Earnings Call Transcript - DHR Q4 2022

Operator, Operator

Good day, everyone. My name is Todd, and I will be your conference facilitator this morning. I would like to welcome everyone to Danaher Corporation's Fourth Quarter 2022 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. 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, Vice President 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, 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 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 February 7, 2023. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. 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 refer to results from continuing operations and relate to the fourth quarter of 2022 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 to all of you. We appreciate you joining us on the call today. Our terrific fourth quarter results rounded out another great year for Danaher. Broad-based strength across the portfolio drove nearly 10% core growth, strong earnings growth and free cash flow generation. We're particularly pleased with the performance of our base business, which grew high single digits for the year and has now grown high single digits or better each of the last 10 quarters. Our well-rounded results this year would not have been possible without the hard work and dedication of our more than 80,000 associates. The team overcame global supply chain challenges, logistics delays, COVID-driven lockdowns and inflationary pressures to reliably support our customers. We believe the DBS-driven execution, coupled with our proactive growth investments over the last several years contributed to meaningful market share gains in many of our businesses. Now looking to 2023 and beyond, we see a bright future ahead for Danaher. Our portfolio is made up of leading franchises of durable business models and attractive end markets that benefit from outstanding long-term secular growth drivers. We're well positioned financially with our strong free cash flow generation and balance sheet capacity, allowing us to actively pursue strategic M&A opportunities. So this unique combination of leading businesses and financial strength all powered by the Danaher Business System differentiates us and reinforces our sustainable long-term competitive advantage. So with that, let's take a closer look at our full year 2022 financial results. For the full year, we delivered nearly 10% core revenue and adjusted earnings per share growth, including 8% core revenue growth in our base business. We also expanded our core operating margins by 60 basis points and generated $7.4 billion of free cash flow. Our free cash flow to net income conversion ratio exceeded 100% for the 31st consecutive year. Our strong financial results allowed us to continue our cadence of high-impact growth investments throughout the year. In fact, our investments in research and development of more than $1.7 billion in 2022 enabled us to accelerate innovation across Danaher. New products such as the Leica Microsystems, Beacon, Leica Biosystems automated advanced staining platform, Bond Prime; and Hach's Headquarters series portable meters are helping improve both human health and the environment, while enhancing our growth trajectory. Our capital expenditures of over $1 billion included substantial investments to expand production capacity in our bioprocessing and genomics businesses. These investments have been critical to support current customer demand but they're equally important to support the long-term growth opportunities and security of supply in these markets. With several of our customers' biologic therapies progressing through the regulatory approval process, we anticipate the size of our bioprocessing and genomics businesses to increase meaningfully here in the coming years. Now let's turn to our fourth quarter results in more detail. Sales were $8.4 billion, and we delivered 7.5% core revenue growth. Our base business core revenue growth was also 7.5% as our core revenue growth contribution from COVID-19 testing was neutral year-over-year. Geographically, core revenue growth in both North America and Western Europe was approximately 10%. We saw healthy demand across our major end markets with customer activity and funding levels largely consistent with the third quarter. High-growth markets core revenue was up slightly. China grew low single digits, driven by robust demand in our life sciences instruments and acute care diagnostic businesses. However, the reopening efforts associated with the ending of zero COVID policies and subsequent increase in COVID-19 infections resulted in reduced patients and testing volumes in our clinical diagnostics business. We anticipate lower testing volumes to continue through the first quarter of 2023 before gradually recovering through the balance of the year. Our gross profit margin for the fourth quarter was 59%, and our operating margin of 27.4% was up 100 basis points, including 105 basis points of core operating margin expansion. This strong margin performance was enabled by the disciplined cost management, productivity measures and price actions our teams implemented to help offset the impact of inflationary pressures across our business. While there continue to be supply chain disruptions and cost pressures, we saw a modest improvement in component availability again this year and this quarter. Adjusted diluted net earnings per common share of $2.87 was up 6.5% versus last