Q3 2024 Revvity Inc Earnings Call
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Speaker Change: Hello, everyone and welcome to Itt's third quarter 2024 earnings Conference call.
Lydia: My name is Lydia and they'll be operated today.
Lydia: Oh, the prepared remarks, there'll be an opportunity to ask questions.
Lydia: If you'd like to ask a question during Q&A you can do side by pressing star followed by one on your kind of thing keypad.
Speaker Change: I'll now hand, you over to Steve Willoughby head of Investor Relations to begin. Please go ahead. Thank you operator, good morning, everyone and welcome to revenues third quarter 2024 earnings conference call on the call with me today, I'm <unk> Singh, our President and Chief Executive Officer, and that's the Kodiak, Our senior Vice President and Chief financial.
Lydia: Officer I'd.
Speaker Change: I'd like to remind you of the safe Harbor statements outlined in our press release issued earlier. This morning and also those in our SEC filings statements or comments made on this call may be forward looking statements, which may include but may not be limited to financial projections or other statements of the company's plans objectives expectations or intentions.
The company's actual results may differ significantly from those projected or suggested due to a variety of factors, which are discussed in detail in our SEC filings any forward looking statements made today represent our views as of today, we disclaim any obligation to update these forward looking statements in the future even if our estimates change.
Speaker Change: So you should not rely on any of todays statements as representing our views as of any date. After today. During this call we will be referring to certain non-GAAP financial measures. A reconciliation of the measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release I'll now turn it over.
Speaker Change: To our President and Chief Executive Officer, Claude saying a lot.
Claude: Thank you, Steve and good morning, everyone.
Speaker Change: <unk> strong execution was again on display during the third quarter, which enabled our total revenue adjusted operating margin and adjusted EPS to east come in better than we had anticipated.
Speaker Change: Our strong execution led to adjusted operating margins, increasing by 80 basis points year over year to $28 three in the quarter, which shows the positive impact our productivity initiatives are having on our cost base and Incrementals. We also had another great quarter from a cash perspective as well.
Speaker Change: Row, regenerated $135 million of free cash flow in the quarter, resulting in 100% conversion to adjusted net income so far this year.
Speaker Change: Given our strong cash performance, we remained aggressive with our share repurchase program and returned over 100% of our cash flow in the quarter to shareholders, why our buybacks and dividends.
Claude: As we look ahead to the final quarter of the year, we expect our diagnostic businesses continued to perform at a very strong level and we are continuing to experience positive momentum in our life science reagents and software businesses.
Speaker Change: In addition, given that as of September we lapped the one year anniversary of the most significant pharma industry pressures seen in many years.
Claude: We remain optimistic that market trends are continuing to stabilize and that the worst of the headwinds are likely behind us.
Claude: However, since we have yet to see a more material conversion of a funnel into orders yet.
Claude: Now factoring in a more subdued and of your spending environment for instrumentation from former customers as compared to our previous expectations.
Claude: This is in part due to the continued delays with instrument purchasing in China stimulus has still not yet begun to meaningfully slow resulting in customers remaining on the sidelines, while they wait to see if they will receive any of these funds.
We expect this change to result in a fourth quarter total company organic growth to be in the range of 3% to 5%.
Claude: This brings our full year organic growth outlook to now being in the range of zero to 1%.
Claude: Modestly below our previous assumptions why is the rate of recovery is not progressing quite as quickly as we had anticipated I'd note.
Claude: Weighted outlook continues to remain several hundred basis points above the market. Additionally, I am proud to share that our strong operational execution enables us to again raise our adjusted earnings per share guidance for the full year, while Max will provide more details in a bit you're now looking for.
Claude: Adjusted earnings per share for the full year to be in a new range of $4.83.
Claude: $4.87.
Claude: As I first shared last quarter based on the feedback from our customers, including those I met with last month, while I was in China. We continue to feel demand in our key pharma biotech markets is making measured progress towards more normalized levels I expect that this spot too.
Claude: Normalization will continue over the coming months and likely persist as we move into the next year.
Claude: Given that we continue to remain very optimistic about our future performance and what it will mean for our company. We plan to remain active with our share repurchase activity for the rest of this year.
Claude: Our board recently approved a new $1 billion share repurchase authorization over the next two years, replacing what was left on our prior authorization.
Claude: The new authorization and its larger size speak to both our strong cash flow performance and balance sheet stability. While also recognizing the significant potential we still have in front of us from an investor awareness and understanding perspective.
Claude: During my recent visit to China, I was able to meet with our teams customers and key government partners. While also inaugurating a new remedy innovation center in Daytona.
Claude: It was a motivating visit for me personally as I was able to see how in just our first your teams have significantly embraced levitous collaborative culture.
Claude: Their passion was overflowing as it pertains to our key focus areas as a company from both a commercial and scientific perspective.
Claude: I can also share that despite geopolitical headlines from our perspective the environment in China remains positively dynamic I came away from the trip feeling optimistic about the future of our business in the region.
Claude: With increased confidence that the measures. The government has recently enacted should translate into improved market conditions for our industry as we head into the next year.
Claude: During the quarter. We also continued our focus on innovation with the successful launch of several new products that utilize cutting edge technologies and help address emerging areas of medical investment.
Claude: For instance, we recently introduced in the logic AI.
Claude: New AI driven offering for our high content screening instruments.
Claude: This solution builds on our existing signals emission artists software platform, taking image analysis to the next level.
Claude: If you use this pre trained AI models to enable the analysis of Bright-field images, allowing for fast and robust identification of cellular structures, resulting in enhanced lifestyle data with the ability to increase functional data for screening sample.
Claude: This solution now launched we will also be more able to rapidly deploy additional AI algorithms for our instrument platforms in the future.
Claude: It was also exciting to see several different teams from across the company come together to quickly develop launch and begin to commercialize another new AI based offering in our diagnostics business. The new Levity transcribe AI service, which was introduced at a key newborn screening conference.
