Danaher - Q1 2023
April 25, 2023
Transcript
Operator (participant)
My name is Ashley. I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's Q1 2023 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press the star, then the 1 on your telephone keypad. If you would like to withdraw your question, please press the star key followed by the 2 on your telephone keypad. I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.
John Bedford (VP of Investor Relations)
Thank you, Ashley. 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, and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the investor section of our website, www.danaher.com, under the heading Quarterly Earnings. The audio portion of this call will be archived on the investor section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until May ninth, 2023.
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 the Q1 of 2023, and all references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future.
These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made. We do not assume any obligation to update any forward-looking statements except as required by law. With that, I'd like to turn the call over to Rainer.
Rainer Blair (President and CEO)
Thank you, John, and good morning, everyone. We appreciate you joining us on the call today. We had a good start to the year. Our team successfully navigated a dynamic operating environment to deliver better than expected revenue, earnings, and cash flow. We're especially pleased with the strength of our base business, which grew 6% in the Q1. Now, across the portfolio, the quarter progressed largely as we anticipated. Our global supply chains have stabilized and component availability improved sequentially. Strong price realization helped offset inflationary pressures and disciplined cost management enabled us to continue our cadence of growth investment. We believe these investments, paired with DBS-driven execution, contributed to market share gains in many of our businesses again this quarter.
A prime example of the power of DBS and our commitment to continuous improvement at all levels of Danaher is the CEO Kaizen, which we kicked off two weeks ago. With this event, our most senior leaders are joining over 700 associates at 10 of our operating companies. We're focusing on the most significant opportunities for lasting competitive advantage across our businesses, including further reducing our best-in-class lead times at Aldevron and improving resin and filter throughput in the biotechnology group. The CEO Kaizen is just another terrific opportunity for our teams to come together and drive transformative change through DBS. In fact, once we wrap up here today, I'll be joining the Cytiva team at our resin facility in Uppsala, Sweden to contribute to these efforts. Our results also reflect the unique positioning of Danaher's portfolio.
We just have an exceptional group of leading franchises serving attractive end markets with durable secular growth drivers. Additionally, the strength of our balance sheet provides us with the optionality to enhance our businesses both organically and through disciplined M&A. This powerful combination of our talented team, leading portfolio, and strong financial position differentiates Danaher and reinforces our sustainable long-term competitive advantage. With that, let's turn to our Q1 results. Sales were $7.2 billion in the Q1, core revenue declined 4%. As I mentioned earlier, we delivered 6% core revenue growth in our base business, with three of our four reporting segments up high single digits or better in the quarter. COVID-19 revenues were a headwind of approximately 10%. Geographically, core revenues in developed markets declined mid-single digits, primarily as a result of lower COVID-19 revenues.
High growth markets were up low single digits with a low single-digit decline in China. Results in China were better than expected, driven by a quicker than anticipated recovery in diagnostic testing and a more favorable life science research funding environment. We expect these positive trends to continue as we move through the year. Our gross profit margin for the Q1 was 61%. Our operating margin of 25% was down 330 basis points, primarily due to the impact of lower COVID volume in our biotechnology and diagnostics businesses. Adjusted diluted net earnings per common share were $2.36, and we generated $1.7 billion of free cash flow in the quarter. Let's take a closer look at our results across the portfolio and give you some color on what we're seeing in our end markets today.
Reported revenue in our biotechnology segment declined 16%, and core revenue was down 13%. In bioprocessing, base business core revenue growth was in line with our expectations of low single digits in the Q1. Underlying demand at our large customers who are primarily responsible for therapies in commercial production and later-stage clinical trials remains robust, and they're steadily working through inventory they built during the pandemic. Based on our most recent customer conversations, we now expect the inventory normalization process to continue through the H2 of the year. During the quarter, we also saw softer demand globally at many of our emerging biotech customers as more pronounced pressures on liquidity and funding accelerated their efforts to conserve capital, leading to project delays and cancellations.
On consideration of these factors, we anticipate Q2 and full-year base business core growth in bioprocessing will be largely consistent with the Q1. That said, these short-term pandemic-related dislocations have not changed our assessment of the tremendous opportunity ahead in the biologics market and for our leading bioprocessing franchise. The number of biologic and genomic medicines in development is meaningfully higher than at any point in history. In fact, there are thousands of biologic therapies currently under development, including more than 750 in phase III clinical trials. With these therapies, our customers are making significant strides in addressing diseases that affect large segments of the population. For example, GLP-1s have become blockbuster treatments for obesity and diabetes, and Antibody-drug conjugates are meaningfully improving treatment outcomes for many types of cancer.
