Danaher Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2024

There are 12 speakers on the call.

Operator

Good morning. My name is Todd, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's Second Quarter 2024 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

Speaker 1

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, slide presentation supplementing today's call, the reconciliations and other information required by SEC Regulation G relating to any non GAAP financial measures provided during the call and at note containing details of historical and anticipated future financial performance 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. A replay of this call will also be available until August 6, 2024.

Speaker 1

During the presentation, we will describe certain of the more significant factors that impacted year over year performance. The supplemental materials describe additional factors that impacted year over year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company specific financial metrics relate to results from continuing operations and relate to the Q2 of 2024 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. 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.

Speaker 1

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 really appreciate you joining us on the call today. Our team executed well during the Q2, delivering better than expected revenue, earnings and cash flow. We were particularly pleased with the sustained positive momentum in our bioprocessing business and with the strong performance at Cepheid, which we believe gained market share in molecular testing again this quarter. Now across portfolio, market conditions were largely as we anticipated.

Speaker 2

In our bioprocessing business, conditions in the U. S. And Europe continued to improve and we were encouraged to see orders increase high single digits sequentially this quarter. In China, bioprocessing demand and underlying activity levels were stable sequentially, but remain weak as customers continue to manage liquidity. In Life Sciences, capital equipment investments remain constrained, while recurring revenue was relatively stable.

Speaker 2

And in Diagnostics, we saw healthy demand globally across our businesses. As we move through this transitional period, we believe Danaher is well positioned for sustainable long term value creation. Our strong positioning in attractive end markets coupled with durable, high recurring revenue business models and the power of the Danaher Business System supports our long term expectations of high single digit core revenue growth with a differentiated margin and cash flow profile. So with that, let's take a closer look at our Q2 2024 results. Sales were $5,700,000,000 in the 2nd quarter and core revenue declined 3.5%.

Speaker 2

Geographically, core revenues in developed markets were down low single digits with strength across diagnostics offset by declines in Biotechnology and Life Sciences. High growth markets declined high single digits including a high teens decline in China. Our gross profit margin for the 2nd quarter was 59.7 percent and our adjusted operating profit margin of 27.3% was up 60 basis points as the favorable impact of cost savings initiatives more than offset lower volume. Adjusted diluted net earnings per common share of $1.72 were essentially flat year over year. We generated $1,100,000,000 of free cash flow in the quarter $2,600,000,000 year to date, resulting in a year to date free cash flow to net income conversion ratio of 129%.

Speaker 2

Now additionally, through the Q2 and into July, we repurchased approximately 19,000,000 shares. While M and A remains our bias for capital deployment, we believe these repurchases will provide an attractive return given the strength of our long term organic growth, earnings and cash flow outlook. Now let's take a closer look at our results across the portfolio and give you some color on what we're seeing in our end markets today. Core revenue in our Biotechnology segment declined 7% with the bioprocessing business down high single digits and the discovery and medical business down mid single digits. In our bioprocessing business, revenue declines moderated from the first quarter as we believe our larger customers in the U.

Speaker 2

S. And Europe have worked through the majority of their excess inventories and are returning to normal ordering patterns. Many of these customers are also seeing strong momentum for therapeutics in their late stage pipeline, which is promising for our future growth. Our emerging biotech customers continue to prioritize projects, particularly for cell and gene therapies in an effort to manage liquidity. However, we are encouraged by the improvement in the overall funding environment, which is a positive leading indicator for these customers.

Speaker 2

So based on the trends we saw through the first half of the year, we continue to expect a low single digit core revenue decline in our bioprocessing business for the full year 2024. There is also no change to our assumption of a bioprocessing core revenue growth rate of high single digits or better as we exit the year. Biologics market remains very healthy as evidenced by the increasing number of treatments both in development and production. Notably, the number of new FDA approvals for biologic and genomic medicines in the first half of this year nearly doubled compared to the first half of twenty twenty three and the full year 2024 is on track to set another record. Underlying demand for biologic medicines also remains on track to grow at a high single digit or better rate again for the full year 2024.

Speaker 2

So given the substantial and sustained increase in approvals and production volumes, we expect the growth rate in bioprocessing to remain very robust for many years to come. We continue to make substantial investments in innovation to support our customers as they pursue these life changing therapeutics. To support monoclonal antibody production, which comprises the majority of our bioprocessing revenues, Cytiva expanded its comprehensive filtration portfolio with the launch of Supor Prime. Now Supor Prime filters are specifically designed to address key challenges associated with high concentration biologic drugs whose complex formulations and high particle loads make them prone to premature filter blockage and costly drug product losses. We're also developing innovative solutions for emerging modalities.

