Q2 2023 Repligen Corp Earnings Call
Good day, ladies and gentlemen, welcome to <unk> Corporation second quarter of 2023 earnings Conference call. My name is Vice Navi and I will be your cognate are all participants will be in a listen only mode should you need assistance. Please signal a conscience specialists by pressing star then zero.
Please note that there will be a question and answer session. Following the company's former remarks.
In order to accommodate all individuals who wish to ask questions. There will be a limit of two questions at a time.
I would now like to turn the call over to your hosts for today's call Saundra Neuman head of Investor Relations Ford Aplington. Please go ahead.
Thank you.
And welcome to our second quarter of 2023 report on.
This call will be covering business highlights and financial performance for the three and six months period ended June 30th 2023.
Will also provide an update to our financial guidance for the full year 2023.
<unk>, President and CEO Tony.
Oh, John Snodgrass will deliver a report and then we'll open the call up for Q&A.
Binder the forward looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company are subject to risks and uncertainties that may cause actual events or results to differ additional information concerning risks related to our business is included in our quarterly report on form 10.
Q our annual report on Form 10-K, and our current reports on 8-K, including the report that we're filing today also other filings that we make with an M. C C.
Today's comments reflect management's current views, which could change as a result of new information future events or otherwise the company does not obligate or commit itself to update forward looking statements, except as required by law.
During this call we are providing non-GAAP results and guidance reconciliations of gas to non-GAAP financial measures are included in the press release that we issue. This morning, which is posted to Replicants website and an S. A C dot com.
<unk> figures in today's report include the following revenue growth that constant currency constant sale gross profit and gross margin upgrading expenses, including our D. N S. G&A operating income and operating margin income tax expense net.
Come and net income per share as well as EBITDA and adjusted EBITDA.
Justin financial measures should not be viewed as an alternative to gas, but are intended to better enable investors to benchmark redwoods and current results against historical performance and the performance appears when evaluating investment opportunities now I'll turn the call over to Tony Hon.
Thank you Sandra good morning, everyone and welcome to our two two earnings call.
Okay stolen or press release. This morning, we delivered to $159 in total revenue in the quarter.
13% sequentially of 23 per cent you are what is your.
Our base business, which excludes COVID-19 revenue and inorganic emanate delivered reasonable performance, where revenues in the quarter, we're down 2% sequentially, 9% versus Q2 of last year.
And what continues to be a very challenging macro environment.
Okay first off of 2023, we delivered 342.
In total revenue.
Overall, this was down 17% per se 20th last year <unk>.
Based business again pulling up relatively well.
And three per cent on the same period.
As a reminder are based business is coming off two years of solid growth.
<unk> really challenging.
To our base business with some 41% of the second quarter and 34 per cent for the full year.
2021 or base business was up 34%.
<unk> I'm 38 per cent for the year and each case lollipop market growth.
On a franchise level, we saw revenue growth during the second quarter and three of them for businesses.
The exception being infiltration, which continues to recalibrate to post COVID-19 market dynamics ultra.
Alterations by far was the largest market inventory overhang almost a primary contributor to revenue declines in the quarter.
With baseball tradition, John 20 per cent year over year <unk> com.
2% sequentially.
Strength came from our analytics chromatography and proteins franchises.
For the quarter first off of the year, we saw minutes and go to the double digit based business growth.
Another area of improvement was challenging therapy, which includes nonpro related mrna.
Revenues were up 7% sequentially, so down 4% versus the prior year also wanted to <unk> com.
The quarter over quarter growth and <unk> by chromatography.
Where are we saw strong adoption of an opus columns and process analytics products by commercial approvals, what it should be a capitalist for future growth.
On the orders fronts are booked to go for the base business was 22 for the quarter unpleasant eight eight for the first half of the year.
Within our base orders cell and gene therapy orders were up 4% in the corner.
Overall, salvaging herpes proving to be a steady performer for us here in 2023 with first off book to Bill.
Six.
However, the big change that we're seeing in the market in the second quarter.
Hop off into my own <unk>, which includes biotech along with a slow down and orders that the C. G. M O level after two quarters of modest gains.
The headwinds in the market, which has been predominantly related to inventory overhang and can find for the most part of the C. D M O and components integrator sectors of the market upfront.
The base revenues were solids in second quarter remain consistent for the past five quarters.
Form of orders of softened.
And the first quarter of this year orders or down primarily due to witness in China.
Problems in the second quarter for farmers based business orders for down 25% in the quartered you're on your on 17% sequentially.
We are seeing longer purchasing an approval timelines for capital equipment purchases and delays in form of projects or some programs are getting pushed out by one to two quarters.
We're also seeing farm of drawing down inventory levels on consumables, something we didn't observe in 2022, one farmer demand remains strong throughout the whole year.
The 25% drop in farm orders here in Europe , we estimate that about a third came from softness in capital equipment spend third from consumables inventory draw down on a final charges related to China.
Artist from C. D Mills also softened and in the second quarter. After two quarters of modest gains down 10% sequentially, but still up 9% for the first half of this year versus the second half of last year or both base in total seeking more orders.
Recently.
Kinda ordering remained weak in the second quarter with no improvement versus Q1, although APAC orders were up 15%, excluding China five per cent as a whole.
With this backdrop forecast demand for the second half of 2023 has dropped across many for product lines impacting all of our franchises except for analytics.
For the full year, we are derisking, our revenue guidance and now expect revenues in the range of $635 million or $665 million, which implies a base business decline of five to nine per cent.
Before moving onto our second half strategic priorities and an update on queue to performance by business I do want to comment on base business performance.
I believe we are still well positioned to grow a bump market or industry comes out of this downturn.
