Thermo Fisher Scientific Inc (TMO) — Q2 2023 Earnings Call Transcript

Good morning, and thank you for joining us. On the call with me today is Marc Casper, our Chairman, President and Chief Executive Officer, and Stephen Williamson, Senior Vice President and Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investor section of our website thermofisher.com under the heading News & Events until August 11th, 2023. A copy of the press release of our second quarter 2023 earnings is available in the investor section of our website under the heading Financials. So before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10-K and subsequent quarterly report on Form 10-Q, which is on file with the SEC and available in the Investor section of our website under the heading Financials, SEC Filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also during this call we will be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our second quarter 2023 earnings and also in the Investor section of our website under the heading Financials. So with that, I'll now turn the call over to Marc.

Thanks, Raf. Good morning, everyone, and thanks for joining us today for our second quarter call. Let me recap our financial performance for the quarter, then I'll provide additional context on what we're seeing playing out in the macro economy and the implications for our outlook. In the second quarter, our revenue was $10.69 billion. Our adjusted operating income was $2.37 billion, and we delivered adjusted EPS of $5.15 per share. As you saw in our press release, the macroeconomic environment became more challenging in the quarter. Economic activity in China slowed and across the economy more broadly, businesses became more cautious in their spending. This impacted our Q2 results and informed a more moderated view for the full-year. We're taking appropriate actions to successfully navigate these conditions. As a reminder, when we set out our guidance at the beginning of the year, we assumed core market growth would be in the normal range of 4% to 6% for 2023. Given the more challenging macroeconomic environment at this point, we think it is best to assume that these conditions will persist for the remainder of the year, and our current assumption is that core market growth will be in the 0% to 2% range this year. We're increasing our commercial intensity to help our customers through this environment and capture even more opportunities. We're also leveraging the PPI Business System to appropriately manage our costs. Given these changes, we're revising our revenue and adjusted EPS guidance for the full-year. I'll cover some of the key points around the guidance, and Stephen will outline our underlying assumptions later in the call. For 2023, we now expect revenue to be in the range of $43.4 billion to $44.0 billion and adjusted EPS to be in the range of $22.28 to $22.72. As you know, during periods of change, we have a very clear set of guiding principles on how we manage the company. These principles have three elements. First, everything we do starts with our customers and ensuring that we're enabling their success. Second, we inspire our colleagues to bring their best every day to fulfill our mission. And third, we hold ourselves to an incredibly high standard to deliver differentiated short-term performance all while capitalizing on dynamic times to enhance our long-term competitive position, creating an even brighter future for our company. To enable the differentiated short and long-term performance in this environment, we're leveraging our PPI Business System to deliver $450 million of additional cost actions in 2023. That's in addition to what was embedded in our previous guidance. We're ramping up our commercial intensity to drive our share gain momentum, and we continue to invest in our capabilities to be an even stronger partner for our customers. We're uniquely positioned to help them navigate their own challenges in this environment. When I think about our proven ability to navigate market dynamics, combined with the long-term market growth drivers for the Life Sciences industry, I'm incredibly confident for the future. As I look ahead, there is a clear need for new medicines, and the scientific advances in Life Sciences are leading to exciting and innovative therapies, which will make a profound positive impact on well-being and be one of the drivers creating the very strong and durable tailwind in our industry. Let me now turn to our quarterly performance and provide you with an update on our end markets. Starting with pharma and biotech, growth was flat for the second quarter. The COVID-19 vaccine and therapy revenue run-off performed as expected during the quarter, resulting in a 5-point headwind within this market. From a segment perspective, that revenue run-off is essentially all in our Life Science Solutions segment, largely in our biosciences business related to nucleotides and enzymes and to a lesser extent in bioproduction. The strongest growth in pharma and biotech end market this quarter was in our pharma services and clinical research businesses. In academic and government, we grew in the high-single-digits in the quarter. We delivered very strong growth in our electron microscopy and chromatography and mass spectrometry businesses, as well as our research and safety market channel. In industrial and applied, we grew in the low-single-digits for the quarter. The strongest growth in this end market was in our analytical instruments businesses. And finally, in diagnostics and healthcare, revenue in Q2 was approximately 20% lower than the prior year quarter. The team delivered very good core business growth during the quarter driven by our microbiology, immunodiagnostics and transplant diagnostic businesses. Let me now turn to our growth strategy. We really made terrific progress in Q2 in this regard. Our growth strategy consists of three pillars: high impact innovation, our trusted partner status with customers, and our unparalleled commercial engine. Starting with the first pillar innovation. We had a really spectacular quarter. We launched high impact new products that are further strengthening our industry leadership by enabling our customers to break new ground in their important work. We had a great showing at the American Society for mass spectrometry conference, where we featured the groundbreaking Thermo Scientific Orbitrap Astral mass spectrometer, which is the most significant advancement in mass spectrometry in 15 years. The Orbitrap Astral combines speed, high sensitivity, and deep proteome coverage to enable researchers to uncover proteins that previously evaded detection. This will enable breakthroughs that could lead to the development of new targeted therapies for a range of diseases, from cardiovascular