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Operator: Hello, and welcome to the Revvity Second Quarter 2023 Earnings Conference Call. My name is Alex, I’ll be coordinating the call today. [Operator Instructions] I’ll now hand over to your host, Steve Willoughby, Vice President of Investor Relations. Please go ahead.

Stephen Willoughby: Thank you, operator. Good morning, everyone, and welcome to Revvity’s second quarter 2023 earnings conference call. On the call with me today are Prahlad Singh, our President and Chief Executive Officer; and Max Krakowiak, our Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind everyone of the safe harbor statements that we have outlined in our press release issued earlier this morning and also those in our SEC filings. Statements or comments made on this call may be forward-looking statements, which may include, but are not necessarily limited to financial projections or other statements of the company’s plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties.

The company’s actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. Any forward-looking statements made today represent our views as of today. We disclaim any obligation to update these forward-looking statements in the future, even if our estimates change. So you should not rely on any of today’s forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release.

To the extent we use non-GAAP measures during this call, which are not reconciled to GAAP, we will provide reconciliations promptly. I’ll now turn it over to our President and Chief Executive Officer, Prahlad Singh. Prahlad?

Prahlad Singh: Thank you, Steve, and good morning, everyone. Revvity has gone through a dramatic transformation over the last several years, which culminated with our rebranding midway through the second quarter. At the same time, the environment for some of the end markets we play in has also recently undergone significant changes. After multiple years of significant growth, our Life Sciences business is now facing new pressures due to softer demand from our pharma biotech customers globally, including in China. Our Diagnostics business has been improving as the year is progressing, which we expect to continue into the second half of the year. Despite these more challenging end-market conditions, we continued to perform well in the quarter and achieved our objectives.

The 6% non-COVID organic growth was in line with our outlook, and the $1.21 of adjusted EPS we generated was slightly above our expectations. However, given the significance of the cautiousness we are seeing from our pharma biotech customers, we are realigning our expectations for the full year and now expect organic growth in the 4% to 6% range overall. We believe this remains meaningfully above market growth rates, driven by the uniqueness of what Revvity is. We are building the company for the long term, and we’ll continue to fully invest in core projects that will drive the business in the future while being diligent and proactively managing our spend in some areas to align with the lower volumes we are seeing. The incremental cost actions we are taking currently represent approximately $30 million of savings on an annualized basis, bringing the impact from our total cost reduction efforts so far this year to be $60 million.

We expect this to now result in approximately 29% operating margins and adjusted EPS in the range of $4.70 to $4.90 for the full year. While there is clearly more uncertainty in some of our markets as compared to 90 days ago, we have intended for this new outlook to account for this uncertainty and believe our actions will enable us to build from a position of strength in the years to come. While it’s been only approximately four months since we successfully completed our significant divestiture and only a little over two months since we fully transformed into Revvity, I’m pleased to see that both our employees and our customers are strongly embracing the new company. I’m also proud to be reporting our first full quarter of financial results as Revvity here for the second quarter, which will hopefully continue to result in even greater simplicity and transparency for our investors, enabling them to better comprehend the exciting and unique company we now are and a compelling financial profile we expect going forward.

The distinctive makeup of the company was on display during the second quarter as our Diagnostics business performed well, growing in the high single digits organically, excluding COVID in the quarter, with particular strength in the immunodiagnostics globally, especially in China. We also continued to see strong performance from our newborn screening business, which again grew in the double digits despite continued global spot rate pressures. This is a testament to our R&D and commercial strategies, which lead to broader screening menus overall and our ability to consistently bring new assets to the market for rare diseases and help them get adopted by governments around the world. While this is important to us as a business financially, even more importantly, it makes us proud that we help play a key role in identifying babies who can potentially benefit from medical intervention at a very early stage of their lives.

I’m not sure there is a much greater purpose for our organization than this. One recent example of this is that the state of Ohio recently became the first state in the U.S. to require universal screening for Duchenne muscular dystrophy for all babies born in the state. With approximately 120,000 babies born in Ohio every year, it’s estimated that this screening will help identify approximately 12 babies with DMD annually. These newborns can now be treated and hopefully cured with novel gene therapies that are becoming available from the pharmaceutical community. In our Life Sciences business, while the market environment is more challenging than we had envisioned at the start of the year, our differentiated and high-value portfolio, innovative preclinical reagents, software and instrumentation is performing well and growing above broader market trends.

This is particularly evident in our reagents and specialty pharma services business, which again grew double digits organically in the quarter. This is being offset by the pharma biotech softness more heavily impacting customer decision-making on CapEx investments such as instrumentation, new software contracts and the timing of finalizing new technology licenses and partnerships. This solid performance, in light of the dynamic market environment we are all facing currently, is exactly what Revvity was built for and is all about. While we are not immune to some of the macro pressures that exist, our unique portfolio and its leading positions in high-growth markets allows us to continue to deliver above-market performance through all macro environments.

Over the past quarter, the Revvity team around the world shared in the excitement, energy and inspiration from our global launch in May. Apart from the modern and vibrant visual rebranding of our new company, we have taken on a spirit that is bold and courageous. This new shared direction is one that we have collectively aspired to over the last few years, and it is now a reality. Following our visit to the New York Stock Exchange to commemorate the rebranding and ticker symbol change, I have the opportunity to visit some of our sites around the world, including in the UK, Thailand, Korea and India. We talked about our vision for the new company. When I was in Mumbai, I also attended the thought leaders confluence, an exciting event hosted by the Revvity India team.

