Q2 2024 Danaher Corp Earnings Call
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By your conference will begin momentarily.
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Good morning, My name is Todd and I will be your conference facilitator. This morning.
At this time I would like to welcome everyone to Danaher Corporation's second quarter 2024 earnings results Conference call.
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After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question during that time simply press. The Star then the number one on your telephone keypad.
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I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford You May begin your conference.
Good morning, everyone and thanks for joining us on the call with US today are Rainer Blair.
Speaker Change: And Chief Executive Officer, and Matt Mcgrew, our executive Vice President and Chief Financial Officer.
I'd like to point out that our earnings release.
Slide presentation supplementing today's call.
The reconciliations and other information required by SEC regulation G relating to any non-GAAP financial measures provided during the call ended.
And at no containing details of historical and anticipated future financial performance are all available on the investors section of our website www Dot Danaher dot com under.
Speaker Change: Under the heading quarterly earnings.
The audio portion of this call will be archived on the investors section of our website later today under the heading events and presentations and will remain archived until our next quarterly call.
A replay of this call will also be available until August six 2024.
During the presentation, we will describe certain of the more significant factors that impacted year over year performance.
The supplemental materials describe additional factors that impacted year over year performance.
Unless otherwise noted all references in these remarks and supplemental materials to company specific financial metrics relate to results from continuing operations and relate to the second quarter of 2024, and all references to period to period increases or decreases in financial metrics are year over year.
Okay.
We may also describe certain products and devices, which have applications submitted and pending for certain regulatory approvals.
Or are available only in certain markets.
During the call we will make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future.
These forward looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings and actual results might differ materially from any forward looking statements that we make today.
These forward looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward looking statements, except as required by law.
With that I'd like to turn the call over to Rainer.
Thank you John and good morning, everyone. We really appreciate you joining us on the call today.
Yes.
Our team executed well during the second quarter, delivering better than expected revenue earnings and cash flow.
We were particularly pleased with the sustained positive momentum in our bio processing business and with the strong performance at Cepheid, which we believe gained market share in molecular testing again this quarter.
Now across the portfolio market conditions were largely as we anticipated.
In our bio processing business conditions in the U S and Europe continued to improve and we were encouraged to see orders increase high single digits sequentially this quarter.
In China bio processing demand and underlying activity levels were stable sequentially, but remained weak as customers continue to manage liquidity.
Okay.
In life Sciences capital equipment investments remained constrained while recurring revenue was relatively stable.
And in diagnostics, we saw healthy demand globally across our businesses.
Yeah.
As we move through this transitional period, we believe danaher is well positioned for sustainable long term value creation, our strong positioning in attractive end markets, coupled with durable high recurring revenue business models and the power of the Danaher business system supports our long term expectations of high single.
Core revenue growth with a differentiated margin and cash flow profile.
So with that let's take a closer look at our second quarter 2024 results.
Sales were $5 $7 billion in the second quarter in core revenue declined three 5%.
Geographically core revenues in developed markets were down low single digits with strength across diagnostics offset by declines in biotechnology and life Sciences.
High growth markets declined high single digits, including a high teens decline in China.
Our gross profit margin for the second quarter was 59, 7%.
And our adjusted operating profit margin of 27, 3% was up 60 basis points.
The favorable impact of cost savings initiatives more than offset lower volume.
Adjusted diluted net earnings per common share of $1.72 were essentially flat year over year.
We generated $1 $1 billion of free cash flow in the quarter and $2 $6 billion year to date, resulting in a year to date free cash flow to net income conversion ratio of 129%.
Okay.
Now Additionally, through the second quarter and into July we repurchased approximately 19 million shares.
While M&A remains our bias for capital deployment. We believe these repurchases will provide an attractive return given the strength of our long term organic growth earnings and cash flow outlook.
Now, let's take a closer look at our results across the portfolio and give you some color on what we're seeing in our end markets today.
Core revenue in our biotechnology segment declined 7% with the bio processing business down high single digits, and the discovery and medical business down mid single digits.
In our bio processing business revenue declines moderated from the first quarter as we believe our larger customers in the U S and Europe have worked through the majority of their excess inventories and are returning to normal ordering patterns.
Many of these customers are also seeing strong momentum for therapeutics and their late stage pipeline.
Which is promising for our future growth.
Our emerging biotech customers continue to prioritize projects, particularly for cell and gene therapies and in an effort to manage liquidity.
