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spk01: Good morning. My name is Emily, and I'll be your conference operator today. At this time, I would like to welcome everyone to Avantor's 2023 second quarter earnings results conference call. After the prepared remarks, there will be the opportunity for any questions, which you can ask by pressing start, followed by the number one on your telephone keypads. I'll now turn the call over to Christina Jones, Vice President of Investor Relations. Mrs. Jones, you may begin the conference.
spk04: Good morning. Thank you for joining us. Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Tom Slozek, Executive Vice President and Chief Financial Officer. The press release and a presentation accompanying this call are available on our Investor Relations website at ir.avantoursciences.com. A replay of this webcast will also be made available on our website after the call. Following our prepared remarks, we will open the line for questions. During this call, we will be making some forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate 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. 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. We do not assume any obligation to update these forward-looking statements as a result of new information, future events, or other developments. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the supplemental disclosure package on our investor relations website. With that, I will now turn the call over to Michael.
spk08: Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on slide three. Our second quarter core organic revenue declined 6.5%. Relative to the first quarter, market trends weakened sequentially, particularly in biopharma, where mid- to large-pharma customers moderated their spend and continued to reduce inventory, and ongoing funding constraints for small biotech persisted. Sales in our advanced technology and applied materials end market were impacted by sharp declines in sales of formulated solutions to semiconductor customers. We also experienced sequential weakness in sales of equipment and instrumentation associated with tighter capital budgets across all end markets. The sustained momentum in our biomaterials and education end markets partially offset these declines, and we are encouraged by the double digit growth in our medical grade silicone platform, as well as continued mid single digit growth in education and government. We continue to leverage the Avantour business system to drive cost savings and enhance operational rigor and efficiency. These productivity efforts and cost containment measures helped mitigate the soft demand environment and enabled us to deliver solid bottom line results including 19.7% adjusted EBITDA margin and 28 cents of adjusted EPS. We also have strong free cash flow momentum and generated approximately 85% free cash flow conversion to adjusted net income in the first half and paid down over $400 million of debt in the same period. While current market conditions are negatively impacting the entire industry, we are confident in our platform, market position, and long-term growth outlook. and the resilience of our end markets. We are doubling down on our actions to accelerate our growth strategy and control costs to help offset industry headwinds and ensure that we are positioned to capitalize when market conditions improve. First, we have taken steps to align our organization and key leadership roles to deliver incremental growth. We have added leaders with expertise in high growth segments and welcome new leaders with a proven track record in driving performance. A few examples include strengthening business leadership for proprietary research and materials businesses under Randy Stone, including adding dedicated leadership for our self-manufactured chemicals business and augmenting Ritter leadership to drive revenue synergies and product line expansion. Establishing dedicated strategy leaders under Kitty Sahin's leadership, who partner with business leaders to identify and capture high growth opportunities. adding product management leadership for bioprocessing, fluid handling, and lab digital services, and realigning our regional commercial teams to enable greater focus on customer needs. These efforts are generating results. In the second quarter, in addition to delivering double-digit education and government growth in the Americas, our strength in commercial teams extended multi-year contracts with several renowned institutions and consortiums in the education sector, including the E&I Consortium, which services over 5,000 educational institutions and gives us broad access to the academic community. Second, we are accelerating new product introductions for both third party and proprietary offerings and investing in Avantour's R&D to support customer needs. For example, in the second quarter, we launched integrated pressure sensors for our MasterFlex MasterSense pumps. novel volume sampling systems to support cell and gene therapy workflows, cryogenic storage vials to support long-term storage of critical biological samples, and introduced a new robotics tip line, the JT Baker HT2. We significantly accelerated new product introductions from our supplier partners during the first two quarters, including onboarding several innovative suppliers to bring thousands of new fine chemical and antibody offerings to our customers. as well as introducing new microplate instrumentation and biological sample storage solutions. And we announced plans for a significant expansion of our flagship R&D center in Bridgewater, New Jersey, planned for August 2024. Third, we are well underway with our digital transformation, including enhancing our e-commerce platform and improving campaign execution and commercial activation processes. We will begin introducing our new online buying experience through a phased rollout across geographic markets starting this autumn. At the same time, we are simplifying and streamlining lab inventory and replenishment processes for our customers by integrating leading electronic lab notebook and smart shelf platforms with our upgraded inventory manager enterprise system. We've increased web traffic through a variety of digital tactics, accelerated deployment of new product and application focused email campaigns, and enhance some of our trigger or action-based campaign programs. We are seeing higher campaign conversion rates as a result of these initiatives. Additionally, we've activated commercial process enhancements that are improving effectiveness in our lead-to-order conversion rates. These tactics complement ongoing content upgrades and search engine optimization enhancements across our digital channels. We've also intensified our focus on operational excellence and productivity to control costs as was evident in our second quarter results. Some examples of these efforts include rationalizing our manufacturing footprint through closures and downsizing, streamlining our organizational structure and de-layering, including simplifying our European organization from three subregions to two in order to reduce cost and complexity and better serve customers, proactively addressing structural costs and reducing discretionary and indirect spend across our global organization, Executing numerous Kaizen events as part of our Avantour business system to expedite process improvements and drive stakeholder engagement. And enhancing our supply chain to drive efficiencies, reduce back orders, and improve lead times, including increasing warehouse productivity and efficiency, as well as automation upgrades at our distribution centers in Germany, Sweden, the United Kingdom, and the U.S. Looking ahead, we are revising our full year 2023 guidance to reflect the more challenging environment the industry faced in the second quarter, which we expect to persist for the remainder of the year. We're also taking the opportunity to further accelerate our deleveraging and are now targeting adjusted net leverage below three times. I will walk you through our updated guidance at the end of the presentation. Before I turn it over to Tom to walk you through our second quarter financial results in more detail, I want to remind you of our previously announced CFO transition. As we announced earlier this month, Brent Jones will join Avantor as Executive Vice President and Chief Financial Officer on Monday, August 7th. Over a nearly 30-year career, Brent served as CFO for several public and private life science companies and previously as a senior investment banker. He is currently Executive Vice President, Chief Financial Officer, and Chief Operating Officer at LifeScan Global Corporation, a global leader in blood glucose monitoring and digital health technology. Brent is an innovative thinker and seasoned operator with a strong track record of driving transformation, building teams, and enhancing financial results to increase value for shareholders. He will be an exceptional partner in running the business, and I look forward to working closely with him to advance our growth strategy. As planned, Tom will be leaving Avantor next Friday, August 4th, to start a new CFO role outside the life sciences industry. As we welcome Brent to the team, I want to reiterate my appreciation to Tom for his many contributions to Avantor and his support of a seamless transition. With that, let me turn it over to Tom to walk you through our second quarter results.
