Danaher Corporation

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© transcript Emily Beynon

My name is Ashton. I'll be your conference facilitator this morning. At this time, I would like to welcome everyone to the Danaher Corporation second quarter 2023 earnings conference call. All outlets have a place 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 and the number one on your telephone keypad. If you would like to withdraw your question, please press star and 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.

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 Form 10-Q for the second quarter, 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 Investors 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 August 8th, 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 related to the second 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 may differ materially from any forward-looking statements that we make today. These statements, 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.

Well, thank you, John, and good morning, everyone. We appreciate you joining us on the call today. Our team executed well and delivered our quarterly revenue, earnings, and cash flow expectations despite a more dynamic operating environment. The resilience of our portfolio showed through in the second quarter. High single-digit base business core revenue growth in life sciences and diagnostics, paired with better-than-expected respiratory testing revenue, helped offset softer base business demand in bioprocessing. Our team's ability to navigate these challenging operating conditions is a testament to their commitment to leading and executing with the Danaher business system. their enhance productivity and improve manufacturing throughput. And we're proactively addressing structural costs while maintaining a healthy cadence of growth investments. Now our second quarter results also highlight the durable, balanced positioning of our portfolio. We have an exceptional group of businesses, all powered by DBS, that serve attractive end markets with favorable long-term secular growth drivers. This powerful combination of our talented team, the strength of our portfolio, and balance sheet optionality differentiates Danaher and positions as well to operate through today's more dynamic operating environment.

So with that, let's turn to our second quarter results in more detail.