The portfolio, we've put together over the last 10 years is highly differentiated is and this is being reflected in the growth we have seen over the last five years, where we have consistently outperformed the market.
From 2019, 320, 22 or average business based business growth for the three year period was 28 per cent.
If we include 2023 Jews in the mid point of your newly revised 2023 guidance both of three or five year average has come in at 22%.
We have an enormous amount of confidence in our strategy and we remain confident about the medium and longer term growth potential for the company.
<unk> term we.
We expect that market conditions will start to improve in Q4 and this is based in large part on our strengthening funneled, where we have seen the 25 per cent increase in high probability opportunities over the last three months.
For the macro environment.
Aleve.
Beyond the macro environment I believe we are executing exactly the way we should be to drive growth for the company.
That said, we do need to focus our media efforts here on second half of 2023 on the following three priorities.
The first is around optimizing our resources and controlling costs.
<unk>, that's a surge in demand related to COVID-19 required sandy industry to wrap up capacity.
Leaves us with the post pandemic reality of lower volumes and associated lower margins.
To address this we've started to rebalance of resources and stand over the last few quarters, especially in the manufacturing perpetration of component products.
Now expanding and accelerating this program with the goal to complete the process over the next few months.
We believe this will put us in a better position to see margin improvement in 2024.
Second is our commercial focus.
We spend a lotta time here in 2023 building on our sales funnel.
Continues to grow and expand as I mentioned, the challenges around delays and closing out opportunities dealing with our customers longer purchase cycles. For example, the time it takes closeout capital equipment opportunities and associate Inconsumable since moved from three to six months out to six to nine months.
We expect this conservativism in the market to remain through 2023.
But we do anticipate orders to pick up again in queue for this would have a positive impact on Q1, 2024 revenues, but not material impact fluffy can ship in queue for this year.
Also investing in building out our top down corporate to your account program, which.
Which we kicked off in Q3 last year response from the top farm and C. D mill counts as being very positive and we have initiated with new programs that Rutledge and products. These accounts. We feel this is an appropriate time in our journey to balance the efforts of our commercial team with a corporate account structure as we become a larger a more integrated <unk>.
<unk> processing.
Finally, new product launches a key part of our strategy this year and boss disruptive product bunches and in 2023, we are on trying to launch H 10 products contribution from new products launched in 2021 through Q2 of this year accounted for 12% of our revenue some second quarter slightly above the 10 per cent we saw the first.
<unk>.
A key launching Q3 will be first to market self contained <unk>, which does not require external ceiling for setup on performance.
This is ideally suited for customers working on a b C's and gene therapy drugs for full containment is required.
Continuing change would use upscale differentiated by processing products into our customers manufacturing workflows.
<unk> to our culture and to drive into longterm growth for <unk>.
So moving now toward Courteney performance.
As mentioned earlier the story of the quarter was the performance of our chromatography proteins and analytics franchises in the overall performance and some gene therapy space.
And chromatography second corporate revenues increased approximately 5% year on year hopeless.
Hopeless revenue was essentially flat versus prior year, However, opus unit probes in the corner was up more than 15% us more customers and drop shipping reference to us at our facilities in North America and Europe .
The driver of Cromer revenue growth in the quarter was our artisans systems and slow parts, which were up more than 50 per cent year on your.
For the first half of 2023 from what was up over 10% again, driven by artist some systems and flopped, which nearly doubled your on your.
As noted in prior quarters, we expect opus resin supplied to pick up here in the second half of 2023, and we are guiding to pull your chromatography growth of 5% to 10% slightly down from one of our prior guidance of 10% based.
Based on <unk>.
Ah <unk>.
Had a solid quarter and first half of 2023 with your over your mechanic growth in the mid single digits for the quarter and for the first half of the year we.
We saw consistent performance across the portfolio in the first half of the year, which was very encouraging.
The challenge is now in the second half.
The slowdown in demand a firm that counts as impacting protein with lower second half forecast for both or like in some grub factors, but.
Push out and demand is coming from project delays, where we are seeing programs move off by up to six months.
Based on this we're not guiding to our proteins business being down 10% to 15% here in 2023.
Infiltration, our business was down approximately 40 per cent of the quarter driven by a predictor sharp decline in COVID-19 related revenue, which was nominal and second quarter of 2023.
Looking at our base filtration business revenues were down 20% in the second quarter, 13% for the first time for 2023 against challenging cops.
Sequentially baseball trace in revenues in the second quarter were down slightly at 2%.
Alteration orders during the quarter was soft but as mentioned previously were encouraged by the strength and our filtration funnel and we do expect ordered to pick up in the second half of this year most likely in queue for.
For the year, we now expect this franchise to be down approximately 30 per cent overall.
14% on base business.
Finally, our <unk> business has been performing well with the second quarter revenues up 15% to 20% and first off growth almost 10%.
We continue to see strong traction for our in lying on the Linux portfolio led by the <unk> RPM systems, what we're integrating real time process management into our cross float <unk> systems.
We are also seeing strong performance for them installed base.
Uhm for someone will be peace and expect this business to deliver 15% growth in 2023.
So overall, we deliver to a little north of $340 million in revenue in the first half the macro headwinds, which I've been buying C. D miles and integrators have spread to the farmers sector, which makes the second half of 2023 more challenging.
We have a strengthening pipeline of higher probably the opportunities that we expect to translate into increased orders in queue for them.
James therapy can change to be resilient, we continue to bring new products to market and finally, we're taking charge of optimizing our resources to control our margins where confidence Bioprocessing markets will turn it positive direction of 2024, and we are well positioned to capture our share with that I will turn the call over to John for the financial updated.