year, and we also generated $2.2 billion of free cash flow in the quarter. Now before we get into the details of the quarter, I'd like to point out some updates we've made in our financial reporting. Due to changes in our organization resulting from the significant growth of our Life Sciences segment over the past several years, we have separated our former Life Science segment into two new reporting segments. Cytiva and Pall Life Sciences, which include bioprocessing and our discovery and medical businesses, are now reported as the biotechnology segment. Our new life sciences segment is comprised of the remainder of the businesses in our former life sciences segment. The Diagnostics and Environmental & Applied Solutions segments are unchanged. Importantly, today's discussion reflects these changes. So now let's take a look at our fourth quarter 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 1% and core revenue was up 4%. In bioprocessing, robust customer activity across monoclonal antibodies, cell and gene therapies and antibody drug conjugates, or ADCs, drove another quarter of more than 20% growth in non-COVID revenue. Total core growth in bioprocessing was mid-single digits for the fourth quarter as customers continue to scale back their COVID-19 vaccine and therapeutic programs. For the full year 2022, core revenue growth in bioprocessing was high single digits, which included non-COVID revenue growth of more than 20%. Looking to 2023, we expect customers to further reduce their COVID-19-related programs. Vaccination and booster rates have been significantly lower than initially anticipated and the availability of alternative therapeutics has reduced the need for monoclonal antibody-based treatment. In light of these dynamics, we now anticipate COVID-19-related vaccine and therapeutic revenue will be approximately $150 million for the full year of 2023, down from approximately $800 million in 2022 and lower than our previous expectation of $500 million. Our non-COVID business has averaged more than 20% growth over the past two years. Given these elevated growth rates, we spent the past several weeks speaking with our customers to better understand their planning assumptions for 2023. And based on these discussions, we anticipate non-COVID bioprocessing core growth will be high single digits for the full year 2023. This includes low single-digit core growth in the first quarter as customers repurpose inventory purchased for COVID-19 vaccine and therapeutic programs to non-COVID projects. Now there is a bright future ahead for the biologics market and our leading bioprocessing business. The number of biologic and genomic-based therapies in development and production continues to rise, and we expect to see significant industry-wide investments in research, development and production capacity well into the future. With our differentiated portfolio, which is the broadest and deepest in the industry across upstream and downstream applications, our best-in-class scientific services and extensive global reach, we're exceptionally well positioned to support our customers as they undertake this complex life-changing work. Now moving to our Life Sciences segment. Reported revenue grew 8%, and core revenue was up 13%. Strength was broad-based across instruments and consumables with all major businesses delivering high single-digit or better core revenue growth. Our Life Sciences instrument businesses collectively delivered double-digit base business core revenue growth, led by Leica Microsystems and Beckman Coulter Life Sciences. Demand remains solid across our major geographies and end markets, and we're seeing good momentum in our opportunity funnels as we begin the new year. Our genomics consumables businesses had another quarter of double-digit core revenue growth, driven by strong demand for our plasmas, RNA and gene lighting and editing solutions. During the quarter, IDT strengthened its next-generation sequencing portfolio with the acquisition of Archer DX NGS assays. These assays are foundational in researching novel cancer fusions and bring new capabilities, including an enhanced bioinformatics platform to expand IDT's suite of sequencing solutions. Now moving to our Diagnostics segment. Reported revenue was up 3% and core revenue grew 7.5%, led by mid-teens growth at Cepheid. Radiometer grew double digits, led primarily by demand for blood gas testing in China. Leica Biosystems was also up double digits with growth across all major product lines. In our digital pathology business, we saw record placements of the GT 450, Leica's best-in-class digital pathology slide scanner, as customers are increasingly realizing the operational and clinical benefits of digitization. In Molecular Diagnostics, core revenue across Cepheid's non-respiratory chest menu grew more than 20% led by infectious disease testing, sexual health and hospital-acquired infections. The acceleration in growth this quarter was due in part to increased adoption of Cepheid's non-respiratory test menu across our nearly 50,000 instruments installed base, which has doubled since 2020. During the quarter, Cepheid expanded their competitively advantaged test menu with the launch of the Xpert Express MVP. The Express MVP rapidly diagnoses three distinct health conditions that cause overlapping vaginitis symptoms in women using a single sample. This addition to our sexual health portfolio enables physicians to quickly diagnose the patient's