We're also seeing promising developments in the field of Alzheimer's research, where several novel monoclonal antibodies are nearing regulatory approval. Now, to best support our customers as they pursue these life-changing breakthroughs, our biotechnology team has been accelerating investment in innovation over the last several years. Cytiva recently introduced the MabSelect VL, a new resin and ligand for bispecific antibodies and antibody fragments. The MabSelect VL's best-in-class binding capacity and improved alkaline stability makes industrial scale purification more efficient, helping customers improve yields, decrease bioburden, and reduce manufacturing costs. This is just one of the innovative solutions from our biotechnology team's project pipeline, aimed at helping customers bring more life-saving therapies to market faster and more efficiently. Turning to our life sciences segment. Reported revenue grew 2.5%, and core revenue was up 5%, including high single-digit growth in our base business.
Our life sciences instruments businesses collectively delivered mid-single-digit core revenue growth, consistent with our expectations. Funding levels and sales funnels remained healthy across most major geographies and end markets. The demand for our advanced solutions remained strong, notably for recent innovations such as the SCIEX ZenoTOF 7600 and Leica Microsystems Mica. Our genomics consumables business had another quarter of double-digit base business core revenue growth. Robust demand for plasmids, proteins, and gene writing and editing solutions was partially offset by declines in next-generation sequencing and basic research. During the quarter, Aldevron brought together capabilities from Cytiva and Precision NanoSystems to create a streamlined offering for the development, production, and release of mRNA drug substance and drug product.
This new offering will be available to customers later this year and is a great example of how we're integrating solutions from across Danaher to create differentiated offerings and deliver even greater value to our customers. Moving to our diagnostics segment. Reported revenue declined 10% and core revenue declined 7.5%, with double-digit growth in our base business offset by lower COVID-related respiratory testing volumes at Cepheid. Our clinical diagnostics businesses collectively delivered mid-single-digit core revenue growth and saw healthy market volumes globally. At Radiometer, strong demand for blood gas testing in China drove double-digit core growth. Leica Biosystems, we met single digits led by advanced staining and digital pathology. Strength across developed markets and China enabled Beckman Coulter Diagnostics to exceed expectations and deliver mid-single-digit core growth.
In molecular diagnostics, broad-based strength across Cepheid's test menu drove more than 30% core growth in non-respiratory testing. As our customers look for ways to capitalize on the workflow advantages the Cepheid GeneXpert delivered for COVID-related testing, they are increasingly adding additional assays from our market-leading test menu. This increased menu utilization by our customers helped drive more than 50% growth in infectious disease testing in the Q1. We also saw good momentum for our recently introduced vaginitis panel, the Xpert Xpress MVP, which contributed to nearly 30% growth in sexual health testing. In COVID-related respiratory testing, customers continued transitioning high throughput testing to the point of care and consolidating their point of care PCR testing platforms onto the GeneXpert.
As a result, Cepheid's respiratory testing revenue of approximately $550 million in the quarter exceeded our expectation of $450 million. This was driven both by higher volume and a preference for our four-in-one test for COVID-19, flu A and B, and RSV. We continue to expect approximately 30 million respiratory tests and $1.2 billion of revenue for the full year. Cepheid's strong results are a testament to the significant value and unique combination of fast, accurate lab-quality results, and a best-in-class workflow provides clinicians. Given Cepheid's leading global installed base and growing adoption of the broadest molecular diagnostic test menu on the market, we're well-positioned to help customers meet their testing needs and continue gaining market share for years to come. Moving to our environmental and applied solutions segment.
Reported revenue grew 5%, and core revenue was up 6.5%. Water quality core revenue grew low double digits, product identification was up low single digits. In water quality, Hach delivered their 4th consecutive quarter of double-digit growth, and ChemTreat was up double digits for the 8th consecutive quarter. Strength was broad-based across both equipment and consumables, particularly in our industrial end markets. This performance highlights the resilience of the high margin, recurring revenue business models that make up water quality and the significant value our solutions provide in support of customers' day-to-day mission-critical water operations. At product identification, marking and coding was essentially flat, while packaging and color management was up low single digits. Videojet was up low single digits despite a difficult year-over-year comparison as the business grew high single digits in Q1 last year.
Our growth investments are driving a healthy cadence of new product innovation at Videojet. In fact, in March, the team released the 1580 C Continuous Inkjet Printer, the industry's first dedicated soft pigmented solution. The 1580 C uses soft pigmented inks to print codes with consistent quality, excellent contrast, and strong durability to avoid degradation and fading during production runs, helping customers reduce production downtime. This is the first of several new product introductions Videojet has planned for the year and is a great example of how our teams are bringing impactful solutions to our customers. In February, we announced that our environmental and applied segment will be named Veralto when it is launched as a standalone company, and that it will be headquartered in Waltham, Massachusetts. This is an exciting milestone for the team, and they're making considerable progress towards becoming a separately traded public company.
