Q2 2023 Avantor Inc Earnings Call
Speaker 1: Good morning, my name is Emily and I'll be your conference operator today. At this time, I would like to welcome everyone to Avantel's 2023 Second Quarter earnings results conference call. After the proposal marks, there will be the opportunity for any questions which you can ask by pressing start followed by the number one on your telephone keypads.
Speaker 1: I'll now turn the call over to Christina Jones, Vice President of Investor Relations. Mrs. Jones, you may begin the conference.
Speaker 1: Good morning. Thank you for joining us.
Speaker 1: Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Tom Slosik, Executive Vice President and Chief Financial Officer. The press release and a presentation accompanying this call are available on our Investor Relations website at ir.avantursciences.com.
Speaker 1: A replay of this webcast will also be made available on our website after the call. Following our prepared remarks, we will open the line for questions.
Speaker 1: During this call, we will be making some forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our FEC filings.
Speaker 1: 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. We do not assume any obligation to update these forward looking statements as a result of new information, future events, or other developments.
Speaker 1: This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the Supplemental Disclosure Package on our Investor Relations website. With that, I will now turn the call over to Michael.
Speaker 2: Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on slide 3.
Speaker 2: Our second quarter core organic revenue declined 6.5%.
Speaker 2: Relative to the first quarter, market trends weakened sequentially, particularly in biopharma, were mid to large pharma customers moderated their spend and continued to reduce inventory, and ongoing funding constraints for small biotech persisted.
Speaker 2: Sales in our advanced technology and applied materials end market were impacted by sharp declines in sales of formulated solutions to semiconductor customers.
Speaker 2: We also experienced sequential weakness in sales of equipment and instrumentation associated with tighter capital budgets across all end markets.
Speaker 2: The sustained momentum in our biomaterials and education end markets partially offset these declines and we are encouraged by the double digit growth in our medical grade silicone platform, as well as continued mid single digit growth in education and government.
Speaker 2: We continue to leverage the Avantor Business System to drive cost savings and enhance operational rigor and efficiency.
Speaker 2: These productivity efforts and cost containment measures helped mitigate the soft demand environment and enabled us to deliver solid bottom line results, including 19.7% adjusted EVID on margin and 28 cents of adjusted EPS.
Speaker 2: We also have strong free cash flow momentum and generated approximately 85% free cash flow conversion to adjusted net income in the first half and paid down over $400 million of debt in the same period. We also have a free cash flow conversion to adjusted net income in the first half and paid down over $400 million of debt in the same period.
Speaker 2: While current market conditions are negatively impacting the entire industry, we are confident in our platform, market position, and long-term growth outlook, and the resilience of our end markets.
Speaker 2: We are doubling down on our actions to accelerate our growth strategy and control costs, to help offset industry headwinds and ensure that we are positioned to capitalize when market conditions improve.
Speaker 2: First, we have taken steps to align our organization and key leadership roles to deliver incremental growth.
Speaker 2: We have added leaders with expertise in high-growth segments and welcome new leaders with a proven track record in driving performance.
Speaker 2: A few examples include strengthening business leadership for proprietary research and materials businesses under Randy Stone.
Speaker 2: including adding dedicated leadership for self-manufactured chemicals business and augmenting Ritter leadership to drive revenue synergies and product line expansion.
Speaker 2: Establishing dedicated strategy leaders under Kitty Sahin's leadership, who partner with business leaders to identify and capture high-growth opportunities.
Speaker 2: adding product management leadership for bioprocessing, fluid handling, and lab digital services.
Speaker 2: and realigning our regional commercial teams to enable greater focus on customer needs.
Speaker 2: These efforts are generating results.
Speaker 2: In the second quarter, in addition to delivering double-digit education and government growth in the Americas, our strengthened commercial teams extended multi-year contracts with several renowned institutions and consortiums in the education sector.
Speaker 2: including the ENI Consortium, which services over 5,000 educational institutions.
Speaker 2: and gives us broad access to the academic community.
Speaker 2: Second, we are accelerating new product introductions for both third party and proprietary offerings, and investing in a Vontors R&D to support customer needs.
Speaker 2: For example, in the second quarter, we launched integrated pressure sensors for our master flex master sense pumps.
Speaker 2: Novel volume sampling systems to support cell and gene therapy workflows.
Speaker 2: Cryogenic storage vials to support long-term storage of critical biological samples.
Speaker 2: and introduced a new robotics tip line, the JT Baker HT2.
Speaker 2: We significantly accelerated new product introductions from our supplier partners during the first two quarters.
Speaker 2: including onboarding several innovative suppliers to bring thousands of new fine chemical and antibody offerings to our customers.
Speaker 2: as well as introducing new microplate instrumentation and biological sample storage solutions.
Speaker 2: And we announce plans for a significant expansion of our flagship R&D center in Ridgewater, New Jersey planned for August 2024.
Speaker 2: Third, we are well underway with our digital transformation, including enhancing our e-commerce platform and improving campaign execution and commercial activation processes.
Speaker 2: We'll begin introducing our new online buying experience through a phased rollout across geographic markets.
Speaker 2: starting this autumn.
Speaker 2: At the same time, we are simplifying and streamlining lab inventory and replenishment processes for our customers by integrating leading electronic lab notebook and smart shelf platforms with our upgraded inventory manager enterprise system.
