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spk06: Ladies and gentlemen, thank you for standing by. I am Kyle, your PGI call operator. Welcome and thank you for joining QIAGEN's second quarter 2022 earnings conference call webcast. At this time, all participants are in a listen-only mode. Please be advised that this call is being recorded at QIAGEN's request and will be made available on their internet site. This preparing mark will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touchstone telephone. Please press the star key followed by zero for operator assistance. At this time, I would like to introduce your host, John Gilardi, Vice President, Head of Corporate Communications and Investor Relations at Cajun. Please go ahead, sir.
spk12: So, thank you very much, operator, and welcome to our call. The speakers today are Terry Bernard, our Chief Executive Officer, and Roland Sackers, our Chief Financial Officer. Also joining us is Phoebe Lowe from the Investor Relations team. Please note that this call is being webcast live and will be archived on the investor section of our website at www.kaizen.com. Today we will first have some remarks from Terry and Roland and then move into the Q&A session. A presentation with details on our performance is available on the IR section of our website along with the quarterly release. We will not be showing the slides during the call. Before we begin, let me cover as usual our safe harbor statement. This conference call discussion and responses to your question reflects the views of management as of today, July 28, 2022. We will be making statements and providing responses to your questions that state our intentions, beliefs, expectations, or predictions of the future. These constitute forward-looking statements for the purpose of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those projected. QIGEN disclaims any intention or obligation to revise any forward-looking statements. For more information, please refer to our filings with the U.S. Securities and Exchange Commission, which are also available on our website. We will also be referring to certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP. All references to EPS refer to diluted EPS. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release for the second quarter. as well as in the presentation for this call that are both available on our website. I would like to now turn over the call to Terry.
spk07: Terry, please unmute your line.
spk01: Thank you, John, and it would be even better, obviously, if I unmute the line. I'm sorry for that. Thank you, everyone, for joining, and welcome to our conference call today. We are very pleased to report that our teams worldwide delivered solid results in the second quarter of 2022. We have again exceeded our outlook, driven by strong double-digit sales growth at constant exchange rates from our non-COVID portfolio. In line with our guidance, our five pillars of growth are making solid progress towards our 2022 goals. While the macro landscape continues to change and to present new challenges, we still have confidence in the robustness of our company and our strategy. Our teams have been very proactive in showing up our business to withstand those challenges. At the onset of COVID, we began strengthening our supply and manufacturing infrastructure against various constraints. This has definitely helped us to prepare the company for the current environment of supply chain tightening and rising costs. We also began implementing alternative energy systems late last year at our German site. This will give us flexibility from now on with energy sourcing away from natural gas. This foresight has served us very well as you can see in our continued delivery of strong results. We have been able to remain commercially and operationally agile during those changing times. And now allow me to get to our key messages for today. First, as mentioned, we exceeded the outlook set for net sales growth and adjusted EPS for Q2 2022. Net sales for the second quarter of 2022 grew to $544 million at CER, a decline of 4% over the same period in 2021. This result was driven by 10% CER growth in sales of our non-COVID products. At the same time, Sales for COVID-19 related solutions decreased by 39% CER compared to 2021, same quarter. Adjusted diluted earnings per share in the second quarter were 53 cents CER above the outlook for at least 46 cents. Second key message. Our teams continue to execute successfully on our goals to advance our portfolios. especially in our five pillars of growth. We have launched instrument upgrades, such as the Kyastat diagnostic RISE for syndromic testing in high-volume labs and continue to broaden the menus. We have added the PneumODIX HSV quant assay. Our installed bases, a key asset for future consumables, also continue to grow. As an example, KayaQuity digital PCR system has now reached over 1,000 cumulative placements and KayaSymphony has passed over 3,000 placements. All of our five pillars of growth are perfectly on track to achieve the sales target we have set for the full year of 2022. And last message for today, we have increased our outlook for the full year 2022 as a result of our performance in the first half. We now expect sales of at least $2.2 billion for the full year 2022, with a reaffirmation of the goal for double-digit CER growth coming from our non-COVID portfolio. And as for adjusted EPS, we are now expecting at least $2.30 CER. With this outlook, we are taking into account the challenging macro-environment. and maintaining a very conservative view on COVID-19 testing demand for the year. As always, we are ready to support COVID testing in case of any outbreaks in the future, but we continue to be focused on executing on our core business to strengthen our foundation for sustainable growth. Our strategy of focus and balance continues to be a cornerstone to how we operate, particularly on our five pillars of growth. We will provide more details on the outlook later in this call. And I would now like to hand over to Roland for the financial update. Roland?
