Operator:

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. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [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.

Rainer M. Blair:

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 U.S. and Europe continued to improve, and we were encouraged to see orders increase high single digits sequentially this quarter. In China, bioprocessing demand and underlying activity levers were stable sequentially, but remained weak as customers continued to manage liquidity. In Life Sciences, capital equipment investments remained constrained while recurring revenue was relatively stable. And in Diagnostics, we saw 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 and attractive end markets coupled with durable, high-recurring revenue business models, and the power of the Danaher business system supports our long-term expectations 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 growth 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 a 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 U.S. 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 pipelines, 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 of 2024. There is also no change to our assumption of a bioprocessing core revenue growth rate of high single digits or better as we exit the year. 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 medicines 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 a new 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 this 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 Cepheid Cell Therapy manufacturing platform, which is helping address critical cost and capacity constraints associated with CAR-T Cell Therapy manufacturing. The Cepheid platforms 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 and 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 models and coding 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 early stages of implementation. So 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 in Quantitative Mass Spectrometry with the release of the 7,500-plus triple-quad mass spectrometer. The 7,500-plus pairs the ultra-high sensitivity of the 7,500 with faster acquisition speeds and the ability to maintain the highest sensitivity quantitation and the ability to maintain the highest sensitivity quantitation for up to twice as many sample runs. This makes the 7,500 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 plasmids business. During the quarter, IDT opened a new manufacturing facility at their Coreville, Iowa campus which enabled the 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 Diagnostic 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 strengths in digital pathology driven by a Aperio GT 450 diagnostics digital pathology slide scanner which recently received its FDA 510K clearance. Beckman Colter Diagnostics was up low single digits with balanced strengths across both developed and high growth markets. Now in May Beckman received FDA 510K 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 a favorable mix of our 4-in-1 tests 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 healthcare systems and integrated delivery network customers are adding new instruments 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 tests, which is the first molecular-based point of care test for Hepatitis C, patients can be tested and receive treatment during the same healthcare 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 detailed 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 at expectations for the third quarter and the full year 2024. In the third quarter, we expect core revenue to decline in the low single-digit percent range. Additionally, we expect a third-quarter adjusted operating profit margin of approximately 26%. For the full year 2024, there is 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.

Operator:

[Operator Instructions]. Our first question will come from Jack Meehan with Nephron Research. Please go ahead.

Rainer M. Blair:

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 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 order 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.

Rainer M. Blair:

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

Rainer M. Blair:

Thanks, Jack.

Rachel Vatnsdal:

Perfect. Hey, good morning, you guys, and thanks for taking the questions. So another one here just on bioprocessing. So on the 3Q guidance, can you just walk us through what's contemplated in 3Q guide, we've seen a few quarters of sequential progression on orders during 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 book for bioprocessing in 3Q as well?

Rachel Vatnsdal:

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 are you thinking about the total business in terms of 2025 in relation to that underlying market? And then you've also talked a lot about the incremental margins on bioprocessing and some of that durability on the margin expansion and diagnostics as well. So, Street's currently at $8.70 or so in EPS $1.25, how are you feeling about that number, any early takes there would be helpful? Thanks.

Operator:

Thank you. Our next question will come from Scott Davis with Melius Research. Please go ahead.

Scott Davis:

Hey, good morning Rainer and Matt and John. The buyback, I don't recall seeing one at least one of this size in the past. What's -- just a little color, is it maybe a statement that M&A is a little slow or is it -- should you guys think about it as a little bit more like housekeeping, what slow color on how you thought through the buyback? Thanks.

Scott Davis:

Makes sense, Rainer. Guys, well 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're already a month into the quarter?

Scott Davis:

Thanks a lot Rainer, thank you guys. Appreciate it.

Operator:

Thank you. Our next question will come from Vijay Kumar with Evercore ISI. Please go ahead.

Rainer M. Blair:

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.

Vijay Kumar:

Okay. That's helpful, Matt. Rainer, one more and a 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 code activity has picked up, is that above trend versus historical averages above trend, any framework would be helpful?

Vijay Kumar:

Understood, thanks guys.

Operator:

Thank you. Our next question will come from Michael Ryskin with Bank of America. Please go ahead.

Rainer M. Blair:

Sure, Mike. Well, 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 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 as 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 and 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 -- the second half, excuse me, 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.

Rainer M. Blair:

Through 2024.

Rainer M. Blair:

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 receive approvals for Hepatitis C, and we look forward to seeing its growth journey going forward. So as 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 equipment being a little bit down and that nudged it just into a 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 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 has 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.

Operator:

Thank you. Our next question will come from Dan Brennan with TD Cowen. Please go ahead.

Matt McGrew:

Yes, Dan, maybe I'll start. I mean, look, we sort of maybe -- maybe this is the way to think about it. We like this portfolio. We like how we're positioned for the future. We like the growth where we're going to be here. The portfolio moves through the last five years have been sort of -- the fog of COVID, if you will, has really sort of 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%. We like our business. And when I see what we trade at, today and then I kind of look out at what some of the still current M&A multiples are, it's just from a return perspective, we're getting as good of a return, if not better, on some of -- on the buyback than 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 we are kind of making a bet, if you will, on a business that we know well and that we think has got a lot of upside.

Matt McGrew:

Yes. No, 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, because we are largely past destocking and because we see the customer order patterns sort of 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.

Operator:

Thank you. Our next question will come from Doug Schenkel with Wolfe Research. Please go ahead.

Douglas Schenkel:

Good morning guys, thanks for taking the questions. First, I 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 seem 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 risk 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, new modalities versus MAB contributions moving forward based on what you're seeing in the market right now, that obviously could be an accelerator to 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 based 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.

Operator:

Thank you. Our last question will come from Tycho Peterson with Jefferies. Please go ahead.

Tycho Peterson:

Thank you, thank you. Rainer, I want to go back to instruments for just a minute and kind of your background, obviously, in SCIEX 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 start to see the replacement cycle from that aspect [ph]?

Tycho Peterson:

Okay. And then on bioprocess, I appreciate all the color. We started to get more questions on yield improvements. I'm wondering how you think about that, just your customers getting more efficient and then how do you think about capacity kind of freeing up in the industry, whether it's Novo selling off some of the talent capacity or Wushi [ph] having to get rid of some capacity in the U.S. Just curious how you think about that playing into kind of the equipment side of things? And then maybe the last part, just what's your view on kind of doing more on the services side, CDMO type work and adding your own capacity?

Tycho Peterson:

Okay, very helpful. Thanks.

John Bedford:

Thank you everybody for joining. We'll be around all day and rest of the week for questions. Have a good day.

Michael Ryskin:

Everyone will kick things off for our next session. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics teams and I'm thrilled to host Danaher and I'm joined by Rainer Blair, CEO. Rainer, thanks so much for coming.

Michael Ryskin:

We'll do a fireside chat as usual, but just kick things off. You reported 1Q a couple of weeks ago, first name out of the gate, set the tone for tools. Pretty impressive quarter, good start to the year. Anything you want to call out, any opening remarks you want to make?

Q - Michael Ryskin:

So, first question, obligatory, has to be about bioprocessing. A lot of debate there, a lot of focus there. Decline was high teens, but slightly better than expected. You had a nice sequential improvement in book-to-bill, order growth. So, could you give us a little bit more color on what's going on in the bioprocess end markets, inventory destocking, and just sort of visibility over the last couple quarters?

Michael Ryskin:

Okay. That's all really helpful context. I think one of the things we've noticed in the last couple quarters, last year, is that between yourselves and Sartorius and Merck KGaA and Avantor and Repligen and Thermo, everyone's got slightly different book to bills. Everyone got slightly different order trends, seasonality, pacing. How would you characterize high level, where your portfolio stacks up versus the others? And what should we keep in mind when we're making those read-throughs from company to company?

Michael Ryskin:

Okay. And most of those comments, I think, really touch on the short term. But can we think about bioprocessing longer term? I think as you exit this year, you talked about mid single digit, high single digit growth or better. That sets you up well for 2025. So, when we think about the long-term bioprocess algorithm, what's your latest view on underlying market demand and just sort of how sustainable is that growth?

Michael Ryskin:

And you don't think -- just to be clear, you don't think there's been any change in competitive dynamics over the last year in terms of market share, market gains and losses. You don't think there's really any new entrants that have popped up in the space. When we go into 2025, it will still be relatively similar market to what it was pre-inventory glut.

Michael Ryskin:

Okay. That's helpful. And then maybe shifting away from bioprocess specifically, let's talk about the biopharma end market. You touched briefly on biotech funding and emerging biotech and sort of early funding levels in 1Q and how that will play out. Let's talk about large pharma. I think broadly the comments were that 1Q was a little bit slow out of the gate. Could you expand on that a little bit in terms of budget releases and how have things trended in terms of conversations through March and April?

Michael Ryskin:

What about factors like IRA, the Inflation Reduction Act? I mean, that's been a hotly debated topic for the past year. Are you seeing any changes tied to that? I know it's still years away.

Michael Ryskin:

Okay. That's helpful. And then, sort of sticking on pharma, but maybe expanding things a little bit, let's talk about instrumentation. It's a small part of your business. It's not the biggest needle mover, but still instrumentation was a little bit challenged in the quarter. Again, you saw relatively similar commentary from some of your peers. How should we think about instruments recovering or progressing as you go through the year?

Michael Ryskin:

And are you seeing any difference across your portfolio? You've got exposure there from Leica, from Beckman, from Sciex. Any parts of the business doing a little bit better than others? And sort of what differentiates that?

Michael Ryskin:

Okay. All right. That's helpful. Next, I want to run through a couple specific business segments. Let's start with Cepheid. Business did really well in 1Q, but then again, it's done very, very well for a number of quarters in a row. It's been a number of years since you closed that deal. If you could just sort of take a step back and evaluate where Cepheid was when you brought it in versus what it is now. What really has driven that outperformance?

Michael Ryskin:

So, with all that being said, where does Cepheid go next? You talked about the massive growth in the install base. You talked about the menu expansion. Margins have really taken a huge leap forward. So, what's your view of Cepheid over the next couple of years?

Michael Ryskin:

So, net-net, above company growth, margin accretive at this point, right?

Michael Ryskin:

Okay. A couple of other assets I want to touch on real quick. Aldevron, you acquired that asset a couple of years ago. When you acquired it, I believe $400 million in revenue, growing healthy, healthy double-digits, very strong margins, really positioned you for nucleic acids, cell and gene therapy, some of the new modalities, so affiliated with bioprocessing. Could you give us an update on that deal, how that's fared since the acquisition post?

Michael Ryskin:

And then your most recent acquisition was Abcam, just closed in December. So, you've had it for a total of maybe five months now, but you've already taken some early steps in terms of integrating that and sort of taking it down the road of becoming a Danaher OpCo. So, give us an update on how that deal is going.

Michael Ryskin:

Okay. All right. And where I'm going with these questions is, Cepheid, Aldevron, Abcam, we kind of talked about Cytiva when we talked about bioprocessing. You take all these together and Danaher exiting COVID, exiting 2024 is going to look like a very, very different company than it looked like in 2016, '17, '18. The last couple of years between COVID and inventory stocking, it's really obscured the underlying performance of the company. So, taking all of that together, how would you characterize, what are we going to be looking at in the next couple of years going forward in terms of the new, new Danaher?

Michael Ryskin:

Okay. You just touched on it there in terms of the earnings accretion and the operating leverage, but I want to touch on that a little bit more. Given the business shift, given where you're seeing the fastest growth opportunities in Cepheid and bioprocess, those are really accretive incremental margins. You've got really high-volume leverage. So, as the business recovers exiting this year, as you look forward to 2025, how should we think about that incremental flow through to the bottom line?

Michael Ryskin:

Okay. Just a couple minutes left, so I want to make sure we touch on capital deployment at M&A. As you said, you just did Abcam last year, but given your free cash flow, given your balance sheet, you could probably do an Abcam sized deal every year, if not more. So, your balance sheet remains really robust, free cash flow strong. There's a lot of opportunities out there. So, how would you characterize your appetite for M&A now or for other capital deployment?

Michael Ryskin:

Okay. And talking about the M&A angle, could you talk us through your framework in terms of how you consider targets? What's the roadmap you take when you're evaluating something?

Michael Ryskin:

Great. I think if you if you frame it that way, you think back between Cytiva, Cepheid, Abcam and Aldevron, they all check the box in terms of long-term secular growth, company-specific advantage, valuation. So, it's a clear way of thinking about it. We got about a minute left. So, just sort of our last concluding question is the standard. Danaher has pretty well understood and pretty well followed, but is there anything that you think is still underappreciated? Is there anything that people misunderstand or misinterpret? Sort of what are the questions you're getting that you want to clarify?

Rainer Blair:

Thanks, Mike.

Rainer Blair:

Appreciate it. Thank you.

Rainer Blair:

Thank you, everybody.

Operator:

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 Fourth Quarter 2023 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.

Rainer Blair:

Thank you, John, and good morning, everyone. We appreciate you joining us on the call today. We delivered better than anticipated core revenue in each of our segments in the fourth quarter led by respiratory revenue at Cepheid. The combination of higher than expected revenues and our team's strong execution enabled us to exceed our margin and cash flow expectations in what remains a dynamic market environment. Now before I get into the details of our performance, I wanted to briefly reflect on the progress we made to enhance our portfolio and accelerate our strategy this year. 2023 was a transformational year for Danaher as we continued to strategically enhance our portfolio and strengthen our growth and earnings trajectory. With the successful spin-off of Veralto in September, we're now a focused Life Sciences and Diagnostics Innovator. Establishing Veralto as a standalone public company was one step in our portfolio transformation over the last several years, which has increased our exposure to end markets with durable secular growth drivers. The acquisition of Abcam, which closed in December, further increases our exposure to these highly attractive markets. Now over the long term, we believe Danaher will be a faster growing business with higher margins and stronger free cash flow generation. 2023 was also a challenging year operationally as pandemic tailwinds became headwinds in our businesses. Our team's commitment to executing with the Danaher Business System helped us navigate these challenges while maintaining a healthy cadence of growth investments and productivity initiatives geared towards improving our cost structure. While we expect this transitional period to continue through the first half of 2024, these proactive steps paired with the transformation in our portfolio provide a strong foundation for sustainable long-term revenue and earnings growth. So with that, let's take a closer look at our full-year 2023 financial results. Sales were at $23.9 billion and core revenue declined 10%, including core revenue in our base business which was down slightly and a COVID-19 revenue headwind of approximately 9.5%. Our adjusted operating profit margin was 28.7% and adjusted diluted net earnings per common share were $7.58. We also generated $5.1 billion of free cash flow resulting in a free cash flow to net income conversion ratio of more than 120%. Strong free cash flow generation is one of the most important metrics at Danaher and 2023 marks the 32nd consecutive year our free cash flow to net income conversion ratio exceeded 100%. We continued to accelerate investments in innovation throughout the year, which enabled us to deliver several impactful new technologies to our customers. In Biotechnology, Cytiva's new Xcellerex X-platform bioreactor is helping improve manufacturing yields and reduce the time and cost of biologic drug production. In Life Sciences, new products such as IDBS' Polar Insight and Molecular Devices' CellXpress.ai are helping accelerate the drug discovery process and bring life-changing therapies to market faster. And in Diagnostics, new solutions such as Beckman Coulter's DxI 9000 next generation immunoassay analyzer are enabling faster, more accurate patient diagnosis. These are just a few of the many examples across Danaher of how we're positioning our businesses for continued growth and delivering on our commitment to help customers solve some of the most important health challenges impacting patients around the world. Now let's turn to our fourth quarter results in more detail. Sales were $6.4 billion in the fourth quarter and core revenue declined 11.5%, including a 4.5% decline in our base business and a COVID-19 revenue headwind of approximately 7%. Geographically, core revenues in developed markets declined low double digits driven by lower respiratory and COVID-19 vaccine and therapeutic revenues coupled with ongoing investment normalization in pharma and biopharma end markets. High growth markets were down high single digits including a mid-teens decline in China where the economic landscape remains challenging. Our gross profit margin for the fourth quarter was 59%. Our adjusted operating margin of 28.7% was down 420 basis points primarily due to the impact of lower volume in our Biotechnology and Diagnostics segments and costs related to productivity initiatives. Adjusted diluted net earnings per common share were $2.09 and we generated $1.2 billion of free cash flow in the quarter. 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. Reported revenue in our Biotechnology segment declined 21% and core revenue was down 22.5%. Bioprocessing core revenue was down over 20% as anticipated and discovery and medical declined high teens. In bioprocessing, base business core revenue declined high teens in the fourth quarter and was down approximately 10% for the full-year 2023. Revenue and order trends were largely consistent with what we saw in the third quarter including our book-to-bill ratio. We were encouraged to see a modest sequential improvement in orders this quarter with some of our customers returning to normal ordering patterns, but we haven't yet seen a broad-based inflection in demand. The environment in North America and Europe is stable with customers still working through inventory built up during the pandemic. Demand and underlying activity levels in China remain weak as customers are continuing to conserve capital and prioritize programs. For the full-year 2024, we expect core revenue in our Bioprocessing business to be down low single digits. This includes an assumption of a mid to high teens revenue decline in the first half of the year followed by a gradual improvement to a core growth rate of high single digits or better as we exit 2024. Despite the near-term headwinds from destocking, our confidence in the health and long-term growth trajectory of the biologics market remains as strong as ever. Underlying demand for biologic medicines continues to rise. 2023 was another record year of FDA approvals for biologic and genomic medicines and the development pipeline is meaningfully higher than at any point in history. These positive market trends reinforce our conviction in the tremendous opportunity ahead and the high single-digit long-term growth trajectory for our leading bioprocessing franchise. Over the last several years, Cytiva has been accelerating investments in innovation to bring impactful new solutions to customers as they advance therapies from the lab through to commercial production. A great example is the recently launched Cytiva protein select technology, an affinity chromatography resin designed to optimize recombinant protein purification. This new technology simplifies the purification process in recombinant proteins, of which there are currently more than 1,800 in development, and enables faster and more efficient process development. Turning to our Life Sciences segment, reported revenue declined 1% and core revenue was down 4% including a low single-digit decline in our base business. Our life sciences instruments business collectively declined mid-single digits with trends in the fourth quarter largely consistent with the third quarter. We saw continued growth from academic and life science research customers globally while investment levels at pharma and biopharma customers remain constrained, particularly in China and in North America. We also expanded our capabilities and portfolio with the acquisition of Abcam, which closed in December 2023. The addition of Abcam to our Life Sciences segment expands our presence in the highly attractive proteomics market and is furthering our strategy to help map complex diseases and accelerate the drug discovery process. We couldn't be more pleased to welcome this highly talented and incredibly innovative team to Danaher. Our genomics consumables base business was essentially flat in the quarter. Robust demand across plasmids, proteins, and gene writing and editing solutions was offset by decline in next generation sequencing and basic research. During the quarter, IDT opened a new cGMP oligonucleotide manufacturing facility at their Coralville, Iowa campus. IDT can now offer a complete CRISPR workflow from design to analysis that supports cell and gene therapy customers in all stages of therapeutic development. This expansion of our capacity and capabilities is both enabling our customers important work today and fulfilling IDT's vision of improving patient lives by facilitating faster development and commercialization of life changing therapeutics. Moving now to our Diagnostics segment. Reported and core revenue both declined 8.5% with high single-digit growth in our base business more than offset by lower respiratory revenue at Cepheid. Our clinical diagnostics businesses collectively delivered high single-digit core revenue growth. Beckman Coulter Diagnostics led the way with over 10% core revenue growth, including double-digit growth in both instruments and consumables and notable strength in clinical, chemistry, and immunoassay. This strong performance in the fourth quarter rounds out a terrific year for Beckman where the team has been doing a fantastic job improving their competitive positioning through new product innovation and enhanced commercial execution. In molecular diagnostics at Cepheid, increased menu utilization by customers paired with recent new product innovation helped drive low teens core revenue growth in our non-respiratory business, including high teens or better core revenue growth in Group A Strep and sexual health. In our respiratory business, Cepheid's revenue of approximately $650 million in the quarter exceeded our expectation of $350 million. The high prevalence of circulating respiratory viruses drove both higher volumes and a preference for our 4-in-1 test for COVID-19, flu A, flu B, and RSV. Based on what we saw the last two years and discussions with customers and public health experts, we believe annual respiratory revenue in a typical respiratory season will be approximately $1.5 billion. This increase from our initial assumption of $1.2 billion per year is driven by an expectation of modestly higher volumes and a greater mix of our 4-in-1 tests. The durability and continued share gains at Cepheid are a testament to the significant value that Gene-Xpert provides customers at the point-of-care, close to patients where the most impactful diagnostic and treatment decisions are made. Cepheid's 4-in-1 test has become the standard of care for clinicians given its ability to provide a fast accurate lab quality diagnosis for four distinct respiratory illnesses with a single easy-to-use cartridge. Looking ahead with our differentiated positioning and respiratory testing, a leading installed base of more than 55,000 systems, and with growing adoption of the broadest molecular diagnostic test menu on the market; Cepheid is well-positioned to help customers meet their clinical needs and continue gaining market share. Now let's briefly look ahead at expectations for the first quarter and the full-year 2024. Beginning with the first quarter of 2024, we will provide guidance for core revenue growth, but will no longer report base business core revenue as the pandemic has transitioned to an endemic state. Now in the first quarter, we expect core revenue to decline in the high single-digit percent range. Additionally, we expect the first quarter adjusted operating margin of approximately 28%. Turning to the full-year 2024. We anticipate core revenue to decline in the low single-digit percent range, which assumes a core revenue decline in the first half of the year before returning to growth in the second half of 2024. Additionally, we expect our full-year adjusted operating profit margin to improve by approximately 50 basis points versus the full-year 2023. So to wrap up, we're pleased to deliver fourth quarter results ahead of our expectations in what remains a dynamic environment. Despite the challenges we saw throughout 2023, we continued to strengthen our portfolio with M&A and took proactive steps focused on improving our cost structure. Our team's consistent application of the Danaher Business System also drove lasting process improvements in our businesses and enabled the launch of several breakthrough solutions. Reflecting back on the past few years, it's clear that Danaher is exiting the pandemic a much better stronger company. We established our dental and environmental and applied solutions segments as standalone public companies in Invista and Veralto. We largely replaced their revenue contribution with higher growth, higher margin annuities with the acquisitions of Factiva, Aldevron, and Abcam. Additionally, Cepheid's respiratory franchise is now six times larger today than it was prior to the pandemic and we expect this to be sustainable. So putting it all together, we've improved our long-term growth trajectory, significantly expanded margins, and strengthened our free cash flow generation. So, our future is bright and I'm excited about what lies ahead for Danaher. The unique combination of our incredibly talented team, differentiated science and technology portfolio, and balance sheet optionality all powered by the Danaher Business System provides us with a strong foundation to maximize value for our customers, our associates, and our shareholders. So with that, I'll turn it back over to you, John.

Operator:

[Operator Instructions] Our first question comes from Dan Brennan with TD Cowen. Please go ahead.

Rainer Blair:

Thanks, Dan. Good morning. And why don't I start off with sort of an overview here on how we've laid out the guide and then we can dig into your bioprocessing question in a little more detail. So, our guide for the full year of 2024 on revenue is down low single digits and now let me break that open and talk about the segments. Biotechnology will be down low to mid-single digits and that's different than bioprocessing. So, keep in mind I'm not talking about the Biotechnology segment in its entirety. The guide is down low to mid-single digits. Life Sciences down low single digits and Diagnostics up low single digits. And once again overall, that's then down low single digits. Now at a high level, we actually expect the dynamic to be opposite of 2023 with a slow first half returning to growth in the second half. And now let me talk just a little bit about the assumptions around our guidance. Starting with bioprocessing, which we're guiding to be down low single digits and we think the first half will look a lot like second half of 2023 down mid to high teens coming off of a fourth quarter which showed incrementally improved orders versus Q3. Second half we expect to return to mid to high single-digit growth and we believe by then that the destocking in North America and Western Europe will have largely been completed and of course the comps ease there as well. So importantly for bioprocessing, we think exit rate for the year will be high single digits or better core growth. Now if we look at Life Sciences, we expect Life Sciences to be down low single digits for the guide and we expect a slow start and we should see growth improve here through the second half given some of the comps that we have seen as the normalization, particularly in the instrument business, continues and we've been talking about that for some time and we expect that to continue into 2024 as well. Now if we look at that by end market and see pharma and biotech, stable but at lower levels of demand; and then academic and applied markets holding up comparatively better. Geographically, we see China weak with a slower macro and of course in Life Sciences in particular, we have some prior year comps related to the subsidized loan program there. And then lastly on Life Sciences, we expect developed markets to be relatively consistent with 2023. As we look at Diagnostics, which we are guiding up low single digits, we see no change to the underlying trends, patient volumes have normalized. And in the non-respiratory business, we expect growth of mid-single digits and of course that's offset by lower respiratory revenue, which was $1.9 billion in 2023 and we anticipate that that will be $1.6 billion in 2024. So Dan, that's how the year shapes up by segment and of course then we can now perhaps talk a little bit more detail around bioprocessing.

Dan Brennan:

Got it. Thanks, guys. And then maybe a follow-up just on bioprocessing. That's such a huge focus. Just in terms of the guide that you've laid out, what does that assume from kind of a book-to-bill or bookings trajectory as we work through the year? And just kind of related to that, several peers have already pointed to book-to-bills kind of above one. Obviously, everyone's order books are, mix of business is different. But what's kind of unique about your business, do you think? Is it clinical versus commercial, or is it just the size of your book or just any color? Why do you think some of the peers have seen the turn in their business faster than what you guys have seen? Thank you.

