Q2 2023 Thermo Fisher Scientific Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2023 second quarter Conference call. My name is Ellen and I'll be coordinating the call for today.
During the presentation, if you'd like to ask a question. Please press star followed by one on your telephone keypad to join the question queue.
I would now like to introduce our moderator Nikko, Mr. Rafael Bajada, Vice President of Investor Relations. Mr. <unk>, you may now begin the call.
Good morning, and thank you for joining us on the call with me today is Marc Casper, Our chairman, President and Chief Executive Officer, and Stephen Williamson Senior Vice President and Chief Financial Officer.
Please note this call is being webcast live and.
Will be archived on the investors section of our website thermal Fisher dot com under the heading news events and presentations until August 11 2023 a.
A copy of the press release of our second quarter 2023 earnings it's available in the investors section of our website under the heading financials.
So before we begin let me briefly cover our safe Harbor statement.
Various remarks that we may make about the company's future expectations.
Plans and prospects constitute forward looking statements for purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including doses cause in the company's most recent annual report on Form 10-K, and subsequent quarterly report on Form 10-Q.
<unk> are on file with the SEC and available in the investors section of our website under the heading financials SEC filings.
While we may elect to update forward looking statements at some point in the future. We specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward looking statements as representing our views as of any date subsequent to today.
Also during this call we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our second quarter. Two 2023 earnings and also in the investors section of our website under the heading financials.
So with that I'll now turn the call over to Mark.
Thanks, Ralph Good morning, everyone and thanks for joining us today for our second quarter call.
Let me recap our financial performance for the quarter, then I'll provide additional context on what we're seeing playing out in the macro economy and the implications for our outlook.
In the second quarter, our revenue was $10 six 9 billion.
Our adjusted operating income was $2 $37 billion, and we delivered adjusted EPS of $5 15 per share.
As you saw in our press release, the macroeconomic environment became more challenging in the quarter.
Economic activity in China has slowed and across the economy more broadly businesses became more cautious in their spend.
This impacted our Q2 results and informed a more moderated view for the full year.
We're taking appropriate actions to successfully navigate these conditions.
As a reminder, when we set out our guidance at the beginning of the year, we assumed core market growth would be in the normal range of 4% to 6% for 2023.
Given the more challenging macroeconomic environment at this point, we think it is best to assume that these conditions will persist for the remainder of the year and our current assumption is that core market growth will be in the zero to 2% range. This year.
We're increasing our commercial intensity to help our customers through this environment and capture even more opportunities. We're also leveraging the PPI business system to appropriately manage our costs.
Given these changes we are revising our revenue and adjusted EPS guidance for the full year.
I'll cover some of the key points around the guidance and Stephen will outline our underlying assumptions later in the call for.
For 2023, we now expect revenue to be in the range of $43 4 billion.
To $44.0 billion and.
And adjusted EPS to be in the range of $22 28 to.
$22.72.
As you know during periods of change we have a very clear set of guiding principles on how we manage the company.
These principles have three elements.
Everything we do starts with our customers and ensuring that we're enabling their success second we inspire our colleagues to bring their best every day to fulfill our mission and third we hold ourselves to an incredibly high standard to deliver differentiated short term performance all while capitalizing on dynamic times.
To enhance our long term competitive position, creating an even brighter future for our company.
To enable the differentiated short and long term performance in this environment, we're leveraging our PPI business system to deliver $450 million of additional cost actions in 2023. That's in addition to what was embedded in our previous guidance.
We're ramping up our commercial intensity to drive our share gain momentum.
And we continue to invest in our capabilities to be an even stronger partner for our customers. We are uniquely positioned to help them navigate their own challenges in this environment.
When I think about our proven ability to navigate market dynamics combined with the long term market growth drivers for the life Sciences industry.
Credibly confident for the future.
As I look ahead, there is a clear need for new medicines and the scientific advances in life Sciences are leading to exciting and innovative therapies, which will make a profound positive impact on wellbeing and be one of the drivers, creating the very strong and durable tailwind.
Our industry.
Let me now turn to our quarterly performance and provide you with an update on our end markets.
Starting with pharma and biotech growth was flat for the second quarter.
The COVID-19 vaccine and therapy revenue runoff performed as expected during the quarter, resulting in a five point headwind within this market.
From a segment perspective that revenue run off is essentially all in our life Science solutions segment, largely in our biosciences business related to nucleotide and enzymes and to a lesser extent in bio production.
The strongest growth in pharma and biotech end market. This quarter was in our pharma services and clinical research businesses.
In academic and government we grew in the high single digits in the quarter, we delivered very strong growth in our electron microscopy in chromatography and mass spectrometry businesses as well as our research and safety market channel.
In industrial and applied we grew in the low single digits for the quarter. The strongest growth in this end market was in our analytical instruments businesses and finally in diagnostics and health care revenue in Q2 was approximately 20% lower than the prior year quarter.
The team delivered very good core business growth during the quarter, driven by our microbiology immuno diagnostics and transplant diagnostics businesses.
Let me now turn to our growth strategy, we really made terrific progress in Q2 in this regard our growth strategy consists of three pillars high impact innovation, our trusted partner status with customers and our unparalleled commercial engine.
Starting with the first pillar innovation.
