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spk07: Good morning, ladies and gentlemen. Welcome to the Dharma Fisher Scientific 2022 Second Quarter Conference Call. My name is Jaquita. I will be your operator for today's call. Our lines will be muted on a presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President of Investor Relations. Mr. Tejada, you may begin the call.
spk09: Good morning, and thank you for joining us. On the call with me today is Mark Casper, our Chairman, President, and Chief Executive Officer, and Steven Williamson, Senior Vice President and Chief Financial Officer. Please note this call is being webcast live and will be archived on the investor section of our website, thermofisher.com under the heading news and events until August 12th, 2022. A copy of the press release of our second quarter 2022 earnings is available in the investor section of our website under the heading financials. So before we begin, let me briefly cover our safe harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10-K and subsequent quarterly report on Form 10-Q, which are on file with SEC and available in the investor section of our website under the heading Financials SEC Filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also, during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures It's available in the press release of our second quarter 2022 earnings and also in the investor section of our website under the heading financials. So with that, I'll now turn the call over to Mark.
spk11: Thank you, Raph. Good morning, everyone, and thanks for joining us today for our second quarter call. As you saw in our press release, we had another excellent quarter. We delivered outstanding financial performance. Our core business is performing very well, that strength is broad-based across all our businesses. As I reflect on the quarter, I'm very proud of the team's great execution and the resulting share gain we saw across our business. Our ongoing success is propelled by our proven growth strategy and our PPI business system, which is a differentiator for us and enables operational excellence within the company. You'll see this in our second quarter results and increased outlook for the year. So let me first recap the financials. Our revenue in the quarter grew 18% year-over-year to $10.97 billion. Our adjusted operating income was $2.61 billion. Our adjusted operating margin in the second quarter was 23.7%, and we delivered another quarter of strong adjusted EPS performance, achieving $5.51 per share. Let me now give you some color on our performance by end market. Starting with pharma and biotech, we had excellent performance in this end market, delivering growth in the mid-teens. We saw excellent growth across all businesses serving these customers, highlighted by our bioproduction and pharma services businesses. We're continuing to benefit from our trusted partner status that we've earned over many years with our pharma and biotech customers. In academic and government, we grew within mid-single digits in the quarter. We saw strong growth in biosciences and chromatography and mass spectrometry. Turning to industrial and applied, we grew in the low double digits for the quarter. We saw very strong growth in electron microscopy, chromatography and mass spectrometry, and our research and safety market channel. Finally, in diagnostics and healthcare, revenue was 20% lower than the prior year quarter. In this end market, the core business saw strong growth led by immunodiagnostics and microbiology. During the quarter, the team continued to execute well to support customers' COVID-19 testing needs. Overall, excellent performance across our end markets. And as I reflect on this quarter's performance, we continue to deliver very differentiated core business growth. This was driven by three factors. The market conditions were good. Our team managed lockdowns in China extremely well. And we had outstanding execution from our global team, resulting in meaningful share gain. Let me now provide an update on the progress we made in executing our proven growth strategy. The investments we've made and are continuing to make across the company are fueling growth and generating strong returns. Our growth strategy has enabled another quarter of excellent performance. As a reminder, our strategy consists of three pillars, developing high-impact innovative new products, leveraging our scale in the high-growth and emerging markets, and delivering a unique value proposition to our customers. I'll start with innovation. We launched a number of new products across our businesses to further strengthen our industry leadership and enable our customers to accelerate scientific breakthroughs. I'll highlight a few of these. We had an outstanding American Society for Mass Spectrometry conference, where we showcased new instruments, consumables, and software to advance our customers' work. These included the thermoscientific accelerome automated sample prep platform, which simplifies workflows for proteomic researchers by eliminating a range of previously manual steps. We also launched a cloud-based thermoscientific RDS software platform, which integrates functionality and data across multiple chromatography and mass spectrometry instruments to simplify application-specific workflows, helping scientists share information with each other in labs around the world and speeding the development of new diagnostics and therapies. In addition, we launched the thermoscientific direct mass technology mode for our industry-leading two exactive orbitrap mass spectrometers. This technology allows for the characterization of complex and large biotherapeutics, which were previously challenging to interpret. In our biosciences business, we launched the GIMCO CTS TrueCut Cas9 protein that supports genome editing for applications such as CAR-T cell therapy research. Emerging therapies like CAR-T are providing new hope in treating cancer. And in specialty diagnostics, we launched the FODIA 2500 Plus series in the U.S., a high-throughput instrument for allergy and autoimmune diagnostics to help further improve lab efficiency. These new products and many others will make a significant difference for our customers and drive future growth for our company. Turning to our high growth in emerging markets, we're really thrilled with our team's progress. You may remember that we called out China as a potential Q2 headwind because of the COVID-19 lockdowns in the country. Obviously, the lockdowns were very severe, but I'm so proud of the way the team responded. They powered through demonstrating the relevance of our offering amid the crisis and delivered over 20% growth. That was the result of a very strong core business, the benefit of deep relationships we have with our customers, and our support for local COVID-19 testing. So overall, it was a great quarter and one that