Danaher Corporation

My name is Shelby, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's third quarter 2022 earning results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key on your telephone keypad. I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

Thanks, Shelby. Good morning, everyone, and thanks for joining us on the call. With us today are Reiner Blair, our President and Chief Executive Officer, and Matt McGrew, our Executive Vice President and Chief Financial Officer. I'd like to point out that our earnings release, the slide presentation supplementing today's call, the third quarter form 10Q, the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call, and additional materials are all available on the investor section of our website, www.danaher.com, under the heading quarterly earnings. The audio portion of this call will be archived on the investor section of our website later today under the heading events and presentations and will remain archived until our next quarterly call. Replay of this call will also be available until November 3rd, 2022. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance, The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics refer to results from continuing operations and relate to the third quarter of 2022, and all references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices which have applications submitted and and pending for certain regulatory approvals, or are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date they were made, and we do not assume any obligation to update any forward-looking statements except as required by law. With that, I'd like to turn the call over to Ryan.

Well, thank you, John, and good morning to all of you. We appreciate you joining us on the call today. So let's jump right in. Our positive momentum continued in the third quarter with 10% core revenue growth and solid earnings and cash flow performance. This strength was based across the portfolio with high single digit or better core growth in all three reporting segments. We're particularly pleased with the consistent performance of our base business, which has grown high single digits or better for nine consecutive quarters. Now, these well-rounded results were driven by our team's outstanding execution through a challenging operating environment. They've done a terrific job running the Danaher playbook to proactively reduce structural costs while continuing to accelerate high-impact growth investments. We believe our ability to deliver meaningful innovation and reliably serve customers has contributed to market share gains in many of our businesses. Now, during the quarter, we also announced our intention to separate our environmental and applied solutions segment to create a publicly traded company. This new company, which we'll refer to as EAS for now, will be well positioned in the most attractive areas of the water quality and product identification market. EAS will be comprised of outstanding businesses with strong ESG fundamentals, durable business models, and a very attractive financial profile, averaging mid-single-digit core revenue growth over the last five years with 55% recurring revenue today and an adjusted EBITDA margin of approximately 25%. Now, as a standalone company, EAS will have greater opportunities to meaningfully deploy capital towards M&A, And, of course, EAS will have the Danaher Business System as its foundation, along with a commitment to continuous improvement that will support the same outstanding results EAS has as a part of Danaher today. Of course, we look forward to sharing more details here in the coming months. As for Danaher, this separation will establish us as a more focused science and technology leader committed to innovation and making a profound impact on human health. We've got a great lineup of leading franchises positioned in highly attractive life sciences and diagnostics and markets, all united by a common set of durable, high-recurring revenue business models. We remain focused on strengthening our portfolio and competitive advantage in these areas, and we see tremendous opportunities to continue delivering sustainable long-term performance. So with that, let's turn to our third quarter results in more detail. Sales were $7.7 billion, and we delivered 10% core revenue growth. including 8.5% core growth in our base business. Respiratory testing contributed an additional 150 basis points to core revenue growth in the quarter. Geographically, we continue to see strong demand across the developed markets despite current macroeconomic and geopolitical events. North America's core revenue was up high teens with all three segments delivering double-digit or better core revenue growth. Core revenue in Western Europe grew high single digits with customer activity and funding levels remaining healthy. High-growth markets' core revenues were up mid-single digits. In