Claude: A few weeks ago provides clinical labs, a new way to highly automate what is currently a time consuming task.
Claude: Transcribing handwritten patient information from individuals samples this novel product, which leverages, both AI and optical character recognition increases workflows speed by approximately 40%, even when including the time required for data verification. This is just another.
Claude: Small example of how we can quickly capitalize on opportunities as a team to better serve our customers and enable us to maintain our industry leading market positions also in our diagnostics business a few weeks ago, our euro immune team launched a new geno typing solution in Europe to help.
Claude: Better assess a patients risk for possible side effects of new therapies coming to market to treat Alzheimer's disease, we expect the market opportunity for this April <unk> gene focused assay to increase significantly as anti amyloid therapies become more widely available in Europe in the future.
Claude: Building off our response to the pandemic a big focus for US has been working to better strategically partner with key government collaborators. This focus was recently highlighted in an important announcement from the U S. Government Agency BARDA, who late last month awarded US a contract of over $9 million to.
Claude: We use towards furthering the development of a novel diagnostics platform.
Claude: While it will likely be several more years before this platform is ready for commercialization. This even contract of this size from such an important U S. Federal Government agency is a testament to both our strong relationships and the level of novel signs that is taking place within the company.
Claude: We are excited to share more with you about our future innovations and the company overall at our upcoming Investor Day on November 21st which will be hosted at our San Diego campus. We have a great day planned for you to better understand what makes it. So unique why we have such a high degree of confidence in financial performance.
Claude: <unk> and how we are capitalizing on the opportunities in front of us through strong collaboration across the business, resulting in our ability to bring meaningful new offerings to the market I hope you can join us in person out in California later this month.
Claude: In addition to visiting us at our Investor Day I also hope you can come meet with us in the future at a brand new corporate headquarters in the Boston area, just down the road from our old offices.
Claude: Celebrated the Grand opening of the modern and high Tech space, just three weeks ago. It perfectly embodies our commitment to embracing technology and collaboration and was designed to inspire and energize. Our teams while also being financially accretive to our bottom line I look forward to welcoming more of you to experience. This.
Claude: Eight of the arc facility in person.
Claude: Been making great progress as a company since becoming reality, but I also think it is paramount that what we do and the way we do it contributes positively to both our employees and the societies in which we live. These contributions were highlighted in our recently published 2024 impact report I'm proud to share that.
Claude: Our scope, one and two emissions were down 7% in 2023, while our facility in Colorado recently won a pollution reduction award from the EPA also highlighted in the report was how we continue to have a strong and diverse leadership team with robust governance programs and a high degree of overall.
Claude: <unk> satisfaction, what do we do with remedies positively impacting the world every day with our focus on how we accomplish this work is also very important so it's great to see these efforts on display in this key annual publication.
Claude: Overall, we had a good third quarter across the board our markets I'm, making measured progress on the path to normalization with some categories further along that path than others and we continue to diligently execute on those items that are more fully within our control and an extremely high level.
Claude: Look forward to connecting with many of you either in person or virtually at our upcoming Investor day in a few weeks, but I am excited to share more of a view about revenue with that I will now turn the call over to Max.
Max: Thanks for that and good morning, everyone as Claude mentioned, we performed well in the third quarter and we were again able to exceed our earnings expectation for the quarter.
Max: Was also extremely pleased to see our focus on cash generation continued as our free cash flow conversion to adjusted net income remains 100% year to date, which is truly outstanding performance.
Claude: Pharma biotech demand continue to remain stable with year over year growth returning for our life Sciences reagents, while instruments continue to remain under pressure, particularly in China and was down more than we had anticipated overall this.
Claude: This was offset by strong performance in our diagnostics businesses across both reproductive health and immuno diagnostics. As we look ahead, we continue to feel that the worst is likely behind us in the markets, which had been under pressure over the last two years as the demand recovery is continuing its path towards more normalized growth rates in the future or die.
Claude: Ignostic and software businesses continue to perform at a very high level given their strong underlying market trends significant innovation and consistently strong commercial execution.
Claude: We had suggested a quarter ago, we became more active with our buyback activity in the quarter, which we anticipate will likely continue given our strong balance sheet and cash flow performance. This year, our future remains extremely bright and we believe being more aggressive with our repurchases in the near term will provide significant returns for our shareholders now.
Claude: Turning to the specifics of our third quarter performance.
Claude: Overall, the company generated total adjusted revenues of $684 million in the quarter, resulting in 2% growth in organic revenue, which was in line with our expectations.
Claude: Effects was neutral to growth and we again had no incremental contribution from acquisitions as it relates to our P&L. We generated 28, 3% adjusted operating margins in the quarter, which was up significantly versus third quarter, 2023, and roughly 30 basis points above our expectations, we were again able to keep.
Claude: Our operating expenses relatively flat sequentially on a dollar basis, resulting in strong incrementals I continue to be impressed by the impact our teams actions are having on our expense structure, which I believe should allow us to expand margins at an industry leading rate at industry demand continues to recover looking below the line, our adjusted net interest and other.
Claude: Expense was $7 million in the quarter as we are benefiting from our strong cash inflows and a favorable interest environment against our fixed rate debt.
Our adjusted tax rate was 15, 3% in the quarter, which was lower than our expectations due to the favorable impact of our recent tax planning initiatives.
Claude: With an average diluted share count of $123 million for the quarter. This resulted in adjusted EPS in the third quarter of $1 28.
Claude: Which was <unk> 16 above our expectations.
Claude: Moving beyond the P&L, we had another strong quarter from a cash perspective, as we generated free cash flow of $135 million in the quarter. This brings the free cash flow generated year to date to $427 million, resulting in a 100% conversion of our adjusted net income cash remains a bright spot as we continue to leverage AI based tools and <unk>.