Thank you Tony and good date, everyone to date, we reporting our financial results for the second quarter of 2023, as well as updating our financial guidance for the year.
Unless otherwise mentioned all financial measures discussed reflect adjusted not got measures.
The shirt in our press release. This morning, we delivered revenue of $159.2 million in the second quarter, nearly all of which was based business revenue at $157.1 million.
As Tony mentioned, the 9% year over your decrease in our base business was against difficult cops following two years well above market growth.
While it is an especially challenging year for our company and industry as we adapt to post COVID-19 and macro market dynamics. We believe we are well positioned to remain the innovation leader in Bioprocessing, and we're taking necessary steps to rebalance our resources and preserve margins, while looking forward to our return to <unk>.
<unk> growth.
Sure more of those details, but first let's review the second quarter and year to date financial highlights.
For the second quarter or total revenue decreased by 23 per cent reported and that constant currency.
Covid related revenue for the second quarter was nominal at just over $1 million compared with $36 million for the 2022 quarter.
Are based business was down 9% is reported and 8% a constant currency.
F X impact in the quarter was less than $1 million, creating less than one point headwind on reported growth.
Based on current market conditions, we expect <unk> negligible impact from F X for the full year.
As it relates to regional revenue, we saw a contraction and Asia Pacific Europe , and North America is expected driven by winning Covid demand and softer order trends in her face business.
Overall revenues from Asia Pacific decreased by 30%, while Europe , and North America contracted by 21% and 22 per cent respectively.
Regarding overall revenue distribution by region for the year to date period Asia Pacific represented 21 per cent Europe represented 37% in North America represented 42 per cent of our global business.
So I'm moving down our income statement.
Second quarter of 2023, adjusted gross profit was $79.9 million or 34% decrease year over year.
Adjusted gross margin of 52% in the quarter was down from 58.7% and the 22 quarter.
The year over year decline in gross margin was <unk> related to volume deleverage less favorable product mix and higher expenses tied to our capacity expansions.
Now transitioning down the piano to adjusted operating expenses.
Justin Research and development expenses for the second quarter of 2023 represented 6.1% of total revenue.
Tony mentioned, we are continuing to focus our R&D efforts to launch key new products until the market. This year with our primary focus areas being filtration in real time process analytics enabled systems.
Adjusted SG&A expenses for the second quarter of 2023, we're nearly 26% of total revenue compared to 22 per cent in the same 2022 period.
You're over your percentage increases continued to be tied to a lighter revenues coupled with capacity expansion expenses and investments made in commercial resources over the past year to continue to drive growth in market share gains.
Now moving to adjusted earnings any P S.
Second quarter of 2023, adjusted operating income was $29.4 million compared to $65.6 billion in the prior year quarter and.
Justin operating margin was 18.5% compared to 31.6%.
Volume to leverage and product mix challenges continued to be primary drivers.
Adjusted net income for the second quarter of 2023 was $32 million compared to $51.4 million. The same quarter of 2022 41 per cent reduction.
Adjusted fully diluted EPS for the second quarter of 2023 was 53 cents compared to 91 cents and the same 2022 period of decline of 37 cents or 41%.
Just for the <unk> for the second quarter of 2023 was $38.4 million, representing a 24.2% margin. This compares to adjusted EBITDA of $67.7 million with a 32.6% margin for the second quarter of 2022.
Finally, we maintain a strong cash position with cash cash equivalents in short term investments, which forgot metrics totaling $603.7 million June 30th 2023.
Well now transition to our 2023 full year guidance.
Forgot to non-GAAP reconciliation for 2023 financial guidance are included in the reconciliation tables and today's earnings press release is.
As previously mentioned unless otherwise noted all 20 twenty-three guidance discussed will be non-GAAP .
Who's also keep in mind that are of 2023 guidance may be impacted by fluctuations in foreign exchange.
Our current guidance includes the impacts of the flex Biosys acquisition that we announced in April but excludes the potential impact of any additional acquisitions that the company may pursue.
Before updating our guidance ranges I'd like to share more about plans for rebalancing resources.
Both in areas, where capacity is currently underutilized and also more broadly across the organization.
We're taking difficult, but necessary steps to protect and preserve our margins.
We expect that rebalancing actions will set us up for margin improvement in 2024.
By our estimates and is reflected in her updated got P&L guidance, we expect charges associated with this rebalancing to be approximately $6 million consisting of severance and related costs, which will be recognized in the second half of 2023.
We also expect to realize approximately $15 million in cost savings in the second half to partially offset the impacts of lower sales volumes another piano timing issues.
Now for our guidance updates.
Based on our current view of market conditions, we're revising our 2023 full year revenue guidance of got metric to arrange a $635 million to $665 million a reduction of 90 million a midpoint compared to our previous guidance.
This revised guidance reflects a 17 to 21 per cent decrease in total revenue compared to 2022.
Our overall revenue guidance includes COVID-19 related revenues of $30 million and includes $5 million of revenue from reflects Biosys acquisition.
Are based business revenue is expected to be in the range of $600 million to $630 million down 5% to 9% year over year compared with our previous expectation to grow based revenue by 4% to 8%.
We were revising our 2023 adjusted gross margin guidance to the range of 50% to 51% or two percentage point reduction from our previous guidance, 52% to 53% driven primarily by lower revenue projections for the year.
We are modifying our adjusted operating income guidance to a range of $104 million to $110 million for the year, a reduction of 48.5 million bitcoin from our <unk> guidance.
Or just an operating margin guidance is now expected in the range of 16% to 17% for the year compared with our me guidance range of 25% to 21.5% of revenue.