Speaker 2

In May, Cytiva introduced the Cepheid cell therapy manufacturing platform, which is helping address critical cost and capacity constraints associated with CAR T cell therapy manufacturing. The Cepheid platform's fully automated manufacturing process can increase productivity by up to 50% per year compared to the industry standard, reducing our customers' costs and increasing throughput. Addressing these key manufacturing challenges will help improve patient access and facilitate wider adoption of these important therapeutics. Now turning to our Life Sciences segment, core revenue decreased by 5.5%. Core revenue in our Life Sciences Instrument businesses collectively declined high single digits as expected with trends in the Q2 largely consistent with what we saw in the Q1.

Speaker 2

Global Pharma and Biotech demand remained weak, academic markets were weaker sequentially and applied markets performed comparatively better, particularly for our advanced solutions which provide critical capabilities needed by our customers. In China, we're seeing improving sales funnels and quoting activity driven by the recently announced stimulus measures. However, we don't anticipate this to convert to orders until 2025 as these programs are in the early stages of implementation. So in the meantime, many customers are delaying purchasing decisions as they await funding. Now last month at the American Society of Mass Spectrometry meeting, SCIEX reinforced their market leadership and quantitative mass spectrometry with the release of the 7,500 plus triple quad mass spectrometer.

Speaker 2

The 7,500 plus pairs the ultra high sensitivity of the 7,500 with faster acquisition speeds and the ability to maintain the highest sensitivity quantitation for up to twice as many sample runs. This makes the 7,500 plus particularly well suited for complex applications such as PFAS analysis where customers need to test more samples across diverse sample types with high precision to meet challenging new regulations. In our genomics consumables business, core revenue declined mid single digits in the quarter. High single digit growth in gene writing and editing solutions was more than offset by declines in next generation sequencing and the impact of project timing in our plasmid business. During the quarter, IDT opened a new manufacturing facility at their differentiated new offerings such as rapid gene synthesis.

Speaker 2

This is the 2nd facility expansion for IET within the last 12 months and provides the capacity needed to support the rapidly expanding global DNA synthesis market and related drug development activities. Now moving over to our Diagnostics segment, core revenue increased 3%. Our clinical diagnostics businesses collectively delivered mid single digit core revenue growth led by high single digit growth at Radiometer. Leica Biosystems was up mid single digits with notable strength in digital pathology driven by a Perio GT450 diagnostics digital pathology slide scanner, which recently received its FDA 510 clearance. Beckman Coulter Diagnostics was up low single digits with balanced strength across both developed and high growth markets.

Speaker 2

Now in May, Beckman received FDA 510 clearance of its Access MT ProBNP on the DXI-nine thousand immunoassay analyzer. This important expansion of Beckman's cardiac testing menu allows clinicians to quickly and accurately diagnose and assess the condition severity of patients suspected of having acute heart failure. Now this clearance is just the latest confirmation of the DXI-nine thousand platform's capability to develop increasingly more sensitive and clinically relevant diagnostics. In molecular diagnostics, Cepheid's respiratory revenue of approximately $300,000,000 in the quarter exceeded our expectation of $200,000,000 driven by both higher volumes and a favorable mix of our 4 in-one test for COVID-nineteen, flu A and B and RSV. So we continue to expect respiratory revenue of approximately $1,600,000,000 for the full year 2024.

Speaker 2

Now as I mentioned earlier, we believe the Cepheid team continued to gain market share during the quarter. Increasing menu adoption and system utilization helped drive mid teens growth in our core non respiratory reagent portfolio, including more than 20% growth in sexual health and virology assays. We also continue to expand our nearly 60,000 system installed base as many existing healthcare system and integrated delivery network customers are adding new instruments at sites further out in their networks and closer to patients. In June, the FDA granted Cepheid marketing authorization for its hepatitis C RNA test. Hepatitis C diagnosis has traditionally been a multi step process requiring follow-up appointments and leading to treatment delays.

