Q1 2023 Danaher Corp Earnings Call
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My name is Ashley and I'll be your conference facilitator. This morning at this time I would like to welcome everyone to Danaher Corporation's first quarter 2023 earnings results Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer.
And if you would like to ask a question. During this time simply press. The Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the star key followed by the number two on your telephone keypad I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford you.
May begin your conference.
Thank you Ashley good morning, everyone and thanks for joining us on the call.
With us today are Rainer Blair, our president and Chief Executive Officer, and Matt Mcgrew, Our executive Vice President and Chief Financial Officer.
I'd like to point out that our earnings release, the slide presentation, supplementing today's call and the reconciliations and other information required by SEC regulation G relating to any non-GAAP financial measures provided during the call are all available on the investors section of our website.
W Dot Danaher dot com under.
Under the heading quarterly earnings.
The audio portion of this call will be archived on the investors section of our website later today under the heading events and presentations.
And will remain archived until our next quarterly call.
A replay of this call will also be available until May nine 2023.
During the presentation, we will describe certain of the more significant factors that impacted year over year performance.
Supplemental materials describe additional factors that impacted year over year performance.
Unless otherwise noted all references in these remarks and supplemental materials to company specific financial metrics relate to the first quarter of 2023.
And all references to period to period increases or decreases in financial metrics are year over year.
We may also describe certain products and devices, which have applications submitted and pending for certain regulatory approvals.
Or are available only in certain markets.
During the call we will make forward looking statements within the meaning of the federal Securities laws.
Including statements regarding events or developments that we believe oriented to paid will or may occur in the future.
These forward looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings.
And actual results might differ materially from any forward looking statements that we make today.
These forward looking statements speak only as of the date that they are made and.
And we do not assume any obligation to update any forward looking statements, except as required by law.
With that I'd like to turn the call over to Rainer.
Thank you John and good morning, everyone. We appreciate you joining us on the call today.
So we had a good start to the year our team successfully navigated that didnt hemic operating environment to deliver better than expected revenue earnings and cash flow.
We're especially pleased with the strength of our base business, which grew 6% in the first quarter.
Now across the portfolio the quarter progressed, largely as we anticipated our global supply chain to stabilize and component availability improved sequentially.
Strong price realization helped offset inflationary pressures and disciplined cost management enabled us to continue our cadence of growth investment.
So we believe these investments paired with DBS driven execution contributed to market share gains in many of our businesses again this quarter.
A prime example.
The power of DBS and our commitment to continuous improvement in all levels of Danaher is the CEO kaizen, which we kicked off two weeks ago.
With this event our most senior leaders are joining over 700 associates at 10 of our operating companies.
We're focusing on the most significant opportunities for lasting competitive advantage across our businesses, including further reducing our best in class lead times at Aldebaran, and improving RASM and filter throughput in the biotechnology group.
The CEO kaizen as just another terrific opportunity for our teams to come together and drive transformative change through DBS.
In fact, once we wrap up here today I'll be joining the <unk> team and our resin facility and it was solid Sweden to contribute to these efforts.
Now our results also reflect the unique positioning of Danaher portfolio.
We just have an exceptional group of leading franchises serving attractive end markets with durable secular growth drivers.
Additionally, the strength of our balance sheet provides us with the optionality to enhance our businesses, both organically and through disciplined M&A.
This powerful combination of our talented team leading portfolio and strong financial position differentiated scanner and reinforces our sustainable long term competitive advantage.
So with that let's turn to our first quarter results.
Yeah.
Sales were $7 $2 billion in the first quarter and core revenue declined 4%.
So as I mentioned earlier, we delivered 6% core revenue growth in our base business with three of our four reporting segments up high single digits or better in the quarter.
COVID-19 revenues or a headwind of approximately 10%.
Geographically core revenues in developed markets declined mid single digits, primarily as a result of lower COVID-19 Robin.
High growth markets were up low single digits with a low single digit decline in China.
Results in China were better than expected driven by a quicker than anticipated recovery in diagnostic testing.
And a more favorable life science research funding environment.
We expect these positive trends to continue as we move through the year.
Our gross profit margin for the first quarter with 61%.
Our operating margin of 25% was down 330 basis points, primarily due to the impact of lower cobot volume and our biotechnology and diagnostics businesses.
