Danaher Corp (DHR) 2024 Q2 法說會逐字稿

Good morning.

My name is Todd, and I will be your conference facilitator this morning.

At this time, I would like to welcome everyone to Danaher Corporation's second quarter 2024 earnings results conference call.

(Operator Instructions)

I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations.

Mr. Bedford, you may begin your conference.

Good morning, everyone, and thanks for joining us on the call.

With us today are Rainer Blair, our President and Chief Executive Officer; and Matt McGrew, our Executive Vice President and Chief Financial Officer.

I'd like to point now that our earnings release, slide presentation supplementing today's call, the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call, and a note containing details of historical and anticipated future financial performance are all available on the Investors section of our website, www.danaher.com under the heading, Quarterly Earnings.

The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call.

A replay of this call will also be available until August 6, 2024.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance.

The supplemental materials describe additional factors that impacted year-over-year performance.

Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to results from continuing operations and relate to the second quarter of 2024, and all references to period-to-period increases or decreases in financial metrics are year over year.

We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets.

During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings and actual results might differ materially from any forward-looking statements that we make today.

These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements except as required by law.

With that, I'd like to turn the call over to Rainer.

Thank you, John, and good morning, everyone.

We really appreciate you joining us on the call today.

Our team executed well during the second quarter, delivering better-than-expected revenue, earnings, and cash flow.

We were particularly pleased with the sustained positive momentum in our bioprocessing business and with the strong performance of Cepheid, which we believe gained market share in molecular testing again this quarter.

Now across the portfolio, market conditions were largely as we anticipated.

In our bioprocessing business, conditions in the US and Europe continued to improve, and we were encouraged to see orders increased high-single digits sequentially this quarter.

In China, bioprocessing demand and underlying activity levers were stable sequentially, but remained weak as customers continue to manage liquidity.

In life sciences, capital equipment investments remain constrained while recurring revenue was relatively stable.

And in diagnostics, we saw a healthy demand globally across our businesses.

As we move through this transitional period, we believe Danaher is well positioned for sustainable long-term value creation.

Our strong positioning in attractive end markets, coupled with durable, high-recurring revenue business models, and the power of the Danaher business system supports our long-term expectation of high-single digit core revenue growth with a differentiated margin and cash flow profile.

So with that, let's take a closer look at our second quarter 2024 results.

Sales were $5.7 billion in the second quarter, and core revenue declined 3.5%.

Geographically, core revenues in developed markets were down low-single digits with strength across diagnostics, offset by declines in biotechnology and life sciences.

High growth markets declined high-single digits, including a high-teens decline in China.

Our gross profit margin for the second quarter was 59.7%, and our adjusted operating profit margin of 27.3% was up 60 basis points as the favorable impact of cost savings initiatives more than offset lower volume.

Adjusted diluted net earnings per common share of $1.72 were essentially flat year over year.

We generated $1.1 billion of free cash flow in the quarter and $2.6 billion year to date, resulting in a year-to-date free cash flow to net income conversion ratio of 129%.

Now additionally, through the second quarter and into July, we repurchased approximately 19 million shares.

While M&A remains our bias for capital deployment, we believe these repurchases will provide an attractive return given the strength of our long-term organic growth, earnings, and cash flow outlook.

Now let's take a closer look at our results across the portfolio and give you some color on what we're seeing in our end markets today.

Core revenue in our biotechnology segment declined 7% with the bioprocessing business down high-single digits and the discovery and medical business down mid-single digits.

In our bioprocessing business, revenue declines moderated from the first quarter as we believe our larger customers in the US and Europe have worked through the majority of their excess inventories and are returning to normal ordering patterns.

Many of these customers are also seeing strong momentum for therapeutics in their late-stage pipeline, which is promising for our future growth.

Our emerging biotech customers continue to prioritize projects, particularly for cell and gene therapies in an effort to manage liquidity.

However, we are encouraged by the improvement in the overall funding environment, which is a positive leading indicator for these customers.

So based on the trends we saw through the first half of the year, we continue to expect a low-single digit core revenue decline in our bioprocessing business for the full year 2024.

There's also no change to our assumption of a bioprocessing core revenue growth rate of high-single digits or better as we exit the year.

