PerkinElmer, Inc.

Good morning. My name is Abby and I'll be your conference operator today. At this time, I would like to welcome everyone to the Perkin Elmer second quarter 2022 earnings conference call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After our 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 key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again. Thank you, and I will now turn the conference over to Steve Willoughby, Vice President of Investor Relations. Mr. Willoughby, you may begin your conference.

Thank you, Abby, and good morning, everyone, and welcome to Perkin Elmer's second quarter 2022 earnings conference call. On the call with me today are Prahlad Singh, our President and Chief Executive Officer, and Jamie Mock, our Senior Vice President and Chief Financial Officer. If you have not received a copy of our earnings press release or the two separate slide presentations we published this morning, you may find copies of them on the investor section of our website. Please note that this call is being webcast and will be archived on our website. Before we begin, I'd like to remind everyone of the safe harbor statements that we have outlined in our press releases issued earlier this morning and also those in our SEC filings. Statements or comments made on this call may be forward-looking statements which may include but are not necessarily limited to financial projections or other statements of the company's plans, objectives, expectations, or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors which are discussed in detail in our SEC filings. Any forward-looking statements made today represent our views as of today. We disclaim any obligation to update these forward-looking statements in the future, even if our estimates change. So you should not rely on any of today's forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non-GAAP measures during this call that are not reconciled to GAAP, we will provide reconciliations promptly. With that, I'd now like to turn it over to our President and Chief Executive Officer, Prahlad Singh. Prahlad?