clearly demonstrates how our growth strategy continues to deliver outstanding results. The third pillar of our growth strategy is our unique customer value proposition. Our capabilities enable our customers' ability to achieve their own goals for innovation and productivity. To be the best partner for our customers, we continue to enhance our capacity and capabilities. Let me share a couple of examples. At our flagship facility for cell culture media in Grand Island, New York, We just completed a capacity expansion to support customers' research, drug development, and production applications. And in our lab chemicals business in Giel, Belgium, where we have our primary continental European distribution center for lab chemicals, we just completed a major expansion of the facility to support the strong growth that we've been delivering. I've had the opportunity to visit both sites a number of times, and it's really exciting to see the ongoing strength in customer demand that's driving the need for this investment. These are just a few reflections on the way we're supporting our customers by further strengthening our capabilities and value proposition. Now, turning to capital deployment, I'd like to share some of the other steps we've taken to further strengthen our customer value proposition and build our future. We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. We're very pleased with the performance of the PPD acquisition. The business is performing very well, delivering strong core revenue and earnings growth. In May, at our investor day, we increased the revenue synergy outlook by $100 million to $250 million in year three, and the cost synergies in that year by $25 million to $100 million. And the synergy opportunities continue to be incredibly exciting. I just had the chance to meet with the Clinical Research Commercial Organization, and I'm so impressed with the team. and the opportunity that they see for enabling the success of our customers going forward. The combination of capabilities is really resonating with customers, and we're seeing strong momentum in the business. All of this is leading to business performance well ahead of the deal model. The acquisition of PPD is another example of how our capital deployment strategy is creating customer and shareholder value. Turning now to an update on our ESG initiatives, We released our latest corporate social responsibility report. This report details our progress and disclosures for all of our key ESG initiatives and is a great example of how we're continually working to enhance our reporting and disclosure using internationally recognized reporting standards. It's great to see the progress detailed in the report and also reflecting the progress we've made through our commitment to ESG over many years. For this quarter, I'll highlight the progress we continue to make on our goal to reduce our carbon footprint. As part of our efforts, we continue to transition to renewable energy, installing on-site rooftop solar power at key locations to reduce our consumption of electricity produced with fossil fuels. We're also working with our suppliers on their climate performance goals, which will ultimately have an impact across our value chain. As a leader in ESG, our commitment to progress is ingrained in everything we do, And we look forward to updating you on our progress as we go forward. Now, I'd like to review our updated 2022 guidance at a high level. And then Steven will take you through the details. We're meaningfully raising our full year guidance. We're increasing our revenue guidance by $700 million to $43.15 billion, which would result in 10% reported revenue growth over 2021. And we're raising our 2022 adjusted EPS guidance by $0.28 to $22.93 per share. This higher outlook primarily reflects the strength of our core business and additional contribution of COVID-19 testing revenue, which are more than offsetting the increased foreign exchange headwinds, demonstrating how well we operate with speed and scale to enable our customer success and navigate dynamic macro environments. So to summarize our key takeaways from the second quarter, our outstanding results in Q2 highlight the benefits of our proven growth strategy, our PPI business system, and our extraordinary team. Our business is performing very well, and we're gaining market share. The PPD acquisition is generating strong returns. We're really well positioned to continue to differentiate ourselves for all of our stakeholders. and the team is doing an excellent job navigating the dynamic times we're living in. All of this has enabled to raise our outlook for 2022 and further solidify our incredibly bright future. With that, I'll now hand the call over to our CFO, Steven Williamson.
spk08: Steven? Thanks, Mark, and good morning, everyone. We delivered another excellent quarter in Q2. This included 13% core organic revenue growth, $630 million of COVID-19 testing revenue, $5.51 of adjusted earnings per share, and over $1 billion of free cash flow. Revenue in Q2 was $930 million higher than we'd incorporated in our previous 2022 guidance, with $640 million driven by ongoing strength in the core business and $400 million from testing, partially offset by $110 million due to higher headwind from foreign exchange. Similar to last quarter, the strength in the core was broad-based across businesses and end markets. From a geographic lens, $200 million of the beat was from China. In our previous guidance, we'd assumed a $200 million headwind from the lockdowns in China, and we offset all of that, half from strong local core growth and half from local testing support, a great achievement by our China team. Our PPI business system enabled us to generate very strong pull-through on the revenue beat, and adjusted EPS for Q2 was 52 cents higher than included in our previous guidance. So Q2 was a continuation of our excellent financial performance track record. Let me now provide you with some more details. Beginning with our earnings results, as I mentioned, we delivered $5.51 of adjusted EPS in Q2. Gap EPS in the quarter was $4.22. On the top line, our Q2 reported revenue grew 18% year over year. The components of our Q2 reported revenue increase included 3% organic revenue growth, a 19% contribution from acquisitions, and a headwind of 4% from foreign exchange. In terms of our organic revenue performance by geography, the organic growth rates by region are skewed by the COVID-19 testing revenue in the current and prior year. In Q2, North America grew in the high single digits, Europe declined in the low double digits, Asia Pacific grew in the low double digits, with China growing over 20%, and rest of the world declined low double digits. With respect to our operational performance, adjusted operating income in the quarter decreased 3%, and adjusted operating margin was 23.7%, 530 basis points lower than Q2 last year. Adjusted