disease to cancer. We've already started to deliver the Astral to our customers and we're very pleased with the strong bookings performance to date. In our electron microscopy business, we launched the Thermo Scientific Metrios 6, scanning transmission electron microscope. The latest innovation in our leading line of instruments designed for the semiconductor industry. This fully automated system enables our customers to rapidly obtain large volume, high-quality data from increasingly complex semiconductors to accelerate development. In our biosciences business, we introduced the Gibco OncoPro Tumoroid Culture Medium Kit. It accelerates the development of novel cancer therapies. These kits support the culture of tumor cells derived from individual patients providing a better disease model for research and drug development that could potentially improve clinical trial success and help bring drug candidates to market faster and more cost-effectively. And in specialty diagnostics, we launched the first and only immunoassay to help doctors stratify a mother's risk of developing preeclampsia, a serious complication that can develop in pregnancy in the postpartum period, endangering both mother and baby. We received breakthrough designation and FDA clearance for assessing a patient's risk of developing severe preeclampsia enabling doctors to better manage care. These are just a few examples of the exciting innovation going on across our company, which will make a significant difference for our customers and drive future growth. The second pillar of our growth strategy is the trusted partner status that we have built with our customers. This unique relationship gives us early insights into our customers' unmet needs and enables us to bring our industry-leading products, services, and expertise together in ways that no one else can. We continue to strengthen our capabilities to be an even stronger partner for our customers. For example, in our Pharma Services business, we added an early development hub at our site in Bourgoin, France enabling early development in addition to commercial manufacturing. The third pillar of our growth strategy is our unparalleled commercial engine. We have a meaningful commercial advantage, due to the deep engagement that we're able to have with our customers across the globe. A great example of our progress here is further strengthening our commercial capabilities with the opening of a state-of-the-art customer center of excellence in Milan. It features a customer application development lab to showcase our industry-leading products, services, and expertise. We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to shareholders. During the quarter, we completed a small bolt-on acquisition of MarqMetrix, a developer of Raman-based spectroscopy solutions for in-line process analytics. This technology expands our capabilities to help our customers make precise and accurate measurements throughout their manufacturing processes in a wide range of applications including biopharma. This business is a nice complement to our analytical instruments business. Let me give you a quick update on the Binding Site acquisitions, which we closed at the beginning of the year. Our protein diagnostics business has delivered outstanding growth and the integration is going incredibly well. Our team is progressing the innovation pipeline to advance the diagnosis and management of patients both multiple myeloma and immune disorders. And just after the close of the quarter, we announced an agreement to acquire CorEvitas, a leading provider of regulatory-grade real-world evidence for approved medical treatments and therapies. Real-world evidence is the collection and use of data from patient health outcomes gathered through routine clinical care. This is a high-growth market segment as pharmaceutical and biotechnology customers, as well as regulating bodies are increasingly looking to monitor and evaluate the safety of approved medicines and examine their effectiveness and value in a post-approval setting. CorEvitas will further strengthen our capabilities to serve our pharma and biotech customers. It's an excellent strategic fit for our company and highly complementary to our clinical research business. There is strong market demand for real-world evidence, which improves decision making and reduces the time and cost associated with drug development. The acquisition is expected to be completed by the end of this year, and I'm very excited about what this will mean for our customers and the patients they serve. Financially, we expect the business to deliver low-double-digit growth and be accretive to adjusted EPS by $0.03 in 2024. So overall, strong progress in the second quarter for capital deployment. During the quarter, we advanced our environmental, social and governance priorities including launching a partnership with Pfizer to increase local access to next-generation sequencing-based testing for lung and breast cancer patients in more than 30 countries across Latin America, Africa, the Middle East, and Asia. These are areas where advanced genomic testing has previously been limited or unavailable. Access to local NGS testing can help to provide faster analysis of associated genes, empowering healthcare providers to select the right therapy for that individual patient. Through the partnership, we will work with local labs using our NGS technology to ensure they meet industry standards for NGS testing for breast and lung cancer. Pfizer will work to enable affordable patient access and to raise healthcare provider awareness regarding the benefits of advanced NGS testing. Together, we'll continue to evaluate additional geographic opportunities and expand testing for other types of cancer. I'm very proud of the way we're making a difference, not only by enabling our customer success, but also by creating a better work environment for our colleagues and then making a positive impact for society. So to summarize our key takeaways from the second quarter, while the macroeconomic environment has become more challenging, our team continues to leverage our PPI Business System to deliver strong productivity. We're focused on driving market share gains, and at the same time, we're advancing our proven growth strategy to be an even stronger partner for our customers. We effectively deployed capital to create significant value for our customers and our shareholders. And the attractive long-term outlook for the Life Sciences industry and Thermo Fisher is unchanged. We're incredibly well positioned to help our customers navigate the current environment, capture incremental opportunities, and exit this period as an even stronger industry leader with a very bright future. With that, I'll now hand the call over to our CFO, Stephen Williamson.