spk05: Thank you, Thierry. Hello, everyone, and thank you for joining this call to review our results for the second quarter and the upgraded outlook for 2022. Let me begin by walking you through our sales and the results in more detail. For the second quarter, sales were $544 million at constant exchange rates. This was well ahead of the outlook we set for at least 510 billion US dollars. The key driver was again better than expected performance in our non-COVID product groups, which grew 10% CER and represented over 80% of total sales. Also remember that we had called out in the past a genomics technology sale of 20 million US dollars in the second quarter of 21. Excluding this factor, non-COVID sales were up 15% CER. Sales for products used in COVID testing declined 39% CER in the second quarter of 22. And while this was better than our expectations, testing volumes dropped significantly across many regions. Actual rates sales in the second quarter declined 9% over the same period in 21. This was due to an above 5% of currency headwinds from the U.S. dollar against the euro and other currencies. For the second quarter, consumers and related revenues declined 4% CER over the same period in 2021. Although incident sales were down 5% CER, this was again a very tough comparison due to COVID testing demand. We have still seen good placement trends in key systems. In terms of sales among the four product groups that start with sample technologies, this is about one-third of total sales. As we said on the last quarterly call, we expect more favorable trends in the non-COVID sales during the course of 2022. That was the case in the second quarter, with non-COVID sales up 8% CR, representing nearly 80% of total sample technology sales. This reflects a strong performance for the first half of 2022 and shows solid market leadership. However, this product group saw an overall sales decline of 7% CER due to the significant headwinds created by reduced COVID testing demands compared to the second quarter of 2021. Sales in diagnostic solutions, which represents about 30% of total, rose 7% at constant exchange rates for the second quarter. The key driver was the quantiferon test for latent tuberculosis. Sales in the second quarter were up 90% on double-digit gains in the Americas and the EMEA region. Given that sales for the first half of the year were $165 million at constant exchange rates, we are clearly on track to exceed our full-year goal for more than $310 million to CEA. The sales trends for the clinical PCR testing systems KIA-STAT-DX and NOLMO-DX remained well on track with our full year expectations, and we were particularly pleased with double-digit CAR growth in consumables for KIA-STAT-DX. In the PCR Nucleic Acid Amplification Product Group, which represents about 20% of total sales, these overall results were largely unchanged from the second quarter of 2021. Our teams deliver double-digit CR growth in the non-COVID testing product groups. This includes solid sales gains with high-activity digital PCR driven by strong instrument placement and an increase in consumable pulse groups. Additionally, the acquisition of Blurt in May 22 provided about 1 million first-time sales for the second quarter. The Genomics NGS product group which represents about 10% of total sales, so a 23% decline in sales at constant exchange rates. As we noted earlier, these results face a difficult comparison due to the genomic technology sales in the 21 quarter. When you exclude this factor, sales in this product group were up 2% CER. Non-COVID product group sales rose at a single-digit CER rate thanks to solid demand for universal NGS solutions. We also saw a slowdown in the QIAGEN digital insights bioinformatics business, which sales declining at a low single-digit CR rate. We see this as an outlier, given that this business can have larger swings and sales trends on a quarterly basis. Moving on to the geographic breakdown of sales. All three of our regions delivered solid sales growth in the non-COVID product groups, but this was more than offset by the drop-off in COVID testing. The best performance came in the Asia-Pacific-Japan region, with sales at contract exchange rates largely unchanged from the second quarter of 2021. China was the driver in this region, with sales growing at a single-digit CR rate. This was in line with our expectations in light of the regional lockdown. Growth came from non-COVID demand among life science customers and for QuantiFerron TB. It was also supported by demand for COVID testing components made in China for the local market. The Americas region felt the impact of reduced COVID testing demand with overall sales down 1% CER for the second quarter. However, we saw double digit CER growth for the non-COVID product groups. In the Europe, Middle East, Africa region, sales were down 10% CER for the quarter due to the sharp drop in COVID testing trends. Despite that headwind, Germany, Spain, and the Netherlands maintained a double-digit CER growth trend from the first quarter. Moving down the income statement, the adjusted operating income margin declined to 28.4% of sales, mainly due to the lower sales contributions. Turning to the components of the adjusted operating income margin, the adjusted gross margin declined about 1.3 percentage points to 67.4% of sales in the second quarter. This reflected initiatives to increase production capacity, especially for Kayastat DX and Noimo DX. It also includes the cost to secure our supply chains with additional product inventory and secondary suppliers. R&D investments rose to 9.7% of sales in the second