Ah just another income guidance as being increased to 18 million compared to our prior guidance of $14 million and we continue to expect 2023 adjusted income tax expense to be approximately 20% of adjusted pretax income.
We are revising our adjusted net income guidance to the range of $98 million to $102 million, a decrease of 36 million a bitcoin a mermaid guidance.
We're revising our adjusted EPS guidance to the range of one dollar and 72 cents to one dollar and 80 cents per fully diluted share a reduction of 63 cents from our may guidance.
Are adjusted EPS guidance assumed $56.8 million weighted average fully diluted shares outstanding ear and 2023.
Suggested EBITDA is now expected to be in the range of $141 million to $147 million.
A reduction of 48.5 million a bitcoin from our prior guidance with depreciation and intangible amortization expense is expected to be approximately 35.8 and $31 million respectively.
Ah just to EBITDA margins are expected to be in the range of 21.5% to 22.5% for the year reflective of the exclusion of fixed depreciation costs from our capacity expansions.
We expect year over year excuse me, we expect your and cash and cash equivalents got metric to be in the range of $610 million to $630 million with $45 million, a capex investments being fully funded by cash generation from our operations.
This revised ending cash figure is inclusive of cash payments made for our April acquisition of Flex Biosys.
This completes our financial report and guidance update and I will now turn the call back to the operator to open the lines for questions.
We don't know how they can the question and answer session to ask a question you may <unk>.
Phone, if you're using a speaker phone please pick up your handset before pressing.
Anytime your question has been that test and you would like to return. Your question. Please press start them too.
Again.
Please limit yourself to two questions at that time.
At this time, we will pause momentarily.
<unk>.
Our first question comes from premium fill it out with leaving pack next please go ahead.
Hi, Tony down Thanks for taking my questions.
So first one if you could maybe step back on the guidance I think one of the key questions Perez.
The guidance has been cut a few times and.
Understand totally that this is an industry wide phenomenon.
But new account or exposure to phase, one and two trials and there is off the subject biotech funding pressures beyond the destocking. So I think the question is at this point.
Is there potential for further cuts beyond this given that environment.
Or at this adequately captures and maybe just talk to us a little bit about when you see the trough levels here and potential recovery, so the destocking side and potentially.
Potentially biotech funding, which is I know, it's more of an industry.
When capital markets are turned into biotech funding. So thank you for covering those points.
Thanks Penny.
Maybe I'll have to start with our guidance cut so it's it's down about 90 million from from our last guidance.
And you know for US we felt it was important to to Derisk the year.
Based on everything we are saying and the difference between where we were in May and where we are right. Now is that when we were all talking to you and may we could clearly see that most of the destocking issues that we were dealing with and I made it from a <unk> perspective was really around the C D mode.
And the integrators.
And then Q1, we clearly saw a drop off in orders in China. The revenue in China was absolutely find in Q1, but it was orders started dropped off significantly in China.
But in Q2, and that's continued all the way through July the the orders have come down. So you can carry see that in her book to Bell.
And it's broadened into pharma.
And what we're seeing in pharma are three things one is burn off of consumable. So there's a destocking, but it's only started maybe.
Maybe it started in Q1, and we just want some visible to us, but definitely visible in terms of the order strength.
In Q2.
And then there's definitely conservatism across the whole industry.
In terms of <unk>.
Capital to spend so for.
Any systems et cetera, it's just taking longer for it on the purchase cycle and then we're seeing project delays.
Projects again delayed three months six months <unk>.
Projects that we're supposed to be.
Kicking in in the second half of this year now slated for cute.
Q for early next year, so those things all combined.
Really led us to looking exactly what we think we can do this here based especially based on the order declines that we saw in at Q2, which is what gave us to the the $90 million drop.
I.
I think the only.
Answer to your question about could there be further cuts.
The states, we don't think so but this like last quarter I said, Hey, you know, we would need to see order growth in the second half of the year for us to hit the guidance that we gave you and we believe that we could do that this time around I'm, saying that unless there's further declines in ordering and the order pattern. Then we're good with the range that we put out there.
In terms of I know you had a bunch of questions and and your <unk> and that first question for any but the the early biotech funding, we'd like that that again, it hasn't really changed in terms of impact to rutledge in in Q2 versus Q1.
And I think pieces for were encouraged as honestly on the cell and gene therapy side, which is where you would honestly put the biotech funding piece.
Peace.
And when we look at that customer base, we are seeing sequential growth, but it is driven I don't wanna be tearing. This it is driven by those customers that we were talking about last year that was scaling it's not a broad market increase it's really the customers who are in phase two phase III going into commercial that's where we're getting our growth this year.
So hopefully that answers the questions for me.
No. That's that's super helpful. Thanks for covering Dosen last one if I could ask on.
There is there was an assumption for based business growth of 20% is that still accurate for 2024, I know historically talked about the number and street is I believe in near that number two prior to the quarter.
And maybe just if you could talk a little bit about margins Kimball point would significantly lower margin by.
Right now for 2023, thank you.
Yeah on the on the growth for next year, I think we need to see out of 2023 and see exactly where we are at the end of the year before we give a guidance for next year I think you know the.
The whole market has honestly change pretty dramatically over the last four or five months. So I think it's more prudent for us at this stage to wait until the end of the year and then guide for next year.
But I will say that based on our funnel right and what we're seeing we do anticipate order pickup in queue for which will translate into revenue increase in Q1 of next year.
And on the margins I.
I I think maybe I'll hand, it over to John to comment on on the margin profile, Yeah happy margin happy to do that so I'm, putting it I think the biggest driver here that we're seeing you know we've got a 90 million dollar revenue reduction of bitcoin.