operating margin was slightly higher than we'd anticipated in our prior guidance for Q2, reflecting how our growth strategy and PPI business system enable us to continue to manage dynamic times. In the quarter, we achieved strong price realization to effectively address inflation, while also driving strong productivity and positive volume leverage in the core business. This was more than offset by the expected impact of incorporating PPD into our financials, lower testing volumes, and continued strategic investments, including investments in our colleagues. Moving on to the details of the P&L, total company adjusted gross margin in the quarter came in at 43.2%, 740 basis points lower than Q2 last year. For the second quarter, the change in gross margin was due to the same drivers as those for our adjusted operating margin. Adjusted SG&A in the quarter was 16.1% of revenues. a decrease of 180 basis points versus Q2 2021. The R&D expense was approximately $360 million in Q2, representing growth of 6% over the prior year quarter. You can see the benefits of our prior R&D investments in our differentiated core organic growth rate and the exciting new products that Mark outlined. Moreover, the continued investments we're making in R&D are helping to fuel an even brighter future. Looking at results below the line for the quarter, our net interest expense was $112 million, approximately flat to Q2 last year. Our adjusted tax rate in the quarter was 13 percent. This was 100 basis points lower than Q2 last year, driven by our tax planning initiatives. Average diluted shares were $394 million in Q2, approximately $2 million lower year over year, driven by share repurchases' net of option dilution. Turn to cash flow on the balance sheet. Year-to-day cash flow from continuing operations was $3.7 billion, and free cash flow was $2.6 billion. Our capacity and capability investments continued to progress well, and our year-to-date net capital expenditures were $1.1 billion. We returned over $150 million to shareholders through dividends in the quarter, and this reflects the 15% dividend increase we announced in February. We paid down $1.85 billion of commercial paper in Q2, and end of the quarter with approximately $1.9 billion in cash and $30.3 billion of total debt. Our leverage ratio at the end of the quarter was 2.3 times gross debt to adjusted EBITDA and 2.2 times on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 16.6%, reflecting the strong returns on investment that we're generating across the company. Now I'll provide some color on the performance of our four business segments. Let me start with a couple of framing comments. The scale and margin profile of our COVID-19 testing revenue varies by segment, and the testing revenue was significantly higher in the prior year quarter, so that does skew some of the reported segment margins. And as I mentioned earlier, we're executing strong pricing realization across all segments to address higher inflation. And as we outlined at the beginning of the year, we're referring to our acquired PPD business as our clinical research business. and that resides in laboratory products and biopharma services segments. So moving on to the segment details, starting with life science solutions, Q2 reported revenue in this segment declined 7%, and organic revenue was 5% lower than the prior year quarter. In Q2, we delivered very strong growth in our bioproduction business. This was offset by lower revenue in the genetic sciences business, driven by the moderation in testing revenue versus the year-ago quarter. Q2 adjusted operating income and lifestyle solutions decreased 23%, and adjusted operating margin was 40.3%, down 800 basis points year over year. In the quarter, we delivered strong productivity, which is more than offset by unfavorable business mix, and the strategic investments we're making across the segment. In the analytical instrument segment, reported revenue increased 9% in Q2, and the organic growth was 13%. The strong growth in this segment this quarter was led by electron microscopy and the chromatography and mass spectrometry businesses. Q2 adjusted operating income in this segment increased 23% and adjusted operating margin with 21.4%, up 250 base points year over year. During the quarter, we delivered strong volume pull-through and productivity that was partially offset by strategic investments. Turning to specialty diagnostics, in Q2 reported revenue declined 11% and organic revenue was 8% lower than the prior year quarter. In Q2, we saw strong underlying growth in our immunodiagnostics and microbiology businesses, as well as our healthcare market channel. This is offset by lower COVID-19 testing revenue versus the year ago quarter. While Q2 adjusted operating income decreased 1% in the quarter, Adjusted operating margin was 22.1%, up 220 basis points from the prior year quarter. In Q2, the impact of lower testing volume was more than offset by strong productivity enabled by a PPI business system and positive business mix. And finally, in the laboratory products and biopharma services segment, Q2 reported revenue increased 55%, organic growth was 10%, and the impact of acquisitions was 48%. During Q2, we had strong growth in the research and safety market channel and in the pharma services and laboratory products businesses. PPD, our clinical research business, is performing very well and continues to exceed our expectations. During the quarter, it grew slightly higher than the rest of the segment, contributing $1.72 billion of revenue. Q2 adjusted operating income in the segment increased 55%. and adjusted operating margin was 12.5%, which is 10 basis points higher than the prior year quarter. In the quarter, we drove strong productivity and also saw the benefit from acquisitions. This was partially upset by strategic investments and unfavorable business mix. Let me now turn to our updated 2022 guidance. And as Mark outlined, we're raising our full-year revenue guidance by $700 million to $43.15 billion. We're also raising our core organic revenue growth outlook from 9% to 11%. And on the bottom line, we're raising our adjusted EPS guidance for 2022 by $0.28 to $22.93. The increase in revenue guidance is driven by three elements. A $750 million increase in the outlook for the core business. $500 million higher assumed COVID-19 testing revenue. and a $550 million decrease to reflect the recent changes in FX rates. So let me provide you some color on each of these elements. So starting with the $750 million increase in the outlook for the core business. This reflects a strong performance in Q2 and a $100 million increase in the core organic outlook for the second half of the year. And that second half raise reflects higher price we put in place to offset higher inflation versus the previous guidance. As I mentioned previously, the increase in core revenue guidance raises the full-year