Dan Brennan:

Great. Thank you, guys.

Rainer Blair:

Good morning, Vijay.

Matt McGrew:

Yes, Vijay, it's Matt. Maybe I'll take a first stab at it. So, if we think about kind of the first half here, I think it's probably instructive to sort of remember where we were. If you remember, our base business core growth in Q1 last year was actually up low single-digits. And for the first half of 2023, we were only down kind of low to mid-single-digits in total, right? The second half, we were down mid-teens or high-teens, as everybody remembers. But we do have that comp coming in the first quarter. And so, when you think about year-over-year, that's really the biggest factor. As far as sequential goes, kind of Q4 to Q1, I would tell you that we would, you know, I think we talked about this in January. Our Q3 to Q4 sequential, that's pretty normal. That's a normal Q3 to Q4 step up. I think we attributed that to a normal seasonality when we were out at JPMorgan. And it's very also normal to see Q4 to Q1 step down. So, just maybe some numbers to that. Q4 is usually 27%, 28% of our year, and Q1 is usually 24% and 25% of revenue for the year. So, I mean, it's pretty normal for us to see it. I think we saw it even, in kind of a heyday of '21 to '22, we saw it step down. So, I think there's a normal seasonality. And I think the other big thing to remember is, and it kind of ties into your last question there, Vijay. We are actively trying to continue to destock and get as much of this behind us as we can. And so I think, we've been pretty aggressive with that. We're going to remain aggressive with that. I think you're seeing that hopefully, here in the first half that we are. And back to your kind of no-fees question, it depends is the answer. But rest assured, we are doing what we can to get to the second half of the year.

Rainer Blair:

Thanks, Vijay. Well, starting with the activity level here for bioprocessing. We've really seen no change in the activity level, which continues to be along the long-term growth rate that we've been talking about, high single-digits, 10%. And that's what's been important in terms of drawing the inventories down. So and it aligns with how we spoke about the regional developments here. Which Western Europe and North America are drawing down inventories more rapidly than perhaps regions that are more, small biotech, emerging biotech companies such as China. So, the activity level continues to be strong. I mentioned to you during the prepared remarks that we've seen a historic level of both approvals as well as number of projects in the biologic development pipeline. So, we continue to be very confident in a - continued positive development there.

Rainer Blair:

Yes Vijay, I mean, I think it's just - it's all going to be mostly a comp issue. The base business, the business outside of, I should say, respiratory continues to do well for Cepheid. All of the other businesses in diagnostics, no real change, to the underlying demand. So it's going to be a comp issue.

Rainer Blair:

All of diagnostics, yes.

Rainer Blair:

Thanks, Vijay.

Rainer Blair:

Good morning, Scott.

Matt McGrew:

Yes. Yes I mean, maybe the way to think about the OP kind of at a high level Scott, is we ended 2023 with an adjusted operating margin of call of, almost approximately 28.5%, and we think, like you said, it's going to be up 50 bps here in the year. We had $350 million of sort of one-time costs last year, some of that, if I think about what that was and the metrics around it, I would tell you that there's a lot of heads that did come out. And largely that was reflective of the lower volumes that we saw last year, particularly at Cepheid as we went from 70 million tests down to 35 million. We sort of knew there would come a day when we were going to need to pull back some of that capacity, and largely last year we did that. I think you also saw it at some of the other businesses in the second half as well in life sciences and some others that have seen a little bit more difficult growth profiles. I think largely it is heads. There are some rooftops here and there, but I think it's more trying to get after the cost structure to right-size it, for what's going to be a difficult first half, so that we're in a good spot. So, that $350 million of benefit that, would have been about 150 basis points on its own, Scott. But we do have the lower volumes, as you mentioned, in bioprocessing, respiratory, and that basically offset all of it. And so really the cost savings, if you will, from that $350 million that we deployed, is what we're getting and flowing through as the 50 bps of margin expansion. So that should be pretty durable as we go. And hopefully, with a little bit better volume here, and the gross and adjusted operating margins, we have, a little bit of volume is going to go a long way.

Rainer Blair:

Sure. Scott China, let me start with this. We continue to believe China is an attractive market in the long-term that is going to be accretive to our overall growth, and the reason for that is that the Chinese government and frankly, the Chinese people are prioritizing, among very few priorities, they're prioritizing healthcare. More broadly, but also more specifically in terms of building their own pharmaceutical industry. With both generic and innovative and biosimilar type drugs. And that process, while it has taken a pause here, or certainly slowed as the funding environment has become more difficult in the short-term, we expect that process to work itself out here in the midterm. Now, for China this year, as it relates to our guide, we're assuming that China will be down high single-digits. Yes, because of the challenging macro. We actually expect that macro to be more challenging than perhaps even what we see in the healthcare market, but we're not planning in that guide, a stimulus from the Chinese government, but more of the same and then of course, the reversing of tough comps here in the second half. So it's going to be a tougher start to the year, as the activity level essentially remains where it has been here in the second half of 2023. Particularly in biotechnology and life sciences, and then as we get through those tougher comps in the first half, we'll see the second half where we're not assuming significantly higher activity levels, but we do see the math then working in our favor. Longer term, we believe the pull and the requirement in China for these innovative and highly effective drugs is intact and that the investment will continue.

Rainer Blair:

Thanks, Scott.

Rainer Blair:

Good morning, Michael.

Matt McGrew:

Yes, I mean, I think the way we talked about the guide, I mean, I did say that it doesn't go over one, but it gets pretty close in the second half. I mean, if you do the math, it does get pretty close to one. So I think, it is still a little bit early to call what we're going to see in '25, but I think you're right. We are calling for gradual improvements in the book-to-bill through the year, and it will get pretty close to one, but not over one in the second half. That's kind of how we're thinking about it. And as far as the growth rate, first half to second half, I think was your question, is that right, Mike I want to make sure?

Matt McGrew:

Yes well, I mean, like I said, it's not a huge number, right? First half to second half, you're talking about $250 million. So we are, I think the visibility, is improving a little bit here as we move into the year, and we expect that it will continue to do so, as we move past the inventory destocking in the first half. And so I think, with the assumption of a ramp, admittedly, but only on - only of a couple hundred million dollars. I just feel like, if we can get past the destocking, be aggressive with that, having a second half ramp that is, $250 million on $6 billion, it's not that steep in reality. And frankly, we constructed the guide to have no real, kind of step up, or inflection either in bioprocessing. It may not happen that way, right? And if it does happen, if we do see something, an inflection that's higher, we obviously will update the guide and update everybody. But we are trying to just lay out how we are thinking about not having an inflection, not calling an inflection. Things are getting a little bit better. They're going to get better through the year. And certainly given the math and the anticipated modest step up, that's how you sort of get to a second half of tight single-digits. Remember, we're also working on a comp of the second half that's going to be down high teens. So, I think that's what gives us sort of the confidence is, we've got a little bit better customer visibility. We think we're going to be behind the destocking, and we've got some comps that will help those numbers.

Matt McGrew:

No, that is second half-to-second half. Yes, that's second half-to-second half. I'm sorry yes, yes.

Rainer Blair:

So, Michael, just to level set then, coming off a Q4, which the life science tools were down mid-single digits, and that was largely consistent with Q3, and we anticipate that this normalization in life science instruments, which really began in the second half of 2023, will continue in 2024. And if we think about it by end market, we do see pharma and biotech stabilizing, but at these lower levels of demand. Just because we believe and saw in the numbers showed here, over the last two years or so, an anomalous level of buying and pulling forward of demand, whether that was China through loan subsidies or whether that was COVID dollars infused for additional research, we expect that normalization to continue here. Also, in the first quarter, where we expect life sciences to be down similarly to the fourth quarter. Now, keep in mind for us, life sciences instruments is only about 10% of the portfolio. So, we may not be a good read across here. Nonetheless, we do think it's going to take some time here in the first quarter, first half, in order for that normalization to occur. But we do believe that it's stabilizing at this lower activity level.

Operator:

Our next question will come from Rachel Vatnsdal with JPMorgan. Please go ahead.

Rachel Vatnsdal:

Thanks so much. Yes, good morning. Thanks for taking the questions. So, I wanted to push a little bit more on bioprocessing. You've noted that you're not modeling an inflection in that business this year, but can you talk about if you're seeing any of these green shoots from customers, signaling that they may have gotten too lean on inventory? And then if we look back at last year, you'd mentioned on the 4Q call that, you'd had conversations with customers that shifted your expectations around bioprocessing and order trends at the JPMorgan conference last year. So, can you talk to us about how those conversations with customers trended at the conference this year and how that's impacting the guide as well?

Rainer Blair:

And just really just to confirm that we continue to see a trend of more positive conversations of customers returning to normal order patterns, thinking about how they're planning out not only the first, but the second half of the year. So all of these conversations are directionally, we believe, positive and sort of support what we saw also in the sequential improvement, which was partially seasonal certainly, but we also saw some improving order patterns there. So what we're looking for ultimately, and that's what Matt referred to previously, is a broad-based improvement in order patterns, at which point we will update accordingly. But where we sit today, we think that the first half will be slower also related to some of the comps that we talked about and that the positive development, which we've seen here in the past months, will continue and then manifest itself really in the second half where we then exit with high single-digits or better exit rate.

Matt McGrew:

Well, I mean, I think it's a little bit tough. When everybody is going to be, while we are all in the same kind of boat, I think everybody will have a slightly different timing about when we get through sort of the inventory destockings. So, I think part of it is going to be the breadth of our portfolio. Part of it is going to be the geographic mix we have, and part of it is going to be just sort of our customers and where we were kind of heavier or not. So, I think there's a lot that goes into it. So I think, it will be a little bit different for everybody. I think kind of each modality might be different as well. So cell culture media might be different from chromatography and filtration. So, I think all of those things combined sort of, are what we're seeing. I think everybody is going to see it at a different time, and I think you saw that with us in the first half of last year. We were - only down low singles, and I think some other folks were down mid-teens or more, right. So I think, there is going to be a little bit of a lag in timing. Could - to your second question, could we see a V? I mean it's possible, but we did not want to kind of model that in for a lack of a better - we don't have enough confidence right now. We have not seen it in the order book of enough magnitude and duration, to be able to call a turn of a V-shaped recovery. Is it possible? Sure. Anything is possible. But if we see that, we obviously would talk about it. But we're going to exit the year here at high single-digits from a high single-digit plus, frankly, as we exit the year. And if we do better than this forecast that, we have here of in the nines, that will have obviously an impact on - at some point the exit trajectory. I suspect it depends on when it happens. Specifically if it happens earlier, I think it would have an impact. But again, we're not planning for it. When we see it, we will obviously update and let people know. But for this guide, it is - you're trying to be transparent with everybody. That's what we're expecting, or what we're guys planning for.

Operator:

Our next question comes from Puneet Souda with Leerink Partners. Please go ahead.

Puneet Souda:

Yes hi, yes thanks, Rainer. My first question - I'm tempted to ask about bioprocessing, but let me stick with instrumentation first. Could you tell us what you're expecting for growth in instrumentation in 2024? And maybe if you could provide some context on the instrumentation recovery, and when can we potentially start to see that at a normalized sort of growth level?

Puneet Souda:

Got it. That's helpful. And then on Abcam, could you update us on the DBS efforts there? And what are you seeing in terms of the RU antibodies markets and expectations that you have for sort of Abcam in '24? And lastly, if I could just ask about after the Veralto spin, how are you thinking about capital deployment overall? Thank you.

Puneet Souda:

Great. Thank you.

John Bedford:

Thanks, Todd. Everyone, we're around for follow-ups. Have a good rest of the day. Thanks.

Operator:

Good morning. My name is Todd, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Danaher Corporation's Third Quarter 2023 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [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.

Rainer Blair:

Well, thank you, John, and good morning, everyone. We appreciate you joining us on the call today. Core revenue in the third quarter came in ahead of our expectations with Biotechnology performing as anticipated, and higher testing revenues more than offsetting slightly softer-than-expected demand in Life Sciences. Our team's consistent DBS-driven execution also enabled us to deliver better-than-expected earnings and cash flow in what remains a challenging and dynamic operating environment. This was also a transformative quarter for Danaher. On September 30, we completed the spin-off of Veralto Corporation, a global leader in water and product quality. The successful launch of Veralto is a testament to the team's execution focus and outstanding teamwork. We believe this separation creates exceptional opportunities for both Danaher and Veralto to better serve their customers, deliver on their respective strategic priorities and create greater long-term shareholder value in the years ahead. Now, I want to thank Jennifer Honeycutt and all the Veralto associates for their contributions to Danaher over the past two-plus decades. And we wish them the very best as they embark on their exciting endeavor to help safeguard the world's most vital resources. Now going forward, Danaher is a more focused life sciences and diagnostic innovator, committed to accelerating the power of science and technology to improve human health. We've got a great line-up of leading franchises, well positioned in attractive end markets with durable, high-recurring revenue business models, and our strong free cash flow generation positions us well to further enhance our portfolio going forward. This unique combination of our leading science and technology portfolio and financial strength all powered by the Danaher Business System, differentiates us, and reinforces our sustainable long-term competitive advantage. So with that, let's turn to our third quarter results in more detail. Now, as John mentioned, since Veralto was part of Danaher through the end of the third quarter, our financial highlights for the third quarter include Veralto's results. Sales were $6.9 billion in the third quarter and core revenue declined 11.5%, including a 3% decline in our base business and a COVID-19 revenue headwind of approximately 8.5%. Geographically, core revenues in developed markets declined low double digits, primarily driven by lower COVID-19 revenues. High growth markets were down high single digits, including a mid-teens decline in China, where the economic landscape remains challenging. Our gross profit margin for the third quarter was 58.2%. Our operating margin of 20.9% was down 540 basis points, primarily due to the impact of lower volume in our Biotechnology and Diagnostics segment and costs related to the separation of Veralto. Adjusted diluted net earnings per common share were $2.02. We generated $1.3 billion of free cash flow in the quarter and $4.6 billion year-to-date, resulting in a year-to-date free cash flow to net income conversion ratio of more than 120%. Strong free cash flow generation continues to be one of the most important metrics at Danaher and enables us to actively pursue high-impact organic growth and M&A opportunities. 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. Reported revenue in our Biotechnology segment declined 19% and core revenue was down 21%. Bioprocessing core revenue declined over 20%, as anticipated, while discovery and medical was down mid-single digits as a result of lower demand from our earlier-stage research and lab filtration customers. In bioprocessing, base business core revenue declined mid-teens and market conditions were consistent with our expectations coming into the third quarter. Our customers are still working through inventory built up during the pandemic, while also continuing to conserve capital as a result of funding pressures. China was down approximately 45% in the quarter, driven by a weak funding environment and lower underlying activity levels. Based on what we're seeing today, we're maintaining our full year outlook of approximately 10% base business decline in bioprocessing, which assumes that market conditions in the fourth quarter are consistent with what we saw in the third quarter. Although these market dislocations are impacting our recent performance, global demand for biologic medicines continues to increase. Since 2018, underlying demand for biologics has grown at an average annual rate of approximately 10%, and is continuing to grow in 2023. In addition to more patients using biologic medicine, this year is on pace to be a record year for FDA approvals of biologics, including approvals for meaningful indications, such as Alzheimer's disease and several cancer immunotherapies. These positive trends reinforce our conviction in the tremendous opportunity ahead in the biologics market and the high single-digit long-term growth outlook for our leading bioprocessing franchise. Now, the pace of innovation and advancement in biologic medicine is accelerating, and Cytiva is uniquely positioned to support customers as they pursue life-changing breakthroughs. Cytiva's recently launched NanoAssemblr, the industry's first end-to-end lipid nanoparticle formulation system, is a great example of how our investments in innovation are supporting customers' needs around quality, yields, and cost. The NanoAssemblr automates and streamlines the lipid nanoparticle manufacturing workflow, helping improve reproducibility and scalability in the nucleic acid therapy manufacturing process. Turning to our Life Sciences segment. Reported revenue declined 1% and core revenue was down 2.5%, including a low single-digit decline in our base business. Our Life Sciences instrument businesses collectively declined mid-single digits, in part driven by China, where an already challenging funding environment further deteriorated as the quarter progressed. Outside of China, we continued to see softness at pharma and biopharma customers, while demand remained stable in life science research and applied markets. Our genomics consumables based business declined low single digits in the quarter. Double-digit growth across plasmids, proteins, and gene writing and editing solutions, which are primarily used in projects that are in later stages of the drug development pipeline or have been commercialized, was more than offset by declines in next-generation sequencing and basic research. Our Life Sciences businesses continue to deliver innovative solutions that are helping accelerate the discovery and development of biologic medicine. Molecular Devices recently released the CellXpress.ai, an artificial intelligence driven cell culture system that automates traditionally manual cultivation processes. The CellXpress.ai is engineered to improve workflows and reproducibility in growing and scaling human-relevant cell lines, which can reduce reliance on animal models and fast-track potential therapeutics to preclinical trials. We're also actively leveraging strategic M&A to enhance our capabilities and bring greater value to our customers. In August, we announced our intention to acquire Abcam, a leading producer of protein consumables that are critical for advancing drug discovery, life science research, and diagnostics. Abcam has a long track record of innovation, outstanding product quality, and breadth of antibody portfolio, which positions them as a key partner for the scientific community. The addition of Abcam will give Danaher entry into this highly attractive market, furthering our strategy to help map complex diseases and accelerate the drug discovery process. We expect Abcam will be accretive on multiple levels, including core growth, earnings, and talent, and look forward to welcoming this incredibly innovative team to Danaher once the transaction closes. Now moving to our Diagnostic segment. Reported revenue declined 16% and core revenue declined 15.5%, with mid-single digit growth in our base business more than offset by lower COVID-related respiratory testing volumes at Cepheid. Our clinical diagnostics businesses collectively delivered mid-single digit core revenue growth. Radiometer led the way with high-single digit core growth and solid results across both blood gas and point-of-care immunoassay product lines. Beckman Coulter Diagnostics was up mid-single digits with double-digit growth in instrumentation and notable strength across clinical chemistry and immunoassay. Beckman's recent strong performance is a direct result of leveraging the Danaher Business System to improve commercial execution. We're seeing better win and retention rates globally, particularly in North America, which grew high-single digits in the third quarter. The team has also been accelerating new product innovation, and there's encouraging early traction in Europe for the DxI 9000, Beckman's next-generation immunoassay analyzer. In molecular diagnostics, increased menu utilization by customers paired with recent new product innovation helped drive over 20% core revenue growth in non-respiratory testing at Cepheid, including more than 25% core revenue growth in Group A strep and sexual health. In respiratory testing, Cepheid's revenue of approximately $350 million in the quarter exceeded our expectation of $100 million. A higher prevalence of COVID-19 drove both higher volumes and a preference for our 4-in-1 test for COVID-19, flu A, flu B, and RSV. As we move into the fourth quarter and our customers begin planning for the respiratory season, we now expect approximately $1.6 billion of respiratory testing revenue for the full year versus our previous expectation of $1.2 billion. The broad-based strength across Cepheid's testing menu is a result of the team's thoughtful approach to placing systems over the last few years. Customers who realized the benefit of accurate, easy-to-use molecular testing during the pandemic are increasingly consolidating their point-of-care testing platforms onto the GeneXpert and adding additional assays from our leading test menu. Their preference for the GeneXpert within their labs and across their healthcare networks has led to a more than 2.5 times increase in both our installed base and revenue since 2019. And we believe Cepheid is well positioned to continue gaining share and expanding our installed base in today's endemic environment. Now let's briefly look ahead at the expectations for the fourth quarter and the full year. As a reminder, both our fourth quarter and full year guidance include only Danaher's continuing operations and exclude Veralto. In the fourth quarter, we expect core revenue in our base business to be down mid-single digits year-over-year. We also expect total core revenue to decline in the high-teens percent range, primarily as a result of lower demand for COVID-19 testing, vaccines, and therapeutics. Additionally, we expect the fourth quarter adjusted operating profit margin of approximately 28%, which includes additional anticipated productivity initiatives to further adjust our cost structure. Turning to the full year 2023, we anticipate core revenues in our base business will be down slightly. And we also expect total core revenue to decline low double digits for the year as a result of lower demand for COVID-19 testing, vaccine, and therapeutics. Additionally, we expect a full year adjusted operating profit margin of approximately 29%. So, to wrap up, we're pleased with our third quarter results and believe the combination of our team's DBS-driven execution and differentiated portfolio enabled Danaher to outperform on a relative basis. With the successful spinoff of Veralto, we are now a more focused company committed to deploying leading-edge science and technology to improve human health. Danaher is purpose built to help customers solve some of the most important health challenges impacting patients around the world. Our proven ability to innovate is enabling faster, more accurate diagnoses and helping customers reduce the time and cost needed to sustainably develop and deliver life-changing therapies. So, as we look ahead, the unique combination of our talented team, differentiated science and technology portfolio, and balance sheet optionality, all powered by the Danaher Business System, positions us well to maximize value for our customers, our associates, and our shareholders. So, with that, I'll turn the call back over to John.

Operator:

[Operator Instructions] Our first question will come from Dan Brennan with TD Cowen. Please go ahead.

Dan Brennan:

Hey, guys. Hey, good morning, Rainer. How are you? Thanks for the questions here. Congrats on the quarter. Maybe just starting off with bioprocess, if you don't mind, since there's remains, obviously, as you know, a tremendous amount of focus here. I know with Q2, you guys talked about order trends being down modestly in the second half of the year. Sounds like what you're seeing is consistent with that, but I was hoping maybe you can unpack a little bit of color on kind of what's going on in the order side for bioprocess and kind of what you're seeing in the field and kind of what this might portend as we think about looking out to 2024.

Matt McGrew:

Hey, Dan, maybe just a little bit of other color, too, just to give some sense of what we saw. Orders in dollar terms were actually down a little Q3 versus Q2. And like Rainer said, the book-to-bill here has been at 0.8. It's been like that for six quarters. I think we anticipate that it will be like that in Q4 as well. And I think kind of another triangulation that I look at is kind of on a two-year stack here. Orders have been kind of, call it, down 32%, 33%, 34% here for the last three quarters. So, like Rainer said, I think we're looking at Q4, it looks a lot like Q3, but no real change here.

Rainer Blair:

Dan, I think as you look towards 2024, it's really important to understand the context here of the second half, so let me lay that out for you briefly. Once again, our Q3 exceeded expectations. Diagnostics was better than we expected, driven by strength at Beckman Diagnostics and respiratory testing at Cepheid. And bioprocessing was as expected, and we don't believe that changes here either. So, we do believe that we're at the bottom here in 2023 in bioprocessing. That's partially offset by weaker life science instruments. And as a reminder, life science instruments for us is less than 10% of our total business. So, Q3, all in, a solid outperformance in the quarter with what we think are some important markers around diagnostics, bioprocessing and life science instruments. And as you think about Q4, in there, bioprocessing and diagnostics, there's really no change to our prior expectations. We expect those to continue to perform similarly as we've talked about in the past in Q3. Now, as it relates to life science instruments, there we've seen some incremental weakness in Q3 and we would expect that to continue or step down slightly here in Q4. So, with that as a context, for the second half, there's really no change to revenue as Q3 offsets Q4. So, we're holding the full year here. And there's also no change to our bioprocessing expectations for the year, and we continue to believe that 2023 represents the bottom. Now, as it relates to 2024 and given where markets are today and the broader macro, we want to see how Q4 plays out before we provide a guide on our Q4 earnings call in January as we always do. We want to see the next couple of months here play out and then build the guide, as always, for our January earnings call.

Rainer Blair:

Thanks, Dan.

Vijay Kumar:

Hey, guys. Thanks for taking my question. Good morning, Rainer.

Vijay Kumar:

One, I just wanted to go back to this bioprocessing. So, with book-to-bill of 0.8x, I guess, is bioprocessing going to grow next year if orders are below revenues in that '23? I don't know if there's a restocking phenomenon. Like, how should we generally broad strokes on bioprocessing, the plus and minuses as we look at the outlook, right? Should China inflect, or any levers that you have that could move bioprocess?

Vijay Kumar:

Understood. Matt, one for you. Thanks for giving the stand-alone numbers. I think it looks like the stand-alone margins here, ex-EAS for Danaher for fiscal '23 is about 28.5% sort of rough numbers, and that includes, I believe, perhaps $400 million of cost actions. What's the right way to think about cost actions, Matt? Is that -- should that all come out next year, so the right jump-off point for us ex cost actions is 30% and that's how we should be thinking about margins for next year?

Vijay Kumar:

Understood. Thanks, guys.

Rainer Blair:

Good morning, Scott.

Rainer Blair:

Sure, Scott, and thanks for the question. So just to the materiality of China here post Veralto, I think 12% is a good number to think about as a total revenue. And now to your point, let me take you through what we saw across the portfolio here in the third quarter. So, let's start with bioprocessing. There, we did not see a change in market demand, which has been here now for several quarters impacted by a weaker funding environment and excess capacity, and that was down 45%, as mentioned previously. Life Sciences was worse than expected on a weaker macro as well as at the margin, not to overread this, but at the margin, some of the anti-corruption initiatives in the country, which slowed down some equipment tenders, some installation of equipment at the margin. And in Diagnostics, we're seeing consistent patient volumes, and it's largely back to normal. So, we expect -- we don't expect this to change here going forward in Q4, and also expect that this is going to continue into 2024. So, we haven't seen a change in bioprocessing, Life Sciences, the worse at the margin here in Diagnostics as expected and largely back to normal.