Speaker Change: However, we are encouraged by the improvement in the overall funding environment, which is a positive leading indicator for these customers.
So based on the trends we saw through the first half of the year. We continue to expect a low single digit core revenue decline in our bio processing business for the full year 2024.
There is also no change to our assumption of a bio processing core revenue growth rate of high single digits or better as we exit the year.
Biologics market remains very healthy as evidenced by the increasing number of treatments both in development and production.
Notably the number of new FDA approvals for biologic and genomic medicines in the first half of this year nearly doubled compared to the first half of 2023 and the full year 2024 is on track to set another record.
Underlying demand for biologic medicines also remains on track to grow at a high single digit or better rate again for the full year 2024.
So given the substantial and sustained increase in approvals and production volumes, we expect the growth rate in bottle processing to remain very robust for many years to come.
We continue to make substantial investments in innovation to support our customers as they pursue these life changing therapeutics.
To support monoclonal antibody production, which comprises the majority of our bio processing revenues Factiva expanded its comprehensive filtration portfolio with the launch of Super Prime now.
Now Super Prime filters are specifically designed to address key challenges associated with high concentration biologic drugs, whose complex formulations and high particle loads make them prone to premature filter blockage and costly drug product losses.
We're also developing innovative solutions for emerging modalities and May Factiva introduced the Sapphire cell therapy manufacturing platform, which is helping address critical cost and capacity constraints associated with car T cell therapy manufacturing.
The Sofia platforms fully automated manufacturing process can increase productivity by up to 50% per year compared to the industry standard.
Speaker Change: Reducing our customers' costs and increasing throughput.
Addressing these key manufacturing challenges will help improve patient access and facilitate wider adoption of these important therapeutics.
Now turning to our life Sciences segment core revenue decreased by five 5%.
Core revenue in our life Sciences instrument businesses collectively declined high single digits as expected with trends in the second quarter largely consistent with what we saw in the first quarter.
Global pharma and biotech demand remained weak.
Academic markets were weaker sequentially and applied markets perform comparatively better, particularly for our advanced solutions, which provide critical capabilities needed by our customers.
In China, we're seeing improving sales funnels and quoting activity driven by the recently announced stimulus measures.
However, we don't anticipate this to convert to orders until 2025 and these programs are in the early stages of implementation.
The meantime, many customers are delaying purchasing decisions as they await funding.
Now last month at the American Society of mass spectrometry meeting.
<unk> reinforce their market leadership in quantitative mass spectrometry with the release of the 7500, plus triple Quad mass spectrometer.
7500, plus pairs the ultra high sensitivity of the 7500 with faster acquisition speeds and the ability to maintain the highest sensitivity quantitation for up to twice as many sample runs.
Makes the 7500, plus particularly well suited for complex applications, such as P. Fast analysis, where customers need to test more samples across diverse sample types with high precision to meet challenging new regulations.
Speaker Change: And our genomics consumables business core revenue declined mid single digits in the quarter high single digit growth in gene, writing and editing solutions was more than offset by declines in next generation sequencing and the impact of project timing in our plasma business.
During the quarter IDT opened a new manufacturing facility at their core mill, Iowa campus, which enabled the team to manufacture differentiated new offerings such as rapid gene synthesis. This is the second facility expansion Friday T. Within the last 12 months and provides the capacity needed to support the rapidly expanding.
Banding global DNA synthesis market and related to drug development activities.
Now moving over to our diagnostics segment.
Core revenue increased 3%, our clinical diagnostics businesses collectively delivered mid single digit core revenue growth led by high single digit growth at radiometer.
Leica Biosystems was up mid single digits with notable strength in digital pathology, driven by Purion GTE 415, diagnostics digital pathology slide scanner, which recently received FDA five 10-K clearance.
Beckman Coulter diagnostics was up low single digits with balanced strength across both developed and high growth markets.
Now it May Beckman received FDA five 10-K clearance of its access and T. Pro BNP on the Dx side 9000, immunoassay analyzer. This important expansion of Beckman cardiac testing menu allows clinicians to quickly and accurately diagnose diagnose and assess.
Speaker Change: The condition severity of patients suspected of having acute heart failure.
Now this clearance is just the latest confirmation of the <unk> 9000 platforms capability to develop increasingly more sensitive and clinically relevant diagnostics.
In molecular diagnostics cepheid respiratory revenue of approximately $300 million in the quarter exceeded our expectation of $200 million driven by both higher volumes and a favorable mix of our foreign one tests for COVID-19, flu, a and B and RSV.