Sales were $7.2 billion in the second quarter. Core revenue declined 7%. We delivered 2% growth in our base business, which was more than offset by a COVID-19 revenue headwind of approximately 9%. Geographically, core revenues in developed markets declined high single digits, primarily driven by lower COVID-19 revenues. High growth markets declined low single digits, with China down approximately 10%. In China, our diagnostics businesses benefited from continued recovery in hospital patient volumes, while stimulus initiatives helped drive strength in life sciences. This was more than offset by a decline in our biotechnology business, where a significant deterioration in the funding environment during the quarter led to project delays and an increase in order cancellations. Our gross profit margin for the second quarter was 56.5%. Our operating margin of 20% was down 840 basis points due to the impact of lower volume in our biotechnology and diagnostic segments and costs incurred to adjust our capacity and cost structure in response to COVID transitioning to an endemic state. These actions in this transition year are intended to ensure that we're in the best position to deliver on our long-term growth and margin objectives while maintaining an accelerated cadence of innovation investments. Adjusted diluted net earnings per common share were $2.05. We generated $1.6 billion of free cash flow in the quarter and $3.3 billion year-to-date. This results in a year-to-date free cash flow to net income conversion ratio of more than 125%. Our notable strength in free cash flow generation differentiates Danaher and illustrates the quality of our portfolio, business models, and our team's consistent execution. 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 17%, and core revenue was down 16.5%. In bioprocessing, underlying market conditions weakened further as we moved through the quarter, resulting in a high single-digit base business decline. Larger customers are still working through inventory they built during the pandemic, and emerging biotech customers, which we define as customers without a commercialized therapy, continued their efforts to conserve capital. In addition, we saw the ongoing biopharma market correction in China intensify as the second quarter progressed. Given these dynamics, where we can, we've started actively working with our larger customers to help them more quickly manage their inventory down to normalized levels. Now, while market dislocations are impacting our near-term growth, recent positive developments have only strengthened our conviction in the tremendous long-term 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. And during the quarter, we saw notable regulatory approvals for a novel gene therapy for Duchenne muscular dystrophy and the monoclonal antibody-based Alzheimer's therapeutic. These groundbreaking therapies are not only poised to improve quality of life for patients around the world, they're also serving as validation of these emerging therapeutic classes and reinforcing the potential of drugs currently in the development pipeline. Now in May, we completed the combination of Cytiva and Paul Life Sciences, creating a premier global bioprocessing franchise. The combined business, which will go to market under the Cytiva name, uniquely positions us to support customers as they pursue these life-changing breakthroughs. Cytiva's portfolio has the broadest offering in the industry, with end-to-end solutions across all major therapeutic modalities and an innovation engine geared towards helping customers bring life-saving therapies to market faster and more efficiently. A great example is the Xcelerex X-Platform Bioreactor, Cytiva, launched in the second quarter. Now, this new bioreactor is optimized to enhance cell culture productivity and increase process intensity to improve manufacturing yields. The X-Platform's modular design also enables customers to more predictably scale from the lab to production across all modalities, including monoclonal antibodies and cell and gene therapies. helping reduce time and cost in biologic drug production. Turning to our life sciences segment, reported revenue grew 5.5%, and core revenue was also up 5.5%, including high single-digit growth in our base business. Our life sciences instrument businesses collectively delivered mid-single-digit core revenue growth led by nearly 10% growth at Leica Microsystems and high single-digit growth at CyEx. Healthy demand across our life science, research, academic, and applied markets, particularly for our more advanced instrumentation, helps offset softness at pharma and biopharma customers. Our genomics consumables-based business was up low single digits in the quarter. Growth in plasmids, proteins, and gene writing and editing solutions, which are primarily used in projects that are commercialized or in later stages of the drug development pipeline, remained robust. This strength was partially offset by declines in next-generation sequencing and basic research. Our life sciences businesses continue to deliver innovative solutions that are helping accelerate the discovery and development of biologic medicines. IDBS recently released Polar Insight, a biopharma data management platform that is leveraging artificial intelligence to help researchers more quickly analyze datasets to accelerate drug discovery, regulatory filings, and technology transfer in the therapeutic development process. And CyEx launched the Intabio ZT, a front end to the Xenotop 7,600, that enables researchers to more quickly and more securely identify and validate drug candidates, improving development workflows and pipeline yields. Now moving to our diagnostic segment. Reported revenue declined 13%, and core revenue declined 11.5%. with high single-digit growth in our base business, more than offset by lower COVID-related respiratory testing volumes at Cepheus. Our clinical diagnostics businesses collectively delivered mid-single-digit core revenue growth. Leica Biosystems led the way with high single-digit core growth driven by strength in core histology and advanced staining. Beckman-Coulter Diagnostics was up mid-single digits again this quarter with solid performance across both instruments and consumables and notable strength in immunoassay. In May, Beckman-Coulter launched the DXi9000, their next-generation immunoassay analyzer that automates up to 90% of standard daily maintenance routines while delivering best-in-class throughput. In addition to significantly improving laboratory workflows and efficiency, the DXI 9000 will enable Beckman to provide a full menu of blood virus assays over time, closing an important menu gap and further enhancing the breadth and clinical value of our test menu. Now, this is just one example of how the Beckman team is improving their competitive positioning through innovation, which is helping drive consistent mid-single-digit growth rates. In molecular diagnostics, broad-based strength across Cepheid's test menu drove another quarter of more than 30% core growth in non-respiratory testing. Customers who benefited from the workflow advantages Cepheid's gene expert delivered for COVID-related testing are increasingly adding additional assays from our leading test menu, most notably Group A strep and hospital-acquired infection assays. And strong momentum for our recently introduced multiplex vaginitis panel, the Expert Express MVP contributed to mid-teens' growth in sexual health testing. In COVID-related testing, Cepheid's respiratory testing revenue of approximately $300 million in the quarter exceeded our expectation of $175 million. This was driven both by higher volumes and a preference for our four-in-one test for COVID-19, flu A, flu B, and RSV. We continue to expect approximately $1.2 billion of respiratory testing revenue for the full year. With COVID now an endemic state, we believe Cepheid is continuing to take share as many customers look to consolidate their point of care PCR testing platforms onto the gene expert for both respiratory and non-respiratory testing. Their preference for the gene expert within their labs and across their healthcare networks is a testament to the significant value the unique combination of fast, accurate lab-quality results and a best-in-class workflow provides clinicians. Now moving to our environmental and applied solutions segment. Reported revenue grew 2% and core revenue was up 1.5%. Water quality core revenue grew mid-single digits, and product identification was down mid-single digits. In water quality, DBS-led execution drove solid growth on top of a double-digit prior year comparison. Strong performance at Chemtreat and Hawk was balanced across industrial and applied end markets. At Trojan, equipment sales and order rates remain strong as customers are continuing to invest in larger municipal projects. At product identification, VideoJet declined low single digits against the high single digit prior year comparison. We're also seeing lower activity levels at our industrial and consumer packaged goods customers who are aligning their production schedules with end user demand. The VideoJet team continued their strong cadence of new product innovation this quarter with the release of the 3350 laser marking system. This impressive addition to VideoJet's portfolio enables users to mark different size products and multiple levels of the same product without adjusting the laser, resulting in increased uptime and higher throughput. This is one of several product introductions planned for the year that are helping position the product identification platform for success as they begin their journey as part of Veralto. So speaking of Veralto, we remain on track for a fourth quarter 2023 separation. Veralto will be well positioned in some of the most attractive areas of water quality and product identification. Their portfolio will be comprised of leading companies with durable, high-margin business models supporting customers' mission-critical operations. The Veralto team is looking forward to hosting an analyst day in Chicago on September 6th, and we hope many of you will attend. So now let's briefly look ahead at expectations for the third quarter and the full year. In the third quarter, we expect core revenue in our base business to be down low single digits year over year. We also expect total core revenue to decline in the low to mid-teens percent range, primarily as a result of lower demand for COVID-19 testing, vaccines, and therapeutics. Additionally, we expect a third quarter adjusted operating profit margin of approximately 26%. which includes the impact of 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, due to the near-term challenges within bioprocessing, we now anticipate low single-digit core revenue growth in our base business. We also expect total core revenue to decline high single to low double digits for the year as a result of lower demand for COVID-19 testing, vaccines, and therapeutics. Additionally, we expect a full year adjusted operated profit margin of approximately 29%. So to wrap up, Our team remains focused on consistent execution in the face of a challenging and more dynamic macroeconomic environment. We're confident about the bright future ahead for Danaher. Our talented associates are innovative and passionate about their work and committed to our culture of continuous improvement. Across our portfolio, we're helping customers solve some of the world's biggest healthcare challenges, including faster, more accurate disease diagnosis and accelerating the discovery, development, and manufacturing factor of therapies. Our solutions are at the forefront of improving patient outcomes and ensuring more patients around the world have access to quality care. Financially, We've got a great lineup of leading franchises and attractive end markets with durable, high-recurring revenue business models and our strong free cash flow generation positions as well to further enhance our portfolio going forward. The unique combination of our talented team, differentiated portfolio, and balance sheet optionality, all powered by the Danaher business system, provide a strong foundation for creating shareholder value while helping to meaningfully improve human health. So with that, I'll turn the call back over to John.