Rainer Blair:

Scott, I would tell you that we take it, as we always do, based on the end market, the asset and the financial model individually. And as we look at our funnel, which is very active, there's no doubt that some valuations still do not reflect what is a higher and likely for some time, sustained interest rate environment. When it comes down to the individual deal, we bring all aspects together and ensure that the deal model meets our expectations as well. And then, we -- as I've always said, we'll pull the trigger if all those lights flip green on end market, the actual target company, as well as the financial market -- financial model, excuse me. And then, lastly, to reiterate, we do think valuations still have some ways to go here on average in order to reflect the interest rate environment.

Rainer Blair:

Thank you, Scott.

Rainer Blair:

Good morning, Michael.

Rainer Blair:

Thanks, Mike. So, let's level set on the numbers here. Our instrument portion of our Life Science tools is less than 10% of Danaher revenue, just to put that in context properly. And as we mentioned, our Q3 performance was modestly below our expectations, with higher-end instrumentation holding up better than the less specialized solutions. Now, if you think about this by end market, academic and life science research have held up well along with the service business that's associated with these instruments. Applied markets were also resilient, led by food and environmental. And within environmental, you are aware of the PFAS testing volumes out there. But pharma and biotech took a modest step down, and that was particularly the case in the U.S. In China, we see large pharma customers also tightening their belts as it relates to capital expenditures. We were just talking about the interest rate environment, and that's playing out here as well. And in China, what we're seeing there is just the sunsetting of the subsidized loan program of the first half of the year and very high comps, as well as the lower funding that's available in the marketplace today in China. So, just to wrap in geographically, our developed markets were down largely due to the softness in pharma and biotech. And China, as we just talked about, was really related to the weaker macro, and, like I said earlier, on the margin only some anti-corruption initiatives there. So, as we wrap up there, I think we remain cautious on LS tools and expect Q4 to be down in the high singles versus -- but still at the low singles for the full year. Now, as it relates to '24, like I said, I think Q4 is a very important quarter here for all kinds of reasons. As you know, in the Life Science business, a lot happens in Q4, and it's also going to tell us a lot as we dialogue with our customers about how to view 2024, which as I mentioned, we'll talk about in January. But I do think it's fair to say that we expect a weaker pharma and biopharma end market here going into 2024.

Rainer Blair:

We think China long-term continues to accrete to the fleet average from a growth perspective, Mike. The demand in China, we're just at the tip of the iceberg of the demand in China for biologic drugs. And there's no question that we're currently going through a reset that's based on many of the things that occurred during the pandemic, if you think about the funds that were spent in the Zero COVID effort over several years, if you look at how the pharmaceutical industry is playing out in China. But all those things over time moderate, and you come back to an end market which has an enormous demand of a population which has already a large and increasing middle class and is really demanding access to the most advanced medications in the world. So, we continue to see China as a opportunity here in the mid and long term, because the fundamentals are in the right place, although we are going through, if you will, a reset here with different funding sources and so forth in the short term.

Rainer Blair:

Hi, Puneet Souda.

Rainer Blair:

Thanks, Puneet. Let's start with the GLP-1, which are real and they are growing, and Danaher is represented into some extent, stacked into all of them, and we expect over time for those to contribute to our growth. Having said that, GLP-1s are a class of drugs where the intensity of the use of, if you will, the standard inputs of biologic processes, for instance, such as mAbs, and I'll come back to that part of your question in a second, is not as intense. So, you have synthetic processes for GLP-1s, you have biologic processes, and depending on how that mix develops, that also impacts the degree to which this contributes to our business. This will contribute to our business, and we think that, that provides a modest tailwind here over time. Now, as it relates to your question around Alzheimer's drugs, those are typically monoclonal antibodies, and the use of our industry's products there is far greater than, for instance, in GLP-1 processes. And as those continue to make their way through the development pipeline, through the regulators, and ultimately get reimbursed and then adopted by patients, we expect that to be a more significant tailwind certainly than GLP-1.

Rainer Blair:

So, Puneet, we have yet to close on this transaction, so we won't be able to talk about the model and its contents in any detail here. But I do want to take a second to reiterate that this acquisition, if that's an entry into a really highly attractive protein consumables market, we estimate that market to be over $8 billion and growing high single digits. And very importantly, because of new detection technologies and other approaches, protein detection is now moving from research to biopharma, and we believe over time to the clinic. And so, you can see how that fits our strategy of helping to map complex diseases, accelerate drug discovery, and hopefully someday even help identify these diseases earlier in their progression. Now, this is a differentiated company with a really terrific brand and a great long-term sustainable business model. We've talked about this, but this is accretive to us in growth, in earnings and also in talent. And we're looking forward to welcoming the team here. We're still focused right now, Puneet, on closing this transaction by mid-2024.

Operator:

Thank you. Our next question comes from Rachel Vatnsdal with JPMorgan.

Rachel Vatnsdal:

Yeah, good morning. Thanks for taking the questions. So, I want to follow up with a few more nuanced questions on China. So, first you mentioned that anti-corruption had some impacts to the Life Sciences segment. So, could you quantify the impact there? And then, can you walk us through, are you just seeing that impact in the healthcare and diagnostic hospital settings, or has that started to bleed into pharma and biotech as well? And then, shifting over to more the Diagnostic side for China, another dynamic that we started hearing about in recent weeks is just China volume-based procurement. So, can you walk us through what you're hearing on that front and what your potential exposure to that would be?

Matt McGrew:

As far as the value-based procurement, Rachel, I think the best way to kind of think about it is I think we think it's going to be about a $50 million kind of annual headwind here for us over the next couple of years. Most of that is at Beckman Diagnostics. So I mean maybe kind of a simple math is $800 million of Beckman revenues and maybe 40% of that is sort of subject to the VBP kind of assume a 50% type price reduction there and you get to $150 million. We think that's kind of two, three year kind of run rate here. So, pretty modest and manageable for us over the period.

Rainer Blair:

Yeah, I mean, I think it's a good question on the $1.2 billion. I think that's probably where my baseline would be, Rachel. And I think we did a little bit better this year because we had another respiratory season that started earlier than normal, right? Just like last year, similarly, we saw sort of September and October, the ILI kind of spiked up. That is usually something in the past that we have seen more in the January-February timeframe. So if I think about the last couple years and think about that, I think $1.2 billion would be sort of where I would base it as a planning kind of purpose going forward. But we sort of typically, as we look forward from planning perspective, do that. We look at the last couple years of ILI and try and mirror that. So that's kind of where I think I'd be.

John Bedford:

Thank you everybody for joining. We'll be around the rest of the day for questions.

Operator:

And this does conclude today's call. We thank you for your participation. You may disconnect at any time.

Operator:

My name is Ashley, and I'll be your facilitator this morning. At this time, I would like to welcome everyone to the Danaher Corporation Second Quarter 2023 Earnings 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.

Rainer Blair:

Well, thank you, John, and good morning, everyone. We appreciate you joining us on the call today. Our team executed well and delivered our quarterly revenue, earnings and cash flow expectations despite a more dynamic operating environment. The resilience of our portfolio showed through in the second quarter. High single-digit base business core revenue growth in Life Sciences and Diagnostics, paired with better-than-expected respiratory testing revenue, helped offset softer base business demand and bioprocessing. Our team's ability to navigate these challenging operating conditions is a testament to their commitment to leading and executing with the Danaher Business System. Their actions are helping mitigate supply chain constraints, enhance productivity and improve manufacturing throughput, and we're proactively addressing structural costs while maintaining a healthy cadence of growth investments. Now our second quarter results also highlight the durable balanced positioning of our portfolio. We have an exceptional group of businesses, all powered by DBS, that serve attractive end markets with favorable long-term secular growth drivers. This powerful combination of our talented team, the strength of our portfolio and balance sheet optionality differentiates Danaher and positions us well to operate through today's more dynamic operating environment. So with that, let's turn to our second quarter results in more detail. Sales were $7.2 billion in the second quarter and core revenue declined 7%. We delivered 2% growth in our base business, which was more than offset by a COVID-19 revenue headwind of approximately 9%. Geographically, core revenues in developed markets declined high single digits, primarily driven by lower COVID-19 revenues. High-growth markets declined low single digits, with China down approximately 10%. In China, our Diagnostics businesses benefited from continued recovery in hospital patient volumes, while stimulus initiatives helped drive strength in Life Sciences. This was more than offset by a decline in our Biotechnology business, where a significant deterioration in the funding environment during the quarter led to project delays and an increase in order cancellations. Our gross profit margin for the second quarter was 56.5%. Our operating margin of 20% was down 840 basis points due to the impact of lower volume in our Biotechnology and Diagnostics segments, and costs incurred to adjust our capacity and cost structure in response to COVID transitioning to an endemic state. These actions in this transition year are intended to ensure that we're in the best position to deliver on our long-term growth and margin objectives, while maintaining an accelerated cadence of innovation investments. Adjusted diluted net earnings per common share were $2.05. We generated $1.6 billion of free cash flow in the quarter and $3.3 billion year-to-date. This results in a year-to-date free cash flow to net income conversion ratio of more than 125%. Our notable strength in free cash flow generation differentiates Danaher and illustrates the quality of our portfolio, business models, and our team's consistent execution. 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. Reported revenue in our Biotechnology segment declined 17% and core revenue was down 16.5%. In bioprocessing, underlying market conditions weakened further as we move through the quarter, resulting in a high single-digit base business decline. Larger customers are still working through inventory they built during the pandemic, and emerging biotech customers, which we define as customers without a commercialized therapy, continued their efforts to conserve capital. In addition, we saw the ongoing biopharma market correction in China intensify as the second quarter progressed. Given these dynamics, where we can, we've started actively working with our larger customers to help them more quickly manage their inventory down to normalized levels. Now while market dislocations are impacting our near-term growth, recent positive developments have only strengthened our conviction in the tremendous long-term opportunity ahead in the biologics market and for our leading bioprocessing franchise. The number of biologic and genomic medicines in development is meaningfully higher than at any point in history. And during the quarter, we saw notable regulatory approvals for a novel gene therapy for Duchenne muscular dystrophy and the monoclonal antibody-based Alzheimer's therapeutic. These groundbreaking therapies are not only poised to improve quality of life for patients around the world, they're also serving as validation of these emerging therapeutic classes and reinforcing the potential of drugs currently in the development pipeline. Now in May, we completed the combination of Cytiva and Pall Life Sciences, creating a premier global bioprocessing franchise. The combined business, which will go to market under the Cytiva name, uniquely positions us to support customers as they pursue these life-changing breakthroughs. Cytiva's portfolio has the broadest offering in the industry with end-to-end solutions across all major therapeutic modalities and an innovation engine geared towards helping customers bring life-saving therapies to market faster and more efficiently. A great example is the Xcellerex X-Platform Bioreactor Cytiva launched in the second quarter. Now this new bioreactor is optimized to enhance cell culture productivity and increase process intensity to improve manufacturing yields. The X-Platform's modular design also enables customers to more predictively scale from the lab to production across all modalities, including monoclonal antibodies and cell and gene therapies, helping reduce time and cost in biologic drug production. Turning to our Life Sciences segment. Reported revenue grew 5.5% and core revenue was also up 5.5%, including high single-digit growth in our base business. Our Life Sciences instrument businesses collectively delivered mid-single-digit core revenue growth, led by nearly 10% growth at Leica Microsystems and high single-digit growth at SCIEX. Healthy demand across our life science, research, academic and applied markets, particularly for our more advanced instrumentation, helped offset softness at pharma and biopharma customers. Our genomics consumables based business was up low single digits in the quarter. Growth in plasmids, proteins and gene-writing and editing solutions, which are primarily used in projects that are commercialized or in later stages of the drug development pipeline, remained robust. This strength was partially offset by declines in next-generation sequencing and basic research. Our Life Sciences businesses continue to deliver innovative solutions that are helping accelerate the discovery and development of biologic medicines. IDBS recently released Polar Insight, a biopharma data management platform that is leveraging artificial intelligence to help researchers more quickly analyze datasets to accelerate drug discovery, regulatory filings and technology transfer in the therapeutic development process. And SCIEX launched the Intabio ZT, a front end to the ZenoTOF 7600 that enables researchers to more quickly and more securely identify and validate drug candidates, improving development workflows and pipeline yields. Now moving to our Diagnostics segment. Reported revenue declined 13% and core revenue declined 11.5%, with high single-digit growth in our base business, more than offset by lower COVID-related respiratory testing volumes at Cepheid. Our clinical diagnostics businesses collectively delivered mid-single-digit core revenue growth. Leica Biosystems led the way with high single-digit core growth driven by strength in core histology and advanced staining. Beckman Coulter Diagnostics was up mid-single digits again this quarter, with solid performance across both instruments and consumables and notable strength in immunoassay. In May, Beckman Coulter launched the DxI 9000, their next-generation immunoassay analyzer that automates up to 90% of standard daily maintenance routines while delivering best-in-class throughput. In addition to significantly improving laboratory workflows and efficiency, the DxI 9000 will enable Beckman to provide a full menu of blood virus assays over time, closing an important menu gap and further enhancing the breadth and clinical value of our test menu. That is just one example of how the Beckman team is improving their competitive positioning through innovation, which is helping drive consistent mid-single-digit growth rate. In Molecular Diagnostics, broad-based strength across Cepheid test menu drove another quarter of more than 30% core growth in non-respiratory testing. Customers who benefited from the workflow advantages, Cepheid's GeneXpert delivered for COVID-related testing, are increasingly adding additional assays from our leading test menu, most notably Group A Strep, and hospital-acquired infection assays. And strong momentum for our recently introduced multiplex vaginitis panel, the Xpert Xpress MVP, contributed to mid-teens growth in sexual health testing. In COVID-related testing, Cepheid's respiratory testing revenue of approximately $300 million in the quarter exceeded our expectation of $175 million. This was driven both by higher volumes and a preference for our 4-in-1 test for COVID-19, flu A, flu B and RSV. We continue to expect approximately $1.2 billion of respiratory testing revenue for the full year. With COVID now in endemic state, we believe Cepheid is continuing to take share as many customers look to consolidate their point-of-care, PCR, testing platforms on to the gene expert for both respiratory and non-respiratory testing. Their preference for the GeneXpert within their labs and across their health care networks is a testament to the significant value, the unique combination of fast, accurate lab quality results and the best-in-class workflow provides clinicians. Now moving to our Environmental & Applied Solutions segment. Reported revenue grew 2% and core revenue was up 1.5%. Water quality core revenue grew mid-single digits and product identification was down mid-single digits. In water quality, DBS-led execution drove solid growth on top of a double-digit prior year comparison. Strong performance at ChemTreat and Hach was balanced across industrial and applied end markets. At Trojan, equipment sales and order rates remained strong as customers are continuing to invest in larger municipal projects. At product identification, Videojet declined low single digits against the high single-digit prior year comparison. We're also seeing lower activity levels at our industrial and consumer packaged goods customers who are aligning their production schedules with end-use demand. The Videojet team continued their strong cadence of new product innovation this quarter with the release of the 3350 laser marking system. This impressive addition to Videojet's portfolio enables users to mark different sized products and multiple levels of the same product without adjusting the laser, resulting in increased uptime and higher throughput. This is one of several product introductions planned for the year that are helping position the product identification platform for success as they begin their journey as part of Veralto. So speaking of Veralto, we remain on track for a fourth quarter 2023 separation. Veralto will be well positioned in some of the most attractive areas of water quality and product identification. Their portfolio will be comprised of leading companies with durable high-margin business models, supporting customers' mission-critical operations. The Veralto team is looking forward to hosting an Analyst Day in Chicago on September 6, and we hope many of you will attend. So now let's briefly look ahead at expectations for the third quarter and the full year. In the third quarter, we expect core revenue in our base business to be down low single digits year-over-year. We also expect total core revenue to decline in the low to mid-teens percent range primarily as a result of lower demand for COVID-19 testing, vaccines and therapeutics. Additionally, we expect a third quarter adjusted operating profit margin of approximately 26%, which includes the impact of efforts to adjust our cost structure and capacity in response to COVID transitioning to an endemic state, particularly within our Diagnostics and Biotechnology businesses. Now turning to the full year 2023. Due to the near-term challenges within bioprocessing, we now anticipate low single-digit core revenue growth in our base business. We also expect total core revenue to decline high single to low double digits for the year as a result of lower demand for COVID-19 testing, vaccines and therapeutics. Additionally, we expect a full year adjusted operating profit margin of approximately 29%. So to wrap up, our team remains focused on consistent execution in the face of a challenging and more dynamic macroeconomic environment. We're confident about the bright future ahead for Danaher. Our talented associates are innovative and passionate about their work and committed to our culture of continuous improvement. Across our portfolio, we're helping customers solve some of the world's biggest health care challenges, including faster, more accurate disease diagnosis and accelerating the discovery, development and manufacture of therapies. Our solutions are at the forefront of improving patient outcomes and ensuring more patients around the world have access to quality care. Financially, we've got a great lineup of leading franchises in attractive end markets with durable, high recurring revenue business models, and our strong free cash flow generation positions us well to further enhance our portfolio going forward. The unique combination of our talented team, differentiated portfolio and balance sheet optionality, all powered by the Danaher Business System, provide a strong foundation for creating shareholder value, while helping to meaningfully improve human health. So with that, I'll turn the call back over to John.

Operator:

[Operator Instructions] And we will take our first question from Mike Ryskin with Bank of America. Please go ahead.

Michael Ryskin:

Good morning, Rainer. Thanks for taking the questions. I'll start on bioprocessing, the obvious one. You provided a lot of comments during the prepared remarks. But I'm just wondering if you could talk a little bit about order trends, anything that you're seeing from customers to give you a sense of when that destocking could continue. As part of that, you also talked a little bit about actively managing inventory with the larger customers. Could you just walk us through what that means exactly? And sort of how you see the rest of the year playing out? You gave the total percent number, but qualitatively, what are your thoughts on bioprocess as you go through the year?

Matt McGrew:

Mike, maybe just - let me give you a little color on some numbers here, too. I think if you think about the first half, like Rainer said, we were sort of down 20% from an order perspective. And like you also said, I think we'll be down modestly in the second half. But I think it's important to remember, too, this is largely driven by the comps that we've got. So if you think last year, the first half, we had kind of a low double-digit comp, in the second half was more like 20%. So step up, get a little easier here in the second half. I think the important thing that Rainer just said is we have not seen in the order book enough to call an inflection in the market, but I think we will see a step up to a more modestly down number here in the second half. But I would really characterize that as very much comp driven, not some sort of market inflection that we're seeing.

Rainer Blair:

So we saw that continued deterioration in the second half of the second quarter. To give you a sense, China orders were down 20% in the first quarter, 40% in the second quarter, but really 50% in June. And frankly, we don't see that getting better here in the second half. And that's really related to two or three factors. One, the funding environment continued to deteriorate. The foreign investment in projects and capacity has dissipated, it has not returned. There are fewer projects there that are being funded. Also, over the last two, three years, a great deal of capacity has been built, particularly CDMO capacity, but also some with the smaller biopharmas there. And so there's not a lot of additional hardware required here in the short term in the second half, nor are there that many molecules that are being worked on by the CDMOs, meaning that the consumables requirements of that capacity are also lower than we saw here in the first half of the year. And then lastly, and part of this is related to our aggressively managing with our customers to get them to their target inventories, there are a fair number of order cancellations there. So when you put all that together here for China, that is a different picture here in the second half than we saw in the first half. And once again, we're working here, if you aggregate this to the total global biopharma business, to get as much of this as possible behind us in 2023. And just to give you a sense here, our China business in 2022 was about $1.3 billion, slightly over that. We expect that to be about an $800 million business by the end of 2023, which would be about 10% of the total bioprocessing business at Danaher.

Rainer Blair:

Thanks Mike.

Rainer Blair:

Good morning, Vijay.

Matt McGrew:

Vijay, it's Matt. Let me give - I just want to kind of set the numbers for everybody, so we've got what we're looking at for China. As you said, from a revenue perspective, in the first half, we were down, call it, 30%. And we did see May and June sort of get down into the more like 45%, 50% down. So as we sort of think about what we're thinking about for China going forward for the second half, we are kind of contemplating, if you will, for Q3 and Q4 both of those quarters to look like May and June, and call it, 50% plus down. With that, maybe, Rainer, you want to give some color on the commentary.

Vijay Kumar:

Understood, Rainer. And Matt, maybe one for you on margin share. I think if your second quarter came in slightly above guidance. But the sequential step down from Q1, that's 450 basis points, can you bridge us on what drove that 450 basis point step-down sequentially? I think some of this is cost actions Danaher undertook? And again, when I look at the annual guidance, I think you implied Q4 is perhaps 31%-ish. What drives the -- 31-ish. What drives that Q4 step-up? And does that assume your bioprocessing inventory levels to step up? Bioprocessing orders exiting Q4, is that assuming like a normalized trends? Thank you.

Vijay Kumar:

Understood. Thanks guys.

Scott Davis:

Good morning Rainer, Matt and John. Yes, I was hoping you could put a little bit more teeth into this cost out and just a little bit more color, even if you, I mean in a perfect world, I'd love to see what the actual - what the tailwinds might be for '24 or what the benefit is? But if you're not willing to go down that path, at least help us understand what's perhaps more rooftop versus labor versus - I know when times are tougher like this, maybe your comp accruals are down, but maybe you guys can give us a little detail will be helpful? Thanks.

Scott Davis:

All right. That's helpful, Matt. And it wasn't clear to me why [AIS] margins were down. Is it kind of price cost, just because I'm assuming had maybe negative actual unit volumes with core up 1.5%? But is it mix price cost? Is there anything - I know there's probably some prep into the spin that may add some near-term costs as well, but some color there would help too? Thanks.

Scott Davis:

Yes, that makes sense. Thanks for the color. And best of luck to rest of you guys.

Matt McGrew:

Thanks Scott.

Rainer Blair:

Good morning, Dan.

Rainer Blair:

Thanks, Dan. I appreciate that question. And as you can imagine and as you suggested, we are constantly, continuously improving our forecasting processes even when we get into these unusual circumstances. And I think one of the aspects here is that the demand situation, the production planning of our customers around the world in the short-term is very dynamic in the sense that production plans are being changed as our customers manage their own inventories as they deal with the demand patterns that they're exposed to. And what we have learned out of that is a more frequent touch point pattern that we have to have with our customers in order to ensure that we keep our finger on the pulse of what's going on there. We think that in the discussions that we've had, that taking the approach of aggressively helping our customers manage their inventories to their target levels in order to find what the true demand signal is. As well as thinking about the second half here, with some degree of conservatism, positions as well in what has been a very dynamic environment with a number of new factors influencing demand. So, we think we're well positioned here for the remainder of the year in terms of the bioprocessing guide.

Daniel Brennan:

Great. And then maybe just thinking about the exit rates that are implied in the guidance. I know you already commented, Rainer, '24 official guidance will come later. But it'd be really helpful just to get some frame of reference about key inputs. I mean we're coming out somewhere in $930 million this year on earnings, and maybe a little below $10, maybe $980 for '24. I know consensus is still of 10/23 as of this morning. So just any help about how we think about the trajectory in '24, either from an earnings basis. And also even given the low single-digit base guide for this year, how we think about that comp and what that could translate into a starting point for base organic growth in '24?

Operator:

We'll take our next question from Puneet Souda of Leerink Partners. Please go ahead.

Puneet Souda:

Yes, hi. Good morning, Rainer and Matt, thanks for taking the questions. So first one, on China, beyond the comments you made and the 50% expectation down for the rest of the year, orders being down. I'm wondering if there is anything fundamental in terms of the shift on the product portfolio? We heard one of your bioprocess peers talk about competition on the less technology-heavy products. Wondering if you're seeing any of that and any share shift there that is also happening in this market?

Puneet Souda:

Okay. That's super helpful. And then one on capital deployment, if I may. How are you thinking about capital deployment now with EAS spend and the backdrop of somewhat of a rather weak end market in the near term? I know historically, you've pursued leading assets that are usually gross margin accretive, wondering if any of that has changed and if you think services has gained more significance in your framework for capital deployment now? Thank you.

Puneet Souda:

Got it. Okay. Thank you guys.

Operator:

We'll take our next question from Rachel Vatnsdal with JPMorgan. Please go ahead.

Rachel Vatnsdal:

Good morning, thank you for taking the questions. So first off, just kind of shifting gears over to the Life Sciences business, that was much better than expected this quarter. And notably, instrument strength was pretty strong, with high single-digit growth at SCIEX and 10% growth at Leica? So could you just walk us through really what drove that strength in instruments this quarter? And then some of your peers have called out a meaningful slowdown when it comes to CapEx spending in some of the customer segments for instrumentation. So, are you seeing any of those same dynamics? And how are you thinking about instrument growth for the full year?

Matt McGrew:

And Rachel, that's sort of on the back, too, if you think about the bookings here. I mean our book-to-bill in Life Sciences in the Instruments businesses was a little bit less than one in the quarter. So I think to Rainer's point, we look at the first half year in China for Life Sciences instruments, that was largely a backlog play from stimulus. And as we sort of head into the second half, I think our assumption is that we're going to be flat in those businesses as China stimulus backlog kind of rolls off and not have the impact that it had in the first half. And we just don't see a real step up here in stimulus in the second half.

