Danaher Corporation

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Please stand by, your program is about to begin. In case you need any audio assistance during your call, please press star zero. My name is Ashley and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's first quarter 2023 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star and the number one on your telephone keypad. If you would like to withdraw your question, please press the star key followed by the number two 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.

Thank you, Ashley. 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 and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the 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. A replay of this call will also be available until May 9th, 2023. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to the first quarter of 2023 and all references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals, or are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements except as required by law. With that, I'd like to turn the call over to Reiner.

Thank you, John, and good morning, everyone. We appreciate you joining us on the call today. So we had a good start to the year. Our team successfully navigated a dynamic operating environment to deliver better than expected revenue, earnings, and cash flow. We're especially pleased with the strength of our base business, which grew 6% in the first quarter. Now, across the portfolio, the quarter progressed largely as we anticipated. Our global supply chains have stabilized, and component availability improved sequentially. Strong price realization helped offset inflationary pressures, and disciplined cost management enabled us to continue our cadence of growth investments. So we believe these investments, paired with DBS-driven execution, contributed to market share gains in many of our businesses again this quarter. A prime example of the power of DBS and our commitment to continuous improvement at all levels of Danaher is the CEO Kaizen, which we kicked off two weeks ago. With this event, our most senior leaders are joining over 700 associates at 10 of our operating companies. We're focusing on the most significant opportunities for lasting competitive advantage across our businesses. including further reducing our best-in-class lead times at Aldevron and improving resin and filter throughput in the biotechnology group. The CEO Kaizen is just another terrific opportunity for our teams to come together and drive transformative change through DBS. In fact, once we wrap up here today, I'll be joining the Cytiva team at our resin facility in Uppsala, Sweden, to contribute to these efforts. Now, our results also reflect the unique positioning of Danaher's portfolio. We just have an exceptional group of leading franchises serving attractive end markets with durable, secular growth drivers. Additionally, the strength of our balance sheet provides us with the optionality to enhance our businesses both organically and through disciplined M&As. This powerful combination of our talented team, leading portfolio, and strong financial position differentiates Danaher and reinforces our sustainable long-term competitive advantage. So with that, let's turn to our first quarter results. Sales were $7.2 billion in the first quarter, and core revenue declined 4%. So as I mentioned earlier, we delivered 6% core revenue growth in our base business, with three of our four reporting segments up high single digits or better in the quarter. COVID-19 revenues were a headwind of approximately 10%. Geographically, core revenues in developed markets declined mid-single digits, primarily as a result of lower COVID-19 revenues. high-growth markets were up low single digits with a low single-digit decline in China. Results in China were better than expected, driven by a quicker-than-anticipated recovery in diagnostic testing and a more favorable life science research funding environment. We expect these positive trends to continue as we move through the year. Our gross profit margin for the first quarter was 61%. Our operating margin of 25% was down 330 basis points, primarily due to the impact of lower COVID volume in our biotechnology and diagnostics businesses. Adjusted diluted net earnings per common share were $2.36, and we generated $1.7 billion of free cash flow in the quarter. Now let's take a closer look at our results across the portfolio and give you some color on what we're seeing in our end markets today. Reported revenue in our biotechnology segment declined 16%, and core revenue was down 13%. In bioprocessing, base business core revenue growth was in line with our expectations of low single digits in the first quarter. The underlying demand at our large customers, who are primarily responsible for therapies and commercial production and later stage clinical trials, remains robust and they're steadily working through inventory they built during the pandemic. Based on our most recent customer conversations, we now expect the inventory normalization process to continue through the second half of the year. During the quarter, we also saw softer demand globally at many of our emerging biotech customers, as more pronounced pressures on liquidity and funding accelerated their efforts to conserve capital, leading to project delays and cancellations. And in consideration of these factors, we anticipate second quarter and full year base business core growth in bioprocessing will be largely consistent with the first quarter. That said, these short-term pandemic-related dislocations have not changed our assessment of the tremendous opportunity ahead in the biologics market and for our leading bioprocessing franchise. The number of biologic and genomic medicines in development is meaningfully higher than at any point in history. In fact, there are thousands of biologic therapies currently under development, including more than 750 in Phase III clinical trials. With these therapies, our customers are making significant strides in addressing diseases that affect large segments of the population. For example, GLP-1s have become blockbuster treatments for obesity and diabetes. And antibody drug conjugates are meaningfully improving treatment outcomes for many types of cancer. And we're also seeing promising developments in the field of Alzheimer's research where several novel monoclonal antibodies are nearing regulatory approval. Now, to best support our customers as they pursue these life-changing breakthroughs, our biotechnology team has been accelerating investment and innovation over the last several years. Dikeva recently introduced the MabSelect VL, a new resin and ligand for bispecific antibodies and antibody fragments. The MabSelect VL's best-in-class binding capacity and improved alkaline stability makes industrial-scale purification more efficient, helping customers improve yields, decrease bio-burden, and reduce manufacturing costs. This is just one of the innovative solutions from our biotechnology team's project pipeline aimed at helping customers bring more life-saving therapies to market faster and more efficiently. Turning to our life sciences segment, reported revenue grew 2.5%, and core revenue was up 5%, including high single-digit growth in our base business. Our life sciences instruments businesses collectively delivered mid-single-digit core revenue growth, consistent with our expectations. Funding levels and sales funnels remained healthy across most major geographies and end markets, and