The contribution margin on that which which you know the the piece of costs that goes away. When you drop the revenue out of some material cost. So that's flowing through at a very high percentage of margin on that revenue decline and that's the key driver overall of the of the overall margin drop it expectation.
<unk>.
Got it okay. Thanks, guys.
The next question comes from Jacob John Stevens. Please go ahead.
Hey, Thanks, Good morning, maybe Tony on on Destocking, you know you've got a couple of times. This year for a variety of reasons now cutting kind of 13 14 per cent. The square is that a good proxy for the Destocking headwind you face in 20th you expect to face in 2023.
And then any kind of comments around confidence and maybe that being done by the end of this year and then I'll say you had a peer talking about working with their customers to work down the inventory I'm just curious if you're doing any of that.
Yeah, maybe start with the last piece.
I don't think we are actively working with customers trying to figure out how to work down inventory levels I think most of our conversation or on the projects that they are working with us on the timing of those projects send a product that they need we absolutely know the customers that have you know.
Months of inventory that they are working through and we know the areas for that exist.
And.
That would work its way through the system I think the difference.
Honestly Jacob is that I don't see this is just a destocking phenomena.
It's more than that it's it's it's destocking and it is.
Much more conservatism in terms of spending patterns much longer purchase cycles.
And delays and projects and maybe Destocking is <unk>.
60% off the total.
Headwind, but 40% as these other factors and I think that's that's kind of the difference between where we are today.
And where we weren't maybe say four months ago in terms of confidence at the end of the year.
You know my my view on Destocking, while the orders dropped it in the second half of last year. It really wasn't until the beginning of this year that the destocking started to happen and I fully expect that the majority of the destocking will be over by the end of the year and again I'll reiterate art.
Pipeline continues to grow our high probability opportunities continue to increase and we're working on a lot of large projects that are slated to close in the fourth quarter <unk> third quarter earnings fourth quarter and I think they are all positive signs for us that.
We will be will be able to get out of this.
Got it set that's helpful. And then maybe a bigger picture question, Tony just processed analytic seemed like a bit of a bright spot this quarter.
You talked about kind of integrating key packet and there's somebody in your system I'm just curious how that's been received by customers and if you're having conversation conversations and seeing additional opportunities to kind of integrate process analytics further.
Yeah, and as you know we integrated the <unk>.
Hello technology into our Benchtop TFS apps and so the response from customers has been incredibly.
Incredibly positive, we definitely are gaining momentum and selling more and more units each quarter. So we had a we had a we had a good quarter for systems in in Q1, or nine Q1 and Q2 expect.
Expect that will do more in the second half than we did in the first half based on the pipeline.
We think it's a natural evolution that we moved from Benchtop too are you know, let's call. It processed scale production scale systems, and that's our plan, especially with the artisan portfolio is to continue the integration which will.
I would say it'll take probably the best part of 12 months to 18 months to complete all the systems that we have an upgrade to include in line analytics, but we see that as a future. That's what our customers want that's what we're gonna do and it's going to be Ah.
Very good business for us as we move forward, so yeah, really happy with analytics portfolio and how it how it's doing.
Yeah. Thanks.
The next question comes from <unk> Ah, Yes, that's T. Four please go ahead.
When you guys. Thanks, Thanks for the questions Tony on China to your guys on the ground feel like to have a handle on the situation. There it's kind of a tough place to do that in general much less in the current environment. It sounds like there's multiple factors that are at play there so where are the level of understanding on the moving parts and what is.
The revenue.
Spectation for China at this point for the year.
Yeah. So no I do think I do think that our team over there has a good handle on what's happening and.
To be honest it is pretty consistent with what you've heard from other players. So it's everything you know weakness at the C. D M O level right in China, it's not it's not outside China, but really within China. The C D. A mozart.
The number of projects that are coming through are just not what it was in 2022 and 2021.
I think a lot of the early biotech funding dried up and so those by tech companies were feeding into the tier two C. D. M. O. So I think that being a challenge I think the other piece that's going on in China is the last year was such a stark stock ear for all companies in China at that.
There was an inadvertent build up of inventory. So you know how the rest of the industry may have built up you know access inventory deliberately I don't think in China that was actually what the plan was but because of the way last year played out there is an excess inventory in China that has to get <unk>.
And as I said back in May we don't expect that China turns until the end of the year.
We look at our apartment, we have a number of projects and programs that we liked that we're working on but the level of activity in China right. Now is much lower than what we were seeing six months ago nine months ago, a year ago.
Okay, and then just maybe on the Fork you order approve minutes. It it sounds like you feel pretty good about it I guess.
Can you, maybe just crystallized forever, one where the confidence highest there is it the C. D. M. A is just give them the trajectory on the way down is at that order final or that funnel of activity that you talked about being up nicely. What do you feel best about as we as we sort of pushed at the end of the year here. Thanks.
Yeah, I would say, it's the filtration portfolio because many of the big projects that we're working on fall within that portfolio of <unk> that would be for the confidence is Dan and you know I think.
When we look at when we look at our position in the marketplace.
We really.
Have a great portfolio products.
And it's this macro environment, that's that's challenging challenging for us challenging for everybody else as well.
And but the the conversations are happening with our customers the programs and projects are happening, it's just at a much slower pace.
Based on what we are seeing we see order pick up in Q4.
Our next question comes from <unk>, William and May I. Please go ahead.
Hi, Good morning, I, just kinda wanted to follow up again.
I should have guidance being the wrist.
One thing is that in the 25 per cent increase in high probability opportunities.
Please help us understand what exactly it that that metric means what it trended like perhaps earlier in the year and anything else that you've been able to do over the past six months.
To get better visibility and to customer ordering behavior or anything or metrics associated with any of the ability I think that'd be helpful as well.