China, our teams effectively managed through ongoing COVID-19 headwinds to deliver high single-digit growth in the quarter. Our growth profit margin for the third quarter was 59.8%, and our operating margin was 26.3%. We had 50 basis points of core operating margin expansion driven in part by disciplined cost management, productivity measures, and price actions. The operating environment remains dynamic across our businesses globally, but we experienced fewer supply chain disruptions in the third quarter. Logistics improved as freight costs began to stabilize. We also saw modest improvement in material availability, though certain electronic components remained difficult to procure. And despite these challenges, our teams have done an outstanding job taking proactive measures and leveraging the DBS tool set to minimize the impact of supply chain constraints and inflationary pressures. Adjusted diluted net earnings per common share of $2.50 were up 7% versus last year. We also generated $1.7 billion of free cash flow in the quarter and $5.2 billion year-to-date. So now let's take a look at our results across the portfolio and give you some color on what we're seeing in our end markets today. In our life sciences segment, reported revenue grew 4%, and core revenue was up 8%. Strength was broad-based, with most businesses achieving high single-digit or better core revenue growth. In bioprocessing, robust activity levels drove over 20% growth in our non-COVID business at Cytiva and Paul Biotech. As expected, our customers continued to transition away from COVID-19 vaccine and therapeutic programs and into programs for other modalities. We expect these trends to continue through the fourth quarter, resulting in high single-digit core revenue growth in our bioprocessing business, for the full year. In September, we hosted an investor day at Cytiva to showcase our bioprocessing business and highlighted the tremendous long-term growth opportunities we're positioned for in biologics and genomic medicine. We also announced that we're bringing together Cytiva and All Life Sciences as the biotechnology group. The combined portfolio has the broadest offering in the industry with end-to-end solutions across all major therapeutic modalities, from monoclonal antibodies to emerging cell, gene, and mRNA-based therapies. The biotechnology group will have unmatched global scale, with the industry's largest commercial team allowing us to further extend the reach of our best-in-class customer service. We also believe focused innovation across the joint portfolio will ensure our products and solutions are aligned to best meet customers' needs around quality, yield, and cost. With Paul Life Sciences and Cytiva joining forces, the biotechnology group is uniquely positioned to help our customers become more efficient and bring more life-saving therapies to market faster. Moving to our life sciences instrument businesses, they collectively delivered double-digit-based business core revenue growth, led by SCIEX, Leica Microsystems, and Beckman Coulter Life Sciences. Funding levels remained strong globally, and we saw solid customer demand across most major end markets. We continued our strong pace of innovation and life sciences with the introduction of Beckman Coulter's Biomek NGenius. The NGenius is a cost-effective, easy-to-use sample preparation system that reduces manual transfers and hands-on time in next-gen sequencing library construction. This is a great example of how our investments in innovation are delivering impactful solutions to our customers. Our genomics businesses had another quarter of double-digit core revenue growth led by strong demand for plasmids, RNA, and next-generation sequencing solutions. This quarter marked Aldebaran's first anniversary as part of Danaher, and we couldn't be more pleased with the team's performance. Financially, the results speak for themselves. With more than 30% year-over-year revenue growth since acquisition, The team has done a tremendous job embracing DBS tools and processes to meaningfully reduce lead time and increase capacity. Now, this capacity is certainly supporting customers' needs today, but it's equally important to support Aldebaran's long-term growth outlook. With a view towards the future, we're excited about the opportunities to collaborate across our genomics businesses and create unique solutions to help our customers accelerate the development and commercialization of mRNA and other nucleic acid-based therapies. Moving to our diagnostic segment, reported revenue was up 9.5% and core revenue grew 13.5%. led by nearly 30% core revenue growth at Cepheid. Leica Biosystems grew mid-teens in the quarter, driven by strength in core histology and advanced staining. As customers seek to improve productivity within their labs, we're seeing strong early momentum for Leica's recent innovation, Bond Prime, a fully automated advanced staining