Claude: Tuning internal processes that allow us to appropriately manage working capital considering this strong year to date performance. We now expect free cash flow generation to be approximately $550 million, resulting in approximately $700 million of total cash inflows when accounting for the additional cash payments already received related to our recent divestiture.
Claude: As for capital deployment as I mentioned, we remained active in the third quarter by repurchasing $154 million worth of shares.
Through October our total spent on buybacks is over $200 million.
Given our intention to continue to remain active with the buyback. We also recently received a new $1 billion repurchase authorization from our board, which replace what was left on our previous authorization and provides us the flexibility to remain aggressive with our share repurchases. We finished the quarter with a net debt to adjusted EBITDA leverage ratio.
You have two one times after retiring roughly $700 million of debt that came due in mid September our balance sheet is strongly positioned with 100% fixed rate debt with a weighted average interest rate of two 6% and maturity out another seven five years as we evaluate capital deployment, we will continue to remain flexible in order to.
Claude: Capitalized on the highest return opportunities, while maintaining our investment grade credit rating.
I will now provide some commentary on our third quarter business trends, which is also included in the quarterly slide presentation on our Investor Relations website.
2% growth in organic revenue in the quarter was comprised of a 3% decline in our life Sciences segment and 5% growth in diagnostics geographically we grew in the low single digits in both the Americas and Europe, while Asia was flattish with China declining low single digits.
Claude: From a segment perspective, our life Sciences business generated adjusted revenue of $301 million in the quarter. This was down 2% on a reported basis and 3% on an organic basis.
Claude: From a customer perspective sales to both pharma biotech customers and academic and government customers declined in the low single digits in the quarter.
Claude: Our life Science reagents grew in the mid single digits in the quarter and were up modestly sequentially on a dollar basis in line with our expectations are.
Claude: Our life science instruments revenue declined in the low teens year over year, which as mentioned was worse than anticipated.
Claude: Our signal software business declined in the mid single digits as it faced known headwinds relating to the timing of renewals. We continue to expect very strong performance for the signals business in the fourth quarter, resulting in expected organic growth for the full year to still be in the low double digits overall.
Claude: In our diagnostics segment, we generated 383 million of adjusted revenue in the quarter, which was up 6% on a reported basis and 5% on an organic basis.
Claude: From a business perspective, our immuno diagnostics business grew in the mid single digits organically during the quarter in line with our expectations. The business continues to perform well with high single to low double digit growth across all regions on a year to date basis.
Claude: Our reproductive health business grew in the high single digits organically in the quarter <unk>.
New born screening continue to perform well and grew in the low double digits in the quarter globally, which is driven by outstanding operational and commercial execution. Given the continued headwinds from global birth rates as we had anticipated we saw a sequential and year over year improvements in the quarter related to the year of the Dragon with improved results in both our pre.
Claude: NATO and newborn businesses in the region.
Claude: Finally, our applied genomics business declined in the low single digits in the quarter, which resulted in its total revenues being up mid single digits sequentially.
After over two years of fairly consistent double digit declines the modest decline in the third quarter was another promising sign as this business has now stabilized.
Claude: We expect its year over year performance to again improve here in the fourth quarter. As this business now appears to be solidly headed on the right path towards recovery.
As it pertains to China, specifically, our revenue in the country declined in the low single digits year over year overall, which was modestly below our flat expectation.
Claude: This consisted of an approximately flat performance for diagnostics and a high single digit decline in life Sciences.
Within life Sciences, we saw strong growth in reagents offset by a double digit decline for instrumentation as customers continued to delay their capital equipment purchases ahead of stimulus arriving.
Claude: Based on recent feedback from our teams we remain confident that stimulus will eventually positively impact customer behavior in the region. While we continue to believe this is largely going to have an impact in 2025 and beyond.
Claude: In regards to our outlook for the fourth quarter, we are seeing strong performance across most of our businesses outside of those where pharma biotech customer activity, it's continuing to gradually improve.
Given that we are not seeing these customers returned to more normal spending patterns as of yet we are now assuming that a typical end of year pickup in demand for capital equipment continues to remain lower than it has historically been.
Claude: This is resulting in our organic growth outlook for the fourth quarter now being in the range of 3% to 5%, which brings our updated full year outlook for organic growth to approximately zero to 1% with updated currency assumptions given the weaker dollar over the last few months. This brings our expected full year 2020 for revenue to be in the range of $2 75 to two.
Claude: $7 7 billion.
Despite a modestly lower overall revenue outlook. It is great to see that we are able to continue to have very strong margin performance and reiterate our outlook for our adjusted operating margins to be in a range of 28 to 28, 5% this year.
This translates to our adjusted operating margins in the fourth quarter expected to be a little over 30%.
Claude: As I highlighted earlier, we are making good progress on our cash generation and interest expense management, allowing us to now expect our net interest expense and other to be approximately $43 million for the year down from our prior estimate of approximately $50 million.
Claude: We are also making good progress on our tax planning initiatives. We now expect this progress to result in our full year adjusted tax rate to be approximately 19% down from our prior 20% outlook.
With our strong operating margin outlook and good execution on below the line items, we are raising our full year 2024 adjusted earnings per share guidance to a new range of $4 83 to $4 87.
Claude: As I've already touched on we expect this increased earnings outlook and our strong working capital performance to result in our free cash flow to now be approximately $550 million up quite significantly from our outlook coming into this year. In addition to this internally generated cash. We also have received another approximately $150 million in cash so far this year.
Claude: Related to our recent divestiture.
Claude: Overall, we had a strong third quarter and are executing well as our diagnostics and software business are performing very well and our life science businesses continue to gradually improve.
Claude: Our expanding margins year over year, this year and generating significant amounts of cash, which we are accretively, putting to use allowing us to raise our adjusted earnings guidance for the year I look forward to many of you joining us in a few weeks out in San Diego. So that you can learn more about remedy what makes us unique and why we are so excited about our future and its potential.