Thanks, Steve, and good morning, everyone. Clearly, we have a lot to cover today, and I thank you for taking the time to adjust your schedules and join us to discuss our exciting news. Today marks one of the most significant developments in the 80 plus year history of Perkin Elmer. As you know, we have been executing a significant portfolio transformation over the last few years. Today, we've announced a pivotal agreement that accelerates this work and establishes us as a leading pure play, high growth, high margin life sciences and diagnostics company with scale. In particular, we have reached a definitive agreement whereby we intend to divest our analytical, food, and enterprise service businesses to new mountain capital. We will become a company that has greater focus, less complexity, an extremely high recurring revenue mix, improved profitability, and faster growth. At the same time, with New Mountain Capital, the analytical and enterprise solutions business will receive increased focus and dedicated investment, which should accelerate its ability to reach its full potential. In addition to creating significant shareholder value, we believe this transaction will lead to superior service and outcomes for customers and increased opportunity for employees. More on this exciting transformation in a minute. As Jamie will touch on in more detail in a moment, we also announced earnings this morning. We had an outstanding quarter in Q2, which meaningfully exceeded our guidance on both the top and bottom line, despite various continuing macro pressures. This excellent operating and financial performance is a testament to our employees' resilience and the portfolio shift that we have been pursuing over the past few years. I'm also pleased to share with you that we are raising our full-year revenue, organic growth, and EPS guidance by a level above and beyond our outperformance here in the second quarter. While various pressures will likely always exist, the increase to our guidance highlights our confidence in our business and our ability to execute in the face of unanticipated challenges. Now, looking at slide two of the transaction-related slide deck, with this agreement, we intend to divest our analytical food and enterprise services businesses, including one source to New Mountain Capital for a total consideration of $2.45 billion. This includes $2.3 billion in cash upon closing and $150 million of future contingent consideration. We expect to receive approximately $1.9 billion of net after-tax proceeds when the deal closes in Q1 of 2023. This transaction will result in the remaining life sciences and diagnostics business having a unique financial profile that is high growth, high margin, is less cyclical, all while retaining significant scale. It also further increases our flexibility and allows us to solely focus on these attractive end markets. The new business that will be owned by New Mountain Capital will consist of almost 6,000 current employees and is expected to generate approximately 1.3 billion in revenue this year. I'm confident that a focused vision and growth plan will enable this business to flourish in the years to come by building upon its existing competitive advantages and reestablishing leadership positions in some. As part of this transaction, we intend to transfer the PerkinElmer brand name logo, and other marketing elements to the new owner, which we expect will be an important asset given the long history and strong reputation in these markets in particular. Prior to closing, which we expect to occur in the first quarter of 2023, we expect to introduce a new brand name and stock ticker for the life sciences and diagnostics business. Until closing, both businesses will continue to operate as they currently do under the Perkin-Elmer name, and the existing enterprise will continue to trade under the PKI trigger. Now moving to the life sciences and diagnostics business on slide three, which our existing senior management team and myself will continue to lead. I could not be more excited not only for how we have gotten here, but also for the significant potential of what we expect to achieve. Upon the closing of this transaction, we will become a leading-edge, science-first company fixated on driving new innovations for our customers. From a best-in-class preclinical discovery franchise with significant breadth and expertise, crossing over to our leading diagnostic franchises that are developing next generation innovations to help diagnose the world's still unmet medical needs. As you see on slide three, it has been quite the evolution of our portfolio over just the last four years. Through intentional internal investments and strategic value creating acquisitions including our BioLegend acquisition last year. We took important steps to shift the profile of the company over just the last three years. The company has gone from generating only 60% of its revenue from our target markets to upon the closing of the sale of our applied food and enterprise services businesses, having a portfolio that is singularly focused on these highly attractive, less cyclical end markets with outstanding margins and a highly recurring revenue mix. We expect an approximately 500 basis point uplift in gross margins once this transaction is complete, putting us over the 60 percent range going forward. This transformation redefines the financial profile of the company and results in even greater opportunities for investment that will meaningfully improve how we serve our customers and bring new innovations to the market. We expect the focus we achieve as a pure play will allow for even greater strategic operational decision making and a unified commercial approach to deliver for our customers even better than we already are doing. Additionally, we will be able to align our internal and external investment priorities more closely to further capitalize on the strong market growth potential that we expect in the years to come. We couldn't be more excited about the potential of this new, more efficient structure and the impact it will have on our ability to innovate and execute to an even stronger degree than we already are doing. So now moving to slide four. As you see here, the new life sciences and diagnostics company will have its revenue fairly evenly split between the two segments, with each having significant addressable markets. It will also be balanced and diverse across geographies, with approximately 45 percent of non-COVID revenues coming in the Americas, 25% coming from greater Europe, and approximately 30% coming from Asia, of which approximately 18% is in China. As we've been increasingly highlighting to you over the past two years, our life sciences franchise is acutely focused on preclinical research and discovery solutions, which help our customers develop new scientific breakthroughs. This business has grown significantly over the last several years, both through low double-digit organic growth on average over the last three years and via meaningful inorganic additions. Today, we are able to offer both our small molecule and increasingly our large molecule-focused customers more complete preclinical discovery workflows. which we are rapidly building upon as we continue to bring new innovations to the market. Our diagnostics franchise has also undergone a significant transformation over the last few years and has now nearly tripled in size as compared to 2015 on a non-COVID basis. Diagnostics is focused on delivering highly sensitive, easy-to-use assays that target specific disease states where we have a strong competitive position in markets with favorable underlying demand trends. A diagnostics business now has the size and capabilities to act as a platform to propel future additions we may add over time, allowing them to perform at an even higher level than what they are able to do on their own. Two recent examples of this are our entry into the latent tuberculosis market and are beginning to offer a broad menu of chemiluminescence assays and related analyzers put simply a