spk07: Thank you, Michael, and good morning, everyone. Starting from the top of slide five, reported revenue was $1.74 billion for the quarter. Revenue declined 6.5% on a core organic basis, reflecting high single-digit declines in biopharma and advanced technologies and applied materials, resulting from lower activity levels, constrained spend, and continued inventory destocking by our customers. partially offset by ongoing growth in our healthcare and education and government end markets. Adjusted gross profit for the quarter was 33.8%, with a reduction from 2022 driven by lower overall volumes negative mixed impacts of lower bioprocessing and semiconductor revenue, and the roll-off of margin-rich COVID-19 revenues, partially offset by productivity efforts and lower distribution costs. Adjusted EBITDA was approximately $343 million. Q2 adjusted EBITDA margin of 19.7% was above our guidance, with positive impacts from cost containment, productivity, and lower incentive compensation costs, offsetting the negative impact of lower gross profit margins. Adjusted earnings per share came in at 28 cents for the quarter, reflecting the flow-through of adjusted EBITDA performance, interest expense in line with expectations, and a modestly higher tax rate. We also recorded a non-cash impairment expense of approximately $160 million in the second quarter, reflect a reduction in the fair value of the Ritter assets, driven by a persistently high customer inventory in the end markets served by Ritter, and an overall slowdown in the research spending environment. The declines in actual and projected income for Ritter have also led to a reduction in current and future tax benefits, leading to a tax rate of 24.2% for the quarter. We remain focused on realizing the long-term growth potential of this business by introducing new products and leveraging our channel to expand Ritter's customer base. Moving to cash flow, we generated $138.1 million in pre-cash flow in the quarter, which enabled an approximately 85% conversion of adjusted net income in the first half of 2023. This year-over-year improvement in conversion has been primarily driven by sustained improvements in accounts receivable and inventory. Our adjusted net leverage ended the quarter at 3.9 times adjusted EBITDA, slightly higher than the first quarter as a result of lower trailing four-quarter adjusted EBITDA, partially offset by ongoing debt paydown. As Michael mentioned, we have paid down over $400 million of debt year-to-date, and deleveraging is our primary capital allocation priority. Additionally, we strengthened our balance sheet by upsizing our revolver capacity in the quarter from $515 million to $975 million and extended the maturity to 2028. Slide 6 outlines the components of our second quarter revenue growth. Core organic revenue declined 6.5% in the quarter. COVID-related revenues represented a 2.6% headwind for the quarter, reflecting the expected roll-off of approximately $50 million of COVID-related sales from the second quarter last year, resulting in a 9.1% organic revenue decline. Core exchange translation represented a 0.4 percent tailwind, driven by a modest appreciation of the Euro, resulting in a second quarter reported revenue decline of 8.7 percent. On to slide seven. From a regional perspective, the Americas declined 8.8 percent on a core organic basis, reflecting weaker customer demand in biopharma and advanced technologies and applied materials. Biopharma results were pressured by sequential declines in both research and bioproduction, and semiconductor-related sales were down more than 80% as customers continued to reduce finished goods inventory as supply chains normalized post the COVID-19 pandemic. Education and government grew double digits with robust funding and focused commercial execution supporting ongoing momentum and recovery in the SEND market. Biomaterial sales were also up double digits, driven by strong demand for our custom-formulated silicone solutions in medical implant procedures and healthcare applications. Our continued investments to de-bottleneck existing manufacturing assets, paired with operational excellence initiatives, are providing additional capacity to meet strong underlying demand in targeted markets and applications. Europe declined 1.8% on a core organic basis in the quarter, driven by weakness in biopharma and education in government and markets. We experienced softer demand for lab consumables and chemicals, reflecting a weaker demand environment and ongoing destocking. The macroeconomic contraction over the past two quarters in the Eurozone, including the recession in Germany, also put pressure on equivalent instrument sales, which were down high single digits in the quarter compared to high single-digit growth in the first quarter. Biomaterials grew double digits in Europe, and advanced technologies and applied materials and market continued to grow, demonstrating the benefit of our diversified customer exposure and our increased emphasis on new, high-growth segments. EMEA declined 8.7% on a core organic basis in the second quarter, driven by declines in formulated solutions for our semiconductor customers, which were down about 70% in the region, and sluggish demand in research settings across all end markets, partially offset by strong core organic revenue growth in bioproduction. Slide 8 shows our core organic revenue growth for the quarter by end market and product group. BioPharm, representing almost 55% of our annual revenue, declined high single digits in both research and production. In the research environment, we saw an increasingly conservative approach to customer spending, resulting in project delays, site closures, reductions in headcount, and more aggressive procurement savings targets. This is negatively impacting activity levels in research labs and constraining capital purchases, putting pressure on both consumables and equipment and instrumentation sales. We are seeing signs of stabilization in the biotech customer base, which remained at Q1 sales levels in the second quarter, while sales to mid-cap and large-cap pharma declined in the quarter. While spending is still constrained, customers are continuing to fund promising science and advance a robust pipeline of clinical research and new molecules. In