Speaker 2: We've increased web traffic through a variety of digital tactics, accelerated deployment of new product and application-focused email campaigns, and enhanced some of our trigger or action-based campaign programs.
Speaker 2: We are seeing higher campaign conversion rates as a result of these initiatives.
Speaker 2: Additionally, we've activated commercial process enhancements that are improving effectiveness in our lead to order conversion rates.
Speaker 2: These tactics complement ongoing content upgrades and search engine optimization enhancements across our digital channels.
Speaker 2: We've also intensified our focus on operational excellence and productivity to control costs, as was evident in our second quarter results.
Speaker 2: Some examples of these efforts include rationalizing our manufacturing footprint through closures and downsisings. Streamlining our organizational structure and delaying, including simplifying our European organization from three subregions to two in order to reduce cost and complexity and better serve customers.
Speaker 2: proactively addressing structural costs and reducing discretionary and indirect spend across our global organization.
Speaker 2: executing numerous Kaizen events as part of our Avantor business system to expedite process improvements and drive stakeholder engagement.
Speaker 2: and enhancing our supply chain to drive efficiencies, reduce back orders, and improve lead times, including increasing warehouse productivity and efficiency, as well as automation upgrades at our distribution centers in Germany, Sweden, the United Kingdom, and the U.S.
Speaker 2: Looking ahead, we are revising our full year 2023 guidance to reflect the more challenging environment the industry faced in the second quarter, which we expect to persist for the remainder of the year.
Speaker 2: We're also taking the opportunity to further accelerate RD leveraging and are now targeting adjusted net leverage below three times.
Speaker 2: I will walk you through our updated guidance at the end of the presentation.
Speaker 2: Before I turn it over to Tom to walk you through our second quarter financial results in more detail, I want to remind you of our previously announced CFO transition.
Speaker 2: As we announced earlier this month, Brent Jones will join Avantor's Executive Vice President and Chief Financial Officer on Monday, August 7.
Speaker 2: Over a nearly 30-year career, Brent served as CFO for several public and private life science companies, and previously as a senior investment banker.
Speaker 2: He is currently Executive Vice President, Chief Financial Officer, and Chief Operating Officer at Lifescan Global Corporation, a global leader in blood glucose monitoring and digital health technology.
Speaker 2: Brent is an innovative thinker and seasoned operator with a strong track record of driving transformation, building teams, and enhancing financial results to increase value for shareholders.
Speaker 2: He'll be an exceptional partner in running the business and I look forward to working closely with him to advance our growth strategy.
Speaker 2: As plans, Tom will be leaving of on tour next Friday, August 4th to start a new CFO roll outside the life sciences industry.
Speaker 2: As we welcome Brent to the team, I want to reiterate my appreciation to Tom for his many contributions to Avantor and his support of a seamless transition.
Speaker 2: With that, let me turn it over to Tom to walk you through our second quarter results.
Speaker 3: Thank you Michael and good morning everyone.
Speaker 3: Starting from the top of slide 5, reported revenue was $1.74 billion for the quarter.
Speaker 3: Revenue declined 6.5% on a core organic basis, reflecting high single-digit declines in biopharma and advanced technologies in applied materials.
Speaker 3: resulting from lower activity levels, constraint spend, and continued inventory destocking by our customers.
Speaker 3: partially offset by ongoing growth in our health care and education and government end markets.
Speaker 3: Adjusted gross profit for the quarter was 33.8% with a reduction from 2022 driven by lower overall volumes, negative mix impacts of lower bioprocessing and semi-conductor revenue, and the roll-off of margin-rich COVID-19 revenues.
Speaker 3: partially offset by productivity efforts and lower distribution costs.
Speaker 3: Adjusted EBITDA was approximately $304.3 million.
Speaker 3: Q2 adjusted EBITDA margin of 19.7% was above our guidance with positive impacts from cost containment, productivity, and lower incentive compensation costs, offsetting the negative impact of lower gross profit margins.
Adjust the bearings per share came in at 28 cents for the quarter, reflecting the flow through of adjusted the EBITDA performance, interest expense in line with expectations, and a modestly higher tax rate.
We also recorded a non-cash impairment expense of approximately $160 million in the second quarter to reflect a reduction in the fair value of the RITR assets.
driven by a persistently high customer inventory in the end market served by Ritter and an overall slowdown in the research spending environment.
The declines in actual and projected income for Ritter have also led to a reduction in current and future tax benefits, leading to a tax rate of 24.2% for the quarter.
We remain focused on realizing the long-term growth potential of this business by introducing new products and leveraging our channel to expand Ritter's customer base.
Moving to cash flow, we generated $138.1 million in pre-cash flow in the quarter, which enabled an approximately 85% conversion of adjusted net income in the first half of 2023.
This year over your improvement in conversion has been primarily driven by sustained improvements in accounts receivable and inventory.
Our adjusted net leverage ended the quarter at 3.9 times adjusted EBITDA, slightly higher than the first quarter as a result of lower trailing four-quarter adjusted EBITDA, partially offset by ongoing debt pay down.
As Michael mentioned, we have paid down over $400 million of debt year to day, and de-leveraging is our primary capital allocation priority.