infection and prescribe a targeted treatment regimen, reducing the need for multiple office visits. Now this is a great example of how bringing accurate, easy-to-use molecular testing closer to patients is improving health care outcomes and driving long-term growth at Cepheid. In respiratory testing, global PCR testing volumes continued to moderate. The demand for Cepheid's point-of-care PCR testing remained robust. Cepheid's respiratory testing revenue of approximately $1.1 billion in the fourth quarter significantly exceeded our expectation of approximately $375 million. The respiratory season got off to an earlier-than-anticipated start with a high prevalence of circulating respiratory viruses, notably COVID-19, flu and RSV leading to both higher volume and a preference for our 4-in-1 test for COVID-19, Flu A&B and RSV. Now based on discussions with our customers, we believe COVID-19 will enter an endemic disease state in 2023, and as a result, expect to ship 30 million respiratory tests and generate $1.2 billion of revenue for the full year. As hospitals and health systems begin planning for their endemic testing needs, we're increasingly seeing customers consolidate their point-of-care PCR testing platforms onto Cepheid's GeneXpert. Our customers' preference for the GeneXpert for both respiratory and non-respiratory testing is a result of the significant value of the unique combination of fast, accurate lab-quality results and a best-in-class workflow provide clinicians. The combination of these advantages, the broadest molecular diagnostic test menu on the market and our leading global installed base creates significant opportunities ahead for Cepheid's point-of-care solutions. Moving to our Environmental & Applied Solutions segment. Reported revenue grew 1% and core revenue was up 5.5%. Water quality core revenue growth was high single digits and product identification was flat. At product identification, marking and coding was up slightly while packaging and color management was down low single digits. Core revenue at Videojet was up slightly due in part to a difficult year-over-year comparison as the business grew low double digits in Q4 last year. In December, Pantone announced Viva Magenta as the 2023 Color of the Year. The color of the year and the billions of media impressions it generates solidifies Pantone's iconic brand and was one of the drivers of high single-digit full-year core revenue growth in X-Rite color standards business in 2022. In water quality, Hach delivered their third consecutive quarter of double-digit growth. ChemTreat was also up double digits in the fourth quarter, capping its 54th consecutive year of growth, a remarkable accomplishment and a testament to the team's best-in-class execution and their commitment to continuous improvement. During the quarter, demand for analytical chemistries and consumables remained strong across municipal and industrial end markets, but we did see a slight moderation of larger project activity at Trojan. Throughout the year, our teams and Environmental & Applied Solutions did a great job leveraging the Danaher Business System to overcome supply chain challenges and manage inflationary pressures. They were at the forefront of identifying potential constraints and quickly deployed DBS tools like daily management to work with suppliers and ensure production part availability. They also used visual project management to rapidly reengineer products and to reduce our reliance on hard-to-source electronic components. Also, strong price performance helped the team expand operating profit margins by more than 80 basis points in 2022, while continuing their cadence of growth investments. We believe this outstanding execution paired with our proactive growth investments drove market share gains and enhanced our long-term competitive advantage in both product identification and water quality. So with that color on what we're seeing in our businesses and end markets, let's now look ahead to our expectations for the first quarter and the full year. Beginning with the first quarter of 2023, we are updating our base business core revenue growth definition to exclude the impact of COVID-19-related testing and the impact of COVID-19 vaccine and therapeutic revenue. In the first quarter, we expect core revenue growth in our base business to be up mid-single digits. We also expect total core revenue growth to decline mid-single digits as a result of lower demand for COVID-19 testing, vaccines and therapeutics. Additionally, we expect the first quarter adjusted operating profit margin of approximately 30%. Now for the full year 2023. We expect high single-digit core growth in our base business. And we also expect total core revenue growth to decline mid-single digits for the year as a result of lower demand for COVID-19 testing, vaccines and therapeutics. Additionally, we expect the full year adjusted operating profit margin of approximately 31%. So to wrap up, 2022 was another terrific year for Danaher. Our team successfully executed through a challenging environment to reliably support our customers and deliver outstanding financial results, all while investing for the future. As we look ahead, we believe the combination of our talented team, differentiated portfolio of businesses and strong balance sheet, all powered by the Danaher Business System, position Danaher to outperform well into the future. So with that, I'll turn the call back over to John.