We had a really spectacular quarter, we launched high impact new products that are further strengthening our industry leadership by enabling our customers to break new ground in their important work, we had a great showing at the American Society for mass Spectrometry Conference, where we featured the groundbreaking thermo Fisher thermo scientific or be trapped astral mass spectrometer, which.
As the most significant advancement in mass spectrometry in 15 years.
The orbit Asheville, combined speed high sensitivity and deep proteome coverage to enable researchers to uncover proteins that previously evaded detection.
This will enable breakthroughs that could lead to the development of new targeted therapies for a range of diseases from cardiovascular disease to cancer.
We've already started to deliver the astro to our customers and we're very pleased with the strong bookings performance to date.
In our electron microscopy business, we launched the thermo scientific metros six scanning transmission electron microscope.
Ladies and innovation in our leading line of instruments designed for the semiconductor industry.
This fully automated system enables our customers to rapidly obtain large volume of high quality data from increasingly complex semiconductors to accelerate development.
In our Biosciences business, we introduced the gift co uncle Pro tumor Roid culture media kit.
It accelerates development of novel cancer therapies. These kits support the culture of tumor cells derived from individual patients, providing a better disease model for research and drug development that could potentially improve clinical trial success and help bring drug candidates to market faster and more cost effectively.
And in specialty diagnostics, we launched the first and only immunoassay to help doctors stratify, our mothers risk of developing preeclampsia.
Serious complication that can develop in pregnancy in the postpartum period endangering both mother and baby, we received breakthrough designation and FDA clearance for assessing a patient's risk of developing severe preeclampsia, enabling doctors to better managed care.
These are just a few examples of the exciting innovation going on across our company, which will make a significant difference for our customers and drive future growth.
The second pillar of our growth strategy as the trusted partner status that we have built with our customers. This unique relationship gives us early insights into our customers' unmet needs and enables us to bring our industry, leading products services and expertise together in ways that no. One else can we continue to strengthen our capabilities.
To be an even stronger partner for our customers.
For example, in our pharma services business, we added in early development hub at our site in Borgwarner, France, enabling early development. In addition to commercial manufacturing.
The third pillar of our growth strategy is our unparalleled commercial engine.
We have a meaningful commercial advantage due to the deep engagement that we're able to have with our customers across the globe.
A great example of our progress here is further strengthening our commercial capabilities with the opening of a state of the art customer center of excellence to Milan.
It features a customer application development lab to showcase our industry, leading products services and expertise.
We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to shareholders. During the quarter. We completed a small bolt on acquisition of Mark metrics, a developer of Robyn based spectroscopy solutions for inline process analytics. This technology expands our.
Abilities to help our customers make precise and accurate measurements throughout their manufacturing processes and a wide range of applications, including Biopharma.
This business is a nice complement to our analytical instruments business.
Let me give you a quick update on the binding site acquisition, which we closed at the beginning of the year our protein diagnostics business has delivered outstanding growth and the integration is going incredibly well our team is progressing the innovation pipeline to advance the diagnosis and management of patients with multiple myeloma and immune disorders.
And just after the close of the quarter, we announced an agreement to acquire <unk>, a leading provider of regulatory grade real world evidence for approved medical treatments and therapies.
Real World evidence is the collection and use of data from patient health outcomes gathered through routine clinical care.
This is a high growth market segment, as pharmaceutical and biotechnology customers as well as regulating bodies are increasingly looking to monitor and evaluate the safety of approved medicines and examine their effectiveness and value in the post approval setting.
Core every task will further strengthen our capabilities to serve our pharma and biotech customers.
Excellent strategic fit for our company and highly complementary to our clinical research business. There is strong market demand for real world evidence, which improves decision, making and reduces the time and cost associated with drug development.
The acquisition is expected to be completed by the end of this year and I'm very excited about what this will mean for our customers and the patients they serve.
Financially, we expect the business to deliver low double digit growth.
Accretive to adjusted EPS by <unk> <unk> in 2024, so overall strong progress in the second quarter for capital deployment.
During the quarter, we advanced our environmental social and governance priorities, including launching a partnership with Pfizer to increase local access to next generation sequencing based testing for lung and breast cancer patients and more than 30 countries across Latin America Africa, the middle East and Asia.
These are areas, where advanced genomic testing has previously been limited or unavailable.
Access to local mgs testing can help to provide faster analysis of associated genes and <unk>.
<unk> health care providers to select the right therapy for that individual patient patient soon.
Through the partnership we will work with local apps using our <unk> technology to ensure they meet industry standards for lgs testing for breast and lung cancer.
Pfizer will work to enable affordable patient access it delays health care provider awareness regarding the benefits of advanced Mgs testing together.
Together, we will continue to evaluate additional geographic opportunities and to expand testing for other types of cancer.
I'm very proud of the way, we're making a difference not only by enabling our customer success, but also by creating a better a great work environment for our colleagues and I'm, making a positive impact for society.
So to summarize our key takeaways from the second quarter.
While the macroeconomic environment has become more challenging our team continues to leverage our PPI business system to deliver strong productivity, we're focused on driving market share gains and at the same time, we are advancing our proven growth strategy to be an even stronger partner for our customers.
We effectively deploy capital to create significant value for our customers and our shareholders.