I was able to share our brand’s story and discussed emerging trends with other industry leaders, drawing insights about the customers we serve in areas where we can further support their needs. With innovation at the center of our purpose to expand the boundaries of human potential through science, we have also recently created new leadership roles that will help us better achieve our goals. For example, we have appointed Arvind Sundar-Rajan as our new Vice President of Digital and Technology, responsible for advancing common capabilities across all markets and segments, from science to the cloud, from sample to answer. Moreover, we appointed Dr. Madhuri Hegde as Revvity’s first Chief Scientific Officer to focus on driving our scientific strategy to translate relevant customer pain points into actionable solutions while enhancing our customer relationships with existing strategic partners.

This focus on innovation was again evident this quarter as we announced our first nonexclusive license of our novel base editing technology, PinPoint, with AstraZeneca. It is exciting to begin to see this unique technology being embraced by one of our most strategic partners. I look forward to sharing even more with you on the commercial development of PinPoint over the coming months. In addition to PinPoint, novel innovation was on display across the business over the last few months, including our new automated indirect immunofluorescence test system, the UNIQO 160 from our EUROIMMUN business. This new system was recently launched in Europe and provides an all-in-one solution that reduces the amount of hands-on time necessary for our customers or our new SaaS-based Signals research suite software offering, which brings together several key pieces of preclinical development software all-in-one SaaS-based solution.

This consistent drumbeat of significant innovation across the company is one of the key things I expect to set Revvity apart in the marketplace with our customers. These past several months have been just an initial glimpse of the drive, passion and commitment we have as a team at Revvity, and I simply could not be more confident in our future. Finally, we’ve continued to make progress with our organic investments and our external capital deployments during the quarter. While we continue to actively review attractive M&A opportunities, we did repurchase just over $200 million of shares in the quarter. So overall, I think the uniqueness of Revvity really shined through here in the second quarter as we were able to achieve our objectives despite increasing end-market pressures in some of our businesses.

While our updated outlook is reflective of the more challenging macro environment we are all facing currently, I think the resiliency of Revvity is being proved and allowing us to stand out with our customers and our other stakeholders. With that, I’ll now turn the call over to Max.

Maxwell Krakowiak: Thanks, Prahlad, and good morning, everyone. As Prahlad highlighted, we performed well in the quarter despite some greater-than-expected challenges, which we expect will likely continue over the remainder of the year. This is leading us to update our guidance for the full year to now expect mid-single digit non-COVID growth overall. The cost actions we have begun to put in place are in an effort to preserve our margins, but still be able to strongly reinvest for the future. While I’ll touch more on the specifics of our new guidance in a moment, I would reiterate Prahlad’s comments that with this new outlook, we have intended to account for the increased uncertainty currently in the market and feel confident in our ability to achieve it.

Despite these near-term pressures, it is a special time for Revvity, which I also got to see firsthand during the quarter as I was able to get out on the road to visit a number of our sites and customers around the world and share in the excitement as we launch our new company. I continue to be amazed at the impact and future potential our company has, helping expand the boundaries of human potential through science. As I begin to walk through our financial results, I want to remind everyone one last time that with our divestiture having been fully completed in mid-March, our financial results here in the second quarter only consists of those businesses under Revvity and completely exclude those that were divested. Overall, the business achieved our 6% non-COVID organic growth expectation despite the incremental pressures in our Life Sciences business.

Our total adjusted revenue was $709 million, which was down 21% due to the significant drop in COVID-related revenues. FX Was neutral to our second quarter revenue, and we again had no incremental contribution from recent acquisitions. COVID revenue was de minimis in the quarter and declined meaningfully compared to the $3 million we generated in the first quarter. Given the immateriality COVID now represents, this will be the last quarter we plan to comment on it going forward. As it relates to our P&L, we generated 28.8% adjusted operating margins in the quarter overall, which was in line with our expectations. Operating margins were up from the 28% in the first quarter, driven by volume leverage, with adjusted gross margin of 62.4% in line with last quarter.

We continue to see favorable net pricing of a little over 150 basis points, which is helping to offset the continued inflation we are seeing across parts of the business. For the full year, we still expect at least 100 basis points of net pricing realization for the company overall. Looking below the line, we had net interest expense and other of $8 million, which was a few million favorable to our initial expectations. This was driven by slightly more interest income than anticipated as we continue to reinvest the proceeds from our recent divestiture and benefit from rising rates. Our adjusted tax rate was 22.6% in the quarter, roughly in line with our expectations. We continue to repurchase some shares in the quarter, which I’ll touch on more in a bit, resulting in an average diluted share count of 125.4 million for the quarter.

This all led to adjusted EPS in the second quarter of $1.21. Moving beyond the P&L, we generated adjusted free cash flow of negative $61 million in the quarter, which on a year-over-year basis continue to be pressured from the drop in COVID revenues and roughly $127 million of outflows associated with one-time divestiture-related costs and rebranding activities. For capital deployment, we continue to remain active during the second quarter. We repurchased another 212 million of shares in the quarter, bringing our year-to-date buyback to nearly 290 million in total. We have also now deployed approximately $800 million year-to-date to properly align our short-term investments for the $1.2 billion of remaining debt we have maturing over the next 13 months, including the $500 million bond that is due in September.

This resulted in our net debt to adjusted EBITDA leverage ratio being 2.5 times at the end of the quarter, which is down from the 2.7 times at the start of the year. I will now provide some commentary on our second quarter business trends, much of which is also included in the quarterly slide presentation on our Investor Relations website. The 6% non-COVID organic growth in the quarter was comprised of 3% growth in our Life Sciences segment and 8% in Diagnostics. Geographically, we grew in the low single digits in the Americas, low double digits in Europe and high single digits in Asia, with China growing in the mid-teens overall. Within China, the mid-teens growth overall was a significant improvement from the flat performance we had in the first quarter and was driven by very different end-market conditions as compared to what we experienced earlier in the year.