Thanks, Marc, and good morning, everyone. As you saw in our press release and as Marc just outlined, the macroeconomic environment became more challenging in the second quarter. We're leveraging our PPI Business System to effectively manage these conditions. In the quarter, we delivered $10.7 billion of revenue, which included just over 2% core organic revenue growth and we delivered $5.15 of adjusted EPS. Revenue in the quarter was $300 million lower than we'd incorporated in our previous 2023 guidance. $280 million of this was related to the core business and $20 million related to testing. Approximately one-third of the change in core revenue was driven by lower economic activity in China and the remainder was driven by more cautious spending across our customer base globally, particularly in biotech. Adjusted EPS in the quarter was $0.28 lower than when incorporated in our previous 2023 guidance, $0.07 of this was driven by FX and $0.21 by the lower revenue. Given the lower core revenue both in the quarter and assumed in our full-year outlook, we're using the PPI Business System to aggressively manage our cost base. In Q2, this enabled us to offset $75 million of the profit impact of the lower-than-expected revenue; this highlights that we're actively managing the business. Let me now provide you with some more details on our performance. Beginning with our earnings results, as I mentioned, we delivered $5.15 of adjusted EPS in Q2; GAAP EPS in the quarter was $3.51. On the top line, reported revenue was 3 percentage points lower year-over-year. The components of our Q2 reported revenue included 3% lower organic revenue, a 1% contribution from acquisitions, and a slight headwind from foreign exchange. As I mentioned earlier, core organic revenue growth in the quarter was just over 2 percentage points. For context, core organic revenue growth includes the runoff in our COVID-19 vaccines and therapies revenue. Without that runoff impact, growth would have been 5% in the quarter. Turning to our organic revenue performance by geography. The organic growth rates by region are skewed by the pandemic-related revenue in the current and prior year. In Q2, North America declined mid-single-digits. Europe grew in the low-single-digits and Asia Pacific declined in the mid-single-digits with China declining in the low-teens. With respect to our operational performance, adjusted operating income in the quarter decreased 9% and adjusted operating margin was 22.2%, a 150 basis points lower than Q2 last year. In the quarter, we delivered very strong productivity and achieved strong price realization, which was more than offset by lower pandemic-related revenue, continued strategic investments, and FX. Given the change in the macro environment, we're using the PPI Business System to drive significantly more productivity this year than initially planned. We've initiated $450 million of additional cost actions. And as I mentioned earlier, we already began to see this benefit in Q2. Total company adjusted gross margin in the quarter came in at 41%, 220 basis points lower than Q2 last year. For the quarter, the change in gross margin was due to the same drivers as those for adjusted operating margin. Moving on to the details of the P&L. Adjusted SG&A in the quarter was 15.6% of revenue, an improvement of 50 basis points over Q2 last year. Total R&D expense was $345 million in Q2, reflecting our ongoing investments in high-impact innovation. R&D as a percent of our manufacturing revenue was 7.1% in the quarter. Looking at our results below the line for the quarter, our net interest was $148 million, which is $36 million higher than Q2 last year, mainly due to capital deployment. Our adjusted tax rate in the quarter was 10%, this was 300 basis points lower than Q2 last year, reflecting the results of our tax planning activities. Average diluted shares were $388 million in Q2, approximately $6 million lower year-over-year, driven by share repurchases net of option dilution. Turning to cash flow and the balance sheet. Year-to-date cash flow from operations was $2.3 billion. Year-to-date free cash flow was $1.5 billion after investing $730 million of net capital expenditures. During the quarter, we repaid $1 billion of senior notes and returned $135 million of capital through dividends. Shortly after the quarter end, we announced the definitive agreement to acquire CorEvitas for approximately $900 million. We ended the quarter with $3.1 billion in cash and $34 billion of total debt. Our leverage ratio at the end of the quarter was 3.2 times gross debt to adjusted EBITDA and 2.9 