platform. Beckman-Coulter Diagnostics delivered solid results with mid-single-digit core growth despite ongoing COVID-19 headwinds in China. In molecular diagnostics, core revenue across Cepheid's non-respiratory test menu grew approximately 10%, led by double-digit growth in virology and infectious disease testing. In respiratory testing, global PCR volumes have moderated. But demand is still elevated for symptomatic testing at the point of care where Cepheid is the gold standard. Cepheid's respiratory testing revenue of approximately $875 million exceeded our expectations of approximately $325 million. A higher prevalence of circulating respiratory viruses combined with advanced purchases by customers in anticipation of a more severe respiratory season in the northern hemisphere led to both higher volumes and a preference for our four-in-one tests for COVID-19, flu A, flu B, and RSV. Now, we're starting to see our customers consolidate their point-of-care PCR testing platforms onto Cepheid's GeneXpert. The GeneXpert provides significant value to clinicians with a unique combination of fast, accurate lab-quality results and a best-in-class workflow. Customers are also increasingly interested in opportunities for broader utilization of Cepheid's leading test menus. Our opportunity funnel for non-respiratory tests has increased significantly this year, and we see opportunities to continue gaining market share moving forward. Moving to our environmental and applied solutions segment. Reported revenue grew 5%, and core revenue was up 10.5%. Water quality was up mid-teens, and product identification grew low single digits. At product identification, marketing and coding was up low single digits, and packaging and color management grew mid-single digits. VideoJet was up low single digits in part due to a difficult year-over-year comparison as the business grew low double digits in Q3 last year. Now, during the quarter, we saw strength in food and beverage as well as the consumer and markets. In water quality, Chemtreat and HAWC each grew high teens during the third quarter. Demand for analytical chemistries and consumables remained solid across our major end markets. Municipal and industrial project activity was broadly consistent with the first half of the year, driving solid equipment growth. Now, last week at WEFTEC, the annual wastewater trade show, The water quality team highlighted several solutions that are improving the efficiency and sustainability of the water treatment process. TOCS Ultra Low Range Chlorine Analyzer raises the industry standard to parts per billion chemical detection levels, helping customers extend the membrane life of their treatment systems and reduce maintenance costs. At Trojan, innovative solutions such as Trojan UV Cigna and Trojan UV 3000 Plus reduce environmental impact by treating water with ultraviolet light instead of traditional chemical disinfection methods. Every day, over 1 billion people benefit from water treated by Trojan. So these are just a few examples of how our water quality platform is supporting customers' day-to-day mission-critical water operations and making a positive impact on the world. So with that color on what we're seeing in our businesses and end markets, let's now briefly look ahead at expectations for the fourth quarter and the full year. In the fourth quarter, we expect to deliver high single-digit core revenue growth in our base business. We expect a high single to low double-digit core revenue growth headwind from COVID-19 testing, resulting in a core revenue growth being flat to down low single digits in the fourth quarter. Additionally, we expect a fourth quarter adjusted operating profit margin of approximately 30%. Now, for the full year 2022, there is no change to our previous guidance of high single-digit core revenue growth in our base business. We now expect high single-digit overall core revenue growth, which is up from our prior expectation of mid-single digits, as a result of our strong COVID-19 testing performance in the third quarter. We continue to expect operating profits fall through of approximately 25%, for the full year. So to wrap up, we're very pleased with our third quarter results. Our well-rounded performance really is a testament to our team's commitment to innovating and executing in support of our customers. These results also reinforce Danaher's strength and durability. Our differentiated portfolio is well positioned in attractive end markets with long-term secular growth drivers. And our business models are resilient, with nearly 75% of our revenue today being recurring. So putting it all together, the strength of our portfolio and balance sheet, combined with our talented team and the power of the proactive application of the Danaher business system, provides an outstanding foundation for delivering sustainable long-term results. So with that, I'll turn it back over to John.

