Revvity, Inc. (NYSE:RVTY) Q2 2024 Earnings Conference Call July 29, 2024 8:00 AM ET

Company Participants

Steve Willoughby - SVP, IR
Prahlad Singh - President & CEO
Max Krakowiak - SVP & CFO

Conference Call Participants

Patrick Donnelly - Citi
Jack Meehan - Nephron Research
Puneet Souda - Leerink Partners
Vijay Kumar - Evercore
Matt Sykes - Goldman Sachs
Dan Brennan - TD Cowen
Catherine Schulte - Baird
Luke Sergott - Barclays
Michael Ryskin - Bank of America
Paul Knight - KeyBanc
Rachel Vatnsdal - JP Morgan
Tycho Peterson - Jefferies

Operator

Hello, and welcome to the Q2 2024 Revvity Earnings Conference Call. My name is Elliott, and I'll be coordinating your call today. [Operator Instructions]

I would now like to hand over to Steve Willoughby, Senior Vice President, Investor Relations. Please go ahead.

Steve Willoughby

Thank you, operator. Good morning, everyone, and welcome to Revvity's second quarter 2024 earnings conference call. On the call with me today are Prahlad Singh, our President and Chief Executive Officer; and Max Krakowiak, our Senior Vice President and Chief Financial Officer.

I would like to remind you of the safe harbor statements outlined in our press release issued earlier this morning and also those in our SEC filings. Statements or comments made on this call may be forward-looking statements, which may include, but may not be limited to financial projections and other statements of the company's plans, objectives, expectations or intentions.

The company's actual results may differ significantly from those projected or suggested due to a variety of factors which are discussed in detail in our SEC filings. Any forward-looking statements made today represent our views as of today. We disclaim any obligation to update these forward-looking statements in the future, even if our estimates change. So you should not rely on any of today's statements as representing our views as of any date after today.

During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release.

I'll now turn it over to our President and Chief Executive Officer, Prahlad Singh. Prahlad?

Prahlad Singh

Thank you, Steve, and good morning, everyone. The power and potential of Revvity were on displayed during the second quarter, which allowed us to exceed our financial expectations for the quarter despite continued market uncertainty persisting amongst some in the pharma biotech market. While the headcount reductions, site consolidations and other cost cutting measures we have seen from these customers since mid-last year continued, we were more than able to offset the impact of these actions through meaningful strength in our other businesses.

Revvity's uniqueness enabled us to overcome these challenges and continue to post leading financial performance. I expect this differentiation to continue even as pharma spending eventually normalizes. Max will provide more specifics, but I wanted to briefly touch on a few key points as it pertains to our recent financial performance. Our negative 1% organic revenue decline was at the upper end of our expectations for the quarter. Our customers are continuing to work through temporary cyclical pressures with their preclinical spending, and I'm confident in the eventual return to a more normalized environment, like, we've seen over the last two decades.

We had fantastic performance in a number of other areas of the business in the quarter, which should continue over the remainder of the year, specifically within our signal software and diagnostics franchises, both of which are somewhat unique to Revvity compared to our general peer group. We also continued to tightly manage spending, which resulted in 29% adjusted operating margins in the quarter, up significantly from the first quarter. These good top line results combined with our strong margin performance led to adjusted EPS of $1.22, which was meaningfully above our expectations.

In addition to the strong P&L performance, we continued to show great progress on managing our operations, leading to another quarter of excellent cash generation. We had over 100% free cash flow conversion of our adjusted net income for the third consecutive quarter, which brings our free cash flow generated so far this year to approximately $300 million. In addition to our robust cash generation, I'm happy to report we also received nearly $150 million of additional inflows that were owed to us related to the divestiture of the PerkinElmer Analytical & Enterprise Services business.

Given we expect this strong year-to-date performance to continue into the second half of the year and that we do not believe the market is currently appreciating either our recent relative outperformance or the significant potential still in front of us, we intend to use our healthy balance sheet to more aggressively repurchase shares over the remainder of the year. We believe this represents a tremendous long-term value creation opportunity for our shareholders, which will not exist forever.