times on a net debt basis. Including my comments on our total company performance, adjusted ROIC was 11.9%, reflecting the strong returns on investment that we're generating across the company. Now I will provide some color on the performance of our four business segments. Let me start with a couple of framing comments. The scale and margin profile of our pandemic-related revenue varies by segment and that revenue was higher in the prior year. So that does skew some of the reported segment growth rates and margins. We continue to execute strong pricing realization across all segments to address higher inflation. Moving on to the segment details, starting with Life Science solutions, Q2 reported revenue in this segment declined 25%, and organic revenue was also 25% lower than the prior year quarter. This was driven by the moderation in pandemic-related revenue in the segment versus the year-ago quarter and to a lesser extent, the macro factors that I described earlier. Q2 adjusted operating income in Life Science solutions decreased 38% and adjusted operating margin was 33.2%, down 710 basis points versus the prior year quarter. During the quarter, we delivered very strong productivity, which was more than offset by unfavorable volume mix. In the Analytical Instruments segment, reported revenue increased 9% in Q2, and organic growth was 10%. The strong growth in the segment this quarter was driven by the electron microscopy business. Q2 adjusted operating income in this segment increased 26%, and adjusted operating margin was 24.7%, up 130 basis points year-over-year. In the quarter, we delivered very strong productivity and had strong volume and mix that was partially offset by strategic investments and FX. Turning to Specialty Diagnostics. In Q2, revenue increased 1% and organic revenue was 5% lower than the prior year quarter. In Q2, we continued to see strong underlying growth in the Core led by our microbiology, immunodiagnostics and transplant diagnostics businesses. This is offset by lower pandemic-related revenue versus the year-ago quarter. Q2 adjusted operating income increased 22% in the quarter and adjusted operating margin was 26.7%, which is a 460 basis points higher than Q2 2022. During the quarter, we delivered very strong productivity and favorable business mix, which was partially offset by the impact of lower COVID-19 testing volume and strategic investments. And finally, in the laboratory products and biopharma services segment, Q2 reported revenue increased 5%, and organic growth was also 5%. During Q2, organic revenue growth in this segment was led by the Pharma Services and Clinical Research Businesses. Q2 adjusted operating income in the segment increased 19% and adjusted operating margin was 14.1% which is 160 basis points higher than Q2 2022. We delivered very strong productivity in the quarter, partially offset by FX and strategic investments. Let me now turn to guidance. As Marc outlined, we're revising our full-year 2023 guidance to reflect both the more challenging macroeconomic environment and the offsetting actions that we're taking to navigate these conditions. Revenue for 2023 is now expected to be in the range of $43.4 billion to $44 billion with core organic revenue growth in the range of 2% to 4%. Adjusted EPS is now expected to be in the range of $22.28 and $22.72. For modeling purposes, our current estimate of where we're likely to end up for the year within that range is $43.5 billion of revenue rounding up to 3% core organic revenue growth and adjusted EPS of $22.36. Let me provide you some additional details behind the changing guidance. Starting with revenue. Our revised guidance reflects the change in the assumption for core organic revenue growth from 7% to a range of 2% to 4%. And it also assumes $100 million lower testing revenue. Our core organic revenue change is driven by two factors: a reduction in the assumed level of economic activity in China and an assumption that the more cautious spending that we saw across our customer base in Q2 will continue throughout the remainder of the year. In relation to China, at the beginning of the year, we saw positive momentum in the Chinese economy. We had previously assumed that this momentum would continue through the rest of the year. However, as the second quarter progressed, economic activity in China significantly slowed, resulting in less customer activity in the quarter. We think it is appropriate to assume this condition remains in place for the remainder of the year. With regards to customer spending patterns more broadly, in Q2, customers in our end markets began