Repligen Corporation

Q1 2023 Earnings Conference Call

5/2/2023

spk02: Good day, ladies and gentlemen, and welcome to the replicant first quarter of 2023 earnings conference call. My name is Vaishnavi, and I will be your coordinator. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on the touch-tone phone. To withdraw your question, please press star then two. In order to accommodate all individuals who wish to ask questions, there will be a limit of two questions at a time. Please note this event is being recorded. I would now like to turn the call over to your host for today's call, Sondra Newman, head of investor relations for Repligen. Please go ahead.
spk00: Thank you and welcome everyone to our first quarter of 2023 report. On this call, we will cover business highlights and financial performance for the three-month period ended March 31st, 2023. We'll also provide updates to our financial guidance for the full year. Replicant's President and CEO, Tony Hunt, and our CFO, John Snodgrass, will deliver our report, and then we'll open the call up for Q&A. As a reminder, the forward-looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning risks related to our business is included in our quarterly reports on Form 10-Q, our annual report on Form 10-K, and the current report on Form 8-K and other filings that we make with the Securities and Exchange Commission. Today's comments reflect management's current views, which could change as a result of new information, future events, or otherwise. The company does not obligate or commit itself to update forward-looking statements, except as required by law. During this call, we're providing non-GAAP results and guidance. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this morning, which is posted to Repligen's website and on sec.gov. Non-GAAP figures in today's report include the following, revenue growth at constant currency, growth profit and gross margin, operating expenses, including R&D and SG&A, operating income and operating margin, net income, and earnings per share, as well as EBITDA and adjusted EBITDA. These adjusted financial measures should not be viewed as an alternative to GAAP measures, but are intended to better enable investors to benchmark Replicant's current results against historical performance and the performance of peers when evaluating investment opportunities. Now I'll turn the call over to Tony.
spk09: Hey, thank you, Sandra. And good morning, everyone, and welcome to our Q1 earnings call. The Sonar Press release this morning delivered an excellent first quarter, given the bioprocessing industry market dynamics, with 7% revenue growth for our base business at constant currency, and stronger than expected growth in operating margin. Overall revenues of $183 million for the quarter were down 9% in constant currency due to the predicted reduction in COVID-related demands. The story in the quarter was the performance of our protein chromatography businesses, where we saw solid gains and an increased contribution from non-COVID mRNA programs in the cell and gene therapy space. COVID-related revenues came in as expected at Cell and gene therapy orders were strong, up 40% sequentially and 20% versus the average quarterly order intake in 2022. The region where orders were soft was China, down 40% sequentially and 60% versus a year ago. Challenges in the region were driven by a combination of inventory burnout that was built up during COVID and lower demand from CDMOs and pharma. Based on current projections, we expect it will take another few quarters for China to return to a more normalized level of demand. Base orders in the other regions performed reasonably well in Q1 with a combined book-to-bill of 1.0. Activity and interest at a customer level remains high with many customers scaling here in 2023. However, given the lack of order growth across the regions and the situation in China, and APEC to a lesser extent, we feel it's prudent to adjust for outcome for the year. We do expect overall orders for the company to pick up in the second half of the year and continue to strengthen as we move into 2024. Our expectation now is to report to 8% organic growth in our base business with our COVID outlook unchanged at 30 to 40 million. Strategically, we continue to make selective investments across our product portfolio. We see 2023 as an important year to complete several key R&D programs, and our intent is to increase our spend to approximately 6% of revenue. We have four new product launches planned by mid-year, supporting our filtration and analytics franchises, with additional launches in the second half positioning us well for 2024. We continue to see strong traction for many of the new products we launched in 2021 and 2022, which contributed 10% of our overall revenues in the first quarter. We saw a strong demand for our synchromatography filtration systems and a high level of activity around our most recent launch, our RPM system with inline analytics. On the M&A front, we closed on the acquisition of FlexBio systems in mid-April, giving us another play in fluid management with the addition of single-use bags. We focused our M&A efforts over the last few years on building out fluid management