Yeah. So I wanted this ability side I think the way we've organized our commercial team are optimized how we organize a commercial team. This year is definitely helping so there's a real focus on the opportunities that we know that are out there and so the conversations are happening with customers and that is what gives us.
Sort of increased confidence on the on the final when you look at any funnel right you've got various probabilities that you have on on closing so I think our overall final has increased probably we started to see that honestly second half of last year has continued to this year, but it's probably be more on the.
Early opportunity, so maybe less than the 50% probability, but it increased significantly we're seeing a lot of what was early now move into the what we call a greater than 50% fall in the 25%.
Increases at the 75% of the Bob So those those are very high probability that they'll close.
And we just haven't seen that level of the jump in any other quarter over the last three or four chords. So we're encouraged by that and we can top right down into the exact opportunity that that's associated with so we've got to execute customers have to continue to close out and provide the P. O's, but there are.
Activities happening that signal.
Orders and picking up at the end of the year in Q4.
Okay, and then just on the.
Martin sat here thinking about right jumping off point for next year I think back have margins based on the new guidance suggests something like high 40th gross margin low double digits operating margin, obviously, you're going through some cost action packed for you will have a fuller it back towards the end of the year, but is that a reasonable star.
Pointedly sore throat first quarter of first half of 2024, Martin's or what are the other moving pieces to help us get a status for the right jumping off point for margins next year.
Yeah, I think I think you you you picked up on that right as we look into the second half of the year, we expect the margins to dip down here, but in Q3 start to recover in queue for what's additional volume and I'll go ahead and throw this out just from a kind of revenue cadence perspective.
Our expectation is probably 45% of the implied mid point in H. Two is gonna come in Q3 and around 55% of the revenue will come in queue for the way. We've got it laid out right. Now this implies margins are gonna dip down or until lower forties on a gross margin level.
And in the mid single digits on an operating margin in Q3, and then they'll rebound up in queue for to get closer to the mid points by the end of the year, how does that lay yourself or for 2024, you know our our views are you know we're kind of rebaselining the margins here with the lower volume here at the end of the year.
And you know our jumping off point I I think a good a good way to model. It right now is to look at the queue for.
Excuse me the second half implied numbers for margins and sort of model off that and we think we can we can drive improvements in margins.
<unk> 2024 based on that I mean, it's really really driven by you know, we're such a volume driven company and the way our our cost structures built up we're working on obviously taking out variable costs, where we can but it's definitely expect margin improvement before.
Okay. Thank you.
The next question comes from retail Latin Dot J.
J P. Morgan. Please go ahead.
It looks good morning, and thank you for taking my questions.
Previously noted that the inventory overhang was primarily related to the mail customer I set that has now brought anarchy noted that karma orders decline, 17% sequentially and you talked about some of the dynamics to farmers dot net by region and on the longer purchasing an approval pie this product push ups et cetera. So can you just walk through what are you hearing.
With your conversations with those customers and turns out well somebody trying to improve or really link or enter 2024 I related to <unk>. Thank you.
Yeah. So.
Submit maybe before I answer the second part of the question just to give people a sense of the farm sits.
Situations. So I think everybody should realize like farm of revenue through the first half of the year, it's actually really consistent with while we saw.
By quarter last year. So it was really being no change in Parma revenue, but.
But the orders if you actually start to look at the orders the orders in two to four problem. It was down 25% versus Q2, a year ago and it was down 17% sequentially.
And just to give you an idea of how that slipped up.
We think about a third of the 25 per cent drop your and your is coming from from inventory drawdown, which is consumables about <unk> coming from Lark Capex spend.
And the third is China.
And if you look at it then sequentially probably inventory drawdown is probably 40, 50% Capex is probably 10 to 20 and then there was some product mix changes, you'll wherever you get big orders and one quarter that don't repeat in the in the following quarter.
So overall when you start to see farm that change by that much in a quarter. It is very it does start to predict what's going to happen with with farm up from a revenue point of view in the second half of the year. So to answer your question on on the on the inventory draw down in <unk>.
<unk> will it be done by the end of the year I think farmers just moved into a more conservative mode right and inventory draw down is just one part of it I think it's the capex spend it's the conservatism delay some projects, but it feels like it's a 2023.
<unk> not at 2024, a bench right now and when you look at the projects. We're working on we're working on a lot of projects with farmers. Some really big projects that will really move the needle for us as we got into Q4 and definitely in 2024.
Great. Thank you for that color.
Alright pricing, obviously, we've been in an inflationary environment here. So can you just give us an update on your expectations for the update and guide on pricing for this here and then how are you thinking about that pricing contribution shipping as we move into 2024, just getting on a multiyear stack pricing at that you know a bigger contributor then hit dry cough.
Thank you.
Yeah, I would say pricing in general is holding <unk>, we got it at the beginning of the year and I think that John that was spot run around five per cent around 5%. So we're on track for that and that's just matching all the inflationary issues that we had to deal with as well so it's covering while we're paying out to our suppliers on all the components.
Some parts that we buy I think when you get into 2024 and I don't want to give a very specific 2024, 2025 guide or anything but I would think that pricing is going to return more to normalised level of price increases in our industry, which is probably going to be in that.
Two 3% per year on average going forward, which is kind of what it's been historical and it's because you know I think the inflationary pressures seemed to be subsiding and again everybody in our industry, it's not about putting prices up because just about covering costs some materials.
So we expect that's going to be more modest price increases in 24 and 2025.
The next question comes from <unk>. Please go ahead.
Alright, yeah, Tony we'd we'd look advisor and Moderna. The vaccine sales are down 70% to 90% here in Q2, I'm guessing it's like that for other treatments related to a COVID-19.