In our Diagnostics segment, the immunodiagnostics portion of our business in China improved meaningfully as non-acute testing volumes continue to normalize. This resulted in mid-30% organic growth with this largest piece of our Diagnostics segment in the region. This was offset by a more pronounced slowing in our Life Sciences business in the region during the quarter. From an overall segment perspective, our Life Sciences business generated total adjusted revenue of $336 million in the quarter. This was up 3% year-over-year on both the reported and organic basis. From a customer perspective, our sales in the pharma biotech declined in the low single-digits organically in the quarter, which offset strong double-digit growth from our academic and government customers.

The slight organic decline in revenue from our pharma biotech customers was driven by increased cautiousness in CapEx spending, which is impacting several pieces of our business. Our Life Sciences reagents and specialty pharma services continued to grow in the double digits, which was offset by a mid-single digit organic decline in Life Sciences instrumentation and a low double-digit organic decline in our software business that was driven by the off-cycle timing of renewals this year and the aforementioned CapEx spending pressures. Moving to our Diagnostics segment, we generated $373 million of total revenue in the quarter. This was down 34% on both the reported and organic basis year-over-year. On a non-COVID basis, the segment grew 8% versus a year ago.

From a business perspective, our immunodiagnostics business grew in the strong double digits organically, excluding COVID, as the business in China grew more than 30%. It was great to see this business bounce back as we had anticipated once the hospitals work through their more acute care backlogs. We continue to expect volumes to fully normalize in the back half of the year, which would result in more modest double-digit year-over-year revenue growth over the remainder of the year. Additionally, outside of China, our immunodiagnostics business also continued to perform extremely well and grew in the high teens organically year-over-year. This strong level of global performance shows the underlying strength in these markets and our leadership position within them.

In our reproductive health business, overall organic growth was slightly negative year-over-year, similar to the flat performance we saw last quarter. We again experienced double-digit growth in our newborn business, which was offset by the as-expected headwinds in our Revvity Omics genomic lab business. Finally, our applied genomics business declined in the mid-single digits organically, excluding COVID. Similar to last quarter, we saw a double-digit decline in instrumentation in this business as the market is continuing to digest the repurposing of equipment post-COVID. This was offset by the low single-digit growth and its related consumable and reagent portfolio. So now moving on to guidance. As we progress throughout the quarter, we saw trends from the pharma end market further degrade and begin to impact other areas of our business outside of instrumentation such as informatics, licensing and partnership and even to a smaller degree, our reagent and consumables, particularly in China.

We are now taking the software trends into account in our updated guidance for the remainder of the year. While there is always the potential for an uptick in the end of year spending from our pharma customers for purchases that were delayed earlier in the year, our updated outlook does not assume an uptick will occur. We now expect that our non-COVID organic growth to be in the 4% to 6% range for the full year and expect FX and M&A to still have a neutral impact for the full year. This results in our 2023 total revenue now expected to be in the range of $2.8 billion to $2.85 billion. From a profitability perspective, as Prahlad mentioned, we are taking some further cost actions to build on what we started to put in place earlier in the year while continuing to invest in strategic growth priorities.

With the benefit from the partial year impact of these cost actions, offset by the lower expected volumes, we are now anticipating our operating margins to be approximately 29% for the full year. Below the line, we are continuing to actively reinvest the funds from our recent divestiture and are benefiting from rising rates, which is resulting in favorable levels of interest income as compared to our prior assumptions. Given this, we now expect our net interest expense and other to be approximately $63 million for the full year, down from our prior $80 million expectation. While tax was slightly above our assumptions in the second quarter, we continue to expect it to average approximately 21% for the full year. Due to our share repurchase activity year-to-date, we now assume our full year diluted share count to average approximately 125 million, down 1 million shares from our previous outlook.

While our primary focus for capital deployment remains strategic M&A, we will always continue to look to be judicious with our investments with an eye to maximizing long-term shareholder returns. This guidance now results in an expected adjusted EPS range of $4.70 to $4.90 for the full year and is detailed on the second to last page of our earnings presentation. As it pertains to pacing over the remainder of the year, we now expect non-COVID organic growth in the third quarter to be in line with our updated full year outlook. Given the timing of incremental cost actions and lower sequential volumes, we expect our operating margins this quarter to be approximately 28%, down slightly from the 28.8% we generated in the second quarter. Our net interest expense and other line will increase from Q2 levels as our cash balances will decline following significant tax payments in the upcoming maturity of our $500 million bond in mid-September.

Consequently, we expect net interest expense and other to be approximately $12 million in the third quarter and then increase a similar amount sequentially in the fourth quarter. We expect our tax rate in the third quarter to likely be the lowest quarter of the year and be in the upper-teens percentage. We anticipate this to result in adjusted EPS for the third quarter to represent approximately 25% of our updated full year outlook. While we are not immune to the changing end-market environment, with the power of what Revvity has become, we are performing well on those items that are fully in our control. We continue to execute well commercially. Our innovation has never been stronger, and we are taking appropriate actions to preserve profitability while still strongly reinvesting back in strategic priorities for the future.

With that, operator, we would now like to open up the call for questions.

Operator: Thank you. [Operator Instructions] Our first question for today comes from Patrick Donnelly of Citi. Patrick, your line is now open. Please go ahead.

Patrick Donnelly: Great. Thanks for taking the question, guys. Maybe one on the margins there, Max. You talked a little bit about some new initiatives you guys are putting in place. Can you just expand a little bit on that? I know you guys have pretty significant opportunities on things like the supply chain side, maybe in-sourcing a bit more, and those take probably a little more time post some of the acquisitions you’ve done. So just curious what the near-term actions are, and again, how we should think about that implication into next year? It seems like the margin story for next year was pretty compelling, given stranded costs, things like that. So I’m just trying to get a handle on the moving pieces here as we work our way through ‘23.