And the attractive long term outlook for the life Sciences industry and Thermo Fisher is unchanged, we are incredibly well positioned to help our customers navigate the current environment capture incremental opportunities and exit this period, an even stronger industry leader with a very bright future with that I'll now hand, the call over to our CFO Stephen Williams.
Stephen.
Thanks, Mark and good morning, everyone. As you saw in our press release and as Mark just outlined the macroeconomic environment became more challenging in the second quarter.
We're leveraging our PPI business system to effectively manage these conditions.
In the quarter, we delivered $10 $7 billion of revenue, which included just over 2% core organic revenue growth and we delivered $5 15 of adjusted EPS.
Revenue in the quarter was $300 million lower than we had incorporated in our previous 2023 guidance too.
$280 million of this was related to the core business and $20 million related to testing.
Approximately one third of the change in core revenue was driven by lower economic activity in China, and the remainder was driven by more cautious spending across our customer base globally, particularly in biotech.
Adjusted EPS in the quarter was 28 cents lower than when they cooperated in our previous 2023 guidance. Seven this was driven by FX and 21 by the lower revenue.
Given the lower core revenue both in the quarter and assumed in our full year outlook, we using the PPI business system to aggressively manage our cost base in.
In Q2, this enabled us to offset $75 million at the profit impact of the lower than expected revenue. This highlights that we're actively managing the business.
Let me now provide you with some more details on our performance beginning with our earnings results as I mentioned, we delivered $5 15 of adjusted EPS in Q2, GAAP EPS in the quarter was $3 51.
On the top line reported revenue was three percentage points lower year over year. The components of our Q2 reported revenue included 3% lower organic revenue, a 1% contribution from acquisitions and a slight headwind from foreign exchange.
As I mentioned earlier core organic revenue growth in the quarter was just over two percentage points.
<unk> core organic revenue growth include.
Includes the runoff in our COVID-19, vaccines and therapies revenue without that runoff impacts growth would've been 5% in the quarter.
Turning to our organic revenue performance by geography, the organic growth rates by region are skewed by the pandemic related revenue in the in the current and prior year in Q2, North America declined mid single digits you're.
Europe grew in the low single digits and Asia Pacific declined in the mid single digits with China declining in the low teens.
With respect to our operational performance adjusted operating income in the quarter decreased 9% and adjusted operating margin was 22, 2%, a 150 basis points lower than Q2 last year.
In the quarter, we delivered very strong productivity and achieve strong price realization. This was more than offset by lower pandemic related revenue continued strategic investments in FX given.
Given the change in the macro environment, we are using the PPI business system to drive significantly more productivity. This year than initially planned we've initiated $450 million of additional cost actions actions and as I mentioned earlier, we already began to see this benefit in Q2.
Total company adjusted gross margin in the quarter came in at 41% 220 basis points lower than Q2 last year for the quarter. The change in gross margin was due to the same drivers as those for our adjusted operating margin.
Moving onto the details of the P&L adjusted SG&A in the quarter was 15, 6% of revenue an improvement of 50 basis points over Q2 last year.
Total R&D expense was $345 million in Q2, reflecting our ongoing investments in high impact innovation.
R&D as a percent of our manufacturing revenue was seven 1% in the quarter.
Looking at our results below the line for the quarter. Our net interest expense was $148 million, which is $36 million higher than Q2 last year, mainly due to capital deployment.
The tax rate in the quarter was 10%. This was 300 basis points lower than Q2 last year, reflecting the results of our tax planning activities.
Average diluted shares were $388 million in Q2, approximately $6 million lower year over year, driven by share repurchases net of option dilution.
Turning to cash flow and the balance sheet year to date cash flow from operations was $2 3 billion.
Year to date free cash flow with $1 5 billion after investing $730 million of.
Net capital expenditures.
During the quarter, we repaid $1 billion.
<unk> seen a notes and returned $135 million of capital through dividends.
Shortly after the quarter end, we announced the definitive agreement to acquire core epitaphs for approximately $900 million.
We ended the quarter with $3 $1 billion in cash and $34 billion of total debt.
Our leverage ratio at the end of the quarter was three two times gross debt to adjusted EBITDA and two nine times on a net debt basis.
Concluding my comments on our total company performance adjusted ROIC was 11, 9%, reflecting the strong returns on investment that we're generating across the company.
Now I'll provide some color on the performance of our four business segments. Let me start with a couple of framing comments the scale and margin profile about pandemic related revenue varies by segment net revenue was higher than the prior year. So that does skew some of the reported segment growth rates and margins, we continue to execute strong pricing realization across all segments to.
Higher inflation.
Moving on to the segment details starting with life Science solutions Q2 reported revenue in this segment declined 25% and organic revenue was also 25% lower than the prior year quarter. This was driven by the moderation in pandemic related revenue in the segment versus the year ago quarter and to a lesser extent the macro factors that I described earlier.
Q2, adjusted operating income in life Science solutions decreased 38% and adjusted operating margin was 33, 2% down 710 basis points versus the prior year quarter.
During the quarter, we delivered very strong productivity, which was more than offset by unfavorable volume mix.
In the analytical instruments segment reported revenue increased 9% in Q2 and organic growth was 10% the strong growth in the segment. This quarter was led by the electron microscopy business.