So we continue to expect respiratory revenue of approximately $1 6 billion for the full year 2024.
Now as I mentioned earlier, we believe the Cepheid team continued to gain market share during the quarter.
Increasing menu of adoption in system utilization helped drive mid teens growth in our core non respiratory reagent portfolio, including more than 20% growth in sexual health and virology assays.
We also continued to expand our nearly 60000 system installed base as many existing health care systems and integrated delivery network customers are adding new instruments at sites further out in their networks and closer to patients.
In June the FDA granted cepheid marketing authorization for its hepatitis C RNA test.
Hepatitis C diagnosis has traditionally been a multi step process, requiring follow up appointments and leading to treatment delays with.
With Cepheid tests, which is the first molecular based point of care test for hepatitis C patients can be tested and receive treatment during the same health care visits.
So this is a great example of how bringing accurate easy to use molecular testing closer to patients is improving treatment outcomes and driving long term growth at cepheid.
Now before we move on to our expectations for the remainder of the year I'd like to highlight our recently released 2020 for sustainability report, which details several important milestones across the three pillars of our sustainability program.
Starting with building the best team in.
Innovating products that improve lives and our planet and protecting our environment.
Notably we have committed to setting science base greenhouse gas emission reduction targets in line with the science based target initiative.
Including reaching net zero value chain emissions by 2050.
I encourage you all to read through the report to learn more about the depth and scope of Danaher is commitment to sustainability and the important work, we're doing to make a positive holistic impact on the world around us.
So now let's briefly look ahead of expectations for the third quarter and the full year 2024.
In the third quarter, we expect core revenue to decline in the low single digit percent range.
Additionally, we expect the third quarter adjusted operating profit margin of approximately 26%.
For the full year 2024, there is no change to our previous guidance.
As a reminder, we anticipate a core revenue decline in the low single digit percent range and our full year adjusted operating profit margin of approximately 29%.
So to wrap up we're pleased with our better than expected second quarter results and are encouraged by the continued momentum in our bio processing business. Our strong performance is a testament to our team and their commitment to innovating and executing with the Danaher business system.
They have done a tremendous job navigating the current environment to support our customers' life changing work today, while also delivering breakthrough innovation that is reinforcing our long term competitive advantage.
The transformation in our portfolio over the last several years has created a focused life sciences and diagnostic leader position for higher long term growth.
Standard margins and stronger cash flow and our recent share repurchases reflect our conviction and a bright future ahead for danaher.
So looking ahead the unique combination of our incredibly talented team the strength and differentiation of our portfolio and our leading financial profile provides us with a strong foundation to create sustainable long term shareholder value.
And with that I'll turn the call back to John.
Thanks, Brian that concludes our formal comments.
We're now ready for questions.
John: The floor is now open for questions. If you would like to ask a question at this time. Please press star one on your telephone keypad you.
You may remove yourself at any time by pressing star two.
Once again to ask a question please press star one or.
John: Our first question will come from Jack Meehan with Nephron Research. Please go ahead.
Thank you good morning.
I appreciate it.
I appreciate all the color on bio processing.
Two follow ups first is on the consumables can you elaborate on what's giving you the confidence that destock, destroying to a conclusion here and then on the capital equipment side, just thoughts on how long. This will remain depressed when you might start to see some improvement there.
So Jack on the consumable side.
We've really seen ordering patterns back to normal.
Very very few exceptions.
And with a pretty clear visibility through the measures that we put in place to stay close to our customers here during the Destocking period.
We feel that we're very close to normal order patterns and keep in mind, we actively monitor for our customers.
A customer by customer basis.
And.
In addition to that we really took active measures here to ensure that inventories were normalized youll recall that we took decisions.
Decisions to ensure that we took the dysfunction in the supply chain out to ensure that we had a true demand signal and we think thats paid off here and we know where our customers sit in terms of their stock levels on consumables consumables now equipment.
There's a slightly different picture, we're seeing good activity there at some of our larger customers and that played out here in the second quarter as well with the sequential order growth.
High single digits and being positive for both equipment and consumables.
And so those larger customers really do have a higher activity level, whereas the smaller customers probably remain a little bit more constrained.
Okay.
Speaker Change: Awesome and then.
I'm just trying to piece together the mosaic here. So your bio processing orders increased high single digits. One of your peers declined sequentially I think theres a lot of plausible explanations being turnaround for why the results in the quarter diverged I was just curious if you could weigh in on what you think the right signal what's the noise.
