Danaher Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 25, 2023

There are 10 speakers on the call.

Operator

My name is Ashley, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's First Quarter 2023 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn the call over to Mr.

Operator

John Bedford, Vice President of Investor Relations. Mr. Red Bedford, you may begin your conference.

Speaker 1

Thank you, Ashley. Good morning, everyone, and thanks for joining us on the call. With us today are Rainer Blair, our President 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, the slide presentation supplementing today's call and the reconciliations and other information required by SEC Regulation G relating to any non GAAP financial measures provided during the call are all available on the Investors section of our website www.danaher.com 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.

Speaker 1

A replay of this call will also be available until May 9, 2023. 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 the Q1 of 2023 and all references to period to period increases or decreases in financial metrics are year over year. 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.

Speaker 1

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.

Speaker 2

Thank you, John, and good morning, everyone. We appreciate you joining us on the call today. So we had a good start to the year. Our team successfully navigated a dynamic operating environment to deliver better than expected revenue, earnings and cash flow. We're especially pleased with the strength of our base business, which grew 6% in the Q1.

Speaker 2

Now across the portfolio, the quarter progressed largely as we anticipated. Our global supply chains have stabilized and component availability improved sequentially. Strong price realization helped offset inflationary pressures and disciplined cost management enabled us to continue our cadence of growth investments. So we believe these investments paired with DBS driven execution contributed to market share gains in many of our businesses again this quarter. A prime example of the power of DBS and our commitment to continuous improvement at all levels of Danaher is the CEO, Kaizen, Which we kicked off 2 weeks ago.

Speaker 2

With this event, our most senior leaders are joining over 700 associates at 10 of our operating companies. We're focusing on the most significant opportunities for lasting competitive advantage across our businesses, including further reducing our best in class lead times at Aldevron and improving resin and filter throughput in the Biotechnology Group. The CEO, Kaizen, is just another terrific opportunity for our teams to come together and drive transformative change through DBS. In fact, once we wrap up here today, I'll be joining the Cytiva team at our resin facility in Ulsanla, Sweden to contribute to these efforts. Now our results also reflect the unique positioning of Danaher's portfolio.

Speaker 2

We just have an exceptional group of leading franchises serving attractive end markets with durable secular growth drivers. Additionally, the strength of our balance sheet provides us with the optionality to enhance our businesses both organically and through disciplined M and A. This powerful combination of our talented team, leading portfolio and strong financial position differentiates Danaher and reinforces our sustainable long term competitive advantage. So with that, let's turn to our Q1 results. Sales were $7,200,000,000 in the first quarter and core revenue declined 4%.

Speaker 2

So as I mentioned earlier, we delivered 6% core revenue growth in our base business with 3 of our 4 reporting segments up high single digits or better in the quarter. COVID-nineteen revenues were a headwind of approximately 10%. Geographically, core revenues in developed markets declined mid single digits, primarily as a result of lower COVID-nineteen revenue. High growth markets were up low single digits with a low single digit decline in China. Results in China were better than expected, Driven by quicker than anticipated recovery and diagnostic testing and a more favorable life science research funding environment.

Speaker 2

We expect these positive trends to continue as we move through the year. Our gross profit margin for the Q1 was 61%. Our operating margin of 25% was down 330 basis points, primarily due to the impact of lower COVID volume in our biotechnology and Diagnostics Businesses. Adjusted diluted net earnings per common share were $2.36 And we generated $1,700,000,000 of free cash flow in the quarter. 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.

Speaker 2

Reported revenue in our Biotechnology segment declined 16% And core revenue was down 13%. In bioprocessing, base business core revenue growth was in line with our expectations of low single digits in the Q1. Line demand at our large customers who are primarily responsible for therapies and commercial production and later stage clinical trials remains robust and they're steadily working through inventory they built during the pandemic. Based on our most recent customer conversations, we now expect the inventory normalization process to continue through the second half of the year. During the quarter, we also saw softer demand globally at many of our emerging biotech customers as more pronounced pressures on liquidity and funding accelerated their efforts to conserve capital, leading to project delays and cancellations.

Speaker 2

In consideration of these factors, we anticipate 2nd quarter and full year base business core growth in bioprocessing will be largely consistent with the Q1. That said, these short term pandemic related dislocations have not changed our assessment of the tremendous opportunity ahead in the biologics market and for our leading bioprocessing franchise. The number of biologic and genomic medicines in development is meaningfully higher than at any point in history. In fact, there are thousands of biologic therapies currently under development, including more than 750 and Phase 3 clinical trials. With these therapies, our customers are making significant strides in addressing diseases that affects large segments of the population.