the production environment, our sales were down high single digits on a core organic basis compared to our expectation of low single digit growth as realized in the first quarter. While destocking persisted as anticipated, we also experienced a sequential reduction in demand driven by improved lead times and campaign and project delays. Despite these challenges, we are seeing some encouraging signals. Customer survey data regarding inventory health continues to improve. We've also seen a marked uptick in engineering drawing activity, a critical leading indicator within our single-use platform. Our focus in cell and gene therapy is also paying dividends, yielding double-digit growth in several critical product lines targeting these workflows. We continue to have high conviction in the fundamental drivers for biopharma. We are in an exciting time for science and the pace of innovative research and regulatory approvals, including Alzheimer's monoclonal antibodies, GLP-1 treatments, and cell and gene therapies supports long-term, double-digit growth in this industry. Healthcare, which represents approximately 10% of our annual revenue, grew mid-single digits on a core organic basis in the second quarter. Biomaterials performance was up over 30% in the quarter, with double-digit growth across all three regions, driven by continued strength in surgical procedures. Education and government, representing approximately 10% of our annual revenue, grew mid-single digits on a core organic basis in the second quarter, driven by double-digit growth in the Americas. We are encouraged by our recent commercial wins and the supportive funding environment and expect continued momentum in this platform. Advanced technologies and applied materials, representing approximately 25% of our annual revenue, declined high single digits on a core organic basis in the second quarter, with solid performance in Europe offset by declines in the Americas and EMEA, largely attributable to softer demand from semiconductor customers. Semiconductor sales were down over 75% in the quarter, reflecting persistent high levels of finished goods inventory at our largest customers and represented a roughly 220 basis point headwind to our core organic growth in the quarter. By product group, proprietary materials and consumables offerings were down double digits in the quarter, with destocking and reduced demand for bioproduction products and formulated solutions for semiconductor customers partially offset by strong biomaterials sales. Sales of third-party materials and consumables declined mid-single digits, impacted by continued destocking of lab consumables and reduced demand across research settings. Services in specialty procurement, which integrate us directly in our customers' critical operations, grew mid-single digits, while equipment and instrumentation declined mid-single digits, reflecting a more cautious approach to capital spending in the current macro environment. With that, I will now hand the call back to Michael.
spk08: Thanks, Tom. Turning to slide nine. I'd like to take a moment to walk you through our updated 2023 guidance. As you recall, our prior guidance was predicated on a continuation of first quarter end market dynamics and a modest seasonality pickup in the second half of the year. Given the sequential deterioration experienced in the second quarter, we are updating our guidance to reflect the second quarter revenue miss and the extension of current end market trends through the balance of the year. This results in organic revenue declines of 9% to 7%, and core organic revenue declines of 6.5% to 4.5%. Applying current exchange rates, we estimate reported revenue of $6.89 to $7.04 billion. We expect adjusted EBITDA margin to contract between 200 and 150 basis points, which incorporates our view of lower volume, offset by productivity and discretionary cost control. We expect interest expense of approximately $290 million and a full year tax rate of 23%, leading to adjusted EPS of $1.04 to $1.12. We're also updating our free cash flow range to $600 to $675 million to reflect the adjusted EBITDA guidance and a continuation of our free cash flow performance from the first half of the year. Regarding phasing, We expect a relatively consistent performance between Q3 and Q4 for total reported revenue, adjusted EBITDA margin, and adjusted EPS. The primarily short cycle nature of our business model, coupled with a dynamic operating environment, makes forward visibility particularly challenging. We believe our updated guidance appropriately reflects the realities of the current macro environment and does not contemplate any material change in end market conditions. We recognize that our second quarter results fell short and that we have made a meaningful change to our full year guidance to reflect the current market conditions. We remain confident in the long-term fundamentals of our attractive end markets and Avantor's proven platform, market position, and targeted growth strategy. We are taking aggressive measures to drive future growth, control costs, and improve productivity to ensure that our organization is well positioned to capture future market opportunities and emerge stronger from the current headwinds facing our industry. We are steadfast in our commitment to our mission of setting science in motion and to our customers, including investing in customer-driven innovation opportunities around the world. Equally important to helping customers solve scientific challenges is operating sustainably. In the second quarter, we committed to updating our emission reduction goals in line with climate science that will be validated by the science-based targets initiative. As a reminder, in 2020, we set a short-term target of a 15% reduction in greenhouse gas emissions by 2025, and we are on track to beat this timeline. We recently earned a bronze medal for our sustainability rating with EcoVadis. This improved rating is a significant validation of our commitment to sustainability. I'd like to close by thanking our associates for their contributions to our customers and communities, as well as their focus on operational discipline as we navigate these dynamic times. I will now turn it over to the operator to begin the question and answer portion of our call.