quarter from 9.2% in the year-ago period. We are taking the opportunity to increase the pace of R&D investments, and the majority of these are in the five pillars of growth. Sales and marketing expenses were also higher in the second quarter of 2022, rising about 3.6% to 23.1% of sales from the same period in 21. This was due to investment into the dedicated sales and marketing activities for the five pillars of growth, as well as higher freight costs, which we are seeking to pass on to customers with surcharges. And as a last point, general and administrative expenses rose about one percentage point to about 6.4% of sales in the 22 quarter. This was mainly due to investments into IT systems and cybersecurity. Adjusted EPS for the second quarter was 53 cents at constant exchange rates, and again, well above our outlook for at least 46 cents. Resulted actual rates were 51 cents due to the strong currency headwinds. The adjusted tax rate was 20% and above the outlook for the quarter, we continue to expect a rate of about 18 to 90% for the full year. Turning to cash flow, we saw solid trends continuing in the second quarter of the year in terms of both operating and free cash flow. Operating cash flow increased 33% to $379 million from $285 million in the first half of 2021. This was driven by sales growth for the first half of the year that led to higher net income and also higher adjustments from non-cash items. The cash flow rose even faster at 63% in the first half of 2022 over the year-ago period. The key factor was lower purchases of property, plant, and equipment with the completion of important investments to expand production capacity. PP&E fell to $61 million of 5.3% of sales in the first half of 2022, compared to $90 million, or 7.9% of sales in the first half of 2021. In terms of our balance sheet, total consolidated debt stood at $625 million at June 30, 2022, compared to $877 million at December 31, 2021. This has decreased due to higher levels of cash, cash equivalents, and short-term investments held at the end of the second quarter. The leverage ratio is unchanged from the third quarter at 0.7 times net debt to adjusted EBITDA. Our healthy cash position and strong cash flow provides us with a solid foundation to continue our disciplined capital deployment policy. You saw in the second quarter with the second quarter with the acquisition of Blurt. I would like to now hand back to Thiel.
spk01: Thank you, Roland, and we would like now to share with you all a few key points of progress in our portfolios. In sample technology, first, the new Kaya XL Connect system was launched in the second quarter. After Kaya Cube Connect and Isin2, this is part of the ongoing program to upgrade our automated sample preparation instrument. This launch of the Kaya XL builds on over 4,000 KIAxcel systems already on the market being used for DNA and RNA quality analysis in both PCR and NGS workflows. The updated system offers higher sensitivity and a new level of connectivity. Much like other instruments in the KIAgen automation portfolio, it connects to the KIAsphere app which allows real-time remote monitoring of the instrument. Second, in diagnostic solution, we already mentioned the KayaStat DX Rise, but let me tell you why this is such a great addition to our portfolio. The KayaStat DX Rise is the only platform on the market offering automatic loading and unloading of samples. That means hands-off sample preparation and processing. It employs eight analytical modules and is the only system with the flexibility to allow the modules to be removed and used individually. So this is truly something unique in the industry for high-volume syndromic testing. As a reminder, we have a solid offering of three key CE IVD tests on KyaSTAT, respiratory, gastrointestinal, and meningitis panels. In terms of menu in the US, we offer the respiratory panel and the respiratory fourplex. The GI panel was submitted to the FDA on time at the end of 2021. Discussions remain ongoing with the Agency. However, it is probable the approval will come after the end of the year. At the beginning of the call, I mentioned the new CE-IVD assay for HSV quantification on PneumODIX. This brings the menu to 15 CE-IVD tests on PneumODIX platforms for Europe, making it one of the broadest menus in CoreLab testing. As a reminder, We continue to invest in research and development to transfer CE IVD tests onto the U.S. menu in the coming years. In PCR and nucleic acid amplification, Kaya QET digital PCR not only had strong placement in Q2, but it also crossed another very important milestone with expansion into the biopharma sector. As you have seen recently, we have just released 13 new kits and assays ahead of schedules that allow QIAquity to be used for quantification and analysis in the development and manufacturing of cell and gene therapy drugs. This is significant since the biopharma sector is probably currently one of the largest customer segments for digital PCR. In genomics and NGS, our QIAgen clinically insights bioinformatics platform has now been used to analyze and report over 3 million cases. To give you a gauge of this success, this is five times more than any other comparable commercial offering. We are strengthening our strategy defined two years ago to be a key platform agnostic player in next-generation sequencing chemistry and data management. This is very relevant because with the introduction of new technology enabling lower cost and faster next-generation sequencing, QIAgen Digital Insights and our universal consumables are very well placed in a rapidly expanding market. We believe that this is a winning strategy to address a growing number of sequencing platforms on this market. Those are just a few examples of the progress of our teams continue to make on goals to advance our portfolio not only that this built on our leadership in areas such as sample tax or quantifier but it also sets the stage for market expansion in all of our five pillars of growth and now once again let me hand it back over to roland thank you and again technology