We currently have roughly $330 million remaining on our existing buyback authorization, which we will look to opportunistically capitalize on. Our operating margin performance and cash flow generation so far this year are both great examples of the company executing at a very high level. It is this determined ability to strongly execute in our key focus areas that will also contribute to our differentiated performance in the years to come.

Now moving on to other highlights in the quarter. It was great to see how we continue to lead with innovation for our customers. In late April, we launched the more highly automated AP2400 workflow in our latent TB testing business. This new offering, which we expect to receive FDA clearance later this quarter has launched in Europe and will be launching in the U.S. and China upon receiving regulatory clearances.

We anticipate that the increased automation and decreased hands-on time for our lab customers, combined with the superior sensitivity and specificity of our T-SPOT assay, should lead to improved competitiveness for us in the IGRA latent TB testing market globally. This is of particular importance in the U.S., which is by far the largest market in the world for latent TB testing, as customers will now be able to have the latent TB tests they really want with the level of automation they need.

It was also great to see at the recent World Health Assembly in Geneva that a new resolution passed by all 194 countries recommends that newborn screening programs be established in every single country. With this key resolution being adopted, additional government agencies such as the World Bank and other federal governments will now consider providing funding for newborn screening. Additionally, a new World Health Organization working group has been created, focused on developing guidance to drive the adoption of newborn screening to cover more of the approximately 70% of babies around the world who go untested at birth today.

We have also continued to make good progress in adopting new technologies, including AI, to further streamline our operations and improve our product offerings. A few examples of this are how we are now using an AI-based tool to drive improved collections from our customers. We can now instantaneously engage with multiple customers in any language, identify why an invoice has not been paid based on the customer's response and flag the concern to the appropriate internal team for resolution.

Just 90 days ago, this same process would have required a person speaking a specific language to either personally e-mail or call a customer, have a conversation, take notes, investigate internally and to follow-up with the customer. Obviously, a much more manual and time consuming process, given a high volume of predominantly consumable related invoices. We expect to broaden the use of this system across the entire company in the coming months.

With our customers, we are building on our past efforts in machine learning to adapt generative artificial intelligence into more of our offerings themselves. Since the beginning of the year, we have been using AI to support the design and sourcing of new materials used in the development of our life science reagent offerings.

With this information, we can develop more complex biological structures more quickly using new and different materials than in the past. We have also recently been using AlphaFold to validate data from some of our high content screening offerings in a key project looking to uncover new insights on the GLP-1 receptor. These findings have recently been submitted to a key scientific journal for publication.

I look forward to sharing more details on how we are using AI in our R&D and building it into our products themselves at our upcoming Investor Day in November. As it pertains to our upcoming Investor Day on November 21, we are preparing what should be a great day to get up close and personal with Revvity. Attendees will better understand who we are, the impact we are having on customers and patients and how we plan to accomplish our key goals over the coming years. It will also be a great opportunity to see BioLegend's operations and beautiful campus in San Diego. So I hope you join us either in person or virtually.

Finally, I wanted to share that we continue to have a keen focus on not only what we are doing for the advancement of science and diagnosis of disease, but also how we are doing it. These efforts were recently recognized by the ESG rating agency MSCI, who increased our ESG rating to AA from A.

We remain active on a number of fronts to increase our sustainability in our operations, R&D and logistics, which will continue. But it was great to see our progress so far resulting in an improved and now upper tier rating from one of the most prominent ESG rating agencies in the world.

So in closing, before turning it over to Max, we had a very good second quarter on many fronts from our top line to margins to our cash flow generation. They were all strong and reflective of our organization's commitment to successful execution as we navigate this evolving end market environment.

These results put us on a good trajectory for the year and allow us to raise our earnings expectations overall. While it is uncertain at this point as to when pharma spending will return to a normal environment, we are optimistic that the worst is behind us as the long term potential of our business remains bright.

With that, I will now turn the call over to Max.

Max Krakowiak

Thanks, Prahlad, and good morning, everyone. As Prahlad briefly touched on, in the second quarter, we continue to do a very good job of executing on those items that are more fully within our control, such as our expenses, which led to strong margin performance and our working capital management, which led to exceptional free cash flow conversion and cash generation.