Speaker 2

For example, GLP-1s have become blockbuster treatments for obesity and diabetes and antibody drug conjugates are meaningfully improving treatment outcomes for many types of cancer. And we're also seeing promising developments in the field of Alzheimer's research where several novel monoclonal antibodies Are nearing regulatory approval. Now to best support our customers as they pursue these life changing breakthroughs, Our biotechnology team has been accelerating investment and innovation over the last several years. Cytiva recently introduced The MabSelect BL, a new resin and ligand for bispecific antibodies and antibody fragments. The MAP Select DL's best in class binding capacity and improved alkaline stability makes And reduce manufacturing costs.

Speaker 2

This is just one of the innovative solutions from our biotechnology team's project pipeline aimed at helping customers bring more life saving therapies to market faster and more efficiently. Turning to our Life Sciences segment. Reported revenue grew 2.5% And core revenue was up 5%, including high single digit growth in our base business. Our Life Sciences Instruments businesses collectively delivered mid single digit core revenue growth, consistent with our expectations. Funding levels and sales funnels remained healthy across most major geographies and end markets.

Speaker 2

Demand for our advanced solutions remains strong, notably for recent innovations such as the SCIEX Venotov 7,600 and Leica Microsystems, Mika. Our genomics consumables business had another quarter of double digit base business core revenue growth. Robust demand for plasmids, proteins and gene writing and editing solutions was partially offset by declines in next generation sequencing and basic research. During the quarter, Aldebron brought together capabilities from Cytiva and Precision Nano systems to create a streamlined offering for the development, production and release of mRNA drug substance and drug product. This new offering will be available to customers later this year and is a great example of how we're integrating solutions from across Danaher to create differentiated offerings and deliver even greater value to our customers.

Speaker 2

Moving to our Diagnostics segment. Reported revenue declined 10% and core revenue declined 7.5 percent with double digit growth in our base business offset by lower COVID related respiratory testing volumes at Cepheid. Our clinical diagnostics businesses collectively delivered mid single digit core revenue growth and saw healthy market volumes globally. At Radiometer, strong demand for blood gas testing in China drove double digit core growth. Leica Biosystems movement single digits led by advanced staining and digital pathology.

Speaker 2

Strength across developed markets and China enabled Beckman Coulter Diagnostics to exceed expectations and deliver mid single digit core growth. Now in Molecular Diagnostics, broad based strength across Cepheid's test menu drove more than 30% core growth in non respiratory testing. As our customers look for ways to capitalize on the workflow advantages, the Cepheid gene expert delivered for COVID related testing, They are increasingly adding additional assays from our market leading test menu. This increased menu utilization by our customers For our recently introduced vaginitis panel, the Expert Xpress MVP, which contributed to nearly 30% growth in sexual health testing. In COVID related respiratory testing, customers continued transitioning high throughput testing to the point of care and consolidating their point of care PCR testing platforms onto the GeneXpert.

Speaker 2

As a result, Cepheid's respiratory testing revenue of approximately $550,000,000 in the quarter exceeded our expectation of $450,000,000 This was driven both by higher volume and the preference for our 4 in-one test for COVID-nineteen, flu A and B and RSV. We continue to expect approximately $30,000,000 respiratory tests and $1,200,000,000 of revenue for the full year. Cepheid's strong results are a testament to the significant value, unique combination of fast accurate lab quality results and the best in class workflow provides clinicians. Given Cepheid's leading global installed base and growing adoption of the broadest molecular diagnostic test menu on the market, we're well positioned to help customers meet their testing needs and continue gaining market share for years to come. Moving to our Environmental and Applied Solutions segment.

Speaker 2

Reported revenue grew 5% and core revenue was up 6.5%. Water quality core revenue grew low double digits and product identification was up low single digits. In water quality, Hach delivered their 4th consecutive quarter of double digit growth and ChemTreat was up double digits for the 8th consecutive quarter. Strength was broad based across both equipment and consumables, particularly in our industrial end markets. This performance highlights the resilience of the high margin recurring revenue business model that make up water quality and the significant value our solutions provide in support of customers' day to day mission critical water operations.

