Danaher - Q3 2024

Transcript

Operator (participant)

My name is Ashley, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Danaher Corporation's Third Quarter 2024 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 that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two 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)

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, Form 10-Q, the slide presentation supplementing today's call, the reconciliations and other information required by SEC Regulation G relating to the non-GAAP financial measures we'll be discussing during the call, and a note containing details of historical and anticipated future financial performance, are all available on the Investors section of our website, www.danaher.com, under the heading Quarterly Earnings. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations, and will remain archived until our next quarterly call. A replay of this call will also be available until November 5th, 2024.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to results from continuing operations and relate to the third quarter of 2024, and all references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements except as required by law. With that, I'd like to turn the call over to Rainer.

Rainer Blair (President and CEO)

Thank you, John, and good morning, everyone. We appreciate you joining us on the call today. Our team delivered strong third quarter results with revenue, adjusted net earnings per share, and cash flow all coming in ahead of our expectations. We were especially pleased with the continued positive momentum in bioprocessing and another exceptional quarter at Cepheid, and we enhanced our long-term competitive advantage with the release of several impactful new innovations across our businesses. Now, we see a bright future ahead for Danaher. A transformation in our portfolio over the last several years has created a focused life sciences and diagnostics leader positioned for higher long-term growth, expanded margins, and stronger cash flow. Danaher is purpose-built to help customers solve some of the most important health challenges impacting patients around the world.

Our proven ability to innovate is enabling faster, more accurate diagnoses and helping customers reduce the time and cost needed to sustainably develop and deliver life-changing therapies. Now, the unique combination of our talented team, our differentiated science and technology portfolio, and the power of the Danaher Business System positions us well as we seek to maximize value for our customers, our associates, and our shareholders. So with that, let's take a closer look at our third quarter 2024 results. Sales were $5.8 billion in the third quarter, and we delivered 0.5% core revenue growth. Geographically, core revenues in developed markets increased low single digits, with low single-digit growth in North America and mid-single-digit growth in Western Europe. High growth markets were down mid-single digits, including a high single-digit decline in China.

Our gross profit margin for the second quarter was 58.7%, and our adjusted operating profit margin of 27.5% was down 10 basis points, as accelerated investments in innovation offset the favorable impact of cost-saving initiatives... Adjusted diluted net earnings per common share of $1.71 were essentially flat year over year, and we generated $1.2 billion of free cash flow in the quarter and $3.8 billion year-to-date, resulting in a year-to-date free cash flow to net income conversion ratio of 135%. Now, let's take a closer look at our results across the portfolio and give you some color on what we're seeing in our end markets today.

Core revenue in our Biotechnology segment was flat year-over-year, with our bioprocessing business up low single digits and our discovery and medical business down high single digits. In bioprocessing, we were encouraged with the continued positive momentum we saw in the quarter. Notably, orders increased high single digits sequentially, which is the fifth consecutive quarter of sequential order improvement, and our book-to-bill ratio improved to approximately one point zero. Now, geographically, we saw improving order trends in developed markets as large customers are returning to more normal ordering patterns. In China, orders and underlying activity levels remain weak, particularly for equipment, as customers continue to conserve their capital. Revenue growth in the quarter was driven by our larger pharma, biopharma, and CDMO customers. Production volumes at these customers, who are primarily manufacturing monoclonal antibody therapies, has continued to grow in line with historical averages.

Now, we've seen demand at these customers steadily improve throughout the year as they're moving past inventory destocking and anticipate this gradual recovery will continue over the coming quarters. In contrast, we're not seeing the same level of improvement in underlying performance from our smaller customers. Despite a modest improvement in the funding environment, they continue to rationalize their therapeutic programs and remain cautious with their investments. Now, putting this all together, we continue to expect low single-digit core revenue decline in our bioprocessing business for the full year 2024, and this includes an assumption of high single-digit core revenue growth in the fourth quarter. Now, as destocking moves behind us, we're increasingly excited about the long-term opportunities ahead for Cytiva's leading bioprocessing franchise. Monoclonal antibodies, which comprise the majority of our revenues, remain the largest investment area for our customers.