Speaker 2

With Cepheid's test, which is the 1st molecular based point of care test for hepatitis C, patients can be tested and receive treatment during the same health care visit. So this is a great example of how bringing accurate, easy to use molecular testing closer to patients is improving treatment outcomes and driving long term growth at Cepheid. Now before we move on to our expectations for the remainder of the year, I'd like to highlight our recently released 2024 Sustainability Report, which details several important milestones across the three pillars of our sustainability program, starting with building the best team, innovating products that improve lives and our planet and protecting our environment. Notably, we have committed to setting science based greenhouse gas emission reduction targets in line with the science based target initiative, including reaching net zero value chain emissions by 2,050. So I encourage you all to read through the report to learn more about the depth and scope of Danaher's commitment to sustainability and the important work we're doing to make a positive holistic impact on the world around us.

Speaker 2

So now let's briefly look ahead at expectations for the Q3 and the full year 2024. In the Q3, we expect core revenue to decline in the low single digit percent range. Additionally, we expect the 3rd quarter adjusted operating profit margin of approximately 26%. For the full year 2024, there is no change to our previous guidance. As a reminder, we anticipate a core revenue decline in the low single digit percent range and a full year adjusted operating profit margin of approximately 29%.

Speaker 2

So to wrap up, we're pleased with our better than expected second quarter results and are encouraged by the continued momentum in our bio processing business. Our strong performance is a testament to our team and their commitment to innovating and executing with the Danaher Business System. And they have done a tremendous job navigating the current environment to support our customers' life changing work today, while also delivering breakthrough innovation that is reinforcing our long term competitive advantage. The transformation in our portfolio over the last several years has created a focused life sciences and diagnostic leader positioned for higher long term growth, expanded margins and stronger cash flow. And our recent share repurchases reflect our conviction in a bright future ahead for Danaher.

Speaker 2

So looking ahead, the unique combination of our incredibly talented team, the strength and differentiation of our portfolio and a leading financial profile provides us with a strong foundation to create sustainable long term shareholder value. And with that, I'll turn the call back to John.

Speaker 1

Thanks, Reiner. That concludes our formal comments. We're now ready for questions.

Operator

Our first question will come from Jack Meehan with Nephron Research. Please go ahead.

Speaker 3

Thank you. Good morning. And, Reiner, appreciate all the color on bioprocessing. Two follow ups. First is on the consumables.

Speaker 3

Can you elaborate on what's giving you the confidence that destock is drawing to a conclusion here? And then on the capital equipment side, just thoughts on how long this will remain depressed when you might start to see some improvement there?

Speaker 2

So Jack, on the consumable side, we've really seen ordering patterns back to normal, with very, very few exceptions, and with pretty clear visibility through the measures that we put in place to stay close to our customers here during the destocking period, we feel that we're very close to normal order patterns. And keep in mind, we actively monitor our customers on a customer by customer basis. And in addition to that, we really took active measures here to ensure that inventories were normalized. And you'll recall that we took decisions to ensure that we took the dysfunction in the supply chain out to ensure that we had a true demand signal. And we think that's paid off here.

Speaker 2

And we know where our customers sit in terms of their stock levels on consumables. Now equipment is a slightly different picture. We're seeing good activity there at some of our larger customers and that played out here in the Q2 as well with the sequential order growth being high single digits and being positive for both equipment and consumables. And so those larger customers really do have a higher activity level, whereas the smaller customers probably remain a little bit more constrained.

Speaker 3

Awesome. And then we're just trying to piece together the Mosaic here. So your bioprocessing orders increased high single digits, one of your peers declined sequentially. I think there's a lot of plausible explanations being thrown around for why the results in the quarter diverged. I was just curious if you could weigh in on what you think's the right signal, what's the noise?

Speaker 2

Well, from a competitive perspective, Jack, everyone has slightly different positioning, whether it's by product category or geography or even customer type. Now if you look at us, we're probably the broadest and the deepest in terms of our portfolio, both upstream and downstream, while some others are perhaps a little bit more concentrated. So giving that, it's always going to be hard to really line up the various players in the industry to have a perfect read across. But again, the good news here is that this is a great business and it's recovering as we expected and we're confident about the future.

Speaker 3

Excellent. Thank you.

Speaker 2

Thanks, Jack.

Operator

Thank you. Our next question is from Rick Shannon with JPMorgan. Please go ahead.

Speaker 4

Perfect. Hey, good morning, you guys, and thanks for taking the questions. So another one here just on bioprocessing. So on the 3Q guidance, can you just walk us through what's contemplated in 3Q guide? You've seen a few quarters of sequential progression on orders, growing the last 3 quarters in a row sequentially.