demand for our advanced solutions remained strong, notably for recent innovations such as the SIEX Vinotop 7600 and Leica Microsystems MECA. Our genomics consumables business had another quarter of double-digit base business core revenue growth. Robust demand for plasmids, proteins, and gene writing and editing solutions was partially offset by declines in next-generation sequencing and basic research. During the quarter, Aldevron brought together capabilities from Cytiva and Precision Nanosystems to create a streamlined offering for the development, production, and release of mRNA drug substance and drug products. This new offering will be available to customers later this year and is a great example of how we're integrating solutions from across Danaher to create differentiated offerings and deliver even greater value to our customers. Moving to our diagnostics segment. Reported revenue declined 10% and core revenue declined 7.5%. with double-digit growth in our base business, offset by lower COVID-related respiratory testing volumes at Cessia. Our clinical diagnostics businesses collectively delivered mid-single-digit core revenue growth and saw healthy market volumes globally. At Radiometer, strong demand for blood gas testing in China drove double-digit core growth. Like a biosystems movement, single digits led by advanced staining and digital pathology. Strength across developed markets and China enabled Beckman Coulter diagnostics to exceed expectations and deliver mid single digit core growth. And molecular diagnostics. Broad-based strength across Cepheid's test menu drove more than 30% core growth in non-respiratory testing. As our customers look for ways to capitalize on the workflow advantages the Cepheid gene expert delivered for COVID-related testing, they are increasingly adding additional assays from our market-leading test menu. This increased menu utilization by our customers helped drive more than 50% growth in infectious disease testing in the first quarter. We also saw good momentum for our recently introduced vaginitis panel, the Expert Express MVP, which contributed to nearly 30% growth in sexual health testing. In COVID-related respiratory testing, customers continued transitioning high-throughput testing to the point of care and consolidating their point-of-care PCR testing platforms onto the GeneXpert. As a result, Cepheid's respiratory testing revenue of approximately $550 million in the quarter exceeded our expectation of $450 million. This was driven both by higher volumes and a preference for our four-in-one tests for COVID-19, flu A and B, and RSV. We continue to expect approximately 30 million respiratory tests and $1.2 billion of revenue for the full year. Cepheid's strong results are a testament to the significant value and unique combination of fast, accurate, lab quality results, and a best-in-class workflow provides clinicians. Given Cepheid's leading global installed base and growing adoption of the broadest molecular diagnostic test menu on the market, we're well-positioned to help customers meet their testing needs and continue gaining market share for years to come. Moving to our environmental and applied solutions segment. Reported revenue grew 5%, and core revenue was up 6.5%. Water quality core revenue grew low double digits, and product identification was up low single digits. In water quality, Hawk delivered their fourth consecutive quarter of double-digit growth, and Chemtreat was up double digits for the eighth consecutive quarter. Strength was broad-based across both equipment and consumables, particularly in our industrial end markets. This performance highlights the resilience of the high-margin recurring revenue business models that make up water quality and the significant value our solutions provide in support of customers' day-to-day mission-critical water operations. At product identification, Marking and coding was essentially flat, while packaging and color management was up low single digits. VideoJet was up low single digits despite a difficult year-over-year comparison, as the business grew high single digits in Q1 last year. Our growth investments are driving a healthy cadence of new product innovation at VideoJet. In fact, in March, the team released the 1580C Continuous Inkjet Printer, the industry's first dedicated soft pigmented solution. The 1580C uses soft pigmented inks to print codes with consistent quality, excellent contrast, and strong durability to avoid degradation and fading during production runs, helping customers reduce production downtimes. So this is the first of several new product introductions VideoJet has planned for the year and is a great example of how our teams are bringing impactful solutions to our customers. In February, we announced that our environmental and applied segment will be named VRR also when it is launched as a standalone company and that it will be headquartered in Waltham, Massachusetts. This is an exciting milestone for the team, and they're making considerable progress towards becoming a separately traded public company. And we remain on track for a fourth quarter 2023 separation and look forward to sharing more details in the coming months. So now let's briefly look ahead to our expectations for the second quarter and the full year. In the second quarter, we expect core revenue in our base business to be up mid-single digits. We also expect total core revenue to decline high single digits as a result of lower demand for COVID-19 testing, vaccines, and therapeutics. Additionally, we expect a second quarter adjusted operating profit margin of approximately 26%, which reflects efforts to adjust our cost structure and capacity in response to COVID transitioning to an endemic state, particularly within our diagnostics and biotechnology businesses. Now turning to the full year 2023. Despite the near-term and temporary challenges within bioprocessing, we anticipate mid-single-digit core growth in our base business. We also expect total core revenue to decline high single digits for the year as a result of lower demand for COVID-19 testing, vaccines, and therapeutics. Additionally, we expect a full-year adjusted operating profit margin of approximately 30%, which reflects the previously mentioned efforts to adjust our cost structure and capacity in response to COVID-19 transitioning to an endemic state. So to wrap up, we're pleased with our strong first quarter results. Our well-rounded performance is a testament to the durability and balanced positioning of our portfolio and our team's commitment to leading and executing with the Danaher business system. While the transition of COVID-19 from a pandemic to an endemic state is causing near-term disruption, there is no doubt that the past three years have helped shape Danaher into a better, stronger company. We meaningfully changed the scale of our bioprocessing business with the addition of Cytiva and the creation of the biotechnology group. And Cepheid's expanded installed base has significantly improved their competitive advantage. We've also increased our cadence of innovation and strategically deployed capital through M&A, including the acquisition of Aldebaran, to accelerate our future growth trajectory. So there's a bright future ahead for Danaher, a combination of our talented team, differentiated portfolio of businesses, and strong balance sheets. all powered by the Danaher business system, provide us with a strong foundation to create value for many years to come. And so with that, I'll turn the call back over to John.