How much of a shock factor do you think farmers are getting from this cliff.
Covid is that party you think their psychology on on their spin.
Yeah, I I saw the same reports on the <unk> and I.
I don't know it.
People on the Bioprocessing side could predict exactly you know how much it was going to drop off by but I think everybody review and realize that.
Related.
Activity would go away.
Because I think those companies are also sitting on some inventory that they would've belt, it's probably not a total surprise that the numbers are down 70% to 90% how that impacts <unk>.
<unk> <unk>.
And what programs and projects that they do I.
I don't think I'm I'm close enough to that but I can tell you that the companies.
Dara worked on Covid.
Vaccines and therapeutics.
Are highly highly active in other areas and I haven't seen any change in terms of the programs or projects beyond what I spoke about there's a general level of conservatism and some of the projects are getting pushed out but it's across the board. So it's not just the it's not just the vaccine guys.
It's broad across pharma, so I'm not seeing anything different at the vaccine companies. Some we are seeing it the other pharma companies.
Okay, and then regarding Ah China.
I understand multinational operate there I understand wuxi is doing its own expansion there and worldwide I was never under the impression that local China companies really had the money for or desire for western product I guess.
There was demand from <unk>.
Emerging China biotech I guess, they were becoming what they would be coming buyers of western product is that a fair kind of <unk>.
Yeah, I think that's a fair Reed I look at one of our sales team does in China. It's we definitely sell very broadly into the market and are a lot of.
Early biotech.
<unk> C D. Among those that are Chinese C D and bows that served in country.
I don't think that's any different honestly versus any other country in Asia, whether it's India or Korea, I think there's a lot of sales that go to.
Companies that are making products for any country use so I think in general, though I think the number because the biotech funding has dried up in China, and because there's a being a big pull back and activity I think the number of projects hitting the C. D. A mouse is gone.
Down pretty dramatically in the first half of the year.
And then lastly, Tony arrest as Asia look pretty good what do you attribute that to us at the <unk>.
<unk> the biotech in Singapore, that's continuing or what ese and rest of Asia that made things that were pretty good there.
And I can only really asked that question from a rutledge in perspective, because I think our peers, probably maybe a little different but when we look at the other countries in Asia outside China. It really is a handful of accounts that we sell into now we sell into a lot of the <unk>.
But the ones that really move the needle or a handful of accounts and so we have some nice projects going on at those accounts, which I think is what's driving the growth on the on the order of <unk>.
Okay. Thanks, Tony.
Yeah.
The next question comes from <unk> R. B C capital markets. Please go ahead.
Good morning, and thanks for taking the questions.
First Tony just on your commentary on return to order to Brooklyn keep for can you remind us what your order breath was in queue for last year and is this a function of easy cats or is it is it more actual activity to pick up in activity that you're staying in the market.
Yeah I took.
So let me, let me talk a little bit about the last year in general right. So we saw the orders begins to dip down in knocked it down they dropped down in Q3 last year from from where we were in the and Q2 and Q1 <unk>.
But you know we were able to hold orders at almost at the same amount.
Or Q3 Q4, two one so if you go back and look at her book to Bill you will see that orders were from a dollar point of view where consistently the same. So you know when you go through three quarters and you know that there's a pullback happening in the industry.
You start to feel like Hey, look at we'd hit a steady state we need to grow from here I think what happened and Q2 as we saw it further depth. So you know you go from same orders not not from the same customers, but the same volume of orders over three quarters in a tough environment and then it drops again in Q2.
Which was really unexpected and then that puts you in a different environment. So we were down to 80%.
Point I think eight two was our book to Bell and Q2. So you can see the dropdown and orders pretty carefully.
I think our confidence around two four is just based on on our final and the <unk>.
Higher probability or the probability of the projects that we always look at moving through into.
Into that higher probabilities level, which results in increased orders for us. So it's based on activity is based on projects based on programs.
It's our view, but we also believed.
Believe that you know are.
It's not gonna have a material impact on revenue in Q4, it's gonna have more of an impact in Q1.
Got it thank you for that and then.
Just.
You said, you've now the risk of your guidance for the year. So how should we be thinking about areas of potential upsides for the rest of the year when it come from.
Ah quicker conversion of that that high probability funnel, you talked about or potential market share gains that could help you.
Uhm return to grow faster or is it is it more a function of just the overall market coming back.
I think it's a function of the overall market coming back up I honestly and in terms of what we've guided too I I don't see upside to the guidance unless there's a remarkable turnaround in the next three or four months and we're just not seeing that in Q3.
When you kind of look at our base business. Because you know you you kind of have to look at what.
<unk> came into 22 and 2000 to three with like we were a much higher per cent of what we're doing with COVID-19 related right. So the impact of Covid on us on a percentage basis much higher than when you look at our base business.
In my script I I, we had 35 to 40 per cent based business growth two years in a row.
And to be down 5% to 9%. This year in this environment is actually not a bad result, considering how much growth we've seen in our base business over the last few years. So you just average out the last three years, including the latest guidance, it's 22% and I think we were back three years ago, and said, we would grow 22% on average.
Over the next three years everybody be Super happy So I think that's more a reflection of how good our portfolio list and you know it's the it's.
This macro environment, we're all dealing with him back to your to the main question here I think the upside would come from a faster turnaround in the market, but I don't see I don't honestly see that happening until we get into Q for which I think it'll be too late for any revenue upside in 2023.
Got it thanks, thanks for that <unk>.
Questions.
The next question comes from up here up with Caprica. Please go ahead.