John Bedford, Vice President of Investor Relations

Thanks, Rainer. That concludes our formal comments. Todd, we're now ready to open up the line for questions.

Operator, Operator

We'll take our first question from Derik De Bruin with Bank of America.

Derik De Bruin, Analyst

Hey, good morning. And thank you for taking my question. So, a couple of questions to start. I guess the first one would be just on the inventory situation and sort of like how we should think about that working through and just sort of your expectations on the bioprocessing front on the non-COVID bioprocessing. Just some sense of timing. Is this a 1Q, 2Q phenomenon? Just general thoughts there.

Rainer Blair, President and CEO

Derik, as it relates to the inventory situation, let's think about sort of our Q1 guide here as a starting point and the context for that. We expect for our overall guide to have a base business growth of mid-single digits, and we expect COVID testing, including now vaccine and therapeutics to have high single-digit and low double-digit headwind, giving us that decline of mid-single digits in the first quarter. Now let me come back to the base business because, of course, that's where your question resides. And once more, we have to be clear that we have now excluded vaccine and therapeutic revenues from the base business, right? So our mid-single-digit base business is down from the comparable low double-digit core growth we saw in Q4 and most of 2022. And that's due mainly to bioprocessing, excluding COVID, and I want to dig into that a little bit, but also because we're expecting lower patient volumes here in China as zero COVID policies are ended. So that's what's happening there in that base business in Q1. Now if we look, and we dig in a little bit deeper into bioprocessing, we anticipate that our non-COVID bioprocessing business will be low single digits, and that's really for two reasons. One, we're coming off of 30% growth in Q1 of 2022. But we're also working through the inventory pockets that we spoke about that was related primarily to COVID programs. And we do expect Q1 to be an inflection point there that we work through the majority of that in Q1 and then after that, continue to see improvement.

Derik De Bruin, Analyst

Got it. Okay. And I have to ask the obligatory analytical instrumentation demand, SCIEX demand coming off of some really strong growth this year. What are your sort of expectations on instruments? And I would expect you would see some slowdown in the back half of the year is embedded in your numbers.

Rainer Blair, President and CEO

I think that reflects our perspective. We saw low double-digit plus core growth in our instrument businesses here in 2022 and believe that we definitely took share there. And frankly, our funnels are still very strong here going into the new year. But as we look to the total year, we would expect that low double-digit plus to moderate to the more normal growth of mid-single digits plus certainly towards the back end of the year.

Derik De Bruin, Analyst

And what's embedded in sort of like an overall pricing expectation just to get your sense of...

Rainer Blair, President and CEO

So as you know, in the fourth quarter on pricing, Derik, we came in over 400 basis points, with the teams really executing very well. And that represents roughly where we were for all of 2022. As we look forward then into 2023, we continue to expect some cost pressures there, and we'll look to have pricing of 200 to 300 basis points, probably closer to 300 basis points.

Matthew McGrew, CFO

Derik, that's for total Danaher, not just instruments.

Derik De Bruin, Analyst

Yes. Okay. Got it. Got it. Like that. Okay. I think I'll get back in the queue. I've got some other ones where I need to digest some stuff, but thank you. I'll get back in the queue. Thanks.

Rainer Blair, President and CEO

Thanks, Derik.

Operator, Operator

Our next question comes from Rachel Vatnsdal with JPMorgan.

Rainer Blair, President and CEO

Good morning, Rachel.

Rachel Vatnsdal, Analyst

Good morning. So first up, just on China. So you mentioned that you're expecting some softness there. Can you just dig a little bit deeper, how much of the softness on that 1Q is going to be pressured there? And then what do you expect for China in total for the year as well? Thanks.

Rainer Blair, President and CEO

As I noted, China is emerging from the zero COVID lockdowns, which is impacting patient volumes. We particularly observed this in December and are using it as a benchmark for our expectations in the first quarter in China, where we anticipate a decline of about high single digits. However, we expect this to stabilize as the population navigates through the various expected infection waves. Consequently, we foresee an improvement in patient volumes over the year and project low single-digit growth for the full year in China.

Rachel Vatnsdal, Analyst

Great. That's helpful. And then just a follow-up. You mentioned that Western Europe was 10% core during 4Q. Can you just talk about your expectations for Europe with this year? Have you seen any softness related to any budget constraints on your conversations with customers there? Thanks.