Speaker 2

At product identification, marking and coding was essentially flat, while packaging and color management was up low single digits. Videojet was up low single digits despite a difficult year over year comparison as the business grew high single digits in Q1 last year. Our growth investments are driving a healthy cadence of new product innovation at Videojet. In fact, in March, the team released The 15 ADC continuous inkjet printer, the industry's 1st dedicated soft pigmented solution. The 15 ADC uses soft pigmented inks to print codes with consistent quality, excellent contrast and strong durability to avoid degradation and fading during production runs, helping customers reduce production downtime.

Speaker 2

So this is the first of several new product introductions Videojet is planned for the year and is a great example of how our teams are bringing impactful solutions to our customers. In February, we announced That our Environmental and Applied segment will be named VirAlto when it is launched as a standalone company And that it will be headquartered in Waltham, Massachusetts. This is an exciting milestone for the team and they're making considerable progress towards becoming a separately traded public company. And we remain on track for a Q4 2023 separation and look forward to sharing more details in the coming months. So now let's briefly look ahead to our expectations for the Q2 and the full year.

Speaker 2

In the Q2, we expect core revenue in our base business to be up mid single digits. We also expect total core revenue to decline high single digits as a result of lower demand for COVID-nineteen testing, Vaccine and Therapeutics. Additionally, we expect a second quarter adjusted operating profit margin of approximately 26%, which reflects efforts to adjust our cost structure and capacity in response to COVID transitioning to an endemic state, particularly within our Diagnostics and Biotechnology businesses. Now turning to the full year 2023. Despite the near term and temporary challenges within bioprocessing, We anticipate mid single digit core growth in our base business.

Speaker 2

We also expect total core revenue to decline high single digits for the year as a result of lower demand for COVID-nineteen testing, vaccines and therapeutics. Additionally, We expect a full year adjusted operating profit margin of approximately 30%, which reflects the previously mentioned efforts to adjust our cost structure and capacity in response to COVID-nineteen transitioning to an endemic state. So to wrap up, we're pleased with our strong first quarter results. Our well rounded performance is a testament to the durability and balanced positioning of our portfolio and our team's commitment to leading and executing with the Danaher Business System. While the transition of COVID-nineteen from a pandemic to an endemic state is causing near term disruption, There is no doubt that the past 3 years have helped shape Danaher into a better, stronger company.

Speaker 2

We meaningfully changed the scale of our bioprocessing business with the addition of Cytiva and the creation of the Biotechnology Group. And Cepheid's expanded installed base has significantly improved their competitive advantage. We've also increased our cadence of innovation and strategically deployed capital through M and A, including the acquisition of Aldevron to accelerate our future growth trajectory. So there's a bright future ahead for Danaher. The combination of our talented team, differentiated portfolio of businesses and strong balance sheet, all powered by the Danaher Business System provide us with a strong foundation to create value for many years to come.

Speaker 2

And so with that, I'll turn the call back over to John.

Speaker 1

Thank you, Rainer. That concludes our formal comments. Ashley, we are now ready for questions.

Operator

We will take our first question from Michael Ryskin with Bank of America. Please go ahead.

Speaker 2

Good morning, Michael. Welcome.

Speaker 3

Good morning. Thanks for taking the question guys. First, I want to start on the broad processing inventory challenges. You've been dealing with this issue for almost a full year now and you've had to revise your outlook lower for fiscal year 2023 a number of times. Why is visibility there into inventory so challenging?

Speaker 3

And how do you know that this latest view of plus low single digits for the year is the right view and there's not further cuts going down the road?

Speaker 2

Thanks, Michael. Look, undoubtedly, Visibility has been choppy here on the way up as COVID tailwinds fueled our growth and now as we Try to drive the soft landing visibility has been impacted. And I would tell you that normally we have Visibility of 9 to 12 months that's very solid, but it is so that in the last quarters that has been probably more like 3 to 6 months related to a number of factors. And let me lay some of those factors out for you here, Michael, Sort of starting with the Q1. In the Q1, our base business in bioprocessing grew about 100 basis points, 1%.

Speaker 2

And if you unpack the growth there, large accounts that are responsible for commercial production and later stage Clinical trials are growing at mid single digits. So they're burning off inventory. I'll come back to that. And then you have sort of emerging biotech and those companies that are more involved in discovery and earlier stage clinical trial phases, Which represent about 20% to 30% of our business, and they're down mid teens. So overall, this is What gets us to this sort of low single digit growth view for the year.