Additionally, we strengthened our balance sheet by upsizing our revolver capacity in the quarter from $515 million to $975 million and extended the maturity to 2028.
Slide 6 outlines the components of our second quarter revenue growth.
Corriganic revenue declined 6.5% in the quarter.
COVID-related revenues represented a 2.6% headwind for the quarter, reflecting the expected roll-off of approximately $50 million of COVID-related sales from the second quarter last year, resulting in a 9.1% organic revenue decline.
Forex change translation represented a 0.4% tailwind driven by a modest appreciation of the euro, resulting in a second quarter reported revenue decline of 8.7%.
On to slide 7.
From a regional perspective, the Americas declined 8.8% on a core organic basis, reflecting weaker customer demand in biopharma and advanced technologies and applied materials.
BioPharma results were pressured by sequential declines in both research and bioproduction, and semiconductor-related sales were down more than 80% as customers continued to reduce finished goods inventory as supply chains normalized post the COVID-19 pandemic.
Education and government grew double digits with robust funding and focused commercial execution supporting ongoing momentum and recovery in the send market.
Biomaterial sales were also up double digits, driven by strong demand for our custom formulated silicone solutions in medical implant procedures and healthcare applications. Our continued investments to de-bottleneck existing manufacturing assets, paired with operational excellence initiatives, are providing additional capacity to ensure that our manufacturing and manufacturing systems are being used.
to meet strong underlying demand in targeted markets and applications. Europe declined 1.8% on a core organic basis in the quarter driven by weakness in biofarma and education in government and markets. We experienced softer demand for lab consumables and chemicals reflecting a weaker demand environment and ongoing destocking.
The macroeconomic contraction over the past two quarters in the Eurozone, including the recession in Germany, also put pressure on equipment and instrument sales, which were down high single digits in the quarter, compared to high single digit growth in the first quarter.
Biomaterials grew double digits in Europe and advanced technologies and applied materials end-market continued to grow, demonstrating the benefit of our diversified customer exposure and our increased emphasis on new, high-growth segments.
EMEA declined 8.7% on a core organic basis in the second quarter, driven by declines in formulated solutions for our semiconductor customers, which were down about 70% in the region, and sluggish demand in research settings across all end markets.
Partially offset by strong, core organic revenue growth in bio production.
Slide 8 shows our core organic revenue growth for the quarter-byte, end-market, and product group.
Biofarmer representing almost 55% of our annual revenue decline high single digits in both research and production.
In the research environment, we saw an increasingly conservative approach to customer spending.
resulting in project delays, site closures, reductions in headcount, and more aggressive procurement savings targets.
This is negatively impacting activity levels in research labs and constraining capital purchases.
putting pressure on both consumables and equipment and instrumentation sales.
We are seeing signs of stabilization in the biotech customer base, which remained at Q1 sales levels in the second quarter, while sales to mid-cap and large-cap pharma declined in the quarter.
While spending is still constrained, customers are continuing to fund promising science and advance a robust pipeline of clinical research and new molecules.
In the production environment, our sales were down high single digits on a core organic basis compared to our expectation of low single digit growth as realized in the first quarter.
While destocking persisted as anticipated, we also experienced a sequential reduction in demand driven by improved lead times and campaign and project delays.
Despite these challenges, we are seeing some encouraging signals.
Customer survey data regarding inventory health continues to improve. We've also seen a marked uptick in engineering drawing activity, a critical leading indicator within our single-use platform.
Our focus in cell and gene therapy is also paying dividends, yielding double-digit growth in several critical product lines targeting these workflows.
We continue to have high conviction in the fundamental drivers for biopharma. We are in an exciting time for science and the pace of innovative research and regulatory approvals, including Alzheimer's monoclonal antibodies, GLP1 treatments, and cell and gene therapies. This technology supports long-term, double-digit growth in this industry.
Health care, which represents approximately 10% of our annual revenue, grew mid-single digits on a core organic basis in the second quarter.
Biomaterial's performance was up over 30% in the quarter with double digit growth across all three regions during my continued strength in cervical procedures.
Education and government, representing approximately 10% of our annual revenue, grew mid-single digits on a core organic basis in the second quarter, driven by double-digit growth in the Americas.
We are encouraged by our recent commercial winds and the support of funding environment and expect continuum momentum in this platform.
Advanced technologies and applied materials representing approximately 25% of our annual revenue.
declined high single digits on a core organic basis in the second quarter, with solid performance in Europe offset by declines in the Americas and EMEA, largely attributable to softer demand from semiconductor customers.
Semiconductor sales were down over 75% in the quarter, reflecting persistent high levels of finished goods inventory at our largest customers, and represented a roughly 220 basis point headwind to our core organic growth in the quarter.
By product group, proprietary materials and consumables offerings were down double digits in the quarter, with destocking and reduced demand for bioproduction products and formulated solutions for semiconductor customers.
By product group, proprietary materials and consumables offerings were down double digits in the quarter, with destocking and reduced demand for bioproduction products and formulated solutions for semiconductor customers partially offset by strong biomaterial sales.
Sales of third-party materials and consumables decline mid-single digits, impacted by continued destocking of lab consumables, and reduced demand across the research setting.
Services in specialty procurement, which integrate us directly in our customers' critical operations, grew mid-single digits, while equipment and instrumentation declined mid-single digits, reflecting a more cautious approach to capital spending in the current macro environment.