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

Thank you. And at this time, if you would like to ask a question, please press star 1 on your touchtone phone. You may withdraw your question at any time by pressing star 2. Once again, that is star 1. And we will take our first question from Mike Ryskin with Bank of America. Please go ahead.

Great. Morning, Mike. Thanks, sir. Morning, Ron. Thanks for taking the question. I'll start on bioprocess, the obvious one. You provide a lot of comments during the prepared remarks, but I'm just wondering if you could You know, talk a little bit about order trends, anything that you're seeing from customers to give you a sense of when that destocking could continue. As part of that, you also talked a little bit about actively managing inventory with larger customers. Could you just walk us through what that means exactly and sort of how you see the rest of the year playing out? You know, you gave the total percent number, but qualitatively, what are your thoughts on bioprocess as you go through the year?

Sure. So let's start with orders. In the first half of the year, our orders are essentially down 20%. And as we look forward here to the second half of the year, we think that our orders will be down modestly. That's a combination of various factors, one being that our large customers, CDMOs, continue to work through inventories, We also see that China continues to deteriorate here from what we saw in the first quarter and certainly saw that deterioration in the second half of the second quarter. We see that continuing. And then we are actively managing inventories down. While that is not We've intensified our efforts there really in order to get as much as possible of this stocking topic behind us here in 2023.