Rainer Blair:

Rachel, overall, our pricing for the quarter, so overall banner, was up 350 basis points with all four segments remaining above the historical average. And specifically, you were talking about Life Science Instruments, there we saw in the quarter 450 basis points of price. Now as we look forward for the remainder of 2023, we do see that and expect that to moderate somewhat. But we do expect to be above our historical averages here for the remainder of the year. And as it relates to 2024, I think we'll come back to you on that as we get closer here to the end of the year.

Rainer Blair:

Good morning, Luke.

Matt McGrew:

Luke, I mean, I just keep coming back to - it's July. We're in a pretty dynamic market, where we are within the industry. And like you said, there's a number of dynamics that still need to be worked through. We mentioned some of them destocking, China, the fact that we're sort of actively managing through this inventory situation. I know why people are trying to get to a '24 number, but I just think it's too early. We just need to get through the second half. We'll get a better sense of how those dynamics play out, which will give us a lot better sense as we get later in the year and into what we normally guide and what that looks like. I just think that there's so many in parts right now that, unfortunately, I think we just do - we really do need to get through the second half here.

Matt McGrew:

I mean I could probably come up with some numbers, but it would be imprecise. I think the reality is that it's going to be very customer dependent. It's going to be manufacturing site depending. It's going to be drug dependent. I mean we don't really spend a lot of time trying to figure out how much was destocking as much as spending time with the customers in a pretty proactive way these days, to understand what's on hand, what's the real need that you've got site by site by site so that we can help them manage down to an inventory level they are comfortable with. Some are comfortable with getting down where they were pre-pandemic, some are trying to get below that and some are trying to be above that, actually. So it's not one number that we manage that we're really doing on a kind of neutral basis. I don't know that I've got a great answer for a number, but we are actively managing it and probably a way that was more active than we have been.

Operator:

Thank you. And I will now turn the call back over to Mr. John Bedford for closing remarks.

Operator:

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.

Operator:

My name is Ashley and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation’s First Quarter 2023 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.

Rainer Blair:

Thank you, John and good morning everyone. We appreciate you joining us on the call today. So we had a good start to the year. Our team successfully navigated a dynamic operating environment to deliver better-than-expected revenue earnings and cash flow. We are especially pleased with the strength of our base business, which grew 6% in the first quarter. Now across the portfolio, the quarter progressed largely as we anticipated. Our global supply chain has stabilized and component availability improved sequentially. Strong price realization helped offset inflationary pressures and disciplined cost management enabled us to continue our cadence of growth investments. So we believe these investments paired with DBS-driven execution contributed to market share gains in many of our businesses again this quarter. A prime example of the power of DBS and our commitment to continuous improvement at all levels of Danaher as the CEO Kaizen, which we kicked off 2 weeks ago. With this event, our most senior leaders are joining over 700 associates at 10 of our operating companies. We are focusing on the most significant opportunities for lasting competitive advantage across our businesses, including further reducing our best-in-class lead times at Aldevron and improving resin and filter throughput in the biotechnology group. The CEO Kaizen is just another terrific opportunity for our teams to come together and drive transformative change through DBS. In fact, once we wrap up here today, I will be joining the Cytiva team at our resin facility in Uppsala, Sweden, to contribute to these efforts. Now our results also reflect the unique positioning of Danaher’s portfolio. We just have an exceptional group of leading franchises serving attractive end markets with durable secular growth drivers. Additionally, the strength of our balance sheet provides us with the optionality to enhance our businesses both organically and through disciplined M&A. This powerful combination of our talented team, leading portfolio and strong financial position, differentiates Danaher and reinforces our sustainable long-term competitive advantage. So with that, let’s turn to our first quarter results. Sales were $7.2 billion in the first quarter and core revenue declined 4%. So as I mentioned earlier, we delivered 6% core revenue growth in our base business with three of our four reporting segments, up high single-digits or better in the quarter. COVID-19 revenues were a headwind of approximately 10%. Geographically, core revenues in developed markets declined mid single-digits, primarily as a result of lower COVID-19 revenues. High-growth markets were up low single-digits, with a low single-digit decline in China. Results in China were better than expected driven by a quicker-than-anticipated recovery in diagnostic testing and a more favorable life science research funding environment. We expect these positive trends to continue as we move through the year. Our gross profit margin for the first quarter was 61%. Our operating margin of 25% was down 330 basis points primarily due to the impact of lower COVID volume in our biotechnology and diagnostics businesses. Adjusted diluted net earnings per common share were $2.36 and we generated $1.7 billion of free cash flow in the quarter. Now, let’s take a closer look at our results across the portfolio and give you some color on what we are seeing in our end markets today. Reported revenue in our Biotechnology segment declined 16% and core revenue was down 13%. In bioprocessing, base business core revenue growth was in line with our expectations of low single-digits in the first quarter. Flying demand at our large customers, were primarily responsible for therapies in commercial production and later-stage clinical trials remains robust and they are steadily working through inventory they built during the pandemic. Based on our most recent customer conversations, we now expect the inventory normalization process to continue through the second half of the year. During the quarter, we also saw softer demand globally at many of our emerging biotech customers as more pronounced pressures on liquidity and funding accelerated their efforts to conserve capital leading to project delays and cancellations. In consideration of these factors, we anticipate second quarter and full year base business core growth in bioprocessing will be largely consistent with the first quarter. That said these short-term pandemic-related dislocations have not changed our assessment of the tremendous opportunity ahead in the biologics market and for our leading bioprocessing franchise. The number of biologic and genomic medicines in development is meaningfully higher than at any point in history. In fact, there are thousands of biologic therapies currently under development, including more than 750 in Phase 3 clinical trials. With these therapies, our customers are making significant strides in addressing diseases that affect large segments of the population. For example, GLP-1s have become blockbuster treatment for obesity and diabetes and antibody drug conjugates are meaningfully improving treatment outcomes for many types of cancer. And we are also seeing promising developments in the field of Alzheimer’s research where several novel monoclonal antibodies are nearing regulatory approval. Now to best support our customers as they pursue these life-changing breakthroughs, our biotechnology team has been accelerating investments and innovation over the last several years. Cytiva recently introduced the MabSelect VL, a new resin and ligand for bispecific antibodies and antibody fragments. The MabSelect VL’s best-in-class finding capacity and improved alkaline stability makes industrial scale purification more efficient, helping customers improve yields, decrease bioburden and reduced manufacturing costs. This is just one of the innovative solutions from our biotechnology team’s project pipeline aimed at helping customers bring more life-saving therapies to market faster and more efficiently. Turning to our Life Sciences segment, reported revenue grew 2.5% and core revenue was up 5%, including high single-digit growth in our base business. Our Life Sciences instruments businesses collectively delivered mid single-digit core revenue growth, consistent with our expectations. Funding levels and sales funnels remained healthy across most major geographies and end markets. The demand for our advanced solutions remains strong, notably for recent innovations such as the SCIEX ZenoTOF7600 and Leica Microsystems, Mica. Our genomics consumables business had another quarter of double-digit base business core revenue growth. Robust demand for plasmids, proteins and gene writing and editing solutions was partially offset by declines in next-generation sequencing and basic research. During the quarter, Aldevron brought together capabilities from Cytiva and Precision Nanosystems to create a streamlined offering for the development, production and release of mRNA drug substance and drug product. This new offering will be available to customers later this year and is a great example of how we are integrating solutions from across Danaher to create differentiated offerings and deliver even greater value to our customers. Moving to our Diagnostics segment, reported revenue declined 10% and core revenue declined 7.5% with double-digit growth in our base business, offset by lower COVID-related respiratory testing volumes at CES. Our clinical diagnostics businesses collectively delivered mid single-digit core revenue growth and saw healthy market volumes globally. At Radiometer, strong demand for blood gas testing in China drove double-digit core growth. Leica Biosystems grew mid single-digits, led by advanced staining and digital pathology. Strength across developed markets and China enabled Beckman Coulter Diagnostics to exceed expectations and deliver mid single-digit core growth. On Molecular Diagnostics, broad-based strength across Cepheid’s test menu drove more than 30% core growth in non-respiratory testing. As our customers look for ways to capitalize on the workflow advantages, the Cepheid GeneXpert delivered for COVID-related testing, they are increasingly adding additional assays from our market leading test menu. This increased menu utilization by our customers helped drive more than 50% growth in infectious disease testing in the first quarter. We also saw good momentum for our recently introduced vaginitis panel, the Xpert Xpress MVP, which contributed to nearly 30% growth in sexual health testing. In COVID-related respiratory testing, customers continued transitioning high throughput testing to the point of care and consolidating their point-of-care PCO testing platforms onto the GeneXpert. As a result, Cepheid’s respiratory testing revenue of approximately $550 million in the quarter exceeded our expectation of $450 million. This was driven both by higher volumes and the preference for our 4-in-1 test for COVID-19, Flu A and B and RSV. We continue to expect approximately $30 million respiratory tests and $1.2 billion of revenue for the full year. Cepheid’s strong results are a testament to the significant value and unique combination of fast, accurate lab quality results and the best-in-class workflow provides clinicians. Given Cepheid’s leading global installed base and growing adoption of the broadest molecular diagnostic test menu on the market, we are well positioned to help customers meet their testing needs and continue gaining market share for years to come. Moving to our Environmental & Applied Solutions segment, reported revenue grew 5% and core revenue was up 6.5%. Water quality core revenue grew low double-digits and product identification was up low single-digits. In water quality, Hach delivered their fourth consecutive quarter of double-digit growth, and ChemTreat was up double-digits for the eighth consecutive quarter. Strength was broad-based across both equipment and consumables, particularly in our industrial end markets. This performance highlights the resilience of the high-margin recurring revenue business model that make up water quality and the significant value our solutions provide in support of customers’ day-to-day mission-critical water operations. At Product Identification, marking and coding was essentially flat, while packaging and color management was up low single-digits. Videojet was up low single-digits despite a difficult year-over-year comparison as the business grew high single-digits in Q1 last year. Our growth investments are driving a healthy cadence of new product innovation at Videojet. In fact, in March, the team released the 15 ADC continuous inkjet printer the industry’s first dedicated soft pigmented solution. The 15 ADC uses soft pigmented inks to print codes with consistent quality, excellent contrast and strong durability to avoid degradation and fading during production runs, helping customers reduce production downtime. So this is the first of several new product introductions Videojet has planned for the year and is a great example of how our teams are bringing impactful solutions to our customers. In February, we announced that our environmental and applied segment will be named Veralto, when it is launched as a stand-alone company and that it will be headquartered in Waltham, Massachusetts. This is an exciting milestone for the team, and they are making considerable progress towards becoming a separately traded public company. And we remain on track for our fourth quarter 2023 separation and look forward to sharing more details in the coming months. So now let’s briefly look ahead to our expectations for the second quarter and the full year. In the second quarter, we expect core revenue in our base business to be up mid-single digits. We also expect total core revenue to decline high single digits as a result of lower demand for COVID-19 testing, vaccine and therapeutics. Additionally, we expect a second quarter adjusted operating profit margin of approximately 26% and which reflects efforts to adjust our cost structure and capacity in response to COVID transitioning to an endemic state, particularly within our Diagnostics and Biotechnology businesses. Now turning to the full year 2023. Despite the near-term and temporary challenges within bioprocessing, we anticipate mid-single-digit core growth in our base business. We also expect total core revenue to decline high single digits for the year as a result of lower demand for COVID-19 testing vaccines and therapeutics. Additionally, we expect a full year adjusted operating profit margin of approximately 30% and which reflects the previously mentioned efforts to adjust our cost structure and capacity in response to COVID-19 transitioning to an endemic state. So to wrap up. We’re pleased with our strong first quarter results. Our well-rounded performance is a testament to the durability and balanced positioning of our portfolio and our team’s commitment to leading and executing with the Danaher Business System. While the transition of COVID-19 from a pandemic to an endemic state is causing near-term disruption, there is no doubt that the past 3 years have helped shake Danaher into a better, stronger company. We meaningfully changed the scale of our bioprocessing business, with the addition of Cytiva and the creation of the biotechnology group and Cepheid’s expanded installed base that significantly improved their competitive advantage. We’ve also increased our cadence of innovation and strategically deployed capital through M&A, including the acquisition of Aldevron to accelerate our future growth trajectory. So there is a bright future ahead for Danaher, the combination of our talented team, differentiated portfolio of businesses and strong balance sheet, all powered by the Danaher Business System provide us with a strong foundation to create value for many years to come. And so with that, I’ll turn the call back over to John.

Operator:

[Operator Instructions] We will take our first question from Michael Ryskin with Bank of America. Please go ahead.

Michael Ryskin:

Good morning. Thanks for taking the questions, guys. First, I want to start on the bioprocessing inventory challenges. You’ve been dealing with this issue for almost a full year now and you’ve had to revise your outlook lower for fiscal year ‘23 a number of times. Why is the visibility there into inventory is so challenging? And how do you know that this latest view of plus low single digits for the year is the right view and there is not further cuts going down the road?

Matt McGrew:

Mike, it’s Matt. Maybe we could give you a little bit of kind of context around January to kind of the guide in January to where we ended up. I know Rainer sort of mentioned it, but I think it’s important to kind of think about it in the two buckets. So we’ve got the larger biotech – or the larger customers that we’ve got, most of their stuff is sort of Phase 3 clinical on market. In January, our assumption was that, that was going to be kind of, call it, high single-digit growth from those customers. So 70% or so of our customers kind of growing at 7%, 8%. And then kind of the remaining 20%, 25% of the customers, which we’re sort of referring to as emerging biotech, not everything in there is probably technically emerging, but that other piece of the customers in January, we thought that was going to kind of be about low double digits to kind of low teens growth. And you add all that up and that would have been the high single-digit growth that we thought we were going to see here for the year. Like Rainer said, what we saw in Q1 was just, frankly, not that supportive of that kind of ramp as we think about what we would need to build in Q1 and Q2 be able to hit those types of numbers for the full year. And so if you think about what we’re looking at and seeing now in April, those large customers instead of being 7%, 8%, they have been growing still nicely, but more mid-single digits, right? And the big change here is this emerging biotech, another 20%, 25%. And instead of being up kind of mid-teens, they are actually down mid-teens and that comes back to everything that Rainer talked about with people really reprioritizing projects, conserving cash. That happened both in the U.S. and we saw it in China as well. And I think I’d probably say it we saw modest headwinds as we entered the year. And those are just more pronounced now as we move through the quarter. So just as a – to maybe put some numbers to what Reiner said.

Michael Ryskin:

Okay. Thanks. And on the emerging biotech, just really hope to clarify. Are you seeing that softness in bioprocessing specifically or across in the life sciences segment as well? And then maybe I could transition that to a question on the instrument. You saw 5% growth or mid-single-digit growth in instruments in the first quarter. What’s your expectation for the rest of the year? Any particular pockets of weakness or strength you can call out?

Michael Ryskin:

Okay, thanks.

Michael Ryskin:

Okay, thanks. I will get back in the queue.

Operator:

Thank you. We will take our next question from Vijay Kumar with Evercore ISI. Please go ahead.

Rainer Blair:

Hi, Vijay.

Rainer Blair:

So Vijay, I mean, we’re basing our view on the second half. Also based on what we’re seeing in the current market environment, which we just talked about as well as our order book. And like I said a minute ago, in order to support a higher guide for the second half, we need to see different activity levels here in Q1 and Q2. And that’s not the case for two reasons. One, the emerging biotech is quite significantly softer, down mid-teens as we just talked about. And then I would say on the margin, larger accounts are taking a little bit more time to burn through inventory, although they are doing that nicely. And those factors together have us believe unless there is any other sort of significant market disruption that the year will play out much as the first quarter has.

Rainer Blair:

Sure. So Vijay, on the Cepheid question, we’re really seeing a broad-based usage of the infectious disease menu. In fact, our broader menu in general, both at our existing installed base that’s been there for some time as well as with our newer customers as they start transitioning that COVID testing capacity that they have to take full advantage of that menu. So we see that 30% here as a good marker of how people appreciate the workflow advantages, the ease of use and the accuracy of the platform. Remember, we’re seeing two factors here. One, we see test transitioning from high throughput environment into the point of care on the one hand. And on the other hand, we see expanded usage of our testing menu.

Rainer Blair:

So, on M&A, Vijay, obviously we don’t comment on chatter. But what I would tell you is we really like the way we are positioned. Our balance sheet is in great shape. Valuations continue to moderate, perhaps the one or the other Board is not quite there yet, but we do see more realism in the many discussions that we have across the board as always. And specifically, as we have said in the past should our customers tag on this and on our help and services, that’s not something that we are going to ignore. But once again, that’s just one of several opportunities. I think the most important thing to remember is that we are not going to deviate from our disciplined approach. It’s got to be the right end market. It’s got to be the right target and the model has to work. And it’s when those three lights flip green that we execute.

Vijay Kumar:

Thanks Matt.

Operator:

We will take our next question from Scott Davis with Melius Research. Please go ahead.

Scott Davis:

Hey. Good morning guys. Rainer, Matt, and John good morning. Rainer, you have said – you made a reference in your prepared remarks to kind of incremental cost-out. I think I probably asked this question last quarter. But can you give us a little bit of granularity or color at least on what you are talking about? Is there a structural cost-out? Is it more of just taking out some of that – some of those kind of temporary costs that came in during COVID that now are unnecessary, or is there an actual attempt to go after some of the structural costs that perhaps you couldn’t have gone after before?

Scott Davis:

That’s super helpful, Matt. Can you guys just remind us what – where is your – the size of their installed base in Cepheid today versus pre-COVID, I know I have – I am sure having the note somewhere, but to just make a little easier on...?

Scott Davis:

Alright. Perfect. I will pass it on. Thank you, guys. Good luck this year.

Rainer Blair:

Thanks Scott.

Rainer Blair:

Good morning Dan.

Matt McGrew:

Yes. So, maybe – again, maybe the way to think about it, Dan, is that sort of the larger customers that are really where we are seeing the inventory drag. That was sort of – we initially thought we would see that in the high-single digits, call it, 7%, 8%, and that’s a little bit lower now, call it, 6% and change. And so I think the inventory destocking is flowing through in the larger customers, and you are seeing it at a slightly lower growth rate that we saw in Q1 and we are expecting them to see for the full year. So, that’s how I would sort of frame what the inventory destocking is. The rest is really, like I talked about earlier, emerging biotech and sort of the other 25% of our customers, we thought that, that would be a low teens type growth rate here for the year. Combine that with the 8% that we thought we would see in the larger, that’s how we get to high-single digits. That low teens is actually negative mid-teens, right, with all the pressures we talked about. So, I would say that we are just sort of assuming that that type of growth rate for the rest of the year for that customer base and that we are going to have – the larger customers will be more in the mid-single digit like I talked about. That’s what we are kind of assuming for the year. And based entirely on what we saw in Q1, the order book in Q1 sort of not being supportive, frankly, of, in our minds, at least, the ability with the limited visibility we have or more limited visibility, just not supportive of being able to say that we think we can get back to high-single digits. I think you asked a question of what those customers were there last year. That entire business largely was up in line with what we saw last year, which is as you remember, mid to high 20s. So, kind of you sort of look at mid to high-20s with that group of folks, now they are sort of down mid-teens, still a very solid growth on a 2-year basis, but it is what we are seeing right now.

Matt McGrew:

Yes. No, I mean I think if you are going through the full year, the math is what it is at around 30% adjusted OP margins, I think sort of that takes care of itself. As far as what we are going to look like as we sort of get to the other side of this. I mean I talked a little bit about Cepheid kind of was 20% to 25% pre-pandemic, peaked up at 45% and 35% to 40%. I mean I think if you sort of use that frame plus what we have in diagnostics, that sort of gets you where we think roughly the margin profile will be. Biotech is probably the other one after we get through some of these costs. The same math there was biotech was, call it, high 30s prior to the pandemic. Again, it peaked at around, call it, 45% and change. And after we sort of get through what I think we are going to do there, they are probably going to be more like low-40s. So, again better than they were pre-pandemic given the fact that they are a bigger business. But those two pieces, I think you can slide into what ‘24 might look like. And then life sciences, that should be kind of plus or minus where we have been here. That has not been a margin that’s moved around quite a bit. A little bit of COVID stuff as we had in ‘22 and ‘21, but I think you can kind of get a sense of what the margins are there. So, maybe it’s just a high-level framework, you are probably high-30s, low-40s with Cepheid, you can kind of assume some other stuff for the diagnostics, biotech, probably low-40s than what we are seeing in LS. But we will obviously sort of come back to that later, still pretty early in ‘23, but just to give you a very high level view.

Rainer Blair:

Thanks Dan.

Rainer Blair:

Good morning Jack.

Rainer Blair:

Sure, Jack. So, once again, first quarter, our orders were down modestly sequentially. So, relative to the fourth quarter, down modestly. But year-over-year, they declined 20%, okay. And so what we have been seeing is the inventory burn down that we have been talking about Matt and myself, is occurring, and we see that in our order book here for the first quarter. And then again, we have laid out why we believe that the current activity level supports sort of a similar progression of the quarters here throughout the year as we had in the first quarter.

Rainer Blair:

Right. So, direct exposure was not material in any sense of the word. As it relates to the impact on our businesses, particularly in bioprocessing, to a much lesser extent in life sciences, we do think that, that provides that additional inflection point here in the first quarter for liquidity tightening up and that prioritization that we are seeing here in the emerging biotech segment, call it emerging biotech, and once again, those companies working on earlier stage projects. So, that’s where we have seen a more pronounced conservation of cash and that plays out in OpEx, CapEx and you can – and we talked about how that played out with mid-teens contraction as opposed to sort of a mid-teens growth versus prior periods.

Rainer Blair:

Thanks Jack.

Rainer Blair:

Good morning Rachel.

Rainer Blair:

So, just to confirm on the topic of emerging biotech, our assumption is and our guide reflects that the activity level in emerging biotech stays for the remainder of the year as it played out in the first quarter. So, we are not assuming any change there including that it doesn’t get significantly worse. Now, as it relates to how that segment progresses here, that’s from today’s point of view, hard to predict. We need to see where capital markets go, liquidity availability and yes, a stabilization and return to some degree of normality in the banking sector. But for the visibility that we have today, we are not expecting an improvement in that segment for the remainder of the year.

Rainer Blair:

Well, as it relates to bioprocessing in China, we have had a very good and strong business there in China for years. And it helped quite significantly in China in order to build the capacity for vaccines and for other biologics. And what we see today, much like we have seen in the U.S. is that the Emerging Biotech segment, which is an important part of China’s efforts to build a local biopharma industry is also impacted by capital constraints. So, we have seen that play out in China as well. And in fact, that’s what is the primary impact on our China numbers here. In the first quarter, which on the whole were better than expected, primarily because of the patient volumes and the diagnostic businesses being stronger. Now, as it relates to the full year in China, we expect our full year in China to be up low-single digits for Danaher overall based on the market recovery, exiting COVID as well as, if you will, a normalization of the activity level in bioprocessing.

Rainer Blair:

Thank you, Rachel.

John Bedford:

Thank you, Ashley. I appreciate everyone for joining us on the call today. We will be around all day and rest of the week for the follow-ups.

Operator:

Thank you. This does conclude today’s program. Thank you for your participation. You may disconnect at any time.

Operator:

Good day, everyone. 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 Fourth Quarter 2022 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there’ll be a question-and-answer session. [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.