Rainer Blair, President and CEO

I would tell you, if we think about non-COVID, we continue to see good demand in Western Europe. We have seen the cycle time of deals. So that period of time between lead, capture and capturing the order extending here in the fourth quarter, and we would expect that to continue. As you think about Western Europe, including COVID headwinds, we would expect that to be flat here in the first quarter and then up low single digits. But once again, that includes some COVID headwinds.

Rachel Vatnsdal, Analyst

Helpful. And then final question for me, just around bioprocessing. Can you just walk us through kind of the order book and how book-to-bill has trended within bioprocessing given some of the puts and takes there getting us to that low single digits in the first quarter and rounding out the year at high single digits on the non-COVID side?

Rainer Blair, President and CEO

Sure. So as it relates to orders, and I talked about this in the past as well as book-to-bill. In fact, we don't really look at book-to-bill for the bioprocessing business because it may not be the best way, and we don't think it is the best way to really understand the underlying health of the business, particularly given the extended lead times that we had here in the prior period. So we've been looking at orders really on a two to three-year horizon to take out the lumpiness as well as the extended lead times. And over the last three years, really, both orders and revenues have grown at a mid-single teens average rate. Now from a current trend perspective, in the fourth quarter, our order rate improved by over 500 basis points sequentially but was still down mid-teens, which was as expected as customers continue to adjust for our shorter lead times. Now to be clear, our full-year 2023 guide anticipates Q1 being the low point at low single digits for the bioprocessing non-COVID core growth. And that also takes account to any inventories that might be with some of our COVID program customers, which are now being repurposed. We're working with those customers to repurpose that inventory. So whatever these order dynamics are revenue forecast for bioprocessing non-COVID in first quarter low single digits, we expect that to be the low point of the inventory work off or burn off and then move forward to what is high single-digit bioprocessing, non-COVID core growth for the full year.

Rachel Vatnsdal, Analyst

Helpful. Thank you.

Operator, Operator

Our next question comes from Vijay Kumar with Evercore ISI.

Vijay Kumar, Analyst

Good morning, Rainer. Thank you for taking my question. I wanted to clarify some numbers regarding bioprocessing. A couple of months ago, the expectation for base bioprocessing was between high singles to teens. If we consider the high single at the lower end of that range, has anything changed? Looking at the cadence for the year, it seems like the first half will be in the mid-single digits, suggesting the second half could reach double digits. Is there any risk for the latter part of the year? What gives you confidence in the activation of bioprocessing in the second half?

Rainer Blair, President and CEO

Thanks, Vijay. So as early as the JPMorgan conference, we did talk about the bioprocessing growth range being from high single digits to mid-teens range. And as I mentioned then, and I'll confirm now, we have spent the last several weeks talking to our customers to understand their planning assumptions for the year. And the clear message is the underlying demand remains robust and unchanged. So we continue to see monoclonal antibodies, cell therapy and gene therapy activity continue to be strong, and we're even seeing more work on mRNA on the back of its success with COVID vaccine. So while the demand is remaining solid, customers are actually not anticipating a step-up in activity. So activity remains strong and as we've seen in prior quarters, but they're not anticipating a step-up versus what we've seen here in the last couple of years. And so as you look at the two, three, even four year stacks here, we've seen mid-teens growth CAGRs for bioprocessing non-COVID. So coming back then, if you take our high single-digit bioprocessing non-COVID full-year guide on the back of an approximately 30% comp from 2022, it's right in the mid-teens range, both on a two and a three-year basis. So we think that's especially strong in light of the fact that in Q1, we do expect to burn off some inventory and will start low single digits. And in fact, if we had assumed the mid-teens to the higher part of the range for '23, that actually would have implied an acceleration of demand to over 20% on a two-year stack. And frankly, that's just not supported by our customer discussions. So as we think about burning off these inventories, you asked about the confidence in the later part of the year, and that confidence is based on our discussions with customers, the backlog that we have, the continued order activity that we see and that has improved over prior periods. And so we feel very good about the high single digits non-COVID bioprocessing growth for 2023.

