Danaher Q4 2023 Earnings Call Transcript

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Provided by Quartr
January 30, 2024

Key Takeaways

  • Portfolio transformation: Danaher completed the spin-off of Veralto and acquired Aldevron and Abcam, sharpening its focus on life sciences and diagnostics to drive faster growth, higher margins and stronger free cash flow.
  • Full-year 2023 results: sales were $23.9 billion, core revenue declined 10% (including ~9.5% COVID-19 headwind), adjusted operating margin was 28.7%, adjusted EPS was $7.58 and free cash flow reached $5.1 billion with a >120% conversion ratio for the 32nd consecutive year.
  • Bioprocessing segment saw a 22.5% core revenue decline in Q4, with ongoing inventory destocking expected to pressure results through H1 2024 before a projected return to high-single-digit growth in H2.
  • Diagnostics performance in Q4: core revenue fell 8.5% overall, but non-respiratory businesses grew mid-single digits and Cepheid’s respiratory tests generated $650 million—exceeding expectations—and management now anticipates ~$1.5 billion of annual respiratory revenue.
  • Outlook for 2024: Danaher forecasts core revenue down low single digits, with a high-single-digit decline in Q1, a return to growth in H2 and an approximate 50 basis-point improvement in full-year adjusted operating margin.
AI Generated. May Contain Errors.
Earnings Conference Call
Danaher Q4 2023
00:00 / 00:00

There are 10 speakers on the call.

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 4th Quarter 2023 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

Speaker 1

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 and Presentations and will remain archived until our next quarterly call. A replay This call will also be available until February 13, 2024.

Speaker 1

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 Q4 of 2023 and all references to period period increases or decreases in financial metrics are year over year. We may also describe certain products and devices, 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.

Speaker 1

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.

Speaker 2

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 4th 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.

Speaker 2

2023 was a transformational year for Danaher As we continue 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 Avcamp, 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.

Speaker 2

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 twenty twenty four. 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 $23,900,000,000 And core revenue declined 10%, including core revenue in our base business, which was down slightly and a COVID-nineteen revenue headwind of approximately 9.5%.

Speaker 2

Our adjusted operating margin was 28.7 percent and adjusted diluted net earnings per common share were $7.58 We also generated $5,100,000,000 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 continue to accelerate investments and innovation throughout the year, which enabled us to deliver several impactful new technologies to our customers. In biotechnology, Cytiva's new AcelRx 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's Polar Insight and Molecular Devices, CellXpress dotai are helping accelerate the drug discovery process and bring life changing therapies to market faster.

Speaker 2

And in diagnostics, new solutions such as Beckman Coulter's DXI 9 South 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 4th quarter results in more detail. Sales were $6,400,000,000 in the 4th quarter and core revenue declined 11.5%, including a 4.5% decline in our base business and the COVID-nineteen revenue headwind of approximately 7%. Geographically, core revenues in developed markets declined low double digits driven by lower respiratory and COVID-nineteen vaccine and therapeutic revenues coupled with ongoing investment normalization in pharma and biopharma end markets.

Speaker 2

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 4th quarter was 59%. Our adjusted operating margin of 28.7 percent was down 4 20 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 $1,200,000,000 of free cash flow in the quarter. Now let's take a closer look at our across the portfolio and give you some color on what we're seeing in our end markets today.

Speaker 2

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 4th quarter and was down approximately percent for the full year 2023. Revenue and order trends were largely consistent with what we saw in the 3rd 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.

Speaker 2

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 health and long term growth trajectory of the biologics market remains as strong as ever.

Speaker 2

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 in 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.

Speaker 2

This new technology simplifies the purification process in recombinant proteins, of which there are currently more than 1800 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 4th quarter largely consistent with 3rd. 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 Fans are present in the highly attractive proteomics market and it's furthering our strategy to help map complex diseases and accelerate the drug discovery process.

Speaker 2

We couldn't be more pleased to welcome this highly talented and incredibly innovative team to Danaher. Our genomics consumables based business was essentially flat in the quarter. Robust demand across plasmids, proteins and gene writing and editing solutions was offset by declines 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.

Speaker 2

This expansion of 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. Eckman 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 Q4 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.