Rainer Blair:

Thank you, John, and good morning to all of you. We appreciate you joining us on the call today. Our terrific fourth quarter results rounded out another great year for Danaher. Broad-based strength across the portfolio drove nearly 10% core growth, strong earnings growth and free cash flow generation. We're particularly pleased with the performance of our base business, which grew high single digits for the year and has now grown high single digits or better each of the last 10 quarters. Our well-rounded results this year would not have been possible without the hard work and dedication of our more than 80,000 associates. The team overcame global supply chain challenges, logistics delays, COVID-driven lockdowns and inflationary pressures to reliably support our customers. We believe the DBS-driven execution, coupled with our proactive growth investments over the last several years contributed to meaningful market share gains in many of our businesses. Now looking to 2023 and beyond, we see a bright future ahead for Danaher. Our portfolio is made up of leading franchises of durable business models and attractive end markets that benefit from outstanding long-term secular growth drivers. We're well positioned financially with our strong free cash flow generation and balance sheet capacity, allowing us to actively pursue strategic M&A opportunities. So this unique combination of leading businesses and financial strength all powered by the Danaher Business System differentiates us and reinforces our sustainable long-term competitive advantage. So with that, let's take a closer look at our full year 2022 financial results. For the full year, we delivered nearly 10% core revenue and adjusted earnings per share growth, including 8% core revenue growth in our base business. We also expanded our core operating margins by 60 basis points and generated $7.4 billion of free cash flow. Our free cash flow to net income conversion ratio exceeded 100% for the 31st consecutive year. Our strong financial results allowed us to continue our cadence of high impact growth investments throughout the year. In fact, our investments in research and development of more than $1.7 billion in 2022 enabled us to accelerate innovation across Danaher. New products such as the Leica Microsystems, Beacon, Leica Biosystems automated advanced staining platform, Bond Prime; and Hach's Headquarter series portable meters are helping improve both human health and the environment, while enhancing our growth trajectory. Our capital expenditures of over $1 billion included substantial investments to expand production capacity in our bioprocessing and genomics businesses. These investments have been critical to support current customer demand but they're equally important to support the long-term growth opportunities and security of supply in these markets. With several of our customers' biologic therapies progressing through the regulatory approval process, we anticipate the size of our bioprocessing and genomics businesses to increase meaningfully here in the coming years. Now let's turn to our fourth quarter results in more detail. Sales were $8.4 billion, and we delivered 7.5% core revenue growth. Our base business core revenue growth was also 7.5% as our core revenue growth contribution from COVID-19 testing was neutral year-over-year. Geographically, core revenue growth in both North America and Western Europe was approximately 10%. We saw healthy demand across our major end markets with customer activity and funding levels largely consistent with the third quarter. High-growth markets core revenue was up slightly. China grew low single digits, driven by robust demand in our life sciences instruments and acute care diagnostic businesses. However, the reopening efforts associated with the ending of zero COVID policies and subsequent increase in COVID-19 infections resulted in reduced patients and testing volumes in our clinical diagnostics business. We anticipate lower testing volumes to continue through the first quarter of 2023 before gradually recovering through the balance of the year. Our gross profit margin for the fourth quarter was 59%, and our operating margin of 27.4% was up 100 basis points, including 105 basis points of core operating margin expansion. This strong margin performance was enabled by the disciplined cost management, productivity measures and price actions our teams implemented to help offset the impact of inflationary pressures across our business. While there continue to be supply chain disruptions and cost pressures, we saw a modest improvement in component availability again this year and this quarter. Adjusted diluted net earnings per common share of $2.87 was up 6.5% versus last year, and we also generated $2.2 billion of free cash flow in the quarter. Now before we get into the details of the quarter, I'd like to point out some updates we've made in our financial reporting. Due to changes in our organization resulting from the significant growth of our Life Sciences segment over the past several years, we have separated our former Life Science segment into two new reporting segments. Cytiva and Pall Life Sciences, which include bioprocessing and our discovery and medical businesses are now reported as the biotechnology segment. Our new life sciences segment is comprised of the remainder of the businesses in our former life sciences segment. The Diagnostics and Environmental & Applied Solutions segments are unchanged. Importantly, today's discussion reflects these changes. So now let's take a look at our fourth quarter results across the portfolio and give you some color on what we're seeing in our end markets today. Reported revenue in our Biotechnology segment declined 1% and core revenue was up 4%. In bioprocessing, robust customer activity across monoclonal antibodies, cell and gene therapies and antibody drug conjugates, or ADCs, drove another quarter of more than 20% growth in non-COVID revenue. Total core growth in bioprocessing was mid-single digits for the fourth quarter as customers continue to scale back their COVID-19 vaccine and therapeutic programs. For the full year 2022, core revenue growth in bioprocessing was high single digits, which included non-COVID revenue growth of more than 20%. Looking to 2023, we expect customers to further reduce their COVID-19-related programs. Vaccination and booster rates have been significantly lower than initially anticipated and the availability of alternative therapeutics has reduced the need for monoclonal antibody-based treatment. In light of these dynamics, we now anticipate COVID-19-related vaccine and therapeutic revenue will be approximately $150 million for the full year of 2023, down from approximately $800 million in 2022 and lower than our previous expectation of $500 million. Our non-COVID business has averaged more than 20% growth over the past two years. Given these elevated growth rates, we spent the past several weeks speaking with our customers to better understand their planning assumptions for 2023. And based on these discussions, we anticipate non-COVID bioprocessing core growth will be high single digits for the full year 2023. This includes low single-digit core growth in the first quarter as customers repurpose inventory purchased for COVID-19 vaccine and therapeutic programs to non-COVID projects. Now there is a bright future ahead for the biologics market and our leading bioprocessing business. The number of biologic and genomic-based therapies in development and production continues to rise, and we expect to see significant industry-wide investments in research, development and production capacity well into the future. With our differentiated portfolio, which is the broadest and deepest in the industry across upstream and downstream applications, our best-in-class scientific services and extensive global reach, we're exceptionally well positioned to support our customers as they undertake this complex life-changing work. Now moving to our Life Sciences segment. Reported revenue grew 8%, and core revenue was up 13%. Strength was broad-based across instruments and consumables with all major businesses delivering high single-digit or better core revenue growth. Our Life Sciences instrument businesses collectively delivered double-digit base business core revenue growth, led by Leica Microsystems and Beckman Coulter Life Sciences. Demand remains solid across our major geographies and end markets, and we're seeing good momentum in our opportunity funnels as we begin the new year. Our genomics consumables businesses had another quarter of double-digit core revenue growth, driven by strong demand for our plasmas, RNA and gene lighting and editing solutions. During the quarter, IDT strengthened its next-generation sequencing portfolio with the acquisition of Archer DX NGS assays. These assays are foundational in researching novel cancer fusions and bring new capabilities, including an enhanced bioinformatics platform to expand IDT's suite of sequencing solutions. Now moving to our Diagnostics segment. Reported revenue was up 3% and core revenue grew 7.5%, led by mid-teens growth at Cepheid. Radiometer grew double digits, led primarily by demand for blood gas testing in China. Leica Biosystems was also up double digits with growth across all major product lines. In our digital pathology business, we saw record placements of the GT 450, Leica's best-in-class digital pathology slide scanner, as customers are increasingly realizing the operational and clinical benefits of digitization. In Molecular Diagnostics, core revenue across Cepheid's non-respiratory chest menu grew more than 20% led by infectious disease testing, sexual health and hospital-acquired infections. The acceleration in growth this quarter was due in part to increased adoption of Cepheid's non-respiratory test menu across our nearly 50,000 instruments installed base, which has doubled since 2020. During the quarter, Cepheid expanded their competitively advantaged test menu with the launch of the Xpert Express MVP. The Express MVP rapidly diagnoses three distinct health conditions that cause overlapping vaginitis symptoms in women using a single sample. This addition to our sexual health portfolio enables physicians to quickly diagnose the patient's infection and prescribe a targeted treatment regimen, reducing the need for multiple office visits. Now this is a great example of how bringing accurate, easy-to-use molecular testing closer to patients is improving health care outcomes and driving long-term growth at Cepheid. In respiratory testing, global PCR testing volumes continued to moderate. The demand for Cepheid's point-of-care PCR testing remained robust. Cepheid's respiratory testing revenue of approximately $1.1 billion in the fourth quarter significantly exceeded our expectation of approximately $375 million. The respiratory season got off to an earlier-than-anticipated start with a high prevalence of circulating respiratory viruses, notably COVID-19, flu and RSV leading to both higher volume and a preference for our 4-in-1 test for COVID-19, Flu A&B and RSV. Now based on discussions with our customers, we believe COVID-19 will enter an endemic disease state in 2023, and as a result, expect to ship 30 million respiratory tests and generate $1.2 billion of revenue for the full year. As hospitals and health systems begin planning for their endemic testing needs, we're increasingly seeing customers consolidate their point-of-care PCR testing platforms on to Cepheid's GeneXpert. Our customers' preference for the GeneXpert for both respiratory and non-respiratory testing is a result of the significant value of the unique combination of fast, accurate lab quality results and a best-in-class workflow provide clinicians. The combination of these advantages, the broadest molecular diagnostic test menu on the market and our leading global installed base creates significant opportunities ahead for Cepheid's point-of-care solutions. Moving to our Environmental & Applied Solutions segment. Reported revenue grew 1% and core revenue was up 5.5%. Water quality core revenue growth was high single digits and product identification was flat. At product identification, marking and coding was up slightly while packaging and color management was down low single digits. Core revenue at Videojet was up slightly due in part to a difficult year-over-year comparison as the business grew low double digits in Q4 last year. In December, Pantone announced Viva Magenta as the 2023 Color of the Year. The color of the year and the billions of media impressions it generates solidifies Pantone's iconic brand and was one of the drivers of high single-digit full year core revenue growth in X-Rite [ph] color standards business in 2022. In water quality, Hach delivered their third consecutive quarter of double-digit growth. ChemTreat was also up double digits in the fourth quarter, capping its 54th consecutive year of growth, a remarkable accomplishment and a testament to the team's best-in-class execution and their commitment to continuous improvement. During the quarter, demand for analytical chemistries and consumables remained strong across municipal and industrial end markets, but we did see a slight moderation of larger project activity at Trojan. Throughout the year, our teams and EAS did a great job leveraging the Danaher Business System to overcome supply chain challenges and manage inflationary pressures. They were at the forefront of identifying potential constraints and quickly deployed DBS tools like daily management to work with suppliers and ensure production part availability. They also use visual project management to rapidly reengineer products and to reduce our reliance on hard-to-source electronic components. Also, strong price performance helped the team expand operating profit margins by more than 80 basis points in 2022, while continuing their cadence of growth investments. We believe this outstanding execution paired with our proactive growth investments drove market share gains and enhanced our long-term competitive advantage in both product identification and water quality. So with that color on what we're seeing in our businesses and end markets, let's now look ahead to our expectations for the first quarter and the full year. Beginning with the first quarter of 2023, we are updating our base business core revenue growth definition to exclude the impact of COVID-19-related testing and the impact of COVID-19 vaccine and therapeutic revenue. In the first quarter, we expect core revenue growth in our base business to be up mid-single digits. We also expect total core revenue growth to decline mid-single digits as a result of lower demand for COVID-19 testing, vaccines and therapeutics. Additionally, we expect the first quarter adjusted operating profit margin of approximately 30%. Now for the full year 2023. We expect high single-digit core growth in our base business. And we also expect total core revenue growth to decline mid-single digits for the year as a result of lower demand for COVID-19 testing, vaccines and therapeutics. Additionally, we expect the full year adjusted operating profit margin of approximately 31%. So to wrap up, 2022 was another terrific year for Danaher. Our team successfully executed through a challenging environment to reliably support our customers and deliver outstanding financial results, all while investing for the future. As we look ahead, we believe the combination of our talented team, differentiated portfolio of businesses and strong balance sheet, all powered by the Danaher Business System, position Danaher to outperform well into the future. So with that, I'll turn the call back over to John.

Operator:

[Operator Instructions] We'll take our first question from Derik De Bruin with Bank of America.

Rainer Blair:

Derik, as it relates to the inventory situation, let's think about sort of our Q1 guide here as a starting point and the context for that. We expect for our overall guide to have a base business growth of mid-single digits, and we expect COVID testing, including now vaccine and therapeutics to have high single-digit and low double-digit headwind, giving us that decline of mid-single digits in the first quarter. Now let me come back to the base business because, of course, that's where your question resides. And once more, we have to be clear that we have now excluded vaccine and therapeutic revenues from the base business, right? So our mid-single-digit base business is down from the comparable low double-digit core growth we saw in Q4 and most of 2022. And that's due mainly to bioprocessing, ex-COVID, and I want to dig into that a little bit, but also because we're expecting lower patient volumes here in China as zero COVID policies are ended. So that's what's happening there in that base business in Q1. Now if we look, and we dig in a little bit deeper into bioprocessing, we anticipate that our non-COVID bioprocessing business will be low single digits, and that's really for two reasons. One, we're coming off of 30% growth in Q1 of 2022. But we're also working through the inventory pockets that we spoke about that was related primarily to COVID programs. And we do expect Q1 to be an inflection point there that we work through the majority of that in Q1 and then after that, continue to see improvement.

Rainer Blair:

I think that reflects our perspective. We saw low double-digit plus core growth in our instrument businesses here in 2022 and believe that we definitely took share there. And frankly our funnels are still very strong here going into the new year. But as we look to the total year, we would expect that low double-digit plus to moderate to the more normal growth of mid-single digit plus certainly towards the back end of the year.

Rainer Blair:

So as you know, in the fourth quarter on pricing, Derik, we came in over 400 basis points, with the teams really executing very well. And that represents roughly where we were for all of 2022. As we look forward then into 2023, we continue to expect some cost pressures there, and we'll look to have pricing of 200 to 300 basis points, probably closer to 300 basis points.

Derik De Bruin:

Yes. Okay. Got it. Got it. Like that. Okay. I think I'll get back in the queue. I've got some other ones where I need to digest some stuff, but thank you. I'll get back in the queue. Thanks.

Operator:

Our next question comes from Rachel Vatnsdal with JPMorgan.

Rachel Vatnsdal:

Good morning. So first up, just on China. So you mentioned that you're expecting some softness there. Can you just dig a little bit deeper, how much of the softness on that 1Q is going to be pressured there? And then what do you expect for China in total for the year as well? Thanks.

Rachel Vatnsdal:

Great. That's helpful. And then just a follow-up. You mentioned that Western Europe was 10% core during 4Q. Can you just talk about your expectations for Europe with this year? Have you seen any softness related to any budget constraints on your conversations with customers there? Thanks.

Rachel Vatnsdal:

Helpful. And then final question for me, just around bioprocessing. Can you just walk us through kind of the order book and how book-to-bill has trended within bioprocessing given some of the puts and takes there getting us to that low single digits in the first quarter and rounding out the year at high single digits on the non-COVID side?

Rachel Vatnsdal:

Helpful. Thank you.

Vijay Kumar:

Good morning, Rainer. Thanks for taking my question. So I had my first question on bioprocessing here just about clarify some of these numbers here. I think a couple of months ago, Rainer, I think the expectation was for base bioprocessing, anywhere from high singles to teens. When you look at the high single, if it's at the low end of the range, did anything change? And when I think about that cadence throughout the year, I think first half is somewhere in the mid-single digits imply second half and double-digit range. Is there any risk out there in the back half? What gives you the visibility in the back half activation [ph] bioprocessing?

Matthew McGrew:

And maybe, Vijay, just to give you a bit -- sorry, yes. Just to give you kind of numbers to it because I know we've talked about this a lot recently, just so that we kind of repeated here. If you look at bioprocessing, ex-COVID growth, right, over the last four years, inclusive of our '23 guide, you have 7%, 8% type growth in 2020 as we are sort of moving into and away from the core bioprocessing doing more COVID work. And then in 2021 and 2022, we grew, ex-COVID, 20% plus in each of those two years. And so now this year in '23, the high single-digit guide, it's sort of kind of an inverse barbell, if you will. But if you look at kind of high single digits to start in '20, high single digits as we get through the last of COVID in '23 with 20% and 25% growth in the middle in '21 and '22, that's sort of the period that we're looking back and over because I don't think you can look at just any one period or quarter, given everything Rainer said that happened in '21 and '22 with the extended lead times and what was happening with COVID. So just so that we're all on the same page on sort of the numbers historically on how we have sort of arrived at that mid-teens growth rate in discussion with our customers who say, Hey, look, if you look back over the last three, four years, my demand is about the same. My order pattern is going to be slightly different, but my end demand is about the same.

Matthew McGrew:

Let me take margins. And I think we sort of covered the high-single digits bit, but maybe Rainer can kind of wrap it up on bioprocessing.

Matthew McGrew:

Non-bioprocessing. I'm sorry. So COVID?

Matthew McGrew:

I'm sorry. I'm sorry. Okay. Everything outside of bioprocessing. Got you. So let me start with the margin question first because I think that's one that's topical here, too. So if you think about margins for the full year, and then I can kind of touch on '21 or Q1 as well. When you look at margins, we're talking about kind of 31% adjusted margin. And that's going to be a bit lower than we were in '23 on the margin, if you will, with the biggest factor going to be the value of leverage, like you alluded to there. We're going to lose, call it, $3.2 billion of COVID headwinds in the year, $700 million from the vaccines and therapeutics as we go from, call it, $800 million to a little over $150 million or a little under $150 million. And then we're going to have $2.5 billion of testing follow-up as we think we get to a more endemic state on Cepheid testing. So the margin profile on that stuff on the headwinds is basically the fleet average. I'd say that probably falls through at 40%. So kind of in line with our normal fall through, but that volume is pretty meaningful at $3.2 billion as you talked about. So we will offset some of that. High single-digit core and base business is going to be $1.7 billion in change, let's call it, falling through 35% to 40%, but just not enough to fully compensate what's happening with our COVID headwinds here. So I think you combine that the volume with sort of an overall macro backdrop, Vijay, that I still want to kind of be prudent here from a planning perspective as we head into the year. I want to see how the inflation of the supply chain kind of progresses through the year. China is still a bit of an unknown on how that bounces back. And I kind of I like to start the year with cost structure that's in the right place, and let's see how some of these things sort of play out. And as the year goes on, we'll obviously try to do better, but that's sort of how I'm kind of thinking about the margin for the year. And really, the only difference between Q1 and Q2 from 31% for the full year -- I'm sorry, in Q1, is FX in the first quarter. That's it. We'll have a $225 million FX headwind in Q1. And so, I would say that the same drivers, if you will, for the full year are for Q1.

Rainer Blair:

And then Vijay, just coming back to your question regarding the base business without Biotechnology growth here for 2023. We talked about Life Sciences instruments going from the low double digits or to the mid-single-digit plus here as we expect that to moderate during the course of the year. But in our Life Science businesses, we also have our genomics businesses, which are growing at double digits. So when you look at our under the new definition, Life Sciences business, so that would be the instrument businesses and genomics businesses, we expect high single-digit growth for the year. As it relates to our Diagnostics business, without COVID testing, we also expect high single-digit growth there, if you think about the growth in Leica Biosystems, Radiometer and as patient volumes normalize, supported also by solid growth at Beckman diagnostics, once again without COVID testing high single digits. And then as it relates to EAS, we would expect that now to normalize after having had just banner growth here in the last couple of years to be more the low to mid-single-digit growth, probably skewed more to mid-single digits for the year.

Operator:

Our next question comes from Scott Davis with Melius Research.

Matthew McGrew:

Yes, Scott. I think when I think about price cost, kind of back to that 200 to 300 basis points of price, we have been positive on price/cost the last, I guess, year here and probably a little bit more. So I think we -- that guide of 200 to 300 basis points would keep us at positive price cost. We are seeing -- I would say that we're seeing some things from a supply chain pressure come down. Freight lanes is probably the one the biggest one that I can think of from a cost perspective. I would tell you that other parts of the supply chain, we probably are seeing availability be better but not necessarily seeing costs come down yet. So I think we're sort of still in that 200 to 300 basis points of price to help offset what is still out there, but there are early signs of things may be turning.

Matthew McGrew:

No. No, it's out. Yes, it's already out there. If we need to if we need to -- we can go for more as we've done here, Scott, and you saw that as we built through the year this year.

Matthew McGrew:

I'd love to say that it's easy to do, but there's quite a bit of work to get through it, Scott. I mean we've got -- we're still in the early days of the audits, getting the audits done. And after that, we've got a lot of org work, obviously, to do and a whole work stream of people who are working on it. I think we are still very much on track for Q4, the ability to do something here in Q4. Anything earlier, I think just between the audits, the work that remains and the tax ruling, it just takes time for these. So I don't think that's probably a base case scenario for us right now, Scott. I still think Q4 is the way to think about it.

Operator:

Our next question comes from Dan Brennan with Cowen.

Rainer Blair:

Dan, so -- I mean, the near term, just to recap is, in fact, that we saw, particularly in our Diagnostics business, lower patient volumes related to the hospitals in China being overwhelmed with COVID-infected patients. And we expect that to continue here in the Q1. It's currently the Lunar New Year holiday, where we expect infections to spread here in the next 30 days or so. And then over time, that, that would start waning, reducing. With -- it's kind of unknown as to how many other waves follow that. But we do believe that during the course of the year, especially as it relates to our business, patient volumes start recovering. We've seen this again and again after severe lockdowns of large cities in the previous years. And so we expect that to be pretty resilient. And that's why we end up then with a full year China guide of low single digits. Now could there be upside? Potentially. There's clearly some pent-up demand in the Chinese economy. And it just depends now on how quickly people can get back to work and some normalcy returns to the markets in general. So we think from where we sit today, low single digits for the full year is a good way to think about it. And of course, we'll continue to update as we go through the year here. But it's a good starting point, and there may be some upside should in fact that pent-up demand be released here in 2023.

Rainer Blair:

So our perspective on M&A remains unchanged here. First of all, our funnels continue to be very active. As you know, our balance sheet, which is now at 1.5 turns is in great shape. We're starting to see in the marketplace some recognition and I'll even say some acceptance of the lower valuation levels that we have now seen for a good period of time. And I would say it is early days, but the environment for M&A continues to improve. And as you know, in the past, when there have been these kind of situations, Danaher has been able to deploy capital in a really value-creating way. And of course, it's our intention to do that here in the future as well.

Operator:

Our next question -- I'm sorry, our last question will come from Patrick Donnelly with Citi.

Patrick Donnelly:

Good morning, Rainer. Thanks for taking my question. Maybe one on -- back to the Diagnostics business. On Cepheid, can you just talk about the non-COVID piece, what you're hearing customers in terms of utilization, usage, particularly those who bought instruments during COVID? Obviously, you saw the installed base double over a couple of years there. Would love just some perspective in terms of what you're seeing as COVID comes down a bit, respiratory comes down here shortly, what the expectations there are?

Patrick Donnelly:

Okay. That's helpful. And then maybe just a follow-up on Dan's capital deployment one there. Can you just refresh us on kind of how you think about leverage ratios and if the current rate environment changes your perspective at all in terms of what size deal you guys would look at?

Patrick Donnelly:

Alright. Thanks, Matt, thanks, Rainer.

Rainer Blair:

Well, first of all, thanks again, everybody. We are thrilled with the way we closed out 2022, and we see a strong 2023 ahead with all the numbers, maybe just a quick recap. For 2023, we see our base business growing at high single digits. And in the first quarter, we see that base business despite the fact that we're working off some biotech and bioprocessing inventories at mid-single digits. Now we've talked at length about COVID testing and vaccine, therapeutic headwinds and I think those are real. But despite those headwinds, we feel great about the important role that we played in the pandemic. Keep in mind, we have reinvested COVID-related cash flows to create lasting annuities with acquisitions and breakthrough innovation while further strengthening our balance sheet. And so, we exit the pandemic much stronger than we entered with higher growth and higher margins in our base business. So with that, we thank you for the call. Wish you all the best for 2023.

Operator:

This concludes today's call. Thank you for your participation. You may disconnect at any time.

Operator:

My name is Shelby, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's Third Quarter 2022 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [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.