Maxwell Krakowiak: Patrick, so from a margin standpoint, in terms of the near-term cost actions that we are taking, I would consider this more from the OpEx line as we look to, I would say, more rightsize our costs given the current market conditions while still protecting our strategic investments that we need to make around areas of e-commerce, GMP, et cetera. But that near-term is going to be more on the OpEx side. As to your point, the gross margin expansion is really longer-term plays. As you look out to 2024, obviously, we’ll have to see how the market turns here over the next couple of months and what that means for 2024. But for right now, I would say the thesis still on our op margin expansion of the 75 to 100 basis points is what our target is for next year.

Patrick Donnelly: Understood. Okay. And then maybe one on the China side. Obviously, that immunodiagnostics piece was a big focus for investors. Nice to see that come back, not surprisingly offset a little bit by the Life Science piece. Can you just kind of pull the curtain back, what are you expecting on the immunodiagnostic side now for the rest of the year? Obviously, the comp is pretty easy as you work your way through the back half. It seems like the trends are stable there. So yes, maybe just China expectations for the rest of the year, immunodiagnostics, Life Sci, what you’re seeing there would be helpful. Thank you.

Maxwell Krakowiak: Yes, absolutely. So I think, Patrick, to your point, as we look at China, it’s really a tale of 2 cities right now as we look into the second half. So let’s start first on the Diagnostics side, with immunodiagnostics being in the biggest piece there. It was great to see that exiting the second quarter. We were starting to get back to what we would consider more normalized volume from a China testing standpoint, which was in line with our expectation and we expect that momentum to continue in the second half. And so as we look at the second half, particularly for the immunodiagnostics business, we expect that to be close to an upper-teens growth rate in the second half. If you look though on the Life Sciences side, obviously, that has been more pressured.

I think you heard some of the other commentary on the market environment there. It’s obviously very challenging. As we look into the second half for the Life Sciences business, we’re probably expecting that to be slightly down in the low to mid-single-digit range versus the first half that was more in sort of a low-teens growth rate in the first half. So we are expecting to see some pressure there. However, if you look at Life Sciences on a multiple year CAGR since the start of the pandemic, even with the downturn in the second half, it’s still growing at a mid-teens CAGR over that time period. So we continue to be excited there. It’s just given the second half right now, it will be a little bit pressured due to the market environment.

Prahlad Singh: Patrick, just to add to that, additionally, in China, the immunodiagnostics continued to do very well globally. So I think it was great to see China come back, but it also continues to do very well globally.

Patrick Donnelly: Yep, understood. Thanks a lot. Thanks, Max.

Operator: Thank you. Our next question comes from Dan Leonard of Credit Suisse. Your line is now open. Please go ahead.

Daniel Leonard: Thank you and good morning. My first question, I wanted to clarify on China. What is your current view for China growth in aggregate in 2023? And how does that change from your prior view?

Maxwell Krakowiak: Yes. So I think overall for China in the – for the full year, we expect it to be low double-digit. I would say that is slightly down from our previous assumption just given the pressures I just mentioned from a China Life Sciences standpoint. And we continue to be, I would say, excited about the progress that we’re making on the immunodiagnostics side.

Daniel Leonard: Thank you. And then for my follow-up, Max, you mentioned that in some areas of your instrument business, applied genomics specifically, there’s a bit of a COVID digestion going on. How broad do you think that is across your instrument portfolio? And how long do you expect that digestion period could last?

Maxwell Krakowiak: Yes, it’s a good question. So I’d say on instruments more broadly across applied genomics, there’s really two dynamics. One is we do sell applied genomics instrumentation to our pharma customers as well. So softness there is going to have an impact on our applied genomics instrumentation business. The second, to your point, is the COVID overhang that I was referring to in the prepared remarks. Now in terms of the duration, I think right now, what we have good line of sight is to for the second half of the year. And I think our guidance is baking in some of that conservatism. As we get closer to year-end, we’ll see what that looks like in terms of the duration of the COVID overhang and also the current environment of pharma biotech.

Daniel Leonard: Okay. Thank you.

Operator: Thank you. Our next question comes from Matt Sykes of Goldman Sachs. Your line is now open. Please go ahead.

Matthew Sykes: Thanks. Good morning. Thanks for my question. Maybe just on sort of the pace of the slowdown that you saw towards the end of Q2 as you exited and then, in particular, sort of what you’ve seen this month now that we’re in August. Just trying to get a sense for the pace of sort of slowdown, particularly on the capital equipment side in China, just giving you the confidence to sort of extrapolate that pace into the full year guide that you’ve changed.

Maxwell Krakowiak: Yes. He, Matt. So I would say from a pacing perspective, what’s assumed in the midpoint of our guidance right now is the current market environment. So whether you want to call that the current July, the exit rate of Q2, that is what is embedded in the midpoint of our guidance. If you talk about it in terms of when we started to see some of the accelerated, I would say, softening from our previous guidance, it was really more so in June; and then in China, specifically really end of June, early July, where we started to see, I would say, more of a stronger deceleration throughout the course of the quarter.

Prahlad Singh: No, I think, Matt, overall, the guidance that we are putting out there is just trying to get ahead of any softer trends that we – what we just started to observe. And our assumption is that will continue at least for the second half of the year.