Yeah.
Well from a competitive perspective, Jack everyone has slightly different positioning.
It's by product category or geography, or even customer type.
Now if you look at us we're probably the broadest.
And the deepest in terms of our portfolio, both upstream and downstream, while some others are perhaps a little bit more concentrated.
Given that it's always going to be hard to really line up the various players in the industry to have a perfect read across.
But again the good news here is that this is a great business and it's recovering as we expected and we're confident about the future.
Excellent. Thank you.
Thanks Jack.
Thank you our next question from Rick.
All with J P. Morgan. Please go ahead.
Perfect Hey, good morning, guys and thanks for taking the questions. So another one here just on bio processing and so on the <unk> guidance can you just walk us through what's contemplated in the <unk> guide you've seen a few quarters of sequential progression on orders.
The last three quarters in a row sequentially. So walk us through how much of is it just seasonality on the step down into three Q versus is there some conservatism in there and then also on order is should we expect seasonality to also impact on the order books for bio processing and <unk> as well.
Yes, no I think I think that's in bio processing in particular, you probably should talk about bio processing in respiratory for Q3.
So if you think about sort of revenue we've got bio processing is going to be down low single digits, which is again, a kind of a continued improvement versus what we saw.
In Q1, and Q2, we were down kind of high teens in Q1 high single digits in Q2, and we think that that goes to kind of low single digits here in Q3, given like Randy just said I think we're largely through the destocking.
Sort of on the consumable side little bit easier comps in China as well, so that probably helps a little.
But if you think about sort of the two big drivers of Q3 outside of even bio processing. When you think about sort of the guide in totality. You have two issues are two things to think about we've got lower volume in biotechnology like I just talked about.
In respiratory as well so biotechnology prior to the pandemic, we sort of had sort of a step down between Q2 and Q3.
Speaker Change: Seasonally that was always the case for the business.
We're kind of we're putting that in sequentially again here in our guide we were about down mid single digits prior to the pandemic from a revenue perspective.
And so thats kind of what we assumed in the guide that we would have that sort of step down that we normally have seen given the fact that we're back to normal order patterns, we sort of believe that we're going to have a normal seasonality as well. So you kind of factor that in for bio processing.
And then on respiratory we're assuming 200 million of revenue versus $300 million here in the quarter. So the two of those kind of combined are the reason that you that you've got the Q3 revenue where it is and I might also add just to kind of to get out in front of them. Maybe the next question on margins. That's a big reason why we're kind of guiding to approximately <unk>.
6% adjusted operating margin in the quarter, those two businesses sort of being being.
A little bit lower sequentially here.
Given their margin profile.
The big driver if not the full driver of what's happening on the margin perspective as well.
Great. Thanks, and then my follow up here just on 2025, there's been a lot of noise across the industry on 2025, and where we'll be absolute underlying market growth standpoint, as well. So you reiterated exiting this year in bio processing at high single digits or above but could you just walk us through how are you thinking about the total business in terms of 25 and relays.
That underlying market and.
Then you've also talked a lot about the incremental margins on bio processing and some of that durability on the margin expansion in diagnostics as well. So strange currently at $8 70 centers, telling EPS on 25, how are you feeling about that number any early takes there would be helpful. Thanks.
Yeah.
We just finished the second quarter.
24, so we still got a lot of work left to do in 24 before we think about 25, we've always sort of.
Guided here in January I think that is still the plan.
Plenty plenty of work left to do here in the quarter from a top line perspective, but clearly we are seeing the improvements we thought clearly this is playing out at least in bio processing like we thought on the topline.
Speaker Change: And so maybe what we should do is look let's just get through Q3 here and then we can kind of revisit the.
The fourth quarter in 2025, as we get there from a margin perspective, I think we have sort of historically talked.
Speaker Change: Both both like I talked on the last call.
<unk> Q4, and Q1 would typically be better margin quarters for us given like you said that the operating leverage that we get out of bio processing and respiratory I don't think that that will be any different here in this year.
But as far as over the long term and as I think about next year from margin perspective, we've talked about this business being a 35% to 40% kind of incremental.
All through I don't I don't see any reason why that that would not be the case, especially as we sort of returned to growth in bioprocess thing I think we've been close to those levels here as we've been shrinking frankly, so I think we've done a lot on the cost structure to be able to make sure that we can continue to do that but I think over time 35, 40% fall through.
And this is a business in a normal time that our adjusted operating margins should be in the low thirties.
