the year.
Yeah, I mean, it's it's.
It's areas like plastics, and stainless steel and a lot of those types of areas, where we see the significant inflation.
Our guidance contemplates.
What we believe is going to be the inflation or the or the 'twenty three period, yes.
Great. Thank you so much.
This concludes our question and answer session I would like to turn the conference back over to Mr. Tony Hunt for any closing remarks. Please go ahead Sir.
Alright, Thank you everybody I appreciate everybody joining today.
Obviously, we've covered a lot.
Obviously, the 2022 stellar year, we got.
Some headwinds as we move through the first half of this year, but I think we're very optimistic about the second half of the year and overall and look forward to getting back on a call in a couple of months and bringing up to speed and where we are in Q1. So thanks everybody for joining.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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