With that, I will now hand the call back to Michael.
Thanks Tom. Turning to slide 9, I'd like to take a moment to walk you through our updated 2023 guidance.
As you recall, our prior guidance was predicated on a continuation of first quarter end market dynamics and a modest seasonality pickup in the second half of the year.
Given the sequential deterioration experienced in the second quarter, we are updating our guidance to reflect the second quarter revenue miss.
and the extension of current end market trends through the balance of the year. This results in organic revenue declines of 9-7% and core organic revenue declines of 6.5-4.5%.
Applying current exchange rates, we estimate reported revenue of $6.89 to $7.04 billion.
We expect adjusted EBITDA margin to contract between 200 and 150 basis points.
which incorporates our view of lower volume offset by productivity and discretionary cost control.
We expect interest expense of approximately $290 million and a full year tax rate of 23%.
leading to adjusted EPS of $1.04 to $1.12.
We're also updating our free cash flow range to 600-675 million to reflect the adjusted EBITDA guidance and a continuation of our free cash flow performance from the first half of the year.
Regarding phasing, we expect a relatively consistent performance between Q3 and Q4 for total reported revenue, adjusted EBITDA margin, and adjusted EPS.
The primarily short cycle nature of our business model coupled with a dynamic operating environment makes forward visibility particularly challenging.
We believe our updated guidance appropriately reflects the realities of the current macro environment and does not contemplate any material change in end market conditions.
We recognize that our second quarter results fell short and that we have made a meaningful change to our full year guidance to reflect the current market conditions.
We remain confident in the long-term fundamentals of our attractive end markets and Avantor's proven platform, market position and targeted growth strategy.
We are taking aggressive measures to drive future growth, control costs, and improve productivity to ensure that our organization is well positioned to capture future market opportunities and emerge stronger from the current headwinds facing our industry.
We are steadfast in our commitment to our mission of setting science in motion and to our customers, including investing in customer-driven innovation opportunities around the world.
Equally important to helping customers solve scientific challenges is operating sustainably.
In the second quarter, we committed to updating our emission reduction goals in line with climate science that will be validated by the Science-Based Targets Initiative.
As a reminder, in 2020 we set a short-term target of a 15% reduction in greenhouse gas emissions by 2025, and we are on track to beat this timeline.
We recently earned a bronze medal for our sustainability rating with EcoVadis.
This improved rating is a significant validation of our commitment to sustainability.
I would like to close by thanking our associates for their contributions to our customers and communities as well as their focus on operational discipline as we navigate these dynamic times.
I will now turn it over to the operator to begin the question and answer portion of our call.
Thank you. We will now begin the question and answer session. If you would like to ask a question today, please do so now by pressing start followed by the number 1 on your telephone keypad. If you change your mind and would like to be removed from the queue, that is start followed by 2. When preparing to ask your question, please ensure that your microphone is unmuted locally.
Our first question today comes from the line of Tejas Savant with Morgan Stanley . Please go ahead, your line is now open.
Good morning, Michael, and thanks for the time here. Perhaps to kick things off, can you just help us allocate that 600 bps haircut, your core growth expectation across end markets, and comment on linearity during the quarter and how July shaped up?
And also, what exactly are you zooming in terms of a year-end budget flush in the new guide? Yeah, good morning Tejas, and thanks for the question. Happy to give you some color on how we have framed our full year outlook. As you suggest, we've dropped
at the midpoint are out looked by about 600 basis points. And if you unpack that about 100 basis points of that is just a reflection of the Q2 miss getting rolled in. And then that leaves you with roughly 500 basis points, which is probably the way I think about it is to have that split roughly in the.
that you referenced.
If you think about the phasing of that, as I suggested in my prepared remarks, we anticipate Q3 and Q4 having roughly equal levels of reported EBITDA, EPS, as well as reported revenue.
And, you know, we're working our way through July , you know, I would just say the experience we're having, you know, up till now, I think is consistent with how we're framing, you know, the outlook for the balance of the year.
Got it. That's helpful. Sorry, Dennis, you had one more question there on the budget plus. Let me address that as well. So if we think about the full year, what we've tried to do here is just recognize the current macro environment.
the trends that we saw in Q2 and extend those through the balance of the year. So that would really not contemplate much if any of a budget flush this year.
Got it. That's helpful. And then on share loss, Michael, any color there, I know in the past, you've shared metrics like churn, web traffic, etc., all looking good. But just as you looked at those trends evolve, are you still confident that you're sort of outgrowing your end markets here?
Thanks for the question on that opportunity to weigh in. Yeah, I think as you would expect, I think we continue to be rather bullish about our positioning within the end markets that we're serving. And one of the proof points I would point you to in this quarter as a validation of that is the strong growth that we delivered in the academic.
end market within the Americas. We grew in that space in double digits this quarter, which really is a reflection of the commercial intensity that we're driving across all of our end markets. And as you know end market health is recovering in certain pockets.
We're certainly there to grab our share, or in this case, probably more than our share of the available opportunities. We do track a lot of different metrics. We hold ourselves to a high standard here and do expect to grow in line, if not faster, than our end markets and whether it is our digital traffic.
our win rates, our share of our customers' R&D spend, all of these things that we do look at real time and we continue to be very confident that we're well positioned in each of the end markets that we serve.