more focused new company is built to help close the chasm between research and the clinic all the way through to diagnosis and treatment now moving to slide five Let me provide a few additional specifics about what a life science business is, what we are focused on today, and at a high level, where we see it going in the future. Today, life sciences is a greater than $1.3 billion franchise, growing in the low double digits organically. Approximately 80% of this business is recurring in nature, with the remainder being instrumentation. I'd note the $0.4 billion of instrumentation revenue shown on the slide does include related service revenue. This cohesive business segment is focused on rapidly introducing new innovations that are intended to help our customers expedite their own preclinical development and scientific discovery. Our leadership positions in reagents, consumables, instruments, and software provide complete workflow solutions which enables our customers to make informed decisions more quickly by replicating a clinical experience in a preclinical setting. This ultimately helps lower their R&D costs by shortening development times and driving higher success rates downstream. We do this with market-leading positions across our entire life sciences business, such as preclinical imaging and detection, cellular analysis, biomarker kits, single-cell and flow cytometry reagents, and cloud-based lab informatics. We bring this broad and rapidly expanding consumable portfolio together with our market-leading instrumentation to help drive discovery across the spectrum of science with a strong focus in the areas of cell and gene therapy and single cell analysis in particular. This business is at the forefront of new scientific discoveries that can have a profound impact on the medicines and therapies that are ultimately brought to market, which can help treat and save lives around the world. Moving to slide six, our diagnostics portfolio is comprised of leading franchises in specific markets that we believe have outsized growth potential, where we can have strong and durable competitive positions and drive an expected overall high single-digit growth rate going forward. As mentioned earlier, this business has expanded significantly over the past few years. going from being singularly focused on reproductive health to one that now spans a number of important clinical diagnostic categories with number one or two market positions in areas such as autoimmune diseases, latent tuberculosis, allergy, and a variety of infectious diseases. We also now have a much stronger position in next generation sequencing sample prep instruments and related consumables in our applied genomics business. Our applied genomics franchise has seen its installed base of equipment increase materially over the last two years during the period. With our new streamlined structure and increased focus within the company, combined with our stronger market positioning over the last few years, Applied Genomics is well positioned to bridge our life sciences and clinical diagnostics franchises to help drive new innovation and growth across the company, including the support of select areas in the clinical development of therapeutics. As you can see, our immunodiagnostics franchise represents the largest piece of our overall diagnostics business, with an estimated $1.1 billion in revenue this year, with our reproductive health businesses representing roughly half a billion in annual revenue, and our applied genomics business expected to be around 400 million in revenue this year, which is up significantly from before the pandemic. And now on slide seven, our transformed company will have tremendous benefits for all our stakeholders. For our customers, It will mean that we can now better and more quickly respond to their unmet needs by using our scale to drive scientific collaboration across our organization, leading to novel solutions and offerings. We will have the flexibility to respond to our customers in the most efficient manner possible, working side by side with them to develop new scientific breakthroughs in drug discovery, translational medicine, and disease detection. For the employees, the transformation will result in increased managerial focus that is properly aligned to drive growth and achieve our respective goals. We will also be able to deploy our internal and external investments in a more focused way. By doing so, the even stronger financial profile of the new life sciences and diagnostics business will lead to new opportunities for internal collaboration, new growth accelerators, and a greater ability to develop our people. I think this combination sets up the future for our employees extremely well and will further enhance our ability to attract and retain excellent talent. Now moving to slide eight. The company we create as a result of this transaction is well positioned to deliver outstanding, sustainable value creation for shareholders. It will have a meaningfully improved financial profile that is just extraordinary. In addition to higher top line growth and a highly recurring revenue mix, we will have gross margins that are expected to be up approximately 500 basis points from previous levels, leading to best-in-class operating margins with the ability to expand operating margins in the future at an even faster rate than we have been projecting historically. We will also be a standout company as a result of our scale. to have as attractive of a financial profile as we will have with more than $3 billion of annual revenue makes for a combination that is extremely rare, having both significant size and high performance. We expect to be able to grow EPS in the low to mid teens and have additional upside from our track record of successful capital deployment. This transformation into a pure-play life sciences and diagnostics company takes us into a whole new spectrum from a financial perspective. Additionally, with the 1.9 billion of net proceeds we will receive and our recent aggressive deleveraging, it makes our already well-managed balance sheet that much more robust. providing us the ability to continue to rapidly invest in our areas of focus, and positions us well to begin appropriately deploying capital meaningfully sooner than we had previously anticipated. Turning to slide nine, let's talk about the valuation of the remaining life sciences and diagnostics portfolio. Following the transaction, our company will have a compelling revenue growth rate in the double digits, largely in line with our new higher value peers. We'll have stronger margins and differentiated scale with total revenues that well exceed the average of our peers. We currently trade at a one-turn discount to the core tools peer group, despite a similar financial profile. Post-close, we will have a best-in-class financial profile that deserves the higher multiple to reflect it. Moving to slide 10. Overall, I believe this transformation will have tremendous benefits for our new standalone businesses, our shareholders, our people, and our customers. Upon closing, we will become a company focused on serving extremely attractive markets with a first-class financial outlook for our customers. The output of today's announcement is the culmination of all the effort, determination, and excellence that all our employees have shown over the past several years, and I could not be more excited for everyone involved. Finally, I'm pleased to welcome Dr. Michelle McMurray-Heath to our Board of Directors. A medical doctor and molecular immunologist by training, Michelle's experience and expertise across a broad spectrum of public and private roles, including currently leading BIO, the world's largest biotech association, will bring a very unique perspective to our company, which will be invaluable as we enter this next stage in our corporate journey. With that, I will now turn the call over to Jamie to walk you through our current financial performance in more detail and provide specifics as it relates to our outlook and updated guidance. Jamie?