Okay.
Adjusted diluted net earnings per common share were $2 36, and we generated $1 $7 billion of free cash flow in the quarter.
Okay.
Yes.
Now, let's take a closer look at our results across the portfolio and give you some color on what we're seeing in our end markets today.
Reported revenue in our biotechnology segment declined 16%.
Core revenue was down 13%.
And bio processing base business core revenue growth was in line with our expectations of low single digits.
The first quarter.
Flying demand at our large customers were primarily responsible for therapies in commercial production and later stage clinical trials remains robust and they are steadily working through inventory they built during the pandemic.
Based on our most recent customer conversations we now expect the inventory normalization process to continue through the second half of the year.
During the quarter. We also saw softer demand globally at many of our emerging biotech customers as more pronounced pressures on liquidity and funding accelerated their efforts to conserve capital leading to project delays.
And cancellations.
In consideration of these factors, we anticipate second quarter and full year base business core growth in Bioprocess, Inc will be largely consistent with the first quarter.
That said.
These short term pandemic related dislocations have not changed our assessment of the tremendous opportunity ahead in the biologics market and for our leading Bioprocess, Inc franchise.
A number of biologic and genomic medicine in development is meaningfully higher than at any point in history.
There are thousands of biologic therapies currently under development, including more than 750 and phase III clinical trials.
These therapies are customers are making significant strides.
<unk> diseases that affect large segments of the population.
For example, <unk>.
L P ones have become blockbuster treatment for obesity and diabetes.
Meaningfully improving treatment outcomes for many types of cancer.
And we're also seeing promising developments in the field of Alzheimer's research, where several novel monoclonal antibodies are nearing regulatory approval.
Now to best support our customers as they pursue these life changing breakthroughs.
<unk> technology team has been accelerating investment and innovation over the last several years.
<unk> recently introduced the Mab select Lee L, a new resin and ligand for bi specific antibodies and antibody fragments.
The map select <unk> best in class finding capacity.
And improve the outline stability mixed industrial scale purification more efficient helping customers improve yields.
Decreased bio burden.
And reduced manufacturing costs.
This is just one of the innovative solutions from our biotechnology team's project pipeline aimed at helping customers bring more lifestyle savings therapies to market faster and more efficiently.
Reported revenue grew two 5%.
And core revenue was up 5%, including high single digit growth in our base business.
Our life Sciences instrument businesses collectively delivered mid single digit core revenue growth consistent with our expectations.
Funding levels and sales funnels remained healthy across most major geographies and end markets.
The demand for our advanced solutions remains strong notably for recent innovations such as the <unk> Casino top 7600, and Leica Microsystems Mika.
Our genomics consumables business had another quarter of double digit base business core revenue growth.
Robust demand for plasma proteins and gene writing and editing solutions was partially offset by declines in next generation sequencing and basic research.
During the quarter Al I'll, let Ron brought together capabilities from Factiva and precision nano systems to create a streamlined offering for the development production and release of mrna drug substance and drug product.
This new offering will be available to customers. Later this year and is a great example of how we're integrating solutions from across danaher to create differentiated offerings and deliver even greater value to our customers.
Moving to our diagnostics segment.
Reported revenue declined 10% and core revenue declined seven 5% with double digit growth in our base business offset by lower COVID-19 related respiratory testing volumes at Cepheid.
Yes.
Our clinical diagnostics businesses collectively delivered mid single digit core revenue growth and saw healthy market volumes globally.
At radiometer strong demand for blood gas testing in China drove double digit core growth.
Leica Biosystems, we mid single digits led by advanced staining.
And digital pathology.
Strength across developed markets and China enabled beckman Coulter diagnostics to exceed expectations.
And deliver mid single digit core growth.
In molecular diagnostics broad based strength across Cepheid test menu drove more than 30% core growth in non respiratory testing.
As our customers look for ways to capitalize on the workflow advantages. The gene is the Cepheid gene expert delivered for Covid related testing they are increasingly adding additional assays from our market leading test menu.
This increased menu utilization by our customers helped drive more than 50% growth in infectious disease testing in the first quarter.
We also saw good momentum for our recently introduced Vaginitis panel the expert express MVP, which contributed to nearly 30% growth in sexual health testing.