Mike, maybe just let me give you a little color on some numbers here, too. I think if you think about the first half, like Reiner said, we were sort of down 20% from an order perspective here. And like he also said, I think we'll be down modestly in the second half. But I think it's important to remember, too, this is largely driven by the comps that we've got. So if you think last year, the first half, we had kind of a low double-digit comp, and the second half was more like 20%. So step up, get a little easier here in the second half. I think the important thing that Reiner just said is we have not seen in the order book enough to call an inflection in the market. But I think we will see a step up to a more modestly down number here in the second half, but I would really characterize that as very much comp-driven, not some sort of market inflection that we're seeing.

Great, thanks. I appreciate that. And if I could squeeze in a follow-up on China specifically. You talked a lot about China and 2Q deteriorated, particularly as it touched on biopharma, you know, biopharma market corrections. Could you expand on that? Just how significant and how protracted do you believe that will be? And it seems like it's really mostly contained to bioprocess. You know, you called out instrumentation and China actually holding in pretty well. What's the difference there? You know, why is it so specific to just that one part of your business?

So we saw that continued deterioration in the second half. of the second quarter. To give you a sense, China orders were down 20% in the first quarter, 40% in the second quarter, but really 50% in June. And frankly, we don't see that getting better here in the second half. And that's really related to two or three factors. One, the funding environment continued to deteriorate. The foreign investment in projects and capacity has dissipated. It is not returned. There are fewer projects there that are being funded. Also, over the last two, three years, a great deal of capacity has been built, particularly CDMO capacity, but also some with the smaller biopharmas there. And so there's not a lot of additional hardware required here in the short term, in the second half. nor are there that many molecules that are being worked on by the CDMOs, meaning that the consumables requirements of that capacity are also lower than we saw here in the first half of the year. And then lastly, and part of this is related to our aggressively managing with our customers to get them to their targets, inventories there are a fair number of order cancellations there so when you put all that together here for china that is a different picture here in the second half than we saw in the first half and once again we're working here if you aggregate this to the total global biopharma business to get as much of this as possible behind us in 2023 and just to give you a sense here our our china business In 2022, it was about $1.3 billion, slightly over that. We expect that to be about an $800 million business by the end of 2023, which would be about 10% of the total bioprocessing business at Danner.

Great. Thanks so much. Appreciate the call. Thanks, Mike.

And we will take our next question from Vijay Kumar with Evercore ISI. Please go ahead.

Good morning, Vijay. Hi, Rainer. Good morning to you, and thanks for taking my question. I guess on the bioprocessing commentary, Rainer, if you just simplify the various moving parts, it seems like large pharma was in line-ish, early phase, early stage was in line-ish. What changed incrementally in QQ was China, and if that is correct, I think you mentioned China was down 50% in June. Is the second half Assuming in a down 50% for China bioprocessing. And I think you also mentioned Danhurst actively managing customer inventory levels. What does that mean? And what is the implication for fiscal 24? Should any of these issues below or under 24?

Vijay, it's Matt. I just want to kind of set the numbers for everybody so we've got what we're looking at for China. As you said, from a revenue perspective, in the first half, we were down, call it, you know, 30%. And we did see May and June sort of get down into the more like 45, 50% down. So as we sort of think about what we're thinking about for China going forward for the second half, we are kind of contemplating, if you will, for Q3 and Q4, both of those quarters to look like May and June and call it 50% plus down. With that, maybe, Ryan, you want to get some color on the commentary?

Sure. DJ, as it relates to 24, we have a lot to work through here still. I think as an industry, in the second half of 2023, we talked about the various puts and takes of the stock destocking that i think you correctly summarize with pharma and emerging biotech you see the china piece that we're flagging here and then of course actively managing those inventories with our customers here in order to get as much as possible behind us in in 2023 and you know we think 2023 probably is the bottom um having said all that it is a little early to be talking about 2024. And as always, as we get closer here to the end of the year, we'll continue to update as we work through the second half here.