Thanks for the time, Michael.
Our next question comes from the line of Michael Riskin with Bank of America. Michael, please go ahead, your line is now open.
Thanks for taking the question, guys.
But first I kind of want to go back and do a little bit more comparison of..................
your commentary after the one key call and in May at some of the conferences and then today I think previously you kind of indicated that the majority of what you're seeing from Biopharm was the stocking and you know underlying demands a little robust underlying Churn and you highlighted you know, excipients and the special chemicals
That was a couple months ago. Now it seems like you're having a little bit more color on demand weakening. So I was wondering if you could just elaborate on that. You know you mentioned R&D a little bit.
Anything can delineate between R&D and production. Maybe you could give us a magnitude for that demand weakening, you know from an end market perspective. How much has it slowed over the course of the quarter? Thanks for the question Michael. First around these talking I think you know from our perspective the headwinds that we face both in lab consumables as well as in our single-use solution.
which gives us some encouragement going forward. But relative to what we saw as we moved through the quarter, in addition to the de-stocking playing out as anticipated, we did see a market slow down in overall demand in the production environment as our customers adopted a bit more cautionary approach as we move through the quarter.
And part of that is certainly linked to them managing their own working capital and their own end market or their own end product inventories. Part of that also reflects our improvement in lead times, but we do see campaigns and projects getting pushed out into a lot of parts of the year into.
next year. On the R&D side, similar type dynamics in that as we move through the quarter, we started to see constrained spending of their capital budgets reflected in our equipment and instrumentation category, which I think we highlighted in a number of the
in a public remarks we made in the quarter. And then we also saw, you know, more constrained approach to how they were, you know, spending across consumables and other categories as, you know, they, you know, implement their own productivity actions around, you know, site closures and headcount reductions. And certainly we did see an impact on overall activity level in the quarter.
stabilize in Q2. So those are a few of the things that we saw in the quarter, Michael.
Anyway, to just put a number on that, let's say that our market used to grow 5% as it down to 3, if it's 0, if it's negative 5, just give us some sense of how much demand flowed.
Well we were in both research and production, Michael, we were down high single digits in the quarter and if you kind of compare with where we have been for bio-production for example in Q1, we grew low single digits so that was roughly a 10 point deceleration that we saw there in the quarter.
then on the on the lab side of you know things we also you know saw that deteriorate you know you know maybe
five, six, seven points, something like that, in the quarter as well. So both parts of our biopharma exposure certainly weakened as we move into the second quarter.
Got it, that's helpful. And then just real quick on the margin guide, I appreciate some of your color on the puts and takes there, but if I'm doing the math right, it still looks like you're guiding to about 100 bps.
sequential de-sell and margins, you're getting to about 18.7, 18.8 even a margin in the second half versus 19.7 in the second quarter. So about 100 bits drop off. On revenues that are relatively consistent on a dollar basis, so is there, I mean just sort of what's driving that? Is it mixed shift away from proprietary?
Is it the less price? Is there some added cost coming into the second half? Walk us through the margin bridge, the 2H. So I think there's two or three things there that I think are critical to understand as we're reflecting the step down in margins in the second half of the year as you referenced. I think if you look at what we said a quarter ago to what we're saying now, it's about 125 basis points.
of decline on a full year basis. And the way I would think about that is it's roughly 200 basis points associated with lower volumes and a weakening mix.
to reflect the experience that we had in the second quarter. And that is offset by roughly 75 basis points of productivity and cost controls.
Okay, thanks.
Our next question comes from the line of Luke Surgott with Barclays. Luke please go ahead your line is open.
Great, thanks for the question. Just a couple clarifications here, Michael and Tom. Can you give us the update on the actual D-Stock dollar and the 2Q and now what you guys are expecting for the second half? Because you guys saw it before everybody else, so we thought that you would...
See it alleviate before everybody else. So just give us an update on that. Please.
Yeah, good morning, Luke. Good to hear from you. You know, as we have talked about in previous quarters, you know, we've been seeing somewhere on the order of, you know, five to six hundred basis points of destocking in our business. And, you know, I think that's, you know, consistent with our experience in the second quarter.
We have a new variable, a new dynamic though that is making the ability to give a precise number for de-stocking a little bit more challenging as we move into the second half of the year because we're also now starting to see, or we did see, a deceleration in just overall demand within the bioproduction space.
you know, link to again, you know, a more cautionary approach and a push out of some of the projects and campaigns. And so at this stage it is difficult to kind of parse that between demand versus these stockings since you know, it's pretty widespread at this stage, but...
I would point you to the data that we have on our customers' overall inventory health. And this is something that we've been really close to for nearly a year now. And what we're seeing there is continued improvement. The survey data and the feedback from our customers continues to trend in the right direction. We're seeing a lot of improvement in the data that we have on our customers' overall inventory. And we're seeing a lot of improvement in the data that we have on our customers' overall inventory.
I think when I look at where our customers inventory is of these overstocked categories and how they're thinking about forward demand, it is encouraging. When I look at within bile production, the category that was most overstocked was in our single-use platform. And I referenced
you know, in my commentary, you know, one of the leading indicators that we look at in that particular business is overall engineering drawing activity. That's really the start of a customer's, you know, demand and that kicks off the whole process.