Rainer Blair:

Well, thank you, John, and good morning to all of you. We appreciate you joining us on the call today. So let's jump right in. Our positive momentum continued in the third quarter with 10% core revenue growth and solid earnings and cash flow performance. This strength was based across the portfolio with high single-digit or better core growth in all three reporting segments. We're particularly pleased with the consistent performance of our base business which has grown high single digits or better for nine consecutive quarters. Now these well-rounded results were driven by our team's outstanding execution through a challenging operating environment. They've done a terrific job running the Danaher playbook to proactively reduce structural costs while continuing to accelerate high-impact growth investments. We believe our ability to deliver meaningful innovation and reliably serve customers, has contributed to market share gains in many of our businesses. Now during the quarter, we also announced our intention to separate our Environmental & Applied Solutions segment to create a publicly-traded company. This new company, which we'll refer to as EAS for now, will be well positioned in the most attractive areas of the water quality and product identification market. EAS will be comprised of outstanding businesses with strong ESG fundamentals, durable business models and a very attractive financial profile, averaging mid-single-digit core revenue growth over the last five years with 55% recurring revenue today and an adjusted EBITDA margin of approximately 25%. Now as a stand-alone company, EAS will have greater opportunities to meaningfully deploy capital towards M&A. And of course, EAS will have the Danaher Business System as its foundation, along with the commitment to continuous improvement that will support the same outstanding results EAS as a part of Danaher today. Of course, we look forward to sharing more details here in the coming months. As for Danaher, this separation will establish us as a more focused science and technology leader committed to innovation and making a profound impact on human health. We've got a great lineup of leading franchises positioned in highly attractive life sciences and diagnostics end markets, all united by a common set of durable, high recurring revenue business models. We remain focused on strengthening our portfolio and competitive advantage in these areas, and we see tremendous opportunities to continue delivering sustainable long-term performance. So with that, let's turn to our third quarter results in more detail. Sales were $7.7 billion, and we delivered 10% core revenue growth, including 8.5% core growth in our base business. Respiratory testing contributed an additional 150 basis points to core revenue growth in the quarter. Geographically, we continue to see strong demand across the developed markets despite current macroeconomic and geopolitical events. North America's core revenue was up high teens with all three segments delivering double-digit or better core revenue growth. Core revenue in Western Europe grew high single digits with customer activity and funding levels remaining healthy. High gross markets core revenues were up mid-single digits. In China, our teams effectively managed through ongoing COVID-19 headwinds to deliver high single-digit growth in the quarter. Our gross profit margin for the third quarter was 59.8%, and our operating margin was 26.3%. We had 50 basis points of core operating margin expansion, driven in part by disciplined cost management, productivity measures and price actions. The operating environment remains dynamic across our businesses globally, but we experienced fewer supply chain disruptions in the third quarter. Logistics improved as freight costs began to stabilize. We also saw modest improvements in material availability, though certain electronic components remained difficult to procure. Despite these challenges, our teams have done an outstanding job taking proactive measures and leveraging the DBS tool set to minimize the impact of supply chain constraints and inflationary pressures. Adjusted diluted net earnings per common share of $2.50 were up 7% versus last year. We also generated $1.7 billion of free cash flow in the quarter and $5.2 billion year-to-date. So now let's take a look at our results across the portfolio and give you some color on what we're seeing in our end markets today. In our Life Sciences segment, reported revenue grew 4% and core revenue was up 8%. Strength was broad-based with most businesses achieving high single-digit or better core revenue growth. In Bioprocessing, robust activity levels drove over 20% growth in our non-COVID business at Cytiva and Pall Biotech. As expected, our customers continue to transition away from COVID-19 vaccine and therapeutic program and into programs for other modalities. We expect these trends to continue through the fourth quarter resulting in high single-digit core revenue growth in our Bioprocessing business for the full year. In September, we hosted an Investor Day at Cytiva to showcase our Bioprocessing business and highlighted the tremendous long-term growth opportunities we're positioned for in biologics and genomic medicine. We also announced that we're bringing together Cytiva and Pall's Life Sciences as the biotechnology group. The combined portfolio has the broadest offering in the industry with end-to-end solutions across all major therapeutic modalities for monoclonal antibodies to emerging cell, gene and mRNA-based therapies. The biotechnology group will have unmatched global scale with the industry's largest commercial team, allowing us to further extend the reach of our best-in-class customer service. We also believe focused innovation across the joint portfolio will ensure our products and solutions are aligned to best meet customers' needs around quality, yield and cost. With Pall's Life Sciences and Cytiva joining forces, the Biotechnology Group is uniquely positioned to help our customers become more efficient and bring more life-saving therapies to market faster. Moving to our Life Sciences instrument businesses. They collectively delivered double-digit base business core revenue growth, led by SCIEX, Leica Microsystems and Beckman Coulter Life Sciences. Funding levels remains strong globally, and we saw solid customer demand across most major end markets. We continued our strong pace of innovation in life sciences with the introduction of Beckman Coulter's Biomet Ingenious. The Ingenious is a cost-effective easy-to-use sample preparation system that reduces manual transfers and hands-on time and next-gen sequencing library construction. This is a great example of how our investments in innovation are delivering impactful solutions to our customers. Our genomics businesses had another quarter of double-digit core revenue growth, led by strong demand for plasmic, RNA and next-generation sequencing solutions. This quarter, marked Aldevron's first anniversary as part of Danaher, and we couldn't be more pleased with the team's performance. Financially, the results speak for themselves, with more than 30% year-over-year revenue growth since acquisition. The team has done a tremendous job embracing DBS tools and processes to meaningfully reduce lead times and increase capacity. Now this capacity is certainly supporting customers' needs today, but it's equally important to support Aldevron the long-term growth outlook. With a view towards the future, we're excited about the opportunities to collaborate across our genomics businesses and create unique solutions to help our customers accelerate the development and commercialization of mRNA and other nucleic acid-based therapies. Moving to our Diagnostics segment. Reported revenue was up 9.5% and core revenue grew 13.5%, led by nearly 30% core revenue growth at Cepheid. Leica Biosystems grew mid-teens in the quarter, driven by strength in core histology and advanced staining. As customers seek to improve productivity within their labs, we're seeing strong early momentum for Leica innovation, BOND-PRIME, a fully automated advancing platform. Beckman Coulter Diagnostics delivered solid results with mid-single-digit core growth despite ongoing COVID-19 headwinds in China. In Molecular Diagnostics, core revenue across Cepheid's non-respiratory test menu grew approximately 10%, led by double-digit growth in virology and infectious disease testing. In respiratory testing, global PCR volumes have moderated, but demand is still elevated for symptomatic testing at the point of care where Cepheid is the gold standard. Cepheid's respiratory testing revenue of approximately $875 million exceeded our expectations of approximately $325 million. Higher prevalence of circulating respiratory viruses, combined with advanced purchases by customers in anticipation of a more severe respiratory season in the Northern Hemisphere, led to both higher volumes and a preference for our four-in-one test for COVID-19, Flu A, Flu B and RSV. Now we're starting to see our customers consolidate their point-of-care PCR testing platforms onto Cepheid gene expert. The gene expert provides significant value to clinicians with a unique combination of fast, accurate lab quality results and the best-in-class workflow. Customers are also increasingly interested in opportunities for broader utilization of Cepheid's leading testament. Our opportunity funnel for non-respiratory tests has increased significantly this year and we see opportunities to continue gaining market share moving forward. Moving to our Environmental & Applied Solutions segment. Reported revenue grew 5% and core revenue was up 10.5%. Water quality was up mid-teens, and product identification grew low single digits. Electronic identification, marking and coding was up low single digits and packaging and color management grew mid-single digits. Videojet was up low single digits, in part due to a difficult year-over-year comparison as the business grew low double digits in Q3 last year. Now during the quarter, we saw strength in food and beverage as well as the consumer end markets. In Water Quality, ChemTreat and Hach each grew high teens during the third quarter. Demand for analytical chemistries and consumables remain solid across our major end markets, municipal and industrial project activity was broadly consistent with the first half of the year, driving solid equipment growth. Now last week at WesTech, the annual wastewater trade show, the water quality team highlighted several solutions that are improving the efficiency and sustainability of the water treatment process. POC's Ultra Low Range Chlorine Analyzer raises the industry standard to parts per billion chemical detection levels, helping customers extend the membrane life of their treatment systems and reduce maintenance costs. At Trojan, innovative solutions such as Trojan UV Signa and Trojan UV 3000+ reduced environmental impact by treating water with ultraviolet light instead of traditional chemical disinfection method. Every day, over 1 billion people benefit from water treated by Trojan. So these are just a few examples of how our water quality platform is supporting customers day-to-day, mission-critical water operations and making a positive impact on the world. So with that color on what we're seeing in our businesses and end markets, let's now briefly look ahead at expectations for the fourth quarter and the full year. In the fourth quarter, we expect to deliver high single-digit core revenue growth in our base business. We expect a high single to low double-digit core revenue growth headwind from COVID-19 testing, resulting in a core revenue growth being flat to down low single digits in the fourth quarter. Additionally, we expect the fourth quarter adjusted operating profit margin of approximately 30%. Now for the full year 2022, there is no change to our previous guidance of high single-digit core revenue growth in our base business. We now expect high single-digit overall core revenue growth, which is up from our prior expectation of mid-single digits as a result of our strong COVID-19 testing performance in the third quarter. We continue to expect operating profit fall through of approximately 25% for the full year. So to wrap up, we're very pleased with our third quarter results. Our well-rounded performance really is a testament to our team's commitment to innovating and executing in support of our customers. These results also reinforce Danaher's strength and durability. Our differentiated portfolio is well positioned in attractive end markets with long-term secular growth drivers and our business models are resilient with nearly 75% of our revenue today being recurring. So putting it all together, the strength of our portfolio and balance sheet, combined with our talented team and the power of the proactive application of the Danaher Business System, provides an outstanding foundation for delivering sustainable long-term results. So with that, I'll turn it back over to John.

Operator:

[Operator Instructions] We'll take our first question from Derik De Bruin with Bank of America.

Rainer Blair:

Thanks, Derek. And let me get right after that question here. So First of all, let's talk about 2022, and I'll certainly speak about the inventory topic here as well. I think Important to reiterate that overall, we're seeing very strong customer demand in Bioprocessing, and we expect to finish 2022 with high single-digit core growth. Now that splits up in a number of sections. Let's start with the non-COVID Bioprocessing is growing well over 20%, and we continue to see that. And the underlying fundamentals here are the funding is there, the clinical trials continue to progress. The pipeline is strong. We're seeing product move into commercial production from Phase 3 and this has really accelerated across all modalities. So sure, monoclonal antibodies, but yes, we're even seeing cell and gene therapy starting to gain their approvals. Additionally, pricing is above historical levels, which is driving some incremental growth, if you will, on top of the underlying demand in the non-COVID areas. Now as I mentioned in my prepared remarks, customers do continue to move away from COVID-related projects. And I don't think that's a surprise to any of us. That's something that we have been speaking about for some time. And in fact, we can confirm that, that is happening. And I think it also reconciles with what we're seeing in the marketplace. We're seeing that vaccines, our uptake is relatively slow. People are unsure if the current vaccine inventories will address the newest variance. So, there's a bit of uncertainty there, I think, in the public as to where we go from a vaccine perspective. And that reflects naturally in what we have seen here with customers starting to move to the other modalities and drive the projects that they had on hold forward. And for us, that manifests here in for the full year that we see $800 million of COVID revenues in Bioprocessing as opposed to the $1 billion that we had been talking about previously. So, we do see customers moving away from these COVID projects and driving their energies, their efforts, and their financial resources into the other projects, and that helps explain why we see the larger part of the business growing at well over 20%. Now, we are not seeing significant stocking, but we do see pockets of stocking, particularly there where there were large COVID-related, either therapeutic or vaccine programs. So, those players that heavily invested in large programs here those players that, in fact, have higher inventories than is normally the case. Having said that, those large players also are those, which are best positioned to redeploy those inventories to other projects. So, we do expect an inventory burn down with those players here in the coming quarters. So that's the inventory situation there, Derik. And then as it relates to some of the other points here, I think we continue to be -- and I just want to reaffirm the high single-digit growth. We're high single digit here year-to-date, and that's how we see ourselves in Bioprocessing concluding the year.

Rainer Blair:

Sure. Sure, Derik. So for Q3, our orders are down over 20% as expected. And I think that's a number which bears some commentary and context. First of all, we're coming off of order comps that are well in excess of 50% in the prior year. And so it's important to take in order to be able to rationalize these numbers that sometimes are viewed in isolation with the right context. The three-year order stack is over 20%. And I think something that is perhaps not as well known and that bears some conversation is we and many others have meaningfully reduced our lead time. And we've done that through capacity investments. We've done that through productivity investments. We've been able to do that because the supply chain has become more secure. And that's a pretty significant impact on the order placement cadence of our customers. So just to mention an example here, if lead times go from 52 weeks, which has been the case in some product categories in the marketplace, to 12 weeks, customers fundamentally change their order patterns. To give you a sense of that, if a customer wanted to order over time four bioreactors, they would order all four bioreactors at one, if there's a 52-week lead time. But if it's a 12-week lead time, they would order one bioreactor and then follow up with other orders in the future. So what we're seeing right now is really the normalization of the marketplace coming from a red-hot pandemic fuel time of constraint a long lead times for orders ramped up significantly. So order rates ramped up significantly to the supply chain now normalizing and customers adjusting their order cadence. And then yes, of course, the COVID volumes are down. That's expected. We've been talking about that, but we also see the strength of the non-COVID market. And keep in mind, that's a much larger market. And currently, it is growing at well over 20% and there's a backlog to be burned down there because previously COVID had been prioritized. So, the orders were negative to repeat, but not unexpectedly and to be seen in the context of a market that is now readjusting.

Derik De Bruin:

I'm sorry, what?

Derik De Bruin:

Okay. Got it. And do you still -- and just one final question. Do you still expect to take significant price across the portfolio next year?

Matt McGrew:

And that commentary is overall, Derik, but I don't think that, that would be any different for Bioprocessing numbers.

Scott Davis:

Go back a little bit to Cepheid. Are there costs -- I would imagine that cost was not a main focus when you were supplying just extreme demand for quite the last couple of years. But are there costs or is there a playbook where cost can come out of the business and to give you a little bit of a tailwind on the margin side while growth kind of stabilizes?

Scott Davis:

So that's helpful. And let's -- if we can go a little bit bigger picture. Reiner, when you think about the M&A funnel, how wide is the lens. You guys obviously have a lot of big focus asking.

Operator:

We'll take our next question from Vijay Kumar with Evercore ISI.

Rainer Blair:

As you can imagine, we're very focused on delivering the fourth quarter here and the full year. But as we think about '23, and I say that because there's a lot of data points to collect here in the fourth quarter as well in such a dynamic environment. And so as we think about the Bioprocessing business for 2023, we still think that there is room for $500 million of COVID opportunity in order to support the needs of the population, the variance to replenish expired sell-by dates and all the things that you can think about. But of course, that's a number that we watch very closely. More importantly, we think that the non-COVID business, which, of course, will again proportionately be a much larger part of the business, will continue to be very robust. Funding levels are there, the number of modalities that continue to grow in the pipeline is broad, our own project activity in early, mid- and late stage is very strong. So, we do not have a different view on 2023 for Bioprocessing today. But of course, it's a fluid situation, and we continue to watch all of that, and we'll update in January when we speak again.

Derik De Bruin:

That's correct. That's the way we see it for sure today. And recall, I mentioned just a minute ago to Derik that in 2022, we were expecting $1 billion of COVID vaccine, therapeutic revenue. We've taken that down to $800 million. It is, of course, offset by the non-COVID business so that we deliver that high single digits here in 2023 for file process. And then looking forward to 2023, we would see that going from $800 million to $500 million.

Matt McGrew:

For '23?

Matt McGrew:

I'm going to go ahead and ask that we get through Q4 here and see where it is. If I had to guess on the FX margins today, I would have been wrong a quarter ago and wrong the quarter before that. So we'll give you a full update on '23. I mean I think you've seen where the margins have gone to. You know that we're going to have an FX headwind next year on the top line of probably, call it, $800 million. So you can probably start there. I would say that the fall-through on that is probably going to be the pretty typical 35% to 40% fall through. And that could be a little bit better or worse depending on where that revenue actually comes in from a mix perspective. But that's probably the best I can give you now, what we know what the rates are. But from a full margin perspective, I'll have to wait until we get a little bit closer and to our guidance in '23.

Dan Brennan:

If I may, just Rainer, I know on the last call, and it was already addressed in some of the Bioprocessing information. But when you look more broadly, obviously, you see a lot of mixed signals on the macro. Last call, you had suggested all-in organic mid-single and if you factor in the COVID would roll off low single digits, like any updated thinking on how you think about that? I know you've already addressed the bioprocess side, but just wondering for the other parts of the business, kind of how those are playing out right now?

Dan Brennan:

Great. And then just maybe one more follow-up. I don't want to kind of continue to readdress Bioprocessing, but I'm just wondering, you talked about bringing in lead times dramatically, which suggests that customers aren't going to need to order as far in advance, right, because you've got them down significantly. The peer yesterday talked about inventories at 12 months versus six months and I know you addressed inventories in one of the prior questions. But can you just speak to it just one more comment, and I apologize, is on the base business. I believe you've done a better job from prior conversations about maybe managing and kind of avoiding some double ordering. But just kind of what do you see broadly on the inventory side for your base business? And kind of how does that kind of impact your outlook for the base power production business as we look forward to '23?

Operator:

We'll take our next question from Dan Leonard with Credit Suisse.

Rainer Blair:

Sure. So as you just said, just to level set, you see high single-digit growth here in China, both for Q3 and we anticipate a similar level in Q4. And that's really a broad-based strength there. Let me start with Diagnostics where we did see patient volumes impacted by these rolling shutdowns. So this zero COVID policy shutdown that you're likely reading about in China. So that affected patient volumes and think of those as being 90% to 95% of what they were in 2021. And we're working through those and continue to see China as really a very, very strong market. Now lastly, the rest of our business continues to be very, very strong. As you think about life science instruments, as you think about EAS, as you think about the diagnostics, the other diagnostics companies, we continue to see robust demand there. And as patient volumes normalize, which we expect to happen sometime in the next year, we're confident that China continues to be a really strong growth lever here for the future.

Dan Leonard:

Appreciate that color. And Matt, just a quick follow-up. Can you talk about the impact of higher interest rates on the business? Did that change at all how you're managing the balance sheet or your capital allocation priorities?

Operator:

We'll take our next question from Luke Sergott with Barclays.

Rainer Blair:

Just a level set, our Life Science instrument business grew low double digits in Q3. And as you pointed out, this is really led by Leica Microsystems, SCIEX, Beckman Coulter Life Sciences with some very, very strong results. And I think the strength of that comes from two areas. The first is the end markets continue to be very strong. So especially pharma, CROs and academic research continues to be well funded, and we're seeing strong buying behavior there, especially towards instruments that provide the necessary answers here in the research. And that's really the newest generation of instruments. And that brings me really to the second pillar of the strength that we've seen there, which is our continued innovation performance there, with all of the operating companies really leaning in and launching leading edge really pushing science further instruments. And I'll give you some examples at SCIEX, ZenoTOF 7600 and the Triple Quad 7500. At LMS, you have the THUNDER widefield imaging system, and we talked about the Mika launch, which is doing extraordinarily well. And then we just talked about the Ingenious launch here at Beckman Life Sciences. So, we're really seeing strength from a funding perspective, and we believe that on top of that, we're outperforming because of the innovation strength that we've shown here, launching a number of great solutions. Now from a comp perspective, we really do think that the strength in the market is sustained. We expect that to be the case in the fourth quarter. And in 2023, like I said, we'll talk about that more in January, but we don't have reason to believe here that this will be significantly different.

Rainer Blair:

Sure. So I think the first place where you're starting to see some of the pressure dissipates is in the logistics area. So, logistic capacities have ramped. We're starting to see greater availability. We're also starting to see freight rates come down, specifically if you think of container freight Those, in particular, have come down quite significantly. And that, of course, is helpful with the global businesses that we have. At the same time, we do see continued pressure on a more limited set of electronic components. So with the Danaher Business System, call it, we've been able to really knock down 80% of the issues there. And I think with that, able to continue to take share because of the availability of our solutions. And with 20%, we're still in countermeasure mode. And I would say that number continues to get smaller every day, but there's still on the electronic component side, some tightness here. And then lastly, I would just say, what is still the same as labor continues to be tight. That is the case, practically everywhere we operate. And so that that's a constraint that we would expect to see get better here over the next 12 to 18 months, but currently still see that as an area to watch out for.

Patrick Dolly:

Maybe just one. You touched on China, but maybe on Europe, a lot of macro concerns kind of popped up their heads there over the last couple of quarters. Can you just talk about what you're seeing, again, across the different OpCos there? Any change in terms of your expectations or any elevated concerns as we work away even into '23 with some of the kind the kind of power rationing and things that are happening there, maybe just your exposure, any customer conversations, how you're feeling in that region?

Matt McGrew:

Patrick, this is Matt. We did a kind of bottoms-up analysis plant by plant, company by company, even factoring in higher costs that we might see here over the winter into the next year. I mean this is a very, very manageable number. It's just not a big number.

Rainer Blair:

So as you suggest, the backlog is elevated. That is due to two factors. The strong demand that I referenced earlier, that's really broad-based, pharma, academic, and so forth. But also because there has been, over the last 18 months, some supply constraints around electronic components. So we see demand remaining strong across the board for all these research applications that I referenced. And as a result of that, we also see that in our order rates and backlog position, not just here for Q4 but also going into '23.

John Bedford:

Thanks, Shelby. We're around all day for questions and follow-ups. Have a good rest of the day.

Operator:

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

Operator:

My name is Gretchen and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Danaher Corporation’s Second Quarter 2022 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 many begin your conference.

Rainer Blair:

Well thank you, John. And good morning to all of you. We really appreciate you joining us on the call today. So let me start with, we had a great quarter. In fact, our strong second quarter results rounded out a terrific first half of the year. Broad-based strength across the portfolio drove better than expected revenue, earnings and cash flow. And we were particularly pleased with the performance of our base business, which through high single digits and believe we gain market share in many of our businesses. Now these results are a testament to our team's strong commitment to executing in a challenging operating environment. They have done an incredible job, leveraging the Danaher business system to help mitigate supply chain constraints, manage inflationary pressures, and improve our competitive positioning with impactful new innovation. Our second quarter results also highlights the strength and resilience of the businesses that make up Danaher today. Our portfolio is comprised of leading franchises positioned in attractive end markets with strong, secular growth drivers, all united by a common set of durable business models. In fact, nearly 75% of our revenues today are recurring, the majority of which are consumables that are specified into highly regulated manufacturing processes or specific to the equipment that we supply. On top of that, our strong balance sheet and free cash flow generation positions us well to further enhance our portfolio going forward. We believe this powerful combination of our talented team and the strength of our portfolio, all powered by the Danaher Business System differentiates Danaher and reinforces our sustainable, long-term, competitive advantage. So with that, let's turn to our second quarter results in a little more detail. Sales were $7.8 billion and we delivered 9.5% core revenue growth, including 8% growth in our base business with strong contributions from all four of our operating platforms. COVID-19 testing contributed an additional 150 basis points to core revenue growth in the quarter. Geographically, core revenue in developed markets grew low double digits with broad based strengths across North America and Western Europe. High growth markets were up mid-single digits, including impressive high single digit growth in China. Our results in China significantly exceeded our expectations, which is particularly notable as lockdowns continued for longer than we anticipated. So now I'd like to take a moment to acknowledge our associates in China for their extraordinary efforts and commitment during such a challenging time, to the teams that managed the approvals necessary to reopen our facilities, the supply chain and logistics teams that kept parts moving and the manufacturing associates who spent several weeks away from their families, thank you. Thank you for supporting the reopening effort. And most importantly, thank you for supporting our customers. This is such a great example of one of our core values. The best team wins in action. Now, as we move through the rest of the year, we're keeping an eye out for further outbreaks and regional lockdowns, but we're currently seeing more normalized business operations in China and expect this positive trend to continue for the balance of the year. Gross profit margin for the second quarter was 60.9%. And our operating margin of 28.4% was up 60 basis points, including 100 basis points of core operating margin expansion. Our strong margin performance was a result of disciplined cost management and the proactive measures our teams have taken to address the inflationary pressures we've seen over the last several quarters. We're also using DBS tools to execute price actions, and we achieved approximately 400 basis points of price increases in the quarter, a significant acceleration from our historical price realization. Adjusted diluted net earnings per common share of $2.76 were up 12% versus last year. We also generated $1.7 billion of free cash flow in the quarter and $3.4 billion year-to-date. Now let's take a look at our results across the portfolio and give you some color on what we're seeing in our end markets today. In our Life Sciences segment reported revenue grew 6% and core revenue was up 7%. Strength was broad based across the segment with high single digit or better base business core revenue growth at each of our largest operating companies. In our bioprocessing business, we continue to see record activity levels from early-stage research to later stage development and production, which drove a combined core revenue growth rate of high single digits at Cytiva and Pall Biotech. Our backlog and our order levels remain very healthy. And as always, we're working closely with customers to ensure they have the right inventory levels to support their planned activity. We are seeing our customers continue the healthy transition away from COVID-19 vaccines and therapies, and into previously paused and new programs for other modalities. As a result, we now expect COVID-19 vaccine and therapeutic revenue of approximately $1 billion in 2022 down from approximately $2 billion in 2021. Now that said, there is no change to our high-single to low-double digit core revenue growth outlook in our bioprocessing business for the year as customers are accelerating their investments across all other major therapeutic modalities. This acceleration, paired with improving price realization, is driving more than 20% core growth in our non-COVID business, up from the low-double digit growth we've seen historically. The biologics market remains very healthy as evidenced by the increasing number of treatments and development and production. Today, there are over 1,500 monoclonal antibody based-therapies in development globally, which is up more than 50% from just five years ago. This is being driven by both novel molecules and development and the proliferation of biosimilars, which are helping to accelerate adoption and underserved markets as patents on higher volume therapies expire. There are also over 2,000 cell and gene therapy candidates in development today, a more than tenfold increase over the last several years. Now, given this backdrop of such a significant and sustained increase in activity, we expect the growth rate in this market to remain very strong for many years to come. Now as the complexity required to manufacture these life saving treatments increases, customers are looking to collaborate with us to help them solve their most challenging problems and assist them as they move from lab to production scale. Cytiva recently announced a collaboration with Bayer to develop the industry's first modular end-to-end manufacturing platform for allogeneic cell therapy, which will help to improve the treatment of a broad array of diseases, including cancer. This collaboration is just another great example of how our scientific expertise and leading positions in upstream and downstream applications are helping these cutting edge therapies advance from the laboratory to the clinic. Our more instrument oriented life science businesses collectively delivered high-single-digit base business core revenue growth. We're seeing a healthy funding environment and solid demand across most major end markets. SCIEX core revenue was up more than 10% in the second quarter driven by an acceleration of new projects at our biopharma, CRO and academic research customers. We continued our cadence of innovation with the introduction of several new solutions that improve the accuracy and efficiency of genomics and proteomics research. Notably SCIEX introduced the Zeno SWATH DIA, an innovative software solution, which doubles the number of proteins that can be discovered versus previous swath approaches. Helping researchers discover more potential biomarkers and better understand the cause and treatment of diseases. Now in our genomic businesses, customers are making significant investments in the development and production of cell and gene therapies, DNA and RNA vaccines, and gene editing. IDT had its 10th consecutive quarter of double-digit core revenue growth led by robust activity and NextGen sequencing and gene writing and editing. Aldevron grew more than 20% while also making significant progress on the capacity expansion projects needed to support their long-term growth outlook. Now moving to our diagnostic segment, reported revenue was up 9.5% and core revenue grew 12.5% led by nearly 30% growth at SCIEX. Our other diagnostic businesses including Beckman Coulter diagnostics, Radiometer and Leica Biosystems collectively delivered mid-single-digit core revenue growth despite headwinds from the COVID-19 related shutdowns in China. In China, our diagnostics core revenue was flat year-over-year. Site access and patient volumes slowly improved as the quarter progressed with a more pronounced recovery in June. Patient volumes remain slightly below normal levels, but we expect continued recovery as we progress through the remainder of the year. Now outside of China, patient volumes across hospital and reference labs held up well during the quarter and remain at or above pre-pandemic levels despite recent outbreaks of emerging COVID variants. Our diagnostics customers continue to face skilled labor shortages and are increasingly seeking to improve automation and productivity within their labs. This quarter Leica Biosystems introduced its next-generation fully automated advanced staining platform bond prime to help address these needs in the pathology lab. Bond prime facilitates a continuous pathology lab workflow and delivers the high resolution stains needed for a definitive diagnosis with an industry leading average turnaround time of only 90 minutes. Now, as I mentioned earlier, core revenue growth at Cepheid was up nearly 30% in the quarter. Low-teens growth across our non-respiratory test menu was led by sexual health, hospital acquired infections and virology. In respiratory testing, strong global demand persisted for Cepheid's point-of-care assays and we believe we continued to gain market share. Respiratory testing revenue of approximately $750 million in the quarter exceeded our expectations of approximately $400 million. The spread of highly transmissible COVID variants and greater incidents of other respiratory infections such as RSV and flu led to both higher testing volume and a preference for our 4-in-1 combination tests. As a result, our 4-in-1 test for COVID-19 Flu-A, Flu-B and RSV represented about 50% of the 16 million respiratory cartridges shipped in the quarter with COVID only tests accounting for the remaining 50%. Now as COVID-19 shifts to an endemic disease state, we're seeing more customers begin to consolidate their point-of-care PCR testing platform onto the Cepheid GeneXpert. This preference for the GeneXpert both within hospitals and across healthcare networks is evidence of the significant value, the unique combination of fast, accurate lab quality results and an easy-to-use best-in-class workflow provide clinicians. In addition, as our customers begin freeing capacity from respiratory testing, they are increasingly interested in discussing opportunities for broader utilization of Cepheid's leading point-of-care molecular testing menu. Now moving to our Environmental & Applied Solutions segment, reported revenue grew 6.5% and core revenue was up 10% with double-digit core growth at water quality and mid-single-digit core revenue growth at product identification. In water quality ChemTreat, Trojan and Hach each group double-digits during the second quarter. Robust growth in our analytical chemistries and consumables was broad-based across all major end markets. Equipment sales remained strong with healthy levels of project activity at both industrial and municipal customers. At product identification, marking and coding was up high-single-digit and packaging and color management grew mid-single-digit. Videojet was up high-single-digit led by North America where food and beverage sales were particularly strong. Our EAS team are leading the charge and writing the newest chapter in the DBS playbook to counter the supply chain and inflationary pressures we're seeing every day. They've been reengineering products to reduce our reliance on hard-to-source electronic components and using daily management to work closely with suppliers to ensure production part availability. These efforts along with our accelerated price actions are also helping improve our margin physician. We saw the impact on our results this quarter with more than 100 basis points of core operating margin expansion at EAS. Our strong performance also highlights the resiliency and the durability of the high margin recurring revenue business models that make up our EAS portfolio. With that color on what we're seeing in our businesses and end markets let's now briefly look ahead at expectations for the third quarter and the full year. In a third quarter, we expect to deliver high-single-digit core revenue growth in our base business. We expect a mid-single-digit core revenue growth headwind from COVID-19 testing resulting in low-single-digit core revenue growth overall. For the full year 2022 there is no change to our previous guidance of high-single-digit core revenue growth in our base business and mid-single-digit core revenue growth overall. Given our strong second quarter performance, we now expect operating fall through at the high end of our previously communicated range of 20% to 25% for the full year. So to wrap up, we're really pleased with our strong second quarter and first half performance. Our results are a testament to the team's consistent execution in a dynamic operating environment, and to the durable balanced position of our portfolio today. Looking ahead, our team's commitment to executing with the Danaher Business System, our differentiated portfolio of businesses serving attractive end markets and our strong balance sheet all positioned Danaher to continue delivering sustainable long-term performance. So with that I'll turn the call back over to John.