We're also seeing accelerated adoption of these therapies, and six of the top ten highest revenue-generating drugs today are monoclonal antibodies. With our comprehensive portfolio, our best-in-class scientific services, and innovation focused on increasing yields and enhancing manufacturing efficiencies, we believe we're very well positioned to support our customers today and well into the future. Now turning to our Life Sciences segment, core revenue decreased by 2%, in line with our expectations. Core revenue in our life sciences instruments businesses collectively declined mid-single digits, with market conditions in the third quarter largely consistent with what we saw in the first half of the year. Ongoing research and lab activity is driving growth in consumables and service, which was more than offset by a decline in capital equipment, particularly in China.

Announced stimulus measures in China have not yet translated into meaningful order activity, as customers are still awaiting details on the implementation of these programs. Now, in the meantime, many customers are delaying purchasing decisions. Outside of China, our end markets are relatively stable, and we were encouraged to see early signs of improvement in demand among our pharma and biopharma customers, particularly in North America. Now, during the quarter, Beckman Coulter Life Sciences introduced the CellXpress.ai. CellXpress.ai is a fully automated, high-throughput cell culture system designed to simplify and accelerate the complex and lengthy process of clone screening and cell line development. Now, by harnessing the power of the CellXpress.ai, researchers can optimize workflows and reduce hands-on time by up to 90%, enabling them to efficiently identify the most promising clones and improve the success rate of their cell line development projects.

In July, we completed the acquisition of Genedata, a leading provider of enterprise and workflow software used in drug discovery and development. Genedata's advanced software solutions automate complex R&D processes, enabling biopharma researchers to analyze and interpret samples more quickly. So we're really excited to welcome this innovative team to our life science segment. Now, Beckman CellXpress.ai and the acquisition of Genedata are both great examples of how we're strengthening our long-term competitive advantage while helping our customers accelerate the drug discovery process. In our genomics consumables business, core revenue declined low single digits, continuing the trends we saw in the second quarter.... In August, IDT expanded its synthetic biology portfolio with the launch of Rapid Genes. These ready-to-use, NGS-verified clonal genes are cost-effective and offer fast turnaround, allowing pharmaceutical researchers to quickly pursue high-throughput experiments, such as antibody development.

IDT's long history of innovation is one of the key reasons the research community turns to IDT to help advance drug discovery and accelerate the pace of genomic medicine development. Now moving to our Diagnostics segment, core revenue increased 5%. Our clinical diagnostics businesses collectively delivered low single-digit core revenue growth. Beckman Coulter Diagnostics was up low single digits, with strong global demand partially offset by the impact of volume-based procurement in China. Outside of China, recurring revenue was up high single digits, driven by recent new product introductions and installed base expansion. The Beckman team continued their accelerated cadence of new product innovation this quarter with the release of the DxC 500i integrated chemistry and immunoassay analyzer. Now, the DxC 500i is specifically designed to improve efficiency and meet the unique workflow needs of low-volume laboratory customers, such as community hospitals.

This highlights Beckman's commitment to serving the entire healthcare network by providing a comprehensive portfolio of solutions for low, mid, and high-throughput core labs. In molecular diagnostics, Cepheid's core revenue increased double digits, with broad-based strength across respiratory and non-respiratory assays. Cepheid's respiratory revenue of approximately $425 million in the quarter exceeded our expectation of $200 million, as we saw both higher volumes and a favorable mix of our four-in-one test for COVID-19, Flu A, Flu B, and RSV. Favorable volume was driven in part by customers purchasing in preparation for the upcoming respiratory season. Now, based on activity in the third quarter and our expectation of a respiratory season with normal severity, we expect respiratory revenue of approximately $1.7 billion for the full year of 2024.

Outside of respiratory, increasing menu adoption and system utilization helped drive another quarter of mid-teens growth in Cepheid's core non-respiratory reagent portfolio, including more than 20% growth in Group A Strep, sexual health, and virology assays. We also saw strong installed base growth, particularly for our lower throughput systems, as customers continued to add GeneXpert instruments in their clinics and alternate care sites. So this expansion out of the hospital allows our customers to improve financial and clinical outcomes by standardizing care across their networks. I'd like to thank all of you who joined us last month for our Investor Day, where we had the opportunity to showcase our differentiated diagnostics portfolio. During the event, we highlighted how DBS-driven innovation and commercial execution have meaningfully improved the growth and margin profile of our diagnostics franchise over the last several years.