We remain on track for a Q4 2023 separation and look forward to sharing more details in the coming months. Now let's briefly look ahead to our expectations for the Q2 and the full year. In the Q2, we expect core revenue in our base business to be up mid-single digits. We also expect total core revenue to decline high single digits as a result of lower demand for COVID-19 testing, vaccines, and therapeutics. Additionally, we expect a Q2 adjusted operating profit margin of approximately 26%, which reflects efforts to adjust our cost structure and capacity in response to COVID transitioning to an endemic state, particularly within our diagnostics and biotechnology businesses. Now, turning to the full year 2023. Despite the near-term and temporary challenges within bioprocessing, we anticipate mid-single-digit core growth in our base business.
We also expect total core revenue to decline high single digits for the year as a result of lower demand for COVID-19 testing, vaccines, and therapeutics. We expect a full-year adjusted operating profit margin of approximately 30%, which reflects the previously mentioned efforts to adjust our cost structure and capacity in response to COVID-19 transitioning to an endemic state. To wrap up, we're pleased with our strong Q1 results. Our well-rounded performance is a testament to the durability and balanced positioning of our portfolio and our team's commitment to leading and executing with the Danaher Business System. While the transition of COVID-19 from a pandemic to an endemic state is causing near-term disruption, there is no doubt that the past three years have helped shape Danaher into a better, stronger company.
We meaningfully changed the scale of our bioprocessing business with the addition of Cytiva and the creation of the biotechnology group. Cepheid's expanded installed base has significantly improved their competitive advantage. We've also increased our cadence of innovation and strategically deployed capital through M&A, including the acquisition of Aldevron, to accelerate our future growth trajectory. There's a bright future ahead for Danaher. The combination of our talented team, differentiated portfolio of businesses, and strong balance sheet, all powered by the Danaher Business System, provide us with a strong foundation to create value for many years to come. With that, I'll turn the call back over to John.
John Bedford (VP of Investor Relations)
Thank you, Rainer. That concludes our formal comments. Ashley, we are now ready for questions.
Operator (participant)
Certainly at this time. Once again, if you would like to ask a question, please press star one on your touch-tone phone. We will take our first question from Michael Ryskin with Bank of America. Please go ahead.
Rainer Blair (President and CEO)
Good morning, Michael. Welcome.
Michael Ryskin (Managing Director)
Morning. Thanks for taking the question, guys. First, I wanna start on the bioprocessing inventory challenges. You've been dealing with this issue for almost a full year now, and you've had to revise your outlook, lower for fiscal year 2023 a number of times. Why is visibility there into inventory so challenging? How do you know that this latest view of plus low single digits for the year is the right view and there's not further cuts going down the road?
Rainer Blair (President and CEO)
Thanks, Michael. Well, look, undoubtedly, visibility has been choppy here on the way up as COVID tailwinds fueled our growth and now as we try to drive the soft landing, visibility has been impacted. You know, I would tell you that normally we have visibility of 9-12 months that's very solid. But it is so that in the last quarters that has been probably more like 3-6 months related to a number of factors. You know, let me lay some of those factors out for you here, Michael, you know, sort of starting with the Q1. You know, in the Q1 our base business in bio processing grew about 100 basis points, 1%.
If you unpack the growth there, you know, large accounts that are responsible for commercial production and later stage clinical trials are growing at mid-single digits, so they're burning off inventory. I'll come back to that. Then you have sort of emerging biotech and those companies that are more involved in discovery and earlier stage clinical trial phases, which represent about 20%-30% of our business. And they're down mid-teens. Overall, this is what gets us to this sort of low single-digit growth view for the year. Let me come back to large, the larger accounts here for just a second. We see in large biopharma that, in fact, the demand is there, the inventory is burning off, but it is slower than expected.
The reason for that is that we're starting to see larger pharma companies as well as larger CDMOs recalibrate their own production plans as they start to conserve working capital and cash. We saw some of that also back in 2016. We're seeing larger customers also look at their own finished good, if you will, inventories, and starting to adjust their production plans in order to bring those down as well. If you then transition over to, again, emerging biotech, so the companies that are working more in discovery and earlier stage, there we have been observing funding headwinds for, call it, you know, the, since the H2 of the prior year. Those funding headwinds became significantly more pronounced here in the Q1.