And we have seen a market uptick in engineering activity as we got into the second quarter. And that will take time to convert into orders and then there's a lead time on the back of that to get into revenue. But that is another signal that gives us some encouragement as we think about our current environment. We have seen a market uptick in engineering activity as we got into the second quarter.
All right, great. And then just two quick follow-ups, I guess, on when you're talking about engineering drawing. I live my life behind Excel, so I have no idea what that means. So can you help, like, justify, or not justify, help lay it out, like, before, you know, the timeframe of when you're starting to see the results?
into the guide or is this could this be a source of upside for the back half of the year?
Great question, Luke. On the engineering activity, so as we've talked before, our single-use platform, it's a custom platform where we're designing custom assemblies and manifolds and connectors. And every opportunity that we have with our customers is going to be unique and requires custom engineering. So they'll come to us with a request for a design.
we obviously have lead times that could be in the two to three month time frame for building those products. So hopefully that gives you some color to what that would look like on a leading indicator basis. And then just in terms of what we've built in here in terms of some of these positive signals.
I just take you back to what we've said about how we've guided. You know, we're grounded in the conditions that we experienced in the second quarter, and we've extended those through the back half of the year. So to the extent that there was you know, a material improvement or I guess, you know, material deterioration in either direction, you know, that wouldn't be contemplated in our current numbers.
Great, thank you. Our next question comes from the line of Vijay Kumar with Evercore ISI. Vijay, please go ahead, your line is open.
Hi guys, Michael and Tom. Good morning. Thanks for taking the question. Just one on revenues here. What was China in the quarter? And you mentioned back half guidance is contemplating, you know, second quarter trends. I'm curious. July.INA, fell.
It looks like things worsen in second quarter, right, when you think about the phasing. When you look at the July exit rate, are we at the, you know, are we seeing an improvement forces, you know, June , or are we at the levels seen in June ?
Good morning, Vijay. Thanks for the questions. You know, on China, I think, you know, we've been clear that, you know, we don't have a significant exposure there in China. It's a few percent of our overall revenues. But I would say that, you know, the trends that we saw in the second quarter are consistent with what you've heard others report. It is weak.
you're not particularly constructive at the moment. And that gets reflected then in the overall performance that we delivered in the EMEA region. When I look at China being a source of weakness, I combine that with the semiconductor headwinds that we have in the region as well. Those are the key drivers for
you know, the print that you see there for the India region. And it does really, unfortunately, mask some pretty positive signals in our bioproduction business in Korea and in Southeast Asia where we continue to see pretty strong core organic revenue growth. But certainly China is a drag at the moment.
And then in terms of what we're seeing in July , you are correct that we did see kind of sequential weaknesses as we move through the second quarter. I think our experience in July does reflect what we were seeing there toward the end of the quarter.
And it's certainly contemplated in our view that it's prudent at this stage to extend those second quarter trends through the back half of the year.
That's helpful, Michael. And Tom, all the best after you as you transition, maybe at one on the margin question for you here, revenue is simplistically cut by 6%, EPS cut by 18%. And then look at second quarter margins.
It was pretty impressive despite the revenue mess. I'm curious why, you know, it looks like no incremental cost actions are being contemplated despite the revenue cut. Just walk us through your thought process on cost actions. Yeah, so just a couple things on tack there, BJ.
You know, 1st of all on the on the.
first of all on the on the other.
The sales versus the EPS revision in the total year guidance at the midpoint, it's roughly 20 cents.
or 24 cents, I'd say that 60% of that is just from the top line. I mean, at the midpoint there's
I'd say that 60% of that is just from the top line. I mean, at the midpoint, there's probably 400M or so of.
sales coming out, and if you take that out at the margin rate, that gets you about 60% of that. The balance is the combination of a lower gross margin rate because as Michael talked about, a fair amount of the sales reduction for the second half.
is in proprietary products which are margin rich for us. So you have maybe a hundred basis point pressure on the gross margin rate in the second half. What you see then is
between two of those, that's most of the EPS impact. A little bit of favorability on the TOE side, like the SG&A probably six cents or so, and the balance is noise between two of those.
between tax and interest. So it's primarily top line driven, little bit of gross margin rate and offset by productivity. So we do have productivity, additional productivity coming through. When you look at the first or the second quarter, we were down on the margin rate, probably had 350 basis points of.
pressure from the top line, just volume as well as the margin rate from the higher proprietary products coming out. But you did see some nice offset on the SG&A side as well as some other productivity initiatives in the supply chain that helped us to offset that and deliver the 19.7. I would say those same factors
are in play for the full year guide. So while we still expect that adverse mixed impact that I talked about, we will continue to get productivity offsets. And we've, in my commentary, I use the words double down, we already had coming into the year a number of different...
specific productivity projects on top of what we normally do around productivity, site closures and de-layering and so forth. We've identified additional opportunities. In addition, as you would expect, Michael's got the team going after discretionary spend.
and some other productivity things. So, I'm pretty confident that the margin rate we're able to offset some of that top line.
Thanks guys.
Our next question comes from Rachel Vantstahl with JP Morgan. Rachel please go ahead your line is open.