spk05: I would like to provide some additional perspective on the upgraded outlook for the full year 22 and also for the third quarter. We have increased our full year sales outlook to now reach at least 2.2 billion US dollars at constant exchange rates. This is an increase from the prior outlook for at least 2.2 billion US dollars. We are reaffirming our expectations for double-digit CER growth in the non-COVID product groups after the 12% CER performance in the first half of the year. This includes a reaffirmation of our targets for the five pillars of growth. We are also maintaining our conservative view on COVID testing demand. We continue to expect a decline in COVID sales from the 21 levels of $704 million. In the first half of 2022, We already generated $336 million of sales at CER, and this is a significant amount of the COVID sales expected for the full year. The new outlook also reflects our updated views on the current inflation and macroeconomic trends. As I mentioned, we are taking actions to mitigate the impact in terms of our supply chain and energy needs. On that point, our natural gas needs in Germany are going to be covered by other energy sources as of August. And while natural gas is used to heat our buildings, we don't need it for production. Our full year outlook had already taken into consideration the impact of about 1% of sales coming from Russia, Ukraine, and Belarus. We had suspended our business in Russia after the invasion of Ukraine. In terms of profitability, we now expect adjusted EPS of at least $2.30 at CER compared to the prior outlook for at least $2.14 CER. This takes into consideration our plan to step up investments into our five pillars of growth in terms of R&D expenses and sales and marketing. We have also considered that costs are rising due to the inflationary trends of 2022. At the same time, we continue with our disciplined view on operating expenses and have also implemented product prices increases in July on a country-by-country basis. The progress in our business, however, is increasingly impacted by adverse currency movements against the US dollar. Based on exchange rates as of July 22nd, currency movements against the dollar are now expected to create an adverse impact of about 5 percentage points on net sales and about 10 to 11 cents per share on adjusted EPS for full year 22. For the third quarter, we have set the floor for both net sales and adjusted EPS. This calls for sales to reach at least 510 million U.S. dollar CER and adjusted diluted EPS of at least 48 cents at CER. We also expect difficult currency headwinds in the third quarter. This means an adverse impact of about six percentage points on sales and about two to three cents on adjusted EPS. I would like to now hand back to Thayye.
spk01: Thank you, Roland. And before we go to the Q&A session, let me provide you with a quick summary and leave you with some obviously key takeaway messages. First, of course, COVID related product did better than expected in Q2, while still experiencing a drop in demand compared to the year ago period. But first and foremost, what is very key is that we exceeded our outlook this quarter, driven by a very strong performance from our non-COVID product groups. And we keep the same message. This is where the focus of the company is. Second, our teams continue to execute on advancing our portfolio with the launch of instrument upgrades and menu expansion in our growth drivers perfectly on plan. And as a last point, we have increased our 2022 outlook for sales and EPS after a very strong first half of the year. We are reaffirming our commitment for double-digit growth, our non-COVID portfolio in 2022, and we continue to take a conservative view on demand for COVID testing in the second half of 2022. QIAGEN is delivering on the goals we have set for this year, moving ahead from a position of strength and determined to create greater value from a truly differentiated portfolio with significant growth potential. As our teams stay focused on executing quarter after quarter, we are working to ensure the strength of our company angels in a dynamic and changing microenvironment. We continue to leverage our strategy anchored by focus and balance. Focus on attractive market opportunities and our five pillars of growth and balance among customers in life science and molecular diagnostics, as well as among the various regions of the world. With that, Thanks a lot for your attention, and I'd like to hand back to John and the operator for the Q&A session. Thank you.
spk07: Thank you.
spk06: Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on the attached tone telephone. If you wish to withdraw your question, you may press star followed by two. To ensure we can accommodate as many people as possible, please limit yourself to only one question, and if necessary, one follow-up. Your microphone will also be muted after finish asking the questions. Anyone who has a question may press star followed by one at this time.
spk07: One moment for the first question, please. The first question comes from Daniel Wentoff,
spk06: of OdoBHF. Your line is open, please go ahead.