Speaker 4

So walk us through how much of this is just seasonality on the certain conservatism in there? And then also on orders, should we expect seasonality to also impact on the order book for bioprocessing in 3Q as well?

Speaker 5

Yes. No, I think that's in bioprocessing in particular, probably should talk about bioprocessing and respiratory for Q3. So if you think about sort of revenue, we've got bioprocessing is going to be down low single digits, which is again kind of a continued improvement versus what we saw in Q1 and Q2. We were down kind of high teens in Q1, high single digits in Q2 and we think that that goes to kind of low single digits here in Q3. Given like Ryder just said, I think we're largely through the destocking sort of on the consumable side, little bit easier comps in China as well.

Speaker 5

So that probably helps a little. But if you think about sort of the 2 big drivers of Q3 outside of even bioprocessing, when you think about sort of the guide in totality, you have 2 issues or 2 things to think about. We've got lower volume in biotechnology, like I just talked about, and in respiratory as well. So biotechnology prior to the pandemic, we sort of had sort of a step down between Q2 and Q3 seasonally. That was always the case for the business.

Speaker 5

And we're kind of we're putting that in sequentially again here in our guide. We were about down mid single digits prior to the pandemic from a revenue perspective. And so that's kind of what we assumed in the guide that we would have that sort of step down that we normally have seen. Given the fact that we're back at normal order patterns, we sort of believe that we're going to have a normal seasonality as well. So you kind of factor that in for bioprocessing.

Speaker 5

And then on respiratory, we're assuming $200,000,000 of revenue versus $300,000,000 here in the quarter. So the 2 of those kind of combined are the reason that you've got the Q3 revenue where it is. And I might also add just to kind of to get out in front of them, maybe the next question on margins. That's a big reason why we're kind of guiding to approximately 26% adjusted operating margin in the quarter. Those two businesses sort of being a little bit lower sequentially here, given their margin profile, that's the big driver, if not the full driver of what's happening on the margin perspective as well.

Speaker 4

Great. Thanks. And then my follow-up here, just on 2025, there's been a lot of noise across the industry on 20 25 and where we'll be at from an underlying market growth standpoint as well. So you reiterated exiting this year in bioprocessing at high single digits or above. But could you just walk us through how are you thinking about the total business in terms of 25 in relation to that underlying market?

Speaker 4

And then you've also talked a lot about the incremental margins on bioprocessing

Speaker 6

and some of that durability on the margin

Speaker 4

expansion in diagnostics as well. So, 0.25 How are you feeling about that number? Any early takes there would be helpful. Thanks.

Speaker 5

Yes. We just finished the Q2 here of 2024. So we still got a lot of work left to do in 2024 before we think about 2025. We've always sort of guided here in January. I think that is still the plan.

Speaker 5

Plenty of work left to do here in the quarter from a top line perspective. But clearly, we are seeing the improvements we thought. Clearly, this is playing out at least in bioprocessing like we thought on the top line. And so maybe we should do is let's just get through Q3 here and then we kind of revisit the Q4 and in 2025 as we get there. From a margin perspective, I think we have sort of historically talked both like I talked on the last call, Q4 and Q1 will typically be better margin quarters for us given, like you said, the operating leverage that we get out of bioprocessing and respiratory.

Speaker 5

I don't think that that will be any different here in this year. But as far as over the long term and as I think about next year from a margin perspective, we've talked about this business being a 35% to 40% kind of incremental fall through. I don't see any reason why that would not be the case, especially as we sort of return to growth in bioprocessing. I think we've been close to those levels here as we've been shrinking, frankly. So I think we've done a lot on the cost structure to be able to make sure that we can continue to do that.

Speaker 5

But I think over time, 35%, 40% fall through and this is a business in a normal time that our adjusted operating margin should be in the low 30s.

Operator

Our next question will come from Scott Davis with Melius Research. Please go ahead.

Speaker 2

Good morning, Scott.

Speaker 7

Hey, good morning, Rainer and Matt and John.

Speaker 2

Good morning.

Speaker 7

Hey guys, the buyback, I don't recall seeing 1, at least one of this size in the past. What's just a little color, is it maybe a statement that M and A is a little slow or is it should guys think about it as a little bit more like housekeeping? What slow color on how you thought through that, the buyback? Thanks.

Speaker 2

Well, Scott, first, it's important to note that this is not a change on our view on capital allocation. So we maintain a strong bias towards M and A and we're going to continue to be active on the M and A front. Now having said that, as always, we evaluate capital allocation using the same ROIC lens, whether it's M and A, buyback, R and D projects, CapEx and so forth. So we evaluate all of these investment options based on the expected returns. And specifically in today's environment, the relative value of a buyback generates attractive financial returns.