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

Certainly at this time, once again, if you would like to ask a question, please press star 1 on your touchtone phone. We will take our first question from Michael Ryskin with Bank of America. Please go ahead.

Good morning, Michael. Welcome. Thanks for taking the question, guys. First, I want to start on the bioprocessing inventory challenges. You've been dealing with this issue for almost a full year now, and you've had to revise your outlook lower for fiscal year 23 a number of times. Why is visibility there into inventories so challenging? And how do you know that this latest view of plus low single digits for the year is the right view and there's not further cuts going down the road?

Thanks, Michael. Look, undoubtedly, visibility has been choppy here on the way up as COVID tailwinds fueled our growth. And now as we try to drive the soft landing, visibility has been impacted. And, you know, I would tell you that normally we have visibility of 9 to 12 months that's very solid. But it is so that in the last quarters, that has been probably more like three to six months related to a number of factors. And, you know, let me lay some of those factors out for you here, Michael. You know, sort of starting with the first quarter. So, you know, in the first quarter, our base business, in bioprocessing grew about 100 basis points, 1%. And if you unpack the growth there, large accounts that are responsible for commercial production and later stage clinical trials are growing at mid-single digits. So they're burning off inventory. I'll come back to that. And then you have sort of emerging biotech and those companies that are more involved in discovery and earlier stage clinical trial phases, which represent about 20 to 30% of our business. And they're down mid-teens. So overall, this is what gets us to this sort of low single-digit growth view for the year. Now, let me come back to the larger accounts here for just a second. We see in large biopharma that, in fact, the demand is there, the inventory is burning off, but it is slower than expected. And the reason for that is that we're starting to see larger pharma companies as well as larger CDMOs replan and recalibrate their own production plans as they start to conserve working capital and cash. And we saw some of that also back in 2016. So we're seeing larger customers also look at their own finished good, if you will, inventories and starting to adjust their production plan in order to bring those down as well. If you then transition over to, again, emerging biotech, so the companies that are working more in discovery and earlier stage, we have been observing funding headwinds for, call it, you know, since the second half of the prior year. But those funding headwinds became significantly more pronounced here in the first quarter. And so we're seeing these accounts looking to conserve cash by prioritizing projects. We see that with lower OpEx and CapEx expenditures. Also see a number of layoffs happening in that particular segment. And that's not just happening in the U.S. We also see that happening in China. And so we're assuming that, you know, barring any other sort of wild cards here, that it doesn't get significantly worse, but that this continues to play out for the remainder of the year. Hey, Mike, it's Matt.