the year with somewhat cautious spending. This is something that was not confined to our end markets; companies across most business segments were cautious with their spending given the uncertain macro conditions. This dynamic became more challenging in Q2. We previously assumed that this would lessen an impact as the year progressed, and we now think it's appropriate to assume that the cautious spending will continue through the remainder of the year. With strong commercial execution from our team, we expect to successfully navigate these macro dynamics and deliver 2% to 4% core organic revenue growth for the year. And for context, as Marc mentioned, with the changes in the macro, we're now assuming core market growth for our industry to be in the range of 0% to 2% for 2023, a reduction of approximately 4 percentage points versus the 4% to 6% assumed previously for market growth. When I think about the range of outcomes for the full-year, core organic revenue growth, the largest swing factor is the extent of the budget flush at the end of the year. Should that be weaker than normal, then core organic revenue growth would round down to 2%, and if stronger, it could round up to 4% for the year. And if China gets traction stimulating the economy, then that could also be an upside late in the year. So moving on now to profitability. As I mentioned earlier, we're using the PPI Business System to aggressively manage our cost base. We put in place $450 million of additional cost actions to limit the impact of the expected lower revenue on the P&L. This demonstrates our active management of the business. As a result, the high profitability pull-through on the lower revenue is expected to be reduced to 35% in terms of how it flows through to the bottom line. Factoring in this and the updated view of FX, we now expect our adjusted operating income margin to be in the range 23.2% to 23.4% for the year. Let me provide some more additional details on the updated 2023 guidance. We're assuming that we'll deliver $300 million of testing revenue in 2023. This is $100 million lower than our prior guidance and through the half-year point we've delivered $225 million of testing revenue. Within the call, we continue to expect $500 million of vaccines and therapies revenue in 2023. This is $1.2 billion less than the prior year, a 3 percentage point impact on core organic revenue growth. Through the half-year point, we delivered $365 million of vaccines and therapies related revenue. Moving on to FX, we continue to assume that FX will be a year-over-year tailwind to revenue of approximately $100 million. And then in terms of adjusted EPS, we now expect FX to be a headwind of $0.11, which is $0.05 higher than our previous guidance. The Binding Site acquisition is performing well and we now assume it will contribute approximately $260 million to our reported revenue growth for the year and $0.09 to adjusted EPS. Below the line, we continue to expect net interest expense in 2023 to be approximately $480 million. The adjusted tax rate assumption for the year has improved to 10% versus our prior guidance of 10.8%, driven by our tax planning initiatives. We're now expecting net capital expenditures will be approximately $1.7 billion, and we continue to expect the free cash flow will be $6.9 billion for the year. In terms of capital deployment, our guidance includes $3 billion of share buybacks, which were already completed in January. We continue to assume that full-year average diluted share count will be approximately 388 million shares and that we'll return approximately $540 million of capital to shareholders this year through dividends, a 17% increase over 2022. And as is our normal convention, our guidance does not assume any future acquisitions or divestitures. We've not included any operational benefit in 2023 for the acquisition of CorEvitas. When we get more clarity on the actual close date for that acquisition, we'll provide an estimate of any potential impact in 2023. To conclude, we recognize that the changing guidance is significant. We think it's appropriate given the change in the macro environment. And as we said at our Investor Day, should market growth be lower than normal? We will leverage the PPI Business System and step up productivity and that's what we've done. We're well positioned to navigate the near-term environment. And while the near-term environment may be more challenging, the long-term fundamentals supporting the growth of our end markets remains unchanged, as does the strength of our position to serve them. Now let me turn the call back over to Raf.