Thank you. Our next question will come from Scott Davis with Melius Research. Please go ahead.
Thanks Scott.
Good morning.
Brian.
John.
Hey, guys.
Buyback I don't recall seeing one at least one of this size in the past.
Sure.
Give us a little color is it maybe a statement that M&A is a little slow or is it.
Think about it is a little bit more like housekeeping.
Give us a little color on how you thought through that the buyback. Thanks.
Well Scott first it's important to note that this is not a change on our view on capital allocation. So we maintain a strong bias towards M&A and we're going to continue to be active on the M&A front.
Now, having said that as always we evaluate capital allocation using the same ROIC seen land, whether it's M&A buyback R&D projects Capex.
And so forth. So we evaluate all of these investment options based on the expected returns.
And specifically in today's environment, the relative value of a buyback generates attractive financial returns. So we're buying a great business. One we know very well we have strong conviction about its future, while maintaining a meaningful M&A envelope.
I would put out there. This this is.
Important that our free cash flow is as nearly $6 billion and our net leverage is about to turn so we feel well positioned here.
With the various alternatives.
Rider: Alright that makes makes sense rider.
Speaker Change: Guys well the book to Bill in Sochi, the well.
That cross.
One in <unk> or maybe said a different way is it already crossed one since we have already a month into the quarter.
While our book to Bill is in the <unk> nine Scott and as we've said in order to make our our full year guide here.
Bio processing being down low single digits, we have to maintain the 0.9.
Certainly how the first half has played out here and we're confident that that will continue to be the case as you know we don't guide to book to bills are orders.
But basically the guide is built on the assumption that.
We will exit.
Our year with high single digit or better growth.
Speaker Change: Okay.
Right. Thank you guys I appreciate it thanks, Scott Thanks, Tom.
Thank you. Our next question will come from Vijay Kumar with Evercore ISI. Please go ahead.
Good morning, VJ, Brian here and good morning to you and congrats.
Nice Green sure.
One maybe high level.
On may.
Maybe talk about the competitive pricing environment any any change I think where I'm going with the question is <unk>.
Given given the mix it signals from different players there is some fear of weather.
Competitive pricing environment could be cleared so maybe talk about what youre seeing in the market.
Sure Vijay look for the second quarter.
All up for Danaher.
Our pricing was up 100 basis points right around there and and for 2024 as a whole.
Vijay: We think will likely be a little above our historical average of 75 to 100 basis points. So we feel good about our positioning and the leverage in our portfolio.
And how we've positioned here price wise.
As far as I think you're probably referring to bio processing price B J.
We did about two 5% here in the quarter, it's probably a pretty good pretty good marker for the full year.
We were we were getting better price in the last couple of years, probably four 5% type price, but that was also in an environment, where we had supply chain and other challenges from an inflationary perspective that we're getting more price to offset some of that so some of those concerns sort of fall off if you will.
The price comes down, but but fundamentally from a competitive perspective, I don't think were seeing significant price pressures, it's much more a function of just.
Vijay: Just coming back to where we used to be which is in the bio processing 100 to 200 basis points.
Okay. That's helpful.
Matt.
One more on the.
Bigger picture on China.
Whats been the historical relationship between.
Code activity.
And when that translates to orders in.
Revenues.
Are there any way to quantify when you say, China quote activity has picked up.
Instead about trend versus historical averages above trend.
Any framework would be helpful.
Sure.
Vijay: In China, what we're seeing is increased activity levels in our funnel. So the volume that we see in our funnel had been growing and that's all related to.
People in the market getting ready for this stimulus funding if you will with sort of shovel ready projects, but what we're also seeing is a decrease in the final velocity ads as naturally market players are looking to see what the financing terms and conditions.
For the stimulus or so.
Watch this development this is.
As expected for US this is not new news, we expected that the market would hold up to see what the funding alternatives would be and we don't expect to see the final convert into orders in any meaningful way here in 2024, we view that more as a 2020.
Five event that people are waiting for their shovel ready projects to receive funding.
Understood. Thanks, guys.
P J: Thanks P J.
Speaker Change: Thank you. Our next question will come from Michael Riskin with Bank of America. Please go ahead.
Great. Thanks very much.
Hey, guys. Thanks for taking the question I wanted to ask on life Sciences segment.
Lab instruments still down high single digits, and that's a small part of the business, but still seems like life sciences as a whole isn't seeing a lot of improvement yet you also called out Ngls, I think being a little bit weaker and parts of consumables are impacted so just as a whole for life sciences, both instruments and consumables can you dive a little bit more in terms of.