vision And we believe that Flex Biosystems technology in 2D and 3D bag manufacturing is a core competency for the company and something we can build upon over the next few years. With the newly built 7,000 square foot manufacturing space, we expect to increase the number of opportunities for Flex Biosystems through our dedicated commercial team and deliver approximately 5 million in revenues this year, with the business ramping up quickly in 2024. As we look to 2024, our goal is to be back to 20% plus growth for our base business, armed with a broader portfolio of products and to return to more historical growth levels across the regions. So moving now to our quarterly performance. As mentioned earlier, the story of the quarter was the performance of our proteins and chromatography franchises and the overall performance itself in gene therapy. In chromatography, our Opus prepack column business had an excellent quarter for orders and revenue. Overall revenue for Chrome came in at close to 20% against the lighter comp in Q1 of last year. We saw a greater than 50% increase in revenues and orders from new modality accounts focused on mRNA, viral vector, and plasma manufacturing. As highlighted in our year-end call, chromatography resin supply remains tight through the first three months of this year, and while our results were strong year on year, our base chromatography revenues were down 15% sequentially. Our expectation is that Q2 will be similar to Q1, with revenues picking up in the second half of 2023 as more resident supply comes online. We continue to expect our chromatography franchise to grow approximately 10% this year. Our proteins business had a good quarter with year-over-year reported growth in the high single digits in Q1. The expected drop-off in sativa ligand demand during the first quarter was more than offset by the performance for other ligands and growth factors as we continue to transform our proteins business with replicant-developed products. We expect proteins to be flat here in 2023. In filtration, our business was down approximately 20%, as reported, driven by a predicted sharp decline in COVID-related revenues. For the base filtration business, revenues were down less than 5% against a tough comp in Q1 last year. Base filtration revenues in Q1 were essentially in line with the revenue in the previous quarter. Our artisan systems and flowpads and XLATF performed well in the quarter, with our systems and flowpad revenues up over 200%. New modality strength came from cell and gene therapy, including mRNA. We are seeing the benefits of our relationships established during COVID, as many of these companies have pivoted to mRNA programs in vaccines and therapeutics. We expect mRNA to be a catalyst for growth over the next few years as new vaccines and therapeutics make their way through clinical trials. Overall filtration orders for the quarter were down versus a year ago, which is driven by the aforementioned weakness in China and APAC for CDMO and pharma-demanded soft. We expect our filtration franchise will start to recover during Q3 as the macro headwinds subside and customers complete their destocking activities. and flat up 8% on base business. Finally, our process analytics business had an excellent quarter on orders, which were up over 30% year on year. While revenues were up slightly versus prior year, the order growth rate is very encouraging. We continue to expect this business to deliver 15 to 20% growth here in 2023. So overall, we're off to a solid start for the year. However, given the macro environment, and for the company. Repligen continues to be well-positioned with a great suite of innovative products and strong traction in key areas of the market to manage through the next six to nine months. We do expect to see order pick up during the second half of the year, which will put us in a good position for 2024. We remain very optimistic about medium to longer-term potential in bioprocessing once we navigate through the next few quarters. With that, I will turn the call over to John for the financial update. Thank you, Tony. Good day, everyone. Today, we are reporting our financial results for the first quarter of 2023, as well as updating our financial guidance for the year. Unless otherwise mentioned, all financial measures discussed reflect adjusted non-GAAP measures. As shared in our press release this morning, we delivered revenue of $182.7 million in the first quarter. The highlight continues to be the performance of our base business, which grew by 7% at constant currency, driven by the performance of our chromatography and proteins businesses, despite challenging market conditions. For the first quarter, our total revenue decreased by 12% as reported and 9% at constant currency. FX impact for the quarter was above 5 million, creating a three-point headwind on reported growth. Based on current conditions, we expect FX headwinds to continue through the first half of 2023 and then shift to tailwinds in the second half, netting out to a zero impact for the full year. For our overall revenue performance, we saw year-over-year reduction in COVID revenue of 30 million. This was partially offset by performance in our base