And COVID-19 related respiratory testing customers continued transitioning high throughput testing to the point of care and consolidating their point of care PCR testing platforms onto the gene expert.
As a result, cepheid respiratory testing revenue of approximately $550 million in the quarter exceeded our expectation of $450 million.
This was driven both by higher volume and the preference for our 401 test for COVID-19, flu, a and B and RSV.
We continue to expect approximately $30 million respiratory SaaS and $1 $2 billion of revenue for the full year.
Cepheid strong results are a testament to the significant value and unique combination of fast accurate lab quality results and best in class workflow provides clinicians.
Given cepheid, leading global installed base and growing adoption of the broadest molecular diagnostic test menu on the market, we are well positioned to help customers meet their testing needs and continue gaining market share for years to come.
Okay.
Moving to our environmental and applied solutions segment.
Reported revenue grew 5% and core revenue was up six 5%.
Water quality core revenue grew low double digits and product identification was up low single digits.
And water quality hot delivered their fourth consecutive quarter of double digit growth and can treat was up double digits for the eighth consecutive quarter strength was broad based across both equipment and consumables, particularly in our industrial end markets.
This performance highlights the resilience of the high margin recurring revenue business model that makeup water quality and the significant value our solutions provide in support of customers' day to day mission critical water operations.
Our product identification, marking and coding was essentially flat, while our packaging and color management was up low single digits.
Video jet was up low single digits, despite the difficult year over year comparison as.
As the business grew high single digits in Q1 last year.
Our growth investments are driving a healthy cadence of new product innovation that video jet and.
In fact in March the team released the <unk> ADC continuous inkjet printer the industry's first dedicated soft pigmented solution.
The $15 ADC uses soft pigmented inks to print codes with consistent quality excellent contrast, and strong durability to avoid degradation and fading during production run helping customers reduce production downtime.
So this is the first of several new product introductions video that is the plan for the year and is a great example of how our teams are bringing impactful solutions to our customers.
Yeah.
In February we announced that our environmental and applied segment will be named bear also.
When it is launched as a Standalone company.
And that it will be headquartered in Waltham, Massachusetts.
This is an exciting milestone for the team and they are making considerable progress towards becoming a separately traded public company.
And we remain on track for a fourth quarter 2023 separation and look forward to sharing more details in the coming months.
So now let's briefly look ahead to our expectations for the second quarter and the full year.
In the second quarter, we expect core revenue in our base business to be up mid single digits.
We also expect total core revenue to decline high single digits as a result of lower demand for COVID-19 testing vaccines and therapeutics.
Additionally, we expect our second quarter adjusted operating profit margin of approximately 26%, which reflects the efforts to adjust our cost structure and capacity in response to COVID-19 transitioning to an endemic state, particularly within our diagnostics and biotechnology.
Businesses.
Now turning to the full year 2023.
Despite the near term and temporary challenges within bio processing, we anticipate mid single digit core growth in our base business we.
We also expect total core revenue to decline high single digits for the year as a result of lower demand for COVID-19 testing vaccines and therapeutics.
Additionally, we expect our full year adjusted operating profit margin of approximately 30%, which reflects the previously mentioned efforts to adjust our cost structure and capacity in response to COVID-19 transitioning.
Two an endemic state.
So to wrap up.
We're pleased with our strong first quarter results.
Our well rounded performance is a testament to the durability and balanced positioning of our portfolio.
And our team's commitment to leading and executing with the danaher business system.
While the transition of COVID-19 from a pandemic to an endemic state is causing near term disruption. There is no doubt that the past three years have helped to shape danaher into a better stronger company.
We meaningfully change the scale of our bio processing business with the addition of <unk> and the creation of the Biotechnology group.
And Cepheid expanded installed base significantly improved their competitive advantage.
We've also increased our cadence of innovation and strategically deployed capital through M&A, including the acquisition of <unk> to accelerate our future growth trajectory.
So there is a bright future ahead for danaher, the combination of our talented team differentiated portfolio of businesses and strong balance sheet.
All powered by the Danaher business system provide us with a strong foundation to create value for many years to come.
And so with that I'll turn the call back over to John .
Thank you Reiner.
That concludes our formal comments Ashley we are now ready for questions.
