Ashley welcomed everyone to the Danaher Corporation Second Quarter 2023 Earnings Conference Call and then turned the call over to John Bedford, the Vice President of Investor Relations. Bedford noted that the Form 10-Q, earnings release, slide presentation, and reconciliations are available on the company's website. The audio of the call will be archived on the website and a replay will be available until August 8, 2023. Bedford also mentioned that they may describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets.

In the second quarter, Danaher's team was able to deliver their expected revenue, earnings and cash flow despite a more dynamic operating environment. This demonstrated the resilience of their portfolio, with high single-digit base business core revenue growth in Life Sciences and Diagnostics, as well as better-than-expected respiratory testing revenue. The team was able to navigate the challenging conditions through the Danaher Business System, mitigating supply chain constraints and enhancing productivity. The results also highlighted the durable balanced positioning of Danaher's portfolio, with businesses serving attractive end markets with favorable long-term secular growth drivers.

In the second quarter of 2020, Danaher reported $7.2 billion in sales and a 7% decline in core revenue. The COVID-19 pandemic had a 9% negative impact on revenue. Geographically, core revenues in developed markets declined high single digits, while high-growth markets declined low single digits, with China down approximately 10%. Danaher had a gross profit margin of 56.5% and an operating margin of 20%. Adjusted diluted net earnings per common share were $2.05 and the company generated $1.6 billion in free cash flow in the quarter and $3.3 billion year-to-date.

Danaher's Biotechnology segment reported a 17% decline in revenue and a 16.5% decline in core revenue. The biopharma market in China and larger customers working through inventory they built during the pandemic have caused market dislocations impacting near-term growth. However, recent regulatory approvals for novel gene therapy and monoclonal antibody-based Alzheimer's therapeutic have strengthened Danaher's conviction in the long-term opportunity of biologics and bioprocessing. In May, the company completed the combination of Cytiva and Pall Life Sciences to create a premier global bioprocessing franchise.

Cytiva, the combination of two businesses, has the broadest offering in the industry with end-to-end solutions across all major therapeutic modalities. The X-Platform Bioreactor, launched in the second quarter, optimizes cell culture productivity and increases process intensity to improve manufacturing yields. Cytiva's Life Sciences segment reported a 5.5% growth in revenue, primarily due to the healthy demand for their more advanced instrumentation. This was driven by nearly 10% growth at Leica Microsystems and high single-digit growth at SCIEX. Genomics consumables saw low single-digit growth, driven by plasmids, proteins, and gene-writing and editing solutions used in commercialized or later stages of the drug development pipeline.

IDBS and SCIEX have both released new products to help accelerate drug discovery and development. In the Diagnostics segment, reported revenue declined 13%, with high single-digit growth in the base business, offset by lower COVID-related respiratory testing volumes. Leica Biosystems had high single-digit core growth, driven by strength in core histology and advanced staining. Beckman Coulter Diagnostics saw mid-single digit growth with solid performance across both instruments and consumables, and the launch of the DxI 9000, which automates up to 90% of standard daily maintenance routines. Cepheid had more than 30% core growth in non-respiratory testing.

Cepheid's respiratory testing revenue of $300 million in the quarter exceeded expectations of $175 million, due to higher volumes and a preference for their 4-in-1 test for COVID-19, flu A, flu B and RSV. They continue to take market share as customers consolidate their point-of-care, PCR, testing platforms on to the GeneXpert. In the Environmental & Applied Solutions segment, water quality core revenue grew mid-single digits and product identification was down mid-single digits. At Trojan, equipment sales and order rates remained strong and Videojet declined low single digits against the high single-digit prior year comparison.

Videojet released the 3350 laser marking system, which allows users to mark multiple levels of the same product without adjustment, resulting in increased uptime and throughput. Veralto is on track for a fourth quarter 2023 separation and will be well positioned in water quality and product identification. For the third quarter, core revenue is expected to be down low single digits year-over-year and total core revenue is expected to decline in the low to mid-teens percent range. Additionally, the adjusted operating profit margin is expected to be approximately 26%. For the full year 2023, the company is adjusting its cost structure and capacity in response to COVID transitioning to an endemic state.

Danaher anticipates low single-digit core revenue growth in their base business, with total core revenue declining high single to low double digits due to lower demand for COVID-19 testing, vaccines, and therapeutics. They expect a full year adjusted operating profit margin of 29%, and they are confident about their future due to their talented associates, differentiated portfolio, and strong free cash flow generation. They are committed to improving patient outcomes and creating shareholder value.

Rainer Blair and Matt McGrew discussed order trends for bioprocessing and the efforts to manage inventory with larger customers. Orders were down 20% in the first half of the year and are expected to be down modestly in the second half. This is largely due to customers working through inventories and the deterioration in China. The company has intensified efforts to get the stocking topic behind them in 2023. The comps for the first half were low double-digit while the second half was more like 20%.