Speaker 2

In molecular diagnostics at Cepheid, increased menu utilization by customers paired with recent new product innovation helped drive low teenscorerevenuegrowthinournonrespiratorybusiness, including high teens or better core revenue growth and group A strep and sexual health. In our respiratory business, Cepheid's revenue of approximately $650,000,000 in the quarter exceeded our expectation of $350,000,000 High prevalence of circulating respiratory viruses drove both higher volumes and a preference for our 4 in-one test for COVID-nineteen, flu A, flu B and RSV. Based on what we saw the last 2 years and discussions with customers and public health experts, we believe annual respiratory revenue in a typical respiratory season will be approximately $1,500,000,000 This increase from our initial assumption of $1,200,000,000 per year is driven by an expectation of modestly higher volumes and a greater mix of our 4 in-one tests. The durability and continued share gains at Cepheid are a testament to the significant value the GeneXpert provides customers At the point of care, close to patients where the most impactful diagnostic and treatment decisions are made. Cepheid's 4 in-one test has become the standard of care for clinicians given its ability to provide a fast, accurate lab quality diagnosis for 4 distinct respiratory illnesses with a single easy to use cartridge.

Speaker 2

Looking ahead With our differentiated positioning and respiratory testing, a leading installed base of more than 55,000 systems And 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 Q1 and the full year 2024. Beginning with the Q1 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 Q1, we expect core revenue to decline in the high single digit percent range. Additionally, we expect the 1st quarter adjusted operating margin of approximately 28%.

Speaker 2

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 twenty twenty four. 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 4th quarter results ahead of our expectations and what remains a dynamic environment. Despite the challenges we saw throughout 2023, We continued to strengthen our portfolio with M and 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.

Speaker 2

So 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 Envista and Veralta, we largely replaced their revenue contribution with higher growth, higher margin annuities with the acquisitions of Cytiva, Aldebron and Abcam. Additionally, Cepheid's respiratory franchise is now 6 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.

Speaker 2

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.

Speaker 1

Thanks, Reiner. That concludes our formal comments. Operator, we're now ready for questions.

Operator

Our first question comes from Dan Brennan with TD Cowen. Please go ahead.

Speaker 3

Great. Thank you. Guys, thanks for the questions here. Ryan, I mean 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.

Speaker 3

And then I was hoping as well, you can give us a snapshot maybe of how much inventory you think your customers have today And how much has that changed versus the peak? And kind of what is your guidance assume kind of when that inventory reaches a normal state?

Speaker 2

Thanks, Dan. Good morning. And why don't I start off with sort of an overview here of 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.

Speaker 2

Biotechnology will be down lowtomidsingledigits and that's different than bioprocessing. So keep in mind, I'm now 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 digit.

Speaker 2

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 I'm going to 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 twenty twenty three down mid to high teens coming off of a 4th quarter, which showed incrementally improved orders versus Q3. 2nd half, We expect to return to mid to high single digit growth and we believe by then that this destocking In North America and Western Europe, we'll have largely been completed. And of course, the comps ease there as well.

Speaker 2

So importantly, for bioprocessing, we think exit rate for the year will be high single digits or better for 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, 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.

Speaker 2

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 $1,900,000,000 in 2023, And we anticipate that that will be $1,600,000,000 in 2024. So Dan, that's how the year shapes up by segment.

Speaker 2

And of course, then, we can now perhaps talk a

Speaker 4

little bit more detail around bioprocessing. Well, 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 The Q1 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 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.

Speaker 4

And as far as the rest The world, I think, will 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 the channel. It's kind of hard to 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 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.

Speaker 3

Got it. Thanks guys. And then maybe a follow-up just on bioprocessing, such a huge focus. Just in terms of the guide that you've laid out, like What does that assume from kind of a book to bill or bookings trajectory as

Speaker 2

we work through the year? And just kind

Speaker 3

of related to that, several peers Have already pointed to book to bill is kind of above 1. 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 Plentable versus commercial or is it just the size of your book or just any color why you think some of the peers have seen the turn in their business faster than what

Speaker 5

you guys have seen?

Speaker 4

Thank you. 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 and 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 over the last couple of We've been in that kind of 0.8%, 0.85% range the last 4 or 5 quarters. And we are not calling for an flexion at any point in the year, but we are assuming some modest improvement as we move through the first half into the second half.

Speaker 4

As 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 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.

Speaker 4

So I think we're back to backlog levels that are relatively speaking pretty much in line with history. And then start with that backlog and add this book to bill assumption in there. We are assuming book to bills improved slightly, like I said, kind of from the 0.8, 0.85 into the 0.9 and that those will get a little bit better every quarter as we build through the year, but we are not assuming book to bill above 1 in any given quarter. 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 1st half will be down mid to high teens, but the second half we exit with high single digit or better without seeing an inflection.

Speaker 4

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 $250,000,000 year over year second half increase. So that's on a call it a $6,000,000,000 6,500,000,000 dollar business. So yes, there is a step up, but I think it's relatively modest on a business with $6,000,000,000 to expect that we think we could do a couple of $100,000,000 better year over year in the second half as we move past the destocking.