What youre seeing in the end market any improvement in order trends there just how should we expect the second half to play out.
Sure, Mike well, let's start with the with the quarters. So overall the second quarter came in as expected down high single digits.
The market conditions, largely consistent with what we saw in the first quarter with capital equipment more constrained, particularly in China, while consumables and services held up comparatively better.
Now in developed markets pharma and biotech remain soft, but stable sequentially, while academic markets were modestly weaker.
And applied markets continue to hold up well, particularly for more advanced instrumentation that you need for complicated applications, such as P fast clinical and so forth.
And coming back to China here and to build on my comments to be Jays question. The recent stimulus measures are really driving improved funnels and quoting activity, but we don't expect that to convert to orders until 2025, so as expected and we're starting to see customers delaying their purchasing decisions there.
As they await the stimulus funding.
How do you think about the second quarter look we're going to enter the second half excuse me.
To see.
Comps easing a bit and that.
Speaker Change: I will certainly contribute to some stabilization, but we would expect this normalization process for life science tools and consumables to continue through 2024.
Okay.
Got it.
Through 2024.
Speaker Change: The endpoint for Okay, alright, thank you.
And then on Cepheid on the diagnostics side, when you talk about respiratory is coming in a little bit stronger at $300 million.
But the rest of the diagnostics and the rest of molecular diagnostic specifically still seemed a little bit choppy.
Speaker Change: You called out.
Klein and core sales in Mdx, So could you talk about what youre seeing diagnostics outside.
Respiratory business.
Sure we saw mid single digit growth in our non respiratory businesses with good customer activity.
Speaker Change: Around the world.
And in particular, if you think about cepheid, both respiratory and non respiratory reagents were up so.
Speaker Change: Non respiratory was actually up mid teens.
And here you see the Cepheid strategy playing out.
Creasing that installed base, increasing menu adoption and utilization.
Barology, a relatively new assay up 20% in the second quarter and we are of course benefiting from our recent menu expansion such as in sexual health, which is also up 20% and then you heard US launch the new assay and receive approvals for hepatitis C and we look forward to seeing its growth journey going forward.
As you look at Cepheid that strategy plays out we continue to take share and grew both in respiratory and non respiratory testing, we have there a little bit of a year over year with equipment being a little bit down in that nudged. It just.
Two small negative growth here for the second quarter.
No.
You look at the remaining businesses Beckman.
Grew low single digits, but really the Beckman diagnostics continues with its momentum with recurring revenue growing at mid single digits again this quarter.
And the overall motor moderation there for Beckman is really related to some challenging equipment comps, we had a lot of backlog that we needed to ship out last last year and thats affecting the compare here a little bit, but beckman diagnostics really as a mid single digit long term grower, it's got our full innovation.
Pipeline the commercial execution is outstanding we've got great instrument placement and we've done a lot on the innovation front, we just talked about the access NT Pro BNP, which has expanded our cardiac menu in the second quarter and we've done a full refresh of our product line with that.
Immunoassay Dx signed 9000.
<unk> chemistry that <unk> 500, and in automation the Dx a 5000, so coupled with our execution, we see our diagnostics businesses.
<unk> and positioned very well here, both competitively and.
Speaker Change: And for the long term.
Great. Thanks.
Thank you. Our next question will come from Dan Brennan with TD Cowen. Please go ahead.
Great. Thanks good.
Good morning, Ryan how are you doing in that thanks for the questions here.
Maybe just going back to Scott's question on the buyback.
The stock Danaher stocks been one of the best performers over the past five and 10 year periods. So arguably you could say the ROIC.
On buybacks was consistently attractive during that period of time and.
As mentioned you guys historically don't really buy back stock and your business model is really predicated on M&A and deploying DBS. So could you just elaborate a bit.
On the M&A environment today, maybe what's holding things back and what's your confidence in appointing meaningful capital for M&A as we look out over the next few years.
Yes, maybe I'll start I mean look.
We sort of maybe maybe this is the way to think about it.
Speaker Change: I like this portfolio, we like how we're positioned for the future we like the growth where we're going to be here.
The portfolio moves in the last five years have been sort of.
The fog of Covid. If you will is really sort of made it hard to see what we think this business is capable we've talked about it with everybody in the past I mean, this is a high single digit growth business, 60% gross margins, 30% op with free cash flow conversion north of a 100%. So we like our business and when I see what we trade at today, and then I kind of look out at what some of the still.