spk01: Thank you. We will now begin the question and answer session. If you would like to ask a question today, please do so now by pressing Start followed by the number 1 on your telephone keypad. If you change your mind and would like to be removed from the queue, that is Start followed by 2. When preparing to ask your question, please ensure that your microphone is unmuted locally. Our first question today comes from the line of Teja Savant with Morgan Stanley. Please go ahead. Your line is now open.
spk00: Good morning, Michael, and thanks for the time here. Perhaps to kick things off, can you just help us allocate that 600 pips haircut to your core growth expectation across end markets and comment on linearity during the quarter and how July shaped up? And also, what exactly are you zooming in terms of a year-end budget flush in the new guide?
spk08: Yeah, good morning, Tejas, and thanks for the question. Happy to give you some color on how we have framed our full-year outlook. As you suggest, we've dropped at the midpoint our outlook by about 600 basis points. And if you unpack that, about 100 basis points of that is just a reflection of the Q2 mist getting rolled in, and then that leaves you with roughly 500 basis points, which is probably the way I think about it is to have that split roughly in equal parts between our expectations for bioproduction as we move through the back half of the year, as well as continuation of current rate of sales into our biopharma research environment. And I think that gets you to the 600 basis points that you referenced. If you think about the phasing of that, as I suggested in my prepared remarks, we anticipate Q3 and Q4 having roughly equal levels of reported EBITDA, EPS, as well as reported revenue. And as we're working our way through July, I would just say The experience we're having, you know, up until now, I think is consistent with how we're framing, you know, the outlook for the balance of the year. Got it. That's helpful. You had one more question. Yes, exactly. Let me address that as well. So if we think about, you know, the full year, you know, what we've tried to do here is just recognize the current macro environments. the trends that we saw in Q2 and extend those through the balance of the year. So that would really not contemplate much if any of a budget flush this year.
spk00: Got it. That's helpful. And then on share loss, Michael, any color there? I know in the past you've shared metrics like churn, web traffic, et cetera, all looking good. But just as you looked at those trends evolve, are you still confident that you're sort of outgrowing your end markets here and any updated color on how you're doing relative to the customer R&D spend that you track?
spk08: Yeah, thanks for the question on the opportunity to weigh in. Yeah, I think as you would expect, I think we continue to be rather bullish about our positioning within the end markets that we're serving and You know, one of the proof points I would point you to in this quarter as a validation of that is, you know, the strong growth that we delivered in the academic end market within the Americas. You know, we grew in that space, you know, double digits this quarter, which really is a reflection of the commercial intensity, you know, that we're driving across all of our end markets. And as, you know, end market health is, you know, recovering in certain pockets We're certainly there to grab our share, or in this case, probably more than our share of the available opportunities. We do track a lot of different metrics. We hold ourselves to a high standard here and do expect to grow in line, if not faster than our end markets. And whether it is our digital traffic, our win rates, our share of our customers' R&D You know, all these things that we do look at real time and we continue to be very confident that we're well positioned in each of the end markets that we serve.
spk00: Got it. Thanks for the time, Michael.
spk01: Our next question comes from the line of Michael Riskin with Bank of America. Michael, please go ahead. Your line is now open.
spk03: Great. Thanks for taking the question, guys. But first, I kind of want to go back and do a little bit more comparison of your commentary after the 1Q call and in May at some of the conferences. And then today, I think previously you kind of indicated that the majority of what you were seeing from Biopharma was the stocking and, you know, underlying demand, robust underlying churn. And you highlighted, you know, excipients, some of the special chemicals. That was a couple of months ago. Now it seems like you're having a little bit more color on, you know, demand weakening. So I was wondering if you could just elaborate on that. You know, you mentioned R&D a little bit. Anything you can delineate between R&D and production? Maybe you could give us a magnitude for that demand weakening, you know, from an end market perspective, how much has it slowed over the course of the quarter?
spk08: Yeah, thanks for the question, Michael. First around destocking, I think, you know, from our perspective, the headwinds that we face both in lab consumables as well as in our single-use solutions, I think we saw those destocking headwinds you know, play out as anticipated and consistent with, you know, previous reporting periods. You know, we have done a tremendous amount of engagement with our customers and the data that we're getting from our customers would certainly support significant improvement in inventory health and, you know, which gives us some encouragement going forward. But relative to what we saw as we moved through the quarter, you know, in addition to the destocking playing out as anticipated, we did see you know, a market slowdown in overall demand in the production environment as our customers adopted a bit more, you know, cautionary approach as we move through the quarter. And, you know, part of that is certainly linked to them managing their own working capital and their own end market or their own end product, you know, inventories. You know, part of that also reflects our improvement in lead times, but we do see, you know, campaigns and projects getting you know, pushed out into, you know, a lot of parts of the year into next year. And on the R&D side, you know, similar type dynamics in that as we move through the quarter, you know, we started to see, you know, constrained spending of their capital budgets, you know, reflected in our equipment and instrumentation category, which I think we, you know, highlighted in a number of the, you know, public remarks we made in the quarter. And then we also saw, you know, more a constrained approach to how they were, you know, spending across consumables and other categories as, you know, they, you know, implement their own productivity actions around, you know, site closures and headcount reductions, and certainly we did see an impact on overall activity level in the quarter, which was a little bit of a change from what we'd seen in previous quarters. Encouragingly, though, as Tom mentioned in his remarks, we did see, you know, a stabilization within the biotech, you know, space, which was off you know, significantly in Q1, and, you know, we saw it, you know, stabilize in Q2. So those are, you know, a few of the things that we saw in the quarter, Michael.