Thanks, Reiner. Shelby, that concludes the formal comments, and we're now ready for questions here.

Thank you. At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one to ask a question. We will pause for a moment to allow questions to queue.

We'll take our first question from Derek DeBruin with Bank of America.

Hi, good morning. Thanks for taking the question. Morning, Derek. Hey. So, obviously, we're, you know, there's a lot of questions on the bioprocessing market, given, you know, one of your competitors in that market was talking about inventory stocking yesterday, and, you know, which hit the sector. Can you just sort of elaborate on what you're seeing a little bit more detail on bioprocessing inventories? Also, you know, we've gotten the question, You're talking about high single-digit growth for the full year. Yeah, I think you commented high single to double-digit prior quarter. So, can you sort of walk us through the dynamics? Are you still looking for like a billion dollars in COVID vaccines for this year? Just a lot more color in what's going on given that's going to be, you know, given how sensitive a topic that is. Thanks.

Thanks, Derek. And let me get right after that question here. First of all, let's talk about 2022, and I'll certainly speak about the inventory topic here as well. I think it's important to reiterate that overall we're seeing very strong customer demand in bioprocessing, and we expect to finish 2022 with high single-digit core growth. Now, that splits up in a number of sections. Let's start with the non-COVID bioprocessing. is growing well over 20%. And we continue to see that. And the underlying fundamentals here are the funding is there. The clinical trials continue to progress. The pipeline is strong. We're seeing products move into commercial production from phase three. And this is really accelerated across all modalities. So sure, monoclonal antibodies, but yes, we're even seeing cell and gene therapy starting to gain their approvals. Additionally, pricing is above historical levels, which is driving some incremental growth, if you will, on top of the underlying demand in the non-COVID areas. Now, as I mentioned in my prepared remarks, customers do continue to move away from COVID-related projects. And I don't think that's a surprise to any of us. That's something that we have been speaking about for some time. And in fact, we can confirm that that is happening. And I think it also reconciles with what we're seeing in the marketplace. We're seeing that, you know, vaccines are uptake is relatively slow. People are unsure if the current vaccine inventories will address the newest variants. So there's a bit of uncertainty there, I think, in the public as to where we go from a vaccine perspective. And that reflects naturally in what we have seen here with customers starting to, you know, move to the other modalities and drive the projects that they've had on hold forward. And for us, that manifests here for the full year that we see $800 million of COVID revenues and bioprocessing as opposed to the billion dollars that we had been talking about previously. So we do see customers moving away from these COVID projects and driving their energies, their efforts, and their financial resources into the other projects. And that helps explain why we see the larger part of the business growing at well over 20%. Now, We are not seeing significant stocking, but we do see pockets of stocking, particularly there where there were large COVID-related either therapeutic or vaccine programs. So those players that are heavily invested in large programs here are those players that, in fact, have higher inventories than is normally the case. Having said that, those large players also are those which are best positioned to redeploy those inventories to other projects. So we do expect an inventory burndown with those players here in the coming quarters. So that's the inventory situation there, Derek. And then as it relates to some of the other points here, I think we continue to be – and I just want to reaffirm the high single-digit growth. We're high single-digit here year-to-date, and that's how we see ourselves in bioprocessing concluding the year.

Got it.

And the order book, the growth in the order book for bioprocessing on the non-COVID growth there?

Sure. Sure, Derek. So for Q3, our orders are down – over 20% as expected and I think that's a number which bears some commentary and context first of all we're coming off of order comps that are well in excess of 50% in the prior year and so it's important to take a in order to be able to rationalize these numbers that sometimes are viewed in isolation with the right context. The three-year order stack is over 20%. And I think something that is perhaps not as well-known and that bears some conversation is we and many others have meaningfully reduced our lead times. And we've done that through capacity investments. We've done that through productivity investments. We've been able to do that because the supply chain has become more secure. And that's had a pretty significant impact on the order placement cadence of our customers. So just to mention an example here, if lead times go from 52 weeks, which has been the case in some product categories in the marketplace, to 12 weeks, Customers fundamentally change their order patterns. To give you a sense of that, if a customer wanted to order over time four bioreactors, they would order all four bioreactors at once if there's a 52-week lead time. But if it's a 12-week lead time, they would order one bioreactor and then follow up with other orders in the future. So what we're seeing right now is really the normalization of the marketplace coming from a red-hot pandemic-fueled time of constraint and long lead times where orders ramped up significantly, so order rates ramped up significantly, to the supply chain now normalizing and customers adjusting their order cadence. And then, yes, of course, the COVID volumes are down. That's expected. We've been talking about that. But we also see the strength of the non-COVID market. And keep in mind, that's a much larger market. And currently it is growing, you know, at well over 20% as there's, you know, a backlog to be burned down there because previously COVID had been prioritized. So The orders were negative to repeat, but not unexpectedly, and to be seen in the context of a market that is now readjusting.

And, Derek, you had asked about the non-COVID as well. Yeah. So if you think about the book to bill there in the quarter, it was essentially 1.0.

Essentially, I'm sorry, what?

Essentially 1.0. Okay. Okay.

Got it. Thank you. And just one final question. Do you still expect to take significant price across the portfolio next year?

We continue to think about price as a lever for us, and we think that lever is available to us next year as well. We have taken the necessary steps to do that. We're over 400 basis points here in the quarter. That's up from 300 basis points in the first half of the year. We expect the fourth quarter to be similar, and we're going to try and keep that momentum going here in the new year as well.

And that commentary is overall, Derek, but I don't think that that would be any different for bioprocessing.

Same numbers. Thank you.

We'll take our next question from Scott Davis with Milius Research.