Speaker 2

So we're buying a great business, one we know very well. We have strong conviction about its future while maintaining a meaningful M and A envelope. And I put out there this is important that our free cash flow is nearly $6,000,000,000 and our net leverage is about 2 turns. So we feel well positioned here with various alternatives.

Speaker 7

Makes sense, Reiner. Guys, will the book to bill in Cytiva, will that cross 1 in 3Q? Or maybe said a different way, has it already crossed 1 since we've already a month into the quarter?

Speaker 2

Well, our book to bill is in the 0.9, Scott. And as we said, in order to make our full year guide here of bioprocessing being down low single digits. We have to maintain the 0.9. And that's certainly how the first half has played out here and we're confident that that will continue to

Speaker 6

be the case. As you

Speaker 2

know, we don't guide to book to bills or orders. But basically the guide is built on the assumption that as we have 0.9% here for the year, we'll exit our year with high single digit or better growth.

Speaker 7

Okay. Best of luck, Reiner. Thank you, guys. Appreciate it.

Speaker 2

Thanks, Scott. Thanks, Tom.

Operator

Thank you. Our next question will come from Vijay Kumar with Evercore ISI. Please go ahead.

Speaker 8

Good morning, Vijay. Hi, Bijay. Good morning to you and congrats on a nice screen share. One, maybe high level on maybe talk about the competitive pricing environment. Any change?

Speaker 8

I think where I'm going with the question is, given the mix of signals from different players, there is some fear whether a competitive pricing environment could degrade. So maybe talk about what you're seeing in the market?

Speaker 2

Sure. Vijay, look for the second quarter, all up for Danaher, our pricing was up 100 basis points right around there. And for 2024 as a whole, we think we'll likely be a little above our historical average of 75 to 100 basis points. So we feel good about our positioning, the leverage in our portfolio, and how we've positioned here price wise. As far as

Speaker 5

I think you're probably referring to bioprocessing price, Vijay. We did about 2.5% here in the quarter. It's probably a pretty good marker for the full year. We were getting better price in the last couple of years, probably 4%, 5% type price, but that was also in an environment where we had supply chain and other challenges from an inflationary perspective that we're getting more price to offset some of that. So as some of those concerns sort of fall off, if you will, the price comes down.

Speaker 5

But fundamentally, from a competitive perspective, I don't think we're seeing significant price pressures. It's much more a function of just coming back to where we used to be, which is in bioprocessing, 100 to 200 basis points.

Speaker 8

Okay. That's helpful. Brian, one more on bigger picture on China. What's been the historical relationship between code activity and when that translates to orders and revenues. Is there any way to quantify when you say China could actually expect up, is that about trend versus historical average is about trend?

Speaker 8

Any framework would be helpful.

Speaker 2

Sure. Well, in China, what we're seeing is increased activity levels in our funnel. So the volumes that we see in our funnel has been growing and that's all related to people in the market getting ready for this stimulus funding, if you will, with sort of shovel ready projects. But what we're also seeing is a decrease in the funnel velocity as naturally market players are looking to see what the financing terms and conditions for the stimulus are. So we have watched this development.

Speaker 2

This is expected for us. This is not new news. We expected that the market would hold up to see what the funding alternatives would be. And we don't expect to see the funnel convert into orders in any meaningful way here in 2024. We view that more as a 2025 event as people are waiting for their shovel ready projects to receive funding.

Operator

Thank you. Our next question will come from Michael Ryskin with Bank of America. Please go ahead.

Speaker 8

Great. Thanks for taking the question.

Speaker 9

I want to ask on the Life Sciences segment. I think you flagged instruments still down high single digits and that's a small part of the business, but still seems like life sciences as a whole isn't seeing a lot of improvement yet. You also called out NGS, I think being a little bit weaker, so some parts of consumables are impacted. So just as a whole for life sciences, both instruments and consumables, can you dive in a little bit more in terms of what you're seeing in the end market? Any improvement in order trends there?

Speaker 9

Just how should we

Speaker 1

expect the second half to play out?