The Biologics market remains very healthy as evidenced by the increasing number of treatments, both in development and production, notably the number of new FDA approvals for biologic and genomic medicine in the first half of this year nearly doubled compared to the first half of 2023 and the full year 2024 is on track to set another record.

Underlying demand for biologic medicines also remains on track to grow at a high-single digit or better rate again for the full year 2024.

So given the substantial and sustained increase in approvals and production volumes, we expect the growth rate in bioprocessing to remain very robust for many years to come.

We continue to make substantial investments in innovation to support our customers as they pursue these life-changing therapeutics.

To support monoclonal antibody production, which comprises the majority of our bioprocessing revenues, Cytiva expanded its comprehensive filtration portfolio with the launch of Supor Prime.

Now Supor Prime filters are specifically designed to address key challenges associated with high concentration biologic drugs whose complex formulations and high particle loads make them prone to premature filter blockage and costly drug product losses.

We're also developing innovative solutions for emerging modalities.

In May, Cytiva introduced the Sefia automated cell therapy manufacturing platform, which is helping address critical cost and capacity constraints associated with CAR T cell therapy manufacturing.

The Sefia platform’s fully automated manufacturing process can increase productivity by up to 50% per year compared to the industry standard, reducing our customers' costs and increasing throughput.

Addressing these key manufacturing challenges will help improve patient access and facilitate wider adoption of these important therapeutics.

Now turning to our life sciences segment.

Core revenue decreased by 5.5%.

Core revenue in our life sciences instrument businesses collectively declined high-single digits as expected with trends in the second quarter largely consistent with what we saw in the first quarter.

Global pharma & biotech demand remained weak.

Academic markets were weaker sequentially and applied markets performed comparatively better, particularly for our advanced solutions, which provide critical capabilities needed by our customers.

In China, we're seeing improving sales funnels and quoting activity driven by the recently announced stimulus measures.

However, we don't anticipate this to convert to orders until 2025 as these programs are in the early stages of implementation.

In the meantime, many customers are delaying purchasing decisions as they await funding.

Now last month at the American Society of Mass Spectrometry meeting, SCIEX reinforced their market leadership and quantitative mass spectrometry with the release of the 7500 Plus Triple Quad mass spectrometer.

The 7500 Plus pairs the ultra-high sensitivity of the 7500 with faster acquisition speeds and the ability to maintain the highest sensitivity quantitation for up to twice as many sample runs.

This makes the 7500 Plus particularly well suited for complex applications such as PFAS analysis where customers need to test more samples across diverse sample types with high precision to meet challenging new regulations.

In our genomics consumables business, core revenue declined mid-single digits in the quarter.

High-single digit growth in gene writing and editing solutions was more than offset by declines in next-generation sequencing and the impact of project timing in our plasmid business.

During the quarter, IDT opened a new manufacturing facility at their Coralville, Iowa campus, which enables a team to manufacture differentiated new offerings such as rapid gene synthesis.

This is the second facility expansion for IDT within the last 12 months and provides the capacity needed to support the rapidly expanding global DNA synthesis market and related drug development activities.

Now moving over to our diagnostics segment.

Core revenue increased 3%.

Our clinical diagnostics businesses collectively delivered mid-single-digit core revenue growth, led by high-single-digit growth at radiometer.

Leica Biosystems was up mid-single digits with notable strength in digital pathology driven by Aperio GT 450 diagnostics digital pathology slide scanner, which recently received its FDA 510(k) clearance.

Beckman Coulter Diagnostics was up low-single digits with balanced strength across both developed and high growth markets.

Now in May, Beckman received FDA 510(k) clearance of its access NT-proBNP on the DxI 9000 immunoassay analyzer.

This important expansion of Beckman's cardiac testing menu allows clinicians to quickly and accurately diagnose and assess the condition severity of patients suspected of having acute heart failure.

Now this clearance is just the latest confirmation of the DxI 9000 platform's capability to develop increasingly more sensitive and clinically relevant diagnostics.

In molecular diagnostics, Cepheid's respiratory revenue of approximately $300 million in the quarter exceeded our expectation of $200 million, driven by both higher volumes and favorable mix of our four-in-one test for COVID-19, Flu A and B, and RSV.