Matthew McGrew, CFO

And maybe, Vijay, just to provide some context with numbers since we've discussed this extensively, looking at bioprocessing growth excluding COVID over the past four years, including our 2023 guidance, we experienced around 7% to 8% growth in 2020 as we transitioned into and out of the core bioprocessing and focused more on COVID-related work. Then in 2021 and 2022, we saw over 20% growth, excluding COVID, in each of those years. Now in 2023, we're anticipating high single-digit growth, which resembles an inverse barbell shape. To summarize, we had high single-digit growth at the start of 2020, a similar rate as we moved through the tail end of COVID in 2023, with significant growth of 20% to 25% during 2021 and 2022. This timeframe is essential to analyze since it's not effective to consider just one period or quarter, especially given the extended lead times and the impact of COVID mentioned by Rainer in 2021 and 2022. It’s important to align on these historical numbers as we discuss the mid-teens growth rate that our customers reference, indicating that while their demand remains steady, their order patterns might differ slightly.

Vijay Kumar, Analyst

That's helpful color and perspective. And then one last question here for me, perhaps, Matt, this is you. The high single-digit guide for bioprocessing implies like the non-bioprocessing that's nearly 75% of Danaher revenues. That's also up high singles. That's a strong number. Again, any confidence here? I think there's been some concerns around capital order trends. So what's the order book shaping up for instruments? And margins here, 31% that's stepped down from Q4. Given that high single digits will resume and the pricing commentary, your volume leverage and pricing contribution should be pretty strong. So maybe if you could just comment on the non-bioprocessing high single-digit assumptions and margin assumptions?

Matthew McGrew, CFO

Let me take margins. And I think we sort of covered the high-single digits bit, but maybe Rainer can kind of wrap it up on bioprocessing.

Vijay Kumar, Analyst

I'm sorry, non-bioprocessing, non-bioprocessing.

Matthew McGrew, CFO

I'm sorry, I'm sorry. Okay. Everything outside of bioprocessing. Got you. So let me start with the margin question first because I think that's one that's topical here, too. So if you think about margins for the full year, and then I can kind of touch on '21 or Q1 as well. When you look at margins, we're talking about kind of 31% adjusted margin. And that's going to be a bit lower than we were in '23 on the margin, if you will, with the biggest factor going to be the value of leverage, like you alluded to there. We're going to lose, call it, $3.2 billion of COVID headwinds in the year, $700 million from the vaccines and therapeutics as we go from, call it, $800 million to a little over $150 million or a little under $150 million. And then we're going to have $2.5 billion of testing follow-up as we think we get to a more endemic state on Cepheid testing. So the margin profile on that stuff on the headwinds is basically the fleet average. I'd say that probably falls through at 40%. So kind of in line with our normal fall through, but that volume is pretty meaningful at $3.2 billion as you talked about. So we will offset some of that. High single-digit core and base business is going to be $1.7 billion in change, let's call it, falling through 35% to 40%, but just not enough to fully compensate what's happening with our COVID headwinds here. I believe that when you consider the volume alongside the overall macro environment, I still want to be cautious in our planning as we move into the year. I'm interested in how inflation in the supply chain evolves throughout the year. China remains somewhat uncertain in terms of its recovery. I prefer to begin the year with a cost structure that is properly aligned, and we will see how these factors unfold. As the year progresses, we will certainly strive for improvement, but that's my perspective on the margins for the year. The only distinction between Q1 and Q2 compared to the full year is the foreign exchange impact in the first quarter. We expect a $225 million foreign exchange headwind in Q1. Therefore, the same factors that will drive the full year also apply to Q1.

Vijay Kumar, Analyst

That’s helpful.

Rainer Blair, President and CEO

And then Vijay, just coming back to your question regarding the base business without Biotechnology growth for 2023. We talked about Life Sciences instruments going from the low double digits to the mid-single-digit plus here as we expect that to moderate during the course of the year. But in our Life Science businesses, we also have our genomics businesses, which are growing at double digits. So when you look at our under the new definition, Life Sciences business, so that would be the instrument businesses and genomics businesses, we expect high single-digit growth for the year. As it relates to our Diagnostics business, without COVID testing, we also expect high single-digit growth there, if you think about the growth in Leica Biosystems, Radiometer and as patient volumes normalize, supported also by solid growth at Beckman diagnostics, once again without COVID testing high single digits. And then as it relates to Environmental & Applied Solutions, we would expect that now to normalize after having had just banner growth here in the last couple of years to be more the low to mid-single-digit growth, probably skewed more to mid-single digits for the year.