We also talked about how we are uniquely positioned for long-term growth opportunities in high-value, high-need areas such as neurodegenerative diseases, infectious diseases, and oncology. And if you haven't had the chance to see the replay, I'd encourage you to watch it on our investor relations website. Now let's briefly look ahead at expectations for the fourth quarter and the full year 2024. For the full year 2024, there is no change to our previous guidance. And as a reminder, we anticipate a core revenue decline in low single-digit percent range and a full-year adjusted operating profit margin of approximately 29%. In the fourth quarter, we expect core revenue to decline in the low single-digit percent range. Additionally, we expect a fourth quarter adjusted operating profit margin of approximately 30%.

So to wrap up, we're pleased with our better-than-expected third quarter performance and expect the trends we're seeing today to continue into Q4. Our team's commitment to executing and innovating with the Danaher Business System enabled us to deliver strong results while continuing to accelerate growth initiatives across the portfolio. Our third quarter results also reflect the unique positioning of Danaher today. We have an outstanding group of businesses that serve attractive end markets with favorable long-term secular growth drivers. We're further enhancing our portfolio and competitive advantage with innovation that is helping customers solve some of the most important health challenges impacting patients around the world. So looking ahead, we believe this powerful combination of our leading portfolio, proven ability to innovate, and our team's commitment to executing with the Danaher Business System provides a solid foundation for delivering differentiated long-term financial performance.

And so with that, I'll turn the call back over to John.

John Bedford (VP of Investor Relations)

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

Operator (participant)

...Certainly. At this time, if you would like to ask a question, please press star one on your telephone keypad. You may withdraw your questions at any time by pressing star two. Again, that is star and one. We'll take our first question from Tycho Peterson with Jefferies. Please go ahead.

Tycho Peterson (Managing Director)

Hey, thanks. Want to probe into the instrument numbers a little bit. Wondering if you can give us instrument growth ex China, and then just maybe talk a little bit about where it's, you know, worse and where it's getting better, whether it's flow, mass spec, lab automation, microscopy, and, you know, any leading indicators of funnel dynamics that make you feel better coming out of the quarter on the instrument side.

Matt McGrew (EVP and CFO)

Yes, Tycho, I'll give you the kind of a number on what it is. It's probably low to mid single digit ex China. And then, Rainer, you want to kind of give the color on what we're seeing on the instrument side?

Rainer Blair (President and CEO)

Sure. No, absolutely. So and then, of course, in China, we would say that, it's down high single digits. But if you look at the developed markets, let's start with those. The end markets were relatively stable sequentially, but we haven't seen an inflection there yet. Although in pharma and in biotech, while it remains soft, we're starting to see some early signs of improvement, especially in North America. On the academic research side, there we see it stable in North America with Europe, modestly weaker. But coming back to China, we're all aware, of course, of the announced stimulus, but that really hasn't translated into meaningful orders, for us as customers continue to wait for those details. So...

And while they're waiting for those details, they tend to also delay perhaps the normal purchasing habits that they might have had. So the stimulus funding has yet to pick up here in the third quarter.

Tycho Peterson (Managing Director)

Okay. And then a follow-up, I know you don't want to talk about 2025 yet, but if we look at kind of the run rate for guidance on life sciences that you're giving us for the fourth quarter, you know, the street is at 6% next year on life sciences. Is that realistic, kind of given the run rate you're laying out for the fourth quarter? And then, you know, anything you can say on China bioprocessing for next year? We've seen some of your peers talk down numbers as well.

Rainer Blair (President and CEO)

Tycho, we're still looking here to see how the fourth quarter plays out and to see whether we can see a pick up in the stimulus, particularly in China, while we do expect the developed markets to be stable along the lines that I just discussed for Q3. So, we're looking to see how China's stimulus plays out here in Q4 before we can get to 2025 numbers. Now, as it relates to bioprocessing, we continue to see there a low activity level, albeit stable, but at a lower level, and we expect that to take more time to play out here in the near term.

Matt McGrew (EVP and CFO)

Yeah. Maybe just to kind of follow up. I think the comment on the China stimulus is for tools, Tycho, right? Just kind of what we're seeing there. For 2025 overall, so that's kind of what 2025 overall for Danaher for tools, but for bioprocessing for 2025, I think, you know, we've kind of talked about a gradual recovery here in 2024, and that's pretty well played out like we thought. You know, like Rainer said, we do need to see sort of how Q4 plays out, but before we kind of give anything formal on 2025. But that said, the Q4 exit rate of high single digits, an important kind of building block for us as we build backlog and visibility heading into 2025.