Thanks, Bilad, and good morning, everyone. While I won't go into detail on today's announcement as Prahlad covered it well, I do want to echo his sentiment that I think that this is a pivotal day in our company's history, and I'm excited to see both businesses blossom in the years to come. And thank you to our employees who have worked tirelessly to make the company what it is today and to make this transformation happen. As Prahlad mentioned, we had a fantastic quarter in Q2 despite continued adversities that, In some cases, we're even a bit larger than we had anticipated a few months ago. I've said it before, but I think this really shows the power of how far we've come with our internal and external evolution over the past several years and how we can overcome unexpected challenges to a much better degree than the company may have in the past. During the second quarter, adjusted revenue of $1.23 billion was flat compared to last year. This included a 4% headwind from foreign exchange, and a 10% contribution from recent acquisitions, which was in line with our guidance despite foreign exchange pressures. Organic revenue declined 5% year over year, driven by a drop in total COVID revenues. On a non-COVID basis, our revenue increased 8% organically, which was above the 4% to 6% growth we were looking for coming into the quarter, and was despite lockdown pressures persisting longer than we had previously expected. Our COVID revenues came in at $222 million, which was also above our $210 million guidance. The revenue upside in the quarter, along with solid adjusted operating margins of 32.7%, helped drive an adjusted earnings per share to $2.32, which was solidly ahead of our expectations. As we previously discussed, Our capital deployment this year is focused on deleveraging, and we paid down another $350 million on our term loan in the quarter, leaving only $50 million remaining. This is the only variable rate debt we have and will complete the repayment in Q3. We ended the quarter with a leverage ratio of 2.3 times net debt to EBITDA, which is flat with where we stood a quarter ago. We also generated $74 million of free cash flow in the quarter. I'd now like to provide some additional color on the performance of the business during the quarter before wrapping up with some updated thoughts on the environment we are currently operating in and our outlook for the remainder of the year. Starting with our discovery and analytical solution segment, which generated $661 million of revenue in the quarter, this was up 29% year over year and represented 54% of our total revenue. Organically, the segment grew 13%, with sales to pharma biotech customers remaining robust and growing in the mid-teens organically. The strong growth we saw in pharma was driven by continued robust demand in our preclinical discovery and research business and strength in our informatics franchise. Sales to applied market customers grew in the low double digits organically, while revenue declined in the mid-single digits organically to academic and government customers, which represent approximately 6% to 7% of our total revenue. Turning to diagnostics, the segment generated $569 million of revenue in the quarter, which was down 20% year over year, and represented 46% of our total revenue. Organically, the segment declined 19%, while on a non-COVID basis, our diagnostics business was flat organically, Excluding lockdown-related pressures in China, our diagnostics business grew 7% in the quarter. As previously mentioned, COVID-related revenues totaled $222 million, down from $365 million a year ago. As we highlighted on our call, our last call, our COVID revenues this quarter included approximately $100 million of non-cash deferred revenue related to our California testing lab contract coming to an end in May. Our applied genomics business, which consists of various instruments, kits, and other consumables for omics sample prep, continued to show strong performance and grew mid-single digits organically on a non-COVID basis in the quarter. I'd note that this was against an extremely different year-ago comp as well, but as we highlighted the past few quarters, we've expected growth rates in this business to begin to moderate as we go throughout the year. In our immunodiagnostics franchise, We did see headwinds from lockdowns in China, which persisted longer and to a greater degree than we had anticipated. While the most severe lockdowns have subsided, regular economic activity does not yet appear to have returned to normal. So while we've seen more acute needs being addressed, such as in our reproductive health business, some of our immunodiagnostic solutions have continued to be pressured. We now expect this to continue to be the case until the normal day-to-day routines reemerge. On a non-COVID basis, our immunodiagnostics business declined in the mid-single digits overall organically. Outside of China, this business continued to perform extremely well and grew in the low teens organically, excluding COVID. Our reproductive health franchise grew in the low single digits on a non-COVID basis in the quarter, as new products and menu expansion helped offset flattish birth rate trends in the U.S. and continued declines in other regions, including China. We are seeing strong uptake for our new preeclampsia offerings, and our non-NGS NIPT offering, vanadis, continued to show very good growth, albeit off a relatively small base bill. From a geographic perspective, our 8% non-COVID organic growth in the quarter was led by the Americas, which grew in the low double digits. While Europe was up in the high single digits, Asia Pacific was up 4%, while China declined in the high single digits. Now moving on to our current view of the macro environment and its impact on the remainder of the year. As you saw with the 8% non-COVID organic growth we posted here in 2Q, demand continues to look very healthy, and we are now raising our full-year non-COVID organic growth outlook to a new range of 8% to 9%, up from our previous outlook of 6% to 8%. As it pertains to COVID, as you might recall, approximately half of our COVID-related revenue last year came from the labs we operated on behalf of government agencies. Both of those main labs have now fully closed, with the California lab closing in May as the contract ended. So going forward, our COVID revenues are expected to be primarily derived from our various related products, such as RNA-DNA extraction instruments and kits, automated liquid handling, and related consumables and service on these instruments, And of course, our portfolio of diagnostic tests for the disease. As we look ahead, we continue to expect PCR-related testing demand to continue to drop off. And after generating $532 million of COVID revenue in the first half, we are now looking for approximately $610 million of total COVID revenue for the year. As a reminder, this includes the non-cash deferred revenue related to the California contract that was fully recognized in Q2. We continue to expect a 7% contribution from recent M&A and now see foreign exchange as being a minus 3% headwind to total revenue this year. This results in our total revenue for the year now expected to be a range of 4.60 to $4.64 billion. In terms of adjusted earnings per share for the year, we are increasing our guidance to a new range of $7.80 to $7.90. which includes our outperformance here in Q2 and a more favorable outlook for the remainder of the year than we had previously assumed. For the third quarter, we are projecting total revenue to be in a range of $1.02 to $1.03 billion, which consists of non-COVID organic growth of 6% to 8%, an M&A contribution of 8%, a minus 4% headwind from foreign exchange, and approximately $50 million of total COVID revenues. In terms of adjusted earnings per share guidance for the quarter, we are forecasting it to be in the range of $1.40 to $1.45. All of this guidance is detailed on the second to the last page of today's earnings presentation that is on our investor website. In closing, as you can see with our strong quarterly results and increased outlook for the remainder of the year, our total company is performing extremely well and exceeded expectations despite incremental challenges. This performance and resiliency will only be further bolstered as we become a pure play life sciences and diagnostics company over the coming year. As Perlad mentioned, I think this new company will be uniquely positioned to respond to customer needs, provide even more opportunities for all our employees, and result in a highly desirable financial profile. With that, operator, at this time, we would like to open the call for questions.