Q2, adjusted operating income in this segment increased 26% and adjusted operating margin was 24, 7% up 330 basis points year over year.
In the quarter, we delivered very strong productivity and had strong volume and mix and that was partially offset by strategic investments and effects.
Turning to specialty diagnostics in Q2 revenue increased 1% and organic revenue was 5% lower than the prior year quarter.
In Q2, we continued to see strong underlying growth in the core led by our microbiology immuno diagnostics and transplant diagnostics businesses. This was offset by lower pandemic related revenue versus the year ago quarter.
Q2, adjusted operating income increased 22% in the quarter adjusted operating margin was 26, 7%, which is a 460 basis points higher than Q2 2022.
During the quarter, we delivered very strong productivity and favorable business mix, which is partially offset by the impact of lower COVID-19 testing volume and strategic investments.
And finally in the priority products and Biopharma services segment Q2 reported revenue increased 5% and organic growth was also 5%.
During Q2 organic revenue growth in this segment was led by the pharma services and clinical research businesses.
Q2, adjusted operating income in the segment increased 19% and adjusted operating margin was 14, 1%, which is 160 basis points higher than Q2, 2022, we delivered very strong productivity in the quarter, partially offset by FX and strategic investments.
So let me now turn to guidance and as Mark outlined we're revising our full year 2023 guidance to reflect both the more challenging macroeconomic environment and the offsetting actions that we're taking to navigate these conditions.
Revenue for 2023 is now expected to be in the range of 43, 4% to 44 billion.
With core organic revenue growth in the range of 2% to 4%.
Adjusted EPS is now expected to be in the range of $22 28.
And $22 72.
For modeling purposes, our current estimates of where we're likely to end up for the year within that range is $43 5 billion of revenue rounding up to 3% core organic revenue growth and adjusted EPS of $22 and 36.
Let me provide you with some additional details behind the change in guidance starting with revenue our revised guidance reflects a change in the assumptions for core organic revenue growth from 7% to a range of 2% to 4% and it also assumes $100 million lower testing revenue.
Our core organic revenue change is driven by two factors a.
The reduction in the assumed level of economic activity in China, and then assumption that the more cautious spending that we saw across our customer base in Q2 will continue throughout the remainder of the year.
In relation to China at the beginning of the year, we saw positive momentum in the Chinese economy.
You had previously assumed that this momentum will continue through the rest of the year.
However, as the second quarter progressed economic activity in China significantly slowed resulting in less customer activity in the quarter.
We think thats appropriate to assume that this condition remains in place for the remainder of the year.
With regards to customer spending patterns more broadly in Q2 customers in our end markets began the year with somewhat cautious spending and this is something that was not confined to our end markets companies across most business segments, we're cautious with our spending given the uncertain macro conditions.
This dynamic became more challenging in Q2.
We previously assumed that this would lessen in impact as the year progressed and we now think it's appropriate to assume that the cautious spending will continue through the remainder of the year.
With strong commercial execution from our team we expect to successfully navigate these macro dynamics and deliver 2% to 4% core organic revenue growth for the year.
And for context, as Mark mentioned with the changes in the macro we're now assuming core market growth for our industry to be in the range of zero to 2% for 2023 through reduction of approximately four percentage points versus the 4% to 6% assumed previously for market growth.
When I think about the range of outcomes for the full year core organic revenue growth. The largest swing factor is the extent of the budget flush at the end of the year.
Should that be weaker than normal than core organic revenue growth would round down to 2% and is stronger it could round up to 4% for the year.
And if China gets traction stimulating the economy, then that could also be an upside later in the year.
So moving now to profitability as I mentioned earlier, we're using the PPI business system to aggressively manage our cost base, we put in place $450 million of additional cost actions to limit the impact of the expected lower revenue on the P&L.
This demonstrates our active management of the business.
As a result of high profitability pull through on the lower revenue is expected to be reduced to 35% in terms of how it flows through to the bottom line.
Factoring in this in the updated view of FX, We now expect our adjusted operating income margin to be in the range of 23, 2% to 23, 4% for the year.
Let me amplify some more additional details on the updated 2023 guidance we're.
We're assuming that will deliver $300 million of testing revenue in 2023. This is a $100 million lower than that prior guidance and through the half year point, we've delivered $225 million of testing revenue.
Within the core we continue to expect $500 million of vaccines and therapies revenue in 2023.
This is $1 2 billion less than the prior year, a three percentage point impact on core organic revenue growth.
Through the half year point, we've delivered $365 million of vaccines and therapies related revenue.
Moving on to FX, we continue to assume that FX will be a year over year tailwind to revenue of approximately $100 million.
And then in terms of adjusted EPS, We now expect FX to be a headwind of 11, which is <unk> <unk> higher than our previous guidance.
The binding site acquisition is performing well and we now assume it will contribute approximately $260 million to our reported revenue growth for the year at <unk> to adjusted EPS.
Below the line, we continue to expect net interest expense in 2023 to be approximately $480 million.
The adjusted tax rate assumption for the year has improved to 10% versus our prior guidance of 10, 8% driven by a tax planning initiatives.
We're now expecting net capital expenditures will be approximately $1 7 billion.
And we continue to expect the free cash flow will be $6 9 billion for the year.