While pharma and biotech spending continued to remain challenging in the second quarter, the uniqueness of Revvity allowed us to overcome these headwinds and be in a position to raise our margin and adjusted EPS expectations for the year. This strong performance year-to-date, combined with our successful cash generation, positions us to more aggressively deploy capital at a very opportunistic time.

We plan to begin more significant share repurchase activity going forward in addition to remaining focused on proactively deleveraging. These actions are expected to drive meaningful value creation for our shareholders in the years to come, while providing even more flexibility to us for future capital deployment activities in the future.

Now turning to the specifics of our second quarter performance. Overall, the company generated total adjusted revenues of $692 million in the quarter, resulting in a 1% decline in organic revenue, which was at the high end of our expectations. FX was a 1% headwind, which was slightly worse than expected, and we again had no incremental contribution from acquisitions.

As it relates to our P&L, we are pleased to report we generated 28.7% adjusted operating margins in the quarter, which was up significantly versus the first quarter and was roughly 120 basis points above our expectations. I'm extremely proud of our team's execution from a cost perspective by controlling what we can control, realizing additional synergies and experiencing the full benefit of the restructuring actions we took at the end of last year.

Looking below the line, our adjusted net interest and other expense was $8 million in the quarter as we are benefiting from our strong cash inflows and the favorable interest environment against our fixed rate debt, while our adjusted tax rate was 21.1%. With an average diluted share count of 123.5 million for the quarter, this resulted in an adjusted EPS in the second quarter of $1.22, which was $0.10 above our expectations.

Moving beyond the P&L, we generated free cash flow of $160 million in the quarter, resulting in free cash flow conversion of our adjusted net income of 107%. This brings the free cash flow generated year-to-date to $293 million, resulting in 108% conversion of our adjusted net income. This result is clearly outstanding as our teams have an increased focus on managing all aspects of working capital to better optimize the business following the transformation we have gone through over the last several years.

As I mentioned, in addition to this internally generated cash, we also received an additional inflow of approximately $150 million in the quarter from PerkinElmer with additional payments expected over the remainder of the year. You will note that the receipt of these PerkinElmer related payments are positively impacting the discontinued operations lines in our investing cash flow statement.

As for capital deployment, we remained active in the second quarter. We repurchased $20 million of shares in the quarter, while also increasing our funding towards key capital expenditure projects. As discussed, we intend to step-up our repurchase activity over the remainder of the year, while remaining committed to our investment grade credit rating. We finished the quarter with a net debt to adjusted EBITDA leverage ratio of 2.4 times.

I will now provide some commentary on our second quarter business trends, which is also included in the quarterly slide presentation on our Investor Relations website. The 1% decline in organic revenue in the quarter was comprised of a 6% decline in our life sciences segment and 3% growth in diagnostics. Geographically, we declined in the low-single digits in the Americas and Europe and grew low-single digits in Asia, with China declining low double-digits.

From a segment perspective, our life sciences business generated adjusted revenue of $314 million in the quarter. This was down 7% on a reported basis and 6% on an organic basis. From a customer perspective, sales to both pharma biotech customers and academic and government customers declined in the mid-single digits in the quarter. Our life sciences instrument revenue was down low-teens in the quarter and our reagents, which includes our technology licensing and specialty pharma services revenue, declined high-single digits.

Our reagent performance was negatively impacted by the difficult technology licensing comps, which contend to be lumpy and did not repeat this year. Absent these comp headwinds, the more modest low to mid-single digit decline in reagents was still below our expectations as there continued to be pockets of pharma headcount reduction activity across the industry. We are not expecting any meaningful improvement in absolute reagent sales volumes in the back half of the year, but we will begin to face easier comparison starting here in the third quarter.

Our signal software business was a highlight again this quarter, as it grew in the high-teens organically year-over-year. We are seeing strong traction across the board in this business, including with our net customer retentions, new business wins, SaaS conversions, and good initial adoption of recent new product launches. The business will face some tough comp dynamics in the third quarter before returning to robust growth in the fourth quarter to finish out, what is on pace to be a very strong year.