Great. Good morning. Thanks for taking the questions. I wanted to follow up to an earlier question around bucketing the guidance cut. So I believe you had said 100 basis point miss, and then the rest of the guide cut was split between bioproduction and biopharma. So could you just walk us through your updated expectations for instrumentations and equipment?
Are you seeing any incremental weakness in that instrumentation business, especially within distribution channel? And then on study conductors, are you expecting any incremental weakness there just given the prior guidance and then the 75% decline this quarter in that market?
Yeah, good morning Rachel, thanks for the question. A couple of things to unpack for you there. On equipment and instrumentation, if you recall in the first quarter we were down low single digits and as we showed in our materials we were down mid single digits in the quarter and that was pretty pervasive. That was across
really all of our end markets. We certainly saw it in our you know Bioform R&D but it was it was also in you know our other end markets as well as we just do see customers taking a more cautionary you know approach to capital spending. When you think about
Your question around semiconductors, it played out, you know, as in, you know, roughly in line with our expectations for the second quarter. It was a little bit weaker, perhaps, but, you know, more on the margin what we've baked in for semiconductors in Q3 and Q4, consistent with our overall approach to our guide is that those conditions would persist.
Which, you know, hopefully proves in this case to be a bit conservative. If you listen to some of the commentary from our customers, as they're in the middle of their earnings season, you do sense a pickup in sentiment and outlook and, you know, we're hopeful that, you know, that that translates into, you know, better performance in the 2nd half of the year, but what we've assumed for semiconductors is similar
levels that we saw in the second quarter persisting through the balance of the year. Great, thank you for that color. And then maybe just shifting over to more bioproduction, biopharma. Can you talk about how many months of visibility you have in bioproduction right now given the key stocking and demand dynamics?
And then, regarding a comment of weakening demand, large to mid-sized biopharma, can you talk about your conversations with those customers? How likely is it that we could see a catch-up in spending later this year, or are budgets really getting cut for 2023 based on your conversations? And then, lastly, how are those customers thinking about project-level activity heading into 2024? How likely is it that we could see a catch-up in spending later this year?
And then, regarding a comment of weakening demand at large to mid-sized biopharma, can you talk about your conversations with those customers? How likely is it that we could see a catch up in spending later this year, or are budgets really getting cut for 2023 based on your conversations? And then lastly, how are those customers thinking about project level activity heading into 2024? Thank you.
So firstly on on bio production you know consistent with what we've said before we do have you know a historically high you know order book and backlog. We're still probably in more than two acts.
orders in hand that what we had on kind of a pre-COVID level. Now that has been normalizing as we've moved through the year consistent with
improving lead times and consistent with some of the de-stocking dynamics that we've seen play out as we've moved through the year. We're also seeing an overall reduction in overall demand as well at the moment.
you know, pretty strong order book. Now as that, you know, gets phased into a particular, you know, reporting period or a particular month, we would, you know, generally have, you know, maybe, you know, half of the demand that we might expect to service in a given month, you know, in an order and then we, you know, we would take orders throughout the month on, you know, some of the portfolio that has
you know, shorter lead time. So, you know, we typically think about visibility there in terms of two to three months on a forward basis, but that would only probably cover, you know, maybe 50 or 60 percent of the demand that we would expect to serve in that particular period.
In terms of the research space, structurally it's a little bit difficult to look ahead at just given the shorter order cycle nature of that business where we have more than 6 million SKUs, we're serving more than 300,000 customer locations.
And so you get more macro level commentary from your customers as opposed to specific forecasts that can translate into demand planning. So as we said before, limited visibility on a forward basis there. But as you see our customers roll through their earnings seasons and ongoing announcements of …
Our next question comes from the line of Matt Sykes with Goldman Sachs. Matt, please go ahead, your line is open.
Hi, good morning things taking my questions. Maybe just following up on your comments about biotech, seeing some level of stabilization. Understand that they're pretty large differences in the funding dynamics for. Small biotech and large biopharma, but does that stabilization give you kind of any.
sort of phasing information in terms of how large biopharma might recover? Is this sort of a first in, first out dynamic or do you think those two customer cohorts are different enough due to the funding dynamics and other things that that's not the case?
Yeah, thanks, Matt. I'm not sure I would necessarily try to link those two segments, what we're seeing there. The funding dynamics are quite different in both cases. It is encouraging to, you know, the trends that we are seeing on biotech. I mean, I think there was a bit of a uptick in funding in the quarter.
And certainly when we look at our sales to that segment, it was quite similar to what we saw in Q1. So we're hopeful that that trend continues and that maybe we're on the way to recovery there. But I would say that the drivers and the
the priorities of the two segments are different enough that I probably wouldn't try to correlate those two maps.