Current M&A multiples are.
It's just from a.
From a return perspective, we're getting as good a return if not better.
Speaker Change: And some of them on the buyback than we would at some of these levels and we just think that.
In today's environment, the buyback makes sense, but that is in today's environment. Our bias is towards M&A, but I do believe that we've got a bit of a <unk>.
Speaker Change: Disconnect here still in today's environment.
<unk>.
Or kind of making a bet. If you will on a business that we know well and that we think has got a lot of upside.
Great Thanks, Matt for that in.
And then maybe just one if I could go back to the Q3 guide for bioprocess and the normal seasonality.
Q2 did come in ahead of expectations and you're maintaining the full year guide. So is there anything in Q2 in terms of a pull forward or timing or is there any change to your view that as inventories normalized which I think you've said in the past you would see a real nice recovery as I think you guys have talked about the math I've seen like a nice kind of growth rate as things normalize.
Yes, no nothing I would say for bio processing and the same for respiratory I would say there is nothing that we saw in Q2 that is causing us.
Consternation about the normal seasonality I think this is really about returning to a normal seasonal pattern, where typically in bio processing.
We're seeing mid single digit decline sequentially from Q2 to Q3.
Speaker Change: And for planning purposes.
Because we are largely past destocking and because we see the customer order pattern sort of coming back to normal for planning purposes. We are going to plan on that same mid single digit decline from a revenue perspective sequentially, but.
It does not change anything in the underlying what we've seen in the business.
So I wouldn't read too much into it other than this is a sequential normal historical revenue pattern and we are assuming that in the guide.
Great. Thanks, Matt.
Thank you. Our next question will come from Doug Schenkel with Wolfe Research. Please go ahead.
Doug: Hi, Doug.
Mark Good morning, guys. Thanks for taking the questions.
First I've got a two parter on bioprocess thing is that I want to pivot back to China, So on bio processing.
Speaker Change: It seems like you need continued improvement in the end market to exit the year growing high single digits, meaning this is more than just year over year comparisons. It does seem like you're expecting continued improvement there.
Just given how the last couple of years have gone in the market.
Speaker Change: Even acknowledging what you talked about in terms of encouraging trends I was just wondering how you got comfortable with any risks to that assumption.
So that's the first question the second is on new modalities.
Speaker Change: The near term and then just looking ahead.
How has your business.
Associated with do modalities performed recently and what's your expectation for mix, new modalities versus map contributions moving forward based on what Youre seeing in the market right now.
Speaker Change: Obviously, it could be an accelerator to growth over the coming quarters, and then finally on China, just regarding the slowdown in purchasing related to stimulus.
Pending stimulus I'm just wondering how broad based this is and where youre seeing the most headwinds as folks basically try to get better clarity on.
Where the money is going to be allocated in.
Speaker Change: Thank you very much.
Sure.
Let's start with how we get comfortable with.
Our view on bio processing and its future and I think it's important to level set one more time on the performance that we've seen here in the first half starting with the second quarter, which again, it's played out as we thought we saw improvement in revenue and orders second quarter in a row row in both consumables and equipment.
And you'll recall from our commentary in the <unk>.
Last quarter's comments.
We wanted to see that improvement in equipment and.
And we did.
And our core revenue improved nearly a 1000 basis points from down high teens, Matt talked about this to down high single digits.
<unk> orders grew high single digits sequentially from Q1, which is an acceleration from the mid single digits. So we do see strength, there and thats because the stock Destocking is largely behind us and there are very few exceptions and those order patterns are more and more similar to the pre pandemic levels, which is also why.
Our guide here for Q3, we've talked about seasonality again, something that we haven't seen and what we will consider the anomalous last.
Eight quarters or so.
So those ordering patterns are returning to what we saw in the pre pandemic level and again important to note here large customers with on market drugs continue to grow because that underlying large molecule demand remains at historical growth rates and we've talked about that high single.
Digits, maybe even low double digits, but certainly at the historical rates, which continues to provide that demand signal through the entire value chain.
Speaker Change: At the same time development pipelines remained very solid across the board, but if we look at phase III, that's particularly strong in fact, we would say it is stronger than it had been prior to the pandemic and that further underwrites, our long term growth expectations.
Now you talked about.
Some of the smaller biotech customers and Thats, where you tend to see some of these advanced modalities, let's just call them for the sake of argument right now nucleic acid based therapies and perhaps a couple of other types by.
Bi specifics adcs and what we see there is that they have been.