Speaker 2

Now let me come back to large the larger accounts here for just a second. We see in large biopharma that in fact The demand is there. The inventory is burning off, but it is slower than expected. And the reason for that is that we're starting to see Larger pharma companies as well as larger CDMOs replan and recalibrate their own production plans as they start to conserve working capital and cash. And we saw some of that also back in 2016.

Speaker 2

So we're seeing larger Customers also look at their own finished good, if you will, inventories and starting to adjust their production plan In order to bring those down as well. So if you then transition over to again emerging biotech, so the companies that are working more discovery in earlier stage. There we have been observing funding headwinds for Call it, since the second half of the prior year, but those funding headwinds became Significantly more pronounced here in the Q1. And so we're seeing these accounts Looking to conserve cash by prioritizing projects. We see that with lower OpEx and CapEx expenditures, Also see a number of layoffs happening in that particular segment.

Speaker 2

And that's not just happening in the U. S, we also see that happening in China. And so we're assuming that barring any other sort of Wildcards here that it doesn't get significantly worse, but that this continues to play out for the remainder of the year.

Speaker 4

Hey, Mike, it's Matt. Maybe let me give you a little bit of kind of context around January 2, kind of a guide in January to where we ended up. I know Reiner sort of mentioned it, but I think it's important to kind of think about it in the 2 buckets. So we've got The larger biotech or the larger customers that we've got most of their stuff is sort of Phase 3 clinical on market. In January, our assumption was that that was going to be kind of call high single digit growth from those customers, so 70% or so of our customers kind of growing at 7%, 8%.

Speaker 4

And then kind of the remaining 20%, 25% of the customers, which we're sort of referring to as emerging biotech, not everything in there is probably technically emerging, but that other piece of the customers. In January, we thought that was going to kind of be about low double digits to kind of low teens growth. And you add all that up and that would have been the high single digit growth that we thought we were going to see here for the year. Like Reiner said, what we saw in Q1 was just frankly not that supportive of that kind of ramp As we think about what we would need to build in Q1 and Q to be able to hit those types of numbers for the full year. And so if you think about what we're looking Seeing now in April, those large customers instead of being 7%, 8%, they've been growing still nicely, but more mid single digits, right?

Speaker 4

And the big change here is this emerging biotech, another 20%, 25%, instead of being up kind of mid teens, they're actually down mid teens. And that comes back to Everything that Reiner talked about with people really reprioritizing projects, conserving cash that happened both in the U. S. And we saw it in China as well. And I think I'd probably say it, we saw modest headwinds as we entered the year, and those are just more pronounced now as we move through the quarter.

Speaker 4

So Just as a to maybe put some numbers to what Reiner said.

Speaker 2

And then just to reiterate, to support a significant second half ramp, We would start to see that activity level increasing now and in the second quarter, And we're just not seeing it to the degree that would support that.

Speaker 3

Okay. Thanks. And on that emerging biotech, Just really quick to clarify that. Are you seeing that softness in bioprocessing specifically or across in the life sciences segment as well. And then maybe I could transition that to a question on the instruments.

Speaker 3

You saw 5% growth or mid single digit growth in instruments in the Q1. What's your expectation for the rest of the year? Any particular pockets of weakness or strength you can call out?

Speaker 4

Yes. I'll comment on the bioprocessing broadly speaking and maybe let Reiner talk about what we're seeing in tools. The answer is yes, we're seeing it in both. I would say that, we are definitely seeing the emerging biotech funding pressures here in the bioprocessing area. I would say, We're seeing it in the tool space or in life sciences as well.

Speaker 4

I would say that is a lesser portion obviously of our revenue. So it's not quite as big of an impact. But are we seeing it? Yes. I would say we are seeing customers in those spaces conserving cash on both CapEx and OpEx.

Speaker 3

Okay. Thanks.

Speaker 2

So Michael, more generally on the Life Sciences here To your first question. So if we look at Q1, the Life Sciences base business finished as we thought at high single digits after low double digit average growth over the last 3 years. And we've talked previously about the expected normalization of those growth rates here after having seen that elevated growth for the last 3 years. So that's right within our expectations. If you look at that geographically, we saw strength in Western Europe.