Maybe let me give you a little bit of... kind of context around January to, you know, kind of a guide in January to where we ended up. I know Reiner sort of mentioned it, but I think it's important to kind of think about it in the two buckets. So we've got the larger biotech or the larger customers that we've got, most of their stuff is sort of phase three clinical on market. In January, our assumption was that that was going to be kind of call it high single digit growth from those customers. So 70% or so of our customers kind of growing at, you know, seven, 8%. And then, you know, kind of the remaining 20%, 25% of the customers, which we're sort of referring to as emerging biotech, not everything in there is probably technically emerging, but that other piece of the customers in January, we thought that was going to kind of be about low double digits to kind of low teens growth. And you add all that up, and that would have been the high single-digit growth that we thought we were going to see here. for the year. You know, like Reiner said, what we saw in Q1 was just frankly, you know, not that supportive of that kind of ramp as we think about what we would need to build in Q1 and Q to be able to hit those types of numbers for the full year. And so if you think about what we're looking at and seeing now in April, you know, those large customers, instead of being 7%, 8%, they've been growing still nicely, but more mid-single digits, right? And the big change here is this emerging biotech, that other 20%, 25%, instead of being up kind of mid-teens, they're actually down mid-teens. And that comes back to everything that Reiner talked about with people really reprioritizing projects, conserving cash. That happened both in the U.S. and we saw it in China as well. And I think I'd probably say it, you know, we saw modest headwinds as we entered the year, and those are just more pronounced now. as we move through the quarter. So just as a, you know, to maybe put some numbers to what Reiner said.

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

Okay, thanks. And on that emerging biotech, just really quick to clarify that. Are you seeing that softness in bioprocessing specifically or across, you know, in the life sciences segment as well? And then maybe I could transition that to a question on the instrument. You know, you saw 5% growth or mid-single-digit growth in instruments in the first quarter. What's your expectation for the rest of the year? Any particular pockets of weakness or strength you can call out?

I'll comment on the bioprocessing, broadly speaking, and maybe let Reiner talk about what we're seeing in tools. The answer is yes, we're seeing it in both. I would say that we are definitely seeing the emerging biotech funding pressures here in the bioprocessing area. I would say we're seeing it in the tool space or in life sciences as well. I would say that is a lesser concern. portion, obviously, of our revenue, so it's not quite as big of an impact, but are we seeing it? Yes, I would say we are seeing customers in those spaces conserving cash on both CapEx and OpEx.

Okay, thanks.

So, Michael, more generally on the life sciences here to your first question, So if we look at Q1, you know, the life sciences-based business finished as we thought at high single digits after low double-digit average growth for the last three years. And we've talked previously about the expected normalization of those growth rates here after having seen that elevated growth for the last three years. So that's right within our expectations. If you look at that geographically, we saw strength in Western Europe And China, in fact, was up double digits on the back of some stimulus there. And North America was a little bit softer. And if you look at life sciences from an end market perspective, large pharma R&D spending levels are still quite healthy, but they're starting to moderate just given the higher comps. And now just connecting the dots to Matt's commentary here, you know, emerging biotech is impacted by the current funding environment. And we see, you know, smaller purchases, if you will. So rather than buying, you know, six, four instruments and, you know, in other places, really, you know, impacted in the less differentiated segments, let's say. So we are seeing it. Our own business is not as exposed to that segment in life sciences, but we do see it at the margin. And then life science research and academic is holding up well globally for life sciences. So, we continue to believe our growth rates moderate to the historical levels in 23, and that's what our guide reflects, and that's not a change to any previous expectations.