Matthew Sykes: Got it. Thanks for that. And then just for my follow-up, you guys have made some comments about the software business, and some of the weakness you’re seeing there is due to the timing of multiyear renewals. But it sounds like you are also kind of tying it to some of the CapEx-type purchases that are going on and the weakness we’re seeing there. Could you maybe sort of give us a little more granularity on what’s going on with software? Is it more about the timing of multiyear renewals? Or is there some softness tied to either instruments or other types of purchases from pharma biotech?

Maxwell Krakowiak: Yes. Matt, so when we were coming into this year, right, as we were talking about our Signals business, we were already flagging that there was going to be issues from a timing of the multiyear renewals. And so coming into this year, from a software perspective, we were expecting software to grow mid-single digits, which is compressed from what it’s normally been of mid-teens. And again, this is on the backbone of sort of the renewal timing, if you will. Now as we look out for the course of the year, we’re probably calling our Signals business to be actually down mid-single digits for the year. The swing you are seeing there is the impact of a softer pharma biotech on the new orders as CapEx budgets impact both instruments, and we are also seeing it on the software side. So this new guidance basically derisks the new order go get of our Signals business for the second half.

Matthew Sykes: Got it. Thanks very much.

Operator: Thank you. Our next question comes from Vijay Kumar from Evercore. Your line is now open. Please go ahead.

Vijay Kumar: Hi, guys. Thanks for taking my question. Prahlad, maybe on guidance, I just want to make sure I heard this correctly. Organic was lowered by 300 basis points at the midpoint. That’s roughly in line with what we’ve seen in the group so far. I think maybe 50%, 60% of that cut was China. Is the remaining all coming from global biopharma? And if that’s true, do you have some historical perspective on how long these cycles last?

Prahlad Singh: Yes, I think the way I would look at the guidance, Vijay, is that assume 400 bps of headwind from pharma biotech overall, which is offset by about 100 bps or stronger in immunodiagnostics. And I think the way I would look at it, of the 300 bps, 100 bps is essentially China Life Sciences softness. And I would say all of it is evenly split between instruments, reagents and the software piece that Max just talked on Matt’s question. So hopefully, that gives you a sense of how we are looking at it in terms of guidance for the second half.

Vijay Kumar: That’s helpful, Prahlad. Sorry, on any historical perspective on how long – when you have biopharma customers being cautious, how long these cycles last?

Prahlad Singh: I mean the way I would say it, you should – if you look at the current portfolio, it’s very different than what historically we have been used to. I think on – if you are in the QA/QC cycle, it would be a different perspective. But I would say probably a couple of quarters to three quarters is what our expectation is this will be. And again, let’s keep in mind, 80% plus of our business is now on the reagents consumables side. So that downturn is not going to impact it as longer as if it was a much more CapEx-heavy business.

Vijay Kumar: That’s helpful, Prahlad. And Max, one for you. The third quarter operating margin of that 28%. You didn’t mention cost actions. Are you not non-GAAP-ing out those cost actions or costs incurred for cost actions in third quarter? Maybe just walk us through why 3Q is stepping down from 2Q?

Maxwell Krakowiak: Yes. So I think there’s a couple of things that play, Vijay. So one, volume will actually be down quarter-over-quarter given the midpoint of our commentary on the third quarter number. So volume leverage is a piece of it. The second from a cost perspective, so the – some of this takes time, right? As I mentioned, this is incremental actions from what we’re taking from the beginning of the year. We do expect most of that benefit, I would say, to show up in the fourth quarter, Vijay, from a cost perspective. And then there are some actual strategic investments as well that we are making in the third quarter, again, that we do not want to delay, but we feel comfortable in our ability to hit our overall updated cost target for the full year.

Vijay Kumar: Understood. Thanks, guys.

Operator: Thank you. Our next question comes from Catherine Schulte of Baird. Catherine, your line is open. Please go ahead.

Catherine Ramsey: Hey guys. Thanks for the questions. As first, just how do you expect your genomics lab business to perform in the back half of the year? Any color on how new projects are shaping up there?

Maxwell Krakowiak: Yes. Hey, Catherine. So I mentioned it a little bit on the software side, but it’s a similar story on the lab. So what we wanted to do for our updated guidance is to basically derisk what we had assumed in terms of new orders, both on the Signal side as well as the genomic lab side. In terms of the commercial activity, we still expect – it’s still going incredibly strong. It’s a matter of when, not if these deals are going to close. There’s obviously the chance that they could push out to 2024. So we thought it would be better to derisk our second half guidance and assume essentially none of those new orders come in from a genomics labs perspective. And so we would expect similar growth rates or growth declines that we had in the first half to persist in the second half as we’ve derisked the forecast.

Catherine Ramsey: Okay. Got it. That’s helpful. And then as we think about your 10% midterm organic growth target, that assumed a stable macro environment, which we clearly are not in right now. But just given what we’re seeing, perhaps a return to trend line after a couple of years of outsized activity levels, do you still think that 10% target is the right number?

Prahlad Singh: Yes. I think in the medium-term outlook, assuming – I think you pointed it out, assuming a stable macro environment, that is what our goal and target is. So yes, there is no change to that, again, assuming the stable market environment.

Catherine Ramsey: Okay, great. Thank you.

Operator: Thank you. Our next question comes from Jack Meehan of Nephron Research. Your line is now open. Please go ahead.

Jack Meehan: Good morning. So I wanted to continue on the China topic. Would just love to get your thoughts on the dynamics you’re seeing in Life Sciences right now. Just what do you attribute this to in that region? Do you think this is just demand or lack of stimulus? Or are you seeing any areas of increased local competition in that business?

Prahlad Singh: I don’t think it’s competition, Jack. I just think that there is – as you heard last week from our peers and from us today, there is just a softness. I mean there was a lot of noise and talk about the stimulus coming in. I mean there was some uptick from it, but that funding has not fully materialized. And I think you are seeing the impact of that because there was an assumption from all of us that, that stimulus was for real. And clearly, that hasn’t panned out yet. And then I think we are all seeing the impact of that.