Speaker 2

And China, in fact, was up double digits on the back of some stimulus there. Active large pharma R and D spending levels are still very quite healthy, but they're starting to moderate just given the higher comps. And now just connecting the dots to Matt's commentary here. Emerging Biotech It is impacted by the current funding environment. We see smaller purchases, if you will.

Speaker 2

So rather than buying 6, 4 instruments and other places really impacted in the less differentiated segments, Let's say. So we are seeing in our own business is not as exposed to that segment in life sciences, but we do see it at the margin. And then life science research and academic is holding up well globally for life sciences. So we continue to believe our Growth rates moderate to the historical levels in 2023 and that's what our guide reflects and that's not a change to any previous expectations.

Speaker 3

Okay. Thanks. I'll get back in the queue.

Speaker 5

Thank you.

Operator

Thank you. We'll take our next question from Vijay Kumar with Evercore ISI. Please go ahead.

Speaker 6

Hey guys, thanks for taking my Hi, Rainer, and congrats on a good start to the year. I guess Just a high level question on the guidance here, Rainer. All of us are looking at this if I go back 3 months ago, We were assuming back half, perhaps normalization in the industry. And given your comments here on Emerging small biotech, that's where the change is. Is this guidance now Be a rest, because we're assuming bioprocessing in line with Q1.

Speaker 6

Are we confident that Q1 was a low point for the year? So just Give us some color on the thought process behind the guidance here. I mean is this now DRS from a back half perspective?

Speaker 2

Vijay, I mean, we're basing our view on the second half. Also Based on what we're seeing in the current market environment, which we just talked about, as well as our order book, And like I said a minute ago, in order to support a higher guide for the second half, we need to Different activity levels here in Q1 and Q2, and that's not the case for two reasons. 1, the emerging Biotech is quite significantly softer, down mid teens as we just talked about. And then I would say on the margin, larger accounts They're taking a little bit more time to burn through inventory, although they're doing that nicely. And those factors together have us believe unless there's any other Sort of a significant market disruption that the year will play out much as the Q1 has.

Speaker 6

Understood. And then just one on Cepheid was a bright spot here, 30% growth, I think you made some comments about infectious disease, different testing tests being really strong. Can you give us some color on the customers you're seeing this ramp? Are these new customers That bought a Cepheid system during the pandemic. I'm just trying to think how sustainable is that 30% growth and So the related one here on M and A, some chatter about Danaher On the M and A side, would Danaher be interested in getting into services or how maybe just remind us on The M and A lens and criteria that Danaher processes that pipeline.

Speaker 2

Sure. So, Vijay, on the That's a question. We're really seeing a broad based usage of The infectious disease menu, in fact, our broader menu in general, both at our existing installed base that's been there For some time as well as with our newer customers as they start transitioning that COVID testing capacity that they have to take full advantage of that menu. So we see that 30% here as a good marker of how People appreciate the workflow advantages, the ease of use and the accuracy of the platform. Remember, We're seeing 2 factors here.

Speaker 2

1, we see tests transitioning from high throughput environments into the point of care on the one hand and on the other hand, we see expanded usage of our testing menu.

Speaker 4

Yes, Vijay, maybe just to kind of to put a real live example to that, I think. So if you think about What we're seeing, we've got customers, existing customers today, which kind of goes both ways, right? So we've got existing customers today That for example will use group based strep and those customers now sort of are also moving everything over to the 4 in 1 or to COVID as well. And then you've got the other way, which is that sort of installed base going from kind of 2x growth here over the last 3 years. You've got people who have used These systems now for many, many years and what they're doing is they're starting to bring in new menu and that new menu has been around infectious disease first, which is primarily right now we're largely group based strep.

Speaker 4

So you're kind of Having somebody who used the box throughout COVID testing using it on for COVID 4 in 1 and standalone and now they're bringing on group based strep as well. And so That's what we always kind of talked about with COVID being an anchor assay as we go forward, larger installed base, anchor assay. Now you move into infectious disease, there will be other opportunities to pull in sort of other menu as we go forward. But that's exactly the type of thing we're seeing play out here and that's it is encouraging. Early days, yes, I mean, and off of still some lower base, These are off of lower numbers, but as we go forward, we've sort of talked about next year and the longer term.

Speaker 4

That's why I think that installed base growth was so important because we've got the menu Be able to pull through and then the additions of the new menu are going to be only helpful on that larger install base.