Understood, Brian. And Matt, maybe one for you on margins here. I think your second quarter came in slightly above guidance, but the sequential step down from Q1, that's 450 basis points. Can you bridge us on what drove that 450 basis points step down sequentially? I think some of this was cost actions Danher undertook. And again, when I look at the annual guidance, I think you implied Q4 is perhaps 30%-ish. 31-ish. What drives Q4 step up and does it assume your bioprocessing inventory levels to step up, you know, bioprocessing orders exiting Q4? Is that assuming like normalized trend? Thank you.

Yeah. No, I think that's right. You got that right. So Q1, we were kind of calling it 31% margin, stepped down to 26.5% in Q2. I think we're going to be more like 26% in Q3 and then a step up to 31% in Q4. If you remember, last quarter we sort of talked about there's a bunch of capacity adjustment, you know, if you will, measures, not only at Summit Biotech, but remember significantly at Cepheid as the volumes there ramp down, we are you know, being pretty proactive about taking down that capacity as we talked about. So, really, the step down in Q2, Q3 is largely due to, one, lower volumes, but, two, remember, we had those big capacity reduction costs. Those are primarily Q2, Q3, and then they sort of go away here in Q4. Combined with higher volume in Q4 is how we get to kind of the 31%. That really has no bearing or impact on, you know, on anything to do with the bioproduction inventory, et cetera. I mean, it's It just incorporates our guide of kind of bioproduction ex-COVID down 10%. So really all about the higher volume and the capacity reduction stuff that we're working on kind of heading out of the P&L in Q2 and Q3.

Thanks, guys.

Thank you.

We'll turn to a question from Scott Davis with Mellius Research. Please go ahead.

Good morning, fellas, Reiner and Matt and John. Guys, I was hoping you could put a little bit more teeth into this cost out and just a little bit more color, even if you, I mean, in a perfect world, I'd love to see what the actual, you know, what tailwinds might be for 24 or what the benefit is. But if you're not willing to go down that path, at least help us understand what's perhaps more rooftop versus labor versus I know when times are tough tougher like this, maybe your comp accruals are down, but maybe you guys can give us a little detail be helpful. Thanks.

Yeah, so Scott, the capacity reduction we talked last quarter that we had about 350Million of cost. It was going to come through in Q2 and Q3. You know, we said probably about 250 of that was going to be at Cepheid, and that is a rooftop effort, right? During the pandemic, we added some rooftops to kind of meet demand. Now we're kind of scaling that back. So that is a little bit of a rooftop dynamic as well as a people dynamic as we scale down to where we are. About $100 million of that $250 is over the same concept, but at BTG, given some of the lower prices. the lower demand there. I would characterize that less as rooftops and more sort of, you know, sort of other actions around kind of demand levels, if you will, at BTG. So that's sort of the 350 we talked about last quarter. You know, some of that 350 is going to be sort of, you know, one time, if you will, right? And probably something in the range of a couple hundred million of it will be a bit of a one-time cost that we are hitting and taking, you know, in this year that probably, you know, should come back to us here next year, as well as the savings that we have moving forward. We haven't really talked about the savings, Scott. That's going to be a little bit dependent on how how much we can get done here in Q4 or Q3 and Q2, Q3, and then what gets done in Q4 as well. And so it'll be a little bit dependent on how – how much we can get done as to what the savings, the annualized savings will be. So we sort of told people last quarter that we kind of update that as we get towards the guide for next year to kind of bake in some of the savings numbers. So I haven't really gotten that yet. I have a sense or an idea, but I do want to see if we can get everything done and kind of where we end up before we talk about how much is coming. But I do think we've talked last quarter about that sort of one-time benefit of call it a couple hundred million bucks.

All right. That's helpful, Matt. And guys, it wasn't clear to me why ENAS margins were down. Is it a kind of price cost? Just because I'm assuming you had maybe negative actual unit volumes with core up one and a half. But is it mixed price cost? Is there anything? I know there's probably some prep into the spin that may add some near-term costs as well, but some color there would help too, thanks.