In our Diagnostics segment, we generated $378 million of adjusted revenue in the quarter, which was up 1% on a reported basis and 3% on an organic basis. From a business perspective, our immunodiagnostics business grew in the high-single digits organically during the quarter, solidly above our expectations. The business continues to perform well with its newer offerings and again experienced robust growth in the Americas. This helped to offset flat performance in China, as it was pressured from the go-to-market change we implemented at the beginning of the year.

Our reproductive health business grew in the low-single digits organically in the quarter. Newborn screening continued to perform well and grew in the low-single digits in the quarter globally, despite continued pressure in China. Excluding China, our newborn business again grew in the high-single digits. We are optimistic for the recent pressures on our newborn business in China to subside starting this quarter, allowing us to return to more meaningful growth to finish up the year.

Finally, our applied genomics business declined in the low double-digits in the quarter. Based on conversations with customers and our current order pipeline, we are cautiously optimistic that we may now have found the bottom in this business as we expect it to be roughly flat here in the third quarter before returning to positive growth to close out the year.

As it pertains to China specifically, our revenue in the country overall declined in the low double-digits year-over-year. This consisted of a high-single digit decline for diagnostics and a low double-digit decline in life sciences. Late in the quarter, we began to see a more meaningful slowing in demand for instrumentation as more customers are holding-off on their purchasing decisions until the availability in terms of stimulus becomes clearer.

This resulted in our life science and applied genomics instrumentation in China being down over 30% overall in the quarter. While we are optimistic that the current stimulus programs will positively impact parts of our business in China eventually, we are not assuming this incremental tailwind significantly materializes until next year.

Consequently, we expect our life science and applied genomics instrumentation in China to remain challenged until stimulus arrives. As a reminder for context, our life sciences and applied genomics instrumentation sales in China represents only approximately 3% of our overall revenues.

In regards to the outlook for the remainder of the year, we are pleased by our performance year-to-date and are starting to see more encouraging signs from our recent pharma biotech customer conversations. Revvity is also fortunate that we have differentiated growth drivers within our company, which have continued to perform well, allowing us to maintain our positive organic growth outlook for the year.

Given we are now at the midpoint of the year and based on our outlook for the remaining six months, we continue to expect that the 2% midpoint of our organic growth guidance is the most likely scenario for the year. With the continued strength in the U.S. dollar at the end of June, we are now anticipating a negative 1% headwind from FX for the full year compared to our prior outlook of FX having a neutral impact. We expect these two factors to result in our full year 2024 revenue being in the range of $2.77 billion to $2.79 billion.

With our profitability pacing better than previously anticipated and our non-operating items also coming in favorable, we are excited to share that we are raising our adjusted earnings per share guidance for the year as our expense, cash flow and balance sheet management have been excellent, which we expect to continue.

Consequently, we now expect our 2024 adjusted EPS to be in the range of $4.70 to $4.80, up from our prior outlook of $4.55 to $4.75. Given that we believe the lower than normal growth this year is only temporary, we plan to capitalize on this opportunity by becoming even more active in our capital deployment via share repurchases over the remainder of the year.

We expect this planned step-up in buyback activity will pay meaningful dividends for our shareholders in the years to come. With our strong margin performance in the first half, which we anticipate will continue over the remainder of the year, we now expect our adjusted operating margins to be in the range of 28% to 28.5% for the year, up from our prior 28% outlook.

Below the operating line, we are also doing a great job managing those items that are more fully within our control. Given the strong cash flow year-to-date, combined with the inflow of nearly $150 million from PerkinElmer, we now expect our net interest and other expense for the year to be approximately $50 million, down from our prior outlook of $60 million. We continue to expect our tax rate to be a little over 20% for the full year.

Since we do not account for share repurchase activity in our guidance until it is actually completed, for the time being, we are still expecting a diluted share count of approximately a 123.5 million shares. As mentioned, we anticipate the impact from any share repurchases we make over the coming months to be relatively neutral to our adjusted EPS in the near term, as we are already more than halfway through the year and it would have an offsetting effect on our interest income.

In the third quarter, we are anticipating our organic growth to improve relative to the first half of the year and grow in the low-single digits year-over-year, while FX is currently expected to be a headwind of approximately 100 basis points. We again expect to hold our operating expenses relatively flat sequentially, resulting in adjusted operating margins of around 28%.