So we continue to expect respiratory revenue of approximately $1.6 billion for the full year 2024.

Now as I mentioned earlier, we believe the Cepheid team continued to gain market share during the quarter.

Increasing menu adoption and system utilization helped drive mid-teens growth in our core non-respiratory reagent portfolio, including more than 20% growth in sexual health and virology assays.

We also continued to expand our nearly 60,000 system installed base as many existing health care systems and integrated delivery network customers are adding new instrument at sites further out in their networks and closer to patients.

In June, the FDA granted Cepheid marketing authorization for its hepatitis C RNA test.

Hepatitis C diagnosis has traditionally been a multi-step process requiring follow-up appointments and leading to treatment delays.

With Cepheid’s test, which is the first molecular based point-of-care test for hepatitis C, patients can be tested and receive treatment during the same health care visit.

So this is a great example of how bringing accurate easy-to-use molecular testing closer to patients is improving treatment outcomes and driving long-term growth at Cepheid.

Now before we move on to our expectations for the remainder of the year, I'd like to highlight our recently released 2024 sustainability report, which details several important milestones across the three pillars of our sustainability program.

Starting with building the best team, innovating products that improve lives and our planet, and protecting our environment.

Notably, we have committed to setting science-based greenhouse gas emission reduction targets in line with the Science Based Target initiative, including reaching net zero value chain emissions by 2050.

So I encourage you all to read through the report to learn more about the depth and scope of Danaher's commitment to sustainability and the important work we're doing to make a positive holistic impact on the world around us.

So now let's briefly look ahead of expectations for the third quarter and the full year 2024.

In third quarter, we expect core revenue to decline in the low-single-digit percent range.

Additionally, we expect the third quarter adjusted operating profit margin of approximately 26%.

For the full year 2024, there's no change to our previous guidance.

As a reminder, we anticipate a core revenue decline in the low-single-digit percent range and a full year adjusted operating profit margin of approximately 29%.

So to wrap up, we're pleased with our better-than-expected second quarter results and are encouraged by the continued momentum in our bioprocessing business.

Our strong performance is a testament to our team and their commitment to innovating and executing with the Danaher Business System.

And they have done a tremendous job navigating the current environment to support our customers' life changing work today while also delivering breakthrough innovation that is reinforcing our long-term competitive advantage.

The transformation in our portfolio over the last several years has created a focused life sciences and diagnostic leader positioned for higher long-term growth, expanded margins, and stronger cash flow.

And our recent share repurchases reflect our conviction in a bright future ahead for Danaher.

So looking ahead, the unique combination of our incredibly talented team, the strength, and differentiation of our portfolio and a leading financial profile provides us with a strong foundation to create sustainable, long-term shareholder value.

And with that, I'll turn the call back to John.

Thanks, Rainer.

That concludes our formal comments.

We're now ready for questions.

(Operator Instructions)

Jack Meehan, Nephron Research.

Appreciate all the color on bioprocessing.

Two follow-ups.

First is on the consumables.

Can you elaborate on what's giving you the confidence that destock is drawing to a conclusion here?

And then on the capital equipment side, just thoughts on how long this will remain depressed when you might start to see some improvement there?

So Jack, on the consumable side, we've really seen ordering patterns back to normal with very, very few exceptions and with pretty clear visibility through the measures that we put in place to stay close to our customers here during the destocking period.

We feel that we're very close to normal order patterns.

And keep in mind, we actively monitor our customers on a customer-by-customer basis.

And in addition to that, we really took active measures here to ensure that inventories were normalized.

And you'll keep -- you'll recall that we took decisions to ensure that we took the dysfunction in the supply chain out to ensure that we had a true demand signal and we think that's paid off here, and we know where our customers sit in terms of their stock levels on consumables.

Now equipment is a slightly different picture.

We're seeing good activity there at some of our larger customers and that played out here in the second quarter as well with the sequential quarter growth being high-single digits and being positive for both equipment and consumables.

And so those larger customers really do have a higher activity level whereas the smaller customers probably remain a little bit more constrained.

Awesome.

And then we're just trying to piece together the mosaic here.

So your bioprocessing orders increased high-single digits when your peers declined sequentially, I think there's a lot of plausible explanations being turnaround for why the results in the quarter diverged.