Yeah. Yeah, I'd say yes to probably all of the above, Scott. I think you're right. You know, it was a little bit of a price cost. I think they are starting to see an environment where, you know, they had really good price actions as some of the supply chain issues and supplies and logistics issues, they were able to kind of cover with price. But I think you're right. We're starting to see a little bit of that come down, probably not terribly unusual. You know, some of it they were able to offset with other measures. But, You're right. I think when you kind of look at what happened there in the quarter, there was a little bit of it. Volumes were on the margin, you know, sort of down. But the price side did hold us up. But that price is coming down, you know, a little bit from where it was. But that was, you know, kind of what happened in the quarter. And like you said, also, you know, ramping up into the spin here probably had an impact as well.

Yeah, that makes sense. Thanks for the color and best of luck the rest of your guys. Thanks, Scott. Thanks, Scott.

Thank you. And we'll take our next question from Dan Brennan with TD Cohen. Please go ahead.

Good morning, Dan. Thanks. Good morning, Ryan. How are you doing? Thanks for the questions here. Maybe the first one just on, you know, the company is obviously a superior executor. DBS is at your core. So the string of bioprocess guide downs is, you know, pretty uncharacteristic, but it's also a situation that has plagued many peers. So I'm sure you're always doing Forensic review, so you go, you know, your future forecasting improves in terms of what you've learned. So can you just give us a sense of, you know, the latest bioprocess guide and, you know, what will provide confidence that the factors that surprise you here and led to the latest cuts won't surprise you again? And now the guide incorporates enough cushion so that investors can have confidence that the bottom of the bioprocess guidance has been reached.

Thanks, Dan. Appreciate that question. And as you can imagine, and as you suggested, we are constantly, continuously improving our forecasting processes, even when we get into these unusual circumstances. And, you know, I think one of the aspects here is that the demand situation, the production planning of our customers around the world in the short term is very dynamic. in the sense that production plans are being changed as our customers manage their own inventories as they deal with the demand patterns that they're exposed to. And what we have learned out of that is a more frequent touchpoint pattern that we have to have with our customers in order to ensure that we keep our finger on the pulse of what's going on there. And we think that in the discussions that we've had that taking the approach of aggressively helping our customers manage their inventories to their target levels in order to find what the true demand signal is, as well as thinking about the second half here with some degree of conservatism positions as well in what has been a very dynamic environment with a number of new factors influencing demand. So we think we're well positioned here for the remainder of the year in terms of the bioprocessing guide.

Maybe, Dan, just maybe just my thoughts on that topic. I think like Reiner said, I think given what we saw in Q2, I think we feel like we've got sort of, you know, China, in a pretty good place from a guide's perspective, given what we saw. Given the fact that we began that active management in earnest in kind of the back half of Q2 and are going to be pretty aggressive with that to get everything possible behind us that we can here in 2023, I think this guide puts us in a pretty good place for the rest of the year.

Great. And then maybe just thinking about, you know, the exit rates that are implied in the guidance. I know you're You already commented, Reiner, you know, 24 official guidance will come later. But it'd be really helpful just to get some frame of reference about key inputs. I mean, we're coming out somewhere at 930 this year on earnings and maybe, you know, a little below 10 bucks, maybe 980 for 24. I know consensus is still, you know, 1023 as of this morning. So is there any help about how we think about the trajectory in 24, either from an earnings basis and also even, you know, given the low single digit base guide for this year, how we think about that comp and what that could translate into a starting point for base organic growth in 2024.

So, Dan, I do think that it's early to talk about 2024 because we still have an entire half of the year in front of us here with a number of factors to work through. We talked about the stocking dynamic in China as well as our efforts to actively get the stocking situation behind us here in 2023. And we think that ultimately, you know, we're probably seeing in 2023 the bottom here and what is the bioprocessing stocking dynamic. And we also, and I talked about this in the prepared comments, you know, are positive about, you know, the long-term growth of this business and this industry. But it's just too early to be putting down a marker here in July on how we think about 2024 and do promise to come back here later in the year to update and then, of course, as always, provide our guide in January for 2024.