Our net interest and others should be up roughly 50% sequentially in the third quarter to approximately $12 million, and we expect a third quarter tax rate of approximately 22%. Overall, this results in an adjusted EPS in the third quarter expected to be in the range of $1.10 to $1.14.

Overall, we had a strong second quarter despite market challenges continuing as we executed extremely well on our areas of focus that are more within our control. The uniqueness of revenue is allowing us to continue to forecast positive organic growth when many others in the industry are not. Combined with our ability to properly manage the business, it is allowing us to raise our adjusted operating margin, free cash flow, and adjusted EPS guidance for the year, which I am very proud of.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Patrick Donnelly with Citi. Your line is open. Please go ahead.

Patrick Donnelly

Hey. Good morning, guys. Thanks for taking the questions. Prahlad, maybe on the reagent side, certainly, I understand the technology licensing comps weighing things down there. But as Max talked about, that low to mid-single maybe a little bit below expectations, sounds like the pharma piece is just lingering there. Can you just talk about, I guess, what you're seeing kind of break down the business a little bit, whether it's BioLegend or different segments and just talk about the trends you're seeing and then expectations, it does not sound, like, you guys are baking in much of an improvement in the guide. But it would be helpful to just talk through what you're seeing and just expectations what you guys are looking for to signal a recovery there?

Prahlad Singh

Hey, Patrick. Good morning. Sure. So on the reagent side, as you heard from both Max and I in the prepared remarks, we saw some sporadic, I would say, volatility and additional site consolidations and close down that happened around the middle of the quarter. But the headcount reductions and site consolidations we saw, I think it's now mostly behind us. I mean despite -- outside of this, I would say, sporadicness, we've seen generally nine months of stability and that's what gives us increased confidence that the worst is behind us.

In terms of the current guidance, we assume very similar level of absolute dollars in the third quarter versus the second quarter with some, I would say, normal seasonal improvements from that going on in 4Q. But I think the essence to your question is, we feel like the worst of the cuts that are going on in the pharma biotech is now likely behind us and that's what sort of gives us a sense of increased visibility into the second half.

Patrick Donnelly

Okay. That's helpful. And then maybe one for Max, just on the margins, nice performance, good to see that come through in 2Q. You obviously moved the guidance up a little bit there. Can you just talk about the moving pieces? How much of it is the restructuring versus any mix? And then it sounds like, again, this 20, 20.5 good launching point for next year. Can you just remind us how you think about the algorithm as we work our way into next year and then any moving pieces we should be thinking about? Much appreciated, guys. Thanks.

Max Krakowiak

Yeah. Hey, Patrick. So from a margin standpoint, I think we're encouraged by the performance for the team for the first half of the year. Again, that's leading us to take up the margin expectations for the full year. I think when you think about the factors that are driving this, I would say it's really continued progress on our integrations and synergies from some of the recent acquisitions in addition to the restructuring actions that we took at the end of last year. So, I think it's kind of a combination of those two factors is really the predominant driving force on the margin side.

As we look longer term, as a reminder, our LRP kind of calls for 75 basis points of OMX per year, assuming a normal market growth rate environment. I think as we mentioned in the call, we'll see about 25 here either at our Analyst Day or again in January. But I think for us, if we are in a normal market environment, we feel very confident on the 75 bps OMX per year.

Operator

We now turn to Jack Meehan with Nephron Research. Your line is open. Please go ahead.

Jack Meehan

Thank you. Good morning. I wanted to ask about China diagnostics. Starting with immunodiagnostics flat in the quarter, what are your expectations for the second half of the year? And can you just remind us what the go-to-market changes you were made were earlier in the year and how those are playing out? Thanks.

Max Krakowiak

Yeah. Sure. Hey, Jack. So from a China diagnostics standpoint, I would say for the second quarter, really the headwind we faced was on the instrumentation side, as we mentioned in the prepared remarks, China IDX was right in line with expectations being approximately flat. As we look towards the second half of the year, specifically again for China IDX, we anticipate positive mid-single digit growth in the second half of the year.