Over proportionately impacted by some of the funding contraction that we saw in the venture capital market, but that's improved.
Which is encouraging.
But again those smaller players really do need to focus on their most promising projects to play that out.
That's going to have an effect on how much capital they spend on equipment. So if a particular player is positioned and their portfolio skewed more towards these advanced therapies and these smaller customers where cash remains fairly tight and that's going to impact the order with our broader.
Portfolio.
Particularly with our skew towards commercialized drugs in those in late phases.
We see that strength and Thats. Another reason why we feel good about exiting 2024 at high single digits or better.
Now coming back to your question here on new modalities.
New modalities are exciting they are a small part of our business and there are a small part of the overall market keep in mind, our business is driven by protein therapies.
In their various forms and of course, we also are a leading player for the advanced therapies, but if you calibrate. This is a much smaller part of both our business and the market and it's going to have a fair amount of variability both in success rates in terms of the approvals that.
These advanced therapies receipt received but also in terms of the uptake and the reimbursement dynamics associated with those so I think we're just at the very beginning of that.
Trend to these advanced modalities going on.
Lastly, China.
On the.
The slowdown that we're seeing is is really fairly broad based as you look at our portfolio.
Life science equipment in particular.
Research and more academic focus and Thats, where you see a lot of waiting for the stim.
Stimulus funds to be dispersed and that segment is ready the applications are filed they are in the final so to speak but we need to see the disbursement of that and we're not counting on that happening and any material form here in 2024.
Thank you our last question will come from Tycho Peterson with Jefferies. Please go ahead.
Good morning, and welcome back. Thank you. Thank you Ronda I want to go back to instruments for just a minute and kind of your background. Obviously in <unk> back in the day, just thinking about the replacement cycle, we get a lot of questions on that for mass spec. How do you think about that potentially kicking in over the next couple of years, because I think there is some debate that some of that got pulled forward during COVID-19 and maybe.
It's going to be more muted this cycle when you do start to see the replacement cycle for mass spec.
Speaker Change: So I think we would support that hypothesis that the additional funding in the various market subsidies pulled forward demand and replaced a lot of equipment out there during the pandemic and immediately following that in and that's why we've talked about the need and we're experienced.
Saying that normalization period right now.
Speaker Change: That replacement cycle is going to remain intact and intact and that's why we would say we're probably.
In the early innings mid innings here of that recovery. The first step that we're probably going to see here are the lower comps in the second half and it's probably going to take 2025 to start approaching that normal replacement cycle again Tycho.
Okay, and then on Bioprocess I appreciate all the color we start to get more questions on yield improvements I'm wondering how you think about that just your customers getting more efficient and then how you think about capacity kind of freeing up in the industry, whether it's novo selling off some of the cabinet capacity, our wuxi, having to get rid of some capacity in the U S. Just curious how you think about that playing into kind of.
Equipment side of things and then maybe the last part just what's your view on kind of doing more on the services side see demo type work and adding your own capacity.
So starting with yields.
And improving customer yields that's what we do our focus and bio processing is to help our customers improve the yields and theres plenty of opportunity for that.
Ultimately lowered the total cost of manufacturing of these life saving certainly quality of life, improving drugs and to improve accessibility to these drugs around the world. So that's what we do and we don't view that as an inhibitor to growth on the contrary through creating more value for.
Our customers, we see more opportunity for growth, there and differentiation and believe that we're very well positioned.
Now as we think about capacity here in the marketplace.
Speaker Change: We actually believe that capacity certainly for commercial production and what is in phase III.
The increase we don't believe that in the large manufacturers pharma, our CMO that ultimately there is sufficient capacity for the long term and we would expect that capacity to continue to increase and theres moves in the marketplace that demonstrate that and then underwrite also.
Our perspective on equipment orders growth.
Now as it relates to services.
Speaker Change: We've talked about that at length, we're very focused on the scope of the businesses that we have we're excited about investing in those businesses and helping our customers do what they do we do provide services.
In order to help them with some of their most complex and new therapies and then ultimately do tech transfers to either the pharma company itself or CMO partner.
Okay very helpful. Thanks.
Thanks, Tycho thank you.
Thank you at this time I would like to turn the call back to John Bedford for any additional or closing remarks.
Thank you everybody for joining us will be around all day and rest of the week for questions.
Good day.
Thank you. This does conclude Danaher Corporation's second quarter 2024 earnings results Conference call. You may disconnect. Your line at this time and have a wonderful day.
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