In terms of capital deployment, our guidance includes $3 billion of share buybacks, which were already completed in January .
We continue to assume that full year average diluted share count will be approximately 388 million shares and that we'll return approximately $540 million of capital to shareholders. This year through dividends, a 17% increase over 2022.
And as is our normal convention that guidance does not assume any future acquisitions or divestitures. We've not included any operational benefit in 2023 for the acquisition of core EDA tests, when we get more clarity on the actual close date for that acquisition will provide an estimate of any potential impact in 2023.
So to conclude we recognize that the change in guidance is significant we think it's appropriate given the change in the macro environment.
As we said at our Investor day should market growth be lower than normal we will leverage the PPI business system and step up productivity and that's what we've done we are well positioned to navigate the near term environment.
And while the near term environment may be more challenging the long term fundamentals supporting the growth of our end markets remains unchanged as does the strength of our position to serve them.
Now, let me turn the call back over to Ralph.
Thank you Stephen operator, we're ready for the Q&A portion of the call.
Thank Keith or now and to the Q&A session.
A reminder, if you'd like to ask a question. Please press star followed by one on your kind of thank you Pat.
In order to allow everyone an opportunity to address this that may session management team. Please limit your time on the question to one question and one follow up question. If you have any additional questions. Please return to the key.
Comparing to ask your question. Please ensure that your omni to blakeney.
First question comes from Mac Sykes from Goldman Sachs. Your line is now Laythan. Please proceed with your question.
Hi, good morning, and thanks for taking my question, maybe just starting on the guidance just given the significant change.
To what you talked about at the Investor Day, a few months ago could you maybe help us a little bit with where some of the biggest deltas in terms of your expectations relative to the time of the Investor day and today in terms of either end market or revenue segment, and specifically within China, where there are certain categories of revenue segments or end markets where.
The weakness was more pronounced I, just kind of wanted to get a little more color on the delta and expectations from an investor day to today.
Yes, so Matt Thanks for the question in terms of the guidance change.
The way that I think about let's start from the from the beginning of the year I think it's a use but it's starting to we can talk about the investor day right. So <unk>.
Terms of the market growth and the conditions there.
Our what we're seeing is that China.
Really slowed quite meaningfully.
In Q2, right and that's actually somewhat surprising given the first quarter, we really started to rebound off of zero Covid policies and there was government stimulus and all of a sudden Q2 really slowed down significantly.
So when I think about that and then we're assuming that for the full year right in terms that it's going to continue.
We've seen customer caution I mean, I think every business when I say this.
As above life science tools and diagnostics businesses have been cautious this year on spend and is certainly manifested itself more meaningfully in Q2, particularly in biotech and so when I think about it about a point of our change in the growth outlook comes from China about three points.
Of it comes from customer caution and within it bio production is about a point or a third of the customer caution aspect two thirds across the rest of the business.
<unk> sort of what the analyst day and sort of the view in May.
We saw China, certainly soft throughout the quarter and in our business. The final month of a quarter is actually quite meaningful.
Across all of our businesses. So while we certainly saw some customer caution.
In the beginning of the second quarter.
June saw no balanced at all right. So.
Flat to kind of flat through the quarter. So therefore, we just didn't see that view, which is why we've adjusted the outlook.
At this point in time.
Great. That's very helpful color. Thanks, Mark and then just for my follow up just on.
The AI segment of instruments could you maybe just given the visibility you might have into sort of the back half of this year talk about sort of what the backlog looks like order growth and how you are feeling about sort of the moderation and instrument growth in the back half of this year that you talked about earlier this year.
Yes, Matt Thanks for the question so when I think about.
Instruments.
We obviously.
Entered the year with a strong backlog when we entered the quarter with a strong backlog and in the 10% growth is very strong performance.
Orders were definitely softer than we expected in Q2, primarily driven by China.
It's a large component of the business there and therefore I would say we would expect that the growth rate would become more muted as the year unfolds in the analytical instruments business as we continue to work down the work down the backlog.
Thank you, Matt Thanks very much.
Thank you. Our next question comes from Dan Arias insightful.
John Your line is now open. Please go ahead.
Good morning, guys. Thanks for the questions Stephen on the PPI commentary and just being able to leverage that can you expand on that a little bit I mean should we take that to mean.
Just sort of pressing harder on being lean in areas, where you've done that in the past.
Or is that more pulling some levers.
Haven't been fully pulled so to speak and then relatedly the.
The EPS guide only came in about 5% or so at the mid point. So how do we think about mix is a factor there and how much room do you think that's left do you given the uncertainty that youre looking at in the back half.
Yes.
Ill explain.
I explained on the PPI side.
Then I'll get onto the EPS view. So it is on PPI that when we do it.
How do we run the company. So this is about the first thing you do when you think about economic conditions being different and activity levels being different with our customers is prioritization in terms of what we're working on and prioritize areas, which may be less important.
Push things out as appropriately and then now make sure that we're investing in the right areas that we should be investing in.
Tight trading back any spending way where that really matches. So its about prioritizing where we're spending our time on what we're working on and part of that then is then a reduction in discretionary spending reduction in activity levels in certain areas and these PPI bill to help us do that and put that into into operation.