And I think then to your last question on the go-to-market change, this was for one of our older legacy product lines that we had in China. It was related mostly to an infectious disease portfolio. At the beginning of the year, we did go to an indirect commercial model. And so again, that's been a little bit of a headwind from a revenue perspective, but it's been a tailwind from a profitability standpoint and it's more or less played out as anticipated.

Jack Meehan

Got it. Okay. And then on the newborn screening side, it sounds like that was still down in the quarter, but you're confident in that making a turn, like, what are you seeing on the ground? What gives you that confidence that business is going to turn? Thanks.

Prahlad Singh

Yeah, Jack. I think just as we've talked about earlier, the prenatal screening tends to be an early indicator around the birth rates that are going to play out over the second half of the year. So it's nothing more than just seeing the prenatal screening numbers going up that sort of gives us a sense that there will be improvement in birth rates as we look into the second half of the year.

Operator

We now turn to Puneet Souda with Leerink Partners. Your line is open. Please go ahead.

Puneet Souda

Great. Thanks. Good to be here, Prahlad and Max. So first question is just a bit more on the -- Max commented about the pharma layoffs. We are all aware of it. So Prahlad, that some of those folks -- preclinical folks are not getting back to labs anytime soon. So wondering sort of what gives you confidence in the recovery within the biopharma segment? And then maybe if you could talk about early stage discovery versus academic. We saw some improvement from your peers in the -- more in the development and later stages, but just wondering what you're seeing with the early discovery folks?

Prahlad Singh

Yeah, Puneet. I think the reason for the visibility that we talk about is that, yes, the headcount reductions have happened and the site consolidations are happening, but it's not that we are getting any indication that the programs are shutting down. It's the time that it takes to transition the program to say from the West Coast to an East Coast side that sort of gives us a sense of visibility as to when it comes back up and running. And then, that gives us a sense of, what I said earlier, visibility into when the programs are and that's what causes the volatility that I talked about earlier.

In terms of early discovery versus clinical, if I'm not wrong, that was what your question was, Puneet?

Puneet Souda

Yes.

Prahlad Singh

I mean, at the end of the day, as I've said earlier, innovation is only going to happen as they continue to invest in early discovery programs, whether there are only two ways that you do it, either you invest in discovery or you buy compounds. And right now, what we are saying is that there is no indication that pharma biotech is saying that we are going to shut down the pipeline for innovation.

Max Krakowiak

And then just the last point on sort of the pre-revenue biotech funding question. Again, as a reminder, it's less than 5% overall of our total company revenue that's exposed to this customer group. However, I would say that the second quarter was a sequential improvement from the first quarter. So it does appear to be getting better, but it is still challenged overall and did decline in the period.

Puneet Souda

Got it. Very helpful. And then just on the buybacks, Max, those $330 million, is that entirely this year? Just wanted to get the view on the cadence for that. Thank you.

Max Krakowiak

Yeah. So in terms of the $330 million, Puneet, that is just the authorization we have left on our share repurchase program. It's TBD, exactly how the timing of that plays out. I think the comments on our call were that we're going to be more opportunistically aggressive on the share repurchasing. And I think that's what all our comments are at this point in time.

Prahlad Singh

Yeah. I mean, just to add to that, it's just the existing authorization that we have. But Puneet, more broadly, just looking at our current valuation and where we think we are headed in the future, the return on buying back our stock makes a lot more sense to deploy capital around that, particularly, if you look at the continued elevation for M&A candidates, and we honestly don't expect this valuation disconnect opportunity to last forever. So, we plan to be aggressive while it does.

Puneet Souda

Got it. That's helpful, guys. Thank you.

Operator

Our next question comes from Vijay Kumar with Evercore ISI. Your line is open. Please go ahead.

Vijay Kumar

Fantastic. Good morning, Prahlad, and thanks for taking my question. One on the second half organic revenue phasing. I just want to confirm if the implied Q4 is high singles. In related to that, I think I heard you say life science instrumentation was down 30% in China because of the stimulus-related delays. Can you give some flavor on what kind of instruments is a small versus large ticket items and when -- and what is the guide assuming for back half on those China instruments?