spk03: Anyway, to just put a number on that, you know, let's say that our market used to grow 5%. Is it down to 3? Is it 0? Is it negative 5? Just give us some sense of how much demand flowed.
spk08: Well, we were in both research and production, Michael. We were down high single digits in the quarter. And if you kind of compare with where we have been for bioproduction, for example, in Q1, we grew low single digits. So that was roughly a 10-point deceleration that we saw there in the quarter. And then on the lab side of things, we also saw that deteriorate maybe five, six, seven points, something like that in the quarter as well. So both parts of our biopharma exposure certainly weakened as we moved into the second quarter. Got it.
spk03: Got it. That's helpful. And then just real quick on the margin guide, I appreciate some of your color on the puts and takes there, but if I'm doing the math right, it still looks like you're guiding to about 100 BIPs sequential decel in margins. You're getting to about 18.7, 18.8 EBITDA margin in the second half versus 19.7 in the second quarter. It's about 100 BIPs drop off on revenues that are relatively consistent on a dollar basis. So is there, I mean, just sort of what's driving that? Is it mixed shift away from proprietary? Is it less price? Is there some added cost coming into the second half? Just walk us through the margin bridge, the 2H.
spk08: So I think there's Yeah, there's two or three things there that I think are critical to understand as we're reflecting the step down in margins in the second half of the year as you referenced. I think if you look at what we said a quarter ago to what we're saying now, it's about 125 basis points of decline on a full year basis. And the way I would think about that is it's roughly 200 basis points associated with lower, you know, volumes and a weakening mix. to reflect the experience that we had in the second quarter. And that is offset by roughly 75 basis points of productivity and cost controls. Okay, thanks.
spk01: Our next question comes from the line of Luke Sergot with Barclays. Luke, please go ahead. Your line is open.
spk06: Great, thanks for the question. Just a couple of clarifications here, Michael and Tom. Can you give us the update on the actual D-Stock dollar and the 2Q and now what you guys are expecting for the second half? Because you guys saw it before everybody else, so we thought that you would see it alleviate before everybody else. So just give us an update on that, please.
spk08: Yeah, good morning, Luke. Good to hear from you. You know, as we have talked about in previous quarters, you know, we've been seeing somewhere on the order of, you know, five to 600 basis points of, of D stalking in our, in our business. And, you know, I think that's, that's consistent with our experience in the second quarter. We have a new variable, a new dynamic though, that is making, you know, the ability to, to give a precise number for D stalking a little bit more challenging as we move into the second half of the year, because we're also now starting to see, or we did see. a deceleration in just overall, you know, demand within, you know, the bioproduction space, you know, linked to, again, you know, a more cautionary approach and a push out of some of the projects and campaigns. And so, at this stage, it is difficult to kind of parse that between demand versus destocking since, you know, it's pretty widespread at this stage. But I would point you to, you know, the data that we have on our customers' overall inventory health. And this is something that we've been really close to for nearly a year now. And what we're seeing there is continued improvement. The survey data and the feedback from our customers continues to trend in the right direction. And I think when I look at where our customers' inventory is of these destocked categories, or these overstock categories and, you know, how they're thinking about, you know, forward demand, it is encouraging. And when I look at within bio production, the category that was, you know, most overstocked was in our single use platform. And I referenced, you know, in my commentary, you know, one of the leading indicators that we look at in that particular business is overall engineering drawing activity. That's really the start of a customer's, you know, demand and kicks off the whole process. And we have seen a market uptick in engineering activity as we got into the second quarter. And that'll take time to convert into orders, and then there's a lead time on the back of that to get into revenue. But that is another signal that gives us some encouragement as we think about our current environment.
spk06: I agree. Two quick follow-ups. I guess on when you're talking about engineering drawing, I live my life behind Excel, so I have no idea what that means. So can you help like justify or not justify, help lay it out like before, you know, the timeframe of when you starting to see the engineers draw up the plans, like for what drugs are they doing? And then by the time they start placing orders and manufacturing drugs, and then the follow-up on that would be, You know, you talked about the inventory surveys looking better. Have you built any of that into the guide or is this, could this be a source of upside for the back half of the year?