You know, given what we've seen here through Q3, I think we're going to see a gradual recovery continue into 2025.

Tycho Peterson (Managing Director)

Okay, and then on the life science, the guidance, you know, fourth quarter down low-single-digit, but the street next year is up six. I was trying to also reconcile, you know, whether that step up is reasonable.

Matt McGrew (EVP and CFO)

Yeah, I mean, I think the biggest factor there for as we look to next year, will be what happens with the China stimulus for life sciences.

Tycho Peterson (Managing Director)

Okay, understood. Thank you.

Operator (participant)

Thank you. We'll take our next question from Michael Ryskin with Bank of America. Please go ahead.

Michael Ryskin (Managing Director)

Hey, thanks. I actually want to just follow up on exactly your last point there on bioprocessing, sort of exit rate and how to think about 2025 and just how are you feeling about that market developing, the gradual recovery. You talked about, I think, five consecutive quarters of order growth there, and the last couple quarters you've had high single digit order growth. Revenues for bioprocessing have done well this year as well, but they've lagged the growth level. So it seems like there's a little bit of a lag in terms of the orders translating to revenue, which, you know, you would expect, obviously. Do you think that lag is closing? Do you think that we're getting closer as we hit 4Q?

You know, you talked about high single digit bioprocessing, where you're going to start to see some of that order growth we've seen over the last quarters, a couple quarters start to translate and, and again, translate into next year?

Matt McGrew (EVP and CFO)

Yeah, I mean, I think it's a perfect frame. I mean, you know, you think about exiting the year at high single digits, but you kind of take a step back and you look at, you know, from a core growth perspective, in 2024, we're going to be down low single digits. And so as you sort of think about where we kind of exit to the totality of 2024 with that gradual sort of, you know, kind of recovery in mind as we head to 2025, I think, you know, that's kind of the way that we're thinking about it, from a perspective of what revenue will do, you know, next year, based on the fact that the order trajectory has gotten better, over the last five quarters.

But, like I said, I mean, it would be great for us to see Q4 here before we go, but I do think, you know, going down low single digits this year in revenue, we, you know, be positive next year, we believe. But let's see where the trajectory goes here, given the fact that I do believe this is going to kind of be a continuation of what we saw in 2024, which is, you know, pretty, pretty gradual recovery. Very, very encouraging, though. So we're very happy with where we are.

Michael Ryskin (Managing Director)

... Okay. All right, and then, follow-up, I want to ask on Cepheid, a couple quick questions, if I can. One is, you know, you talked about timing of some purchasing of the kits in the quarter. Any chance you could quantify that? I know you did, you know, 425 in respiratory versus the 200 guide. Do you think that 225 was timing, or maybe it was some of that organic beat, and some of it was timing? Just trying to get a sense of how much pull forward there was from the fourth quarter, and in the press release, you also specifically called out Cepheid gaining market share in molecular testing. If you could expand on that, you know, where are you gaining share in terms of customer or geographically? Any specifics there?

Thanks.

Matt McGrew (EVP and CFO)

Yeah, I mean, Mike, it's a little hard to parse out to the dollar how much of the, you know, the beat was related to pull forwards versus just sort of better than we thought. I think, you know, probably anecdotally, from what we heard from customers, I would say that we do believe that there was a good portion of that was probably due to wanting to make sure that they had kind of a security of supply heading into the fourth quarter. Which is not a huge surprise, I guess. But, you know, as we sort of look forward to the fourth quarter, then, you know, we did take that into account as we thought about what we might see here in the fourth quarter.

So, you know, I'd say a significant portion of the beat was probably related to that. As far as market shares go, I think, I'd probably put it in two categories. I'd probably say one, it's largely in the U.S., though that's not, you know, an absolute statement. I would say largely in the U.S. As you know, we are entirely in, you know, sort of hospitals as well as near point of care. We've been doing very, very well with IDNs as we've expanded beyond their core hospitals into other point of care settings closer to the patient. That has continued here in the quarter, and I expect that would continue as well. Again, with this, the install base that we've been able to to drive.

Michael Ryskin (Managing Director)

Thanks for that, guys.

Operator (participant)

We'll move next to Doug Schenkel with Wolfe Research.