Speaker 2

So on M and A, Vijay, obviously, we don't comment on chatter, but what I would tell you is we really like the way we are positioned. Our balance sheet is in great shape. Valuations continue to moderate. Perhaps the one or the other Board is not quite there yet, but we do see more realism in the many discussions that we have across the Board as always. And specifically, as we have said in the past, should our customers tug on us and want our help And services, that's not something that we're going to ignore.

Speaker 2

But once again, that's just one of Several opportunities. I think the most important thing to remember is that we are not going to deviate from our disciplined approach.

Operator

It's got

Speaker 2

to be the right end market. It's got to be the right target and the model has to work. And it's when those three lights Flip Green that we execute. Fantastic, guys. Thank you.

Speaker 4

Yes, I think Vijay too. I mean, I think as we sit here, I think it's not saying this is 'eight, 'nine, but having a balance sheet that we've got right now and being able To kind of be flexible, I think is important in times like these because as Reiner said, when the market company and valuation all line up, We're ready to go, but we do need to see all three of those. And as things get a little choppier here, as they might get a little choppier here, I think I really like How we are kind of set up here from a balance sheet perspective as well.

Speaker 2

Thanks, Matt. Thanks, Vijay.

Operator

We'll take our next question from Scott Davis with Melius Research. Please go ahead.

Speaker 2

Good morning, Scott. Hey, good morning

Speaker 7

guys. Reiner, Matt and John, good morning.

Speaker 4

Good morning, Scott.

Speaker 7

Reiner, you said you made a reference in your Prepared remarks to kind of incremental cost out. I think I probably asked this question last quarter, but Can you give us a little bit of granularity or color at least on what you're talking about? Is there structural cost out? Is More of just taking out some of that some of those kind of temporary costs that came in during COVID that now can are unnecessary or is there an actual attempt to go after some of the structural costs that perhaps you couldn't have gone after before?

Speaker 4

Yes, Scott, maybe I'll take a crack at Yes, like we talked about in the prepared remarks, we're sort of going from an adjusted OP, adjusted operating margins of 31% in our previous guide to 30%. And I think the way to think about it is sort of twofold. Half of that's just the volume, right? Like and most of that is all of that actually is in bioprocessing. But the other half is capacity reduction costs.

Speaker 4

I would say that that's going to be 2 places. It's going to be at in Biotechnology and then as importantly and more importantly probably at Cepheid. Like you said, we've always sort of known we were going to get to an inflection point here at some point where we were sort of making the call that we've moved into an endemic phase. And once we moved into an endemic phase, we were going to need to bring some of the capacity that we've been running at Cepheid down. And so I think just as a reminder, in Q4 last year, we did 20,000,000 respiratory tests and that was only 3 months ago.

Speaker 4

But I think you've really seen a tail off here as we have entered into the last couple of months. And I think our team is Pretty clear that we are now kind of entering a new phase of volume that we will need. And so we're going to be getting after some of that. And I think what does that look like? It's talking about closing and consolidating some of the plants that we've got.

Speaker 4

Some of those were frankly put up quickly in locations that were not Ideal for the longer term because we're trying to meet the needs of a pandemic. So we're going to get after a couple of those sites. We're going to reduce some of the headcount And then we're going to go after indirect and fixed overhead costs as well reducing shifts, etcetera, etcetera. So those are the types of things we're going to be going after here. That's largely going to be in the 2nd and third quarter is when you're going to see the costs sort of roll through.

Speaker 4

So you'll see that in the margin in those two quarters and then it sort of Hop back a little bit. And then maybe just to give you some sense of what's that look like in once we're done with that kind of in Q4 And as we head into 'twenty four, Scott, I think Cepheid in 2019 was a 20% to 25% OP business. During the peak of the pandemic here, it probably was north of 45%. And After we get through what we're going to do in the next couple of quarters, like I said on the capacity reduction side, starting kind of in Q4 and heading into 'twenty four, They're going to be 35% to 40% margin, right? So meaningfully up from where we were given the volumes that we have now.

Speaker 4

It's much bigger business, but not Quite at the peak pandemic where I was getting a lot of volume leverage, but that gives you a sense of what we're going after, what we're trying to do and where we end up on the other side.

Speaker 7

That's super helpful, Matt. Can you guys just remind us what where is your the size of your installed base in Cepheid today versus pre I know I have. I'm sure I have in the notes somewhere, but to just make it a little easier on that.

