Earnings call: Danaher tops Q4 expectations, eyes gradual 2024 recovery

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Earnings call: Danaher tops Q4 expectations, eyes gradual 2024 recovery
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Danaher Corporation (NYSE: DHR ) has reported its fourth-quarter earnings for 2023, surpassing both margin and cash flow projections, backed by higher-than-expected revenues and solid execution. Despite a core revenue decline of 10% over the full year, the company achieved an adjusted operating profit margin of 28.7% and adjusted diluted net earnings per share of $7.58. Danaher's sales reached $23.9 billion, and it generated $5.1 billion in free cash flow, continuing a 32-year streak of a free cash flow to net income conversion ratio over 100%. The company anticipates a gradual improvement in its Bioprocessing business, expecting a high single-digit growth rate by year-end. The Life Sciences and Diagnostics segments saw declines in core revenue, but Cepheid's molecular diagnostics business showed significant growth. Danaher remains optimistic about its long-term growth, underpinned by strategic acquisitions and portfolio enhancements.

Key Takeaways

  • Danaher exceeded Q4 margin and cash flow expectations with strong revenue and execution.
  • Full-year sales were $23.9 billion; core revenue declined by 10%.
  • Adjusted operating profit margin stood at 28.7%, with earnings per share at $7.58.
  • The company generated $5.1 billion in free cash flow, marking a 32-year record.
  • Bioprocessing business expected to see low single-digit decline in H1 2024, with recovery to high single-digit growth by year-end.
  • Life Sciences segment reported a 4% core revenue decline; Diagnostics segment declined by 8.5%.
  • High single-digit decline in core revenue anticipated for Q1 2024; low single-digit decline for full year 2024.
  • Adjusted operating profit margin expected to improve by 50 basis points in 2024.
  • Danaher's portfolio strengthened through the spin-off of Veralto and acquisition of Abcam.
  • Cepheid's molecular diagnostics business grew, with respiratory revenue at approximately $650 million.

Company Outlook

  • A gradual improvement in Bioprocessing business, aiming for a high single-digit growth rate by end of 2024.
  • Anticipates high single-digit decline in core revenue for Q1 2024, with a low single-digit decline for the full year.
  • Expects to improve adjusted operating profit margin by 50 basis points compared to 2023.

Bearish Highlights

  • Core revenue for the full year declined by 10%.
  • Life Sciences and Diagnostics segments reported declines in core revenue.
  • China's pharmaceutical market expected to decline by high single-digits this year.

Bullish Highlights

  • Cepheid's molecular diagnostics business saw low teens core revenue growth.
  • Cepheid's respiratory revenue exceeded expectations at approximately $650 million.
  • Strong balance sheet optionality post-Veralto spin-off, with plans for strategic capital deployment.

Misses

  • The company experienced challenges due to the pandemic and macroeconomic conditions.

Q&A Highlights

  • Backlog at a level consistent with historical figures, around 1.5 quarters.
  • Gradual improvement in book-to-bill ratios expected throughout the year.
  • China market may face short-term challenges but remains attractive long-term.
  • No significant bioprocessing improvement expected this year, but positive signs for H2 2024.
  • Life science instrumentation business to be down low single-digits for the year.

InvestingPro Insights

Danaher Corporation (DHR) has demonstrated resilience in its latest earnings report, showcasing robust execution despite a challenging economic landscape. As investors digest the details, let's delve into some key metrics and insights from InvestingPro that may further inform their perspective on the company's financial health and market position.

InvestingPro Data highlights Danaher's market capitalization at a substantial $178.37 billion, reflecting its significant presence in the industry. The company's Price to Earnings (P/E) ratio stands at 37.56, which, while indicating a premium valuation, aligns with its adjusted P/E ratio for the last twelve months as of Q3 2023 at 29.54. This suggests that investors have confidence in Danaher's earnings potential. Additionally, the company's Revenue Growth for the same period shows a contraction of 5.39%, aligning with the core revenue decline noted in the article.

The InvestingPro Tips provide further context for Danaher's performance. With analysts having revised their earnings upwards for the upcoming period, it signals potential optimism about the company's future profitability. Moreover, Danaher's track record of raising its dividend for 6 consecutive years, and maintaining dividend payments for 31 years, underscores its commitment to shareholder returns even in times of revenue pressure.