Certainly at this time and once again, if you would like to ask a question. Please press star one on your Touchtone phone, we will take our first question from Michael <unk> with Bank of America. Please go ahead.
Good morning, Mike well, thanks, Rob.
Good morning, Thanks for taking the question guys.
First I want to start on the dry processing inventory challenges.
<unk> been dealing with this issue for almost a full year now and <unk> had to revise your outlook.
For fiscal year 2003, a number of times.
Why is the visibility of their inventory is so challenging and how do you know that this latest view of plus low single digits for the year is the right view and there is not further cuts going down the road.
Thanks, Michael look undoubtedly visibility has been choppy here on on the way up as Covid tailwind fueled our growth and now as we try to drive.
The soft landing visibility has been impacted and I would tell you that normally we have visibility of nine to 12 months.
Very solid.
It is so that in the last.
Quarters that has been probably more like three to six months related to a number of factors.
Yes, let me let me allay some of those factors out for you here Michael.
Yes sort of starting with the first quarter.
Yes.
Yes in the first quarter our base business.
And bio processing grew.
Grew about 100 basis points, 1%.
And as you unpack the growth there.
<unk> accounts that are responsible for commercial production in later stage clinical trials are growing at mid single digits, So they're burning off.
Inventory.
I'll come back to that.
And then you have sort of emerging biotech and those companies that are more involved in discovery and earlier stage clinical trial phases, which represent about 20 or 30% of our business.
And theyre down mid teens.
So overall this is what gets us to this sort of low single digit growth view.
For the year.
Now, let me come back to large the larger accounts here for just a second we see in large biopharma that in fact, the demand is there the inventory is burning off but it is slower than expected and the reason for that.
We're starting to see larger pharma companies as well as larger <unk>.
We plan.
And recalibrate their own production plans as they start to conserve.
Working capital and cash and we saw some of that also back in 2016, So we're seeing larger.
Customers also look at their own finished good if you will inventories.
Inventories and starting to adjust their production plan.
In order to bring those down as well. So if you then transition over to again emerging biotech. So the companies that are working more in discovery and earlier stage.
There.
We have been observing funding headwind for call it.
The second half of <unk>.
Prior year, but both funding headwinds became.
Significantly more pronounced here in <unk>.
First quarter and so we're seeing these accounts looking to conserve cash by prioritizing projects, we see that with lower Opex and Capex expenditures also see a number of layoffs happening.
That particular segment segment and that's not just happening in the U S. We also see that happening.
In China, and so we're assuming that barring any other sort of.
Wildcards here.
It doesn't get significantly worse, but that does continue to play out for the remainder of the year.
Hey, Mike and Greg, It's Matt maybe let me give you a little bit of.
Kind of context around January to kind of a guide in January to where we ended up Rainer sort of mentioned it but I think it's important to kind of think about it in the two buckets. So we've got the larger biotech cut where the larger customers that we've got most of their stuff is sort of phase III clinical on market in January our assumption was that that was going to be kind of call. It high.
<unk> digit growth from those customers, so 70% or so of our customers kind of growing at seven 8% and then kind of the remaining 2025% of the customers, which were sort of referring to as emerging biotech not everything and theres, probably technically emerging but that other piece of the customers in January we thought that was going to kind of be about.
Low double digits to kind of low teens growth and you add all that up and that would have been in the high single digit growth that we thought we were going to see here.
For the year.
Like Reiner said, what we saw in Q1 was just frankly not that supportive.
That kind of ramp as we as we think about the what we would need to build in Q1 and Q2 be able to hit those types of numbers for the full year and so if you think about what we're looking at and seeing now in April those large customers instead of being seven 8% they've been growing still nicely, but more mid single digits right and the big change here is this emerge.
<unk> biotech that other 2025% instead of being up kind of mid teens, they're actually down mid teens and that comes back to everything that Ryan talked about with people really re prioritizing projects conserving cash that happened both in the U S and we saw it in China as well and I think I'd, probably say it's.
We saw modest headwinds as we entered the year and those are just more pronounced now as we move through the quarter. So just to maybe put some numbers to two what I understood.
And then just to reiterate to support a significant second half ramp.
We would start to see that activity level, increasing now and in the second quarter and we're just not seeing it to the degree that would support that.