spk02: Thanks and good afternoon and thanks for taking my question. I like to better understand the dynamics of non-COVID related sales, what we have seen so far in Q1 and Q2. Maybe you can talk a bit about how important here are catch-up effects. Is the increased installed basis during the pandemic a key driver or is there just a general continuous trend to increase R&D spending? So I really like to better understand the dynamics here. Thank you.
spk01: Thanks, Daniel. I think the main part of my answer here is it's basically a combination of different factors. First of all, you know that many parts of our portfolio are purely a menu play. Those are systems, for example, Kayastat or Pneumodics, that have been obviously benefiting from tailwinds with COVID because they have seen a very good increase of the placements. But they were not limited to be installed in a laboratory just to run COVID tests. And we always highlighted that year after year, we will continue to increase the menu available for those platforms and therefore increase their potential for growth. This is why you have seen the extension of the menu on Kayastat beyond respiratory to GI and recently meningitis in Europe. This is why we highlighted today also the launch of a new assay for pneumotics complementing already 15 assays 14 assays in europe and therefore being so this is the first movement obviously of favoring the growth second if you remember we had also a strong quarter of placement in Q1. Those systems obviously are now going to generate also consumption of menu in COVID for some of them, but also around non-COVID menu. Third, there are some parts of our portfolio that are very little or not at all impacted by COVID and that clearly benefit from a return to quasi-normal of investment and activities in labs. The best system, obviously, or the best example is Kayakuity. Digital PCR has never been launched for COVID. Obviously, we took advantage of COVID to launch a specific COVID application with wastewater testing, but now the install base that we are creating for the last year and a half is fully at play to receive, obviously, consumption of menu in the life science department. QuantiFERON is the same. QuantiFERON, if you remember, was impacted obviously at the height of COVID because laboratory were invested on COVID. And this is why we had a blank year with QuantiFerron in 2020. But since then, we always said that we would recover and we went back on growth. And I would say that when international migration are not back to their normal potential, I think the normal level of consumption for QuantiFerron is back to quasi pre-pandemic level. So you have these conti, those double effect of basically laboratories coming back to normal level or more normal level activity. And obviously, the demand generated by our increased install base thanks to the pandemic. And you could extend that to other activities, oncology. I mean, I have said that in 2021, most of the laboratories were probably back 80 percent to the pre pandemic level. We are now closer to fully pre pandemic level in oncology. In companion diagnostic, pharma companies start again to invest into new development of growth, and this is why we see promising contract in PCR technologies, but also in NGS and also with our digital PCR solution as well. So basically, it's a combination of those different factors that is also confirming this good trend of non-COVID. Does it answer your question, Daniel?
spk07: Thank you very much. We take our next question from Dan Brennan of Cohen. Your line is open. Please go ahead. Dan, are you there? We don't hear you. Okay, operator, let's move on to the next person. Operator, let's move on to the next person. One moment, please. We move to the next question, Patrick Donnelly with CT. Your line is open. Please go ahead. Great. Can you guys hear me okay? Very well. Okay, good.
spk11: Thanks for taking the question. Maybe just on focusing on the PCR side, you know, it looked like the base PCR performance was really strong, even if you back out COVID and digital PCR. Can you just talk about what you're seeing there? Maybe start with base PCR and then obviously digital PCR. You touched on chiacuity, getting into biopharma a bit, but maybe base PCR and then digital PCR as well, just the performance in the quarter, and then I have a quick follow-up.
spk01: Yes, thank you, Patrick. Digital PCR first, if you may. We are still, let's be also very clear, in an infant launch. After all, this solution has been launched a year and a half by QIAGEN. Obviously, more than a thousand systems in a year and a half in that difficult environment proves the quality of our solution and the fact that the market answers very well. So here we are In our plan, we are executing in what we basically proposed to you at the time of the launch, is that once installed, the system needs to go as soon as possible into increased consumption to reach routine consumption. And the play now is to offer our laboratories more and more application. And this is why going to the biopharma development is extremely important for us, because it's one of the most active applications. uh market obviously for digital pcr And so this is why we see both that nice increase of installed bays and nice increase on consumption. At the same time, for digital PCR, it's also worth saying that you have seen the very important decision by the CDC in the U.S. to choose digital PCR to test for wastewater testing when related to COVID. It's an important win for this technology and therefore an important win for collagen as well. On the More classical, I would say, PCR, we see obviously a sharp decline of COVID cells, but the non-COVID applications are growing very substantially at double digits and more than double digits. And this is showing what? That many labs are coming back to a more normal pattern of consumption, and they are back into their pre-COVID situation. And this is what we always say, basically, that there will be a point where investment will go back once again in academia, in research, but also in clinical, into, let's say, non-COVID application. This is what we are seeing at the moment, and this is what is explaining our comeback on growth for this application.