I was just curious if you could weigh in on what you think's the right signal.

What's the noise?

But from a competitive perspective, Jack, everyone has slightly different positioning whether it's by product category or geography or even customer type.

As you look at us, we're probably the broadest and the deepest in terms of our portfolio, both upstream and downstream, while some others are perhaps a little bit more concentrated.

So giving that it's always going to be hard to really line up the various players in the industry to have a perfect read across.

But again, the good news here is that this is a great business and it's recovering as we expected, and we're confident about the future.

(technical difficulty) [Rachel Vatnsdal], JPMorgan.

Perfect.

Hey, good morning, guys, and thanks for taking the questions.

So another one here on bioprocessing and so on the 3Q guidance, can you just walk us through what's contemplated in 3Q guide?

We've seen a few quarter for the sequential progression on orders grow in the last three quarters in a row sequentially.

So walk us through how much of this is just seasonality on the step down into 3Q versus is there some conservatism in there?

And then also on orders, should we expect seasonality to also impact on the order books for bioprocessing in 3Q as well?

Yeah.

No, I think that's in bioprocessing in particular.

You're probably should talk about bioprocessing and respiratory for Q3.

So if you think about revenue, we've got bioprocessing is going to be down low-single digits, which is, again, the kind of a continued improvement versus what we saw in Q1 and Q2.

We were down high teens in Q1, high-single digits in Q2, and we think that that goes to low-single digits here in Q3.

Given like Rainer just said, I think we're largely through the destocking on the consumable side, a little bit easier comps in China as well.

So that probably helps a little.

But could if you think about the two big drivers of Q3, outside of even bioprocessing, when you think about the guide in totality, you have two issues or two things to think about.

We've got lower volume in biotechnology like I just talked about and in respiratory as well.

So biotechnology, prior to the pandemic, we had a step down between Q2 and Q3 seasonally.

That was always the case for the business and we're monitor -- we're putting that in sequentially again here in our guide.

We were about down mid-single digits prior to the pandemic from a revenue perspective.

And so that's what we assumed in the guide that we would have that step down that we normally have seen.

Given the fact that we're back at normal order patterns, we believe that we're going to have a normal seasonality as well.

So you factor that into bioprocessing and then on respiratory, we're assuming $200 million of revenue versus $300 million here in the quarter.

So the two of those combined are the reason that you've got the Q3 revenue where it is.

And I might also add just to get out in front of them, maybe the next question on margins.

That's a big reason why we're guiding to approximately 26% adjusted operating margin in the quarter.

Those two businesses being a little bit lower sequentially here given their margin profile.

That's the big driver, if not the full driver of what's happening on the margin perspective as well.

Great.

Thanks.

And then my follow-up here, just on 2025, there's been a lot of noise across the industry on 2025 and where we'll be at from an underlying market growth standpoint as well.

So you reiterated exiting this year in bioprocessing at high-single digits or above, but could you just walk us through how you're thinking about the total business in terms of '25 in relation to that underlying market.

And then you've also talked about the incremental margin on bioprocessing and some of that durability on the margin expansion in diagnostics as well.

So Street's currently at $8.70 or so in EPS on '25.

How are you feeling about that number?

Any early takes there would be helpful.

Thanks.

Yes, we just finished the second quarter year of '24, so we still got a lot of work left to do in '24 before we think about '25.

We've always guided here in January.

I think that is still the plan.

Plenty of work left to do here in the quarter from a top-line perspective.

But clearly, we are seeing the improvements we thought.

Clearly, this is playing out at least in bioprocessing like we thought on the top line.

And so maybe, what we should do is let's just get through Q3 here and then we revisit the fourth quarter and 2025 as we get there.

From a margin perspective, I think we have historically talked both, like I talked on the last call, Q4 and Q1 will typically be better margin quarters for us given, like you said, the operating leverage that we get out of bioprocessing and respiratory.

I don't think that that will be any different here in this year.

But as far as over the long term and as I think about next year from margin perspective, we've talked about this business being a 35% to 40% incremental fall through.

I don't see any reason why that would not be the case, especially as we return to growth.

In bioprocessing, I think we've been close to those levels here as we've been shrinking, frankly.