Speaker 4

Yes. 2x, Scott, we were we're about 50,000 Okay. Started probably like 2019.

Speaker 7

All right, perfect. I'll pass it on. Thank you guys. Good luck this year.

Operator

Yes.

Speaker 2

Thanks, Scott.

Operator

We'll take our next question from Dan Brennan with Citi Cowen. Please go ahead.

Speaker 5

Great. Thank you. Good morning. Thanks for the questions guys. Maybe just one on file process to start out.

Speaker 5

Just could Could you help us think through like what is the magnitude of that destock drag that's kind of baked in guidance? I know you gave a lot of color earlier in the Q and A. And then related to that or emerging bio, it's certainly a bigger group than we thought as a percentage of that segment. Any color kind of what that grew in 2022 and kind of a quick math to get to low single for the year, if it's 30% of revenues, I guess you are assuming some improvement there because if we kept it down 15%, I don't think we'd get to upload single for the year.

Speaker 4

Yes. So maybe again, maybe the way to think about it, Dan, is that sort of the larger customers that are really where we are seeing the inventory drag, That was sort of we initially thought we would see that in the high single digits, call it 7%, 8%, and that's a little bit lower now, Call it 6 and Change. And so I think the inventory destocking is flowing through in the larger customers and you're seeing it in a slightly lower growth rate that we saw in Q1 And we are expecting them to see for the full year. So that's how I'd sort of frame what the inventory destocking is. The rest is really, like I talked about Earlier, emerging biotech and sort of the other 25% of our customers, we thought that that would be a low teens type growth rate here for the year, Combine that with the 8% that we thought we'd seen the larger, that's how we got to high single digits.

Speaker 4

That low teens is actually negative mid teens, Right. With all the pressure that we talked about. So, I would say that we are just sort of assuming that That type of growth rate for the rest of the year for that customer base and that we're going to have the larger customers will be more in the mid single digit like I talked about. That's what we're kind of assuming for the year. And based entirely on what we saw in Q1, the order book in Q1 Not being supportive, frankly, of in our minds at least, the ability with the limited visibility we have or more limited visibility, Just not supportive of being able to say that we think we can get back to a high single digits.

Speaker 4

I think you asked a question of what those customers were in the last year. That entire business largely was up in line with what we saw last year, which is, as you remember, mid to high 20s. So kind of you sort of look at mid to high 20s with that group of folks. Now they're sort of down mid teens, still a very solid growth on a 2 year basis, But it is what we're seeing right now.

Speaker 5

Got it. And then thanks, Matt. And then just maybe on the margins and the earnings. So we're coming out somewhere Kind of 9.25%, 9.30% for the year. Just wondering if you guys you kind of put the pieces together.

Speaker 5

Is that kind of the right zip code? And given the cost actions you're taking this year, Does that set yourself up in 2024 for like potentially higher than normal operating leverage depending on what the top line comes in at?

Speaker 4

Yes. No, I mean, I think if you're going through the full year, the math is what it is at around 30% adjusted OP margins, I think, sort of That takes care of itself. As far as what we're going to look like as we sort of get to the other side of this, I mean, I talked a little bit about Cepheid, kind of was 20% to 25% pre pandemic peaked up at 45% and 35% to 40%. I mean, I think if you sort of use that frame plus what we already have in diagnostics, that sort of gets Where we think roughly the margin profile will be, biotech is probably the other one. After we get through some of these costs, The same math there was biotech was call it high 30s prior to the pandemic.

Speaker 4

Again, it peaked at around Call it 45 and change. And after we sort of get through what I think we're going to do there, they're probably going to be more like low 40s. So again, better than they were pre pandemic given the fact that they're bigger business. But those two pieces, I think you can slot into what 24 might look like. And Life Sciences, that should be kind of plus or minus where we've been here.

Speaker 4

That has not been a margin that's moved around quite a bit. A little bit of COVID stuff as we had in 2022 2021, but I think you can kind of get a sense of what the margins are there. So maybe as a just a high level framework, You're probably high 30s, low 40s with Cepheid. You can kind of assume some other stuff for the diagnostics. Biotech probably low 40s and then what we're seeing In LS, but we will obviously sort of come back to that later, still pretty early in 2023, but just to give you a very high level view.