spk07: Thank you. We take our next question from Dan Brennan of Cowen. Your line is open. Please go ahead. Great. Thanks. Can you hear me? Yep. Great. Thanks, guys. Sorry about that.
spk09: So in the last, you know, recession in 08-09, you guys held up exceptionally well. And I know, Thierry, you talked about it in your prepared remarks in terms of, you know, I guess seeing some impacts or potentially seeing some impacts. I'm just wondering, with the revised guide, have you assumed anything for impact this year? And when we look ahead to 23, Is double-digit growth ex-COVID still reasonable, given the durability of your portfolio? Or if not, how do we think about potential macro risks?
spk01: Well, I think we can take this, the both of us, Roland and I, and I will appreciate Roland also to give his opinion. We both said in the presentation today that the current forecast for 2022, the full-year forecast, is completely factoring some visible trend. Obviously, the situation with the war in Ukraine and the geopolitical tension. So, for example, as we communicated, we have suspended our operation in Russia, Belarus and Ukraine, and therefore all this is completely factored. Current trends regarding inflation, current trends regarding tensions on the supply chains are completely factored. But we also insist on two things. QIAGEN is a company with pricing power. And we are really very, very granular every year on passing price increase. We do it normally in a normal environment in December and January of every year. This year, we have decided, given the specific inflationary environment, to do it twice. So we are passing a second price increase in June and July. And we are already, by the way, preparing the next wave, which will be for the next December and January. this is also factored in our forecast obviously we need to be very clear we have some customers that have priori annual contract with fixed cost or basically already contracted CPI increase so the price increase never covers the entirety obviously of the revenues or of the portfolio but anytime we can And when it's accepted by customers, we are passing this year a second price increase. We have not factored any improvement in the supply chain constraint. But as we have explained today, perhaps our industry, and in particular Kyogen, we are slightly more prepared than the rest of the world in those supply chain constraints. Why? Because for us, if you remember, Dan, they started two years ago when we were developing Because of the huge demand of COVID testing, we were already under constraints for raw material supply, plastic supply. So we are coming already with two years of hard work to strengthen our supply chain. So what does it mean? I think there is no company in the world, no industrial sector, which is completely immune to macro factors and to economic, obviously, volatility. I believe overall healthcare is always more protected for obvious reasons. I believe QIAGEN has taken the proactive measures basically to navigate this choppy environment in a, let's say, optimal way. Now to the second part of your question, what does it mean for 2023. Dan, we know what we know. I mean, I don't believe that inflationary pressure will disappear by magic as of January the first of next year. I don't know what's going to happen. This is why I'm saying we are already working and preparing our next price increase, which will be due for December and January, for example. I do not believe that suddenly, even if everything goes back to normal, supply chain is going to drastically improve. So we need to take this into account also when we are going to plan 2023. In our calendar, Dan, we start to work on budget for the next year at this time of the year. So we are actively currently working on 2023. What I can tell you is what you probably already know. We are not going to take extra assumptions on COVID. COVID is volatile. We do not want to have our P&L impacted by that volatility. If it continues, see it as a bonus on our model. At the same time, we confirm what we said as early as December 8th, 2020, when we said that with the exception of sample take, our five pillars of growth all had to a different, obviously, level, a double-digit growth profile. And we confirmed that, and we confirmed that for next year. The exception being SampleTech, where we believe that with our leadership, plus what we have been able to add in our portfolio of solutions during the COVID crisis, we have a potential of probably low to mid-single-digit growth profile.
spk07: Thank you.
spk06: We take our next question from Falco Friedrich of Dutch Bank. Your line is open. Please go ahead.
spk00: Thank you very much. My question is actually on the sample tech business. Could you elaborate a little bit on the reasons for the very strong performance in the non-COVID business in Q2 within sample? Private seemed to be a high single digit. So what was driving this higher growth over But you just mentioned your ambition is going forward for this business. Thank you.