Doug Schenkel (Managing Director)

Hey, good morning, guys. I guess a couple quick follow-ups. There's been a lot of questions that kind of dance around the 2025 question, as I'm sure you appreciate. When I look at numbers, the Street's looking for 8% core growth, with bioprocessing growing double digits and life sciences growing 7%. You haven't said anything about anything resembling a snapback. Respiratory comps are going to be tough. VBP seems to be picking up in China. Stimulus activity follow-through seems unclear, and then, you know, just knowing you guys, you tend to be conservative. So cutting to the chase, am I missing anything? And, you know, should The Street be modeling things at these levels, recognizing you still want to see another quarter? But, you know, as we sit here today, the numbers look a smidge high to me. Am I missing anything?

Rainer Blair (President and CEO)

Well, I don't think you're missing much here. If we just take a look real quick on how we're thinking about 2025. It's important to know that we need to see how Q4 plays out here. I'll come back to that in a minute, but there's still a couple important variables in Q4 that's going to shape the next year, and those relate to really the trajectory of the order book in bioprocessing. It's so important. So certainly the high single-digit core growth that we expect in bioprocessing for the fourth quarter is fully supported by backlog and what we expect in orders. But we also want to see more deeply into 2025 by seeing that orders momentum continue into Q4.

So that's going to be key here for understanding how, you know, the second half of 2025 plays out in bioprocessing. As it relates to respiratory for Cepheid, Cepheid, another key variable here, as we just talked about, there's been some purchasing ahead here in Q3, and, you know, based on what we saw in the southern hemisphere, we do expect the northern hemisphere to have a more normal respiratory season. And as you know, that straddles the first respiratory season of the year, straddles Q4 and Q1. And then lastly, and, and this is important for life sciences, but also more generally, we need to see how this China stimulus plays out in 2025, and we'd like to see some indicators of that accelerating here in Q4.

To date, we've not really seen anything meaningful in that regard, so we're going to put numbers all around us here and then update you in January.

Doug Schenkel (Managing Director)

Okay, super helpful, Rainer. And I guess another follow-up on just... I mean, essentially trying to get at the question of the utility of the book-to-bill metric. You know, like if we look at book-to-bill from Q3 of last year and this year and assume that bioprocessing accounts for roughly 85% of biotech sales, you know, it seems like orders are up over 20% year-over-year. So I'm not sure if that math is right. That would be one question, but if it is, I'm just wondering how important is that as we think about the outlook for a return to robust bioprocessing growth? Because, you know, I think there are some that are concluding that it's taking longer to convert.

I think there's others that are assuming it's converting much more quickly than it used to. You know, I guess we're just trying to get at, you know, how useful this metric is, especially keeping in mind this is largely a consumable business at this point.

Matt McGrew (EVP and CFO)

Yeah, I mean, I think we've talked in the past about book-to-bill being, you know, it's an interesting, you know, number and can be helpful, you know, in certain businesses, but traditionally or historically, we have not really used book-to-bill to, to kind of run this business for the exact reasons you said. Lots of consumables and the timing of when the shipments hit. So I think from our perspective, book-to-bill is not something we spend a lot of time thinking about, but we do think about the orders. And as you said, you know, the orders here in the quarter were north of 20%.

Now, that is off of a very easy comp, so I think we need to have, you know, a little bit of restraint on what that means. But, you know, five quarters of sequential order growth is important. I think it's also, you know, what gave me a lot of encouragement in this quarter was, you know, typically, we do see some seasonality where we go down from Q2 to Q3, and we did not see that in this environment. I was encouraged by that, that we actually went up again sequentially. And so I sort of look at everything and think about, you know, my order growth rates, the percentages, even though those- they're off low numbers, that's important.

The fact that we've had five sequential quarters in a row coming off of where we've been on the destocking, I think that's an important factor. So to your point, I'm not sure book-to-bill is super critical for us, but maybe triangulating that with those other two factors, I really do think, you know, we're really happy with the trajectory of what we've seen in 2024, you know, and what that means heading into 2025. But, you know, again, I think we're... You know, we've seen a pretty gradual, you know, build up here in revenue and in orders, and I suspect that that continues.

Doug Schenkel (Managing Director)

Super helpful. All right, thanks, guys.

Matt McGrew (EVP and CFO)

Thanks, Scott.

Operator (participant)

Thank you. We will take our next question from Vijay Kumar with Evercore ISI. Please go ahead.

