Scott Davis: Hey. Good morning guys. Rainer, Matt, and John good morning. Rainer, you have said – you made a reference in your prepared remarks to kind of incremental cost-out. I think I probably asked this question last quarter. But can you give us a little bit of granularity or color at least on what you are talking about? Is there a structural cost-out? Is it more of just taking out some of that – some of those kind of temporary costs that came in during COVID that now are unnecessary, or is there an actual attempt to go after some of the structural costs that perhaps you couldn’t have gone after before?
Matt McGrew: Yes. Scott, maybe I will take a crack at it. Yes, like we talked about in the prepared remarks, we are sort of going from an adjusted OP – adjusted operating margins of 31 in our previous guide to 30. And I think the way to think about it is sort of twofold, half of that is just the volume, right. Like – and most of that is all of that activities in bioprocessing. But the other half is capacity reduction costs. I would say that that’s going to be two places. It’s going to be in biotechnology and then as importantly, and more importantly, probably at Cepheid. Like you said, we have always sort of known we were going to get to an inflection point here at some point where we were sort of making the call that we have moved into an endemic phase.
And once we moved into an endemic phase, we were going to need to bring some of the capacity that we have been running at it Cepheid down. And so I think just as a reminder, in Q4 last year, we did 20 million respiratory tests, and that was only three months ago. But I think you have really seen a tail off here as we have entered into the last couple of months. And I think our team is pretty clear that we are now kind of entering a new phase of volumes that we will need. And so we are going to be getting after some of that. And I think what does that look like, it’s talking about closing and consolidating some of the plants that we have got. Some of those were frankly put up quickly in locations that were not ideal for the longer term because we are trying to meet the needs of a pandemic.
So, we are going to get after a couple of those sites. We are going to reduce some of the headcount and then we are going to go after indirect and fixed overhead costs as well, reducing shifts, etcetera, etcetera. So, those are the types of things we are going to be going after here. That’s largely going to be in the second quarter and third quarter is when you are going to see the costs sort of roll through. So, you will see that in the margin in those two quarters and then to sort of pop back a little bit. And then maybe just to give you some sense of what’s that look like in – once we are done with that kind of in Q4 and as we head into ‘24, Scott, I think Cepheid in 2019 was a 20% to 25% OP business, during the peak of the pandemic here, it probably was north of 45%.
And after we get through what we are going to do in the next couple of quarters, like I have said on the capacity reduction side, starting kind of in Q4 and heading into ‘24, they are going to be 35% to 40% margin, right. So, meaningfully up from where we were given the volumes that we have now, it’s a much bigger business, but not quite at the peak pandemic where I was getting a lot of volume leverage, but that gives you a sense of what we are going after, what we are trying to do and where we end up on the other side.
Scott Davis: That’s super helpful, Matt. Can you guys just remind us what – where is your – the size of their installed base in Cepheid today versus pre-COVID, I know I have – I am sure having the note somewhere, but to just make a little easier on…?
Matt McGrew: Yes. 2x, Scott, we are about 50,000 today. Started probably like 2019.
Scott Davis: Alright. Perfect. I will pass it on. Thank you, guys. Good luck this year.
Matt McGrew: Yes.
Rainer Blair: Thanks Scott.
Operator: We will take our next question from Dan Brennan with TD Cowen. Please go ahead.
Rainer Blair: Good morning Dan.
Dan Brennan: 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. And then 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 ‘22 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 would get to up low single for the year.
Matt McGrew: Yes. So, maybe – 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 – we initially thought we would see that in the high-single digits, call it, 7%, 8%, and that’s a little bit lower now, call it, 6% and change. And so I think the inventory destocking is flowing through in the larger customers, and you are seeing it at a slightly lower growth rate that we saw in Q1 and we are expecting them to see for the full year. So, that’s how I would sort of frame what the inventory destocking is. The rest is really, like I talked about earlier, emerging biotech and sort of the other 25% of our customers, 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 would see in the larger, that’s how we get to high-single digits. That low teens is actually negative mid-teens, right, with all the pressures we talked about. So, I would say that we are just sort of assuming that that type of growth rate for the rest of the year for that customer base and that we are going to have – the larger customers will be more in the mid-single digit like I talked about. That’s what we are kind of assuming for the year. 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 high-single digits.
I think you asked a question of what those customers were there 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. So, kind of you sort of look at mid to high-20s with that group of folks, now they are sort of down mid-teens, still a very solid growth on a 2-year basis, but it is what we are seeing right now.
Dan Brennan: Got it. And then thanks Matt. And then may be on the margins and the earnings, so we are coming out somewhere kind of $925 million, $930 million for the year. Just wondering if you guys – you kind of put the pieces together. Is that kind of the rates of code? And given the cost actions you are taking this year, does that set yourself up in ‘24 for like potentially higher than normal operating leverage, depending on what the top line comes in at?