With that operator, we would now like to open up the call for questions.
Thank you.
Speaker Change: Please press star followed by the number one if you'd like to ask a question and ensure your devices Amit it lightly when it's your turn to speak.
Speaker Change: We ask that you limit yourself to one question and one follow up.
Speaker Change: Our first question today comes from Mike <unk> with Bank of America.
Speaker Change: Line is open. Please go ahead.
Great. Thanks for taking my question and congrats on the quarter guys. Max maybe first one for you you just touched on it a little bit there in terms of the moving pieces in the quarter and how that impacted your form <unk> outlook I just want to clarify a couple of things.
Speaker Change: Touched on instruments, a couple of times you touched on pharma and biotech you touched on China could you break those down a little bit maybe de convolute for us what changed in the quarter and how that's driving your in your view just sort of like how much of it is instruments in China versus instruments globally pharma and biotech in China responded Baskin globally, just wanted to get a clearer picture of.
Speaker Change: What changed and.
Speaker Change: What's what's really behind the increased caution for <unk>.
Yeah, Hey, Mike So as we looked at our full year outlook as a result of the third quarter performance and the expectation for the fourth quarter really the change in our organic growth assumption of going from the 2% to the zero to 1% range is all driven by the instrumentation assumptions. So it was the weaker slightly weaker performance in the third quarter.
Claude: And then a reduced outlook on the return to that sort of normal seasonality in the fourth quarter. So that is really the fundamental driving change I would say as you look at the pharma biotech dynamic that is majority of where our instrumentation is sold to so that is the biggest end market I think as you look at it globally, China was definitely a bigger piece than we had.
Claude: Anticipated as we've mentioned customers are pausing as they await for stimulus.
U S and Europe I would say we are.
Relatively in line to maybe slightly lower than our expectations, but the U S is definitely probably the one market that continues I would say to return to normal faster than the other regions.
Speaker Change: Okay. That's helpful. And then for my follow up I know you don't typically guide to 2025 at this point, but maybe I'll just ask you to sort of framing question. A couple of your counterparts have given some early commentary on 2025, just given it's still a very fluid environment youre exiting this year at about 4% organic for the fourth quarter.
Speaker Change: <unk> six to eight just given everything you said about China and instruments doesn't seem like 2025, assuming a normal year.
It's 4% to 5% maybe for kind of where you exited fourth quarter is that a good starting off point for us to think about next year for organic growth.
And what are the puts and takes to that.
Speaker Change: Hey, Mike This is a prolonged let me let me let me help with that question.
We will provide guidance on 2025 at the <unk> call, but I will say that it appears that the worst is behind us and demand has started to recover what we just really need to see is what is the rate of recovery and how quickly normalizes.
Our plan is to take the next couple of months to have the best lead as possible at the time.
Speaker Change: And I really feel strongly that normalization will likely take us into the first quarter or the first half of 2025.
Okay. Thanks, a lot.
Claude: Okay.
Speaker Change: Thank you. Our next question comes from Vijay Kumar with Evercore ISI. Please go ahead.
Hi, guys. Thanks for taking my question.
Claude: For the other.
Vijay Kumar: Maybe my first one on <unk>.
Vijay Kumar: What happened in the quarter phasing, but it looks like instrument supply to Nymex for the major Delta.
Vijay Kumar: Did things worsened as the quarter progressed or was this more perhaps the lack of recovery.
Vijay Kumar: Towards the end of the quarter.
Vijay Kumar: And what is what is Q4 assuming.
Vijay Kumar: For instrumentation and applied genomics.
Is it the guide here.
Claude: Conservative enough in your mind.
Claude: Yes.
Speaker Change: Good morning.
Claude: As we said in our prepared remarks are Jay.
Claude: The fact is that we are seeing sequential improvement quarter over quarter.
Claude: This is a very good sign that we see continued stabilization and then as I said to Mike question, we really feel that the worst is behind us.
The fact is that the path to normalization may take a little longer than previously expected.
Claude: Primarily the leeson brought us loading out of instrument expectations for <unk> 24.
Claude: Specifically as Max mentioned the instruments in China, we have worse because of the pause on the delay in the expectation from our customers as to when the stimulus funding come is when they will release that which we now seem to the first half of 2025 or more into the first going into the first quarter of 2025.
Claude: That's the way I would calibrate I don't think things are not going worse things continued to sequentially get better it's probably the back to where it is more I would say.
Claude: Gradual then SUV would have expected an uplift coming into the fourth quarter Max anything to add debt.
Speaker Change: Understood and maybe for the follow up here.
Claude: I think in the share.
Claude: Sure repo.
Claude: Stood out with a new authorization.
$150 million repo imply as the average share price of around current levels.
Speaker Change: Mm 100 Twentyish.
The I guess, given where the stock is right now how should we be thinking about the pacing will revenue be more opportunistic around.
Share repurchases.
Claude: Yeah.
In the near term and sorry, just to clarify on is applied genomics and instrumentation, we expect to grow in Q4, I know some of the comps get easier just to clarify that thank you.
Speaker Change: Yes, I can clarify the numbers before <unk> can jump in on the on the share repurchasing Vijay so from a numbers perspective in the fourth quarter. We now expect instrumentation on the life Sciences side should be declining mid single digits and for our applied genomics business, we anticipate roughly flat levels to what we saw here in the third quarter.
Thanks Max.
Claude: On the on the share repo.
I said in our prepared remarks, we continue and the board continues to be very optimistic about our future performance and what does it mean for our company and we plan to remain active with our purchasing activity on the share side.
Vijay Kumar: As you mentioned the board recently approved a $1 billion.
Claude: Purchase authorization for the next two years.
New authorization and its size should speak to us about the <unk>.
Claude: <unk> boat and then what you saw with a strong cash flow performance and the balance sheet stability, but also more importantly, recognizing the potential that we have in front of us.