outlook for core organic revenue growth from 9% to 11%. This is very strong growth performance reflecting excellent commercial execution and strong share gains. In terms of our COVID-19 testing revenue assumptions, the $500 million increase for the year includes the $400 million beat in Q2 and a $100 million increase in the assumption for Q3. This reflects an assumed glide path from Q2 to an endemic run rate level in Q4. There continue to be scenarios where testing demand could be higher than this level, and should that be the case, we're well positioned to support customer needs. And as we did in the first half of the year, we'll flow the benefits of that through our P&L. But for now, we thought it was prudent to continue to take a de-risk approach to the outlook. In terms of FX, we've incorporated current rates into guidance, and we now expect FX to be a year-over-year headwind of $1.25 billion on revenue, or 3.2%. The FX headwind on adjusted EPS in 2022 has increased by $0.31 to $0.84 for the full year, or 3.3%. The $0.31 change includes a 34% headwind in the second half of the year versus that previous guidance. In terms of profitability, we expect to deliver $110 million more adjusted operating income of the $700 million raise in revenue guidance. This reflects strong pull through on the higher core and testing volume, additional price offsetting inflation, and the impact of the headwind from FX. We now expect full year 2022 adjusted operating margin to be 25.2%. In terms of adjusted EPS, a stronger outlook is enabling us to raise the 2022 adjusted EPS guidance by 28 cents from $22.65 to $22.93, further building on an already very strong outlook for the year. So to recap on the guidance change, we continue to execute really well and are able to more than offset the significant FX headwinds, effectively manage inflation, and still raise our four-year outlook. This demonstrates the power of our proven strategy and our PPI business system execution. Let me now provide you with a couple of other details from the 2022 guidance. PPD, our clinical research business, is now expected to deliver $6.8 billion of revenue in 2022, which represents 12% core organic revenue growth on a full year basis for this business, up 1% from our previous guidance. We now expect the business to contribute just over $2 to adjusted EPS in the year, up 3 cents from our prior guidance. Our guidance now assumes net interest expense of approximately $460 million for the year, We're assuming an adjusted income tax rate of 13.2% in 2022, slightly higher than the prior guidance. We continue to assume net capital expenditures of approximately $2.5 to $2.7 billion, and free cash flow of approximately $7 billion. A guidance still assumes $2.5 billion of capital deployment, which is the $2 billion of share buybacks to be completed in January, and $475 million of capital return to shareholders through dividends. And we continue to assume the full year average diluted share count will be between 394 million and 395 million shares. And finally, I wanted to touch on phasing of the P&Ls to help you with your modeling. When I think about the revenue dollars in Q3 and Q4, we expect Q4 to contribute just under 52% of the second half total. And looking at adjusted EPS on that same basis, we expect the second half total to be weighted a couple of percentage points more to Q4 than the revenue. To conclude, we'd live another excellent quarter and in great position to achieve our 2022 goals. With that, I'll turn the call back over to Russ.
spk09: Thank you, Stephen. Operator, we're ready for Q&A.
spk07: Absolutely. In order to allow everyone in the question an opportunity to address the Thurman Fisher Management Team, Please limit your time on the call to one question and only one follow-up. If you have additional questions, please return to the queue. Again, press star one to ask a question. The first question comes from the line of Jack Meehan with Needham Research. You may proceed.
spk04: Thank you. Good morning. Hi, Jack. Good morning. Good morning. So, you know, versus the analyst day at the end of May, a lot has transpired on the macro environment. We see this morning GDP officially declined again for 2Q. It would be great to hear just your latest thoughts on macro sensitivity for Thermo Fisher. And if you'll humor me as we sit here in July, just any thoughts on positioning for 2023, how that might fit versus the three-year CAGRs you talked about a couple months ago?
spk11: Yeah, so Jack, I guess the first thing is business performing extraordinarily well. We have broad-based strength. As I look at the companies that are reported, we've done very well from a top-line perspective. So I feel good about how we're performing. Booking's performance was very good. So if I think about what are we seeing in our business, we're seeing very strong strength. In terms of the macro, obviously, when you read the papers or whatever information source, lots and lots of challenges in the world. In the last quarter, we articulated some of them and how we factored some of that into the thinking for our outlook. What do we think about sensitivity? This company is incredibly well positioned to navigate whatever the world throws at us. You know, the industry in and of itself is attractive. It's less sensitive economically than many. We are very well positioned within it. And we have tremendous momentum. You know, when I think about if we see a downturn, and we're not seeing the signs of one, but that doesn't mean that there won't be one. You know, we have the benefit of, you know, a track record of dynamic in those, you know, of navigating dynamic times and exiting those periods, really an incredibly strong industry leader. We benefit from an experienced management team, an incredible team around the world, a proven growth strategy, and a PPI business system, which gives us great operational discipline. As you know, we've taken a number of actions over the last few years to strengthen our position in the end markets we serve. And today, relative to the recession and the great financial crisis, we have less industrial exposure. As a reminder, about 30% of our revenue going into the last recession was industrial today. It's about 13%. And, you know, pharma and biotech is much larger, and that has been the least economically sensitive of the end markets, and that represents just under 60% of our revenue. And when I think about our mix, we're more service and consumables oriented than we were then. You know, then it was 65% of our revenue. Today it's 82% of our revenue. So the company's performing well. Our end markets are good, and we'll manage through whatever the world throws at us. And you see that in the results, right? You see that in the, you know, FX got, you know, meaningfully more challenging for all global companies and we're able to power through that and deliver an increase in our guidance.