So I think we've done a lot on the cost structure to be able to make sure that we can continue to do that.

But I think over time, 35%, 40% fall through.

And this is a business in a normal time that our adjusted operating margin should be in the low 30s%.

Scott Davis, Melius Research.

I think the buyback, I don't recall seeing one at least one of the size in the past.

What's -- somewhat color -- is it maybe a statement that M&A is a little slow or is it should -- do you guys think about it as a little bit more like housekeeping?

What slow color on how you thought through that the buyback?

Thanks.

Well, Scott.

First, it's important to note that this is not a change on our view on capital allocations.

We maintain a strong bias towards M&A, and we're going to continue to be active on the M&A front.

Having said that, as always, we evaluate capital allocation using the same ROIC lens whether it's M&A, buyback, R&D projects, CapEx, and so forth.

So we evaluate all of these investment options based on the expected returns.

And specifically in today environment, the relative value of a buyback generates attractive financial returns.

So we're buying a great business.

One, we know very well.

We have strong conviction about its future while maintaining a meaningful M&A envelope.

Now I had put out there that this is important that our free cash flow is nearly $6 billion and our net leverage is about two turn.

So we feel well positioned here with the various alternatives.

Makes sense, Rainer.

Guys, will the book to bill in Cytiva, will that cross 1 in 3Q or maybe said a different way, has it already crossed 1 since we've already up a month into the quarter?

Well that book to bill is in the 0.9, Scott.

And as we said, in order to make our full year guide here of bioprocessing being down low-single digits, we have to maintain the 0.9. And that's certainly how the first half has played out here and we're confident that that will continue to be the case.

As you know, we don't guide to book to bills or orders, but basically the guide is built on the assumption that as we have 0.9 here for the year, we will exit our year with high-single digits or better growth.

Best of luck Rainer.

Thank you, guys.

Appreciate it.

Vijay Kumar, Evercore ISI.

Hi, Rainer.

Good morning to you and congrats on a nice finish here.

One, maybe high level.

Maybe talk about the competitive pricing environment?

Any change, I think where I'm going with the question is, given the mixed signals from different players, there is some fear whether a competitive pricing environment could degrade.

So maybe talk about what you're seeing in the market?

Vijay, look for the second quarter, all up for Danaher, our pricing was up 100 basis points right around there.

And for 2024 as a whole, we think we will likely be a little above our historical average of 75 to 100 basis points.

So we feel good about our positioning, the leverage in our portfolio, and how we've positioned here, price-wise.

As far as -- I think you're probably referring to bioprocessing price, Vijay.

We did about 2.5% here in the quarter.

It's probably a pretty good marker for the full year.

We were getting better price in the last couple of years, probably 4%, 5% type price, but that was also in an environment where we had supply chain and other challenges from an inflationary perspective that we're getting more price to offset some of that.

So some of those concerns fall off, if you will, the price comes down.

But fundamentally, from a competitive perspective, I don't think we're seeing significant price pressures.

It's much more a function of just coming back to where we used to be, which is in bioprocessing 100 to 200 basis points.

Okay, that's helpful, Matt.

Rainer, one more on bigger picture on China.

What's been the historical relationship between code activity and when that translates to orders and revenues?

Is there any way to quantify when you say China quote activity expect has picked up, is that above trend versus historical averages above trends?

Any framework would be helpful.

Well in China what we're seeing is increased activity levels in our funnel.

So the volumes that we see in our funnel has been growing and that's all related to people in the market getting ready for this stimulus funding, if you will, with shovel-ready projects.

But what we're also seeing is a decrease in the funnel velocity as naturally market players are looking to see what the financing terms and conditions for the stimulus are.

So we have watched this development.

This is expected for us.

This is not new news.

We expected that the market would hold up to see what the funding alternatives would be and we don't expect to see the funnel convert into orders in any meaningful way here in 2024.

We view that more as a 2025 event as people are waiting for their shovel-ready project to receive funding.

Michael Ryskin, Bank of America.

I want to ask on life sciences segment.

I think you flagged instruments still down high-single digits, and that's a small part of the business.

But still seems like life sciences as a whole isn't seeing a lot of improvement yet.

You also called out NGS.

I think, being a little bit weaker, so some parts of consumables are impacted.