From an investor awareness and understanding perspective.
Speaker Change: Understood. Thanks, guys.
Claude: Yeah.
Speaker Change: Our next question comes from Dan Leonard with UBS. Please go ahead.
Claude: Yes.
Thank you I wanted to make sure I better understand the trends in reproductive health.
I think it was a low double digit growth rates in newborn screening how much of that was China compared to growth worldwide and what does that look like end of the year of the snake as opposed to year the dragon.
Speaker Change: Yes, let me, let me start with the Horoscope Park <unk> good morning.
Speaker Change: Good morning.
Claude: The.
Claude: The year of the Dragon definitely helped but it was.
Claude: We have started seeing improvements in birth.
Claude: But we haven't seen it to the level for example than the last year of the Dragon happened, which was.
Claude: Whenever it was this is more subdued than that.
Claude: Expect the the.
Claude: The improvement or the increase in birth to China to continue the government has taken a lot of measures and continues to be very diligent and its something of extreme focus for them.
Claude: So we do expect it to gradually improve but not going back to what it was.
The last time this happened in the next year as the out of the snake, but just consider the smaller dragons. So we expect that to be.
Claude: We expect that to be on a positive trend.
Speaker Change: I would just say as we look at the new reproductive health performance overall to your point Dan. It is driven by the strong performance in our newborn business globally growing low double digits, China grew in the high single digits in the quarter. So the rest of the globe grew a little bit faster than that I think it's a combination of two things one we continue to see traction on our commercial.
Speaker Change: <unk> around geographic and menu expansion for our reagent portfolio and then secondly, there were some I would say higher level of instrument placements in the period as some customers refresh their budgets based on their fiscal calendar.
Speaker Change: Okay. Thank you and just to stick with China diagnostics for a moment can you comment on immuno diagnostics performance in China and what is the outlook. There are couple of the peers have flagged incremental headwinds.
Speaker Change: Yeah. So as we look at the China immuno diagnostics performance was right in line with expectation that Q4 assumption has not changed for that business.
Speaker Change: For the full year, we anticipate that business to be growing roughly around mid single digits in China.
Speaker Change: So I think for that it's kind of steady as she goes again I think we've mentioned that our immuno diagnostics business in China is not like the other diagnostics players. So I would caution referencing their commentary and making it directly to our business.
Speaker Change: Perfect. Thank you.
Speaker Change: Thank you next in queue, we have Andrew Cooper with Raymond James.
Speaker Change: Your line is open.
Andrew Cooper: Hey, Thanks, everybody good morning.
Andrew Cooper: Maybe just a quick one last quarter, we spent a little bit of time talking about some of the innovation in TV in terms of the.
Andrew Cooper: The additional automation would love just sort of an update there how thats trended through the quarter and kind of where we are in terms of U S launch hopefully with that with that updated automation.
Speaker Change: A follow up as well.
Speaker Change: Hey, good morning, Andrew.
Speaker Change: We expect the launch now to be more in the <unk>.
Andrew Cooper: First quarter of 2025, so it did get pushed out from what we expected it to be in the fourth quarter.
Andrew Cooper: Some questions that we are going back.
Responding to and be more of a <unk> 2025 launch.
Andrew Cooper: Okay helpful. And then I'm sure we'll talk more in a few weeks about it but just given the size of the repo authorization over the next two years.
Should we be reading anything into how you think about M&A and capital deployment from that and maybe just in addition to that what are you seeing in the M&A pipeline in terms of seller behavior or any changes in terms of activity in the environment or anything you could call out there would be great.
Speaker Change: Yeah. So very good question and as I have said this before and I'll say it again, we will continue to remain active.
Andrew Cooper: Diligent on building a strong pipeline on the M&A is just that the targets that we're looking at them. The valuation expectations. I don't think has changed a whole lot and then I think from our perspective, we see a lot more value right now within our within our own valuation and we want to make sure that we take advantage of that opportunity.
Claude: Okay.
Speaker Change: Okay, I'll stop there and hop back in the queue. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Andrew Coombs.
Claude: Bob <unk> with Barclays. Please go ahead.
Andrew Coombs: Alright, thanks, guys good morning.
Andrew Coombs: Wanted to dig in here on the drug discovery side, a lot of mixed signals coming here from various <unk> and then from the other tools players, especially when we have the mid year cuts in pipeline rationalizations, continuing especially on large pharma. So could you guys just give us a.
Our view of how you guys are seeing any impacts there to the quarter and to the updated outlook.
Claude: Reagents came in a lot better than we expected just kind of want to understand the puts and takes there.
Speaker Change: Yeah, Hey, look I think we've covered.
Broadly in the script as well as some of those initial Q&A, but it's really the the change in the market versus what our anticipation was coming into the third quarter is really related to I would say just the instrument normalization not happening as quickly as we had anticipated things are definitely not getting worse, but it is a slower rate of recovery.
Claude: As you look at the other areas of our business that are exposed to sort of the preclinical drug discovery areas reagents performed well in the period again, returning to mid single digits growth. It was relatively in line with our expectations and as we look at the fourth quarter, we're expecting a similar volume level from our reagents business I think also on the <unk>.
Claude: Software side, our software business continues to perform well, we anticipate that business, finishing the year growing low double digits for the full year and we're excited about the potential of that business over the next two to three years.
Speaker Change: Great. Thanks.
Speaker Change: And then I guess when you guys think about the China stimulus.
Claude: Yeah.
Speaker Change: I don't think you guys had much stimulus baked into the prior guide and so now that you. When you are talking about the instrument weakness, particularly in China around the stimulus kind of resulting in the guide down it gives his update.
Claude: What happened there and more longer term, how you guys view the stimulus.
Claude: Flowing through and how your funnel is building there.
Speaker Change: Hey, Luke.
Speaker Change: Youre right.