He's the company's scale in terms of the levers in sourcing, particularly in indirect. So you can you can you can lean on those levers when economic conditions aren't as strong and that's definitely a way of getting some of the benefits in and then when we think about the expected slightly lower volumes and that we are optimizing our manufacturing operations appropriately and generally across our businesses, we're appropriately reducing head count.
Well that makes sense across the business and so all of that wraps up into $450 million of benefit this year and those actions are pretty much all been action right now in terms of the.
Significant to comments, we've taken the appropriate actions given the environment that we see.
And then in terms of the terms of the backup of the year with three with your question around the phasing of EPS.
The range of EPS could you just clarify.
I guess it was a little bit of both I mean organic growth is going from high single to potentially low singles in the <unk>.
So we actually came in pretty modest amount. So I was just wondering how much room do you think you've given yourself given your PPI comment.
I guess the answer is you're comfortable with it but how comfortable actually argue given that the range of outcomes in the background. So we provided a range of outcomes.
What about what the market conditions could be and when we think about what the pull through would be on the revenue in that range of outcomes plus the activities you're working on the cost side I think that's an appropriate range for EPS.
And then the phasing first half second half.
Yes, Hi, adjusted operating income margin in the second half of the year and Thats really largely driven by the impact of the cost actions of the full $50 $75 million impacted the first half.
Youll have $375 million of benefit in the second half and then revenues a little bit more weighted when you look at the year as a whole to the second half versus the first half that's the other piece that drives the profitability and EPS.
Thanks, Dan.
Okay helpful.
Thank you. Our next question comes from Vijay Kumar from Evercore ISI P. J. Your line is now open. Please proceed with your question.
Hi, guys. Thank you for taking my question Marc maybe one on the thanks for all the color on the assumptions around the guide change.
When you look at the quarter, maybe can you talk about how things progressed I think China was down.
Low teens overall organic underlying organic was 2%, but things worsened throughout the quarter, because I think the implied guidance for back half as low singles.
Two 2% ish at the midpoint.
So we're just wondering if the exit rate was around 2% ish or is the back half assuming some improvement from from the exit rate level, so far to queue.
Yes, so P J in terms of.
The.
The easing of the quarter I think really what.
Was different was June .
So none of the normal.
Quarter end pattern. So it was it was very similar to April and May that to my many years of doing this thats unusual actually where the last month isn't a big step up in activity. That's just that's sort of the pattern of the industry a bit so our assumption for the year.
As effectively that the market conditions that we saw in Q2 in aggregate for Q2 continues to play out for the balance of the year.
And you have all sorts of different comparisons within the different businesses versus the prior year and so forth, but we felt that the.
Zero to 2% market growth and for us for the full year, the 2% to 4% core growth.
Would be an appropriate performance I think maybe the best color that I can give you sort of how we think about it right. Our best view on what happened in the market is informed by looking at all of the competitors peers that reported in Q1, obviously that goes well into may.
All of our internal data about what's going on in the market, our extensive dialogue with customers and the few companies that.
<unk> reported so far right. So that informs the zero to two the way we think about this and the standard is it's our job to gain market share we put in two points of growth faster than that assumption.
We're going to hold ourselves to that standard, meaning if we're too conservative on the market outlook. Then we will have higher expectations of what good looks like in.
In terms of the year.
But that's our best view when you look at the script in the comments that Steve and I made we made no comments about share gain in Q2, because when you delivered 2% growth, we're not going to Pat ourselves on the back.
At least looking at the first few companies that have reported it appears that our performance is actually quite good in that we're growing faster. There's a lot of companies you have to report, but it actually looks like on a relative basis, we actually had a solid quarter of growth. So hopefully that gives you some context, so where things are but we are.
We're going to keep studying it make sure we got a good handle on our performance.
When we and 23 that we will be proud that we navigated the environment extremely well to deliver differentiated performance and set the company up for long term success.
That's extremely helpful color more and maybe one follow up here. The updated guidance is this assuming China to remain declined for rest of the year and what was <unk> growth in the quarter.
So it's a video that the decline will lessen on a reported basis because of the run up in testing.
Vaccines and therapies.
In terms of the the support for the pandemic that we did in the back half of the year last year.
So we're assuming basically the same market conditions, not just China, but for the.
The rest of the world as well as we saw in Q2 for the remainder of the year clinical.
Clinical research and double digit growth.
Thank you Peter Thank you guys.
Thanks.
Thank you. Our next question comes from Dan Brennan from television Kevin John Your line is <unk>. Please proceed with your question.
Great. Thanks, guys.
Mark.
Jets are hoping I haven't Rogers can navigate through difficult schedule, certainly hope and expect you will navigate the thermo through.
These more difficult macro times here.
Maybe just the first one would love to get more color on China.
Could you just walk us through just more color across your major customer segments kind of unpack kind of how the quarter played out from that perspective.
And then specifically would also love to hear color on bio production in China.
Yes, so in terms of.
China.
Hum.
When I think about it we had.
<unk> declined on an organic basis.
A little over 10%.
Core was about flat in.
In terms of it.
I'm just trying to give some flavor you obviously have the COVID-19 testing.
What we saw in China and.
It was very different than.
What our team expected what we expected and then if I think about that that's unusual comment coming from us actually our leadership team from China came to the U S and the opportunity to sit down and chat with them about what are they seeing so and I'm heading over to China in a few weeks as well for a week so.