Okay. Thanks on that.
Emerging biotech just really hope to clarify are you seeing that softness in bio processing, specifically or Cros and the life Sciences segment as well and then maybe I can transition that's a question on the instruments.
You saw 5% growth or mid single digit growth.
In instruments in the first quarter, what's your expectation for the rest of the year.
Any particular pockets of weakness or strength you can call out.
Now I'll comment on the bio processing broadly speaking and maybe let Bryan talk about what we're seeing in tools.
The answer is yes, we're seeing it in both I would say that we are definitely seeing the emerging biotech funding pressures here in the bio processing area I would say, we're seeing it in the tool space or in life Sciences, as well I would say that as a lesser portion obviously of our revenue. So it's not quite as big of an impact but are we seeing it yes.
I would say we are seeing customers in those spaces conserving cash on both Capex and Opex.
Okay. Thanks, So Michael more generally on on the life Sciences here too.
To your first question.
So if we if we look at Q1.
Life Sciences based business finished as we thought.
At high single digits.
After low double digit average growth over the last three years and we've talked previously about the expected normalization of those growth rates here after having seen that elevated growth for the last three years. So that that's right within our expectations. If you look at that geographically, we saw strength in western Europe .
In China in fact was up double digits on the back of some stimulus there.
In North America was a little bit softer.
And if you look at life Sciences from an end market perspective, large pharma R&D spending levels are are still very quite healthy, but they are starting to moderate just given the higher comps and now just connecting the dots to Matt's commentary here.
Four instruments.
And in other places.
Really.
<unk> in the less differentiated segments.
Let's say so we are seeing in our own business is not as exposed to that segment in life Sciences, but we do see it at the margin and then life Science research and academic is holding up well globally for life Sciences. So we continue to believe our growth rates moderate to the historical levels in 'twenty three and.
And that's what our guidance slacks and Thats not a change to any previous expectation.
Okay. Thanks, I'll get back in the queue.
Thank you.
Thank you we'll take our next question from Vijay Kumar with Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking my question and congrats again.
I guess.
Just a high level question on the guidance here Rainer.
All of US are looking at.
If I go back three months ago.
Were assuming back half.
Perhaps normalization in the industry and given your comments here on <unk>.
Emerging.
Small biotech that's where the changes.
Is this guidance now.
Drs.
Because we're assuming bioprocess in line with Q1.
Are we confident that Q1 was the low point for the year. So just give us some color on the thought process behind the guidance here is this now derisked from a back half perspective.
So Vijay I mean, we're basing our view on the second half also based on what we're seeing in the current market environment, which we just talked about as well as our order book.
And like I said, a minute ago in order to support a higher guide for the second half we'd need to see different activity levels here in Q1 and Q2.
It's not the case for two reasons one the emerging biotech is quite significantly softer down mid teens as we just talked about.
And then I would say on the margin larger accounts are taking a little bit more time to burn through inventory, although theyre doing that nicely.
And those factors together.
Have us believe unless there is any other sort of significant market direction disruption.
That.
The year will play out much as the first quarter has.
Understood and then just.
One on.
Cepheid list was a bright spot share.
In a 30% growth I think you made some comments about infectious disease testing.
Tests being strong can you give us some color on that.
Customers are seeing this frame.
These new customers.
You know that.
Bach BARDA Cepheid system during the pandemic I'm just trying to think how sustainable is that 30% growth in AR.
Related one here on M&A, some chatter about that.
Dan her.
On the M&A side would danaher be interested in getting into services or how should maybe just remind us on the M&A lens and criteria that danaher processes.
Pipeline.
Sure.
So vijay on on the Cepheid.
Question.
Really seeing broad based usage of the.
The infectious disease menu in fact, our broader menu in general both at our existing installed base.
That's been there for some time as well as with our newer customers as they start transitioning that COVID-19 testing capacity that they have to take full advantage of that menu. So we see that.
30% here.
That's a good marker.
How people appreciate the workflow advantages.
He's of use and the accuracy platform remember, we're seeing two factors here one we.
We see.
Test transitioning from high throughput <unk>.
<unk> environments into the point of care on the one hand and on the other hand, we see expanded usage.
Of our testing menu.
Yes, maybe just to kind of about to put a real live example, too that I think so if you think about.