Vijay Kumar (Senior Managing Director of Equity Research)

Hi, Rainer. Good morning, and, thanks for taking-

Matt McGrew (EVP and CFO)

Good morning

Vijay Kumar (Senior Managing Director of Equity Research)

My question. I guess, one, you know, I wanna ask on genomics here, low signals. Maybe in the past, you spoke about sequencing versus gene editing, writing. What were trends between those two segments? And I think this Rapid Genes that you mentioned, maybe you talk about what Rapid Genes is, and would you expect some share gains here, you know, due to launch of this product?

Rainer Blair (President and CEO)

Sure, Vijay. On the gene reading side of the house, we do still see the markets softer, particularly in the smaller customer emerging biotech segment, we see less activity. While the funding's improved, those customers are still prioritizing their projects quite a bit, and so we're seeing a bit less consumption in that area. Now, in gene editing, of course, that's a different story, where we see a great deal of CRISPR and guide RNA and other types of solutions doing very well. Having said that, and coming back to our new product launch here with Rapid Genes, we're very excited about that. This will offer whole genes to our customers at a quality and a turnaround time, which is highly differentiated in the market.

We expect that, over time here, to provide us, some tailwind. So we're very pleased here with how IDT is performing in this environment.

Vijay Kumar (Senior Managing Director of Equity Research)

Understood. And maybe, Matt, one for you. Your Q4 operating margin assumption, it came down a tad versus the prior. I think we're looking at the low thirties exit rate. Is this some timing of expenses or anything change in margin assumption? And if it is, any change in investments and implications here as we look at the incremental margins for fiscal 2025?

Matt McGrew (EVP and CFO)

Yeah. I mean, our full year margin didn't change, approximately 29%. Q4 will be, you know, approximately 30%. I mean, I think it's probably a function of a couple things. One, we anticipate at least lower revenue in respiratory in Q4. Obviously, that has some margin implications to it. I think, you know, we did have a little bit of sort of timing, you know, a little bit better bioprocessing in Q3 than we thought, and probably some of that might be a little bit of timing related as well, sort of impacting Q4 margins.

And as you said, you know, we've had a pretty good year here, and as we head into the fourth quarter, we're thinking about the cost structure, thinking about the investments that we wanna make in the business, and we're picking an opportunity to make sure that we do some of those smartly here in the quarter. And I think you sort of, you know, add it all up, and you kinda come up with that adjusted operating margin in the thirties, sort of holding the full year here, as we head into the end of the year.

Vijay Kumar (Senior Managing Director of Equity Research)

I'm sorry, the incremental margin implications for fiscal 2025, should the bolt-ons would be in the 35%-40% range?

Matt McGrew (EVP and CFO)

I mean, it's gonna depend on volume, I think, Vijay. But, you know, like we've kind of talked about from a margin perspective, that, you know, this business, when it is operating sort of in a normal environment, the low 30s are where it should be. So I mean, 2025, you know, we'll sort of update you that in January when we get there. But, you know, that'll be a function of volume and mix, you know, depending on where it comes from, it'll be different. So we'll have to wait until we get a little bit further to give you that, but that's sort of how I'm thinking about 2025.

Vijay Kumar (Senior Managing Director of Equity Research)

Understood. Thank you, guys.

Matt McGrew (EVP and CFO)

Thanks, Vijay.

Operator (participant)

Thank you. We'll take our next question from Scott Davis with Melius Research. Please go ahead.

Scott Davis (Chairman and CEO)

Hey, good, good morning, fellas.

Matt McGrew (EVP and CFO)

Good morning, Scott. You guys mentioned again this quarter that the smaller customers in bioprocessing not coming back as fast. At what point does it become such a small piece of the business that maybe we stop having that color or it's less material? Or maybe a different way to ask the question is, what percent of revenues is it now, where it's kinda large versus small customers?

... Yeah, I mean, the larger versus small, roughly, Scott, is kind of 75% are larger and 25% are smaller. And, you know, I think, you know, we give the color primarily because those smaller customers have a little bit of a different dynamic than the larger customers. Larger customers typically have on-market, you know, or later phase, you know, phase III trial kind of, you know, you know, exposures, whereas the smaller customers tend to be, you know, earlier stage, probably, a little bit more related to, in some instances, you know, the cell and gene therapies of the world. So a little bit different. They act differently in the funding environment as well.