We're seeing these accounts looking to conserve cash by prioritizing projects. We see that with lower OpEx and CapEx expenditures. Also see a number of layoffs happening in that particular segment. That's not just happening in the U.S., we also see that happening in China. We're assuming that, you know, barring any other sort of wild cards here, that it doesn't get significantly worse, but that this continues to play out for the remainder of the year.
Matt McGrew (EVP and CFO)
Hey, Mike.
Rainer Blair (President and CEO)
Great.
Matt McGrew (EVP and CFO)
It's Matt. Maybe let me give you a little bit of, kind of context around January to, you know, kind of the guide in January to where we ended up. I know Rainer sort of mentioned it, but I think it's important to kind of think about it in the two buckets. We've got the larger biotech customers that we've got, most of their stuff is sort of phase III clinical on market. In January, our assumption was that that was gonna be kind of, call it, high single digit growth from those customers. 70% or so of our customers kind of growing at, you know, 7%, 8%.
You know, kind of the remaining 20%-25% of the customers, which we're sort of referring to as emerging biotech, not everything in there is probably technically emerging, but that other piece of the customers. In January, we thought that was gonna kind of be about low double digits to kind of low teens growth. You add all that up, and that would've been the high single digit growth that we thought we were gonna see here for the year. You know, like Rainer said, what we saw in Q1 was just frankly, you know, not that supportive of that kind of ramp as we think about the what we would need to build in Q1 and Q2 to be able to hit those types of numbers for the full year.
If you think about what we're looking at and seeing now in April, you know, those large customers, instead of being 7%-8%, they've been growing still nicely, but more mid-single digits, right? The big change here is this emerging biotech, that other 20%-25%, instead of being up kind of mid-teens, they're actually down mid-teens. That comes back to everything that Rainer talked about with people really reprioritizing projects, conserving cash. That happened both in the U.S. and we saw it in China as well. I think I'd probably say it, you know, we saw modest headwinds as we entered the year, and those are just more pronounced now as we move through the quarter. Just as a, you know, to maybe put some numbers to what Rainer said.
Rainer Blair (President and CEO)
Yeah. Then just to reiterate, you know, to support a significant H2 ramp, we would start to see that activity level increasing now, and in the Q2, and we're just not seeing it to the degree that would support that.
Michael Ryskin (Managing Director)
Okay. Thanks. On that emerging biotech, just really quick to clarify that. Are you seeing that softness in bioprocessing specifically or across, you know, in the life sciences segment as well? Then maybe I could transition that to a question on the instrument. You, you know, you saw 5% growth or mid-single digit growth in instruments in the Q1. What's your expectation for the rest of the year? Any particular-
Rainer Blair (President and CEO)
Yeah
Matt McGrew (EVP and CFO)
... pockets of weakness or strength you can call out?
I'll comment on the bioprocessing broadly speaking, and maybe let Rainer talk about what we're seeing in tools. The answer is yes, we're seeing it in both. I would say that, you know, we are definitely seeing the emerging biotech funding pressures here in the bioprocessing area. I would say, you know, we're seeing it in the tools space or in life sciences as well. I would say that is a lesser portion obviously of our revenue, so it's not quite as big of an impact, but are we seeing it? Yes. I would say we are seeing customers in those spaces conserving cash on both CapEx and OpEx.
Michael Ryskin (Managing Director)
Okay. Thanks.
Rainer Blair (President and CEO)
Michael, more generally on,
Michael Ryskin (Managing Director)
Yes
Rainer Blair (President and CEO)
The life sciences here, to your first question. If we look at Q1, you know, the life sciences base business finished as we thought at high single digits after low double-digit average growth for the last three years. We've talked previously about the expected normalization of those growth rates here after having seen that elevated growth for the last three years. That's right within our expectations. If you look at that geographically, we saw strength in Western Europe. China, in fact, was up double digits on the back of some stimulus there. North America was a little bit softer.
If you look at life sciences from an end market perspective, large pharma R&D spending levels are still very quite healthy, but they're starting to moderate just given the higher comps. Now, just connecting the dots to Matt's commentary here, you know, emerging biotech is impacted by the current funding environment, and we see, you know, smaller purchases, if you will. Rather than buying, you know, six, four instruments, and, you know, in other places, really, you know, impacted in the less differentiated segments, let's say. We are seeing it. Our own business is not as exposed to that segment in life sciences, but we do see it at the margin. Then life science research and academic is holding up well globally for life sciences.
We continue to believe, our growth rates moderate to the historical levels in 2023, and that's what our guide reflects then, and that's not a change to any previous expectations.
Michael Ryskin (Managing Director)
Okay, thanks. I'll get back in the queue.
Rainer Blair (President and CEO)
Thank you.