It's an important market it really does feel like it is broad economic based.
And so we saw that across our different businesses not limited to one clearly.
<unk> production was soft in China, so consistent with some of the other comments that you've heard from others.
But we saw the slowdown.
Really cut across the portfolio, if you will and it seems to be economic activity. We always assume hey are we doing something wrong are we losing share all of those things because I think that's sort of the PPI discipline, which as you know.
<unk> base hold yourself accountable to a high standard at least of what we're seeing it just feels like <unk>.
Customers got extraordinarily cautious in China activity has slowed and it showed up across the portfolio and while I haven't had a moment to distract myself on some.
Some fun activities.
I look forward to at some point some of football and.
Seeing if the just actually make an improvement.
That I can't comment on the on the jets, but when I think about China.
His way broader than lifetime to the Chinese economy. They are clearly having problems getting the economy back up and running post COVID-19 in.
They have a history of being able to do that so, but we're not counting on that for the remainder of the year as a way to frame it from us.
The wider economic viewpoint.
Thanks, Dan Greg and then maybe just.
And then maybe just on the end market 46, which you took down to zero to two right now under your planning for 2023 kind of from what you see today is that zero to two of the best starting point as we think about modeling out there most top line for 2024.
John has been a little bit about soon yes, yes.
Just broadly on 2024.
I think about what you need to do to model the company going forward.
Two factors one is the jumping off point for the 2023 margins in and then what the macro conditions assumptions you used for 2024.
So obviously on the macro we're assuming that the near term conditions stay the same throughout the remainder of the year.
You will need to make your own assumption around what that market growth is for next year, we'll have more clarity on that when we get towards the end of this year and know what the macro conditions of life isn't a macro within our industry at the macro in terms of the overall economy and economic situation across the globe. So we'll have a clearer view on that towards the end of this year.
Mark said earlier, we will hold ourselves to the standard of delivering a couple of points higher than what the market growth is when we think about that so as you leave.
You have I think the assumptions will be driving a couple of points of share gain above that and then from a margin standpoint, a normal assumption for the year would be start with 50 basis points of expansion on top of what we just ended the year in and then when you think about my guide for this year.
Some small benefit of carryover of the cost actions into 2023 as well. So that will help you think about the margin profile for 24 at this point and provide you more refined view on that when we give guidance for 'twenty four in more detail.
Thanks, Tim.
Thank you. Our next question comes from Derik de Bruin from Bank of America.
Line is now open. Please go ahead.
Hi, Thank you and good morning, So Dan.
Asked some of the question I wanted to talk to you about 24, I guess Mark what's your view that we're not entering.
A more prolonged downturn in the life sciences tools market.
Just sort of thinking about this from a historical perspective, when we sort of seeing some resets in the market and it's taken a while for this to sort of like washed through the system. So it's like what's your what's your confidence that.
We're not in a situation where we've got a couple of we've got a period, where the growth is going to be sort of back in that lower range.
Yes, so derik as quick question, so if I step back.
From the Crystal ball for them, which moment.
What's the drivers here. This is an unbelievable industry with incredible tailwind and even since the analyst day, if you look about the progress.
Approved medicines.
Going on in the <unk>.
Cycle that that creates more funding to fuel the pharmaceutical and biotech industry.
It's extraordinarily encouraging for the long term right. So when I think about 4% to 6% market growth for the long term.
Bullish as ever right in terms of that when I think about the dynamics. Most of what is going on is around the macroeconomic environment not the life science tools diagnostics pharma services right in terms of.
Caution in the economy.
Credit availability all of that cycle higher interest rates, and therefore less funding going into higher growth businesses all of that dynamic as a macro.
Within our own industry, you clearly have the pandemic unwind right.
That's shaking out and as you look at the industry numbers.
And even if you look at our numbers the pandemic related activity will be relatively modest. This year. So most of that will have washed out in the industry. This year. So when I think about 'twenty four as Stephen said, its really going to be what's the macro not the life sciences tools macro.
That I think is the big driver is the science can be exquisitely, great things going on in pharma biotech there'll be great new discoveries all of that will attract funding and this is a question of.
Is this a kind of stabilization year for the economy and then the balances. That's the bulk case or is this a more prolonged period and then that obviously is more of the bearish case on sort of what the macro isn't.
While we won't have a perfect crystal ball as we get into our guidance and 24, we will have a much better sense of what the conditions are we are navigating hopefully that's helpful.
Yes. It is it is so.
Just a follow up and this is like how much of the pharma and biotech slowdown it's just.
Digestion of the excess COVID-19 spending.
And clearly there was.
Frothy biotech markets and people worry about supply chain. So there is.
A lot of a lot of money that went into the system has to go to others. How much of this how much of it is just digesting that extra spend.
Versus are you seeing new concerns are these customers that new concerns over regulatory environment drug pricing patent expirations.
Are you seeing any signs of slowing in clinical trial activity or higher cancellations rates just from sort of thought on.
What's just a hangover period from Covid versus.
New trepidation in this space.
Sure so to Erik the way I would think about it is if you go back to the beginning of the year and sort of how we talked about.
Our guidance pharma and biotech right as a company as a reminder, our core organic growth was 14% in 2022.