business, which grew by 10 million, or 4% as reported, and 7% in constant currency. As it relates to regional revenue growth, we saw strong performance in Asia with Europe and North America down as expected due to COVID revenue declines. For the quarter, overall revenues from Asia, rest of the world increased by 21% while North America and Europe contracted by 15% and 21% respectively. While revenue growth in Asia was strong, orders in the region especially in China, dropped off significantly, setting us up for a tougher last three quarters in 2023 for this region. Regarding overall revenue distribution by region for the first quarter, Asia represented 23%, Europe represented 39%, and North America represented 38% of our global business. Now moving down our income statement. First quarter 2023 adjusted gross profit was 100.8 million, a reduction of 23.8 million, or 19%, compared to the 2022 first quarter. Adjusted gross margin of 55.2% in the quarter goes down from 60.4% in the 2022 first quarter. Gross margin declines compared to the 2022 first quarter are related to volume deleverage, less favorable product mix tied to COVID revenue declines, material cost inflation, and higher expenses tied to our capacity expansions. Sequentially, gross margins in the quarter improved by 370 basis points for our fourth quarter 2022 performance of 51.5%, driven by improved product mix benefiting our material costs, price increases covering material cost inflation from suppliers, and operational cost optimization in our business. Now transitioning down to P&L to adjusted operating expenses. Adjusted research and development expenses for the first quarter of 2023 were 6.7% of revenue. As Tony mentioned, we are focused on ramping up our R&D efforts here in 2023 in order to launch key new products into the market this year, with our primary focus areas being filtration and systems. Adjusted SG&A expenses for the first quarter of 2023 were 26% of total revenue compared to 22% in the same 22 period. Year over year, percentage increases are tied to capacity expansion and investments in commercial resources to continue to drive growth and market share gains in the short and long term. Now moving to adjusted earnings and UPS. First quarter of 2023 operating income was 40.9 million compared to 67.4 million in the prior year quarter. An adjusted operating margin is 22.4% compared to 32.6% the same prior year period. Adjusted net income for the first quarter of 2023 was 36.3 million compared to 53.7 million in the same quarter of 2022, a 32% reduction. Adjusted fully diluted EPS for the first quarter of 2023 was $0.64, compared to $0.92 in the same 22 periods. A decline of $0.28, or 31%. Our cash, cash equivalents to short-term investments, which are GAAP metrics, totaled $618 million at March 31, 2023. We'll now transition to our 2023 full-year guidance. Our GAAP to non-GAAP reconciliations for our 2023 financial guidance are included in the reconciliation tables in today's earnings press release. As previously mentioned, unless otherwise noted, all 2023 financial guidance discussed will be non-GAAP. Please also keep in mind that our 2023 guidance may be impacted by fluctuations in foreign exchange rates beyond our current projection of flat on full-year sales. and includes financial estimates for flex-biosis acquisition closed on April 17. Guidance does not include potential impact of any future acquisitions that the company may pursue. Based on our current view of market conditions, we are revising our 2023 full-year revenue guidance, the GAAP metric, to a range of 720 to 760 million, a reduction of 40 million at bid point compared to our February guidance. This revised guidance reflects overall reported and constant currency growth of minus 10% to minus 5% and organic growth of minus 11% to minus 6%. Our overall revenue guidance includes COVID revenues of 30 to 40 million, consistent with our February guidance. And we have included 5 million of revenue from our FlexBiosis acquisition. We are updating our base business revenue guidance to a range of 685 to 715 million, growing at 4 to 8% as reported and at constant currency. This compares to our February guidance of 730 to 760 million, growing at 11 to 15% as reported and 12 to 16% at constant currency. We are revising our 2023 adjusted gross margin guidance to the range of 52 to 53% 50 basis point reduction from our previous guidance of 52.5 to 53.5%, driven primarily by lower revenue projections for the year. We are modifying our adjusted operating income guidance to a range of 153 to 158 million for the year, 23.5 million at midpoint from our February guidance of 176 to 182 million. Our adjusted operating margin guidance is now in the range of 20.5 to 21.5% for the year compared with our February guidance range of 22.5 to 23.5% of revenue. Adjusted other income guidance is being increased to 14 million compared to prior guidance of 10 million. And we continue to expect 2023 adjusted income tax expense to be approximately 20% of adjusted pre-tax income. We are revising our adjusted net income guidance to the range of 134 to 138 million, a difference of 15.5 million at midpoint from our February guidance of 149 to 154 million. We are revising