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

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

Hey, guys. Thanks for taking my question. Hi, Vijay. Hi, Rainer, and congrats on a good start to the year. I guess just a high-level question on the guidance here, Rainer. All of us are looking at this. If I go back three months ago, we were assuming back half, perhaps normalization in the industry, and given your comments here on that, emerging, you know, small biotech, that's where the change is. Is this guidance now, DRS, you know, because we're assuming bioprocessing in line with Q1. Are we confident Q1 was a low point for the year? So just give us some color on the thought process behind the guidance here. And is this now DRS from a back half perspective?

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

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

Sure. So, Vijay, on the CEPHID question, you know, we're really seeing a broad-based usage of the infectious disease menu. In fact, our broader menu in general, both at uh our existing install base that that's been there for some time as well as with our newer customers as they start transitioning that covet testing capacity that they have to take full advantage of that menu so we see that um 30 percent here um as as a good marker uh of how people appreciate the workflow advantages uh the ease of use and the accuracy of the platform remember We're seeing two factors here. One, we see tests transitioning from high throughput environments into the point of care on the one hand, and on the other hand, we see expanded usage of our testing menu.

Yeah, Vijay, maybe just to kind of put a real-life example to that, I think. So if you think about what we're seeing, we've got customers, existing customers today. It kind of goes both ways, right? So we've got existing customers today that, for example, will use Group A strep, and those customers now sort of are also moving everything over to the foreign one or to COVID as well. And then you've got the other way, which is that sort of install base going from, you know, kind of 2X growth here over the last three years. You've got people who have used, you know, these systems now for many, many years. And what they're doing is they're starting to bring in new menu, and that new menu has been around infectious disease first, which is, primarily right now, or largely Group A strep. So you're kind of having somebody who used the box throughout COVID testing, using it on for COVID 4-in-1 and standalone. And now they're bringing on Group A strep as well. And so that's what we always kind of talked about. with COVID being an anchor assay as we go forward. Larger installed base, anchor assay, now you move into infectious disease, there will be other opportunities to pull in, you know, sort of other menu as we go forward. But that's exactly the type of thing we're seeing play out here, and it is encouraging. Early days, yes, I mean, you know, and also still some lower base These are often lower numbers, but as we go forward, we've sort of talked about next year and the longer term. That's why I think that install base growth was so important, because we've got the menu, be able to pull through, and then the additions of the new menu are going to be only helpful on that larger install base.

So on M&A, Vijay, you know, obviously we don't comment on chatter, but what I would tell you is we really like the way we are positioned. Our balance sheet is in great shape. Valuations continue to moderate. You know, perhaps the one or the other board is not quite there yet, but we do see more realism in the many discussions that we have across the board, as always. And specifically, as we have said in the past, should our customers tug on us and want our help and services, you know, that's not something that we're going to ignore. But once again, that's just one of several opportunities. I think the most important thing to remember is that we are not going to deviate from our disciplined approach. It's got to be the right end market. It's got to be the right target. And the model has to work. And it's when those three lights flip green that we execute.

Fantastic, guys.

Thank you.

Yeah, I think Vijay, too. I mean, I think as we sit here, I think it's – You know, I'm not saying this is 08, 09, but having a balance sheet that we've got right now and being able to kind of be flexible I think is important in times like these because, as Reiner said, you know, when the market, company, and valuation all line up, we're ready to go. But we do need to see all three of those. And, you know, as things get a little choppier here, as they might get a little choppier here, I think I really like how we are kind of set up here from a balance sheet perspective as well.

Thanks, Matt. Thanks, CJ.

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

Good morning, Scott.