Operator (participant)
Thank you. We'll take our next question from Vijay Kumar with Evercore ISI. Please go ahead.
Vijay Kumar (Senior Managing Director)
Hey, guys. Thanks for taking my question, and congrats on.
Rainer Blair (President and CEO)
Hi, Vijay.
Vijay Kumar (Senior Managing Director)
Hi, Rainer, and congrats on a good start to the year. I guess just a high-level question on the guidance here, Rainer. You know, all of us are looking at, you know, this... If I go back two months ago, we were assuming back half, perhaps normalization in the industry. Given your comments here on emerging, you know, small biotech, that's where the change is. Is this guidance now de-risk, you know, because we're assuming bio-processing in line with Q1? Are we confident that Q1 was the low point for the year? Just give us some color on the thought process behind the guidance here. Is this now de-risk from a back half, perspective?
Rainer Blair (President and CEO)
Vijay, I mean, we're basing our view on the H2, also based on what we're seeing in the current market environment, which we just talked about, as well as our order book. You know, like I said, a minute ago, in order to support a higher guide for the H2, we'd need to see different activity levels here in Q1 and Q2. That's not the case for two reasons. One, the emerging biotech is quite significantly softer, you know, down mid-teens, as we just talked about. Then I would say on the margin, larger accounts are taking a little bit more time to burn through inventory, although they're doing that nicely.
Those factors together have us believe, unless there's any other sort of significant market disruption, that the year will play out much as the Q1 has.
Vijay Kumar (Senior Managing Director)
Understood. Just one on, you know, Cepheid was a bright spot here. You know, 30% growth. I think you made some comments about infectious disease, different, you know, testing, tests, you know, being really strong. Can you give us some color on the customers who are seeing this ramp? Are these new customers, you know, that bought a Cepheid system during the pandemic? I'm just trying to think how sustainable is that 30% growth. Sort of a related one here on M&A, some chatter about Danaher on the M&A side. Would Danaher be interested in getting into services? How you know, maybe just remind us on the M&A lens and criteria that Danaher processes that pipeline.
Rainer Blair (President and CEO)
Sure. Vijay, on the Cepheid question, you know, we're really seeing a broad-based usage of the infectious disease menu. In fact, our broader menu in general, both at our existing install base that's been there for some time, as well as with our newer customers as they start transitioning that COVID testing capacity that they have to take full advantage of that menu. We see that 30% here as a good marker of how people appreciate the workflow advantages, the ease of use, and the accuracy of the platform. Remember, we're seeing two factors here.
One, we see tests transitioning from high throughput environments into the point of care on the one hand, and on the other hand, we see expanded usage of our testing menu.
Matt McGrew (EVP and CFO)
Yeah, Vijay, maybe just to kind of to put a real-life example to that, I think. If you think about what we're seeing, we've got customers, existing customers today, and it kind of goes both ways, right? We've got existing customers today that, for example, will use Group A strep. Those customers now sort of are also moving everything, you know, over to the four-in-one or to COVID as well. You've got the other way, which is the sort of install base going from, you know, kind of 2x growth here over the last three years. You've got people who have used, you know, these systems now for many, many years.
What they're doing is they're starting to bring in new menu, and that new menu has been around infectious disease first, which is primarily right now or largely Group A strep. You're kinda having somebody who used the box throughout COVID testing, using it for COVID, four-in-one and standalone, and now they're bringing on Group A strep as well. That's what we always kinda talked about with COVID being an anchor assay as we go forward. Larger install base, anchor assay, now you move into infectious disease. There will be other opportunities to pull in, you know, sort of other menu as we go forward. That's exactly the type of thing we're seeing play out here, and that's, it's, it is encouraging. Early days, yet.
I mean, you know, off of still some lower base. These are off of lower numbers. As we go forward, we've sort of talked about next year and the longer term. That's why I think that install base growth was so important because we've got the menu, be able to pull through, and then the additions of the new menu are gonna be only helpful on that larger install base.
Rainer Blair (President and CEO)
On M&A, Vijay, you know, obviously we don't comment on chatter, but what I would tell you is we really like the way we are positioned. Our balance sheet is in great shape. Valuations continue to moderate. You know, perhaps the one or the other board is not quite there yet, but we do see more realism in the many discussions that we have across the board as always. Specifically, as we have said in the past, should our customers tug on us and want our help and services, you know, that's not something that we're gonna ignore. Once again, that's just one of several opportunities. I think the most important thing to remember is that we are not going to deviate from our disciplined approach.
It's got to be the right end market, it's got to be the right target, and the model has to work. It's when those three lights flip green, that we execute.