Operator:

[Operator Instructions] We'll take our first question from Derik De Bruin from Bank of America.

Mike Ryskin:

Hey, thanks for taking the question. This is Mike Ryskin on for Derik.

Mike Ryskin:

Hi. Couple of quick questions; one on the COVID versus non-COVID bioprocess you talked about, really appreciate the clarity on the reduction in COVID but then fully offsetting that with non-COVID strength. I want to ask on the non-COVID bioprocessing, your higher expectations for that. How durable do you think that is in the future years? Is that growth rate in those business sustainable for 2023 and beyond? Or are we seeing a little bit of a catch-up in 2022? Just due to some of those projects being put on hold the last couple of years?

Mike Ryskin:

Great. Are you seeing any, any stocking or any change in purchasing patterns by any of your customers in particular CDMOs? And that's related to the by bioprocess, but then just overall anywhere across your portfolio?

Mike Ryskin:

Okay. Thanks. And then one last one if I could squeeze it in. The feeling better about the operating margin fall through for the rest of the year, just to clarify, is that the effect of the beat in 2Q? Or is there anything else going into that in terms of pricing, supply chain, COVID contribution sort of like what's changed there?

Mike Ryskin:

Great. Thanks so much.

Rainer Blair:

Good morning, Vijay.

Rainer Blair:

No, I think we feel continue to be really comfortable with our full year guide here. We've talked about the base business being high-single-digit here for some time. And we saw that play out here throughout the quarters. And we don't see any reason whether that is demand and the orders development or the backlog position that would give us pause as it relates to the high-single-digit base business guide that we have. Now as we talk about COVID testing I think you as many and all of us continue to do our best in terms of forecasting, what might be happening and testing at any given moment. But as we go forward with testing I think our perspective that Q3 in particular is sort of the slowest respiratory testing quarter of the year, is important to note. And then of course, as you go into Q4 respiratory season picks up again, and so we would expect to see that as well. And as I talked about there in my prepared remarks, we took up that that COVID testing number to about $2.5 billion here from around $2.2 billion. So we would also say it's important to think about China here. China recovered very well for us here in the second quarter after an unexpectedly long shutdown and we continue even today to see these sort of more limited spot shutdowns throughout the country. So we continue to watch that, but fundamentally expect the second half in China to be more constructive than it was here in the second quarter.

Matt McGrew:

I'm sorry, was that fiscal 2023 you said?

Matt McGrew:

Yes. So, I mean, maybe just – let me just be clear. We reiterate kind of what we said for the full year. I can give you a little bit of color on Q3, hopefully that sort of gets you where you need to be. I think, so let me recap what we said in the prepared remarks. Like Rainer just said, we reaffirmed high-single-digit core growth in the base business and overall kind of mid-single-digit core growth inclusive of test. Like we talked about a little bit earlier Q2, our performance gave us the ability to fully offset all over the second half FX headwinds. So you'll see that in sort of the margins. 400 million of incremental FX here since April talking about 1.3 billion, almost 5% for the full year from a revenue perspective, so no doubt for the second half will have. That FX will have an impact worse than it even did in the first half. But despite that additional FX headwind, we expect to be at the high-end of the range that we talked about earlier of 20% to 25% from a fall through perspective. So, I mean, just kind of give you that color of where we think we'll be here in the second half inclusive of FX headwind. And then for Q3, revenue is going to be down $200 million year-over-year, and that is all due to FX headwinds. So if you think about it, we're going to have, call it $400 million of FX headwinds, couple hundred million of core growth and acquisitions, but net-net we're going to be negative here in the year. And from a – I realize from a modeling perspective, it sort of fall through in a negative environment isn't all that meaningful. So I think maybe the easier way to think about where we're thinking about for Q3 is we're expecting our EBITDA margins to be about 30% in the quarter. And so hopefully with that, and then the full year frame, right on 20% to 25% you can kind of – it frames a little bit of what we're thinking about for sort of the back half from a margin perspective. Hopefully that's helpful.

Matt McGrew:

Yes. I think barring any additional FX headwinds or something who knows what could happen out there these days, but barring anything else, barring FX or some sort of other macro event, yes, I think that's right 35% to 40% on our base business is a good way to think about margins as we head into 2023. We've talked about in the past how our margin profile has rerated from 30% to 35% to 35% to 40%, and there's no change to that.

Matt McGrew:

Yes.

Operator:

Our next question comes from Scott Davis from Melius Research.

Scott Davis:

Hey, good morning guys. Now that we're on the topic of FX; Matt, is FX more of a concern on, I mean, is it more of a translation issue for you guys or, or is there a certain level where the competitive dynamic that [indiscernible] product around from dollar based regions to non-dollar based?

Scott Davis:

Guys, help us understand the logistics of pricing and some of your business. I know its different business like Beckman. Do you have to wait until kind of contracts kind of renew to get the price? Is it, I mean the big step up in price you had quarter-to-quarter and just a function of time and diagnostics?

Scott Davis:

Well good luck. I'll pass it on. Thank you guys.

Matt McGrew:

Thank you, Scott.

Rainer Blair:

Good morning, Dan.

Rainer Blair:

Sure. Dan, first of all I think you hit it on the head. We are a very different company today than we were in 2009, and some of that you already saw in 2020 where even as the country and the world shutdown, we only had one negative quarter and ended up being obviously very positive for the year even in 2020. But let's talk about, why here first? I mean, the portfolio transformation that was purpose driven has made Danaher far more resilient today than ever before. And let's talk – let's tease out why that is. I mean, first of all, over 40% of our portfolio – well, over 40% is in biopharma, genomics, molecular diagnostics, and all of these are supported by very, very strong secular growth drivers. And you heard me talk about those in the prepared remarks with a number of therapeutic projects that are in the, in the pipeline that drive so much value creation and activity in our industry. We also see population increases access to medical care increasing. So when we think about patient volumes around the world, we see those continuing to increase. So also from a diagnostic perspective, we're very well positioned. You think about EAS, the positioning there is water is becoming scarcer, unfortunately more polluted and requires more testing. The food supply is under pressure and so PID is very much involved in these kind of macro drivers as well. So we feel that from a portfolio perspective it's nearly purpose built for the world that we're in and the pressures that we live under. Now, you add to that 70% of our revenues or I should say over 75% of our revenues are recurring. And most of those are captive, meaning they're specked in or they're specific to our equipment and instruments along with these super durable business models, razor – razor blade and high service levels. So that's a very different kind of business that once again, I'd say it's purpose built for these type of things. Now you add to that our scale and our DBS led execution where even in tough and choppy times we're able to focus on what matters, which is our customers and execute in that environment. On top of the strength of our balance sheet we actually see these challenging macro environments as opportunities. So rather than battening down hatches here and having our head down, we're focused on executing continuously improving and taking advantage of the opportunities that the crisis can offer us. And so, as you think about our balance sheet position today, less than 2x net debt-to-EBITDA we're well positioned there for sure. And so looking ahead should a recession be there, or should the times get choppier? We're looking to get to the other side of that even stronger than we would enter that. Now, as we think about our 2023 guide, which I think, is what part of your question was trying to tease out, we feel good about our mid-single digit plus positioning there where for, for the long term, which we have talked about in a number of occasions. And when you unpack that a little bit, we see bioprocessing could be up high single digit and that's consistent with what we've spoken of. And as you look at bioprocessing, there we continue to think that the non-COVID business is going to be growing very strong. You saw what we're doing here in the second half of the year with growth rates, well, over 20% in non-COVID, and then we've also, de-risked the discussion here relating COVID related therapeutics and vaccines. We see $1 billion of revenue in 2022, and that's down from $2 billion in 2021. And we'd probably say $500 million for 2023. So 2021, $2 billion, 2022, $1 billion and 2023 $500 million for COVID-related vaccine. And having said all that, we still see our biotechnology business growing at high single digits. And that leads you then with COVID testing. And we've talked about that at length. We speak to our customers about that. They still think that COVID goes endemic at the end of 2023, beginning of 2024. And we still think our framework of about $1.2 billion of COVID testing revenue in 2023, which is roughly around 30 million tests, is the right way to think about it. So when you put all that together we feel very good about the way we're positioned here from a core growth perspective, think mid-single digit plus on the base business. And then, from a COVID headwind perspective, think low-single, mid-single headwind overall giving you a solid low single digit 2023.

Rainer Blair:

For a normal year, we would see China in the low double digits, low teen kind of growth. We'd say for the full year, this year in view of what we've seen in the first half, high single digits is the way to think about China, which we consider to be strong growth in view of some of the macro challenges that China is facing today.

Rainer Blair:

Thanks, Dan.

Rainer Blair:

Good morning, Jack.

Rainer Blair:

So just to repeat here, Jack, for everybody 2021, $2 billion of revenue, 2022, $1 billion of COVID-related vaccine and therapeutic revenue, I think, it's fair to say that that trails off here towards the second half of the year, getting you to for that 2023 run rate that I talked about we're $500 million for the year. So some of this stuff is lumpy. So it can go back and forth in a quarter, but that's the general downdraft.

Jack Meehan:

Got it. Yes, that makes sense.

Jack Meehan:

That makes sense. And I also had a follow-up on China. So you grew high single digits, the guide was for down mid to high single digits. And that was despite the fact the lockdowns were longer than expected. I guess my question is simple. How do you pull it off? Can you just talk about instruments versus consumables, just what kind of the shape of the quarter will look like?

Jack Meehan:

Very nice. Thank you, Rainer.

Operator:

Our next question comes from Rachel Vatnsdal from JPMorgan.

Rachel Vatnsdal:

Thanks. Good morning guys. Yes, congrats on the nice quarter. So first off on COVID testing, so those obviously came in higher than expected, but I'd like to really dig into the mix of fluid versus standalone. So you were anticipating 10% of the four-in-one test this quarter and 90% stand-alone, but that sounds like it came in about fifty-fifty. So that mix has increasingly been skewed towards the four-in-one product in recent quarters. So how are you thinking about that mix shift moving forward in the back half of the year? And then what's the mix that's anticipated in 30 million tests for next year?

Rachel Vatnsdal:

Great. Thank you. And then on biotech funding concerns, so obviously there has been a number of concerns about the potential slowdown in biotech funding leading to a smaller funnel at earlier stage biotech companies, as they try to rationalize candidates to conserve cash. And so you flagged a number of stats on the positive pipeline for monoclonal antibodies, cell and gene therapy, et cetera, the prepared remarks. So can you just walk us through, have you seen any impact or shift in demand from that mid-biotech customer segment as a result of these funding concerns? And then how should we think about – let's say that we face a prolonged constrained funding environment for these mid-biotechs. At what point do you think that could really start to impact that Phase 2, Phase 3 part of the pipeline where it starts to become meaningful from a volume perspective, which is obviously the main driver of that bioprocesing business. Thank you.

Operator:

Our next question – our last question comes from Patrick Donnelly from Citi.

Patrick Donnelly:

Hey Rainer, how are you? Thanks for taking the question. Maybe another one just cleaning up on 2023. I really appreciate all the color you gave. It sounds like with all the moving pieces, in terms of COVID headwinds, we'll probably shake out maybe in a little more low-single than the mid-single for 2023. And I'm just trying to figure out, I guess, with all the mix changes again, being a little less, COVID more heavy on the core, what the right way to think about the incrementals is? I mean, it sounds like Matt earlier was talking about kind of getting back to that 35%, 40%. But just wanted to circle up in terms of the moving pieces. Again, given the mix shift, I assume FX will still be a bit of a headwind in the first half. I mean, it's still a bit away, but we'll see what the dollar does. But can you just talk through, I guess, that margin structure as we work our way into 2023, given again, the growth is looking a little more, low single with the COVID headwinds that you laid out?

Patrick Donnelly:

Okay. That's helpful, Matt. I appreciate that. And then Rainer you touched a little bit on the M&A landscape, obviously I don't think there is any doubt you guys have the capacity and the balance sheet is healthy. I think the questions are more around are the sellers ready? Or are valuation still kind of resetting in boardrooms? What are the conversations like for you guys? Again, it seems like your appetite is certainly high to your point, macro uncertainty tends to favor you guys, you tend to see a little bit of panic out there sometimes and sellers kind of hit the bid. So can you just talk about conversations? Are people starting to warm up a little bit, or is it still a lot of kind of pointing back six months and maybe we bounce back, maybe we don't, what are the conversations like on that front?

Patrick Donnelly:

Great. Thank you guys.

Operator:

And that is all the time we have for today. And I will turn the program back over to our speakers.

Operator:

This does conclude today's program. Thank you for your participation. You may now disconnect. Have a great.

Operator:

Good day. My name is Leo and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation’s First Quarter 2022 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.

Rainer Blair:

Well, thank you, John and good morning everyone. We appreciate you joining us on the call today. We are off to a good start in 2022 with the first quarter coming in ahead of our initial expectations. The team navigated a challenging operating environment to deliver strong revenue, earnings and cash flow growth. And our performance was broad-based with high single-digit or better core revenue growth in each of our three segments. Now during the first quarter, we continued to strengthen our competitive advantage through high-impact growth investments in innovation and bio-processing production capacity, both of which we believe are contributing to market share gains. Now, clearly, our well-rounded results are really a testament to our team’s commitment to continuous improvement and to the unique positioning of our portfolio. We just have an exceptional collection of businesses, all powered by the Danaher Business System that serve attractive end markets with durable secular growth drivers and it’s this combination that differentiates Danaher today and provides a strong foundation for the future. So with that, let’s turn to our first quarter results. Sales were $7.7 billion in the first quarter and we delivered 12% of core revenue growth. Our base business was up 8% and with broad-based strength across the portfolio and COVID-19 testing contributing 4%. Geographically, revenue in both the U.S. and Western Europe grew mid-teens, while high-growth markets were up low single-digits. China declined low single-digits, but was up high single-digits, excluding the impact of a previously called out significant bioprocessing project delivered in the prior year. The COVID-19 driven lockdowns that began in late March had a very modest impact on our first quarter results in China. However, as these lockdowns extend further into April, we are seeing more of an impact in our businesses. And we anticipate the situation will begin to ease in the coming weeks with an eventual return to normalized activity levels by the end of June. Our gross profit margin for the first quarter was 61.2%. The operating margin decline of 80 basis points to 28.3% is largely due to year-over-year changes in foreign currency exchange rates and product mix, primarily within our Life Sciences segment. Now, adjusted diluted net earnings per common share of $2.76 were up 9.5% versus last year and we generated $1.7 billion of free cash flow in the quarter. So, now let’s take a look at our results across the portfolio and give you some color on what we are seeing in our end markets today. Let’s start with Life Sciences where reported revenue grew 9.5% and core revenue was up 7.5% with broad-based strength across the segment. In bioprocessing, we are seeing very robust activity levels. Customers are accelerating their investments in research and production across all major therapeutic modalities. Core revenue in our bioprocessing business at Cytiva and Pall Biotech grew high single-digits and was up low double-digits, excluding the impact of that significant one-time project in China last year. The orders remain very healthy and we continued to build backlog across both businesses during the quarter. Now over the last 2 years, our customers prioritized the development of COVID-19 vaccine and therapies to rapidly accelerate their time to market. Today, these programs require less investment in manufacturing capacity as they mature and become a part of our customers’ core business. And as a result, our customers are starting to reallocate resources back to previously paused and new programs for other modalities, notably monoclonal antibody-based therapies or MAB cell and gene therapies and mRNA-based technologies. In bioprocessing today, monoclonal antibodies are the largest investment area for our customers as they are becoming the standard of care in the treatment of many diseases. Customers are adding manufacturing capacity to support both novel MABT in clinical trials and the rapid growth of approved treatment. Biosimilar development and production are also increasing as patents on higher volume therapies expire. This trend is making life-saving treatments more accessible and helping to accelerate adoption in underserved markets. Now, we continue to make substantial investments in manufacturing capacity to help meet our customers accelerating demand in bioprocessing. An important focus area of our expansion has been with single-use technology which are key enablers to scale the development and manufacturing of biologic and genomic-based medicines. In this first quarter, our newest plan dedicated to the manufacturing of single-use technology came online in Cardiff, Wales. Now, this plant, along with recently opened facilities in South Carolina and Beijing are critical to support our customers’ demand today. Long-term, they provide additional capacity for one of the fastest growing product categories within bioprocessing. So turning to our Life Sciences Instrument businesses, we are seeing strong levels of activity in all major end markets. Demand is particularly robust at our pharmaceutical CRO and academic research customers where a healthy funding environment is accelerating the initiation of new projects. In the first quarter, Leica Microsystems, IDT and SCIEX each grew over 10%. At SCIEX, the ZenoTOF 7600 and Triple Quad 7500 continue to perform well and are great examples of how our investments in innovation are driving market share gains and enhancing our growth trajectory. At Leica Microsystems, Mica is another example of impactful innovation for our customers. Mica integrates wide field and confocal imaging in a single instrument while leveraging machine learning and automation to dramatically simplify the imaging workflow for our researchers. So clearly, across the life sciences portfolio, we are investing in innovation to bring meaningful solutions to our customers and to strengthen our competitive position. Aldevron continued its great start as a part of Danaher, delivering over 40% growth in the first quarter. Since joining Danaher in late August, the team has embraced the Danaher Business System and is putting DBS tools to work. Recently completed Kaizen event which focused on increasing throughput further reducing lead times are already generating terrific results. So we are excited about the early progress at Aldevron and thrilled with the great work the team is doing. So now let’s move to Diagnostics, where reported revenue was up 21.5% and core revenue grew 22.5% led by over 50% growth at Cepheid. Our non-COVID clinical diagnostics businesses collectively grew mid single-digits. Notably, Leica Biosystems delivered their seventh consecutive quarter of double-digit order growth driven by strength in core histology, advanced staining and digital pathology. The clinical diagnostic market volumes remain at healthy levels in most geographies as patients are returning for wellness checks, routine screenings and other elective procedures. Our customers are effectively managing through periodic outbreaks by adapting their protocols and procedures allowing them to continue providing critical healthcare services. Now in China, we are currently seeing regional lockdowns impact patient volumes and we expect our Diagnostics business to be the most effective in the second quarter. In Molecular Diagnostics, respiratory testing volumes have moderated globally as the Omicron outbreak has subsided in most regions. However, demand for Cepheid testing at the point of care remains very strong and we believe we are taking market share. Our continued growth and share gains are a testament to the significant value the unique combination of fast, accurate lab results and a best-in-class workflow is providing to clinicians at the point of care. So, as COVID-19 moves towards an endemic disease state, we are seeing increased demand for Cepheid’s broader test menu. In the first quarter, non-respiratory testing revenue grew double-digits, led by hospital-acquired infection, urology and infectious disease testing. Customers, including several who initially purchased our GeneXpert system for COVID-19 testing, are expressing increased interest in expanding their menu utilization. As our customers free capacity from respiratory testing, we believe there are significant opportunities to leverage our market leading installed base and testing menu to drive broader utilization and demand for Cepheid’s point-of-care molecular testing solutions. Now, respiratory testing revenue of $900 million in the quarter exceeded our expectations as customers showed an increased preference for Cepheid’s 4-in-1 combination test during the respiratory season. Our combination test for COVID-19, Flu A, Flu B and RSV represented approximately 65% of the 17 million respiratory cartridges shipped in the quarter with COVID-only tests accounting for approximately 35%. So now, let’s move to our Environmental & Applied Solutions segment, where reported revenue grew 2.5% with core revenue up 6.5%, including [Technical Difficulty] water quality and mid single-digit growth at product identification. At water quality, ChemTreat delivered its fourth consecutive quarter of double-digit core growth, accelerating demand for our analytical chemistries and consumables was driven by activity across municipal, chemical, food and beverage end market. The equipment order rate also remained strong as customers are continuing to invest in larger municipal projects. Now Product Identification, our marking and coding business was up high single-digits partially offset by slight decline in our packaging and color management business. Videojet was up high single-digits with strong demand in food, beverage and industrial end markets. So stepping back, our water quality and product identification platforms have done an exceptional job of leveraging the Danaher Business System to improve their positioning both from a cost and growth perspective. While supply chain pressures have been modestly more pronounced than EAS, our teams are using DBS tools such as daily management to work with suppliers and ensure production component availability. We are also using visual project management to help us reengineer our products faster with a focus on moving from difficult to source electronic component to newer, more cost-effective next-generation chipsets. Now, we believe DBS enables us to deliver faster and more reliably than many of our competitors. Now, our teams are also using DBS growth tools to accelerate innovation and deliver more impactful solutions to the market, innovations such as Videojet, CIJ 1880 printer and HACH’s HQ series portable meters, are helping our customers solve the many challenges they face from increasing regulatory requirements to skilled labor shortages. And we are seeing the impact in our core growth, which has averaged mid single-digits annually over the past 10 years at EAS. So we believe this combination of the rigorous application of DBS tools, paired with our proactive growth investment is driving meaningful market share gains and enhancing our long-term competitive advantage. So now, let’s briefly look ahead to our expectations for the second quarter and the full year. In the second quarter, we expect to deliver mid single-digit core revenue growth in our base business, which includes a headwind of approximately 200 to 300 basis points from the ongoing COVID-19 related shutdowns in China. For the full year 2022, there is no change to our previous guidance of high single-digit core revenue growth in our base business as we expect the shutdowns in China to normalize as we move through the remainder of the year. We continue to expect both a low single-digit core growth headwind from COVID-19 testing and overall mid-single-digit core revenue growth. So to wrap up, we had a good start to the year and look forward to building on this foundation as we move through 2022. Our first quarter results are a testament to the dedication of our outstanding team and their commitment to executing with the Danaher Business System. And these results also reflect the unique positioning of our portfolio and the exceptional collection of high-quality franchises that comprise Danaher today. We believe the durability of our businesses where consumables now represent 75% of revenue, positions us exceptionally well in today’s dynamic operating environment. So this powerful combination of our talented team, the strength of our portfolio and the Danaher Business System differentiates Danaher and reinforces our sustainable, long-term competitive advantage. So with that, I’ll turn the call back over to you, John.