Speaker 5

Great. Thanks, Matt. Thanks, guys.

Operator

Thanks, Dan. And we'll take our next question from Jack Meehan with Nephron. Please go ahead.

Speaker 8

Good morning, Jack. Good morning. Another question on bioprocessing. Can you share what was your total order rate in the quarter? Is there any color you can just share around how the quarter played out?

Speaker 8

Have things weakened throughout the quarter, just curious about how things are trending?

Speaker 2

Sure. Jack, so once again, Q1, Our orders were down modestly sequentially, so relative to the Q4, down modestly. But year over year they declined 20%, okay? And so what we have been seeing is the inventory burn down that We've been talking about, Matt and myself, is occurring, and we see that in our order book Here for the Q1. And then again, we've laid out why we believe that the current activity level supports Sort of a similar progression of the quarters here throughout the year as we had in the Q1.

Speaker 8

Great. Thank you. And then just as a follow-up, I was curious what impact if any did You see from the banking crisis, which took place in the quarter. I understand you probably didn't have any direct exposure to that, but how were your customers reacting sort of across the business?

Speaker 2

Right. So direct exposure was not material in any sense of the word. As it relates to the impact on our businesses, particularly in bioprocessing To much lesser extent in life sciences, we do think that that provides that additional inflection point here in the Q1 For liquidity tightening up and that prioritization that we're seeing here in the emerging biotech segment, call it emerging biotech and once again those companies working on earlier stage projects. So that's where we have seen More pronounced conservation of cash and that plays out in OpEx, CapEx And you can and we talked about how that played out with mid teens contraction as opposed to sort of a mid teens growth versus prior periods.

Speaker 8

Thank you, Einar.

Speaker 2

Thanks, Jack.

Operator

And we will take our final question from Rachel Vazdal with JPMorgan. Please go ahead.

Speaker 2

Good morning, Rachel.

Operator

Great. Good morning. Thank you for taking the questions you guys.

Speaker 9

And so appreciate all the comments that you've given on emerging biotech softness and bioprocessing Saying that that customer set really down mid teens in 1Q. So first, just a clarifying question. Did you say that you expect that emerging biotech to remain at mid teen declines for the year? And then kind of shifting more longer term, can you talk about your assumptions around when you expect emerging biotech to return to growth and at what point can this funding issue really pressures the long term growth outlook for the bioprocessing market.

Speaker 2

So just to confirm on the topic of emerging biotech. Our assumption is and our guide reflects that the activity level in emerging biotech Phase for the remainder of the year as it played out in the Q1. So we're not assuming any change there, Including that it doesn't get significantly worse. Now as it relates to how that segment progresses here, That's from today's point of view hard to predict. We need to see where Capital markets go, liquidity availability and yes, a stabilization and return To some degree of normality in the banking sector.

Speaker 2

But for the visibility that we have today, We're not expecting an improvement in that segment for the remainder of the year.

Speaker 9

Got it. And then maybe a few questions on China here. So one of your peers recently flagged China bioprocessing weakness. I think you also mentioned that in one of your answers So can you talk about how did bioprocessing perform during 1Q in China? And can you just give us some context of how big China is for bioprocessing for Danaher?

Speaker 9

Looking forward, how are those orders trending within China, specifically around some of those localized manufacturers? And then last question, just stepping back, You previously had guided to low single digit growth for China for the year. 1Q was well above expectations. So what's the total co outlook for China? Thanks.

Speaker 2

Well, as it relates to bioprocessing in China, we've had a very Good and strong business there in China for years and helped quite significantly in China in order to build the capacities for vaccines and for other biologics. And what we see today, much like we've seen in The U. S. Is that the emerging biotech segment, which is an important part of China's efforts to build a local biopharma industry is also impacted by capital constraints. So we've seen that play out in China as well.

Speaker 2

And in fact, that's what is the primary impact on our China numbers here In the Q1, which on the whole were better than expected primarily because of The patient volumes in the diagnostic businesses being stronger. Now as it relates to The full year in China, we expect our full year in China to be up low single digits for Danaher overall Based on the market recovery exiting COVID as well as if you will a normalization of the activity level In bioprocessing.

Operator

Great. Appreciate it. Thank you. And I will

Speaker 2

turn it over

Operator

to the speakers for closing remarks.

Speaker 2

Thank you, Ashley.

Operator

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
Danaher Q1 2023
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