Yeah, we'll take our next question from Tunit Sauta, Learing Partners.

Please go ahead.

Good morning, Puneet. Yeah, good morning, Rainer and Matt. Thanks for taking the question. So first one, you know, on China, you know, beyond the comments you made and the 50% expectation down for the rest of the year, orders being down. I'm wondering if there is anything fundamental in terms of the shift on the product portfolio. We heard one of your bioprocess peers talk about competition on the less technology-heavy products. I'm wondering if you're seeing any of that and any share shift there that is also happening in this market.

Puneet, our point of view on China is that the continued deterioration is far more about demand and funding than it is about local competition. The local competition has always been there, no question during the pandemic, local competition became more relevant as lead times extended. And where we do see that local competition, it tends to be more for local China for China therapeutics than for products that find global application. So for us, this is really a topic at the margin. And the real story here is that the funding environment, as well as the stocking situation in China requires further mediation here in the second half. And that's exactly what we're doing in order to get as much of this as possible behind us in 2023.

Okay, super helpful. And then one on capital deployment, if I may. How are you thinking about capital deployment now with the EAS spin and the backdrop of somewhat of a rather weak end market in the near term? I know historically you've pursued leading assets that are usually gross margin of creative. Wondering if any of that has changed and if you think services has gained more significance in your framework for capital deployment now? Thank you.

Sure. So, Puneet, for us, M&A requires, you know, continues to be the primary form of capital deployment. And we do that when we see the end market, the asset, and the model, the financial model align with our requirements. And that is relevant for any end market or adjacency that we might be thinking about, and we maintain a consistent perspective there. Now, having said that, you've likely noted that our balance sheet is in great shape and we are in a market that, you know, provides opportunity and we continue, as we always do, to work our M&A funnels to find those opportunities. where all three lights flip to green, if you will, market, company, as well as the business model.

Got it. Okay. Thank you, guys. Thank you.

We'll take our next question from Rachel Vattenstall with JP Morgan. Please go ahead.

Morning, Rachel.

Great.

Morning. Thank you for taking the questions. So first up, just kind of shifting gears over to the life sciences business, that was much better than expected this quarter. And notably, instrument strength was pretty strong with high single-digit growth at SIAX and 10% growth at Leica. So could you just walk us through really what drove that strength in instruments this quarter? And then some of your peers have called out a meaningful slowdown when it comes to CapEx spending and some of their customer segments for instrumentation. So are you seeing any of those same dynamics? And how are you thinking about instrument growth for the full year?

Thanks for the question, Rachel.

So as you suggested, our Q2 life sciences business finished as expected up mid single digits. And we've been talking about a normalization process for some time now. And that's also what we're expecting going forward. And I'll come back to that in a minute. But if we look at the strength here of mid single digits geographically, The U.S. was okay. I would exclude large pharma there and sort of small biotech where that's relevant. The EU, Europe, was solid. And we also saw a good level of activity in China on the remainder of the stimulus for the subsidized loan program that China had in place. Now, from an end market perspective, we see the academic end market holding up well. We see the applied markets, if you think of food testing, environmental testing with some strength. But as I mentioned, we see biotech and pharma softer. If you think about this from a product category perspective, we think lower end, so less expensive, perhaps even operating cost versus capital expenditure type of equipment is impacted more severely than the higher end, which we still see holding up. And you saw that with Leica Microsystems and CyEx as well. So as we think about the second half here, we continue to be cautious for a couple of reasons. We mentioned that, you know, the China market, while strong, the The subsidies there have come sunset at the end of the first quarter, and we'll have to see how that continues. There's no news on that front going forward. And so we think really the second half ends up being flat for life science instrumentation, putting the full year at low single digits as The normalization process, if you will, from what has been over several years now, very elevated growth rate continues.