Within that.
<unk> seen some therapies were essentially flat.
No actually the whatever the stripping that out we actually grew faster than that pharma biotech incredibly strong in 2022.
Our view was while the market would.
<unk> be a good end market in 2023, but given the comparisons it would moderate meaningfully that's not a negative comment it's just such an oversized growth and our very strong growth.
The prior year period, we knew that growth would slow.
And when you look at the Q2 results.
Youre flat and five points of headwind, which actually performed literally exactly as we had forecasted for the quarter. So it kind of 5% growth, excluding excluding but sort of vaccine and therapy runoff. This year that gives you a sense of what the sort of base activity is in that market, which actually is as reason.
Slower than.
Some other periods, but given the comparison.
Is a reasonable view.
View in terms of the color and all of those things.
<unk> is doing fine right I mean in terms of what's happening there and it's really biotech.
Every quarter that funding has been a little bit more challenged or not as strong as the past companies get more conservative because they think about what the runway on spending and that really picked up in terms of the headwinds in Q2 against an incredibly difficult comparison in the prior year period.
The final point I would make here is that there are some green shoots starting to happen in biotech are you in terms of new company formation. Some of the funding actually Q2 started to show some signs of positivity that obviously takes a while to flow through the numbers, but.
But actually that's an encouraging data point as well hopefully that level of context gives you.
So how to think about it.
Great. Thanks, Mark Thanks Jill.
Thank you. Our next question comes from Rachel Bakken style from J P. Morgan.
Your line is now <unk>. Please go ahead.
Perfect Hey, guys. Thank you for taking my questions. This morning, So I just wanted to dig a little deeper on that guidance and how you guys are pocketing, where they're really cutting front. So you said that on the 400 basis points. One point was really from China, three turnaround customer spending with one in that Canadian bio production.
So can you just give us a bit more color on whether a meeting to appoint complete her customer spend is happening it sounds like PPD growth restaurants, and warehouse are you seeing weakness in the portfolio and then also from an end market perspective is this really all just weakness in pharma biotech or there are some additional weakness in industrial for example.
Yes, so when I think about customer caution sort of a macroeconomic view you see that across all types of customers. So it's not limited to one segment, it's more pronounced in biotech, but what we saw it in some industrial customers and certainly we saw it.
Some of the other customers that we serve academic and government. So forth. So it's not limited to one view in terms of the.
<unk> growth, where the impact in the change of growth is in the other segments.
Clearly with our view is that the instruments business will slow in the second half of the year. So that's.
Probably one of the changes and then some of the run rate activity that you would see in things like bioscience reagents or customer channels. We've actually those are great businesses, we think customer we have.
Little bit more muted than spending so it's really not pinned to one area, but just a spread across the portfolio probably with instruments feeling the most of the most of the impact.
Okay, operator, we're ready we.
We will take one last question.
Thank you. Thank you. Our next question comes from Jack Meehan.
Nephron Research. Your line is now open. Please proceed.
Thank you good morning I.
I wanted to ask about M&A. These dynamic times, historically have a way of creating new opportunities.
A few larger assets talked about in the press just would love to get your thoughts do you expect to be active something materialized.
Yeah.
Thanks for the question so in terms of.
Capital deployment and M&A.
We've been active on return of capital both of the increase in the dividend and the share buybacks earlier in the year.
We've also been active on M&A with <unk>.
Closing the binding site to start the year.
We're excited about <unk> and we have a lot of firepower and we're very active right I do agree with.
With your sentiment that in these periods there are opportunities. So we're actively looking at a number of things and we're only going to do transactions that fit our criteria, which is ultimately it's going to strengthen our offering from a customer perspective.
Clearly as.
Shareholder value in terms of the returns that we generate from the transaction. So youll see us be active in whether that.
Happens in terms of the second half of the year or into 'twenty four.
Were certainly busy is the way we think about it.
Great I have one.
Follow up on pharma services, it sounds like that business grew faster than PPD. This quarter can you talk about how the demand profile is holding up there and I need to ask about the tornado that hit Rocky Mount does that have any material impact on the market as you see it.
Yeah.
Yes, so pharma services really strong performance.
In terms of growth and the way you characterized it is accurate.
So very strong growth in that business.
When I think about.
New wins in some of the things that we're securing for the future of the team's doing a nice job of.
Building out.
A strong backlog for the future so our businesses in a good spot.
When I think about.
The tornado.
The hit.
In North Carolina.
The good news is that.
Nobody was injured.
Our discussions with the customer.
Testing the issues from a market perspective.
We stand ready to help our customers as we do in any situation and.
And we never view that as a business opportunity always viewed as we have very material relationships with our customers.
Our colleagues are there to support them and we will support in any way that is helpful.
As they work through the natural disaster. So thank you Jack for the question and thanks, everyone for the questions today, Let me wrap up with you know thanks for joining us.
We're very well positioned to deliver and continue to deliver differentiated performance, which will do and as always thank you for your support of Thermo Fisher scientific and we'll keep you updated on our progress thanks, everyone.
That concludes today's conference call. Thank you everybody for joining you may now disconnect your lines, how about if you had a good day.
[music].
Yeah.
Yes.
Yeah.
[music].
Yes.
Yeah.
Okay.
Yes.
Yeah.