our adjusted EPS guidance to the range of $2.35 to $2.42 per fully diluted share. a reduction of 27 cents from our previous guidance of $2.61 to $2.69. Our adjusted EPS guidance assumes $57.1 million weighted average fully diluted shares outstanding at year-end 2023. Adjusted EBITDA is now expected to be in the range of $190 to $194 million. A reduction of $24 million at midpoint from our prior guidance, $213 to $219 million. With depreciation and intangible amortization expenses expected to be approximately $35.7 million and $30.2 million respectively. Adjusted EBITDA margins continue to be strong and are expected to be in the range of 25.5 to 26.5% for the year. reflective of the exclusion of fixed depreciation costs from our capacity expansions from this metric. We expect year-end cash and cash equivalents, a GAAP metric, to be in the range of $620 to $640 million, with $60 million of CapEx investments being fully funded by cash generation from our operations. This provides any cash figures inclusive of cash payments made for our April acquisition of FlexBios. This completes our financial report and guidance update, and I will now turn the call back to the operator to open the lines for questions.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. Again, in order to accommodate all individuals who wish to ask questions, there will be a limit of two questions at a time. At this time, we will pause momentarily to assemble our roster. Our first question comes from Dan Arias with Stifel. Please go ahead.
spk10: Good morning, guys. Thanks for the questions. Tony, maybe just to start on where things might be improving a little bit here. Is there an overlap between the new modality accounts where you're seeing a pickup in order activity and those that look to be, you know, some of the heavy inventory builders during the COVID trough? Or do you feel like those two dynamics are separate right now? And then within that is this question of small and emerging biotech, just given where those companies tend to play. How should we extrapolate the comments there? to that customer bucket overall? Obviously there was quite a bit of discussion on that subset last week.
spk09: Yeah, so thanks, Ben. So to answer your first question, I don't think they're related between any kind of inventory buildup would be going on at the, you know, the companies that were involved in COVID plus the companies focusing on mRNA in new indications. So there is a, you know, a significant number of companies that have really focused on new mRNA-based vaccines, mRNA-based therapeutics. I think a lot of the work we've done over the last two or three years put us in a good position to be able to get involved in many of those programs. And that's kind of setting us up well in terms of what you saw in terms of revenue growth and order growth. And I think that's, again, going to be a nice catalyst for us as we go through the next few years. On the small emerging biotech, no revenue, sort of discussion from last week. Where, you know, when we look at our accounts, right, the most exposure that we have is probably in the cell and gene therapy space. And obviously there's some exposure in the biotech that are working on monoclonal antibodies as well. So we're at the, you know, just a little north of 10%. of our revenue comes from the small biotechs with one caveat, right? That does not include what percent of CDMOs focuses on small biotechs. We just don't have any idea how we would split our CDMO revenue into small biotech versus large biotech. So, but in general, it's like, you know, a little north of 10%, closer to 10%. Okay.
spk10: And then just maybe on some of the comments that you made around relationships that were made during the pandemic, one of the pieces in the equation seems to be this idea that there may have been some share shifts or just new business wins during COVID as some of the larger players felt themselves constrained. Now that we're decently removed from the height of the situation, can you maybe just comment on what you're seeing from your seat in terms of share gains that you think should stick versus business that maybe moves back to the big guys? Anything notable that you're taking away in terms of the current state of affairs there?
spk09: Yeah, I would say that for the most part, the players that we were deeply involved with during COVID have continued to work with us. And I can't honestly say that they were share gains. We had the right products with the right the companies that were deeply involved in COVID vaccine manufacturing. The relationships with those companies have continued, and that's rolled into other programs. And we continue to get our share of those opportunities. And all the other players in bioprocessing are also working with those companies as well. So it's not like this. It's unique to Repligen. I think the broader comment I would make is that the overall market, it's a tough market out there. And everybody is kind of working, every company in the bioprocessing space is working hard to secure orders and get traction at various accounts. But it's just a tough macro environment right now that everybody's working through.
spk10: Okay. Thank you, Tony. Thanks, Tom.