Speaker 2

Sure, Mike. Well, let's start with the quarter. So overall, the second quarter came in as expected down high single digits with the market conditions largely consistent with what we saw in the Q1, with capital equipment more constrained particularly in China, while consumables and services held up comparatively better. Now in developed markets, pharma and biotech remained soft, but stable sequentially, while the academic markets were modestly weaker. And applied markets continue to hold up well, particularly for more advanced instrumentation that you need for complicated applications such as PFAS, clinical and so forth.

Speaker 2

And coming back to China here and to build on my comments to Vijay's question, the recent stimulus measures are really driving improved funnels and quoting activity, but we don't expect that to convert to orders until 2025. So as expected, we're starting to see customers delaying their purchasing decisions there as they await the stimulus funding. Now as you think about the second quarter, look, we're going to or the second half, excuse me, we're going to see the comps easing a bit and that will certainly contribute to some stabilization. But we would expect this normalization process for life science tools and consumables to continue through 2024.

Speaker 9

Okay. 2025, you mean that?

Speaker 2

Through 2024. The end of 2024.

Speaker 9

Okay. All right. Thank you. Sorry about that. And then on, Cepheid, on the diagnostic side, when you talked about respiratory coming in a little bit stronger at 300,000,000 dollars But the rest of diagnostics and the rest of molecular diagnostics specifically still seems a little bit choppy.

Speaker 9

I think in the Q you called out a decline in core sales in MDx. So could you talk about what you're seeing in diagnostics outside of respiratory business?

Speaker 2

Sure. We saw mid single digit growth in our non respiratory businesses with good customer activity around the world. And in particular, if you think about Cepheid, both respiratory and non respiratory reagents were up. So non respiratory was actually up mid teens. And here you see the Cepheid strategy playing out, increasing that installed base, increasing menu adoption and utilization.

Speaker 2

Virology, a relatively new assay, up 20% in the second quarter. And we're, of course, benefiting from recent menu expansions such as in sexual health, which is also up 20%. And then you heard us launch the new assay and receive approval for hepatitis C and we look forward to seeing its growth journey going forward. So if you look at Cepheid, that strategy plays out. We continue to take share, and grew both in respiratory and non respiratory testing.

Speaker 2

We have there a little bit of a year over year with equipment being a little bit down and that nudged it just into small negative growth here for the Q2. Now, as you look at the remaining businesses, Beckman grew low single digits, but really the Beckman Diagnostics continues with this momentum with recurring revenue growing at mid single digits again this quarter. And the overall moderation there for Beckman is really related to some challenging equipment comps. We had a lot of backlog that we needed to ship out last year, and that's affecting, the compare here a little bit. But Beckman Diagnostics really is a mid single digit long term grower.

Speaker 2

It's got a full innovation pipeline. The commercial execution is outstanding. We've got great instrument placement And we've done a lot on the innovation front. We just talked about the Access NT Pro BNP, which has expanded our cardiac menu in the Q2. And we've done a full refresh of our product line with the immunoassay DXI-nine thousand on chemistry the DXC-five hundred and in automation the DXA-five thousand.

Speaker 2

So coupled with our execution, we see our diagnostics businesses poised and positioned very well here, both competitively and for the long term.

Speaker 9

Thanks.

Operator

Thank you. Our next question will come from Dan Brennan with TD Cowen. Please go ahead.

Speaker 6

Hey, thanks. Good morning, Rainer. How are you doing? And Matt, thanks for the questions here. Maybe just going back to Scott's question on the buyback.

Speaker 6

The stock, Downhill stock has been one of the best performers over the past 5 10 year period. So arguably, you could say the ROIC on buybacks was consistently attractive during the period of time. And as mentioned, you guys historically don't really buy back stock and your business model is really predicated on M and A and deploying DBS. So could you just elaborate a bit on the M and A environment today, maybe what's holding things back? What's your confidence in deploying meaningful capital for M and A as we look out over the next few years?

Speaker 5

Yes, Dan, maybe I'll start. I mean, look, we sort of maybe this is the way to think about it. We like this portfolio. We like how we're positioned for the future. We like the growth, where we're going to be here.

Speaker 5

The portfolio moves in the last 5 years have been sort of the fog of COVID, if you will, has really sort of made it hard to see what we think this business is capable of. We've talked about it with everybody in the past. I mean, this is a high single digit growth business, 60% gross margins, 30% OP with free cash flow conversion, north of 100%. We like our business. And when I see what we trade at today and then I kind of look out at what some of the still current M and A multiples are, it's just from a return perspective, we're getting as good of a return, if not better, on some of on the buyback than we would at some of these levels.