Yeah, it's largely played out as we would have expected in terms of the guide that we gave. It continues to be a fairly healthy pricing environment for us. Not as robust maybe as 2022 as we talked about initially, but it's held up reasonably well. I think the frequency of price increases is probably going to normalize here. Given the inflation that was coming through in 2021 and more so in 2022, there was a more robust cadence of increase.
but you know largely in line with plan. Thanks. Our next question comes from Patrick Donnelly with Citi. Patrick please go ahead your line is open. Great thank you guys. Maybe there's another one kind of following up I think Mike's question earlier on the second half margin implications. You know obviously the exit rate you're going to be quite a bit lower than expected. I think the street is somewhere around 21% you get to offer next year. You guys have these cost containment measures in place. I guess how quickly can you see you know those.
take hold and then drive some expansion or protection of the bottom line. Just trying to figure out, I guess, how much of these headwinds linger into 24, particularly on the margin side, given that second half guide, versus kind of inflecting back. You kind of mentioned things like pricing. Yeah, it would be good to just get a handle on the moving pieces in the dynamic.
to provide a whole lot of color as to what we might anticipate in 2024, given what's driving our business at the moment is the macro economy and not something so specific that we can isolate to our own business. So that certainly challenges the visibility. So we'll work through the balance of the year here.
through our normal cycle here. We should be able to give you some transparency and color on how we see next year shaping up as we get a little bit closer to that. But I would point you to the second quarter as kind of the proof point of our focus on productivity and how that is getting reflected. We are getting significant contributions from our cost controls and our
you know, ongoing investments in efficiency and continuous improvement. And, you know, the thing to keep in mind about our business is we've got a long-standing track record of this. Going back to the IPO, you know, every year we've expanded margins by over 100 basis points.
And so, you know, in an environment like this, that culture of continuous improvement, you know, certainly does serve us well. We've doubled down on that given the environment and driven incremental actions that is flowing through as you see in the second quarter. And, you know, we're able to offset as we move to the balance of the year more than 200 basis points of
volume and mix headwinds through the productivity actions that we're taking and would anticipate these things to carry into next year.
Okay, that's helpful. And then maybe just a couple of questions on the guide. Can you just refresh us on kind of the full year bioprofse guide and then the semis guide as well? I think instead of down 80, you know, where's the bottom there and visibility would be helpful. Thank you guys. robbery.
So on bioproduction, Patrick, probably the best way to think about that on a core organic basis for us, we had modeled that down mid to high single digits is what I'd point you to there, and the COVID headwinds are playing out as anticipated there to get to a organic number.
And then on the semiconductor space, we have modeled Q3 and Q4 similar to Q2. But as I said earlier, we are encouraged by what we're hearing from our customers here as they work through their earnings season and disclose their results. Certainly you see a more positive...
turn in their sentiment and we are starting to see some of that getting reflected in the midterm outlooks that they're giving us. So, there could be some upside there, but the way we've modeled it in our guide would be a continuation of T2 trends.
in their sentiment and we are starting to see some of that getting reflected in the outlooks, the midterm outlooks that they're giving us. So, you know, it could be some upside there, but the way we've modeled it in our guide would be continuation of Q2 trends.
Our next question comes from Justin Bowles with Deutsche Bank. Please go ahead Justin, your line is now open.
Hi, good morning, everyone. Just wanted to understand some of the customer inventory surveys you were referring to and it sounds like it was in BioPharma. Any thoughts on when the de-stocking element troughs, it sounds like it was stable and in line with x-pex Q over Q. Okay, good.
Does that point to some green shoots with respect to 2024 and that part of the business? And then just a refresher on trends and that business or performance in the business in one, two, two, three. So I think you said it was a 10 points swing between the quarters.
Thanks for the question, Justin. On these customer surveys and the engagement that we have with our customers, I do view that as one of the bright spots in a rather challenging market environment. And there's probably two things I would point you to there. One of the things we're testing for in those interactions is just how much inventory do you have.
you know, relative to your target. And of course we can then track that as we've, you know, been consistent in our surveying over the last number of quarters.
As we did that again here over the last several weeks, that inventory health has definitely improved, meaning the amount of overstock that's in the channel that's being reported by our customers has definitely come down pretty meaningfully and certainly it does reflect.
the dynamics that we were hoping to see there. The second piece that we also test for there is just a little bit around sentiment in terms of as you think about where you sit here today, which direction do you see your demand going? And the percentage of customers that are...
I would say responding to that favorably, meaning that they would see demand to pick up, also is moving in the right direction.
Now, those are encouraging signs. I'd be hesitant to call the bottom. We have not yet seen, to be clear, an inflection in order books or certainly in daily rates of sales. But ultimately, we need to see to have the proof.
that things have turned. But there are a number of leading indicators across a lot of our in markets here that do give us some optimism. And where markets are healthy, whether that be in our medical implants business or whether that be in academia.
you see that we are very well positioned. We grow strongly where the markets are conducive to that. And that's another thing that feeds our optimism in our business. I appreciate it. And it's just one quick follow up on
on the order book, the large order book, is there, are you seeing any sort of timing issues there with customers in terms of maybe pushing back when they want to take those deliveries or any change in sort of cancellation levels?
Thought that would be a little more stable for demand throughout the rest of the year, but any comments there would be helpful. As you would expect, we end up working quite closely with all of our customers to help them manage their production plans and their inventory levels.
And consistent with what I said earlier, we do see an increasing trend of project delays and campaigns that are getting either reduced in size or pushed out. Order cancellations aren't a big part of our business. It ends up being more of a collaboration with our customers in terms of how we...
to spend, which gets reflected in the second quarter numbers as well as the roll through into our full year guide.
Understood, appreciate it. Those are all the questions we have time for today, so I'll turn the call back to Michael Stubblefield for any closing remarks. Yeah, thank you all for participating in a call today. I certainly look forward to updating you when we get a chance to meet next.