Jack Meehan: Got it. That makes sense. And then sticking with Life Sciences, the double-digit growth you’re seeing in academic and government, can you talk about some of the regional trends that you’re seeing there and just how you feel about the durability of this business?

Maxwell Krakowiak: Yes. Hey, Jack. So from an academic and government standpoint, it’s actually been pretty balanced across all regions. So I would say all regions are growing safely in the double-digit range. So it’s not one region versus another. Coming into this year, we had a hunch that academic and government was going to be stronger, especially if you look at what had happened in Europe over the course of 2022 and with some of the stimulus that has been mentioned that we did see come through from the China side. So I would say it’s been relatively balanced performance across the board from an academic and government perspective.

Operator: Thank you. Our next question comes from Josh Waldman of Cleveland Research. Your line is now open. Please go ahead.

Joshua Waldman: Hey, guys. Thanks for taking my questions. Two for you. First, Prahlad, a follow-up on the ImmunoDx business outside of China. It sounds like it grew high teens, if I heard Max right. How is that versus your expectations? And any drivers you could point us to? Just curious if it’s more underlying growth in the end market or is it share gain, maybe menu expansion? And then how sustainable do you think this could be throughout the remainder of ‘23?

Prahlad Singh: Josh, I think it’s a combination of all of what you pointed out, right? The business continues to do well. There is still continued awareness around immunodiagnostics in autoimmune testing, which will – which has a lot more traction over the next few years. The new NPIs that they keep coming out with, the Uniqo 160 that I had talked about in my prepared remarks, that’s getting a lot of traction. And I think the portfolio of the assays that they keep bringing to the market continues to have an impact. So I would say that the growth that we signed in the immunodiagnostics business outside of China was expected and is sustainable over the future. So feel really good about that business.

Maxwell Krakowiak: Yes. And just to it from a numbers perspective, Josh, to your point, it was high teens in the first half. We expect the second half to be closer probably to low teens, which is still very strong performance. And so we expect that business to continue doing well.

Joshua Waldman: Got it. Then the Life Science reagent business continues to hold in well despite the softer pharma biotech end market. I guess, could you comment on the drivers here, maybe a comment on volume versus price mix? And then as we look forward, would you expect the softer instrument sales, maybe the softness in pharma biotech to eventually weigh on this business? Or is there enough kind of low-hanging fruit to drive sustainability and recent growth rates?

Maxwell Krakowiak: Yes. So a couple of questions in there, Josh, I’ll kind of unpack them here one by one. So the first one is as you look at the performance of reagents to your point, it was low double digits in the first half. In terms of the combination of volume and price, we did roughly a little bit more than 150 basis points of price overall in the first half. Our strongest portfolio in terms of pricing power is our reagents business, so you could assume it’s going to be slightly above that number. And so then that should help you give some perspective from a volume or somewhere in the high single-digit range from a volume perspective overall is probably a fair assumption. Then as you look in terms of the trends for the second half, I do think that the reagents business will be slightly pressured versus the first half performance.

So our current midpoint assumption has the business going from low double digits in the first half to more of a mid-single-digit performance in the second half. However, I will note, though, that if you were to look at this on a two-year stack basis for our reagents business, it was low double digits in the first half. It will still be low double digits in the second half. So it’s a relatively fair comparison on a year-over-year comp basis. It’s just we have a tougher comp in the back half of the reagents.

Joshua Waldman: Got it. I appreciate it, guys.

Operator: Thank you. Our next question comes from Andrew Cooper of Raymond James. Your line is now open. Please go ahead.

Andrew Cooper: Hey, everybody. Thanks for the questions. A lot has already been asked. Maybe just first, if you could give a little bit more color, peel back the onion a little bit on some of the CapEx tightening? Are there particular products or segments of products that are holding up better or were surprising versus expectations, whether it’s higher end, higher dollar, lower? Any context there would be super helpful.

Maxwell Krakowiak: Yes, Andrew, I don’t know that I would say anything has been different from our expectations, right? So instruments is obviously a group that has been hit hard by the pharma biotech CapEx. You’ve got the new software and genomics deals that I mentioned earlier that have been hit by, I would say, the more cautious spending level from the pharma customers. Reagents has probably hung in better than both those two, but it’s not like that is also completely immune, especially when you look at the pre-revenue from our biotech customers, we are seeing reagent volumes drop there year-over-year. And so I would say it’s been relatively consistent from our expectation. I don’t think there’s any surprises from what we’re seeing in terms of the broader CapEx caution from the pharma biotech customers.

Andrew Cooper: Okay, great. And then maybe just one follow-up. When I do the quick math on the EBIT drop down in terms of the guidance change, it’s about 60% in the new guide versus the old. I guess, give us a little bit of context when we think about that $30 million annualized, how we should think about that drop down trending and what that looks like in a little bit more normalized environment relative to your point, some of the spend that you plan for 3Q and the rest of this year that you don’t want to delay?

Maxwell Krakowiak: Yes, Andrew, I’m not sure I completely follow your math there on the EBIT drop. In terms of looking at the cost actions and how we think about that, again, I don’t know that I have too much further color to add other than the fact that we are continuing to be prudent in our cost management given the market conditions and want to maintain our margin profile. But what – and yet we are still very much protecting our core strategic investments that we’re going to need for the next couple of years for our business.

Andrew Cooper: Okay, I’ll stop there. Thank you.

Operator: Thank you. Our next question comes from Dan Brennan of TD Cowen. Your line is now open. Please go ahead.