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

Yeah, Scott, maybe I'll take a crack at it. Yeah, like we talked about in the prepared remarks, we're sort of going from an adjusted OP, you know, just operating margins of 31 in our previous guide to 30. And I think the way to think about it is sort of twofold. You know, half of that's just the volume, right? And most of that is all of that actually is in bioprocessing. But the other half is capacity reduction costs. I would say that that's going to be two places. It's going to be in biotechnology and then, as importantly or more importantly, probably at Cepheid. Like you said, we've always sort of known we were going to get to an inflection point here at some point where we were sort of making the call that we've moved into an endemic phase. And once we moved into an endemic phase, we were going to need to bring some of the capacity that we've been running at at Cepheid down. And so, you know, I think just as a reminder, in Q4 last year, we did 20 million respiratory tests, and that was only three months ago. But I think you've really seen a tail off here as we have entered into the last couple of months. And I think our team is pretty clear that we are now kind of entering a new phase of volume that we will need. And so we're going to be getting after some of that. And I think, you know, what does that look like? It's talking about closing and consolidating some of the plants that we've got. You know, some of those were frankly put up quickly, you know, in locations that were not ideal for the longer term because we were trying to meet the needs of a pandemic. So we're going to get after a couple of those sites. We're going to reduce some of the headcount. And then we're going to go after, you know, indirect and fixed overhead costs as well, reducing shifts, et cetera, et cetera. So those are the types of things we're going to be going after here. That's largely going to be in the second and third quarter is when you're going to see the costs sort of roll through. So you'll see that in the margin in those two quarters, and then it sort of popped back a little bit. And then, you know, maybe just to give you some sense of what's that look like in, you know, once we're done with that, kind of in Q4, and as we head into 24, Scott, you know, I think Cepheid in 2019 was a 20 to 25%, you know, OP business. You know, during the peak of the pandemic here, it probably was, you know, north of 45%. And after we get through what we're going to do in the next couple of quarters, like I said, on the capacity reduction side, you know, starting kind of in Q4 and heading into 24, they're going to be 35% to 40% margin, right? So meaningfully up from where we were given the volumes. that we have now. It's a much bigger business, but not quite at the peak pandemic where I was getting a lot of volume leverage. But that gives you a sense of what we're going after, what we're trying to do, and where we end up on the other side.

That's super helpful, Matt. Can you guys just remind us, where is the size of your installed base in Cephia today versus pre-COVID? I know I'm sure I have it in the notes somewhere, but to just make it a little easier. 2x, Scott.

We're about 50,000 Started probably like 2019. All right.

Perfect. I'll pass it on. Thank you guys. Good luck this year. Yep.

Thanks, Scott.

We'll take our next question from Dan Brennan with Judy Cohen. Please go ahead.

Great. Thank you. Good morning. Thanks for the questions, guys. Maybe just one on file process to start out. Could you help us think through, like, what is the magnitude of that D-stock drag that's kind of baked in, guys? I know you gave a lot of color earlier in the Q&A. And then related to that, or Emerging Bio, it's certainly a bigger group than we thought as a percentage of that segment. Any kind of what that grew in 22 and kind of the quick math to get to low single for the year if it's 30% of revenues? I guess you are assuming some improvement there because if we kept it down 15, I don't think we'd get to up low single for the year.

Yeah, so maybe, again, maybe the way I think about it, Dan, is that sort of the larger customers that are really where we are seeing the inventory drag, that was sort of, you know, we initially thought we would see that in the high single digits, call it 7, 8%, and that's a little bit lower now, call it 6 and change. And so I think the inventory destocking is flowing through in the larger customers, and you're seeing it in a slightly lower growth rate that we saw in Q1, and we are expecting them to see for the full year. So that's how I'd sort of frame what the inventory destocking is. The rest is really, like I talked about earlier, you know, emerging biotech and sort of the other 25% of our customers You know, we thought that that would be a low teams type growth rate here for the year. Combine that with the 8% that we thought we'd seen the larger, that's how we got to high single digits. That low teams is actually negative mid-teens, right, with all the pressures we talked about. I would say that we are just sort of assuming that type of growth rate for the rest of the year for that customer base and that we're going to have the larger customers will be more in the mid single-digit like I talked about. That's what we're kind of assuming. For the year, you know, based entirely on what we saw in Q1, the order book in Q1 sort of not being supportive, frankly, of, in our minds at least, the ability with the limited visibility we have or more limited visibility, just not supportive of being able to say that we think we can get back to a high single digits. I think you asked the question of what those customers were last year. That entire business largely was up in line with what we saw last year, which is, as you remember, mid to high 20s. So kind of, you know, you sort of look at mid to high 20s with that group of folks. Now they're sort of down mid-teens. Still a very solid growth on a two-year basis, but it is what we're seeing right now.