Speaker Change: Our expectations were not not much but actually the performance came out worse in the sense that customers, who we expect to provide perspective. Those stimulus also have taken a pause to see if they're able to get funding and that spread.
We saw worst performance in China vis vis vis stimulus.
Claude: Thanks.
Claude: Yeah.
Claude: Yeah.
Speaker Change: Okay, great. Thanks, guys.
Speaker Change: The next question comes from Dan Brennan with TD Cowen. Please go ahead.
Dan Brennan: Great. Thank you thanks for the questions.
Dan Brennan: Sorry to go back to the kind of fourth quarter, but just wanted to fully understand kind of what's changed.
Dan Brennan: I can confirm to some quick math, so if instruments or 12% of revenues.
Previously you were thinking kind of a nice recovery for acute maybe the mid teens.
Dan Brennan: It would get you to your kind of total company growth rate, which was around 10%.
Claude: And now if you are saying instruments were down five.
Claude: I would assume those changes to the other parts of the business.
Claude: Otherwise like I would need instruments to be down 30 to get to your new guidance before so can you just maybe walk through beyond instruments kind of what else maybe might've changed in terms of the implied guide for the fourth quarter.
Speaker Change: Yeah, Hey, Dan I think the other piece you've got a factor into is the applied genomics business as well if youre just looking at the life Sciences instrumentation piece of the of the overall business. The other piece I would mention as well is look as you look at the second half guide as I mentioned really the only thing that is fundamentally changes our assumptions on the life Sciences instruments.
Speaker Change: Applied genomics the rest of the business is in line with our expectations and for what we had set out for the second half of the year.
Okay. That's fine we can cover maybe offline to dwell Max. Thank you and then maybe just a high level one the elections tomorrow.
Speaker Change: I'm just wondering like if Trump is elected just wondering how we might think about possible implication tuna is what ultimately will pass, but he kind of talking about super high tariffs on imports from China. Similarly.
Speaker Change: 20% tariff on rest of world and who knows what kind of reaction China would have but we have a predicate a little bit going back to the last time. He was president so probably I know you've just over in China, just kind of how do we think about the possible impacts of any kind of planning strategies, you could make to kind of mitigate some of this thank you.
Speaker Change: Good morning, Doug the last thing I want to do is speculate on elections.
Speaker Change: Quarterly earnings call.
Speaker Change: The results will be what the result will be from our perspective as a company and as most of our peers in the owned industry. We all prepare for all scenarios.
Speaker Change: I think it would be best to see what the results of the elections are and we have an investors call coming up in three quarter.
Speaker Change: Long term from China perspective, as you know very well than what we have done this via our strategy has been in China for China.
Speaker Change: And that has worked during all the election cycles and be very confident in the ability to continue to execute for our customers in China from China.
Speaker Change: Great. Thank you.
Speaker Change: The next question comes from Puneet <unk> with Leerink partners.
Speaker Change: Your line is open.
Speaker Change: Yeah, Hi, thanks.
puneet: Thanks for the questions.
Speaker Change: The reagents business was up mid single digits and I'm sure we're going to get more details on that at the Investor day, but just can you elaborate what's sort of behind that.
Speaker Change: From the biologic customers.
Speaker Change: Peers are still down in the <unk> antibodies business. So obviously this is better versus the peers, but just you talked about North America, and Europe being positive, but biopharma and academic where both are down low single digits. So just trying to parse out what's happening in the reagents business and maybe what cut.
Speaker Change: <unk> are applications of where you're seeing the traction or is it just largely comps.
Speaker Change: Hey, good morning, Puneet No I think it's continued sequential improvement as you look at it through quarter by quarter, and then I think that speaks to somewhat on the diversity of our portfolio on the reagent side, obviously, you mentioned <unk>, but <unk> from Dharma con or HDR.
Speaker Change: Our allies.
Speaker Change: Elisa kits the whole portfolio continues to do very well globally. So I think it's not just one segment that I would call out that's outperformed our overall reagents business and followed biotech continue.
Speaker Change: <unk> continues to perform to our expectations and.
I'd say that speaks to the strength and the diversity and it relates to pharma programs, whether it's around GNP ones or others that we continue to see traction with that portfolio.
Speaker Change: Got it and then in China just wondering.
Speaker Change: Given the challenges you are seeing with instrumentation and your recent visit there whats your sense in the level of confidence about instrumentation purchases, if the stimulus was to come through and again.
Speaker Change: Timing of that is.
It hasn't been Super clear, but just wondering if you can elaborate more there on the instrumentation side in China. Thank you.
Sure. We continue to remain very optimistic on the stimulus program and overall on the pipeline and the portfolio that we have the number of proposals that the teams working on day in and day night and submitting.
Speaker Change: On the stimulus programs gives us a strong degree of confidence irrespective of the yield that we would get out of this stimulus. So the government is serious about ensuring that the economic activity takes an uplift. They are strongly supportive of the life sciences and diagnostic tool.
Sector, and then behooves value for us and our peer group.
I would say the way I would the way.
Claude: I would assess this and calibrate it is that yes. It did not happen in <unk> of 2024, and it's more of a 2025 activity, but at the same time. It also gives you a sense of seriousness and diligence that both the government and those that are applying for these loans.
Claude: Putting in place. So we expect this to be a driver for growth in 2025.
Speaker Change: Got it thank you.
Claude: Yeah.
Next we have Dan Arias with Stifel.
Speaker Change: Your line is open.
Dan Arias: Hey, good morning, guys. Thank you a lot I wanted to actually take the opposite side of that China question. There just based on your visit what are you hearing from customers and your sales teams when it comes to <unk>.
Dan Arias: 2025 demand outside the stimulus dynamic and outside of the instrument dynamic right now.
Claude: It can be hard to separate out the government help component, but I'm just curious about.
Overall sentiment on reagents budget expect success et cetera.
Specifically as it relates to the next 12 months of X 14 months more than the multi year I know everybody's still feel okay about the multi year outlook.