Vijay Kumar (Senior Managing Director)
Fantastic, guys. Thank you.
Matt McGrew (EVP and CFO)
Yeah, I think Vijay too. I mean, I think as we sit here, I think it's, you know, not saying this is 2008, 2009, but having a balance sheet that we've got right now and being able to kind of be flexible, I think is important in times like these. Because as Rainer said, you know, when the market company and valuation all line up, we're ready to go. We do need to see all three of those. You know, as things get a little choppier here, as they might get a little choppier here, I think I really like how we are kind of set up here from a balance sheet perspective as well.
Daniel Brennan (Senior Equity Research Analyst)
Thanks, Matt.
Matt McGrew (EVP and CFO)
Thanks, Vijay.
Operator (participant)
We'll take our next question from Scott Davis with Melius Research. Please go ahead.
Matt McGrew (EVP and CFO)
Morning, Scott.
Scott Davis (Chairman and CEO)
Hey, good morning, guys. Rainer, Matt, and John, morning.
Matt McGrew (EVP and CFO)
What's up, Scott?
Scott Davis (Chairman and CEO)
Rainer, you made a reference in your prepared remarks to kind of incremental cost out. I think I probably asked this question last quarter, can you give us a little bit of granularity or color at least on, you know, what you're talking about? Is there structural cost out? Is it more of just taking out some of those kind of temporary costs that came in during COVID that now are unnecessary? Is there an actual attempt to go after some of the structural costs that perhaps you couldn't have gone after before?
Matt McGrew (EVP and CFO)
Yeah, Scott, maybe I'll take a crack at it. Yeah, like we talked about in the prepared remarks, we're sort of going from an adjusted OP, you know, adjusted operating margins of 31 in our previous guide to 30. I think the way to think about it is sort of twofold. You know, half of that's just the volume, right? Like, and most of that is all of that actually is in bioprocessing. The other half is capacity reduction costs. I would say that that's gonna be 2 places. It's gonna be in biotechnology, and then as importantly or more importantly, probably at Cepheid.
Like you said, we've always sort of known we were gonna get to an inflection point here at some point where we were sort of making the call that we've moved into an endemic phase. Once we moved into an endemic phase, we were gonna need to bring some of the capacity that we've been running at Cepheid down. You know, I think just as a reminder, you know, in Q4 last year, we did $20 million respiratory tests, and that was only three months ago. I think you've really seen a tail off here as we have entered into the last couple of months. I think our team is pretty clear that we are now, you know, kind of entering a new phase of volume that we will need.
We're gonna be getting after some of that. I think, you know, what does that look like? It's talking about closing and consolidating some of the plants that we've got. You know, some of those were frankly put up quickly, you know, in locations that were not ideal for the longer term because we were trying to meet the needs of a pandemic. We're gonna get after a couple of those sites. We're gonna reduce some of the headcount, then we're gonna go after, you know, indirect and fixed overhead costs as well, reducing shifts, et cetera, et cetera. Those are the types of things we're gonna be going after here. That's largely gonna be in the second and Q3 is when you're gonna see the costs sort of roll through.
You'll see that in the margin, in those two quarters, and then it'll sort of pop back a little bit. You know, maybe just to give you some sense of what's that look like, you know, once we're done with that kind of in Q4 and, as we head into 2024, Scott, you know, I think, Cepheid in 2019 was a 20%-25%, you know, OP business. It, you know, during the peak of the, of the pandemic here, it probably was, you know, north of 45%. After we get through what we're gonna do in the next couple of quarters, like I said, on the capacity reduction side, you know, starting kind of in Q4 and, heading into 2024, they're gonna be 35%-40% margin, right?
Meaningfully up from where we were, given the volumes, that we have now. It's a much bigger business, not quite at the peak pandemic where I was getting a lot of volume leverage. That gives you a sense of what we're going after, what we're trying to do and where we end up on the other side.
Scott Davis (Chairman and CEO)
That's super helpful, Matt. Can you guys just remind us where is your the size of your installed base in Cepheid today versus pre-COVID? I'm sure I have it in the notes somewhere, but to just make it a little easier on me.
Matt McGrew (EVP and CFO)
Yeah. Two x, Scott. you know, we're about 50,000 today. Started probably like 20 in 2019.
Scott Davis (Chairman and CEO)
All right, perfect. I'll pass it on. Thank you guys. Good luck this year.
Matt McGrew (EVP and CFO)
Yep.
Rainer Blair (President and CEO)
Thanks, Scott.
Operator (participant)
We'll take our next question from Daniel Brennan with TD Cowen. Please go ahead.
Rainer Blair (President and CEO)
Come on, Dan.