Vijay Kumar, Analyst

That’s extremely helpful, Rainer. Thank you, guys.

Operator, Operator

Our next question comes from Scott Davis with Melius Research.

Scott Davis, Analyst

Hey, good morning, guys. Lots of detail already discussed here, so I'll try to go back to a little bigger picture. What assumptions are you guys using for kind of labor and material inflation for 2023? I assume this is mitigated a little bit from the high labor inflation you've had the last couple of years, but curious on your view there?

Matthew McGrew, CFO

Yes, Scott. When I consider price cost, looking at that 200 to 300 basis points of price, we have been optimistic about price/cost over the past year and possibly a bit longer. I believe that maintaining that 200 to 300 basis points guidance will keep us in a positive price cost position. We are noticing some reductions in supply chain pressures, particularly in freight lanes, which is a significant area for cost. While we are observing improvements in availability in other parts of the supply chain, we haven't yet seen a decrease in costs. Therefore, we are still relying on that 200 to 300 basis points of price to help mitigate ongoing challenges, but there are early indications that things might be shifting.

Scott Davis, Analyst

Is that price, Matt, is that pretty much already out in the system? Or is that still to be...

Matthew McGrew, CFO

No, it's out. Yes, it's already out there. If we need to, we can go for more as we've done here, Scott, and you saw that as we built through the year this year.

Scott Davis, Analyst

And can you guys remind us what are the remaining steps you need for the Environmental & Applied Solutions separation? Is there any kind of upside to getting that done on the earlier than planned?

Matthew McGrew, CFO

I would like to say it's easy, but there is a lot of work involved, Scott. We're still in the early stages of the audits, and after that, we have significant organizational tasks to tackle, along with a whole team working on it. I believe we are still very much on track for Q4, aiming to achieve something then. Anything before that seems unlikely due to the audits, the remaining work, and the tax ruling, which all require time. So, I don't think we should consider that a base case scenario right now, Scott. Q4 still seems to be the most realistic timeframe.

Scott Davis, Analyst

Okay. I’ll pass it on. Thank you, guys and best of luck in '23.

Operator, Operator

Our next question comes from Dan Brennan with Cowen.

Dan Brennan, Analyst

Good morning, Rainer and Matt. Thank you for addressing my questions. I wanted to start with China. While there was a previous question on this topic, I’ve noticed that some industry peers are saying there's currently a challenge due to rising COVID rates, but as the year progresses, China might actually outperform expectations due to economic advantages. What are your projections regarding this low single? Do you believe a cushion is necessary, or how do you see China's situation unfolding this year in light of the policy changes?

Rainer Blair, President and CEO

In the near term, we have seen lower patient volumes in our Diagnostics business due to hospitals in China being overwhelmed with COVID-infected patients, and we expect this trend to continue into the first quarter. Currently, it is the Lunar New Year holiday, which may lead to increased infections over the next 30 days. Over time, we anticipate that the situation will improve, though it’s uncertain how many additional waves of infection may occur. However, we believe that throughout the year, especially regarding our business, patient volumes will start to recover. This has been a consistent pattern following severe lockdowns in large cities in previous years, so we expect resiliency. As a result, we project a full year guidance for China at low single-digit growth. There is potential for upside, as there is pent-up demand in the Chinese economy. It will depend on how quickly people can return to work and how quickly markets can return to normal. From our perspective today, low single digits for the full year seems reasonable, and we will provide updates as the year progresses. There may be additional growth if this pent-up demand is realized in 2023.

Dan Brennan, Analyst

Great. And then just on the M&A environment. We've heard some commentary in kind of recent weeks that there seems to be a more willing seller environment, maybe just a reflection of macro and interest rates. So there seems to be maybe more folks coming to the table. How would you characterize obviously, it's impossible to time M&A, but how would you characterize the current environment? And just any color in terms of the outlook, whether it be from private targets or public targets and obviously, I'm sure all the remaining businesses post the EAS spin, EAS and excuse me, are candidates for M&A, but just how would you characterize kind of the interest levels by your business? Thank you.