Speaker 4

So hopefully that helps frame the guide a little.

Speaker 5

Great. Thank you, guys.

Operator

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

Speaker 5

Good morning, Vijay. Good morning, Rainer, and thanks for taking my question. So I guess I'll start off with Last comment from Matt. The Q1 guidance here, Rainer, on Biotech and Bioprocess being down low 20s. I guess we did see sequential order improvements in Q4 for Bioprocess.

Speaker 5

What is driving and comps to get easier for you, Q4 to Q1 on Biotech, Comps do 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?

Speaker 4

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.

Speaker 4

And for the first half of twenty twenty three, we were only down kind of low single 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 Q1. 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 I think we talked about this in January. Our Q3 to Q4 sequential, That's pretty normal.

Speaker 4

That's a normal Q3 to Q4 step up. I think we attributed that to a normal seasonality when we were out at JP Morgan. 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 Q1 is usually 24% 25% of revenue for the year.

Speaker 4

So I mean, it's pretty normal for us to see it. I think we saw it even kind of a heyday of 2021 to 2022, we saw a 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.

Speaker 4

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 do to get to the second half of the year.

Speaker 5

Understood. And I guess my follow-up here, Rainer, is when you look at customer activity levels consumption, if you will, what's been the underlying activity at customer levels? When we think about drug volumes being up 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 Slow down.

Speaker 2

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 with 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.

Speaker 2

I mentioned to you during the prepared remarks that we've seen historic level of both approvals as well as number of projects in the biologic development pipeline. So we continue to be very confident in continued positive development there.

Speaker 5

Thank you. I'm sorry, on diagnostics, Reiner?

Speaker 4

Yes, Vijay. I mean, I think 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

Speaker 2

a comp issue. Thanks, guys. All diagnostic. Fantastic. Thank you.

Speaker 2

Thanks, Vijay.

Operator

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

Speaker 2

Good morning, Scott.

Speaker 6

Hey, good morning guys. Good morning, Ryan and Matt and John. Guys, can you help us when volumes are kind of still moving Negative in 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 in Not just 2024, but going forward.

Speaker 6

Thanks.

Speaker 4

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 it almost approximately 28.5%. And we think like you said, it's going to be up 50 bps here in the year. We had $350,000,000 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.

Speaker 4

And largely that was reflective of the lower volumes that we saw last year, particularly at Cepheid, as we went from 70,000,000 tests down to 35,000,000, 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, right size it for what's going to be a difficult first half, so that we're in a good spot. So that $50,000,000 of benefit, that would have been about 150 basis points on its own, Scott.

Speaker 4

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 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 in the gross and adjusted operating margin margins we have, a little bit of volume is going to go a long way.

Speaker 6

Yes, 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 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.

Speaker 6

I'll just kind of open it up to that. It's a lot of white space, if you will. Thanks.

Speaker 2

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.

Speaker 2

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 2nd half of twenty twenty three, 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, we're not assuming significantly higher activity levels, But we do see the math then working in our favor.

Speaker 2

Longer term, we believe the full and the requirement in China for these innovative and highly effective drugs is intact and that the investment will continue.

Speaker 6

Very helpful. Best of luck in 'twenty four guys. Thank you.

Speaker 2

Thanks, Scott.

Operator

Our next question comes from Michael Ryskin with Bank of America. Please go ahead.

Speaker 2

Good morning, Michael. Great. Hey, Rainer. Hey, Matt.

Speaker 7

I want to follow-up on a couple of your comments from earlier in the Q and A, just done by a process to make sure I got it right. I mean, first, I think you called out that you don't expect book to bill above 1 at any point during the year. So I mean, that means you'll be continuing to deplete the backlog all year, but 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 1. And then sort of related to that, if you've only got 1 to 2 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, queue to start the year.

Speaker 4

Yes, I mean, I think the way we talked about the guide, I mean, I did say that it doesn't go over 1, but it gets pretty close in the second half. Mean, if you do the math, it does get pretty close to 1. So I think, it is still a little bit early To call what we're going to see in 2025, 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 1, but not over 1 in the second half. That's kind of how we're thinking about it.

Speaker 4

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. Yes, sure.

Speaker 7

Just visibility, not improvement.

Speaker 4

Yes. Well, I mean, like I said, it's not a huge number, Right. First half to second half, you're talking about $250,000,000 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 of $100,000,000 I just feel like if we can get past the destocking, be aggressive with that, having a second half ramp that is $250,000,000 on $6,000,000,000 Not that steep in reality. And frankly, we constructed the guide to have no real Kind of step up or inflection either in bioprocessing.