Daniel Brennan (Senior Equity Research Analyst)
Great. Thank you. Good morning. Thanks for the questions, guys. Maybe just one on bioprocess to start out. Just, could you help us think through, like, what is the magnitude of that destock drag that's kind of baked in guidance? I know you gave a lot of color earlier in the Q&A. Related to that or, Emerging Bio, it's certainly a bigger group than we thought, as a percentage of that Segment. Any color kind of what that grew in 2022 and kind of the quick math to get to low single for the year, if it's 30% of revenues? I guess you are assuming some improvement there because if we kept it down 15%, I don't think we'd get to up low single for the year.
Matt McGrew (EVP and CFO)
Yeah. again, maybe the way to think about it, Dan, is that sort of the larger customers that are really where we are seeing the inventory drag, that was sort of, you know, we initially thought we would see that in the high single digits, call it 7%, 8%. That's a little bit lower now, call it 6% and change. I think the inventory destocking is flowing through in the larger customers, and you're seeing it at a slightly lower growth rate that we saw in Q1, and we are expecting then to see for the full year. That's how I'd sort of frame what the inventory destocking is. The rest is really like I talked about earlier, you know, emerging biotech and sort of the other 25% of our customers.
You know, we thought that that would be a low teens type growth rate here for the year. Combine that with the 8% that we thought we'd see in the larger, that's how we got to high single digits. That low teens is actually negative mid-teens, right, with all the pressures we talked about. I would say that we are just sort of assuming that type of growth rate for the rest of the year for that customer base and that we're gonna have the larger customers will be more in the mid-single digit like I talked about. That's what we're kind of assuming for the year. You know, and based entirely on what we saw in Q1.
The order book in Q1 sort of not being supportive, frankly, of, in our minds at least, the ability, with the limited visibility we have or more limited visibility, just not supportive of being able to say that we think we can get back to a high single digits. I think you asked a question of what those customers were than last year. That entire business, largely, was up in line with what we saw last year, which is, as you remember, mid- to high-20s. Kind of, you know, you sort of look at mid- to high-20s with that group of folks. Now they're sort of down mid-teens. Still a very solid growth on a two-year basis, but, it is, it is, it is what we're seeing right now.
Daniel Brennan (Senior Equity Research Analyst)
Got it. Then, Thanks, Matt. Then, this may be on the margins and the earnings. You know, we're coming out somewhere kind of $9.25-9.30 for the year. Just wondering if you guys, you know, you kind of put the pieces together. Is that, is that kind of the right zip code? Given the cost actions you're taking this year, does that set yourself up in 2024 for like, you know, potentially, you know, higher than normal operating leverage, you know, depending on what the top line comes in at?
Matt McGrew (EVP and CFO)
Yeah. No, I mean, I think if you, if you're going through the full year, the math, you know, is what it is at around 30% adjusted OP margins, I think, you know, sort of that takes care of itself. As far as what we're gonna look like as we sort of get to the other side of this. I mean, I talked a little bit about Cepheid, you know, kind of was 20%-25% pre-pandemic, you know, peaked up at 45% and 35%-40%. I mean, I think if you sort of use that frame plus what we already have in diagnostics, that sort of gets you know, where we think roughly the margin profile will be. You know, biotech is probably the other one.
After we get through some of these costs, you know, the same math there was biotech was, call it high thirties, you know, prior to the pandemic. Again, it peaked at around, call it 45 and change. After we sort of get through what I think we're gonna do there, they're probably gonna be more like low forties. You know, again, better than they were pre-pandemic, given the fact that they're a bigger business. You know, those two pieces, I think you can slot into what 2024 might look like. You know, life sciences, you know, that should be kind of plus or minus where we've been here. That has not been a margin that's moved around quite a bit.
A little bit of COVID stuff as we had in 2022 and 2021, but I think you can kind of get a sense of what the margins are there. Maybe as just a high-level framework, you know, you're probably, you know, high 30s% to low 40s% with Cepheid. You can kind of assume some other stuff for the diagnostics. Biotech, probably low 40s%, what we're seeing in LS. We will obviously sort of come back to that later. Still pretty early in 2023, but just to give you a very high-level view.
Daniel Brennan (Senior Equity Research Analyst)
Great. Thanks, Matt. Thanks, guys.
Matt McGrew (EVP and CFO)
Thanks, Dan.
Operator (participant)
We'll take our next question from Jack Meehan with Nephron. Please go ahead.
Matt McGrew (EVP and CFO)
Morning, Jack.
Jack Meehan (Equity Research Analyst)
Good morning. Another question on bioprocessing? Can you share what was your total order rate in the quarter? Is there any color you can just share around how the quarter played out? Have things weakened throughout the quarter? Just curious about how things are trending.