Thank you. I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad, and we'll pause for just a moment to compile the Q&A roster. And we will take our first question from Dan Aris with Stifel. Your line is open.

Good morning, guys. Congratulations on the transaction here. Jamie or Prahlad, appreciate the profile that you gave for 24 through 26. Maybe on the diagnostic side, are you able to give us some guideposts when it just comes to the underlying growth assumptions that you have for your immune reproductive applied genomics? And then on the overall 10% organic goal, the slides have you at 10 plus in fiscal 23 for the new portfolio. So I'm just curious whether we should think about 10% being the sort of the base jumping off point for next year. then acceleration from there into that 24 through 26 period you sort of layer in the investment trying to just sort of understand the trajectory that you see as you enter this new phase of yours here sure dan i mean you know there are two ways to look at it one as you've seen euroimmune they have historically grown you know in the low double digits

And they've pretty much beaten the deal model since we've acquired that. We do not see that stopping in the future. Obviously, because of the COVID situation in China, it has had some issues in the current quarter. But overall, the growth trajectory, if you take China out, that continues to be there. So similarly, you know, just as diagnostics has grown, it will continue to grow in the high single digits. And overall, for the new company, you should expect this to be growing double digits in the future.

Okay. Appreciate that, Keller.

And then maybe just on the deploying of the capital that you expect with the proceeds, I mean, you guys have been pretty aggressive over the last couple of years just in terms of transforming this portfolio. How quickly should we think about you being in the market for interesting assets that come into focus just given the new prioritization here? Does the business need time to settle, so to speak, or do you think the 23 is a year where you could kind of keep your foot on the gas when it just comes to transforming the way that the business looks?

I think the way I would answer that question, Dan, is just go back and look at our past two, three years M&A track record. We've done more than 10 deals over the last 24 months, and that should be a proof point of what our strategy is around M&A, and it will continue. Now, again, just to remind you, and as you very well know, the kinds of deals that we do are very focused and very strategic, which tend to be founder-owner companies. So I think that's where our continued focus will be. And in our base plan, you should expect us to continue to be acquisitive. But more importantly, Dan, I think what this does, it gives us an opportunity to deploy capital and makes our balance sheet much more robust to do that.

Abby?

Excuse me, yes. We will move on to our next question from Derek DeBroom with Bank of America. Your line is open.

Hi, good morning. Morning, Derek. Hey, so a couple of points. So I guess what's the implied EBITDA margin in the Romain Co.?

EBITDA margin?

So yeah, we put out, you can see on, yeah, this slide, greater than 30%. And our EBITDA normally tracks about 2% to 3% higher than that, Derek. So the reason why we put out 30% is for your modeling purposes. So let's just back up for a second here. This is a complex carve out. It's not a standalone business. There's a lot of allocated costs. That's why we said the business that is being divested is in the low to mid teens from an EBITDA perspective. And we wanted to at least give people some kind of modeling purpose, you know, range here for 2023, which is why we said 30% plus. I think long-term this can be in the mid thirties for sure. We got to figure out the stranded costs that are in there, but in terms of whatever, you know, your modeling rate is from a nonprofit rate perspective, I would add probably 3% to that for EBITDA.

Great. That's what I was looking for. And just on the current quarter, what was the overall headwind on China that you saw in 2Q? And sort of like, what's the embedded headwind since the lockdowns were lasting longer for 23 guys, 22 guys?

Yeah, let me say it a couple ways here. So China in total, I said, was down high single digits. If you exclude the impact on the immunodiagnostics in China, China was actually up low teens or 13%. At an overall company level, that had a three-point organic impact to us. So ex-China IDX, we would have been up 11%, which I think speaks to the strength of the company. As I mentioned in my prepared remarks, diagnostics would have been 7 percent, excluding China. You know, this is I think it is different than what we talked about last time on the call. I think while the economy is starting to emerge a little day in and day out, life is not the same. And that is having and will continue to have an impact in the second half, as we alluded to and as you just asked. And so therefore, we've been more conservative in the second half. So overall, I think diagnostics, which was 0% for the quarter organically on a non-COVID basis, is probably in the low single digits in the second half. So we've expected a tiny bit of improvement on China, but not very much. I think this will persist all the way through the second half is our running assumption. But from a big picture perspective, even with that said, we are raising the second half organic growth in our implied guidance by probably 1% to 2% to get to an overall 8% to 9% for the year. So I think it speaks to the portfolio. I think it speaks to the strength of what we've done. I think it speaks to the strength of the teams and how they're executing. So even with China being down in immunodiagnostics, which we think is temporary, the company's raising the overall guidance both in the year and in the second half. And we're long-term very confident that our China immunodiagnostics business is a terrific asset. And when COVID subsides and things reemerge, it'll be just fine.

And are you embedding anything into the guide for potential recessionary headwinds and purchasing delays? Have you seen anything to suggest that your customers have had some hesitation in buying, particularly on the DAS side of the business?