Good morning, just one question for me and and I apologize if I missed this earlier, but is it safe to assume that your confidence regarding the pipeline conversion that's expected to start here in queue for us because as you look at those projects, they're tending to be more late stage, so phase three and or commercial projects, which are much more.
Or much less likely to be cancelled or delayed.
Yeah, Great question, Ma'am I I I haven't looked at exactly every single opportunity in that final, but many of them are late stage.
And I I think your analysis is accurate right I think there's a higher probability that they move forward then get cancelled.
Great. Thank you.
The next question comes from when you set out here at E. B S. Please go ahead.
Hey, guys. Thanks for squeezing in.
No I know, it's early days, but it would be great to just get a sense of kind of early integration on.
<unk> you know obviously.
Interesting times in the market, but I guess you know.
That can create app or Kennedy so can I just get in uhm balance sheet optionality it'd be great to kind of get it sent to me you guys kind of had the final is looking and and and you know kind of get an essentially you guys that.
<unk> and the opportunities in the market at the moment.
And I have a quick yeah, maybe.
<unk> I think the the M&A activity.
I think is if I look at the first half of this year versus first top of last year. It was pretty dead first half of last year first half of this year a lot more activity going on I would say, we continued to be very active in the market place and.
I think we've shown over the years that were kind of selective buyers. So it has to fit with our strategy. It has to strengthen some part of the portfolio that we're focused on we'd like what we did with flecks earlier in the year integrations, calling while we'd like the fact that we're now.
In the bioprocess back part of the market and we have some big plans on how we want to do over the next 12 months with that portfolio, how we grow what they have but also how do we expand but they have so between what we're doing a flex and what we're doing in our Hopkinton Assembly facility I think that's.
Going to be kind of the drivers of the success of that of that particular acquisition.
So I think the final is is actually reasonably strong and I don't see us slowing down in terms of M&A over the next few years, so kind of the pace. We've done in the past is probably the pace that will move forward with.
Great and then yeah, great to hear <unk> unit volume increase at Opus 15 per cent I think you said.
Just give a quick update on kind of how <unk> availability has been training relative to expectations to be here I know that with a little bit of an issue in the beginning of the year.
Appreciate that yeah yeah.
Yeah, I think Verizon availability has steadily improved we see that from the two three big suppliers, it's getting a <unk> dummy getting better I think the peace. That's all it's hard to predict is is what percent of.
Orders, we get are going to be with reznor without <unk> fairly driven a lot of the ordering in North America to just drop ship the resin and since we pulled out our we added in.
We added in our facility in Breda customers.
Customers in Europe are starting to drop ship or a restaurant to us, but yet look we're encouraged by the increase in unit volume that helps us on the margin side and.
It's.
Rather than availability is definitely improving.
Alright, okay.
The next question comes from <unk> Securities. Please go ahead.
Great. Thanks, I've just got one here so.
Tony you were hesitant to give an update for for 20 per cent previously communicated twenty-four outlook wanting to see where this here ends up.
I just wanted to understand the factors behind this hasn't let's see so to Rachel's question earlier, you seem dedicated farmers spend pause dynamic maybe 23 events to another question you suggested that inventory destock will be over this year.
Comps are getting easier with today's cuts just putting it all together suggest that the prior guide <unk>.
For here so.
A long winded way to say you know are you waiting to update us on 24 growth to see where the cops and up and 23 or 24 girls and see where the content up in twenty-three or are there other factors that you're concerned may leak in the 24.
Yeah, No I I think that right now given the changes that we saw in queue too and that was not something that we were factoring in at all and so the weakness in farm.
Is definitely the primary recent why I don't want to comment on 2024 growth until we get closer to the end of the year. We just have to see this year route it's had <unk>.
So many twists and turns that.
Just don't I don't think it's prudent right now to start putting another a number out there and saying Hey, we think we can do X and Y I think we felt a lot more confident about that a quarter ago, because we knew where the destocking and issues War and it has broadened so we've gotta get through.
To a more stable.
Customer base before we start talking about 2024, so it's got nothing to do with the comps got everything to do with market dynamics and how fast the industry now pulls out of what we're dealing with.
Got it thank you for time.
No problem.
The next question comes from <unk> Jeffrey Please go ahead.
Good morning, Tony you called out.
Many campaigns that are being pushed back call at three or six months I mean, I imagine there are some normal churn that maybe a normal part of the business, but it just seems to be more of a consistent trend.
Across your your customer basis is that accurate and the earliest mostly for commercial therapies I imagine would make them more material terms of your revenue impact.
Picked out a little bit.
I I think it's.
I think it's the combination of everything Brenda right I I think there's probably you could go into any year right and find a handful of customers that have delayed projects, but we're seeing longer.
Approval cycles on P. O's, we're seeing projects that we're supposed to happen to this year at like capital projects were building up facilities coming on line that are getting delayed we've got programs that are getting pushed out by one to two quarters, then you've got the inventory overhang. It's the.
It's the combination of all of these things that are all coming together at the same time, where you could obviously handle some delays at some pharma companies are biotech companies that C. D. Most in the past, but when you have it all in in one it just makes it really really challenging and that's the difference.
Okay. That's really helpful last one John you break out the M&A dollar contribution into Q and then what you had penciled in for the four year.
Yeah, We said the M&A would be 5 million for the for the year for reflects Biosys. So we we haven't changed that that's consistent with what we said back in 222.
<unk> around the Q1 call excuse me.
Okay.
Maybe back to the operator.
Alright, I will this concludes the question and answer session.
Like to turn the conference back over to Tony Hawk for any kind of thing in mind.
Alright. Thank you. So thanks, everybody for joining us we'll be back in a in a few months with an update on on Q3.
<unk>. Thank you for attending today's presentation, you may all know disconnect.