And Rachel, that's sort of on the back, too, if you think about the bookings here. I mean, our book to build in life sciences and in the instruments businesses was a little bit less than one in the quarter. So I think to Reiner's point, we look at the first half here in China for life sciences instruments. That was largely a backlog play from the stimulus. And as we sort of head into the second half, I think our assumption is that we're going to be flat in those businesses as China stimulus backlog kind of rolls off, does not have the impact that it had in the first half. And we just don't see a real step up here in stimulus in the second half.

Great, thank you for all the color there. Maybe just a follow-up on pricing. Can you walk us through how much was pricing an impact for instruments in the quarter and were you assuming for pricing on instruments in the back half of the year? And then as a follow-up, just pricing on bioprocessing. For bioprocessing, it sounds like you took 350 basis points of pricing in one queue. What was that pricing contribution in two queue? And then how are you thinking about pricing evolving within bioprocessing in the back half of this year and also just heading into 24. You know, last year, you guys took 400 basis points of price in bioprocessing. Obviously, the industry is pretty dynamic right now. So, any color there would be appreciated. Thank you.

Rachel, overall, our pricing for the quarter, so overall banner was up 350 basis points with all four segments remaining above the historical average. And specifically, you were talking about life science instruments. There we saw in the quarter 450 basis points of price. Now, as we look forward for the remainder of 2023, we do see that and expect that to moderate somewhat, but we do expect to be above our historical averages here for the remainder of the year. And as it relates to 2024, I think we'll come back to you on that as we get closer here to the end of the year.

Okay, we'll take our final question from Luke Sergott with Barclays. Please go ahead.

Good morning, Luke. Great, thanks. Warren, thanks for squeezing me in here. This is just kind of to follow up on Danny Brennan. I know you guys aren't going to give 24 given how everything is dynamic, but I think that, you know, the destocking is what it is, right? That's rolling off. That shouldn't be 24, but that sets up an easy comp. And so everybody's just trying to figure out right now what the industry demand is to support the type of overall industry growth. So, you know, typically the market grows, you know, the bioprocessing markets like high doubles to mid-teens, and that's in a normalized market. And so how quickly do you think we can get back to that level? And then on top of that, you have the comps, which would take you over that. Or do you think that we're going to be in a period of subdued contraction from a demand and capacity perspective, given COVID rolling off? You have China, the headwinds there. There's several other things, you know, the lack of biotech funding. So give us a sense what that normalized market looks like for you guys right now.

Luke, I just keep coming back to it's July. We're in a pretty dynamic market where we are within the industry. And like you said, there's a number of dynamics that still need to be worked through. You mentioned some of them, destocking China, the fact that we're sort of actively managing through this inventory situation. I know why people are trying to get to a 24 number, but I just think it's too early. We just need to get through the second half. We'll get a better sense of how those dynamics play out, which will give us a lot better uh you know sense as we get later in the year and into uh into into when we normally guide of what that looks like i just think that there's so many parts right now that you know unfortunately i think we just do we we really do need to get through the second half here yeah i understand um and then i guess like can you can you quantify how much d stocking was in the in the in the quarter for you guys and and kind of year to date i mean i i could probably come up with some numbers, it would be imprecise. I think the reality is that it's going to be very customer dependent. It's going to be manufacturing site dependent. It's going to be, you know, drug dependent. So, I mean, we don't really spend a lot of time trying to figure out how much was destocking as much as spending time with the customers in a pretty proactive way these days to understand what's on hand, what's the real need that you've got site by site by site. so that we can help them manage down to an inventory level they're comfortable with. Some are comfortable with getting down to where they were pre-pandemic. Some are trying to get below that, and some are trying to be above that, actually. So it's not one number that we manage to. We're really doing it on a kind of individual basis. I don't know that I've got a great answer for a number, but we are actively managing it in probably a way that was more active than we have been.

Gotcha.

All right.

Fair enough. Thank you.

Thank you, and I will now turn the call back over to Mr. John Bedford for closing remarks.

Thanks, everyone, for joining us today. We'll be around the rest of the day and week for follow-up questions. Thanks.

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