For investors seeking a comprehensive analysis, there are over 17 additional InvestingPro Tips available, offering deep dives into various financial metrics and market indicators. Subscribers to InvestingPro+ can access these valuable insights, and with the New Year sale, there's an opportunity to save up to 50% on subscriptions. To further sweeten the deal, use coupon code SFY24 for an additional 10% off a 2-year InvestingPro+ subscription, or SFY241 for an additional 10% off a 1-year subscription.

Danaher's position as a prominent player in the Life Sciences Tools & Services industry, combined with its solid financials, suggests a company equipped to navigate the current economic headwinds and capitalize on long-term growth opportunities.

Full transcript - Danaher corp (DHR) Q4 2023:

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.

John Bedford: Good morning, everyone, and thanks for joining us on the call. With us today are Rainer Blair, our President and Chief Executive Officer; and Matt McGrew, our Executive Vice President and Chief Financial Officer. I'd like to point out that our earnings release, the slide presentation supplementing today's call, the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call, and a note containing details of historical and anticipated future financial performance are all available on the investors section of our website www.danaher.com under the heading Quarterly Earnings. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events & Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until February 13, 2024. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company specific financial metrics relate to results from continuing operations and relate to the fourth quarter of 2023 and all references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices, which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date they are made and we do not assume any obligation to update any forward-looking statements except as required by law. With that, I'd like to turn the call over to Rainer.

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.

John Bedford: Thanks, Rainer. That concludes our formal comments. Operator, we're now ready for questions.

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

Dan Brennan: Great. Thank you, guys. Thanks for the questions here. Rainer, maybe starting off just on bioprocess. Could you give us a little breakdown here in terms of the outlook that you're providing say for China and then rest of world? And then I was hoping as well you can give us a snapshot maybe of how much inventory do you think your customers have today and how much of that changed versus the peak and kind of what does your guidance assume kind of when that inventory reaches a normal state?

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.

Matt McGrew: Dan, maybe to just kind of to put some numbers around your question as well. So I think China for the year for bioprocessing, you should probably think about the first quarter being down similar to what we saw in Q2, Q3, and Q4 last year call it north of 40%. And then I think for the full year, I just think even that will still be down kind of mid-teens for bioprocessing in China. That's sort of what we've got dialed in. And as far as the rest of the world, I think we'll be down in the first half and then kind of return to growth here in the second half after we get past the destocking. And I know you asked how much kind of inventory is in China. It's kind of hard to say, Dan. I mean we've got a kind of a moving target, but we've got a good sense that what we will largely be through most of the destocking, particularly in North America and Europe where it was probably the biggest. I think we're going to be through that here in the first half, which then sort of speaks to why we think it gets a little bit better in the second half of the year.

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.

Matt McGrew: Yes, let me give you a little bit of color on how I'm thinking about the guide or how we're thinking about the guide. Maybe start with - this is for bioprocessing. Start with kind of a qualitative overview of what this guide sort of is, right? This guide calls for a slight improvement versus our demonstrated book-to-bill of the last couple quarters. We've been in that kind of 0.8, 0.85 range the last four or five quarters. And we are not calling for an inflection at any point in the year, but we are assuming some modest improvement as we move through the first half into the second half. Like I said before, as we think that North America and Europe destocking is largely behind us after the first half. So, no inflection, sort of just kind of gets a little bit better than where we were. As far as kind of some numbers around that, Dan, maybe start with the backlog. So, we're starting with about a quarter and a half of backlog. That's pretty consistent with where we were in 2018, 2019. So, I think we're back to backlog levels that are, relatively speaking, pretty much in line with history. And then you start with that backlog and add this book-to-bill assumption in there. We are assuming book-to-bills improve slightly, like I said, kind of from the 0.8, 0.85s into the 0.9s. And that those will get a little bit better every quarter, as we build through the year. But we are not assuming book-to-bills go above one in any given quarter. And so that kind of assumes that, we get past the inventory destocking in the first half. The second half gets a little bit better. And that we're kind of exiting here, like I said, the first half will be down mid-teens. Mid-to-high teens for the second half we exit with high single-digits or better without seeing an inflection. And I think maybe, I know that there's been some questions on that second half ramp as well. Maybe just to give people some quantitative numbers on that. So the second half ramp in bioprocess assumed in this guide is about a $250 million year-over-year second half increase. So that's on a, call it a $6.5 billion business. So yes, there is a step up. But I think it's relatively modest on a business with $6 billion to expect that we think we could do a couple hundred million dollars better year-over-year in the second half as we move past the destocking. So hopefully that helps frame the guide a little.