What we're seeing we've got customers existing customers today, we'd kind of goes both ways right. So we've got existing customers today that for example will use group a strep and those customers now sort of are also moving everything over to the foreign water to Covid as well and then you've got the other way, which is that sort of installed base going from.
Kind of two X growth here over the last three years, you've got people who have used.
These systems now for many many years and what they're doing is they're starting to bring in new menu and that new menu has been around infectious disease first which is primarily right now were largely group a strep, so you're kind of having somebody who use the box throughout COVID-19 testing using it for Covid foreign one in Standalone.
And now they're bringing on group, a strep as well and so that's what we.
We always kind of talked about.
With Covid being an anchor assay as we go forward.
Larger installed base anchor assay now you move into infectious disease there'll be other opportunities to pull in sort of other other menu as we go forward, but that's exactly the type of thing we're seeing.
Play out here and Thats. It is encouraging early days yet.
And also still some lower base. These are off the lower numbers, but as we go forward, we've sort of talked about next year and the longer term. That's why I think that installed base growth was so important because we've got the menu be able to pull through and then the additions of the new menu, we're going to be only helpful. Net larger install base.
So on M&A Vijay obviously, we don't comment on chatter, but what I would tell you is we really like the way we are positioned our balance sheet.
Is in great shape.
Valuations continue to moderate.
Sure.
Perhaps the one or the other.
Board is not quite there yet, but we do see more realism in many discussions that we have across the board as always.
And specifically as we have said in the past should our customers tag on that and want our help in and services, that's not something that.
That we're going to ignore.
But once again, that's just one of several opportunities I think the most important thing to remember is that we.
We are not going to deviate from our disciplined approach.
It's got to be the right end market, it's got to be the right target and the model has to work and its when those three lights flipped green that we execute.
Fantastic guys.
Yes, I think Vijay to I mean, I think as we sit here I think it's.
Not saying this is <unk> nine, but having a balance sheet that we've got right now and being able to to kind of be flexible I think is important in times like these because as Rainer said when the market company and valuation all line up we're ready to go but we do need to see all three of those and as things get a little choppy year here as they might get a little job here.
Here I think I think I really like how we are kind of set up here from a from a balance sheet perspective as well.
Thanks, Matt.
Thanks P J.
Yes.
We will take our next question from Scott Davis.
With Melius research. Please go ahead.
Good morning, Scott, Hey, good morning, guys, Brian or Matt and John Good morning.
Ron are you said.
<unk> made a reference in your prepared remarks to kind of incremental cost out.
I, probably asked this question last quarter, but Ken.
Ken can you can you give us a little bit of granularity or color at least on an.
No.
What youre talking about is our structural cost out is it more of just taking out some of that some of those kind of temporary costs that came in during bad debt now Ken unnecessary or are there is there an actual.
Tempt to go after some of the structural cost that perhaps you couldnt have gone after before.
Yes, Scott, maybe I'll take a crack at it.
Yeah like we talked about in the prepared remarks, we're sort of going from an adjusted op. Just operating margins of 31, and our previous guide to 30, and I think the way to think about it is sort of twofold half of that is just the volume right.
Most of that is all of that actually was in bio processing, but the other half is capacity reduction costs I would say that that's going to be two places it's going to be at.
In biotechnology, and then as importantly, or more importantly, probably at Cepheid Leica.
You said, we felt we've already just always sort of known we're going to get to an inflection point here at some point, where we were sort of making the call that we've moved into an endemic phase and once we moved into an endemic phase we were going to need to bring some of the capacity that we've been running out at Cepheid down.
And so I think just as a reminder, in Q4 last year, we did 20 million respiratory tests and that was only three months ago, but I think you've really seen a tail off here as we entered into the last couple of months and I think our team is it's pretty clear that we are now kind of entering a new phase of volumes that we will need and so we're good.
Well, we're going to be getting after some of that and I think what does that look like.
It's talking about closing and consolidating some of the plants that we've got some of those were frankly put up quickly.
In locations that were not ideal for the longer term because we are trying to meet the needs of a pandemic and so we're going to get after a couple of a couple of those sites were going to reduce some of the head count and then we're going to go after indirect and fixed overhead cost as well, reducing shifts et cetera et cetera. So those are the types of things we're going to be going after here, that's largely going to be in the second and third quarter is when youre going to see the cost.