spk04: Great. And then my second question is on capital allocation. So it looks like it was a relatively quiet quarter here, though I know you're always very active internally. Just be great to get your thoughts on the deal pipeline. Do you think it's getting more interesting with some of these macro challenges around the world? And then given PPD's strong performance here out of the gate, just thoughts on adding more CRO exposure to the business?
spk11: Yeah. So, you know, from a capital deployment perspective, you know, I really wanted to do the deeper dive on the progress of PPD. And we did a large acquisition in December, right? And the first thing we have to demonstrate is that, You know, we're great owners and operators of the businesses that are part of the family, and that's always our number one priority, and our businesses perform great. And we have an active pipeline. And when I think about, you know, how valuations have come in in many sectors, that creates opportunities, right? So we're actively engaged as we always are, and we're well positioned to capitalize on the M&A opportunities that will be out there in the landscape. So thank you, Jack.
spk04: Thanks, Mark.
spk07: Thank you. The next question comes from the line of Patrick Donnelly with Citi. You may proceed.
spk12: Questions, guys. Mark, maybe one on the bioprocessing business. You know, it continues to be a source of strength for you guys, among others. Can you just talk about the performance this quarter for that business? It seems like it accelerated for a few players across the industry. And then secondarily, inside that bioprocessing piece, on the COVID vaccine side, are you still kind of, obviously you de-risked it a little bit last quarter, I think you lowered it 500, 600 million for the year. Maybe just updated thoughts on that front along with the core bioprocessing piece.
spk11: Patrick, good morning. Thanks for the questions. So, you know, when I think about bioprocessing, I always like to frame it in the context of how we serve pharma and biotech, right? The market, one level up, you know, is very attractive. We have a leading presence. And we're really well positioned to serve those customer base. You've seen us deliver really strong growth. When I think about production, right, or bioproduction, you know, as a reminder, we have two major activities that we, you know, we have within our company. We have our bioproduction business, which is the leading presence in cell culture media, single-use technologies, and a rapidly growing purification residence business. as well as our pharma services business, which is both drug substance and drug product for biologics. And you see us play with the monoclonal antibodies, viral vectors, cell therapy, plasmids, sterile fill finish, all part of that. So it's a large proportion of our total presence in serving pharma biotech. Outstanding quarter, right? When I look at, you know, and that was both across the services business and bioproduction. When I look at how others have done and reported, I feel very, very good about our performance. And the outlook here is really positive. When I think about your question on the COVID vaccine therapies, you know, our outlook for the year is $1.5 billion. That's the same as it was in Q1. We did just over $400 million in revenue in Q2, which was, you know, right in line with our expectations. It brings us to a little bit over $900 million today. at the halfway point of the year. So we feel good about our role in supporting our customers' activities in vaccines and therapies. That's part of our core revenue growth. So over time, when there's less demand for those capabilities, we will transition that well to other applications, which we do all the time.
spk12: That's really helpful, Mark. And then maybe just on the pricing side, I know Stephen kind of talked about that being a key bridge to raising the guidance in the back half. I think you previously discussed maybe two times the normal in pricing to combat inflation. Can you just kind of update where we are on the pricing side, any pushback from customers, maybe just what those conversations have been like? Obviously, pricing power has obviously been a great thing for you guys over the years, but this is getting to be the highest level we've seen. So maybe just talk a little bit about the pricing side. Thank you, Mark.
spk11: I'll start with the customer comment and then Steve will go through his thoughts. You know, we're incredibly transparent with our customers and a partner to enable their success. So we've had very constructive discussions and we've operated with transparency and it's allowed us to get an appropriate level of pricing.
spk08: Yes, in fact, in terms of the setup on pricing, you know, think back to kind of a normal year for us, about half a percent to a percentage point of net price across the whole business and For the first half of the year, we've been running kind of slightly north of double that high end of that range. And the additional pricing we put in place is really to offset the higher inflation that we're seeing, largely energy costs in Europe, as we think about the change in guidance. And that change in guidance is really slightly higher revenue and no impact on adjusted operating income or adjusted EPS, but a little pressure on margin, which is the reason why the The overall margin came down in the guidance from the last guidance, but that's kind of active management of the pricing to offset the additional inflation.
spk12: Helpful. Thanks, Patrick.
spk07: Thank you. The next question comes from the line of Derek Eberwin with Bank of America. Derek, you may proceed.