Thank you, Stephen. Operator, we’re ready for the Q&A portion of the call.

Hi, good morning and thanks for taking my question. Maybe just starting on the guidance, just given the significant change relative to what you talked about at the Investor Day a few months ago. Could you maybe help us a little bit with where some of the biggest deltas in terms of your expectations relative to that time of the Investor Day and today, in terms of either end market or revenue segment, and specifically within China, were there certain categories or revenue segments or end markets where the weakness is more pronounced? I just kind of wanted to get a little more color on the delta and expectations from the Investor Day to today?

Yes, Matt, thank you for your question. To address the change in our guidance, let's start from the beginning of the year, as it provides a clear perspective. At the Investor Day, we discussed market growth and conditions. We observed a significant slowdown in China during Q2, which was unexpected given the recovery in Q1 following the easing of zero COVID policies and government stimulus. This decline became pronounced in Q2. Our expectation for the full year is that this trend will continue, as we have noticed cautious spending from customers across all businesses, particularly in life science tools and diagnostics. This caution became more evident in Q2, especially within biotech. In assessing the change in our growth outlook, about one point can be attributed to China, with an additional three points due to customer caution. Specifically, bioproduction accounts for approximately one point of customer caution, while the remaining two-thirds affect other areas of the business. Compared to our Analyst Day in May, we witnessed consistent softness in China throughout the quarter, with the last month being particularly significant for our overall performance. While we initially saw some caution from customers at the beginning of Q2, June did not show any signs of recovery, remaining flat throughout the quarter. This led us to adjust our outlook accordingly.

Great. That's very helpful color. Thanks, Marc. And then just for my follow-up, just on the AI segment and instruments, could you maybe just given the visibility you might have into sort of the back half this year, talk about sort of what the backlog looks like order growth and how you're feeling about sort of the moderation in instrument growth in the back half of this year that you talked about earlier this year?

Yes, Matt. Thanks for the question. So when I think about instruments, we obviously entered the year with a strong backlog, and we entered the quarter with a strong backlog. And the 10% growth is very strong performance. Orders were definitely softer than we expected in Q2 primarily driven by China, which is a large component of the business there. And therefore, I would say we would expect that the growth rate would become more muted as the year unfolds in the analytical instruments business as we continue to work down the backlog. Thank you, Matt.

Good morning, everyone. I appreciate the questions. Stephen, regarding your comments on the PPI, could you elaborate on that a bit? Should we interpret this as a call to tighten operations in areas where you've optimized before, or is it more about utilizing strategies that haven't been fully explored yet? Additionally, the EPS guidance has only increased by about 5% at the midpoint. How should we consider mix as a contributing factor, and how much potential do you believe remains given the uncertainties you're anticipating in the latter half of the year?

Yes. Dan, I'll explain the PPI aspect first and then move on to the EPS. Regarding PPI, it's fundamental to how we operate the company. When we notice changes in economic conditions and customer activity levels, we prioritize our efforts and sometimes deprioritize less critical areas, deferring certain projects while ensuring that we invest in the right initiatives without cutting spending where it truly matters. This is all about focusing our time and efforts effectively. Part of this involves reducing discretionary spending and scaling back activities in specific areas, leveraging PPI to implement these changes. We utilize the company's scale and adjust sourcing, especially when economic conditions are not robust, which helps us gain some benefits. As we anticipate slightly lower volumes, we are optimizing our manufacturing processes across our businesses and appropriately reducing headcount where sensible. All these actions are expected to yield approximately $450 million in benefits this year, and most of these measures have already been undertaken given the current environment. Regarding the second half of the year, could you clarify if your question was about the phasing of EPS or the range of EPS?

I think it was a combination of factors. Organic growth is shifting from high-singles to possibly low-singles, and the EPS came in at a fairly modest level. I was curious how much flexibility you believe you have, considering your comments on PPI. I assume you're comfortable with it, but how comfortable are you when looking at the possible outcomes for the second half of the year?

Yes. So we provided a range of outcomes and what you thought about what the market conditions could be and when we think about what the pull-through would be on the revenue and that range of outcomes, plus the activities we're working on the cost side. I think that's an appropriate range for EPS. And then the phasing first-half, second-half, clearly, a higher adjusted operating income margin in the second half of the year and that's really largely driven by the impact of the cost actions. So of the $450 million, $75 million impacted the first half and you'll have $375 million of benefit in the second half. And then revenue is a little bit more weighted and look at the year as a whole to the second half versus the first half. That's the other piece that drives the profitability in EPS difference.

Hi, everyone. Thank you for my question. Marc, could you elaborate on the guidance change and how things progressed during the quarter? I believe China was down in the low-teens, and overall organic growth was around 2%. However, conditions worsened as the quarter went on. The implied guidance for the second half appears to be in the low singles, around 2% at the midpoint. So, we're curious if the exit rate was approximately 2%, or does the guidance for the second half anticipate some improvement from the Q2 exit rate?