Got it. And then, thanks, Matt. And then, And then there's maybe on the margins and the earnings. So, you know, we're coming out somewhere kind of 925, 930 for the year. Just wondering if you guys, you know, you kind of put the pieces together. Is that kind of the right zip code? And given the cost actions you're taking this year, does that set yourself up in 24 for, like, you know, potentially, you know, higher than normal operating leverage, you know, depending on what the top line comes in at?

Yeah, no, I mean, I think if you're going through the full year, the math is what it is at around 30% adjusted OP margins. I think that takes care of itself. As far as what we're going to look like as we sort of get to the other side of this discussion, I mean, I talked a little bit about Cepheid, you know, kind of was 20 to 25 percent pre-pandemic, you know, peaked up at 45 and 35 to 40. I mean, I think if you sort of use that frame plus what we have in diagnostics, that sort of gets you, you know, where we think roughly the margin profile will be. You know, biotech is probably the other one. After we get through some of these costs, you know, the same math there was biotech was call it high 30s, you know, prior to the pandemic. Again, it peaked at around, call it 45 and change. And after we sort of get through what I think we're going to do there, they're probably going to be more like low 40s. So, you know, again, better than they were pre-pandemic, given the fact that they're bigger business. But, you know, those two pieces, I think you can slot into what 24 might look like. And then, you know, life science is That should be kind of plus or minus where we've been here. That has not been a margin that's moved around quite a bit. A little bit of COVID stuff as we had in 22 and 21, but I think you can kind of get a sense of what the margins are there. So maybe it's just a high-level framework. You're probably high 30s, low 40s with Cepheid. You can kind of assume some other stuff for the diagnostics, biotech, probably low 40s, and then what we're seeing in LS. But we will obviously sort of come back to that Later, still pretty early in 23, but just to give you a very high-level view.

Great. Thanks, Matt. Thanks, guys. Thanks, Dan.

And we'll take our next question from Jack Meehan with Nefron. Please go ahead.

Good morning, Jack. Good morning. Good morning. Another question on bioprocessing. Can you share what was your total order rate in the quarter? Is there any color you can just share around how the quarter played out? Have things weakened throughout the quarter? Just curious about how things are trending.

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

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

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

Thank you, Rainer. Thanks, Jack.

And we will take our final question from Rachel Vatsnall with J.P. Morgan. Please go ahead.

Morning, Rachel.

Great morning.

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

So, just to confirm on the topic of emerging biotech, our assumption is and our guide reflects that the activity level in emerging biotech stays for the remainder of the year as it played out in the first quarter. So, we're not assuming any change there, including that it doesn't get significantly worse. Now, as it relates to how that segment progresses here, You know, that's, from today's point of view, hard to predict. We need to see where capital markets go, liquidity availability, and, yes, you know, a stabilization and return to some degree of normality in the banking sector. But for the visibility that we have today, we're not expecting an improvement in that segment for the remainder of the year.

Got it. And then maybe a few questions on China here.

So one of your peers recently flagged China bioprocessing weakness. I think you also mentioned that in one of your answers to an earlier question. So can you talk about how did bioprocessing perform during 1Q in China? And can you just give us some context of how big China is for bioprocessing for Janahar? Looking forward, how are those orders trending within China, specifically around some of those localized manufacturers? And then last question, just stepping back, you previously had guided to low single-digit growth for China for the year. 1Q was well above expectations. So what's the total co-outlook for China? Thanks.

Well, as it relates to bioprocessing in China, we've had a very good and strong business there in China for years. and helped quite significantly in China in order to build the capacity for vaccines and for other biologics. And what we see today, much like we've seen in the U.S., is that the emerging biotech segment, which is an important part of China's efforts to, you know, build a local biopharma industry, is also impacted by capital constraints. So we've seen that play out in China as well. And in fact, that's what is, you know, the primary impact on our China numbers here in the first quarter, which on the whole were better than expected primarily because of the patient volumes and the diagnostic businesses being stronger. Now, as it relates to the full year in China, we expect our full year in China to be up low single digits for Danaher overall, based on the market recovery exiting COVID, as well as, if you will, a normalization of the activity level in bioprocessing.

And now we'll turn it over to the speakers for closing remarks.

Thank you, Ashley.

Appreciate everyone for joining us on the call today. We'll be around all day, rest of the week for a follow-up.

Thanks, everyone.

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