It's a great question I mean, as I've said, just two weeks ago I spent a week in China meeting with government officials customers. We had we have a strong <unk> and advisory board and we spent four hours with them going through market trends and markets, what's happening and most.
Claude: Ultimately with our with our team.
I will say this on the sentiment remains strong.
Claude: Especially in our sector, there's a lot of optimism there is.
Claude: Clarity on the government side to infuse.
Claude: Elements that help too.
Claude: Ensure that the economic recovery continues to be robust.
Claude: And more importantly, our customers are telling that the products that you have put in place the pipeline that we have coming out.
Claude: Both on the diagnostic and the life sciences side or something that is relevant for the market and will gain traction. So I think at a high level. What I will leave you with is that our strategy for in China for China is working and is one that we will continue to deploy.
Claude: As I mentioned in my prepared remarks, we just launched the <unk> innovation center in Taichung.
Claude: It's a facility.
Claude: And we now have a fully contiguous competency and capability around early discovery development manufacturing and we've put all of these elements in place.
Claude: Over the last several years to ensure that.
Claude: Irrespective of the installation that the market has to if the market has to go through our team in China is fully enabled us to execute on its own.
Speaker Change: Okay, and Matt just really quickly do you have a regional forecast for China.
Claude: <unk>.
Speaker Change: Yes, I think as we look at the the fourth quarter for China, we anticipated growing in the mid single digits, that's predominantly driven by our diagnostics performance in the fourth quarter. As we had previously mentioned that we do expect diagnostic performed well in the fourth quarter. We also have a little bit of easier comps.
Claude: Really assuming any change in the market environment on the life Sciences side.
Speaker Change: Yeah, Okay. Thank you.
Speaker Change: The next question comes from Mac Sykes with Goldman Sachs. Please go ahead.
Hey, good morning, Thanks for taking my questions, maybe a high level question for you first.
Mac Sykes: Given that you've kind of launched the transformation of this business into an increasingly weaker environment, we haven't really been able to see sort of the power of that transformation. We know that the recurring revenue is significantly higher than it had been in the past.
Claude: Think about going into a recovery and the operating leverage that this new business has.
Speaker Change: Is that why some of the recovery that we're seeing could be more gradual just because of that level of recurring revenue.
Claude: Or do you feel like the operating leverage is still there in this business with a smaller portion of instruments, but still there just kind of how are you thinking about what revenue it looks like into recovery as we think about 25.
Speaker Change: Hey, Good morning, Matt I think maybe just to take a step back yes.
Speaker Change: Really appreciate that the market conditions have been weak.
Speaker Change: When we launched it in the midst of that but I do want to make sure that we don't lose sight of the fact that despite.
Speaker Change: I would say anemic organic growth.
Speaker Change: Increased our operating margin 80 basis points year over year in the quarter and that shows I mean, if you look at our cost bases incrementals are strong cash flow performance.
Speaker Change: This is all because of the strategic <unk>.
Speaker Change: <unk> that we put into the place and it is a direct result of that.
Speaker Change: If we are able to execute at such a strong level in an anemic market environment imagine what the strength of the portfolio will be.
Speaker Change: In the markets.
Speaker Change: Turned around.
Speaker Change: And in regards to the market I will say that if you look at the reinsurance portfolio performance in the quarter.
It is it is starting to show signs of stabilization and improvement and as I have said earlier. The reagents are the first peak into the recovery.
Speaker Change: That's why I keep going back to the fact that in saying that we have started seeing stabilization, we feel that the worst is over.
Speaker Change: I think obviously the instruments are a big swing factor and Thats the impact that we are seeing but overall, we see that the agents essentially coming back to what we hope in 2025.
Speaker Change: Got it thank you for that and Mac, just drilling a little bit more on the life Sciences side on the margins you mentioned that margins were pressured obviously due to lower volumes, but also investments can you maybe talk about what some of those investments are in.
Speaker Change: In terms of how should we should think about Q4 and beyond but where those investments start to trail off a little bit as we continue the volume recovery to get a bigger level of margin expansion.
Mac Sykes: Yeah, Hey, Matt in terms of the investments on the life Sciences side.
Speaker Change: Couple of the more strategic areas of investments of us had been one around the GMP.
Speaker Change: Facility, which we've talked about and those that will be out in San Diego with us for the inbound Investor day, we'll get a chance to see it.
Speaker Change: It will be exciting I think the second piece is around e-commerce and getting to one platform for us as the company and then the third one is really around our signals.
Speaker Change: Portfolio, we've launched a couple of products in the first half of this year. We continue to have a roadmap with additional launches here over the next couple of years and so that business will continue to be in a heavy investment cycle.
Speaker Change: As I step back again, and maybe just reiterating some of the comments provided mentioned in terms of our overall operating margin.
Speaker Change: Maintaining our full year 24 operating margin, despite cutting our organic growth year around 2% and now that <unk> to 1% range.
Speaker Change: So I mean, you could read into that and argue that if we had held the organic growth guidance. We would have already been at the upper end of our operating margin if not above it and I think that gives you a little bit of insight into what the execution. The team is having on our productivity initiatives and driving our integration synergies, but also the power and potential of our incrementals in the business once we <unk>.
Speaker Change: Turn to a more normalized market environment.
Speaker Change: Thank you very much.
Speaker Change: Our next question comes from Brandon Couillard with Wells Fargo.
Speaker Change: Please go ahead.
Brandon Couillard: Hey, Thanks, Good morning, two questions for the macro squeeze in motion here.
Brandon Couillard: You talked about tax planning initiatives.
Brandon Couillard: The effective rate continues to trend below target do you think 19% is a good assumption going forward and then secondly, free cash flow conversion, obviously been solid year to date do you still think there's more juice to squeeze from working capital as you move into 'twenty Fives can you maintained 100% conversion next year. Thanks.