spk02: The next question comes from Jacob Johnson with Stevens. Please go ahead.
spk04: Hey, thanks. Good morning. Tony, maybe starting off where you just ended on a tough macro environment and the weakness in Asia Pacific, can you just unpack what you're seeing from that region? It sounds like some of this is destocking, but I think there's also been some scuttlebutt around local competition in China. maybe some reshoring going on to just, just what, can you unpack what you're seeing in Asia Pacific?
spk09: Yeah. And for, and just to be, you know, very specific about it. Um, most of the challenges we are seeing are, are in China. And if we look at the order of patterns that we, uh, saw in 2022, China, and APEC kind of followed very much in line with what we saw in North American Europe with strong first half of the year, and then dipping down in Q3, China recovered in Q4, then dipped down significantly in Q1 of this year. And our view of it is that it is a combination of stocking that happens not because of COVID, but not because of COVID vaccine manufacturing, just that there was such a start-stop in China throughout the second half of last year that I don't think that the amount of product that was procured in the first half was just actually used for the manufacturing that may be scheduled for the year. That said, I do think that there's a bit of a reset going on in China, and we think that demand is soft, and it's beyond just destocking. Just demand has been relatively soft. We had a good quarter on revenue, but the orders were weak. And we expect that that's going to continue through most of the year. On the competition side, there's always going to be local competition in China. That hasn't changed, you know, over the last five, ten years. And there are more players popping up. So there's always that. There's always going to be some competition and some probably, you know, changes in share. But it's not a primary or secondary reason what we're observing right now.
spk04: Got it. Thanks for that, Tony. And then just the follow-up, going back to last week, I think one of your peers talked about kind of less visibility in the current environment. I'd be curious kind of how you'd compare, contrast your visibility right now versus maybe pre-COVID, especially in light of the comment around kind of 20% or turning to 20% growth in 2024, kind of what gives you confidence in that? Thanks.
spk09: Yeah, you know, what's What's good about our industry is there's a ton of activity going on. There's a lot of scale-up happening in North America, Europe, Asia. The conversations we have with our customers is definitely about projects and timing and the scale of activities that they're going through. So lots of opportunities. Our funnel of opportunity continues to strengthen. What we have seen, and I think other companies companies in bioprocessing have also commented on this, is that it's taking a little longer for those orders to materialize. We're seeing projects getting pushed out into the second half of the year and into early 2024. We're seeing just longer, just time to get orders secured versus what we might have seen over the last three or four years. So that's really the dynamic. We're not seeing any kind of slowdown in, hey, overall activity at the accounts. It's just a timing issue, and it's also some project delays.
spk04: Got it. Thanks for taking the questions, Tony.
spk02: The next question comes from Puneet Soda with SVB Securities. Please go ahead.
spk08: Yeah, hi, Tony. Thanks. So maybe just first one, I appreciate the comments on emerging biotech being about 10%, but just, you know, could you remind us what's your exposure for phase one and two? Obviously, that's an important question. Sort of what you're seeing within that, you know, segment for you. Obviously, you've been levered to more of the, you know, innovators and early adopters of the technologies in phase one and two.
spk09: Yeah, so maybe a broader way of answering that question, Puneet, I think in general, right, 65% of our revenue comes from clinical, 35% is coming from commercial, and that's ex-COVID, so that's looking at our base business. I don't have a split on phase one and two, but you could assume that Our 10% emerging biotech is all pre-tentacle phase one, phase two. Maybe a small percentage in phase three. But that would be my sense. And again, I would add the caveat that we don't know what percent of the CDMO part of our customer base, how much that is serving small biotech as a percent.
spk08: Got it. And then just a clarification on, you know, excluding FlexBioSys, should we be looking at a 3% to 7%, you know, guide for the year versus 4% to 8%? Just wanted to confirm that. And then, Tony, on, you know, on the resin side, it seems like things are improving. But obviously, you're pointing out that, you know, this is still, you know, recovery into the second half. Things should improve more. Can you just elaborate a bit on your conversations and sort of the visibility that you have for the chromatography segment and the drop shipments that you're getting? Thank you.