Sort of rolled through so youll see that in the margin in those two quarters, and then a sort of pop back a little bit.
Maybe just to give you some sense of what's that look like and once we're done with that kind of in Q4.
And as we head into 'twenty for Scott.
I think cepheid in 2019 was a 20% to 25% op business.
During the peak of the pandemic here it probably was north of 45% and after we get through what we're going to do in the next couple of quarters.
Like I said on the capacity reduction side.
<unk> kind of in Q4 and heading into 'twenty, four theyre going to be 35% to 40% margin right. So meaningfully up from where we were given the volumes.
That we have now it's much bigger business, but not quite at the peak pandemic, where I was getting a lot of volume leverage but that gives you a sense of what we're going after and what we're trying to do and where we ended up on the other side.
Okay.
Super helpful. Matt can you guys just remind us what where is your.
The size of the installed base of Cepheid today versus pre Covid I know I asked I'm sure, having the notes somewhere but.
Yes, it's easier to ask Scott we were we're about 50000.
Correct.
It started probably.
Only 19.
Alright, perfect I'll pass it on thank you guys. Good luck this year.
Thanks Scott.
We will take our next question from Dan Brennan with Cowen. Please go ahead.
Great. Thank you good morning, thanks for the questions guys.
Maybe just one on bioprocess to start out just.
Could you help us think through like what is the magnitude of that destock correct. That's kind of baked in guidance. I know you gave a lot of color earlier in the Q&A.
And then related to that or emerging bio, it's certainly a bigger group than we thought as a percentage of that.
Segment any color kind of what that grew in 'twenty, two and kind of a quick math to get to low singles for the year.
If it's 30% of revenues I guess you are assuming some improvement there because if we kept it down 15, I don't think we'd get to up low single for the year.
Yes, so maybe again, maybe the way to think about it Dan is that sort of the larger customers that are really where we're seeing the inventory drag that was sort of we initially thought we would see that in the high single digits call. It seven 8% and Thats, a little bit lower now call. It six and change and so I think the inventory Destocking is.
<unk> flowing through in the larger customers and Youre seeing it in a slightly lower growth rates that we saw in Q1, and we are expecting them to see for the full year. So that's how I'd sort of frame what the inventory destocking is there.
The rest is really like I talked about earlier emerging biotech and sort of the other 25% of our customers, we thought that that would be.
Low teens type growth rate here for the year combine that with the 8% that we thought we'd seen the larger that's how we got the high single digits that low teens is actually negative mid teens right with all the pressures we've talked about so.
I would say that we are just sort of assuming that that that type of growth rate for the rest of the year for that customer base and that we're going to have the larger customers will be more in the mid single digit like I talked about that's what we're kind of assuming.
For the year.
And based entirely on what we saw in Q1, the order book in Q1 sort of not being supportive frankly of in our minds at least the ability with the limited visibility we have more limited visibility just not supportive of being able to say that we think we can get back to a high single digits. I think you asked a question of what those customers where the flu.
Last year.
That entire business.
Largely was up in line with what we saw last year, which is as you remember mid to high <unk>.
So kind of.
You sort of look at mid to high Twenty's with that group of folks now there is sort of down mid teen still a very solid growth on a two year basis, but it is it is it is what we're seeing right now.
Got it and then thanks, Matt and then and then just maybe on the margins and the earnings so we're coming out somewhere.
$925 930 for the year just wondering if you guys can you kind of put the pieces together was that is that kind of the rates its code and given the cost actions. You are taking this year does that set yourself up in 'twenty four for potentially.
Potentially higher than normal operating leverage depending on what the top line comes in it.
Yes, no I mean, I think if you if youre going through the full year. The math is what it is that at around 30% adjusted op margins I think.
Sort of.
That takes care of itself.
As far as what we're going to look like as we sort of get to the other side of this I talked a little bit about cepheid kind of was 20% to 25% pre pandemic picked up at 45 and 35% to 40, I mean, I think if you sort of use that frame plus what we have in diagnostics that sort of gets you where we think roughly the margin profile will be.
Biotech is probably the other one after we get through some of these costs. The same math there was biotech was.