Hey, good morning, guys. Good morning, Scott. Hey, Scott. Just to go back a little bit to Cepheid, are there costs? I would imagine that cost was not a main focus when you were supplying just extreme demand for quite the last couple of years. But are there costs or is there a playbook where costs can come out of the business and kind of give you a little bit of a tailwind on the margin side while growth kind of stabilizes?

So we have, as you suggested, invested significantly in order to drive, in order to be able to supply the demand here during the pandemic. and watch very carefully where our capacity needs to be, one, to, of course, serve the needs of the pandemic, but also to fuel the growth in our non-COVID testing business. And that continues to grow very well here. You saw the very strong growth we had in COVID, but not to be underestimated, the very nice 10% growth in non-COVID off of a very strong comp in the prior year. Capacity for us is an area of great focus, and we're able to adjust that capacity up and downward, both in terms of, you know, units of capacity, but also cost as we need. So that is a relatively flexible lever for us, and we'll continue to adjust that lever up or down, both from a capacity perspective as well as a cost perspective, as required.

So that's helpful. And let's, if we can go a little bit bigger picture, how, Reiner, when you think about the M&A funnel, you know, how wide is the lens? You know, you guys obviously have a lot of big focus on cell and gene therapies and such, but when you think about your lens today versus perhaps where it was even when you started in the role, Reiner, I mean, is it as wide, you know, and kind of broadly in different healthcare areas, or is it more narrow towards more cell and gene therapy? This is kind of what I'm asking.

I would characterize our lens as broad and not limited to cell and gene therapy. We want to have a profound impact on human health, Scott. We've talked about that here now for some time, and that allows us a very large space in order to identify investment opportunities, capital deployment opportunities. And as such, our funnel is wide and deep and very active, as always.

Helpful. I'll pass it on. Thank you, guys, and best of luck.

Thank you. Thank you.

We'll take our next question from Vijay Kumar with Evercore ISI. Good morning, Vijay.

Good morning, Rainer, and congratulations on a good, steady print share this morning. Just maybe back on the vaccine question, appreciate all the color. And I know, you know, given that we don't have the order of numbers, I know what you're, you know, what you imply by the lead times coming down. But just maybe to put a finer point on that, is your outlook for bioprocessing, including vaccines, I think, I think Dan Hurd expected high singles for 23. Has that changed? And I think, you know, prior expectation was half a billion of vaccine revenue for next year. Has that changed?

CJ, as you can imagine, we're very focused on delivering the fourth quarter here and the full year. But, you know, as we think about 23, and I say that because, you know, there's a lot of data points to collect here in the fourth quarter as well in such a dynamic time. in such a dynamic environment. And so as we think about the bioprocessing business for 2023, we still think that there is room for $500 million of COVID opportunity in order to support the needs of the population, the variants, to replenish expired sell-by dates and all the things that you can think about. But of course, that's a number that we watch very closely. More importantly, you know, we think that the non-COVID business, which of course will again proportionately be a much larger part of the business, will continue to be very robust. Funding levels are there. The number of modalities that continue to grow in the pipeline is broad. Our own project activity in early, mid, and late stage is very strong. So, we do not have a different view on 2023 for bioprocessing today. But, of course, it's a fluid situation and we continue to watch all of that. And we'll update in January when we speak again.

That's helpful, Ryan. And just to sort of clarify, any change here, that sensitivity would be on the vaccine side, but not on the base, correct?

That's correct. That's the way we see it for sure today.

And I recall I mentioned just a minute ago to Derek that, you know, in 2022, we were expecting a billion dollars of COVID vaccine and therapeutic revenue. We've taken that down to 800 million. It is, of course, offset by the non-COVID business so that we deliver that high single digits here in 2023 profile process. And then looking forward to 2023, we would see that going from $800 million to $500 million.

I appreciate the call, Rainer. Matt, one quick one for you. Based on current FX rates, and I think, you know, your assumptions on pricing for next year, how should we think about incremental margins for 2023? For 2023? Yeah.