spk01: Thank you, Falco. And I think it's the translation of what we keep explaining for the last two years, that RNA testing, which was basically behind the COVID numbers of sample techs for QIAGEN, has always been a rather limited part of our portfolio, around 25% of sample tech for us. The real part of the portfolio is the DNA testing. And we said that when little by little COVID would recede, we would see labs coming back to pre-COVID consumption of DNA testing. And they come back to the leading brand and the leading portfolio of solution on the market, which is QIAGEN. Obviously also, because since sample tech is one of our pillars of growth, we pay obviously very granular attention in our commercial deployment and commercial strategy. So we are systematically basically visiting all our install base to make sure that we can basically bring them back to a normal level of consumption. Let's not forget as well that we have continuously upgraded our range of automation, as we said today, Falco, once again. Remember, starting two years ago, we launched Kaya Cube Connect. Last year, we launched EZ2. This year now, we are launching Kaya XL. And we always said that there will be also, in the coming two years, a new version of Kaya Symphony. So this also is helping customers to move also together with us with better connected, higher throughput also system, and this is pushing our consumption, obviously, of sample tech non-COVID.
spk07: Thank you.
spk06: We move to the next question from Casey Woodby of JP Morgan. Your line is open. Thank you.
spk08: Hi, thanks for taking my questions. Just wanted to go through the business regionally. So I was wondering what drove strength in China, you know, how much of that was COVID versus the base business there. And then can you talk toward what you're seeing in Europe? Seems like results were mixed between countries there. So was that simply due to some COVID headwinds between countries or was there something else going on? And then specifically on the UK side, did you see any slowdown from academic customers related to the noise around the EU pulling the region's horizon academic funding? Thank you.
spk01: So first on to China, you remember when we communicated after Q1 result, we explained that we took very proactive measures on China regarding the potential lockdown and we saw it coming as early as the first part of Q1 and therefore we decided to basically deliver our commercial partners with more product than Azure so that they could supply even if obviously shipping to China would become more difficult. So that's number one. It's not driven by COVID because you remember we have two activities in China. We have the purely classical Kaizen products and we have also a second brand. The QIAGEN products in China are not benefiting from COVID. Why? Because no foreign products on COVID is accepted in China or is registered in China. So our growth in the classical QIAGEN solution is fully non-COVID, of course. With our second brand, as Roland described, is a purely manufactured product locally. We also benefit also anytime there is a surge of demand for COVID. So that's for China. For Europe, as you said yourself, it's simply very diversified pictures of the situation between countries. You know that Europe is a mosaic. So when you see, for example, Germany, Spain and the Netherlands, we still double GGCER growth trend in our Q2. We had, let's say, slower sales in France, Switzerland and the United Kingdom. United Kingdom is far too early for us to see a decline in investment into academia or research labs. On the contrary, we still believe that the budget allocated to the national center of research is still healthy. I think it's rather just sequentially one quarter. It's too early to say if it's a trend. Europe, every quarter, shows diversified pictures. I would say two things to conclude. First of all, There are some countries, obviously, where we also benefit for what has started in the second half of Q2, which is obviously strong demands on COVID. This strong demand of COVID goes either to antigen testing. It's not obviously occasion play. But let's be clear, also go to our PCR portfolio. But Europe... despite COVID, is also a perfect translation of QIAGEN's strategy with most of our instruments, which is the menu play. And it's very interesting, as Roland said in his part, to see that, for example, the ratio between COVID and non-COVID in Europe of consensual novices and pneumatics is still very much impacted by COVID, obviously, in Europe. but has decreased in favor on the non-COVID portfolio already in Q2. And this is very encouraging because this is exactly where we want to drive our install base.
spk07: Thank you. We take our next question from Hugo Solveig with BNP Paribas.
spk06: Your line is open.
spk03: Hi, hello. Thanks for taking my question. I have a few on supply chain theory, which you alluded to. Can you maybe remind us what business or product is mostly impacted by supply chain issue at the moment, and if you see that spreading to other parts of the business, or is it contained or getting better? On the single-digit growth of the non-COVID life science business, which you mentioned in the press release, any differences in regional... in regional dynamics or client dynamics here that we should be aware of? Are you seeing any weakening of weak biotech funding environments starting to come through? And on pneumoDX and on the sequential slowdown, could you maybe share with us some data points on the pull-through for the COVID and the non-COVID tests? Thank you.
spk01: So thanks Hugo. On the supply chain, again I'm going to stress that while we say that no company is immune to the tension, I think that we are prepared because we are working hard on that for the last two years. And I believe that I wouldn't say we are completely protected, but we have it under control. Which are the parts that are the most affected? It's a mix of different products. There are some raw materials. There are some, for example, also specific papers for labeling, components of instruments such as, for example, electronic lead boards. But overall, basically, we can manage. It doesn't create pure back orders in our companies, but we are for some products in allocation. It's better than pure back order. We are working on that. we have significantly also increased the level and granularity of communication to our people in the field and also our customers to make sure that they are fully informed of the situation. There is nothing worse than the customers not knowing what's the situation of his order. But PIRAPS, how long you want to add something also on the supply chain solution situation? I'm sorry.