Speaker 4

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 and 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 high single digits. Remember, we're also working on a comp of the second half, it's going to be down high teens.

Speaker 4

So I think that's what gives us sort of the confidence is we've got a little bit better customer visibility. We're going to be behind the destocking and we've got some comps that will help those numbers.

Speaker 7

Okay. All right. I thought the $250,000,000 was 2nd half to second half, not first half to second half, but I can

Speaker 4

follow-up on that one. No, that is second half to second half. Yes, that's second half to second half. I'm sorry. Yes.

Speaker 4

Okay.

Speaker 7

All right. Well, either way, we'll pop offline. For just 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 bioprocess, putting bioprocess aside? For the rest of pharma and biotech, it seems like your outlook is still somewhat you're talking about low levels of demand.

Speaker 7

Just curious any early signs, I know we're still in January, still early in the year, but sort of how those companies are thinking about budgets for the year, how the Life Science segment and pharma and biotech specifically recovers post-twenty 23? Thanks.

Speaker 2

So Michael, just to level set then, coming off of 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 twenty twenty three 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 and the numbers showed here over the last 2 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 Q1 where we expect Life Sciences to be down similarly to the Q4. Now keep in mind, we for us life sciences instruments is only about 10 of the portfolio.

Speaker 2

So we may not be a good read across here. Nonetheless, we do think it's going to take some time here in the Q1, 1st half in order for that normalization to occur, but we do believe that it's stabilizing at this lower activity level. Thanks.

Operator

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

Speaker 2

Hi, Rachel. Hey, thanks

Speaker 8

so much. Yes, good morning. Thanks for taking the questions. So I want to push a little bit more on bioprocessing. You've noted that you're not modeling an inflection in that business this year.

Speaker 8

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 you look back at last year, you'd mentioned on the 4Q call that you'd had conversations with customers that shifted your at the conference this year and how that's impacting the guide as well?

Speaker 4

Yes. Maybe I can start and Reiner 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 6 months ago, There were no anecdotes. There were no customers coming and saying I needed something quickly.

Speaker 4

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. And anecdotally, I don't think it is widespread enough to be able to say we're going to be beyond this in the next 2, 3 months, which is why we sort of have our the first half Hey, 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 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 destocking is going to be largely behind us as we get through the first half.

Speaker 4

And that's sort of how we modeled 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 3, 4 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 Ryan, you want

Speaker 2

to talk about customer discussions at JPN? 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 in 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's a 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.

Speaker 8

Great. And then my follow-up. I wanted to just press a little bit more on this pace of recovery within bioprocessing. One of your peers has slowly been ticking up their book to bill sequentially over the last few quarters. They just recently crossed that 1.0 level.

Speaker 8

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 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 PACE recovery V shaped recovery, excuse me, for Danaher? Thank you.

Speaker 4

Yes. Well, I mean, I think it's a little bit tough, right? 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 destocking. So I think a part of it is going to be The breadth of our portfolio, part of it's going to be the geographic mix we have and part of it's going to be just sort of our customers and where we were kind of heavier or So I think there's a lot that goes into it. So I think it'll be a little bit different for everybody.

Speaker 4

I think every kind of each modality might be different as well. 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. And I think everybody's going to see it at a different time. And I think you saw that with us in the first half of last year.

Speaker 4

We were only down low singles and I think some other folks were down mid teens or more, right? I think there is going to be a little bit of a lag in timing. 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 to 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.

Speaker 4

Is it possible? Sure. Anything's possible. But if we see that, we obviously we 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.

Speaker 4

And if we do better than this forecast that we have here of in the 9s, 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.

Speaker 4

But for this guide. It is trying to be transparent with everybody. That's what we're expecting or what we're planning for.

Speaker 8

Great. Thank you.

Operator

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

Speaker 9

Yes. Hi. Yes. Thanks, Rayner. My first question I'm tempted to ask about bioprocessing, but let me stick with instrumentation first.

Speaker 9

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?

Speaker 2

So 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 that China loan program in particular In the first half of last year, put us into mid to high teens growth.

Speaker 2

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 sciences, 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.

Speaker 9

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 2024? And lastly, if I could just ask About after the Veralta spin, how are you thinking about capital deployment overall?

Speaker 9

Thank you.

Speaker 2

So first of all, AvChem, 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, ATCAM 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.

Speaker 2

Great. Thank you.

Operator

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

Speaker 1

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

Operator

This does conclude today's call. We thank you for your participation.

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