So I'm going to go ahead and ask that we get through Q4 here and see where it is. If I had to guess on the FX margins today, I would have been wrong a quarter ago and wrong a quarter before that. So we'll give you a full update on 23. I mean, I think you've seen where the margins have gone to. You know that we're going to have a FX headwind next year on the top line of, you know, probably call it $800 million. So you can probably start there. I would say that, you know, the fall through on that is probably going to be the pretty typical, you know, 35% to 40% fall through. And that could be a little bit better or worse depending on where that revenue actually comes in from a mixed perspective. But that's probably the best I can give you now, you know, what we know what the rates are. But, you know, from a full margin perspective, I'll have to wait until we get to a little bit closer and do our guide in 23.

Thanks, guys.

We'll take our next question from Dan Brennan with Cowan & Company.

Good morning, Dan. Thanks for the questions. If I may, just, Ryan, I know in the last call, and it was already addressed in some of the bioprocess information, but when you look more broadly, there's obviously a lot of mixed signals on the macro. Last call, you had suggested that you know, all inorganic, mid-single, and if you factor in the COVID roll-off, low single digits, like any updated thinking on how you think about that? I know you've already addressed the bioprocess side, but just wondering for the other parts of the business, kind of how those are playing out right now.

Thanks, Dan. So I think we are still in that zip code here. Specifically, if we think about our base business, without testing, so our business without COVID testing. For 2023, we still see that as mid-single digit plus. And, you know, of course, we're watching. There's a lot of headlines in Western Europe and emerging markets and, you know, but to date, our business momentum does not indicate, you know, any dramatic slowdown here. And so we think mid-single digit plus from today's point of view for the base business is the right way to think about it. And, you know, as we go forward here, and Matt mentioned this, of course, we're looking at all the data points daily here. And then in January, we'll update you again. But from today's perspective, it's single digit plus for the base business. And then as it relates to COVID testing, you know, we do still anticipate that step down. The experts that we speak with, our customers, Still think that, you know, COVID is endemic by the end of 23, beginning of 24, and that we'll step down there from, you know, where we've been here, close to 50 million tests, to about 30 million tests, or the $1.2 billion roughly of COVID revenue. And then lastly, I'll say, you know, the FX situation is very dynamic. We've been talking about that. And I think Matt covered that as well.

Great. Thanks, Reiner. And then just maybe one more follow-up. I don't want to, you know, kind of continue to readdress file process, but I'm just wondering, you talked about bringing in lead time dramatically, which suggests that customers aren't going to need to order as far in advance, right, because, you know, you've got them down significantly. You know, the peer yesterday talked about inventories at 12 months versus six months. And I know you addressed inventories in one of the prior questions. But can you just speak to it just one more time? And I apologize. Just on the base business, I believe you've done a better job from prior conversations about maybe managing and kind of avoiding some double ordering. But just kind of what do you see broadly on the inventory side for your base business? And kind of how does that kind of impact your outlook for the base fire production business as we look forward to 23? Thank you.

Sure. We have been, as a result of the pandemic, even closer than traditionally, working with our customers to understand their production plans and to ensure that they are not overstocking at the expense of others who would need the product in what was a time of constraint here for the last 18, 20 months. So as a result of that, we feel as though we are you know, well-positioned to understand the inventory situation. We do regular surveys with our customers. And as a result of that, we don't believe that there is a general overstocking in the market. Having said that, we do think there are pockets where inventories are high. And those are based on, you know, customers ultimately changing their production plans. In other words, canceling you know orders specifically for COVID and so the large COVID players whether that be for vaccine production or whether that be for therapeutics production they have larger inventories and those will likely exceed six months of inventory but I think it's important to note that those large players have many programs and they're able to redeploy that inventory so this in in most cases You know, these are not tailor-made solutions for any specific molecule and can be redirected and burned down using, you know, in the use for other modalities or other programs of the same modality. So we do see that the market is currently, you know, resetting itself from, as I mentioned, a red-hot pandemic era of constraint with long lead times, to one where lead times and supply chain disruptions are starting to normalize, and then add to that the cancellation of, you know, some COVID vaccine or therapeutic plans just because the uptake hasn't been the same or the variants have rendered them, you know, not usable for that application. So we are confident that the strength of this market, and it's fundamental, remain very, very strong. Biologics in all the modalities that we've talked about are very underpenetrated in the market, and it is a matter of, you know, getting the penetration up, launching the new products in the pipeline that will continue to drive the growth of this market despite the reset that we see going on in the supply chain.