spk02: Great. Thanks for taking the question. This is Mike Ruskin on for Derek. Mark, I want to follow up on a lot of your comments and the prepared remarks. You really seem to emphasize share gains again this quarter. And the core business is doing really well in a number of different segments. So I'm curious if you could provide a little bit more color on some specifics on where you're seeing the biggest share wins versus your peers. Is it in sort of the core chromatography and mass spec and AI? or in the channel or by processing portfolio. We were just talking about just sort of what's working well and what's allowing you to take that share and, you know, any specifics you can give on individual pieces of the business would be helpful.
spk11: Sure, Mike. Thanks for the question. So when I think about the 13% core growth, the 14% core growth for the first half, really strong momentum in the business. very broad-based, right, so that's exciting. And when I look at how the industry is reporting, we're faring very well, so I'm proud of the team's efforts. So some of the highlights, you know, geographically, the team is doing an incredibly good job in China, so that's one lens. You know, end market lens, pharma and biotech growing incredibly quickly, right, with mid-teens growth, so that's another lens. And then the way you framed it, from the business's perspective, analytical instruments are doing very well. It's great to see the 13% growth in this segment, great performance in electron microscopy and chromatography and mass spectrometry. Our channel is performing well, pharma services. And then, you know, while it doesn't, it's in the core, you know, our PPD acquisition has performed very well. We've obviously had the benefit of seeing a couple of industry participants report, and that business is going well. And to be candid, It's pretty much broad-based. Of course, I haven't mentioned either. I didn't say something, so it's not doing well. The team is really humming right now.
spk02: Okay, great. And then for the follow-up, if you look at how this year has trended, sort of what you're implying for the rest of the year, what you're guiding for the rest of the year for COVID diagnostics, there's still going to be a little bit of a cliff as we go into next year, a little bit of a reduction in COVID diagnostics from 22 to 23. just given what you were able to accomplish in the first half of the year. But the base business is doing incredibly well. You're now guiding to 11% core business. So you've got your multi-year target of 7% to 9% out there, right? If we're using this year as a jumping off point, is there any reason to think that next year shouldn't be squarely in that range as well, despite the comps and then sort of adjusting for the COVID diagnostic delta between $2.5 billion this year to the run rate next year? I'm just trying to do the bridge between the base and the COVID diagnostics, sort of where that puts the model.
spk11: So Mike, I guess a few thoughts on 2023, right? And obviously, I'm looking forward, I actually am enjoying every day, so not that, but when we get to January, I'll be looking forward to giving you the update on sort of what we think for the year, right? So, you know, in the details. You know, what we don't know now, right? And it's just, nobody knows. um is what's the macro environment right is it you know it wasn't like the first half of this year and wow phenomenal right or is it different so we'll appropriately um you know set the context for 2023 um when we when we get there but i think there are a couple things that are worth saying at this point in time to at least help you think about it you know one is um the core business right it's going to be larger right we're growing the business faster this year than we had outlined in the long-term model. So that means the jumping off point in 2023 is we're going to have a bigger business, and that's cool. That drives earnings power and all of those things. We'll have an appropriate growth range based on how we see the world at that point in time. We'll figure that out when it gets closer. And then, you know, Stephen, might you want to comment on FX? I know that The movements have been enormous, and you might want to frame how to think about that for next year.
spk08: But I feel great about how the core businesses are performing. Yeah, I think if you look at FX rates, if they stay the same as they are now, that would be kind of an additional year of a year ahead when next year, about $600 million, about $0.40 for just EPS. I think about the mix of currencies and where currencies have changed. Obviously, that could change as we go through the year, but something to watch out for and incorporate.
spk11: Yeah, and Mike, when I think about the 7% to 9% growth, that's the long-term sort of average we work through. So it can vary in a given year, as this year obviously is above it. It can be within it. It can be different. It just depends on the measure we use. Are we delivering really good performance, right? And it's going to be in the context of what's the environment. So that's going to wait until January. Thanks for the questions. Very appreciated. Thank you.
spk07: Thank you. The next question comes from the line of Rachel Vansal with JP Morgan. You may proceed.
spk01: Hey, thanks for taking the questions and congrats on the quarter. So my first question is on China. Growth of over 20% in the quarter was very impressive. You said that some of that was driven by COVID testing. So can you just break out what was the COVID contribution versus core growth in China? And then what are your latest expectations for China for the year, given some of the headlines we've been seeing about additional lockdowns?
spk11: Yeah, so when I think about the business in China, the team really did an excellent job. Under really difficult circumstances, they basically had a month in the Shanghai region to basically get the business to really incredible performance in June. So we're very proud of that. We had good growth in the core business, much better than we expected. And a nice chunk of the overdrive in COVID testing was in supporting the local activities. So the team did a really good job there. We don't sell our assays there, but we do sell our instruments and our reagents to support local demands. So we had both strong core growth and a meaningful response in China, actually larger than we typically have in China for COVID testing. The way I think about the outlook, is it should be a good market in the second half of the year. I have no doubt there'll be some level of COVID disruption. What that'll be, when it'll be, where it'll be, hard to know. But just given the zero COVID policies, there'll be bumps in the road. But the team knows how to navigate that, and I feel like we'll get through that period effectively. And there could be some headwinds here or there, but nothing that we see at this point in time in China. It looks very small.