spk09: Yeah, so the 48% does not include the impact of flex, right? So it's 48% on base. The resin supply, I think, was tight. throughout Q1, right? I think we, in our February call for the year end 2022, we called out that we had seen a slowdown in terms of resident supply versus what we saw in Q3, Q4 last year. And that's why I provided that 15% sequential drop off in revenue versus Q4. That said, you know, our conversations are, you know, indicating that as we move through Q2 and into Q3, supply is going to get better. So we feel fairly confident based on the conversations that we've been having that, you know, things will start to open up in the second half of the year. Our order, the order strength on our prepack comms has stayed high. And so we have dependent on dropshipping of resin. And again, we expect that to open up in the second half of the year.
spk08: Got it. Okay. Thank you. Thanks, Judy.
spk02: The next question comes from Julia King with JPM Chase. Please go ahead.
spk03: Hi. Good morning. Thanks for taking the question. So, Tony, I want to follow up on the order trends you mentioned. Book-to-Build during the quarter was 0.94 with some strength at MRNA customers. Could you talk about order trends excluding MRNA customers? And what have you been seeing in terms of Book-to-Build coming out of 1Q? And generally, what's your expectation for order trends through the rest of the year? And then in light of the pressures that you mentioned, how is pricing trending versus your prior expectation?
spk09: Did you repeat the last part again, Julia? I missed that.
spk03: How's pricing holding up versus your prior expectations?
spk09: Okay. Maybe start with pricing. Pricing has held up pretty well. It's covering our inflation. So I think that's going exactly the way John and myself and the team figured it would play out here in 2023. On the book to bill, I know that I would say that it's, I don't have the exact book to bill without MRNA, but obviously it'll be a little lower than the 0.94, but it's not a massive contributor. Obviously, this is a market that's just taking off. So I, beyond the fact that we're getting really strong traction and actually reasonable orders, multi-million dollar type orders, it's just not big enough to really move the needle up or down. So there's nothing really a whole lot less, maybe it's 0.9, I'm not sure exactly, but it's not a big detractor when you take it out. Order trends, we're expecting that orders will pick up in the second half of the year, but it's slower pace than what I think we all thought back in February. So that's really the piece that we all have to keep an eye on as we go through Q2 and we get into Q3 and Q4. But the expectation is that the orders will pick up in the second half of the year and that will contribute towards overall revenue for us in 2023 and obviously sets us up for a better 2024. Got it.
spk03: That's helpful. And then a follow-up on China dynamics. Are you seeing any differences in terms of activity or order patterns between different types of customers or between your different product lines? And within your guidance, what kind of recovery expectation have you baked in? And if any, what supports your confidence for a return to normal in China? Thanks.
spk09: In China, It is a challenging situation. I would say the CDMOs in China are down more than the pharma companies. That said, it's a significant drop-off in what I think everybody was expecting for the year. So we've taken out, we've de-risked China for the year. We expect that orders will start to pick up in Q4, but not soon enough to have any meaningful contribution to Q4 revenue. But the conversations we're having with customers is still around a lot of activity and investment. And I don't think there's anyone in bioprocessing that believes that China is going to stay in a prolonged slump. I think this is a few quarters that everybody has to work, or at least we have to work through, because I can only speak to our situation in China, and that we expect that that will get... carried out by the end of the year and returns to more normal growth rates that we've seen in the past for China, even pre-COVID.
spk03: Thank you.
spk02: The next question comes from Matt Larry with William Blair. Please go ahead.
spk01: Hey, good morning. I'm just thinking about the guidance reduction here and trying to assess whether there might be additional risk or not for the guidance of the pallets of the year. When you talk about an expectation for orders picking up in the second half of the year, could you give us a sense just for what underlies that? Is it sort of actual on-the-ground order activity? Is it customer surveys? Assessment of product shelf lives within customer inventory? More qualitative conversations? Just what are the kind of other metrics internally that feed into that optimism for the second half of the year?