We haven't seen any of that, Derek. I think the demand continues to be very strong. Our backlog is as healthy as ever. On a quarter-over-quarter sequential basis, taking it back down to kind of what we think is a more normal run rate. So, you know, in the third quarter, we're obviously guiding 6% to 8% versus 8%. And so life sciences, which was mid-teens, we're taking down to low double digits just because that's what we think the long-term outlook for that business is. For applied markets, we said we were low double digits in the second quarter. We're going to take that to high single digits because I just don't think that we can continue to bank on low double digits. But we haven't seen anything to state the opposite. And so therefore, we haven't seen any recessionary pressures. We're not really embedding any recessionary pressures. I think sequentially, that's what we're guiding to is a little bit more conservatism versus our 2Q run rate. But hopefully that proves conservative at the end of the day.

And also, as we look into the future, you know, the new company allows us to, you know, avoid some of this macro uncertainty.

Yeah. Yeah. Thank you. Thanks, Derek.

And we will take our next question from Vijay Kumar with Evercore ISI. Your line is open.

Hey, guys. Thanks for taking my question, and congratulations on the transactions here. I had two Martin-related questions. Jamie, maybe the first one for you. The EPS speed in the quarter is very healthy. Gas margins came in well above. And I look at the guidance. Revenues maybe up 50 basis points at the midpoint. EPS up almost 8%. Your COVID revenues really didn't change a whole lot. Below the line seems fairly consistent. I'm wondering what the delta is. Did anything change on the accounting front here? That would explain the magnitude of the EPS raise.

No, I think if I understand your walk there, BJ, a lot of moving pieces here. So I think you covered most of them. Foreign exchange is a little worse, but it doesn't really hurt us too much at the end of the day because we're pretty well hedged in Europe operationally. Obviously, COVID was a little bit better. But I think the big thing that is different here, BJ, is we are much more confident in the profitability on the second half. And I think that was a question coming out of the last discussion that we had. We were probably conservative in what we put in from an inflation and freight and when we think pricing would kick in. But we're raising the profitability in both in the second half, and obviously with the 30-ish cent beat in the second quarter, that proved very healthy. Some of that was California, but being a little bit better than what we thought. But a lot of that was rate. The team is doing a fantastic job mitigating cost actions, both particularly on the freight side, but also on the inflation side. I think we've seen both stabilize and our productivity measures kick into place. And while we knew it was coming from a pricing standpoint, we finally started to incur some of that price increase that we saw in the second quarter, and we think that will continue to snowball here as we get into the second half. So I think it's really just that maybe what you're missing there is just an increase in the rate profitability in the second half as well, if I understood your question correctly.

And just to clarify that, Jamie, there was no – I guess the question I got was – How is the legacy divested assets being treated from an accounting perspective? Is this disc ops or is this being held for sale accounting? So that's what I think.

Yeah, nothing. No, nothing is going into disc ops as the deal was closed early this morning. So that doesn't impact any of the results that you're seeing, nor our guidance for the rest of the year, because we are still operating as a standalone company now. Come when we close the third quarter, we will have discontinued operations accounting and therefore reporting. But that said, we're trying to give you a picture of what the consolidated company would look like for the remainder of the year.

Understood. That's helpful. And, Prahlad, one for you. I think the prior operating margin target of 26%. I think the DEC had 30% operating margins. If I assume the base LSDX of 30% for fiscal 23%, Just one, is that 30% for 23 or 24? And then if I assume double-digit margins for the divested business, I'm getting to something like 25%. So is that prior 26% target still relevant or perhaps that's changed given some of the stranded costs here?

Let me answer the first part and maybe Jamie can take the second part. So when I, you know, the 30% plus operating margin that we are talking about is off the bat in 23%. So that's not a 24 number, Vijay, that's a 23 number. In fact, if you look also on the top line of this company, even including COVID, if you look at the top line, this business has already grown 8% over the last three years, and it continues to split operating margins in that range. So off the bat, we expect this to be a 10% growth and a 30% operating margin business at close.

Yeah, and on the 30% next year, it's a 2020, as Vlad mentioned, 2023 number. And Vijay, we wanted to get some modeling guide out there. And yes, it does have stranded costs. And as I mentioned in my earlier remarks, it's difficult to ascertain what that total amount is yet. We feel very comfortable with at least 30%. It's not really coming off the overall 26% that you're talking about, but it is a different size company and there will be stranded costs that we will have to work through both in 2023, probably a little bit less than 2024, and by 2025, I would assume we're back to normal. But, you know, absent that, the 26% is still fully intact here.

Thanks, guys. Thanks, Vijay.

And we will take our next question from Catherine Schulte with Baird. Your line is open.

Hey, guys. Thanks for the questions. I guess first, for the new life sciences segment, can you just talk through the end-market mix post-divestiture and then maybe give us an update on BioLegend performance in the quarter?

Yeah, so I'll talk about the end-market mix.