spk08: Great question, Luke. On the engineering activity, so as we've talked before, you know, our single-use platform, it's a custom platform where we're designing custom assemblies and manifolds and connectors and every, you know, opportunity that we have with our customers is going to be unique and requires custom engineering. So they'll come to us with a request for a design. Our engineers will go to work and turn around a design. We'll collaborate with them. And then, you know, ultimately that'll, you know, hopefully translate into an order. That whole process can take a few months from when that is kicked off to when, you know, it ultimately manifests itself in an order that they're ready to move forward with. And then, You know, depending on what it was, you know, we obviously have lead times that, you know, could be in the two to three month timeframe for building those products. So hopefully that gives you some color to what that would look like on a leading indicator basis. And then just in terms of, you know, what we've built in here in terms of some of these positive signals, I just take you back to what we've said about how we've guided. You know, we're grounded in the conditions that we experienced in the second quarter. and we've extended those through the back half of the year. So to the extent that there was, you know, a material improvement or, I guess, you know, material deterioration in either direction, you know, that wouldn't be contemplated in our current numbers.
spk06: Great. Thank you.
spk01: Our next question comes from the line of Vijay Kumar with Evercore ISI. Vijay, please go ahead. Your line is open.
spk11: Hi, guys. Michael and Tom, good morning. Thanks for taking the question. Just one on revenues here. What was China in the quarter? And you mentioned back half guidance is contemplating, you know, second quarter trends. I'm curious. July, it looks like things worsened in second quarter, right, when you think about the phasing. When you look at the July exit rate, are we at the, you know, Are we seeing an improvement versus June, or are we at the levels seen in June?
spk08: Good morning, Vijay. Thanks for the questions. On China, I think we've been clear that we don't have a significant exposure there in China. It's a few percent of our overall revenues, but I would say that the trends that we saw in the second quarter are consistent with what you've heard others report. It is weak, and not particularly constructive at the moment. And that gets reflected then in the overall performance that we delivered in the EMEA region. When I look at China being a source of weakness, I combine that with the semiconductor headwinds that we have in the region as well. Those are the key drivers for the print that you see there for the EMEA region. And it does really, unfortunately, mask some pretty positive signals in our bioproduction business in Korea and in Southeast Asia, where we continue to see pretty strong core organic revenue growth. But certainly China is a drag at the moment. And then in terms of what we're seeing in July, you are correct that we did see, you know, kind of sequential, you know, weakness as we move through the second quarter. I think our experience in July, you know, does reflect, you know, what we were seeing there, you know, toward the end of the quarter. And it's certainly contemplated in our view that it's prudent at this stage to extend those second quarter, you know, trends through the back half of the year.
spk11: That's helpful, Michael. And Tom? All the best for you. As you transition, maybe one on the margin question for you here. Revenue is simplistically cut by 6%. EPS cut by 18%. Now look at second quarter margins. It was pretty impressive despite the revenue mess. I'm curious why. It looks like no incremental cost actions are being contemplated despite the revenue cut. Just walk us through your thought process on cost actions.
spk07: Yeah, so just a couple things unpacked there, Vijay. First of all, on the sales versus the EPS revision in the total year guidance, at the midpoint, it's roughly $0.20 or $0.24. I'd say that 60% of that is just from the top line. I mean, at the midpoint, there's probably $400 million or so sales coming out, and if you take that out at the margin rate, that gets you about 60% of that. The balance is a combination of a lower gross margin rate because, as Michael talked about, a fair amount of the sales reduction for the second half is in proprietary products, which are margin-rich forests. So you have maybe 100 basis point pressure on the on the gross margin rate in the second half and you know what you see then is um you know between two of those you know that that's most of the of the uh the eps impact a little bit of favorability on you know on the toe side like the sgna probably six cents or so um and the balance is noise between tax and interest so it's primarily top line driven a little bit of uh gross margin rate and offset by productivity. So we do have, you know, productivity, you know, additional productivity coming through. When you look at the, you know, the first or the second quarter, you know, we were down on the margin rate, probably had 350 basis points of pressure from the top line, you know, just volume as well as, you know, margin rate from the higher proprietary products coming out. But you did see some nice offsets you know, on the SG&A side, as well as some other productivity initiatives in the supply chain, you know, that helped us to offset that and deliver the 19.7. I would say those same factors are in play for, you know, the full year guide. So while we still expect, you know, that adverse mix impact that I talked about, we will continue to get, you know, productivity offsets. And we've, you know, in my commentary, I use the words double down. We already had coming into the year a number of different specific productivity projects on top of what we normally do around productivity, site closures and de-layering and so forth. We've identified additional opportunities. In addition, as you would expect, Michael's got the team going after discretionary spend and some other productivity things. I'm pretty confident that
spk01: know that you know the margin rate we're you know we're able to offset some of that some of that top line thanks guys our next question comes from rachel van star with jp morgan rachel please go ahead your line is open great good morning thanks for taking the question
spk05: I wanted to follow up to an earlier question around bucketing the guidance cut. So, I believe you had said 100 basis point miss, and then the rest of the guide cut was split between bioproduction and biopharma. So, could you just walk us through your updated expectations for instrumentations and equipment? Are you seeing any incremental weakness in that instrumentation business, especially within distribution channel? And then on study conductors, are you expecting any incremental weakness there, just given the prior guidance and then the 75% decline this quarter in that market?