So I think it's, you know, we're just trying to kind of give color as to what we're seeing there, where we are seeing an improvement in the funding environment. It's not necessarily working its way through into orders and revenue at this point. And so just to kind of give a little bit of color, but, you know, to your, to your point, I think is, you know, most of our customers are the larger customers with stuff that is on market. When I look back at what has caused all the pain of the last, you know, kind of two years in this business, it was destocking at those customers, and I believe that is largely behind us. And so that's why I think it's really encouraging as we stand here and look forward. Though the recovery has been gradual, it has happened.

It's happened at the largest customers. Gives me a lot of faith that the long-term outlook of this business still is the high single digits. When we get there, kind of a little is a bit of a TBD, but I think that's the reason we sort of want to give a little bit of color on both of them.

Scott Davis (Chairman and CEO)

Okay, that makes sense, Matt. And guys, we didn't talk about the buyback or M&A or kind of your funnel or nothing mentioned in prepared remarks. Any update there, as it relates to your confidence or size or any metrics around the funnel would be helpful.

Matt McGrew (EVP and CFO)

Yeah, I'll just touch real quick on the buyback, and maybe Rainer can give some color on the, on the funnel, the M&A funnel. But, I mean, the buyback, we... You know, I think if you see and, you know, we did complete it technically, that buyback straddled both Q2 and Q3, so if you see something in the Q, that's what it was related to, just so everybody's kind of clear. It was not a new issuance. It was the final, you know, final pieces, if you will, of the buyback that we talked about in Q2.

Rainer Blair (President and CEO)

Thanks, Matt. And as it relates to the M&A environment, Scott, as we do every day, we're out there cultivating across all of our segments, and we're fairly active there. Our funnels are pretty dynamic. It's fair to say that while the environment, though, is improving, valuations are still elevated. And so we feel great about our positioning, both in terms of the assets that are attractive out there and, of course, our balance sheet. But we're going to maintain our discipline, with our deals needing to meet our trifecta of attractive end market, attractive company, and then, of course, the valuation framework, the model, has to work as well. So active, but we still see that the valuations are elevated.

Scott Davis (Chairman and CEO)

Makes sense, Rainer. Thank you. I'll pass it on. Appreciate it. Good luck, guys.

Matt McGrew (EVP and CFO)

Thanks, Scott.

Rainer Blair (President and CEO)

Thanks, Scott.

Operator (participant)

Thank you. We'll take our next question from Puneet Souda with Leerink Partners. Please go ahead.

Puneet Souda (Senior Research Analyst)

Yeah. Hi, Rainer and Matt, thanks for taking my question.

Rainer Blair (President and CEO)

Happy.

Puneet Souda (Senior Research Analyst)

Specifically on China, just following up on a few things. What's the right sort of jump-off point for China as we think about 2025, just given the uncertainties here in the market and the backdrop of the stimulus? And also wondering if you can elaborate a bit on the China volume-based procurement. How much of an impact are you making there? And just lastly, on China, how much is local bioprocessing competition, you know, important in this market? And does that change your view for the long-term growth of the worldwide, you know, bioprocessing or biotech segment, just now that local competition has emerged and is being utilized more in some of those local labs?

Matt McGrew (EVP and CFO)

Yeah, maybe to start, because I think your first question and your third question sort of wrapped around China for next year in bioprocessing. Maybe I'll let Rainer take that, but just VBP, just to remind everybody, we sort of assumed that it was going to be kind of a $150 million impact over three years, really starting this year, as we ramp up. Our assumptions initially were sort of that that would be linear over the next three years.

You know, we are starting to see a little bit more activity in China around VBP here at the end of this year, so I think we'll have a better sense of what that linearity looks like after we get through the next couple of months, where it does look like the activity is sort of ramping up. So I still think the number is a good number, but how that rolls out and plays out will sort of be determined in the next couple of weeks.

Rainer Blair (President and CEO)

As it relates to VBP, Puneet, really, I think we need to view China as stable and sort of bumping along the bottom, and we don't expect a change in that in the short term, as we go through and think about 2025, unless we see a material change in the execution and rollout of the stimulus program in China. So we expect China to continue to develop as it has been here for most of the year in 2024. Now, as it relates to your question on local competition, certainly there's local competition out there, but we have to be clear that particularly in biotech, there are many companies simply struggling to survive, and they're buying essentially the least expensive solution that they can to make it to the end of the month.