Operator:

[Operator Instructions] We will take our first question from Derik De Bruin of Bank of America.

Derik De Bruin:

Hi, good morning. Thanks for taking my question. I got just a couple of sort of like incoming from clients. I think, first of all, just a little bit more on the difference between – I think you mentioned 19 million on the Cepheid guide, and it came in at 17. Just a little bit more color on the volume difference there? And I think also a related question, just are you seeing any sort of stockpiling in terms of either vendors for either bioprocessing or on the diagnostics side? And I’ve got more follow-up.

Rainer Blair:

Well, this is entirely related to supply accessibility of customers. So the demand in China continues to be very robust. As you may have noted, without the – in the first quarter without this large project in the prior year, China was up high single digits for us, orders very strong. So this is really related to customer accessibility in hospitals, in labs and of course, the one or the other manufacturing plant that’s affected by these shutdowns. Now as we sit here today, we’re already receiving the news from our team that we’re able to open up not just our plant, and so those are starting to open up here as well slowly but surely, as well as we would expect throughout the quarter client – I’m sorry, as well as lab accessibility to improve already in May and then get back to more normal levels here by the end of the quarter.

Rainer Blair:

This is mostly about China getting back to normal activity levels and both customers as well as our plants having the makeup capacity to make up for what we think are relatively short shutdown period. Having said that, the business is a large one, and there is always pockets that will grow faster. So between the two things, we feel confident that our guide for the full year holds.

Rainer Blair:

Good morning, Vijay.

Rainer Blair:

Well, thanks, Vijay. So let’s just level set on the numbers briefly here. If we think about bioprocessing Q1, and as I mentioned during my opening commentary, we extract that very large Q1 shipment last year in China, our bioprocessing business was up low double digits here in Q1. Very, very strong order activity, and I’ll come back to that in a minute. Now if you look at our first quarter last year, our sales were up over 70%. And so if you look at the 2-year stack for Q1, we’re in the 35% to 40% growth area, which we think is very robust and more than representative of what is going on in the market and think that, that compares extremely well. In fact, we still think that we’re taking share there. So that’s sort of one marker that I want you to have. And then the second point is the order activity continues to be very, very strong. Last year, our orders in the first quarter were up over 90%. And so we anticipated that our orders in Q1 of this year would be down but nonetheless, we continue to build backlog here in Q1 as well in the bioprocessing area. And this is why we’re so confident in our core growth guide here for the year and bioprocessing of high single digit, low double digits between the robust growth that we’re seeing and the backlog that we have, that’s really important. So now let’s unpack that a little bit and think about what’s going on and why COVID is sort of one variable, but that there are other variables here that are incredibly important and explain why we talk about the bioprocessing business and its growth in aggregate. So first of all, as you think about the activity levels outside of COVID in the bioprocessing business, it’s important to see what’s going on in clinical trials. And I’ve talked about this, but you know that the project pipeline for monoclonal antibodies is 50% larger today than it was 5 years ago. For cell and gene therapy, it’s 10x larger, driving extraordinary activity here in the clinical trial area. And what you see, and as I mentioned in the opening comments, you see customers really starting to focus on these new projects across all modalities and not just allocating the resources to COVID, but to these new modalities. So that’s really important to note that customer activity level continues to be very, very high, and that plays through in the clinical trials. Now another point to take here is monoclonal antibodies are becoming the standard of care and the predominant class of biologic drugs. So what’s going on in monoclonal antibodies is the primary growth driver in the market and also for our business and recently launched products that are ramping to new treatment and new indications are driving an exceptional amount of volume here. And then you add to that, that emerging markets and high-growth markets, such as China and India, are starting to have access to these monoclonal antibody treatments that provides additional and significant volume leverage. At the same time, you have biosimilar growth, Vijay. So these biosimilars are leveraging the fact that some of the biologic drugs, monoclonal antibody that are higher volume are starting to come off patent, and that’s increasing the penetration of those drugs throughout the world where the penetration has been lower. And that’s providing another growth impetus. And then lastly, I’ll start with this now. We’ve been talking about single-use technology and their adoption for a while, which is an additional leverage growth vector within the bioprocessing business. So all that helped the activity that we talked about provides for volume, but SUT on top of that is substituting more traditional technologies and is growing even faster. And we have well over $1 billion of single-use technology. And we’ve just announced that our third new plant coming on for single-use technologies in Cardiff, Wales. So we feel very confident on the basis of what’s going on outside of COVID. And that’s why we look at it together because it’s the aggregate that we look at and that really ultimately count that, that will drive that high single-digit, low double-digit growth here for 2022 and also supports our high single-digit perspective beyond that.

Matt McGrew:

Yes. No, for Q1, I mean, we kind of came through about 25%. I think that was pretty much in line with what we thought, Vijay. So no real difference, I think – from a year-over-year perspective, the difference between that $35 million to $40 million that we normally talk to in this 25, it was all FX, right? So in the quarter, I mean you think about it, it was kind of like a $0.07 headwind here for us. So I don’t think we saw anything. Obviously, supply chain is what it is, but I think we were able to kind of work our way through that. I really think it was all FX here – excuse me. In the quarter and first quarter. As far as – I think you bring up a good point then as far as the full year goes, so I would say there is no change to the full year fall through other than the FX impact that we’re seeing. And just to kind of lay that out. We continue to expect mid-single-digit core growth from kind of the core and acquisitions, and that will have that 35% to 40% fall through. In January, we thought that FX was going to bring that 35% to 40% down to, say, 30% to 35%. But given the currency moves we’ve seen since January, as we sit here today, I think it’s going to be more like 20%, 25% fall-through for the year versus the 30 to 35 that we sort of guided to the last time. So look, it still leaves us, if we deliver that, that still leaves low single-digit EPS growth for the year despite what I think is some pretty significant FX headwinds year-over-year. And maybe just to give you a color on the sizing of that headwind, I mean right now, FX is going to be a $0.35 EPS headwind year-over-year, and that’s a pretty meaningful number for us here during the year. It’s probably half of what we initially thought. So it’s a pretty big headwind here for the year, and it was a little bit here in the quarter, too.

Operator:

We will take our next question from Scott Davis of Melius Research.

Scott Davis:

Good morning, guys. Thanks for all the detail here. The price dynamic, I mean, I know it’s FX is FX. I can’t do much about that perhaps. But – do you – are you still out there capturing additional price to offset the general inflation and general cost and logistics issues that are so prevalent?

Operator:

We will move next to Dan Brennan of Cowen.

Dan Brennan:

Good morning Rainer. Thanks for taking the questions. Congrats on the quarter. So, if I could just go back to bioprocess, obviously, a really nice quarter with a high-single digit growth against so extremely tough comp. I appreciate COVID is part of the base, and it’s great about all the robust demand, obviously, ex-COVID, which is a big driver long-term. But given the interest in kind of dissecting COVID at this point from investors, it would be helpful to learn if the 2022 high single, low-double digit guide continues to incorporate $2 billion from COVID. And if it does, any color you can provide there about like how much of that $2 billion is blocked in with firm orders?

Dan Brennan:

Thanks Rainer. So, I will get on a really strong quarter out of the gate. Maybe can you give us a little color on how the integration is going – and in light of the really strong first quarter, how do we think about Aldevron for the full year in 2022 and beyond?

Dan Brennan:

And if I could squeeze one more in. Just on China. Obviously, good news that you guys are managing through this and the full year guide is maintained. Maybe if you could just give us an update like in Q2, like what you are actually expecting for China? Maybe you said the number, I missed it. And kind of how do you think about China for the full year since you are expecting a nice rebound beginning Q2? Thank you.

Dan Brennan:

Great. Thank you.

Rainer Blair:

Good morning Jack. How are you?

Rainer Blair:

So, in Life Sciences, if we now pivot from bioprocessing and more to the life science analytical businesses, as you suggest, Jack, we are seeing very strong underlying activity in the various sectors of the business. If you think about the Pharmaceutical segment, CROs, academic research customers, our funnels are strong and continue to outpace quarter-over-quarter what we have seen in 2021. I think that buttressed for us, particularly because of the strong innovation track record and the recent launches that we have had. I have talked to those at SCIEX, the ZenoTOF, the accurate mAb instrument as well as the 7500 Triple Quad, those are class-leading innovations that are growing exceptionally well and driving market share gains. Beckman Life Sciences, with their CytoFLEX Benchtop sales order the most recent launch. And then of course, we talked about Mica, which is that combination of wide field and confocal leveraging machine learning. So, we are firing on all cylinders here in a strong investment environment. And we think that, that’s sustainable here for the foreseeable future as we continue to see investments from both the biotech sector, but also academic sectors, as well as institutions that are very, very bullish on the innovation and the science that they want to drive forward.

Rainer Blair:

Well, Jack, I will tell you, we have excelled in these kind of environments historically from an M&A perspective. These environments of dislocation inevitably show opportunity and we feel very good about how we are positioned with our funnel. Now having said that, the volatility that we are seeing today is while it might not feel that way relatively recent and it’s probably a little too early to see the full impact of that volatility. Having said that, we are sitting here with 2x a turn, very strong free cash flow of over $7 billion and over $10 billion of EBITDA. So, we feel like we are in a very good position both in terms of the strength of our balance sheet as well as the opportunities that lie ahead.

Rainer Blair:

Good morning Patrick.

Rainer Blair:

So, Western Europe has continued to perform very well for us. As I mentioned in our opening comments here, we had strong growth in the mid-teens in Western Europe here in the first quarter. And while we think that moderates a little bit here in Q2 just because of some of the prior year performance is, the activity levels remain very strong. Certainly, in Western Europe, that is the case. And as you think about your reference to the geopolitical side, Eastern Europe just has not been that large of a factor in the life science research and bioprocessing area as an example. And from a diagnostics perspective, we continue to see a very high, let’s say, close to normal activity levels as well. So, Western Europe for us continues to perform as expected.

Rainer Blair:

As we think about the business momentum really in all regions, with the exception of China, which I talked about, we are seeing patient levels, activity levels really at or very close to pre-pandemic levels. And so from a macro perspective and patient volume, it’s a positive environment for us. And then if you put on the back of that, the recent product launches that we have had, the DxH900 hematology as well as the DxA Fit and automation for small and medium-sized labs, we are also continuing to benefit from that NPI pace that we have invested in here over the past year. So for us, diagnostics continues to be a strong forward momentum. Matt, do you want to take this?

Patrick Donnelly:

Thanks guys.

Rainer Blair:

Good morning Luke.

Rainer Blair:

Happy to. So Luke, the way we are thinking about that is – the strength of our underlying business, which I laid out here in some details, some clinical trials, mAbs, biosimilar volumes, keep in mind, it’s the commercialized drugs that really drive volume here in this business. And then of course that additional growth accelerator of the single-use technology adoption. Those are really the foundations that are driving the growth of this business. And the COVID business, it will do what it does, but that variation is within the realm of what we have been casting as the overall growth rate of the business. And so you take the backlog, which continues to grow quarter-over-quarter and you take the growth drivers that I have laid out. That is what supports the high-single digit, low-double digit growth for 2022 and the high-single digit longer term growth guide that we have talked about.

Rainer Blair:

That’s going to continue to pace out as we add line after line after line. But I would say that these are programs that are coming on, on or better than schedule as the team continues to gain speed here not only with their subject matter expertise, which is differentiated. So, unique in the marketplace, but also with their adoption of the Danaher Business System. So, we look for that $500 million here in 2022.

Operator:

And this does conclude our question-and-answer session. I would be happy to return the call to our host for any concluding remarks.

Operator:

This does conclude today’s call. You may now disconnect your lines and everyone, have a great day.

Operator:

Hello. My name is Ashley, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Danaher Corporation Fourth Quarter 2021 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.

Rainer Blair:

Well, thanks, Matt, and good morning, everyone. We appreciate you joining us on the call today. 2021 was a tremendous year for Danaher capped off by a very strong finish to the fourth quarter. Our well-rounded performance throughout the year was highlighted by outstanding core revenue and earnings growth as well as strong free cash flow generation. We're particularly pleased with the strength of our base business across the portfolio, which was up low double digits for the year. And we believe our accelerated innovation and capacity expansion initiatives has helped us capture market share at a number of our businesses. Now these results are a testament to our team of 80,000 associates and their outstanding execution in what has been a challenging operating environment. Despite the uncertainty that has come to characterize life for all of us, throughout the pandemic, our associates are showing up big every day, working longer shifts, launching breakthrough products in record time and going above and beyond to support our customers, and they remain committed as ever to executing with the Danaher Business System. Really, their dedication to serving our customers and the global community is as humbling as it is inspiring, and we're grateful for their invaluable contribution. The circumstances over the last several years have also shined a light on the high-quality, market-leading franchises and technologies that now comprise Danaher. We're seeing the results of our purpose-driven portfolio transformation in action today through higher growth in margins, stronger cash flow and a higher percentage of recurring revenue. We're exceptionally well positioned to continue this trajectory going forward, and we see a very bright future ahead indeed. So with that, let's take a closer look at our full year 2021 financial results. We delivered 25% core revenue growth, 560 basis points of core operating margin expansion, nearly 60% adjusted earnings per share growth and over $7 billion of free cash flow. We deployed $11 billion of capital towards acquisitions, closing 14 deals across all four of our platforms. The largest acquisition, Aldevron, joined our Life Sciences segment in August, providing a fantastic beachhead for us in the important frontier of genomic medicine. It's just a great example of how we're using strategic M&A to enhance our capability and bring greater value to our customers. Now throughout the year, we also made significant organic investments to accelerate innovation across our businesses. Our R&D spend was up approximately 30% year-over-year and is now more than $1.7 billion annually. New products, which as the SCIEX ZenoTOF 7600 and Triple Quad 7500 and Leica Biosystems Aperio GT 450 digital pathology slide scanner are driving share gains in their respective markets through proprietary innovation while further enhancing our growth trajectory. Now total capital expenditures were $1.3 billion for the year, which reflects substantial investments to expand production capacity across our businesses, particularly at Cepheid, Pall and Cytiva. In bioprocessing, I'm really happy to report that our new single-use technology plants in South Carolina and Beijing and our cell culture media expansion in Utah all came online in the fourth quarter. And at Cepheid, we more than doubled our production capacity for respiratory tests in 2021. For near term, we believe these investments have been critical to support customer demand, and it helped us achieve meaningful market share gains. And they're equally important in the long term to support the significant growth opportunities we see ahead in these very attractive end markets. And now let's spend some time on the fourth quarter results. Our sales were $8.1 billion, and we delivered 19.5% core revenue growth with strong contributions from all three segments. We saw broad-based strength across our base business, which was up approximately 10% in the quarter. And geographically, both have developed and high-growth markets were up approximately 20% led by nearly 25% growth in North America and high teens growth in China. Gross profit margin was 60.7%, and our operating profit margin of 26.4% was up 270 basis points, including 240 basis points of core margin expansion. Adjusted diluted net earnings per share of $2.69 were up approximately 30%. And now for the full year, we generated more than $7 billion of free cash flow, up 30% year-over-year. In fact, our free cash flow to net income conversion was 112% from the full year and it marks the 30th consecutive year this figure has exceeded 100% for Danaher. So now let's go into more detail on our quarterly results across the segment. Life Sciences reported revenue increased 20.5% with core revenue up 17%. Now these strong results were broad-based with most major operating companies achieving low double-digit or better core growth. In fact, Aldevron delivered over 30% revenue growth in the quarter and finished the year with approximately $400 million in total revenue. That business is off to a great start as part of Danaher, and we couldn't be more pleased with the team's performance out of the gate. Our core revenue growth in our processing businesses continued to outpace segment level results with Cytiva and Pall Biotech, both up more than 25%. Non-COVID related bioprocessing trends remained strong with our businesses growing low double digits again this quarter. We continue to support significant customer activity across the development and production of COVID vaccines and therapeutics, which drove $2 billion of revenue in 2021. Moving to Diagnostics. Reported revenue was up 29.5% and core revenue grew 29% led by greater than 75% core growth at Cepheid. Non-COVID clinical diagnostic activity across all our operating companies, including Beckman Coulter Diagnostics, Radiometer, and Leica Biosystems collectively drove high single-digit core growth as patient and testing volumes largely remained at or near pre-pandemic levels. And we also saw an acceleration in demand that crosses non-respiratory menu, led by telehealth, hospital-acquired infections and urology testing. Cepheid produced and shipped approximately $19 million of respiratory test cartridges during the quarter. This dropped the total number of respiratory tests shipped in 2021 to approximately 16 million cartridges, more than 10x the number of tests produced and shipped in 2019 prior to the start of the pandemic. In fact, our four-in-one combination test for COVID-19, Flu A, Flu B and RSV represented approximately 50% of Q4 respiratory test shipments, while our COVID-only test accounted for the remainder. Now let's move on to our Environmental & Applied Solutions segment. Reported revenue was up 4%, with 7.5% core revenue growth. Our water quality and product identification platforms both delivered high single-digit core growth for the quarter. Now across our water quality businesses, strength was broad-based globally across industrial and municipal end markets. Customer activity accelerated with the support of a strong funding environment and many projects that were put on hold during the pandemic have now resumed. Country delivered low double-digit core revenue growth in the quarter to close out its 53rd consecutive year of growth. This is a tremendous accomplishment and a testament to the team's best-in-class commercial execution and commitment to continuous improvement, with truly a differentiating combination, which has driven consistent market outperformance. In Product Identification, our packaging and color management businesses were up mid-single digits and marking and coding was up approximately 10%. Videojet had its third consecutive quarter of double-digit core growth, led by strong demand in industrial and food and beverage end markets. So with that as a backdrop for what we saw in the quarter, let me highlight the trends we're seeing, both geographically and in our end markets. So a return to pre-pandemic levels of activity is driving healthy customer demand across most major geographies. This is reflected in the strong results we've seen throughout both the developed and high growth markets and our strong order book growth, which continues to trend above revenue growth. While certain regions have implemented targeted lockdowns to address recent COVID-19 outbreaks, we're not seeing any widespread decline in our customer activity. Now given the size and scope of our business, we're certainly not immune to ongoing supply chain constraints and inflationary pressures, but we're proactively addressing these challenges across Danaher, leveraging the Danaher Business System and tools such as daily management and working closely with our customers and suppliers to mitigate the impact. We're also using DBS to accelerate price action and manage cost pressures. In fact, we've achieved nearly 150 basis points of price each of the last three quarters, which is approximately double our historical price realization. Now in Life Sciences. We're seeing robust demand across all major end markets. Lab and customer site access is holding at pre-pandemic levels, evidenced by more normalized customer productivity, equipment installations and project initiation supported by a strong funding environment. Biopharma continues to be our strongest performing end market within the Life Sciences business, while shifts in treatment towards biologics as the standard of care and the accelerating focus on genomic therapies are driving significant investments in research, development and production capacity across the sector. And we believe we're well positioned to support this work across our $7.5 billion bioprocessing franchise. Now in addition, we continue see significant demand related to development and production of COVID-19 vaccines and therapeutics. And we expect this activity to persist longer term. Our customers are planning for ongoing production with the assumption that there will be an enduring need for effective treatment and prevention as the world transitions to approaching COVID-19 as an endemic virus. And more broadly, our customers increasingly view the potential applications of new mRNA modalities, including vaccines and other therapeutics as an important area for future investments. In the clinical diagnostics market, patient volumes remain at or near pre-pandemic levels. Our customers have largely adapted their protocols and procedures to manage through recurring outbreaks, allowing them to continue wellness checks, routine screening and other diagnostic procedures. While selective lockdowns are causing modest disruptions in certain regions like pockets of China and Europe, we're not experiencing any material widespread negative impact from these measures. In Molecular Diagnostics, global demand persists for Cepheid's point-of-care PCR respiratory test further heightened as a result of the recent global surge of the Omicron variant. Additionally, we're seeing a more active respiratory season in the Northern Hemisphere, driving customers' preference for our four-in-one combination test, and we expect both of these trends to continue into the first quarter. Now in light of these dynamics and conversations we're having with our customers about their expectations for the upcoming year, we anticipate shipping the same number of respiratory tests in the first quarter as we did in the fourth quarter and approximately 50 million sets for all of 2020. In 2021, Cepheid placed a record 10,000 new GeneXpert system bringing the total install base to more than 40,000 systems worldwide. The team's thoughtful approach to placing systems throughout the pandemic is focused on both the near and long-term value this technology can bring to our customers. More recently, we've seen several existing health care system and integrated delivery network customers adding new instruments at sites further out in their networks and closer to their patients, facilitating faster diagnostics and treatment decisions. The scalability and unique architecture of the GeneXpert where the same test cartridges are used on higher and lower throughput instruments with the broadest test menu in the market provides our customers with the confidence that they will achieve consistent reference lab quality results, whether they're testing in an urgent care clinic or a central hospital lab. So now looking ahead, with the assumption that COVID-19 will be in an endemic disease, we believe that the point-of-care molecular respiratory testing market will expand significantly from where it was prior to the pandemic. Given Cepheid's leading test menu and install base, combined with an advantaged positioning around speed, accuracy and workflow, we believe Cepheid will continue to gain share in an endemic environment. So moving on to the applied markets, customer activity is largely back to pre-pandemic levels, which we see a robust order rates for both consumables and equipment. In fact, project-oriented activity is accelerating with an improving funding environment and more normalized site access has prompted the resumption of many projects and installations that were put on hold in the throes of the pandemic. So now let's look ahead to our expectations for the first quarter and full year. Beginning with the first quarter of 2022, we will now include the impact of COVID vaccine and therapeutic-related revenue as part of our base business core revenue growth. This change is driven by our greater confidence in the durability of our COVID-related vaccine and therapeutic revenue as the virus turns endemic. So now for the first quarter and full year 2022, we expect our base business core revenue growth to be in the high single-digit percent range. Additionally, we expect to generate operating profit fall-through of 35% to 40% in the first quarter and for the full year 2022, up from historical and pre-pandemic rate between 30% and 35%. So now to wrap up, 2021 was another terrific year for Danaher. Our team successfully executed through a challenging environment to deliver outstanding financial performance, all while supporting our customers and directly contributing to the global fight against COVID-19. We're seeing the results of our purpose-driven portfolio transformation in action through faster growth, expanded margins, stronger cash flow and higher recurring revenue. We're a better, stronger company today and there is tremendous runway ahead for us to continue building upon this foundation. With the Danaher Business System as our driving force, our talented team and resilient portfolio of businesses, we believe Danaher will continue generating sustainable long-term shareholder value for years to come. And with that, I'll turn the call back over to Matt. Thank you.

Operator:

[Operator Instructions] We'll take our first question from Tycho Peterson with JPMorgan. Please go ahead.

Rainer Blair:

So just to confirm, that's right. For 2022, we're guiding the base business to high single digits. And no, our assumptions as it relates to the vaccine and therapeutics business have not changed. We saw continued strength in our orders. In fact, orders exceeded our sales here in Q4, and we continued to build backlog. At the same time, we have to say that from a roughly 70% comp, we were down about mid-teens in terms of the orders growth. Nonetheless, orders still outpace sales. We built backlog and we're looking forward to roughly flat sales in the bioprocessing business for vaccine and therapeutic revenues in 2022. Now the core business, so in other words, the non-vaccine and therapeutic-related business for COVID, we expect that to continue to grow, of course, in the low double-digit area as has been the case here for many quarters.

Rainer Blair:

They're right on the mark $500 million is a good number. That's kind of growth and slightly better than we expected here, closing the year off right around $400 million. So, Aldevron is right where we think we should be and performing at our expectations.

Matt McGrew:

Yes, sure. Like you said, it was down 410 here in the quarter. It's probably three things. I would say, first, that's probably the area that we accelerated the investment spend the most in the fourth quarter, given obviously, a pretty strong print here across the entire portfolio. I think we took an opportunity in the fourth quarter to kind of overcharge a little bit of the investment there at EAS. So I think that's probably the first thing. I think the second thing is the supply chain. The challenges I would say there are probably modestly more pronounced at than they are elsewhere, Tycho. There's a kind of a high number of legacy products here that probably, I would say, have more components. And really what's happening is kind of the specialty components are a little bit harder to procure, especially in this environment that we're seeing. So largely offsetting that with daily management and doing some spot buys and some other product redesigns, et cetera, but I think a little bit more kind of supply chain issues there. And then lastly, I think if you think about -- there was a bit of mix issue here, too, with Trojan, which is a bit lower margin business being up, I think it was even north of 20% in the quarter. And so, I think despite that though, the good news is, like I said, I think teams doing a pretty good job using DBS to drive it from what we think and what we've seen here, it looks like even because of all that, I think we took some share here in Q4 and definitely in Q1, and that's really a result of being able to get through those challenges and still meet customer demand.

Michael Ryskin:

Thanks for taking my question. This is Mike calling for Derik. First of all, focus on Cepheid, both in '22 and post-pandemic. Given you're saying 19 million tests again in 1Q, it seems like you're assuming a pretty short drop off in 2Q, 3Q. And then you set up pretty confident duration, the COVID being endemic now, the POC market expanding spiffy going forward being to keep market share. So could you give us some more color on continued market share gains, the 10,000 boxes you place this year, so what are your expectations going forward? And just is that $50 million testing, does that sort of assume that that's going to be the run rate beyond that? Or do you expect continued sort of deterioration in COVID revenues offset by the other [indiscernible]?