spk01: Great to hear. And then can you just give us an update on what you're seeing for earlier stage work in biopharma, just given some of the funding concerns pressuring those mid-cap biotech customers? I know that's a small percent of your revenue, but still just any dynamic in color that you're seeing in that market would be helpful. Thanks.
spk11: Yeah, so, Rachel, thanks for the question. You know, pharma biotech has been very strong. One of the questions, because, you know, our investors and analysts ask the question, You know, I asked the team about, you know, are there patterns, trends, anything that, you know, is jumping out? And it's actually been broad-based strengths, right? We've seen good, you know, good growth and, you know, in the various sub-segments within the customer base. So I feel like the momentum is strong, orders were strong. There's always company-specific challenges, right? There'll be companies that have bad data, you know, bad report out, or a company that's going through a patent cliff or whatever, and You know, we help those companies navigate those times. We help them drive productivity and, you know, accelerate innovation, those things. But we continue to see strong momentum in pharma and biotech.
spk09: Thanks for the questions.
spk07: Thank you. The next question comes from the line of Matt Fikes with Goldman Sachs. You may proceed.
spk10: Thanks for taking my questions and congrats on the quarter, Mark and Steve. Just my first question, Mark, when you announced the PPD acquisition last year, you said that part of the rationale was due to your large pharma customers wanting to reduce the number of trusted partnerships they had. And given that we're more than a half a year on from the close of the deal and we're potentially facing a tougher economic environment where cost savings might become more important, have you been able to capitalize on expanding these relationships And could you share any specific examples of partnership expansions with large pharma as a result of the addition of the TPD business?
spk11: So, Matt, thanks for the question. One of the things that's just been phenomenal is the speed at which we've been able to get meaningful authorizations that look clearly synergy work, meaning the benefits of bringing the combination together and We've had several of the larger clients that have worked historically very closely with us already select us to do business with them in clinical research. So we've had meaningful wins there. We're also seeing some really interesting momentum in some of the smaller companies as well. So it's not just the large ones, but that concept of leveraging the existing relationships you know, and the trusted partner status is working really well. And I think it was really cool that we were able to increase our synergy output by $100 million back in May. Really just at that point, it was just six months after the close, and it's a big number. And, you know, the team is not stopping there. They're focused on closing business, you know, building a very large authorizations backlog and growing the business incredibly strongly for the long term. So I think it's very positive. And we've earned a lot of trust over many years, and we're going to help our customers, you know, develop their medicines and do that cost effectively and rapidly so that, you know, they can really benefit patients. So it's very exciting times in terms of our clinical research momentum.
spk10: Great. That's great to hear. Thanks. And just one last question. Just any commentary on demand in the European region? Just give us some of the challenges. your customers may be facing there. Have you seen any change in demand from customers across your business within Europe?
spk11: Yeah. So Matt, thanks for the question. So Europe actually, um, had a good quarter, right? And it's, so I need to say that with, you know, down, um, double digits and effectively we had a very significant, you know, COVID-19 testing comparison. So, you know, embedded under that, the core business, um, was grew very strongly actually. So, The demand has been good, and we saw really good market conditions in bioproduction. The research and safety market channel will be examples because this has been really well in Europe. So what I saw in Q2 was strong. There's obviously lots of challenges in Europe, but when I put that sentence, it's not a thermal fissure comment or an industry comment with pressures on energy prices and certainly lots of challenges with the war in Ukraine. I think Europe will clearly be bumpy from a global economy perspective. But given our mix of business, which is very similar to the company average, we have a very large pharma and biotech presence in Europe. And when you take out the COVID testing, it represents a little under 20% of our revenue. I think we'll navigate that well.
spk10: Great. Thank you very much. You're welcome.
spk07: Thank you. The next question comes from Dan Arias with Stackable. You may proceed.
spk05: Morning, guys. Thank you. Steven, maybe just back on the pricing topic. Hey, guys. How much of the pricing plan that you have for the year has been implemented at this point? Can we think about sort of a percentage of the portfolio where you've successfully pushed an increase through versus what might be left for the back half?
spk08: Yeah, Dan, thanks for the question. So we've been very active on pricing from midway through last year. So it's not just a this year thing. And we've been appropriately adjusting as we've been seeing the impacts of inflation change. And it's, as Mark mentioned before, it's kind of how you bring our customers with us at the same time. So we're pricing appropriately given the economic challenges that are around and and I think appropriately navigating. So when I think about that, we're going to be dynamic as we go forward. So we'll figure out what the markets look like, what the inflation looks like, and adjust appropriately as we think about the second half of this year and then going into 2023. So it's kind of a constant working process is the way I view it.
spk00: Yeah.
spk08: I mean, the teams have actually done a very good job so far, and we'll continue to navigate that way.
spk05: Okay. Appreciate that. Just as a follow-up, maybe Mark, on your follow-up to Jack's question on sort of the end market pie chart, I'm curious how the applied science business looks for you at this point, and would you draw any distinction between the growth that you're seeing or that you think you'll see for industrial versus applied, just knowing that those two tend to get lumped together a lot? I mean, do you think decoupling those two is a useful thing at all to do?