spk05: Yeah, I do think for us right now, to be honest, I don't think there's any specific product to mention, but I do think if we at all impacted, it comes mainly by logistic hiccups because, as you know, shipping things around these days is difficult, particularly also out of China. But I do think we are well prepared because clearly with all the volatility we were facing over the last 18 months because of COVID, we were actually always ramping up inventories quite significantly. You can see it also in our balance sheet. So I do think that having this larger inventory level so far served us quite well to have this more or less temporary issues becoming never an issue which were affecting carriage and customers so far.
spk01: Thanks, Roland. And to your second part of the question, Hugo, so first you wanted to understand a bit the non-COVID basically situation for life science. And is that something that we can highlight? Yes, indeed. We see stronger trends at the moment in the U.S. As I shared with you, if you remember, at the end of Q1, academia especially in Europe was rather soft in Q1 and has evolved a bit more favorably as we were progressing into Q2 so it's coming back it's still a bit softer than in the US But it's coming back. So it's encouraging. Let's see what is happening with the summer of UC starting in Europe. We don't see clearly at the moment a real impact, at least on our activities, on basically decreasing funding for biotechs or for so-called research activities. We believe that the level of funding for public research and public academia is still rather healthy. and we don't see a drop for us of interest in our collaboration especially with biotech companies. For Pneumodics I would just leave you with one number. I always disclosed to the market in the previous month that it was fair to say that Pneumodics between Europe and the US and even more in the US as you know because we don't have the width of the menu that we have in Europe the the the 2021 results for pneumatics were driven by kovi that probably 80 to 85 percent of the total consumption i'm happy to see that in q2 in europe obviously because this is where we have the menu that uh a ratio of kovid on the menu for uh for uh on the menu consumption for pneumatics is uh lower than 65 to 70 percent it depends on the country So we see now that the system is installed. Laboratories are starting to pick up our blood-borne viruses or our sexually transmitted diseases. Obviously, we need to continue to push that, but this is encouraging.
spk07: Thank you.
spk06: We take our last question from Matt Sykes with Goldman Sachs.
spk10: Your line is open. Great. Thank you for taking my questions. Thierry, maybe a high-level question for you. Just given... the sustainable growth you've seen in non-COVID of double digits and what you're calling for in 23, and the level of investment that you've been putting into your five pillars of growth, how are you thinking about the growth versus margin trade-off? As you want to spend to fuel that growth at the same time, want to protect margins, do you feel that there is a necessary trade-off, or can you balance the two as we move into 23? Just would love to get your thoughts in terms of strategy for that.
spk01: I think Roland also could chime in. Also, I would say that I don't see it as a trade-off. I see it as a management duty. Obviously, we are perfectly aware that if we want to optimize the potential of our five pillars of growth, we need to continue to invest, heavily invest in R&D there. And this is explaining also some of the evolution, as we have explained, of our growth margin. recently, which is below 68%, as you have seen. We have clearly given an explanation around that. We will continue to invest. I'm still thinking in two broad dimensions that this company has a potential when those investments will start to pay off, obviously. to come back in a more normalized gross margin situation for Kayagen between 68% and 70%. And I believe that we have definitely the potential to be very close to 30% operating margin, but without forgetting that we are still in an investment mode for part of our portfolio. That's how it's not necessarily a trade-off. It's a question of careful management of our priorities. But I'm sure that Roland also has a point here.
spk05: Yeah, I would agree that kayaking clearly has a premium gross margin as well as a particular premium operating margin in the overall industry. So I would say, given the growth rate we are delivering, and in particular now more or less in two and a half years on the non-COVID side, I do think there is clearly also a reason to believe that we are able to match the balance between both quite nicely. it's quite sure that growth is important to overall the industry, in particular also to collagen. But again, I would say we have a record of very strong margins within collagen.
spk12: Okay. With that, I'd like to end the call here. Thank you very much for your participation. As you know, please reach out to Phoebe and me if you have any questions or comments or follow-up topics. We'd be glad to discuss them with you. Thank you.
spk06: Ladies and gentlemen, this concludes the conference call. Thank you for joining and have a pleasant day. Goodbye.
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