spk09: Yeah, I think that when you look at our, we look at our funnel and we look at the progression of opportunities as those opportunities move through the funnel up to the higher probability level that is getting better. We are talking to a lot of customers around second half of the year programs and activities. So again, that gives us some confidence. So it's really based on, you know, the feet on the street and conversations that we expect the second half of the year is going to pick up. And obviously, you know, as we go through the next three, six months, we'll absolutely see if all of that's going to materialize or not.
spk01: Okay. And then just for John, new gross margins were obviously strong in the first quarter. I assume COVID maybe was a part of that. But I think to sort of balance the year, it looks like the guide would imply something, you know, 51.5%. The initial conversation for the year, I think, was to start at 51% and then build throughout the year. I think the quarterly revenues for Q2 through Q4 are, just based on your guidance, above that within Q1. Again, I know the majority of COVID was in Q1, but maybe just help us understand what exactly is going on from a gross margin perspective for the rest of the year?
spk09: Sure. Just to give a little bit of color on Q1, Q1 came in with a better product mix than we were originally projecting. So our proteins came in a bit higher. Our opus revenues came in a bit lower with some of the pressure on resin supply being a little bit more than we even expected. And then we had some favorable product mix within our overall filtration business, so a higher mix consumable products versus equipment. So that was a positive. The challenge with that, though, is as we move through the year, we expect that to correct itself and go back some pressure on next and the second half of the year. The other thing is, you know, we've taken, you know, $40 million out of our top line revenue at midpoint. And with that, you know, most of the, the cost that drops out is really just your material costs, right? All your overhead costs and facilities costs and all those types of things do not come out of the equation. So as we see that dropping through, you know, that's putting pressure on the overall margins And I'll call it volume deleverage as the major headwind there. So those are the drivers. The revenue impact in the second half of the year, we expect to be stronger than the first half of the year for overall revenue. But again, with some of these other headwinds, you know, bringing down the overall revenue projection, that's the impact. And if you look at phasing, we expect the phasing on the gross margin at roughly 51.5 at midpoint, you know, should be a good gauge for, you know, through the rest of the year at this point.
spk01: Okay. Thank you.
spk02: The next question comes from Paul Knight. With KeyBank, please go ahead.
spk06: Could you give us a little color? I know you're building a factory or you're positioning a product to get to the next year's growth. So what should we think about for 2024? Is it C technologies? Is it fluid management? Is it artisan expansion of manufacturing at companies? the hollow fiber. I mean, what are kind of the three levers you're looking at and doing this year to get ready for 24? Yeah, great question, Paul.
spk09: I think that when you look at it, I think it's exactly the three areas that you've highlighted. I think fluid management is a big lever for us, right? Obviously, there's a a cure destocking challenge that goes on with the component side of fluid management. We're investing very heavily on the assembly side of fluid management. We expect that that's going to be a growth driver for us next year. There's a lot of work going into our systems portfolio. And ever since we did the acquisition of Artisan, we've been really trying to transform that business from a custom system shop to a more standardized system shop, which we were able to do for the most part in 2022. But what we're trying to do right now is continue to build up the overall systems portfolio, whether it's the benchtop, you know, care to eyes that have been around for a number of years that came out of spectrum deal by adding in advanced analytics. It's the combination of advanced analytics, with our systems, that's going to be a big driver for us next year. And then there's some other products that we'll talk about as we go through the year that I think will serve as a catalyst for growth for us. you can see that the evolution of the company is really happening, right? If you went back a few years ago, Paul, you would see us as an individual product-by-product company, and now we're a lot more integrated between our consumables and our systems and our fluid management solution. So it's that kind of integrated offering that I think is going to be a driver for us when we get into 2024. Thanks.
spk02: Our next question comes from Lisa Garcia with UBS. Please go ahead.
spk11: Good morning, guys. Thanks for taking the questions. So I think you guys called out that new products were about 10% of revenue this quarter. Is 14% kind of still the right number to think about for this year? How are you guys thinking about 2023 and kind of the new product build? I know you guys also kind of threw in the new acquisition this year.
spk09: I think 14% is still a very good number for the year. I remember a number of the products were launched recently. you know, in, you know, mid to late last year. So picking up at around 10%, I think is very encouraging and fully expect that we'll be closer to that 14% by the time we get to the end of the year.