Speaker Change: Yeah, Hey, Brian.
Speaker Change: So first I'll start with the tax planning question. So again we.
Speaker Change: We have revamped our tax team coming into this year and I think we've seen the fruits and the benefits of that team and their execution. We have now lowered our full year expectation to 19% I would say that most of those benefits. We've received this year are structural in nature and so we have essentially lowered our tax tax rates going forward.
Speaker Change: So that has been encouraging progress year to date I would say on the second one from a free cash flow conversion again. This year has been incredibly strong performance I do think there is still room to go from a working capital improvement standpoint, although the team has made tremendous progress this year with the increased focus as well as improving some of our operating processes.
Speaker Change: And leveraging our digital capabilities.
Speaker Change: As we look into outer years, we've already kind of gone out there that this business should be normally running at greater than 85% free cash flow conversion. We've also mentioned that we're going to continue to have a step up in capex, which is offsetting our we're basically self funding some of that step up in capex with the improved working capital performance is probably the best way to think about it.
Speaker Change: Great. Thanks.
Speaker Change: Okay.
Speaker Change: Your next question comes from Patrick Donnelly with Citi.
Speaker Change: Your line is open.
Patrick Donnelly: Hey, guys. Thanks for taking the questions.
Patrick Donnelly: Max maybe a follow up on some of the margin conversation a minute ago I guess when you think about just high level moving pieces into next year I mean, obviously the growth should hopefully come back a bit I would think that mix, particularly from the agents pick up a little bit I know, that's a higher margin business for you guys would be beneficial could you just talk about the high level.
Speaker Change: Headwind on the margin piece you know other companies have talked about things like incentive comp coming back so would love to just talk about the high.
Speaker Change: High level bridge and to make sure we think about it appropriately.
Speaker Change: Yeah, Hey, Patrick again, I think we're going to reserve official 2025 commentary until our Q4 call I think as you look at some of the dynamics that will play out next year. One is that I think really just the biggest assumption of what market environment. We're going to look into I think we've been out there and mentioned that if we are growing in line with a normalized market.
Speaker Change: We've talked about 75 basis points of operating margin expansion, if it is a little bit lower than that.
Speaker Change: Something in the.
Speaker Change: 2% to 3% overall market range, we'd probably be closer to 50 bps operating margin expansion.
Speaker Change: And so I think we've already kind of put those framing comments out there I wouldn't say, there's anything I would have to call out in terms of a known headwind for US next year I think we've already sort of normalize our cost bases as we headed into this year.
Speaker Change: Okay. That's helpful.
Speaker Change: And then maybe just to follow up on some of the reagent conversations earlier.
We've got a bunch of questions as the quarter went about things like the preclinical side I think we've touched on that a little bit can you just talk about your exposure on that front, what youre seeing from that customer base and just the right way to think about what the recovery path and reagents. It looks like again nice to see it back to mid single digit growth here.
Speaker Change: Just trying to think about the go forward just given some of the noise, particularly from the early stage customers. What your exposure there would be helpful. Thank you guys.
Speaker Change: Okay.
Speaker Change: Let me I hope at that one.
Speaker Change: I mean as you know majority of our reagents on the preclinical side of the business given that our focus is on discovery.
Speaker Change: The only discovery with pharma biotech so too.
Speaker Change: Your point I think that's why it's a lot more encouraging to see that business coming back to growth and the reagents starting to perform.
Speaker Change: I mean as I mentioned earlier to I think it was Luke's question.
Speaker Change: We've seen broad based recovery across our different business lines on the reagent side. So it's not that I could highlight one product line or one business line and say that that's done.
Speaker Change: And then the 19 that is why that is what we feel.
Speaker Change: Encouraging about the portfolio there that whether it's Elisa SD RF.
Speaker Change: <unk> <unk> <unk> all of these product lines have done well.
Speaker Change: Our final question today comes from Jack Meehan with Nephron Research. Please go ahead.
Jack Meehan: Thank you good morning.
Jack Meehan: I was wondering if you could unpack the.
Jack Meehan: Low double digit newborn growth in the quarter.
Jack Meehan: What are you seeing in terms.
Speaker Change: Prenatal in China and that just how that's folding into the expectations for <unk>.
Speaker Change: Newborn screening thank you.
Speaker Change: Yeah.
Speaker Change: Yes, so I think again as we look at the reproductive health performance in the quarter Jack.
Speaker Change: I would say a strong performance really globally.
Speaker Change: On newborn screening globally again was up low double digit growth I think as you look at prenatal. It was also a strong performance in the period.
Speaker Change: I think part of that again I had mentioned some of that was capex related and some instrument placements.
Speaker Change: But then also there were pockets of actual underlying reagent growth an increase in <unk>.
Speaker Change: Screening that did that China was one of those geographies that also had the increase in screening, which again is linking to our expectations around the newborn business in China for the fourth quarter.
Speaker Change: Got it and then can you give us an update how did revenue mixed performance there.
Speaker Change: Youre, not giving 2025 thoughts now, but maybe just any color on how the pipeline is shaping up there.
I think I'll start with the pipeline the pipeline continues to be extremely robust I think it's something that we are.
Speaker Change: Incredibly excited about over the next couple of years I think as we look at the performance of the business. Jack. This is last year was down 40% almost I think for this year. We've returned to positive growth I think it's been relatively consistent over the course of the year.
Speaker Change: As a little bit of tailwind to reproductive health overall, but it's definitely not driving the strong performance.
Speaker Change: Thank you we have no.
Speaker Change: Further questions, so I'll hand back to Steve Willoughby for any closing comments.
Steve Willoughby: Thank you Lydia and thank you everyone for your time. This morning, we look forward to seeing everyone. In a few weeks on November 21st either virtually or hopefully out in person in San Diego have a good day.
Steve Willoughby: This concludes our call. Thank you for joining you may now disconnect your lines.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Okay.