Speaker 5

And we just think that in today's environment, the buyback made sense, but that is in today's environment. Our bias still is towards M and A, but I do believe that we've got a bit of a disconnect here still in today's environment and we are kind of making a bet, if you will, on a business that we know well and that we think has got a lot of upside.

Speaker 6

Great. Thanks, Glenn, for that. And maybe just one, if I just go back to the Q3 guide for Bioprocess and the normal seasonality. Q2 did come in ahead of expectations and you're maintaining a full year guide. So is there anything in Q2 in terms of a pull forward or timing?

Speaker 6

Or is there any change to your view that as inventories normalize, which I think you've said in the past, you would see a real nice recovery as I think you guys have talked about the math of seeing like a nice kind of growth rate as things normalize?

Speaker 5

Yes. No, nothing I would say for bioprocessing and the same for it's this is really about returning to a normal seasonal pattern where typically in bioprocessing, we are seeing mid single digit declines sequentially from Q2 to Q3. And for planning purposes, we because we are largely past destocking and because we see the customer order patterns sort of coming back to normal, for planning purposes, we are going to plan on that same mid single digit decline from a revenue perspective sequentially. But that does not change anything in the underlying what we've seen in the business. So I wouldn't read too much into it other than this is a sequential normal historical revenue pattern and we are assuming that in the guide.

Speaker 6

Great. Thanks, Matt.

Operator

Thank you. Our next question will come from Doug Schenkel with Wolfe Research. Please go ahead.

Speaker 2

Hi, Doug.

Speaker 10

Good morning, guys. Thanks for taking the questions. First, I got a 2 parter continued improvement in the end market to exit the year growing high single digits, meaning this is more than just year over year comparisons. It does seem like you're expecting continued improvement there. Just given how the last couple of years have gone in the market, even acknowledging what you talked about in terms of encouraging trends, I'm just wondering how you got comfortable with any risk to that assumption.

Speaker 10

So that's the first question. The second is on new modalities. In the near term and then just looking ahead, how has your business associated with new modalities performed recently? And what's your expectation for mix, new modalities versus mAb contributions moving forward based on what you're seeing in the market right now? That obviously could be an accelerator to growth over the coming quarters.

Speaker 10

And then finally on China, just regarding the slowdown in purchasing related to stimulus, pending stimulus, I'm just wondering how broad based this is and where you're seeing the most headwinds as folks basically try to get better clarity on where the money is going to be allocated and when? Thank you very much.

Speaker 2

Sure. Let's start with how we get comfortable with our view on bioprocessing and its future. And I think it's important to level set one more time on the performance that we've seen here in the first half, starting with the second quarter, which again, it's played out as we thought. We saw improvement in revenue and orders, 2nd

Speaker 7

quarter in

Speaker 2

a row in both consumables and equipment. And you'll recall from our commentary in the last quarter's comments that we wanted to see that improvement in equipment and we did. And our core revenue improved nearly 1,000 basis points from down high teens, Matt talked about this, to down high single digits. And again, orders grew high single digits sequentially from Q1, which is an acceleration from the mid single digits. So we do see strength there.

Speaker 2

And that's because destocking is largely behind us and there are very few exceptions. And those order patterns are more and more similar to the pre pandemic levels, which is also why in our guide here for Q3, we've talked about seasonality again, something that we haven't seen in what we'll consider the anomalous last 8 quarters or so. So those ordering patterns are returning to what we saw in the pre pandemic level. And again, important to note here, large customers with on market drugs continue to grow because that underlying large molecule demand remains at historical growth rates. And we talked about that high single digits, maybe even low double digits, but certainly at the historical rates, which continues to provide that demand signal through the entire value chain.

Speaker 2

At the same time, development pipelines remain very solid across the board. But if we look at Phase 3, that's particularly strong. In fact, we would say, it is stronger than it had been prior to the pandemic. And that further underwrites our long term growth expectations. Now you talked about some of the smaller biotech customers and that's where you tend to see some of these advanced modalities.

Speaker 2

Let's just call them for the sake of argument right now, nucleic acid based therapies and perhaps a couple of other types, bispecifics ADCs. And what we see there is that they have been over proportionately impacted by some of the funding contraction that we saw in the venture capital markets. But that's improved, which is encouraging. But again, those smaller players really do need to focus on their most promising projects to play that out. And that's going to have an effect on how much capital they spend on equipment.