Rainer Blair explains that in China, orders were down 20% in the first quarter, 40% in the second quarter, and 50% in June, and that this trend is expected to continue into the second half of the year. He attributes this to a decrease in foreign investments in projects and capacity, as well as an overabundance of capacity built in the last few years, leading to fewer hardware requirements and fewer molecules being worked on by CDMOs.

In the second half of the year, Danaher's bioprocessing business in China is expected to be around $800 million, which is about 10% of the total bioprocessing business. This is a significant decrease from the first half of the year, where China bioprocessing was down 30%. In May and June, the decline was even more severe, with revenues dropping by 45-50%. Danaher is actively managing customer inventory levels to help mitigate the impact of the decrease.

Rainer Blair and Matt McGrew discuss their plans for the second half of 2023 and 2024. Rainer talks about managing inventories with customers and believes 2023 will be the bottom. Matt explains the 450 basis point sequential step down in Q1 and Q2 to 26.5% and 26% in Q3 and a step up to 31% in Q4, respectively, which assumes normalized trends in bioprocessing orders.

In quarter two and three, Summit Biotech and Cepheid are taking proactive measures to reduce capacity which will result in a 31% reduction in costs. This cost reduction is due to lower volumes and the capacity reduction measures taken by the companies. The cost reduction does not affect bioproduction inventory and is a result of higher volume combined with the $350 million cost reduction from rooftop efforts, labor, and lower comp accruals.

Matt McGrew explains that out of the $250 million, about $100 million is due to lower demand at BTG, and some of the $350 million from last quarter will be one-time costs that will be reflected in the annual savings. He notes that the AIS margins are down due to mix, price, and cost, as well as some costs associated with the spin.

Rainer Blair answers a question from Dan Brennan about the company's bioprocess guidance. He explains that the company had some supply chain and logistics issues in the quarter which led to a slight decrease in volumes and prices, but they were able to offset it with other measures. He then goes on to explain that the company is doing a forensic review to make sure that future forecasting is improved and investors can have confidence that the bottom of the bioprocess guidance has been reached.

Rainer and Matt discussed the improved forecasting processes that have been implemented due to the dynamic production planning of customers worldwide. They have adopted a more frequent touch point pattern with customers to manage their inventories and find the true demand signal. They are also taking a conservative approach to the second half of the year and feel they are in a good position for the remainder of the year. Daniel Brennan asked for clarification on the exit rates implied in the guidance, which will be officially released later.

Rainer Blair discussed the difficulties of predicting growth in 2024 due to the current destocking situation in China and the efforts to get it under control. He is positive about the long-term growth of the business and this industry, but does not want to put a marker down yet. Puneet Souda asked if there is any shift in the product portfolio in China due to competition on less technology-heavy products, to which Rainer Blair did not give a response.

Rainer Blair and Puneet Souda discuss China's deteriorating market and how it affects local competition. Rainer notes that the real issue is the funding environment and stocking situation in China, and that they are working to get the situation resolved in 2023. Puneet then asks about capital deployment, and Rainer states that M&A remains the primary form of capital deployment, but that they are looking for opportunities where the market, company, and business model all align.

Rainer Blair reports that Life Sciences business had a strong quarter with mid-single digit growth. This was driven by the US, EU, and China, with academic end markets holding up well and applied markets such as food testing and environmental testing showing some strength. Lower and less expensive equipment is being impacted more than the higher end, which is holding up, as seen with Leica Microsystems and SCIEX.

In the second half of the year, Life Science instrumentation is expected to remain flat due to the sunset of subsidies in China. Bookings in the instrument business were less than one in the quarter. Additionally, pricing was discussed with regards to both instruments and bioprocessing. For instruments, the pricing contribution in the second quarter was discussed, as well as expectations for the back half of the year. For bioprocessing, the pricing contribution in the second quarter was discussed, as well as expectations for the back half of the year and into 2024.

Rainer Blair and Matt McGrew discussed the pricing for the quarter, which was up 350 basis points with all four segments remaining above the historical average. They expect the prices to moderate somewhat for the remainder of 2023, but remain above the historical average. For 2024, they will provide more information as the year progresses. Luke Sergott asked how quickly the bioprocessing market can get back to its normal level of high double to mid-teens growth, taking into account the destocking, COVID, China, and lack of biotech funding. Rainer and Matt responded that the market is dynamic and they need to work through the many dynamics before they can provide a full answer.

Matt McGrew explains that it is difficult to quantify the amount of destocking that has occurred in the quarter and year-to-date, as it is dependent on the customer, manufacturing site, and drug. He states that they are managing the inventory situation actively and proactively with customers to ensure they are comfortable with their inventory levels. He further adds that they are managing the situation in a more active way than before the pandemic.

The program has concluded and the participants are thanked for their participation. They can disconnect at any time.

This summary was generated with AI and may contain some inaccuracies.