Dan Brennan: Great. Thank you, guys.

Operator: Our next question will come from Vijay Kumar with Evercore ISI. Please go ahead.

Rainer Blair: Good morning, Vijay.

Vijay Kumar: Good morning, Rainer. And thanks for taking my question. So I guess I'll start off with those last comments from Matt. The Q1 guidance here, Rainer, on biotech and bioprocess being down in low 20s, I guess we did see sequential order improvements in Q4 for bioprocess. What is driving, and comps to get easier for you for Q4 to Q1 on biotech comps to get easier. So what is driving the minus 20% maybe thought process around the Q1 guidance assumptions? And also have you - I know there was a no-fee cancellation policy. Has that stopped for Danaher?

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 (NYSE: JPM ). 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.

Vijay Kumar: Understood. And I guess my follow-up here, Rainer, is when you look at customer activity levels or consumption, if you will, what's been the underlying activity at customer levels, when we think about drug volumes being up high singles in that space, is that still intact? And sort of, I guess, one on diagnostics, if you will, last year you guys did base diagnostics up double-digits. And I think you mentioned mid-singles for this year. So is that just a comp issue? Why diagnostics would slow down?

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.

Vijay Kumar: Thank you. And sorry, on diagnostics, Rainer?

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.

Vijay Kumar: Thanks, guys.

Rainer Blair: All of diagnostics, yes.

Vijay Kumar: Fantastic. Thank you.

Rainer Blair: Thanks, Vijay.

Operator: Our next question comes from Scott Davis with Melius Research. Please go ahead.

Rainer Blair: Good morning, Scott.

Scott Davis: Hi good morning, guys. Good morning, Rainer, Matt and John. Guys, can you help us, when volumes are kind of still moving negative in the first half of the year, it's hard to get your arms around kind of what you've done to the cost structure with the 50 basis point guide up. Is there anything we can look at, any KPIs you can share around, like, headcount reductions or rooftops or anything that you guys have kind of tangibly done internally on costs that, you can share that helps us understand, perhaps what that impact on margins will be and not just '24, but going forward? Thanks.

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.

Scott Davis: Got it. I would imagine so. Guys, can you help us understand China? I understand that, I guess consistent with last quarter and the guide and such, still pretty conservative. How do you kind of separate the cyclical versus kind of, what I'll call the secular, which is perhaps maybe government policy and other impacts are out there? I haven't been to China in a while, so perhaps maybe you guys can help us understand the puts and takes there, and is that market still attractive long-term, or has there been some sort of change at the margin there that perhaps makes it less interesting? I'll just kind of open it up to that. It's a lot of white space, if you will? Thanks.

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.

Scott Davis: Very helpful. Best of luck in 2024, guys. Thank you.

Rainer Blair: Thanks, Scott.

Operator: Our next question comes from Michael Ryskin with Bank of America (NYSE: BAC ). Please go ahead.

Rainer Blair: Good morning, Michael.

Michael Ryskin: Great. Hi, Rainer. Hi Matt. I want to follow-up on a couple of your comments from earlier in the Q&A just on bioprocessing to make sure I got it right. I mean first, I think you called out that, you don't expect a book-to-bill above one at any point during the year. So, I mean, that means you'll be continuing to deplete the backlog all year, but you already cited that the backlog, is sort of at a normal level with 1.5 quarters. So, I'm just wondering, how low is that going to get over the course of the year then if your book-to-bill doesn't break one? And then sort of related to that, if you've only gotten one to two quarters of backlog and yet you're calling for this gradual improvement as the year goes on, high single-digit growth rate, just sort of like what underpins that improvement from what you do see in 1Q, 2Q to start the year?

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?

Michael Ryskin: Yes, just visibility, not improvement?

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.

Michael Ryskin: Okay. All right. I thought the $250 million was second half-to-second half, not first half to second half. But I can follow-up on that?