Speaker 2

So if a particular player is positioned and their portfolio is skewed more towards these advanced therapies and these smaller customers where cash remains fairly tight, then that's going to impact the order book. With our broader portfolio, particularly with our skew towards commercialized drugs and those in late phases, we see that strength and that's another reason why, we feel good about exiting 2024 at high single digits or better. Now coming back to your question here on new modalities. New modalities are exciting. They're a small part of our business and they're a small part of the overall market.

Speaker 2

Keep in mind, our business is driven by protein therapies, in their various forms. And of course, we also are a leading player for the advanced therapies. But if you calibrate, this is a much smaller part of both our business and the market. And it's going to have a fair amount of variability both in success rates in terms of the approvals that these advanced therapies received, but also in terms of the uptake and the reimbursement dynamics associated with those. So I think we're just at the very beginning of that trend to these advanced modalities going on.

Speaker 2

Lastly, China, the slowdown that we're seeing is really fairly broad based. As you look at our portfolio, life science equipment in particular has a research and more academic focus and that's where you see a lot of waiting for the stimulus funds to be dispersed. And that segment is ready. The applications are filed, they're in the funnel so to speak, but we need to see the disbursement of that and we're not counting on that happening in any material form here in 2024.

Operator

Thank you. Our last question will come from Tycho Peterson with Jefferies. Please go ahead.

Speaker 2

Good morning, Tycho. Welcome back.

Speaker 11

Thank you. Thank you. Reiner, I want to go back to instruments for just a minute and kind of your background obviously in SCIEX back in the day. Just thinking about the replacement cycle, we get a lot of questions on that from mass spec. How do you think about that potentially kicking in over the next couple of years?

Speaker 11

Because I think there's some debate that some of that got pulled forward during COVID and maybe it's going to be more muted this cycle when you do start to see the replacement cycle from Aspect?

Speaker 2

So I think we would support that hypothesis that the additional funding and in the various market subsidies pulled forward demand and replaced a lot of equipment out there during the pandemic and immediately following that. And that's why we've talked about the need and we're experiencing that normalization period right now. And that replacement cycle is going to remain intact. And that's why we would say we're probably sort of in the early innings, mid innings here of that recovery. The first step that we're probably going to see here are the lower comps in the second half.

Speaker 2

And it's probably going to take 2025 to start approaching that normal replacement cycle again Tycho.

Speaker 11

Okay. And then on bioprocess, appreciate all the color. We started to get more questions on yield improvements. I'm wondering how you think about that, just your customers getting more efficient. And then how you think about capacity kind of freeing up in the industry, whether it's Novo selling off some of the catalytic capacity or Wuxi having to get rid of some capacity in the U.

Speaker 11

S? Just curious how you think about that playing into kind of the equipment side of things? And then maybe the last part, just what's your view on kind of doing more on the services side, CDMO type work and adding your own

Speaker 2

capacity? So starting with yields and improving customer yields, that's what we do. Our focus in bioprocessing is to help our customers improve the yields and there's plenty of opportunity for that to ultimately lower the total cost of manufacturing of these life saving, certainly quality of life improving drugs and to improve accessibility to these drugs around the world. So that's what we do and we don't view that as an inhibitor to growth. On the contrary through creating more value for our customers, we see more opportunity for growth there and differentiation and believe that we're very well positioned.

Speaker 2

Now as we think about capacity here in the marketplace, we actually believe that capacity certainly for commercial production and what is in Phase 3 needs to increase. We don't believe that in the large manufacturers, pharma or CDMO that ultimately there is sufficient capacity for the long term and we would expect that capacity to continue to increase and there's moves in the marketplace that demonstrate that. And then underwrites also our perspective on equipment orders growth. Now as it relates to services, we've talked about that at length. We're very focused on the scope of the businesses that we have.

Speaker 2

We're excited about investing in those businesses and helping our customers do what they do. We do provide services in order to help them with some of their most complex and new therapies, and then ultimately do tech transfers to either the pharma company itself or its CDMO partner.

Speaker 11

Okay, very helpful. Thanks.

Speaker 2

Thanks, Tycho.

Operator

Thank you. At this time, I would like to turn the call back to John Bedford for any additional or closing remarks.

Speaker 1

Thank you everybody for joining. We'll be around all day and rest of the week for questions. Have a good day.

Operator

Thank you. This does conclude Danaher Corporation's Q2 2024 Earnings Results Conference Call. You may disconnect your line at this time and have a wonderful day.

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Earnings Conference Call
Danaher Q2 2024
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