Great. Thank you. We'll take our next question from Dan Leonard with Credit Suisse.

Thank you. So my first question, Reiner, I was hoping, hello. Good morning. I was hoping you could elaborate on trends in China across your different opcos. I think you said growth was high single digits in total, but flagged some weakness in diagnostics. So just wondering if you could offer more color by opco. Thank you.

Sure. So as you just said, just to level set, you see high single-digit growth here in China, both for Q3, and we anticipate a similar level in Q4. And that's really a broad-based strength there. Let me start with diagnostics, where we did see patient volume impacted by these rolling shutdowns, so this zero COVID policy shutdowns. that you're likely reading about in China. So that affected patient volumes and, you know, think of those as being 90 to 95% of what they were in 2021. And, you know, we're working through those and continue to see China as really, you know, a very, very strong market. Now, lastly, the rest of our business continues to be very, very strong. As you think about life science instruments, as you think about EAS, as you think about the diagnostics, the other diagnostics companies, we continue to see robust demand there. And as patient volumes normalize, which we expect to happen sometime in the next year, we're confident that China continues to be, you know, a really strong growth lever here for the future.

And, Dan, just to give you some context, I mean, life sciences and EAS were both up high single digits in the quarter. And, you know, diagnostics, while it did struggle a little on the patient volumes, I mean, it was still up mid-single digits.

Appreciate that, Collar. And, Matt, just a quick follow-up. Can you talk about the impact of higher interest rates on the business? Do they change at all how you're managing the balance sheet or your capital allocation priorities?

I don't think so. From a balance sheet perspective, we don't really have – we've got no variable sort of debt, so that doesn't really impact us. I'm trying to think. I mean, it might have – spots here or there from things like currency swaps that we've done and interest income. But I mean, those are pretty minor. I mean, I don't think we think of capital allocation in a different way. I mean, I think we still sort of go through the same processes from an M&A perspective and a return perspective, and interest has always been a component of that. So I don't think it really changes all that much on how we're thinking about either A, running the business, the balance sheet given where we're at on fixed, you know, sort of mostly fixed debt here. And, you know, I don't think it really impacts us on our thinking about, you know, doing something different than what we do, which is allocate capital towards M&A largely, so.

Thanks for all that, Cutler.

We'll take our next question from Luke Sergant with Barclays.

Good morning, Luke. Morning, guys. Thank you again for the question. So I'm going to talk about the instrument growth. It looks like another big quarter for Cyax and LMS. This is following very strong first half of the year. Can you just give us a sense of where all the demand's coming from? Is this like a new facility build-out, or are these from upgrades? And then how to think about this from a comp perspective, how you guys are thinking about it for next year?

So just to level set, our life science instrument business grew, you know, low double digits in Q3. And as you pointed out, this was really led by like a microsystem science Beckman culture life sciences with, you know, some very, very strong results. And I think the strength of that comes from, you know, two areas. The first is the end markets continue to be very strong, so especially pharma, CROs and academic research continues to be well-funded, and we're seeing strong buying behavior there, especially towards instruments that provide the necessary answers here in the research. really the newest generation of instruments. And that brings me really to the second pillar of the strengths that we've seen there, which is our continued innovation performance there with all of the operating companies really leaning in and launching leading-edge, really pushing science further instruments. And I'll give you some examples. At SCIEX, the Xenotop, 7600, and the triple quad 7500. At LMS, you have the Thunder Wide Field Imaging System, and we talked about the MICA launch, which is doing extraordinarily well. And then we just talked about the NGenius launch here at Beckman Life Sciences. So we're really seeing strength from a funding perspective, and we believe that on top of that, we're outperforming because of the innovation strength that we've shown here, launching a number of great solutions. Now, from a comp perspective, we really do think that the strength in the market uh sustains uh we we expect that to be the case in the fourth quarter and in 2023 like i said we'll talk about that more in january but we don't have reason to believe here uh that you know this will be significantly different all right that's helpful um and then when you're thinking about um well you called out the supply chain right and and things are starting to get better can you talk about where you're seeing the the biggest relief

in your end markets or businesses and where you're still seeing things constrained and not getting better?