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

Michael Ryskin: Okay. All right. We'll follow-up offline. Just a follow-up question. I want to ask a little bit on the Life Sciences segment and maybe put another way. I want to think about from a customer perspective, can you talk about pharma and biotech outside of bioprocessing, putting bioprocessing aside? For the rest of pharma and biotech, it seems like your outlook is still somewhat cautious. You're talking about low levels of demand. I'm just curious, any early signs? I know we're still in January, still early in the year, but just sort of how those companies are thinking about budgets for the year, how the Life Science segment and pharma and biotech specifically recovers post-2023? Thanks.

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.

Michael Ryskin: Thanks.

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

Rainer Blair: Good morning, Rachel.

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?

Matt McGrew: Yes, maybe I can start, and Rainer can probably - he had more of the customer conversations than I did, if we're being honest. So yes, I mean, I think when we think about the guide and you think about green shoots, I think maybe the way I would characterize it, is we - you know, six months ago, there were no anecdotes. There were no customers coming and saying, I needed something quickly. There were no pull-forwards from out-quarters into this quarter. I think, we have started to see a little bit more of that here anecdotally. I don't think it is widespread enough to be able to say, we're going to be beyond this in the next two, three months, which is why we sort of have our - the first half tagged where we do. But combined with the - our tracking of the inventory, so we do know where it is at. We've got a much better handle on that. Combined with sort of some of these anecdotes and frankly, a little bit better sort of funnels that we are seeing, we do feel like we've got a little bit better visibility as we head into the year, which gives us the confidence, as we talked about earlier, to think that the de-stocking is going to be largely behind us as we get through the first half. And that's sort of how we modeled into the - into the book-to-bill slowly kind of getting up. But not wanting to get, real aggressive and call a big inflection anywhere. So that's sort of how we - what we've seen here over the course of the last probably three, four months. So anecdotally, a little bit better situation out there. Are hearing some good things that you want to call it a green shoot, I suppose you could, but I'd probably call it, a good anecdote that is now starting to see more of those and sort of less of the negative ones, if you will. And maybe, Rainer, you want to talk about the customer discussions at JPM?

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.

Rachel Vatnsdal: Great. And then my follow-up, I wanted to just press a little bit more on this pace of recovery within bioprocessing. So, one of your peers has slowly been taking up their book-to-bill sequentially over the last few quarters. They just recently crossed that 1.0 level. That said, though, Danaher is really one of the few companies, or only that has been actively working with customers to manage their inventory levels. So while I appreciate the guidance, isn't modeling a massive inflection at some point this year in bioprocessing, how should we think about that impact in managing your customers' inventory levels on what that does to the pace of recovery? And is there some reason why we shouldn't see more of a V-paced recovery - V-shaped recovery excuse me for Danaher? Thank you.

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.

Rachel Vatnsdal: Great. Thank you.

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

Rainer Blair: Good morning.

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?

Rainer Blair: We think, our life science instrumentation business will, for the year, be down low single-digits. And that's based really on a softer first half of the year and then slow, but persistent improvement here in the second half of the year. What are some of the drivers of that? Well, first of all, here in the first half, we are looking at some pretty significant comps. You will recall the China loan program in particular in the first half of last year, put us into mid to high-teens growth. And of course, at the current activity levels, that will result in a softer first half here. We also talked about the fact that pharma, biopharma, are constraining their investment a bit more along the lines of just recently having changed out, their installed base, taking advantage of additional dollars available during the pandemic and normalizing here as we get through the first half of the year. If we think geographically, China remains weak and we don't expect that to improve here. If anything, that will be a second half of the year dynamic. So life science is starting to stabilize really at the activity levels of the second half of last year. We expect that to continue through the first and then see gradual improvement here in the second half of the year, also from a comp perspective.

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.

Rainer Blair: So, first of all, Abcam, we couldn't be more pleased than having closed that early here in December. They had a good finish to the year and we are working with the team and we're up and running. And of course, you can imagine the DBS implementation is proceeding, in a focused way where the team is really pulling. So Abcam is on the way. Then as it relates to capital deployment, you heard my comments earlier around our balance sheet optionality, which is strong, we believe, differentiated. And post the Veralto spin, we'll continue, as we always have, to work on deploying that capital to strengthen our portfolio and continue to be active as always.

Puneet Souda: Great. Thank you.

Operator: Thank you. This does conclude today's question-and-answer session. I will now turn the call back to John Bedford for any additional or closing remarks.

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

Operator: This does conclude today's call. We thank you for your participation. You may disconnect at any time.

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