Call It high thirties prior to the pandemic.
Again, it peaked at around call it 45 and change and after we sort of get through what I think we're going to do there, they're probably going to be more like low forties. So again better than they were pre pandemic given the fact that a bigger business.
Should be kind of plus or minus where we've been here that has not been a margin that's moved around quite a bit a little bit of COVID-19 stuff as we had in 'twenty, two and 'twenty, one, but I think you can kind of get a sense of what the margins are there so maybe as a just.
Just a high level framework.
Probably.
High <unk> low fourteens with Cepheid, you can kind of assume some other stuff for the diagnostics biotech probably low forty's and then what we're seeing in all of us, but we will obviously sort of come back to that later still pretty early in 'twenty three but just to give you a very high level.
Great. Thanks, Matt Thanks, guys.
Okay.
And we will take our next question from Jack Meehan with Nephron. Please go ahead.
Good morning, Jack.
Good morning.
Another question on bio processing can you share what was your total order rate in the quarter is there any color you can just share around how the quarter played out.
Have things weakened throughout the quarter, just curious about how things are trending.
Sure Jack So once again first quarter.
Our orders were down modestly sequentially, so relative to the fourth quarter down modestly.
90%.
Okay.
And so what we have been seeing is the inventory burn down that we've been talking about Matt and myself is occurring.
And we see that.
In our order book.
Here for the first quarter and then again, we've laid out why we believe that at the current activity level.
<unk> supports sort.
Sort of a similar.
Progression of the quarters here throughout the year as we had in the first quarter.
Great. Thank you.
Then just as a follow up I was curious what impact if any did you see from the banking crisis, which took place in the quarter I understand you probably didnt have any direct exposure to that but how are your customers reacting sort of across the business.
Right. So so direct exposure was not.
Not not material in any sense of the word.
As it relates to the impact.
On our businesses, particularly in bio processing to much lesser extent in life Sciences, we.
We do think that that provide that additional inflection point here in the first quarter for liquidity tightening up and that prioritization that we're seeing here in the emerging biotech.
<unk> call that emerging biotech and once again those companies working on earlier stage projects, So thats, where we have seen.
More pronounced conservation of cash and that plays out in Opex Capex.
And you can and we talked about how that how that played out with mid teens contraction as opposed to sort of a mid teens growth.
Versus prior periods.
Thank you Rainer.
Thanks Jack.
And we will take our final question from Rachel <unk> with J P. Morgan. Please go ahead.
Good morning, Rachel Great. Good morning. Thank you for taking the questions you guys and I appreciate all the comments that you've given on emerging biotech softness in bioprocess, saying that that customers that really down mid teens in <unk>. So first just a clarifying question can you say do you expect that emerging biotech to remain at mid teen declines for the year, and then kind of shifting more longer term.
Can you talk about your assumptions around when you expect emerging biotech to return to growth and at what point in the funding issue really pressured for long term growth outlook for the bio processing okay.
Yeah.
So just to confirm on the topic of emerging biotech our assumption is and our guide reflects.
That the activity level and emerging biotech stays for the remainder of the year as it played out in the first quarter. So we're not assuming any change there.
Including that it doesn't get significantly worse.
As it relates to how that segment progresses here.
That's.
From today's point of view hard to predict we need to see where.
Capital markets go liquidity availability and yes, a stabilization.
<unk> and return to some degree of normality.
In the banking sector, but for the for the visibility that we have today, we're not expecting an improvement in that segment for the remainder of the year.
Got it and then maybe a few questions on China here. So one of your peers recently slide China bio processing weakness I think you also mentioned that in one of your answers to the earlier question. So can you talk about how did <unk> perform during <unk> in China and can you just give us some context of how big China is for bio processing.
For Danaher.
And looking forward how are those orders trending with in China, specifically around some of the local manufacturers.
Then last question just stepping back you previously guided to low single digit growth for China for the year <unk> was well above expectations. So what's the total kind of outlets for China.
Okay.
As it relates to bio processing in China.
Had.
Very good and strong business there in China for years.
And helped quite significantly in China in order to build the capacity capacities for vaccines and for other biologics.
And what we see today much like we've seen in the U S is that the emerging biotech segment, which is an important part of China's efforts to build a local.
Biopharma industry.