Daniel Brennan: Great. Thanks. Thanks for the questions, guys. Maybe just back to biopharma, could you just give us a little color between emerging biopharma and mid-large kind of what you’re seeing there? And then kind of what feedback are you hearing that’s kind of what’s driving the weakness, particularly for the mid-large customers? Obviously, macro is choppy here, but this group is viewed to be more of a stable customer. So I’m just wondering kind of what you’re hearing from the front line.

Prahlad Singh: Yes, I think as you know them, our pre-revenue biotech pharma is a very, very small component of our business. And we – that was already being highlighted as being pressured early in the first half of the year. So I don’t think that there is much change. I think the way I would sort of color the mid-large biopharma biotech is the pause, the caution and the delay in terms of CapEx spending. And then that is what is basically driving the – being influenced by the macro environment that we are all seeing. So I would say it’s across the board, but it is having an impact primarily on the organic, on the CapEx investments that our customers are looking at making. And I think the delay in that is what is that we are accounting for in the second half of our forecast.

Maxwell Krakowiak: Agreed. Yes, I’m just going to elaborate on some numbers for you there. So in terms of the pre-revenue, as Prahlad mentioned, it is a small piece of our portfolio. It’s 10% of our Life Science business. And so if you look in the first quarter, it was down mid-teens. Second quarter, it was down closer to upper 20%. And then the large pharma or midsize pharma in the second quarter was growing low single digits. And then if you unpack that further, instruments for the large and midsize was probably down high single digits; and reagents was on the flip side, up high single digits as they continue to drive lab activity. And so that’s how I would break it down from a numbers perspective for you.

Daniel Brennan: Great. And then maybe just a follow-up, just on the guide. The guidance reduction completely not surprising given what we’ve seen so far. It’s actually more modest than what we’ve seen so far from the peers. Prahlad, I think I heard you discuss earlier that in terms of trends in the quarter, it was really June where the weakness occurred and you guys are assuming kind of where we are today in July kind of persists. So I guess the question is, how do investors view like the cushion per se that you may have baked in the back half of the year. I guess you’re assuming kind of where we are today is stable and that’s it, so things don’t get worse. So just kind of wondering if you’ve kind of incorporated any kind of further weakening possibly in the back half of your implied guidance. Thanks.

Maxwell Krakowiak: Yes. Hey, Dan. So if we take a step back and look at our guidance overall, we wanted to be more cautious given the dynamic macro environment. So the 4% to 6% range is driven by really the uncertainty surrounding Life Sciences, with the midpoint being aligned to today’s current market and the low end providing cushion in case things get worse. Conversely, on the upside if things get better, that would push us closer to the upper range of our new guidance. I would say, additionally, we did really want to derisk the second half assumption on new software, genomics and licensing deals with our pharma customers. Again, the commercial pipeline there looks strong, but I think there are some questions around the timing of when these might get signed. And given the chance that they might get pushed out to 2024, we wanted to, again, derisk the second half assumption related to those business.

Daniel Brennan: Great. Thanks, Max.

Operator: Thank you. Our next question comes from Derik De Bruin of Bank of America. Your line is now open. Please go ahead.

Derik De Bruin: Hi, good morning. Thank you for taking my questions. Just the first one, what’s your overall instrumentation as a percentage of the portfolio? And how much was that just down in aggregate?

Maxwell Krakowiak: Yes. So we look at the total instrumentation for the portfolio, I would say, it’s roughly about 30%, Derik. And if you look at it in terms of the overall performance, I would say it was down, what was it, mid-single digits here in the first half – second quarter, excuse me.

Derik De Bruin: Got it. Okay. So just going back, sorry to repeat on this, but I’m just sort of trying to digest what everybody means by macro because, I mean, our economists are sort of getting a little bit more less likely on recession, people’s numbers see be picking up, yet the pharma industry seems to be having some issues. So I’m just curious on what is – can you differentiate what is just – what was just excess spending during COVID, right? Does extra spending because times are flush and everybody had money versus a new sense of concern, caution because people worry about the regulatory environment, IRA, or whatever it is. I’m just trying – can you differentiate between what is like excess spend in that market? Was there – and have you noticed any difference between U.S. and European pharma? So thanks.

Prahlad Singh: Yes. I mean I think that is a broad question, and I think I’ll try to sort of give color on what our observation is. I think in terms of the question around the excess spending, I think if there was desire to get instrumentation or upgrade their lab in terms of automation or adding extra liquid handling capability or more imaging capabilities or more QA/QC capabilities, that’s where the flush funds were leveraged and utilized. And I think that is what the normalization, to some extent, of that is going to happen more in the second half. In terms of the question around Europe versus U.S., I would say that probably Europe has been a little bit more careful and cautious in its spending than the U.S.

Derik De Bruin: Got it. Okay. Thank you. Appreciate it.

Operator: Thank you. Our next question comes from Dan Arias of Stifel. Your line is now open. Please go ahead.

Daniel Arias: Yes, good morning. Thanks for the questions here. Prahlad, maybe just rounding out the commentary on the portfolio, can you just add some color to what’s taking place in the Pharma Services business? How would you compare the demand that you’re seeing for genomics versus sell-on development versus some of the other applications like viral vectors? Obviously, anything that helps triangulate biopharma is just helpful right now. And then as an add-on, I’m curious how OneSource is doing in this environment.

Prahlad Singh: So I can tell you on the first one. The second one, unfortunately, Dan, you will have to go to the owners of OneSource. I won’t be able to help you on that one. But on the first one, I would say that we have a very active pipeline. We have a very strong pipeline, and there’s a lot of discussions going on. And I think, as Max has pointed out a couple of times, what we’ve tried to do is assess the timing to the best of our ability in terms of when some of these will materialize and try to derisk our forecast for the second half to the best of our ability.