So just as a whole for life sciences both instruments and consumables.

Can you dive a little bit more in terms of what you're seeing in the end market?

Any improvement in order trends there?

Just how should we expect the second half to play out?

Sure, Mike.

Let's start with the quarter.

So overall, the second quarter came in as expected, down high-single digits with the market conditions largely consistent with what we saw in the first quarter with capital equipment more constrained, particularly in China, while consumables and services held up comparatively better.

Now in developed markets, pharma and biotech remain soft but stable sequentially while the academic markets were modestly weaker and applied markets continue to hold up well, particularly for more advanced instrumentation that you need for complicated applications such PFAS, clinical, and so forth.

And coming back to China here and to build on my comments to Vijay's question, the recent stimulus measures are really driving improved funnels in coding activity, but we don't expect that to convert to orders until 2025.

So as expected, we're starting to see customers delaying their purchasing decisions there as they await the stimulus funding.

Now as you think about the second quarter, look, we're going to the second half -- we're going to see the comps easing a bit and that will certainly contribute to some stabilization.

But we would expect this normalization process for life science tools and consumables to continue through 2024.

Okay.

2025 --

Through 2024.

The end of '24.

Okay.

All right.

Thank you.

Sorry about that.

And then on Cepheid, on the diagnostics side, I mean you talked about respiratory coming in a little bit stronger at $300 million, but the rest of diagnostics and the rest of the major diagnostic specifically still seemed a little bit choppy in the Q you called out a decline in core sales and on

[DX].

So could you talk about what you're seeing diagnostics outside of respiratory business?

Sure.

We saw mid-single digit growth in our non-respiratory businesses with good customer activity around the world.

And in particular, if you think about Cepheid, both respiratory and non-respiratory reagents were up.

So non-respiratory was actually up mid-teens.

And here you see the Cepheid strategy playing out, increasing that installed base, increasing menu adoption and utilization.

Virology, a relatively new assay, up 20% in the second quarter.

And we're, of course, benefiting from recent menu expansion such as in sexual health, which is also up 20%.

And then you heard us launch the new assay and received approval for hepatitis C, and we look forward to seeing its growth journey going forward.

So if you look at Cepheid, that strategy plays out.

We continue to take share and grew both in respiratory and non-respiratory testing.

We have there a little bit of a year over year with the equipment being a little bit down and that nudged it just into small negative growth here for the second quarter.

Now as you look at the remaining businesses, Beckman grew low-single digits, but really the Beckman Diagnostics continues with this momentum with recurring revenue growing at mid-single digits again this quarter and the overall motor -- moderation there for Beckman is really related to some challenging equipment comps.

We had a lot of backlog that we needed to ship out last year, and that's affecting the compare here a little bit.

But Beckman Diagnostics really is a mid-single-digit long-term grower.

It's got a full innovation pipeline.

The commercial execution is outstanding.

We've got great instrument placement and we've done a lot on the innovation front.

We just talked about the access NT-proBNP, which is expanded our cardiac menu in the second quarter.

And we've done a full refresh of our product line with the immunoassay DxI 9000.

On chemistry, the DxC 500 and in automation, the DxA 5000.

So coupled with our execution, we see our diagnostics businesses poised and positioned very well here, both competitively and for the long term.

Dan Brennan, TD Cowen.

Maybe just going back to Scott's question on the buyback.

The stock -- Danaher stock has been one of the best performers over the past 5 and 10-year periods, so arguably, you could say the ROIC on buybacks was consistently attractive during that period of time.

And as mentioned, you guys, historically don't really buy back stock and your business model is really predicated on M&A and deploying DBS.

So could you just elaborate a bit on the M&A environment today?

Maybe what's holding things back?

And what's your confidence in employing meaningful capital for M&A as we look out over the next few years?

Yeah, Dan, maybe I'll start.

I mean, look, we -- maybe this is the way to think about it.

We like this portfolio.

We like our position for the future.

We like the growth where we're going to be here.

The portfolio move to the last five years have been -- the fog of COVID, if you will, has really made it hard to see what we think this business is capable of.

We've talked about it with everybody in the past.

I mean this is a high single-digit growth business, 60% gross margins, 30% OP with free cash flow conversion north of 100%.