Sure. So I think the first place where you're starting to see some of the pressure dissipates is in the logistics area. So logistics capacities have ramped. We're starting to see greater availability. We're also starting to see You know, freight rates come down, specifically if you think of container freight. Those in particular have come down quite significantly, and that, you know, of course is helpful with the global businesses that we have. At the same time, you know, we do see continued pressure on a more limited set of electronic components. So with the Danner business system, call it we've been able to really knock down 80% of the issues there. And I think with that, able to continue to take share because of the availability of our solution. And with 20%, you know, we're still in countermeasure mode. And I would say that that number continues to get smaller every day. But there's still on the electronic component side, you know, some tightness here. And then lastly, I would just say what is still the same is labor continues to be tight. That is the case practically everywhere we operate. And so that's a constraint that we would expect to see get better here over the next 12 to 18 months, but currently still see that as an area to watch out for.

Okay, thank you.

We'll take our last question from Patrick Dolly with Citi.

Morning, Patrick. Hey, guys. Appreciate it. Hey, Reiner. How are you? Thanks for putting me in. Maybe just one. You touched on China, but maybe on Europe, you know, a lot of macro concerns kind of topped up their heads there over the last couple quarters. Can you just talk about what you're seeing, again, across the different opcos there, any change in terms of your expectations or any elevated concerns as we work away even into the 23 with some of the kind of power rationing and things that are happening there. Maybe just your exposure, any customer conversations, you know, how you're feeling in that region.

Well, starting with Q3 here, just a level set, we had high single-digit growth in Western Europe, and we would expect that to be comparable here going into the quarter. Our funnels continue to be strong. And, you know, I would say that we're starting to see, you know, deal velocity slow a little bit. So it is clear that people are starting to think about where they're going to invest their cash. At least for Q3 and Q4, we're still seeing robust demand and robust funding. Having said that, and in view of everything we read in the news, as do you, we continue to watch that very closely to see whether that sustains going forward into 23. And, of course, we're going to talk to you about that again in January. Now, as it relates to our own exposure, specifically as it relates to energy, You know, we continue for many reasons to take a very close look at our energy consumption, so also from a sustainability perspective. But now, particularly, this becomes an area of focus for Europe. And, in fact, we do not have a lot of heavy manufacturing, so energy-intensive manufacturing in Europe. It's mostly light assembly. And we have taken the measures to ensure energy supply continuity through the appropriate backup systems. And then in the event of, you know, if you will, fuel rationing, whether that's gas or oil or otherwise, We also have contingency plans there to ensure that we're able to reduce our demand but still supply mission-critical capabilities, including manufacturing, should that become the case. So, yes, it's something that we're closely focused on. Two, we've taken measures in order to ensure that we have supply and can provide supply continuity. And then lastly, we also have the contingency plans Should the situation deteriorate?

Patrick, this is Matt. We did a kind of bottoms-up analysis, plant by plant, you know, company by company, even factoring in higher costs that we might see here over the winter and into the next year. I mean, this is a very, very manageable number. It's just not a big number.

Okay. Yeah, that's good to hear. And then maybe just a follow-up on Luke's instrument question. I guess just kind of wondering in terms of the visibility of You guys have, you know, I know the backlog has been elevated. Order growth has been really strong, particularly on SIEX. There's kind of this, is there a pull forward, is there not? Maybe just talk a little bit about, again, the visibility you have, what the backlog looks like currently, and just how durable some of that instrument strength is. It's been elevated for a while now, so just trying to get a handle on the comfort level of the strength there. Thank you.

So as you suggest, the backlog is elevated. That is due to two factors. The strong demand that I referenced earlier that's really broad-based, you know, pharma, academic, and so forth. But also because, you know, there has been over the last 18 months some supply constraints around electronic components. So we see demand remaining strong across the board. for all these research applications that I referenced. And as a result of that, we also see that in our order rate and backlog position, and not just here for Q4, but also going into 23.

Great. Thank you, guys.

It appears that we have no further questions at this time. I will turn the program back over to our presenters for any additional or closing remarks.

Thanks, Shelby. We're around all day for questions and follow ups. Have a good rest of the day.

Thanks, everyone.

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