Daniel Arias: Okay. Totally fair. Then I’d ask you to comment on a business that you did not own anymore. Max, on the cost reduction. Simply if you think about the split on…

Prahlad Singh: But actually, I do want to point out, Dan – sorry, I do want to point out since you did bring up OneSource that today is the one-year anniversary of when we signed the deal exactly a year ago. And I think as a company, we could not be prouder of how we’ve executed in terms of closing on that deal, ensuring a smooth close and sort of switching over to what we are today in terms of remedy. So thank you for that.

Daniel Arias: Sure. Absolutely. Congratulations on the milestone there. If I could just sneak one more in, Max. How should we think about the split of what you’re doing when it comes to the cost reductions, Life Sciences versus Diagnostics? I don’t know if you’re interested in talking about segment margins, but it would just be helpful to know what kind of mix to assume there on spending changes. Thanks.

Maxwell Krakowiak: Yes. Thanks, Dan. I would say that it’s probably going to be in the areas where we are seeing the greatest amount of market pressures. There’s some, I would say, just general overhead, but for the most part, it is the line to maybe where we are seeing the pressures from a top line perspective. And so as you look kind of in the segment margins in the second half, I wouldn’t expect too much volatility from sort of where they are directionally right now in the first half with Life Sciences being sort of in the upper 30% range; and you’ve got the Diagnostics business, which is going to be probably closer to a mid-20s here in the second half.

Daniel Arias: Okay. Thank you.

Operator: Thank you. Our next question comes from Rachel Vatnsdal from JPMorgan. Your line is now open. Please go ahead.

Rachel Vatnsdal: Hi, thanks for taking the questions, you guys. There’s been a lot of pharma biotech questions, so I thought maybe I’d shift over to M&A. You guys mentioned some of the share repurchases this quarter and that M&A still remains a priority. So can you just talk about how you’re thinking about the current M&A environment? Valuations have come in pretty meaningfully in the last six to nine months here. So what are you seeing in the marketplace? And then are there any pockets that you’re most interested in?

Prahlad Singh: Rachel, I mean, again, as we pointed out, my answer is going to be no different than what you’ve heard I say before, we have an active pipeline. We continue to have discussions. I think at the right time, we will move forward. At the end of the day, the market environment is softer in terms of the external market. But as you know typically our focus areas that we do operate in, our founder owner company. And generally, they tend to remain immune and resilient to the marketplace. So hopefully, we are able to execute on something, but we will continue to be diligent in our search.

Rachel Vatnsdal: Great. And then just one follow-up. You mentioned that reagents were weaker in China this quarter. Can you kind of clarify for us what did reagents grow in China? And then what are your latest expectations for the year for reagents in China as well? Thank you.

Maxwell Krakowiak: Yes. Hey, Rachel. So from a reagent standpoint, in the second quarter, they were growing low single digits positively. As we look out into the second half, we would expect that to probably flip to a low single-digit to mid-single digit decline with the biggest external factor there being the CRO volumes, specifically in China is where we are facing the biggest headwinds.

Operator: Thank you. Our next question comes from Liza Garcia from UBS. Your line is now open. Please go ahead.

Elizabeth Garcia: Great Thanks so much for speaking in guys. Just sticking on the topic of China, I guess, thinking a little bit more broadly on China, if you could just remind us kind of where we sit on the localization of manufacturing for EUROIMMUN, just given kind of – just how to tumultuous COVID has been in everything. I guess any perspective just kind of where China sits on the kind of localization and time lines there and if you guys have any perspective there and how to think about that. It’s a little bit of a broad-based question, but I’ll kind of leave it there.

Prahlad Singh: Sure, Liza. I think as you know and you probably heard on the reproductive health side, majority of our products have moved to China and are in China for China. On the EUROIMMUN side, I would say probably 25% of our products are in China for China. The rest, we continue to move. And of course, the NMPA approval process is what becomes a more of a timing factor. And I would expect that over the next couple of years to two to three years, most of what we think needs to be moved to China will be moved to China. It’s not a CapEx issue. The building, the facilities and all are ready and already invested in. It’s just more from a timing perspective to get the studies done there and submission of NMPA and getting the approvals from there.

Elizabeth Garcia: Great, which is helpful. And just squeezing one last one in, if I can. Just thinking about just e-commerce objectives, I know that you guys are sub-10% on that. But kind of just thinking about that kind of over the longer term and kind of just given kind of the cost initiatives, the 75 to 100 bps still kind of the right kind of medium-term outlook to kind of think about for you guys over the longer-term algorithm and kind of how to think about that. That’s probably a Max question, but I’ll kind of leave it there.

Maxwell Krakowiak: Yes. So maybe just to address the first – one part of that question in terms of the operating margin expansion, yes, the 75 to 100 basis points is still what we are planning in terms of our midterm margin expansion targets. Obviously, we will have to see what happens from a market perspective. But as of today, that is still our assumption. To your question on e-commerce, it continues to be an area we are very excited about. We continue to make great strides there. We will be having sort of the launch of our new e-commerce platform here in the first quarter of next year. And then Europe will be shortly following on sort of a six to nine-month lag from an e-commerce platform perspective, but we do expect that to be a continued area of opportunity for us as a company.

Operator: Thank you. At this time, we currently have no further questions. So I’ll hand back to Steve Willoughby for any further remarks.

Stephen Willoughby: Thanks, Alex, and thanks, everybody, for all your great questions today. We look forward to catching up over the remainder of the week. Talk soon.

Operator: Thank you for joining today’s call. You may now disconnect your lines.