So we like our business and when I see what we trade at today, and then I look out at what some of these still current M&A multiples are, it's just from a return perspective, we're getting a good return if not better on some of -- on the buyback and we would at some of these levels.

And we just think that in today's environment, the buyback made sense, but that is in today's environment, our bias still is towards M&A.

But I do believe that we've got a bit of a disconnect here still in today's environment and where we are making a bet, if you will, on the business that we know well and that we think is got a lot of upside.

Great.

Thanks, Matt, for that.

And maybe just one, if I just go back to the Q3 guide for bioprocess in the normal seasonality.

Q2 did come in ahead of expectations and you're maintaining the full year guide.

So is there anything in Q2 in terms of a pull forward or timing?

Or is there any change to your view that as inventories normalize, which I think you've said in the past, you would see a real nice recovery as I think you guys have talked about the math of seeing like a nice growth rate as things normalize.

Yeah. nothing I would say for bioprocessing and the same for respiratory.

I would say there's nothing that we saw in Q2 that is causing us consternation about the normal seasonality.

I think this is really about returning to a normal seasonal pattern where typically in bioprocessing, we are seeing mid-single digit decline sequentially from Q2 to Q3.

And for planning purposes, we -- because we are largely past destocking and because we see the customer order patterns coming back to normal, for planning purposes, we are going to plan on that same mid-single digit decline from a revenue perspective sequentially.

But that does not change anything in the underlying what we've seen in the business.

So I wouldn't read too much into it other than this is a sequential normal historical revenue pattern, and we are assuming that in the guidance.

Doug Schenkel, Wolfe Research.

First, I've got a two parter on bioprocessing and then I want to pivot back to China.

So on bioprocessing, it seems like you need continued improvement in the end market to exit the year growing high-single digits.

Meaning, this is more than just year-over-year comparisons.

It does seemed like you're expecting continued improvement there.

Just given how the last couple of years have gone in the market, even acknowledging what you talked about in terms of encouraging trends, I'm just wondering how you got comfortable with any risks to that assumption.

So that's the first question.

The second is on new modalities.

In the near term and then just looking ahead, how has your business associated with new modalities performed recently?

And what's your expectation for mix, either new modalities versus MAB contributions moving forward based on what you're seeing in the market right now?

That obviously could be at accelerated growth over the coming quarters.

And then finally on China, just regarding the slowdown in purchasing related to stimulus -- pending stimulus, I'm just wondering how broad base this is and where you're seeing the most headwinds as folks basically try to get better clarity on where the money is going to be allocated and when?

Thank you very much.

Sure.

Let's start with how we get comfortable with our view on bioprocessing and its future.

And I think it's important to level set one more time on the performance that we've seen here in the first half, starting with the second quarter, which again, it's played out as we thought.

We saw improvement in revenue and orders second quarter in a row in both consumables and equipment.

And you'll recall from our commentary in the last quarter's comments that we wanted to see that improvement in equipment and we did.

And our core revenue improved nearly a 1,000 basis points from down high teens Matt talked about this to down high-single digits.

And again, orders grew high-single digits sequentially from Q1, which is an acceleration from the mid-single digit.

So we do see strength there, and that's because destocking is largely behind us and they're very few exceptions.

And those order patterns are more and more similar to the pre-pandemic levels, which is also why in our guide here for Q3, we've talked about seasonality again, something that we haven't seen and what will consider the anomalous last eight quarters or so.

So those ordering patterns are returning to what we saw in the pre-pandemic level.

And again, important to note here, large customers with on-market drugs continue to grow because that underlying large molecule demand remains at historical growth rates.

And we talked about that high-single digit, maybe even low-double digits, but certainly at the historical rates, which continues to provide that demand signal through the entire value chain.

At the same time, development pipelines remain very solid across the board.

But if we look at Phase 3, that's particularly strong.

In fact, we would say it is stronger than it had been prior to the pandemic and that further underwrites our long-term growth expectations.

Now you talked about some of the smaller biotech customers, and that's where you tend to see some of these advanced modalities.

Let's just call them for the sake of argument right now nucleic acid-based therapies and perhaps a couple of other types of bispecifics ADCs.