spk08: Yeah, good morning, Rachel. Thanks for the question. A couple of things to unpack for you there. On equipment and instrumentation, if you recall in the first quarter, we were down low single digits. And as we showed in our materials, we were down mid-single digits in the quarter. And that was pretty pervasive. That was across really all of our end markets. We certainly saw it in our BioPharm R&D, but it was also in our other end markets as well, as we just do see customers taking a more cautionary approach to capital spending. When you think about your question around semiconductors, it played out as roughly in line with our expectations for the second quarter. It was a little bit weaker perhaps, but more on the margin. What we've baked in for semiconductors in Q3 and Q4 consistent with our overall approach to our guide is that those conditions would persist. which, you know, hopefully proves in this case to be a bit conservative. If you listen to some of the commentary from our customers as they're in the middle of their earnings seasons, you do sense a pickup in sentiment and outlook. And, you know, we're hopeful that, you know, that that translates into, you know, better performance in the second half of the year. But what we've assumed for semiconductors is similar, you know, levels that we, as we saw in the second quarter, persisting through the balance of the year.
spk05: Great, thank you for that color. And then maybe just shifting over to more bioproduction, biopharma, can you talk about how many months of visibility you have in bioproduction right now given the destocking and demand dynamics? And then regarding your comment of weakening demand at large to midsize biopharma, can you talk about your conversations with those customers? How likely is it that we could see a catch up in spending later this year or are budgets really getting cut for 2023 based on your conversation? And then lastly, how are those customers thinking about project level activity heading into 2024? Thank you.
spk08: So, firstly, on bioproduction, you know, consistent with what we've said before, we do have, you know, a historically high, you know, order book and backlog. We're still probably, you know, more than two acts of orders in hand that what we had on kind of a pre-COVID level. Now, that has been normalizing as we've moved through the year, consistent with improving lead times and consistent with some of the de-stocking dynamics that we've seen play out as we've moved through the year. But we're also seeing just an overall reduction in overall demand as well at the moment. But a pretty strong order book. As that gets phased into a particular reporting period or a particular month, we would generally have maybe half of the demand that we might expect to service in a given month in an order. And then we would take orders throughout the month on some of the portfolio that has shorter lead time. So we typically think about visibility there in terms of two to three months on a forward basis. But that would only probably cover maybe 50 or 60% of the demand that we would expect to serve in that particular period. In terms of the research space, structurally, it's a little bit difficult to look ahead at, just given the short order cycle nature of that business, where we have more than 6 million SKUs, we're serving more than 300,000 customer locations. you get more macro level commentary from your customers as opposed to specific forecasts that can translate into, you know, demand planning. So, as we said before, you know, limited visibility on a forward basis there. But, you know, as you see, you know, our customers roll through their earnings seasons and, you know, ongoing announcements of, you know, reductions and reprioritizations of pipelines and, you know, more constrained spend and focus on productivity, you know, that is certainly being reflected in the high single-digit decline that we saw in the second quarter. And it's, you know, our expectation, at least based on the way we've modeled it, is that we would continue to see that as we move through the balance of the year.
spk01: Our next question comes from the line of Matt Sykes with Goldman Sachs. Matt, please go ahead. Your line is open.
spk09: Hi, good morning. Thanks for taking my questions. Maybe just following up on your comments about biotech seeing some level of stabilization. I understand that there are pretty large differences in the funding dynamics for small biotech and large biopharma, but does that stabilization give you kind of any sort of phasing information in terms of how large biopharma might recover? Is this sort of a first in, first out dynamic? Or do you think those two customer cohorts are different enough due to the funding dynamics and other things that that's not the case?
spk08: Yeah, thanks, Matt. I'm not sure I would necessarily try to link those two segments, but we're seeing there that the funding dynamics are quite different in both cases. It is encouraging to, you know, the trends that we are seeing on biotech. I mean, I think there was a bit of a uptick in funding in the quarter. And certainly when we look at our sales to that segment, it was quite similar to what we saw in Q1. So we're hopeful that that trend continues and that maybe we're on the way to recovery there. But I would say that the drivers and the priorities of the two segments are different enough that I probably wouldn't try to correlate those two maps. Great.
spk09: Thank you. And then, Tom, just on pricing, can you just kind of talk about what you achieved in terms of pricing in the second quarter and what your expectations are for the back half of this year?
spk07: Yeah, it's largely played out as we would have expected in terms of the guide that we gave. It continues to be a fairly healthy pricing environment for us. Not as robust maybe as 2022 as we had we talked about initially, but it's held up really well. I think the frequency of price increases is probably going to normalize here. I mean, given the inflation that was coming through in 21 and more so in 22, there were a more robust cadence of increase. I think we're more returning to normal on that front. But the overall quantum of it has been similar, a little bit high by historic standards, but largely in line with the plan. Thanks.
spk01: Our next question comes from Patrick Donnelly with Citi. Patrick, please go ahead. Your line is open.
spk02: Great. Thank you, guys. Maybe just another one kind of following up, I think it was Mike's question earlier on the second half margin implication. You know, obviously the exit rate is going to be quite a bit lower than expected. I think the street is somewhere around 21% you get to offer next year. You guys have these cost containment measures in place. I guess how quickly can you see those take hold and drive some expansion or protection of the bottom line? Just trying to figure out, I guess, how much of these headwinds linger into 24, particularly on the margin side, you know, given that second half guide versus, you know, kind of inflecting back. You kind of mentioned things like pricing. You know, it would be good to just get a handle on the moving pieces and the dynamics as we look ahead.