Rainer Blair, President and CEO

So our perspective on M&A remains unchanged here. First of all, our funnels continue to be very active. As you know, our balance sheet, which is now at 1.5 turns is in great shape. We're starting to see in the marketplace some recognition and I'll even say some acceptance of the lower valuation levels that we have now seen for a good period of time. And I would say it is early days, but the environment for M&A continues to improve. And as you know, in the past, when there have been these kind of situations, Danaher has been able to deploy capital in a really value-creating way. And of course, it's our intention to do that here in the future as well.

Dan Brennan, Analyst

Great. Thanks, Rainer, thanks, Matt.

Operator, Operator

Our last question will come from Patrick Donnelly with Citi.

Rainer Blair, President and CEO

Good morning, Patrick.

Patrick Donnelly, Analyst

Good morning, Rainer. Thank you for taking my question. I would like to ask about the Diagnostics business, specifically regarding Cepheid. Can you discuss the non-COVID aspect and what feedback you are receiving from customers about utilization and usage, especially from those who purchased instruments during the COVID period? It's clear that the installed base saw significant growth over a couple of years. I would appreciate your insights on what you anticipate as COVID decreases and respiratory cases decline.

Rainer Blair, President and CEO

I mean, Patrick, we're very encouraged by what we're seeing. As you mentioned, over 50,000 instruments placed, more than double than we've had; well into the mid-20s in the number of tests. Now as you can imagine here in the fourth quarter and sort of the beginning of the first quarter, our customers have been busy with respiratory testing. No question about that. But we're very encouraged by the fact that even in the fourth quarter, we saw that non-COVID testing growing at over 20%. And I think that's indicative of a couple of things. First of all, we were very strategic in how we thought about placing our instrument in the sense that we really stayed at the point of care with customers that would be able to standardize their larger IDNs around the GeneXpert architecture as well as leverage subsequent to the pandemic, the broad testing menu that we offer, and we continue to see that. Not only do we continue to see that, but we see continued consolidation of point-of-care molecular testing onto the GeneXpert platform, which is likely also another driver for us seeing the continued adoption of the non-respiratory menu. So very positive outlook here. We're encouraged and it's still kind of early days.

Patrick Donnelly, Analyst

Okay. That's helpful. And then maybe just a follow-up on Dan's capital deployment one there. Can you just refresh us on kind of how you think about leverage ratios and if the current rate environment changes your perspective at all in terms of what size deal you guys would look at?

Matthew McGrew, CFO

Yes, Patrick. From a leverage perspective, we've historically reached just over four a few times. We've always stated that we prefer not to be rated any lower than our current status, so that's the limit we consider. Our leverage has varied significantly over time, and we don't target a specific ratio like two or three; it fluctuates with deal activity, and we approach it at our own pace. Regarding the current rate environment, it doesn't change our approach. We continue to evaluate returns as we always have. We've experienced similar rate environments in the past, and even tougher ones. The last decade or so, when rates were near zero, was quite different, but we don't anticipate any fundamental changes given our current situation.

Patrick Donnelly, Analyst

Alright. Thanks, Matt, thanks, Rainer.

Operator, Operator

Thank you. At this time, I would like to turn the call back over to John Bedford for any additional or closing remarks.

Rainer Blair, President and CEO

Well, first of all, thanks again, everybody. We are thrilled with the way we closed out 2022, and we see a strong 2023 ahead with all the numbers, maybe just a quick recap. For 2023, we see our base business growing at high single digits. And in the first quarter, we see that base business despite the fact that we're working off some biotech and bioprocessing inventories at mid-single digits. Now we've talked at length about COVID testing and vaccine, therapeutic headwinds and I think those are real. But despite those headwinds, we feel great about the important role that we played in the pandemic. Keep in mind, we have reinvested COVID-related cash flows to create lasting annuities with acquisitions and breakthrough innovation while further strengthening our balance sheet. And so, we exit the pandemic much stronger than we entered with higher growth and higher margins in our base business. So with that, we thank you for the call. Wish you all the best for 2023.

John Bedford, Vice President of Investor Relations

Thanks, everybody. We're around for follow-ups all day. Thanks.

Operator, Operator

This concludes today's call. Thank you for your participation. You may disconnect at any time.