And what we see there is that they have been over-proportionately impacted by some of the funding contraction that we saw in the venture capital markets but that's improved, which is encouraging.

But again, those smaller players really do need to focus on their most promising projects to play that out.

And that's going to have an effect on how much capital that they spend on equipment.

So if a particular player is positioned and their portfolio skewed more towards these advanced therapies and these smaller customers where cash remains fairly tight, then that's going to impact the order book.

With our broader portfolio, particularly with our skew towards commercialized drugs and those in late phases, we see that strength and that's another reason why we feel good about exiting 2024 at high-single digits or better.

Now coming back to your question here on new modalities.

New modalities are exciting.

They are a small part of our business and they are a small part of the overall market.

Keep in mind, our business is driven by protein therapies in their various forms.

And of course, we also are a leading player for the advanced therapies.

But if you calibrate, this is a much smaller part of both our business and the market.

And it's going to have a fair amount of variability both and success rates in terms of the approvals that these advanced therapies receive, but also in terms of the uptake and the reimbursement dynamics associated with those.

So I think we're just at the very beginning of that trend to these advanced modalities going on.

Lastly, China, the slowdown that we're seeing is really fairly broad based.

As you look at our portfolio, life science equipment in particular has a research and more academic focus, and that's where you see a lot of waiting for the stimulus funds to be dispersed and that segment is ready, the applications are filed.

They are in the final, so to speak, but we need to see the disbursement of that and we're not counting on that happening in any material form here in 2024.

Tycho Peterson, Jefferies.

Rainer, I want to go back to instruments for just a minute and your background, obviously and SCIEX's back in the day.

Just thinking about the replacement cycle.

We get a lot of questions on that for mass spec.

How do you think about that potentially kicking in over the next couple of years?

Because I think there's some debate that some of that got pulled forward during COVID and maybe it's going to be more muted this cycle when you do you start to see the replacement cycle for mass spec?

So I think we would support that hypothesis that the additional funding and in the various markets subsidies pulled forward demand and replaced a lot of equipment out there during the pandemic and immediately following that.

And that's why we've talked about the need and we're experiencing that normalization period right now.

And that replacement cycle is going to remain intact and that's why we would say we're probably in the early innings, mid innings here of that recovery.

The first step that we're probably going to see here are the lower comps in the second half.

And it's probably going take 2025 to start approaching that normal replacement cycle, again, Tycho.

Okay.

And then on bioprocess, I appreciate all the color.

We start to get more questions on yield improvement.

I'm wondering how you think about that just your customer is getting more efficient and then how you think about capacity freeing up in the industry, whether it's Novo selling off some of the capital capacity or Wushi having to get rid of some capacity in the US.

Just curious how you think about that playing into the equipment side of things.

And then maybe last part, just what's your view on doing more on the services side CDMO type work and adding your own capacity?

Starting with yield and improving customer yield, that's what we do.

Our focus is bioprocessing is to help our customers improve the yields and there's plenty of opportunity for that to ultimately lower the total cost of manufacturing of these life-saving, certainly a quality-of-life improving drug and to improve accessibility to these drugs around the world.

So that's what we do and we don't view that as an inhibitor to growth on the contrary through creating more value for our customers that we see more opportunity for growth there and differentiation and believe that we're very well-positioned.

Now as we think about capacity here in the marketplace, we actually believe that capacity certainly for commercial production and what is in Phase 3 needs to increase.

We don't believe that in the large manufacturers, pharma, or CDMO that ultimately there is sufficient capacity for the long term.

And we would expect that capacity to continue to increase and there's moves in the marketplace that demonstrate that, and that underwrites also our perspective on equipment orders growth.

Now as it relates to services, we've talked about that at length.

We're very focused on the scope of the businesses that we have.

We're excited about investing in those businesses and helping our customers do what they do.

We do provide services in order to help them with some of their most complex and new therapies and then ultimately do tech transfers to either the pharma company itself or its CDMO partner.

Thank you.

At this time, I would like to turn the call back to John Bedford for any additional or closing remarks.

Thank you, everybody, for joining.

We'll be around all day and rest of the week for questions.

Have a good day.

Thank you.

This does conclude Danaher Corporation's second quarter 2024 earnings results conference call.

You may disconnect your lines at this time and have a wonderful day.