spk08: Yeah, thanks, Patrick, for the question. You know, probably not, you know, surprising as we think about, you know, where we sit here in the calendar and the dynamic environment that we're in. you know, it's pretty difficult to provide a whole lot of color as to what we might anticipate in 2024, given, you know, what's driving our business at the moment is, you know, the macro economy and not something, you know, so specific that we can isolate to our own business. So that's, you know, certainly challenges the visibility. And so we'll work through the balance of the year here and, you know, through our normal cycle here. We should be able to give you some transparency and color on how we see next year shaping up as we get a little bit closer to that. But I would point you to the second quarter as kind of the proof point of our focus on productivity and how that is getting reflected. We are getting significant contributions from our cost controls and our ongoing investments in efficiency and continuous improvement. And the thing to keep in mind about our business is we've got a long standing track record of this going back to the IPO. Every year we've expanded margins by over 100 basis points. And so in an environment like this, that culture of continuous improvement certainly does serve us well. We've doubled down on that given the environment and driven incremental actions that is flowing through as you see in the second quarter. And we're able to offset as we move through the balance of the year, more than 200 basis points of volume and mixed headwinds you know, through the productivity actions that we're taking and would, you know, anticipate these things to carry into, you know, into next year.
spk02: Okay, that's helpful. And then maybe just a couple of cleanup questions on the guide. Can you just refresh us on kind of the full year bioprocessing guide and then the semis guide as well? I think you said it was down 80. You know, where's the bottom there? And visibility would be helpful. Thank you, guys.
spk08: So on bioproduction, Patrick, probably the best way to think about that on a core organic basis for us, you know, we had modeled at it, you know, kind of down mid to high single digits is what I'd point you to, you know, there, and the COVID headwinds are playing out as anticipated there to get to a organic number. And then on the semiconductor, you know, space, we have modeled, you know, Q3 and Q4 similar to Q2. But as I said earlier, we are encouraged by, What we're hearing from our customers here is they work through their earnings season and disclose their results. Certainly, you see a more positive turn in their sentiment, and we are starting to see some of that getting reflected in the mid-term outlooks that they're giving us. So there could be some upside there, but the way we've modeled it in our guide would be continuation of Q2 trends.
spk02: Helpful. Thanks, Michael.
spk01: Our next question comes from Justin Bowers with Deutsche Bank. Please go ahead, Justin. Your line is now open.
spk10: Hi. Good morning, everyone. I just wanted to understand some of the customer inventory surveys you were referring to. And it sounds like it was in biopharma. And any thoughts on when sort of the D stocking element troughs, it sounds like it was, it was sort of stable and in line with expects Q over Q. So does that, you know, point to some green shoots, um, with respect to 2024 and, and that part of the business, and then just a refresher on trends, um, in that business or performance in the business in one Q and two Q. So I think you said, um, it was a 10 point swing, uh, between the quarters.
spk08: Yeah, thanks for the question, Justin. On these customer surveys and the engagement that we have with our customers, I do view that as one of the bright spots in a rather challenging market environment. And there's probably two things I would point you to there. One of the things we're testing for in those interactions is just how much inventory do you have relative to your target? And of course, we can then track that as we've, you know, been, you know, consistent in our surveying over the last number of quarters. And as we did that again, you know, here over the last several weeks, that inventory health has definitely improved, meaning, you know, the amount of overstock that's in the channel that's being reported by our customers has definitely come down, you know, pretty meaningfully. And, you know, certainly it, you know, it does reflect, you know, you know, the dynamics that we were hoping to see there. The second piece that we also test for there is just a little around sentiment in terms of, you know, as you think about where you sit here today, you know, which direction do you see your demand going and, you know, the percentage of customers that are, you know, I would say responding to that favorably, you know, meaning that they would see, you know, demand to pick up. you know, also, you know, is moving in the right direction. Now, you know, those are, you know, encouraging signs. You know, I'd be hesitant to, you know, to call, you know, the bottom or, you know, we have not yet seen to be clear, you know, an inflection in order books or certainly in daily rates of sales. And that's what ultimately we need to see to, you know, to have the proof that things have turned. But there are a number of leading indicators across you know, a lot of our end markets here, you know, that do give us, you know, some optimism. And, you know, where, you know, markets are healthy, you know, whether that be in our medical implants business or whether that be in academia, you know, you see that we are very well positioned. We grow strongly, you know, where the, you know, the markets are conducive to that. And that's, you know, another thing that feeds our optimism in our business.
spk10: Appreciate it. And just one quick follow up on the order book, the large order book. Are you seeing any sort of timing issues there with customers in terms of maybe pushing back when they want to take those deliveries or any change in sort of cancellation levels? I thought that would be a little more stable. for demand throughout the rest of the year. But any comments there would be helpful.
spk08: As you would expect, we end up working quite closely with all of our customers to help them manage their production plans and their inventory levels. And consistent with what I said earlier, we do see an increasing trend of project delays and campaigns that are getting either reduced in size or pushed out. Order cancellations aren't a big part of our business. It ends up being more of a collaboration with our customers in terms of how we schedule and manage the deliveries to best meet their needs. But as we move through the quarter, we definitely saw customers in wild production start to more actively manage their campaigns and you know, take a more cautionary approach to spend, you know, which gets reflected in the second quarter numbers as well as, you know, the roll-through into our full-year guide.
spk10: Understood. Appreciate it.
spk01: Those are all the questions we have time for today, so I'll turn the call back to Michael Stubblefield for any closing remarks.
spk08: Thank you all for participating in a call today. I certainly look forward to updating you when we get a chance to meet next. Until then, be well, everyone.
spk01: Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.
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