spk11: You know, again, in terms of the industrial and applied, We obviously continue to see good momentum. We have a good position in serving semiconductor materials science. Those have been strong. The applied markets, funding has been fine. That sector continues to be good. There's obviously global macroeconomic concerns, but generally things continue to be strong. We do have a different mix. We're much smaller in terms of the percentage of the total. We just have a different mix. We have more of a material science mix than we did back in the last recession.
spk12: Great. Thanks, Ben.
spk07: Thank you. The next question comes from the line of Puneet Sudha with SBB Securities. You may proceed.
spk03: Mark Stephen. Thanks, Mark, and congrats on the quarter. Just two brief questions for me. First one on analytical technologies, that was obviously very strong in the quarter, 13% growth. I think in the last quarter you did 12%. You pointed to a strong backlog going into the quarter as well. So just wondering sort of how sustainable is that into the second half, given that these are instruments and not sort of consumables and services that you've highlighted as being a larger part of the business. And anything on the analytical instruments you could share on this strength, you know, maybe potentially continuing into 2023 given the backlog or not would be really helpful.
spk11: So, Puneet, you know, we had very strong performance in the quarter. Bookings were very strong as well, so that gives us, you know, that's encouraging in the second half. You know, we also have a very large backlog, right? So that also gives us some visibility to the second half as well and, you know, gives us the confidence and the very strong outlook we have for the year from a core perspective. So, you know, the signs are very good. And, you know, we're launching some amazing technology, and that makes a huge difference. Thank you. ASMS this year, I give obviously a deeper dive than normal, really affecting the workflow across a number of key applications for mass spectrometry. Fantastic in terms of the feedback and momentum in the business. The same thing is true in our electronic cross-group business. It's very strong. So I think we're very well positioned going forward there.
spk03: Got it. Okay. And then, Mark, a high-level question for you, a bigger important question we get from sort of investors around capacity expansion. I mean, Thermo has expanded capacity across multiple business lines and across PPD as well as single-use sites and agreements with Moderna and such. Are these sites and production capacities sort of fully operational sort of in 2022 timeframe? and delivering to the level that you expect them to deliver, or this is more of a 2023 or 2024 timeframe when you see them coming fully online, because it obviously requires hiring of folks and getting the facility fully ramped up. So asking that because we get questions around capacity expansion and over capacity, but on the flip side, when I look at it, I mean, this will generate meaningfully higher revenue for you when the capacity comes online fully. So just wondering, how to think about that in light of the 11% guide that you have today and the 7% to 9% longer term. Thank you.
spk11: Okay, thanks for the question. So, you know, we picked a couple really specific examples this quarter to highlight. You know, I picked the example of Grand Island and Gill. And those capacity expansions or demand has been so strong for so long that we need to expand our capacity just to be able to support our future growth, right? It's It's just, it's a different type of example, which is you deliver great results year in, year out. You know, at some point you expand your network to facilitate the growth strategy. Other of the expansions have, you know, where it's more just adding new capabilities. They've been coming online this year and will continue to come online next year. So it's a mix and, you know, it's exciting in terms of in the wind and we have really, you know, we brought on new capacity in our That was really the enabling the Moderna relationship expansion outside of COVID, and that's really a 2023 example. We have a number of other examples like single-use technology that we've been bringing along and will continue to bring along. So it's a mix, but I feel good about the blend of investments and how they'll fuel our growth strategy going forward. Great.
spk09: Thanks, Benito. Operator, we'll take one more question.
spk07: Absolutely. The next question and final question comes from the line of Teja Sagan with Morgan Stanley. You may proceed.
spk06: Hey, guys. Thanks for the time. Maybe I'll sneak in a two-parter here at the end. You know, beyond just the translational headwind from FX, Mark, do you see any signs that the strength of the dollar is beginning to weigh on customer minds, specifically in Europe and Japan? And then, Stephen, on the quarter-over-quarter sort of dip in gross margins, roughly about 430 bps or so, can you just help parse out what that bridge looks like between the COVID wind-down versus FX versus other dynamics? Thank you.
spk11: So on the FX and customer impact, the movements have been very rapid and relatively recently, so there hasn't been a lot of customer discussion. It's really about where the rate's going to settle, and it's also going to depend a lot on what the alternatives are. If everybody is a U.S.-based cost company, then it is what it is. If you have different, you know, where are we producing, where are others producing, you get into some of those dynamics. It's been a non-issue, and we've dealt with this. In fact, I pulled out a playbook from that we had in the years past where we had rapid moves of the rates, and we know how to navigate that environment well.
spk00: Steve?
spk08: Yeah, so on the gross margin, the gross margin came in exactly where I thought it would, so kind of in line with our expectations. I think that on a year-over-year basis, I think a lot of people are missing the impact of PPD It's just under a 400 basis point impact on market profile. And the rest really, since the change with quarter over quarter and year over year is related to the mix in business in terms of testing versus other core and an element of pricing to offset inflation, that also puts a little bit of pressure on markets. So that's the other piece to it. Great.
spk00: Thanks, James.
spk11: Thanks, Dave. Thanks, James. Let me wrap up. So as you heard this morning, really an excellent first half of the year. We're on track to deliver another outstanding year with great momentum, and that sets us up for a very bright future. As always, thank you for your ongoing support of Fennell Fisher Scientific. Thanks, everyone.
spk07: That concludes the conference call. You may now disconnect your lines.
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