Rainer Blair (President and CEO)
Sure. Jack, once again, Q1, our orders were down modestly sequentially, relative to the Q4, down modestly. Year-over-year, they declined 20%. Okay? What we have been seeing is the inventory burn down that we've been talking about, Matt and myself, is occurring. We see that in our order book here for the Q1. Again, we've laid out why we believe that the current activity level supports sort of a similar progression of the quarters here throughout the year as we had in the Q1.
Jack Meehan (Equity Research Analyst)
Great. Thank you. Just as a follow-up, I was curious, what impact, if any, did you see from the banking crisis which took place in the quarter? I understand you probably didn't have any direct exposure to that, but how were your customers reacting sort of across the business?
Rainer Blair (President and CEO)
Right. Direct exposure was not material in any sense of the word. As it relates to the impact on our businesses, particularly in bioprocessing, to much lesser extent in life sciences
We do think that that provides that additional inflection point here in the Q1 for liquidity tightening up and that prioritization that we're seeing here in the emerging biotech segment, call it emerging biotech, and once again, those companies working on earlier stage projects. That's where we have seen a more pronounced conservation of cash, and that plays out in OpEx, CapEx. We talked about how that played out with mid-teens contraction as opposed to, you know, sort of a mid-teens growth versus prior periods.
John Bedford (VP of Investor Relations)
Thank you, Rainer.
Rainer Blair (President and CEO)
Thanks, Jack.
Operator (participant)
We will take our final question from Rachel Vatnsdal with JPMorgan. Please go ahead.
Rainer Blair (President and CEO)
Morning, Rachel.
Rachel Vatnsdal (VP of Equity Research)
Great. Morning. Thank you for taking the questions, you guys. Appreciate all the comments that you've given on emerging biotech softness and bioprocessing with that customer set really down, you know, mid-teens in 1Q. First, just a clarifying question. Did you say that you expect that emerging biotech to remain at mid-teen declines for the year? Then kind of shifting more longer term, can you talk about your assumptions around when you expect emerging biotech to return to growth? At what point can this funding issue really pressure the long-term growth outlook for the bioprocessing market?
Rainer Blair (President and CEO)
Just to confirm on the topic of emerging biotech, our assumption is, and our guide reflects, that the activity level in emerging biotech stays for the remainder of the year, as it played out in the Q1. We're not assuming any change there, including that it doesn't get significantly worse. As it relates to how that segment progresses here, you know, that's from today's point of view, hard to predict. We need to see where capital markets go, liquidity, availability, and yes, you know, a stabilization and return to some degree of normality in the banking sector. For the visibility that we have today, we're not expecting an improvement in that segment for the remainder of the year.
Rachel Vatnsdal (VP of Equity Research)
Got it. Then maybe a few questions on China here. One of your peers recently flagged China bioprocessing weakness. I think you also, you know, mentioned that in one of your answers to an earlier question. Can you talk about how did bioprocessing perform during 1Q in China? Can you just give us some context of how big China is for bioprocessing for Danaher? Looking forward, how are those orders trending within China, specifically around some of those localized manufacturers? Then last question, just stepping back, you previously had guided to low single-digit growth for China for the year. 1Q was well above expectations. What's the total co-outlook for China? Thanks.
Rainer Blair (President and CEO)
Well, as it relates to bioprocessing in China, we've had a very good and strong business there in China for years and helped quite significantly in China in order to build the capacities for vaccines and for other biologics. What we see today, much like we've seen in the U.S., is that the emerging biotech segment, which is an important part of China's efforts to, you know, build a local biopharma industry, is also impacted by capital constraints. We've seen that play out in China as well.
In fact, that's what is, you know, the primary impact on our China numbers here in the Q1, which on the whole were better than expected, primarily because of the patient volumes and the diagnostic businesses being stronger. Now, as it relates to the full year in China, we expect our full year in China to be up low single digits for Danaher overall, based on the market recovery exiting COVID, as well as, if you will, this normalization of the activity level in bioprocessing.
Rachel Vatnsdal (VP of Equity Research)
Great. Thanks for that. Thank you.
Operator (participant)
now we'll-
John Bedford (VP of Investor Relations)
Thank you, Rachel.
Operator (participant)
Thank you. We'll turn it over to the speakers for closing remarks.
John Bedford (VP of Investor Relations)
Thank you, Ashley. Appreciate everyone for joining us on the call today. We'll be around all day, rest of the week for follow-ups.
Rainer Blair (President and CEO)
Thanks, everyone.
Operator (participant)
Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.