spk11: Great. And then I think last quarter, you've kind of discussed the order book by customer type, kind of thinking about pharma versus, CDMO, and I don't know if you have these numbers at your fingertips, but maybe are you able to even speak qualitatively about kind of where kind of the book bill ratios are and kind of, you know, kind of thinking about parsing between those two customer types and kind of where we sit?
spk09: Yeah, a little bit. I would say that on the CDMO side for the sort of second quarter in a row, we saw a positive uptick, which is, you know, encouraging, but not back to where we were a year ago. So there's a bit of a journey that we all have to go on to get to see CDMOs back to where CDMOs were, right? And clearly, having a very low order book in China and APAC didn't help on that, right? So, but in general, CDMOs have moved back up. I think if you look at pharma, If you take pharma, excluding China, APAC, I think pharma in Q1 versus the average pharma intake in 2022 is pretty much in line. So we had an outstanding Q4. It was lower in Q1, but versus the average order intake where pharma was strong last year, it was very much in line.
spk11: Great. Thanks so much, guys.
spk02: The next question comes from Matt Hewitt with Craig Halem Capital Group. Please go ahead.
spk05: Good morning. Thank you for taking the questions. Maybe first up, I'm just curious what feedback you've gotten on the large-scale controller that you launched during the quarter. How do you expect that to ramp over the course of the year?
spk09: Yeah, this is just an evolution, really, of our ATF portfolio. So we've been making probably custom large-scale controllers for a handful of companies over the last 12 to 18 months. Feedback from those companies has been really, really very positive. And so we did a technical launch of it in Q1. You'll probably start to see more of a marketing launch done on the controllers. as we go through Q2 here. But in general, it's a modernization of ATF. We've done that on the lab controller, which was done really last year. Large scale controllers, which are for the much larger ATF units, is what's happening right now. I think our customers expect it. They want it. They like what we've added in terms of feature sets. And I think it's a lot more around ease of use, customer satisfaction. done anything else. But it's where we should be checking that portfolio.
spk05: Got it. And I guess along those lines, as you look at the remainder of the year, the number of launches, new products that you plan to introduce to the market, are the majority of those more evolution type products or is there one or two in there that you think could really move the needle as you get into 24 and beyond?
spk09: There's definitely some transformative products that are going to get launched this year. But it's going to take a little while. Remember when we had those conversations, Matt, about TFDF and how long it takes to get market traction. I just think it takes a while even when you have some great products to get customers to not only adopt but start to platform the technologies at an account. So you get into a process, but what you really want to be is platformed We have a number of products this year that I would say are disruptive products, and I think we're looking forward to getting those into the market. Expect that what we're going to be talking about as we go through the year is really around systems, analytics, and filtration products. They're kind of the buckets where most of the products fall.
spk05: Understood. All right. Thank you. Yeah, thanks, Matt.
spk02: The next question comes from Brandon Coulier with Jefferies. Please go ahead.
spk07: Hey, thanks. Good morning. Um, Tony, just on China, will you remind us how big China is? It's the percent of the mix. Uh, what were you assuming for growth there previously and what's embedded in the new guide and longer term, do you think you need to have more in China for China manufacturing to be competitive locally?
spk09: Great question, Brandon. In general, our China exposure is about 10% revenue last year. So that kind of gives you an idea of how big China is for replicants grown quite rapidly. That 10% did include COVID-related accounts as well. In terms of assumptions going into this year, I don't have the exact growth at my fingertips, but it would have been probably on base business, probably close to 20% growth going into the year. Clearly, that's going to be a real challenge given the dynamics that we're dealing with. The in-China, port-China, clearly there's plenty of manufacturing going on at our peer level. and also with other local competitors in China. And that's something that we talk about internally. But right now, I think we're continuing to manufacture outside the region. And with a really great team in China, we've been able to compete well. It doesn't mean we won't do manufacturing in China in the future. It's just where we are today.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Tony Hunt for any closing remarks.
spk09: Thanks, everybody, for joining. Good discussions today. Look forward to connecting with everybody in a few months' time and talking through how first half of the year has gone for us. So thanks, everybody, for joining.
spk02: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-