So our life sciences business is, in general, I think, Maybe 85% pharma biotech, 15% academic government, something like that. I'll check it, but that's roughly probably right. And then as you break down the full business, both end markets, we've always said we were 60-40 large molecule, small molecule. So that kind of gives you a little bit about the end market mix. Catherine? In terms of BioLegend, which is the second part of your question, they had a fantastic quarter. Overall, M&A contribution as a total company came in line exactly where we thought it would be at 10% overall contribution. BioLegend and the teams continue to integrate well. They're growing double digits, and everything seems to be going very well. I don't know what more I would say. Anything else you've got?

I think, again, the trends of Catherine for these businesses, You know, the bigger question really what we were looking at, you know, to Derek's earlier question, it is not a cyclical business, you know, from a research discovery and preclinical perspective. It allows us to, you know, largely avoid the macro uncertainty. And given our focus typically on large pharma and biotech, it insulates the business from those uncertainties.

Yep. Okay. Got it. Maybe for your kind of prior 2023 outlook, you talked about $7 plus of EPS. Where does that stand now in terms of NUCO?

Well, let me talk about it as overall framework first, and then we can talk about NUCO. So, in general, you know, we feel as positive about how the company is operating as we ever have. So, as you know, Catherine, we said we'd hit high single-digit organic growth next year. absent some large economic condition change, that we still feel excellent about that. We said 26%, which is what I talked about on Vijay's operating margin, that is, which is what I answered with Vijay. We still feel great about that. I'd say the only wild card is foreign exchange, and it has been severe. So maybe that has a minor impact on the overall year. But overall, I think the way the team is operating is terrific, and we wouldn't change any of that guidance overall. In terms of RemainCo, that's, you know, maybe I wanted to make sure I understand the question. So what we're really trying to put out some markers here that says, hey, look, RemainCo should be growing 10% plus. And this year, you know, let's say RemainCo is $3.3 billion we put on the chart, you know, take out $600 million of COVID revenue, grow that 10%, then add $100 million back for COVID durability. That should give you some modeling, you know, numbers here. Feel great that at a minimum, including a lot of stranded costs, we should be at least 30 operating profit and so we feel great about that financial profile and over the next two years as that stranded cost comes out we see no reason why this business shouldn't be in the mid-30s from an operating profit perspective it'll take a couple years to work through that but i think it has a terrific financial profile ahead of it all right great thank you thanks catherine

And we will take our next question from Josh Waldman with Cleveland Research. Your line is open.

Hey, guys. Thanks for taking my questions. First, just a clarifying question on the divestiture. Are you selling the entire analytical instrument business, including, for example, like LCMS that touches life science and DX?

Yes, we are. Yes, we are.

Now, we'll have a TSA-backed with Mountain Capital to be able to purchase those instruments and use in our life sciences and diagnostics business, but they will own the capabilities related to LCMS. Got it.

And then a follow-up on Dan's question, I guess. I mean, where do you think that investiture leaves gaps in the portfolio that you'll target within organic investments? Or I guess asked another way, I mean, where do you think the most opportunity from an M&A

uh exist within the new company no and josh that would be not dissimilar to what we've talked about you know what this gives us now is an opportunity to continue to build on the scale that we have on the life sciences and diagnostic side so you should you know expect us to you know continue to be in the fairway that we have played in over the last i would say 24 months look at opportunities in cell and gene therapy and continue to build our portfolio both in the life sciences and diagnostic side

Okay. And then lastly, on, I guess, existing deals that you've done, I mean, can you talk to the performance on recent deals? I know you reiterated the 7% M&A impact, but curious how other recent acquisitions that are now in the organic comp are performing versus expectations, and then maybe how those acquisitions are contributing to the organic outlook and margin outlook for 22 and 23.

Yeah, again, Josh, as Jamie pointed out earlier, we continue to see strong performance from all our inorganic acquisitions that have been done recently, including BioLegend, which is now, as you know, we talked about earlier, it's part of our total life sciences reagents growth story, which is in low double digits overall, and it's a piece of our broader portfolio. So overall, all our acquisitions are doing well, including BioLegend. And, you know, we had 10% M&A contribution, which was in line with guidance, despite the FX headwind that we saw in the quarter.

Yeah, I would just add, I think, on a pro forma basis, Josh, this entire year, the basket of acquisitions you're talking about would grow mid-teens, which is terrific and in line with what we're talking about here. So as you look to 2023, obviously that does help with the step up in the Remain Co. company here.

Yeah.

the life sciences and diagnostics company moving forward since all of these assets are in there. That's why they are a major contributor to this business being, to us having confidence that they can grow with over 10% here.

Got it. Helpful, guys. Appreciate it. Thanks, Josh.

And we will take our next question from Liza Garcia with UBS. Your line is open.

Thanks so much for squeezing me in, guys. Congratulations on the transaction. Not sure if I caught it, but just wondering if you guys could maybe touch on, I know it's kind of a little bit less for you guys, but pricing and kind of what you saw and your expectations kind of for the balance of the year for you guys.