And it's just going to have to be good enough. So that's sort of one section of the market. Then there's another segment that really is targeting the international sale of their therapeutic molecules, and they tend to want to have solutions from multinational companies, first and foremost from ourselves here and Cytiva, in order to ensure that regulators around the world are comfortable with the inputs that are required to make these incredibly effective drugs. So yes, there's local competition. We would see it more on the margin, especially as it relates to local molecules.

Puneet Souda (Senior Research Analyst)

Got it. Thank you. Very helpful. I'll leave it there.

Rainer Blair (President and CEO)

Thanks, Puneet.

Operator (participant)

Thank you. We'll take our next question from Dan Leonard with UBS. Please go ahead.

Dan Leonard (Research Analyst)

Thank you. I wanted to circle back to the trends in life science instruments and equipment specifically, because I think you do have some consumables in that instrument reporting. Can you elaborate a bit further on what the equipment trends were in the quarter from a growth perspective?

Rainer Blair (President and CEO)

So just to talk about the quarter more generally, the market conditions in the third quarter were essentially consistent with what we saw in the first half of 2024, and capital equipment spending continued to be constrained, and to the last question, particularly in China. Now, in contrast to the equipment constrained environment, consumables and service grew in the quarter, as lab and research facilities and institutions activity has started to stabilize. So we do see equipment being constrained, but consumables are starting to move.

Dan Leonard (Research Analyst)

Then a quick follow-up, Rainer. Could you comment on the performance at Abcam? It seems like versus our numbers, the run rate there is improving. I'm unsure if that's the correct read or if it's just rounding or if there's other, you know, M&A into that revenue mix.

Rainer Blair (President and CEO)

There's no other M&A in that revenue mix, but of course, we're working very hard to drive our hypothesis around Abcam. And right now, the focus is on transitioning into Danaher, of course, and the team is making great progress with that. They're implementing, actually pulling on our DBS capabilities to drive those growth accelerators and of course, improve the cost positioning that we've talked about. So we feel very good about where we are with Abcam, and long term, we absolutely believe that this meets our expectations, both in terms of growth and the bottom line.

Dan Leonard (Research Analyst)

Thank you.

Rainer Blair (President and CEO)

Thanks, Dan.

Operator (participant)

Thank you. And we will take our final question from Jack Meehan with Nephron Research. Please go ahead.

Jack Meehan (Equity Research Analyst)

Thank you. Good morning, guys.

Rainer Blair (President and CEO)

Good day.

Jack Meehan (Equity Research Analyst)

I wanted to ask about diagnostics in the China region. To start for Matt, can you just check my math? Can you remind me, is this, like, 15% of diagnostic sales? And I was trying to back into how Beckman might have done in the quarter in the region. It could have been to the tune of down 20% or so. And then for Rainer, would just be great to hear about your thoughts on regional dynamics and diagnostics. Is this all kind of price impact or any change in kind of share shift? Thank you.

Rainer Blair (President and CEO)

Yeah, so diagnostics, the total revenue for China diagnostics, I think you're in the ballpark on that. As far as what China was from China diagnostics perspective in the quarter, I don't think it would have been down that high, Jack. Probably it was down in overall diagnostics, which most of that's going to be Beckman. It was kind of down low double digits, so I think that's probably a more, a better place to anchor, but I think your total number is probably pretty close to right, as far as percentage set. We saw across the world here, really, with one exception, strong performance in all of our clinical diagnostic businesses. And of course, you heard from Matt around Cepheid, that we believe to be taking share there at really at all levels.

But coming back to our clinical diagnostics businesses, we saw a high single-digit recurring revenue growth in North America and in Europe. On the other hand, we come back to China, we see the impact of the volume-based procurement, which is what brings us down. We also had in Beckman Coulter, in particular, a high hardware sell-out comp last year as we were burning down some backlog. But we're very pleased with how our clinical diagnostics businesses continue to develop, continue to take share, and volume-based procurement is sort of the topic right now for diagnostics in China.

Operator (participant)

Thank you, and this will conclude our Q&A session. I'll turn the call over to John for closing remarks.

John Bedford (VP of Investor Relations)

Thank you, everybody, for joining today. We'll be around for follow-ups all day, rest of the week. Thank you.

Operator (participant)

Thank you, and this does conclude today's program. Thank you for your participation. You may disconnect at any time.