Yes. So in terms of the quarter's progression, June did not reflect the typical end-of-quarter activity, resembling April and May instead. This lack of a significant increase in activity during the last month is quite unusual based on my experience. Our expectation for the year is that the market conditions observed in Q2 will persist for the remainder of the year. There are various comparisons across different business segments relative to the previous year. We believe that a market growth of 0% to 2% and a core growth of 2% to 4% for the full year would be a reasonable target. To provide more clarity, our perspective on market developments is shaped by analyzing our competitors and peers who reported in Q1, along with our internal market data and discussions with customers. This has led us to the 0% to 2% estimate. Our goal is to gain market share. If we exceed this assumption by 2 percentage points in growth, we will hold ourselves accountable to that standard, which means if our market outlook is overly conservative, we will raise our performance expectations accordingly. It's essential to note that we did not comment on market share gains in Q2, as delivering 2% growth does not warrant self-congratulation. However, early reports from a few companies suggest that our performance is strong and that we are growing at a faster rate. While many companies have yet to report, it appears that we had a solid quarter relative to others. This context should help clarify our current standing, but we will continue to monitor the situation to ensure we understand our performance. By the end of 2023, we aim to reflect on our effective navigation of the market challenges, showcase differentiated performance, and position the company for long-term success.

Great. Thanks, guys. Marc, just hoping to get more color on China. Could you just walk us through just more color across your major customer segments, kind of unpack how the quarter played out from that perspective? And then specifically, I would also love to hear color on bioproduction in China.

Yes. Regarding China, we experienced an organic decline of just over 10%. The core business remained relatively flat, and I want to provide some context. The COVID testing situation was different from what our team and we anticipated. It's not typical for us to say that. Our leadership team from China visited the U.S. recently, and we had the chance to discuss their observations. I will also be heading to China in a few weeks for a week-long visit, as it's a crucial market. It appears to be tied to broader economic factors. We observed a slowdown across all our different businesses, not restricted to just one area. Bioproduction in China was particularly weak, consistent with comments from others in the industry. The downturn affected our entire portfolio, seemingly linked to reduced economic activity. We often question if there's something we're doing wrong or if we're losing market share, reflecting our commitment to high standards and accountability. From what we are seeing, it feels like customers have become very cautious in China, leading to a slowdown that impacted our entire portfolio. While I haven't taken time for leisure activities yet, I look forward to catching some football and seeing if the Jets can improve.

Fantastic. Thank you, guys.

Thank you. Good morning. I wanted to ask about M&A. These dynamic times, historically, have a way of creating new opportunities. There's been a few larger assets talked about in the press. Just would love to get your thoughts. Do you expect to be active if something materialized?

Yes. Jack, thanks for the question. So in terms of capital deployment and M&A, we've been active on return of capital, both through the increase in the dividend and the share buybacks earlier in the year. We've also been active on M&A, with closing the Binding Site to start the year. We're excited about CorEvitas. And we have a lot of firepower, and we're very active, right? I do agree with your sentiment that, in these periods, there are opportunities. So we're actively looking at a number of things. And we're only going to do transactions that fit our criteria, which is, ultimately, going to strengthen our offering from a customer perspective. It's going to clearly add shareholder value in terms of the returns that we generate from the transaction. So you'll see us be active. And whether that happens in terms of the second half of the year or into '24, we're certainly busy is the way I would think about it.

Great. And I have one follow-up on Pharma Services. It sounds like that business grew faster than PPD this quarter. Can you talk about how the demand profile is holding up there? And I need to ask about the tornado that hit Rocky Mount. Does that have any material impact on the market as you see it?

Pharma Services has shown impressive growth, and I would describe our performance in that sector as strong. The team is effectively building a robust backlog for future opportunities. Regarding the tornado in North Carolina, fortunately, no one was injured according to our conversations with the customer, who is currently evaluating the market situation. We are prepared to assist our customers, as we always do, viewing this not as a business opportunity but as a chance to support our significant relationships. Our colleagues are ready to help in any way necessary as they navigate this natural disaster. Thank you, Jack, for your question, and thanks to everyone for their inquiries today. In conclusion, I appreciate your participation. We are well positioned to maintain and enhance our performance, and we will keep you informed about our progress. Thank you, everyone.