Yeah, sure. Thanks, Liza. I couldn't be more proud of the team for what they've done on pricing. You know, a lot, I think we talked about this in the past, a lot of effort went in to really build this muscle in a much stronger way for our company. It took a little while to get through some of the backlog. We saw it in our backlog in the first quarter, although we didn't recognize a ton of price. We started to really see it come through here, particularly in the, I'd say, last month and a half of the second quarter, which is part of the EPS beat in the second quarter. We see it continued in our future backlog here. So that price impact and contribution to our company should continue to increase both in the third quarter and again in the fourth quarter. And I think more importantly, I think, you know, the lasting impact and, you know, our focus on price, I think, has gotten much stronger. And I think it'll bode well for the years to come.

Great. And if you could just touch a little bit on kind of what you're seeing in supply chain as well. I know, obviously, it kind of hasn't impacted you guys, but if you're seeing any changes there and kind of your expectations for the year on that, that would be great as well.

Yeah, I would say in general, things have stabilized, if not gotten a touch better. And when you combine that with the actions our teams are taking, that's what's really driven our confidence in the increased profitability versus our prior guide, both in the second quarter, obviously, but more importantly, we've taken up the second half from a profitability standpoint as well. So we continue to buy, you know, advanced purchases of inventory, and you can see a You know, freight in general, we're not having any shipping delays or anything, and we have had that in prior quarters. So I would say it's gotten better, and you combine that with the actions the teams are taking, and I think the outlook looks promising here.

Great. Thanks so much.

Thank you.

And we will take our next question from Jack Meehan with Nefron Research. Your line is open.

Thank you. Good morning. I wanted to ask on the transaction, just as you were thinking about the businesses that you were divesting, enterprise services specifically, you know, just given there's overlap in the customer base with biopharma services, I guess just the thought between divesting that versus holding on to it would be helpful.

Yeah, Jack. I mean, you know, it's a good question. From our perspective, when we look at where we are today, this is probably the best path for most value creation for both companies. You know, we see some overlap on the enterprise side, as you said, but there is not much overlap from product that goes from life sciences or a diagnostics business through one source or through that channel. You know, that is, as you know, is mostly service focused. But what it does now is it allows us to singularly put more focus around the market trends in life sciences and diagnostics. And, you know, and honestly, it gives a lot of simplicity and reduces the complexity both for our employees and investors and how they look at the company. Anything else?

I would just add that there is a lot of synergy between our enterprise services business named OneSource plus our core services business that is being sold in conjunction with our analytical technologies business. So it did make sense to pair those together.

Great. And then two clarifications for Jamie. Just first, what's your updated target for BioLegend in 2022? And then can you break down... the 222 million of COVID sales between the service lab and everything else, that would be helpful.

Yeah. BioLegend is doing very well. We're very pleased, but I don't think we're going to give single point estimates anymore. I think we want people focused on the fact that this is a $700 million life sciences reagent portfolio. Certainly BioLegend is half that. So You know, we're excited about the promise of that combined collective capabilities. So I think we're going to come off giving, you know, here's an exact dollar for biology. In terms of the second part of your question, Jack, in the 222 million, I think labs was maybe 150 to 160 million dollars of that. And the remaining everything else I mentioned in my prepared remarks in terms of everything else that we sell is probably 75 ish or 70, 70 million dollars.

Super. Thank you. Thank you.

And we'll take our final question from Paul Knight with KeyBank. Your line is open.

Hi, Prahlad. You had mentioned taking a conservative view on China rest of year. What are you seeing in terms of shutdowns? They seem to have been getting better. But if you could kind of give us an update on things and, you know, your outlook.

in that market. Thanks, Paul. I think the way to think of it, as Jamie mentioned earlier during the Q&A session, things are improving, but it's not really totally back to, I would say, 100% normal. So we've started seeing people, and this is people coming out, going to see their physicians, going to hospitals for testing. The newborn screening side has come back. I would say that's the piece that has come back. It's more around the autoimmune and allergy there are still some sporadic shutdowns that you see. And even where things have opened up, people are still hesitant to go to physicians or to hospitals for those testing. And I think that will gradually come back over the next several weeks or months.

Okay. And then the COVID, Jamie, you were guiding to what in 3Q?

$50 million.

Okay.

In the third quarter. Yep, and then we get to our kind of normal, we've always said $100 million of COVID durable revenue, so the implied 4Q guidance is about $25 million.

Okay, thanks. Thanks, Paul.

And ladies and gentlemen, this concludes our question and answer session today. At this time, I will turn the call back over to Mr. Steve Willoughby for any additional or closing remarks.

Thank you, Abby, and thank you, everyone, this morning on short notice. We appreciate your questions, and we look forward to speaking with you all again next quarter. Have a good day.

And ladies and gentlemen, this concludes today's conference call. We thank you for your participation and you may now disconnect.