Max Krakowiak

Yeah. So maybe I'll start with the second one first, Vijay, just on the China life sciences instrumentation. So as a reminder on our portfolio, most of the items are what we would consider bigger ticket items. The ASP is sort of 500,000 plus from a life sciences instrumentation standpoint. I think as we look at the second half of the year right now, our guidance assumes it's still down mid-single digits for the second half of the year from an instrumentation standpoint. And so, we'll see how that plays out, but that's what the assumption in the guidance is.

I think as you look at the overall second half organic revenue ramp, in the second quarter, our guidance is for positive low-single digits, which then implies for the fourth quarter that you're going to be looking at high single to low double-digit organic growth range in the fourth quarter. Now that step up has a couple of different components. Half of that step up is related to instrumentation, which is really just normal seasonality between the third and the fourth quarter. We are not factoring in any change in market environment.

Then there's another 2% of that is related to our software business, which is just the renewal timing in our pipeline, and we have good visibility into that. The remaining couple of percentage points is really related actually to China diagnostics and the two pieces there. One, it's an easier comp for immunodiagnostics in the fourth quarter. And then, as we already talked about, we are anticipating a step up in our neo business in the fourth quarter in China.

Vijay Kumar

That's extremely helpful, Max. And maybe one on margins here, pretty impressive free cash outperformance and OM execution. The -- I think your cost actions was $100 million last year. Did we pull forward the savings? Like, what is the total cost actions benefit we're expecting for fiscal '24 and what is remaining for fiscal ‘25?

Max Krakowiak

Yeah. I think, so just as a reminder too, Vijay, when we had come into this year and we are calling for flat operating margin performance year-over-year, the dynamics that played were one, the cost actions we took at the end of last year, but then two, the return of the variable comp, which we said should normalize in 2024 versus the compression that it faced in 2023. So those were the assumptions coming into this year.

I think what you're seeing is just continued execution on a lot of the operational initiatives we have. I talked about some of the synergies and integration work that continues to be ongoing. And I think, again, as we look again in the outer years from a margin standpoint, this is what really gives us the confidence in our ability to execute and sort of reach our ultimate margin entitlement from an overall company perspective.

Vijay Kumar

Got it. Thanks, guys.

Operator

Our next question comes from Matt Sykes with Goldman Sachs. Your line is open. Please go ahead.

Matt Sykes

Good morning. Thanks for taking my questions. Maybe just focus on applied genomics for a minute. You mentioned the weakness was due to subdued pharma demand. Just curious the dynamics of the applied genomics business as it relates to pharma demand. Should we see a similar level of recovery and cadence for that recovery versus what you're saying in life sciences or is there something about the applied genomics business that you think might take longer for the recovery to take hold in that specific business?

Max Krakowiak

Yeah . Hey, Matt. From an applied genomics perspective, I don't know, if there's anything specifically unique to that business that I would call out. I think as you've been following the company over the past six, seven quarters, it's been a meaningful headwind for us as an overall company. The business has been facing two headwinds. One is on the pharma biotech side and then the second was the build out of the installed base on the clinical side during the COVID period ramp.

I think what we're seeing here is in the second half of the guidance is we are assuming a similar market dynamics that we saw in the first half of the year. We continue to work through those two headwinds and really the function of the performance in the second half is the same market environment and normal seasonality in the fourth quarter.

Prahlad Singh

Yeah, Matt. If you recall, I think this product line grew close to 50% two years in a row. So that this is hopefully what we are seeing is now the bottoming out of it.

Matt Sykes

Got it. Thank you. And then, Max, just for modeling, just would love to get what you achieved in terms of pricing in the quarter and what your expectations for pricing are embedded in the guide for the balance of the year?

Max Krakowiak

Yeah. So from a pricing perspective in the second quarter, similar to the first quarter. In the first quarter, I think we mentioned it was around approximately 100 basis points of price. I think we have a similar assumption for the second half of the year. I would just say overall, obviously, given the market environment, pricing is, I would say, more challenged than what it is in a normal year, but we continue to still get price on the life sciences side. Yeah.

Matt Sykes

Great. Thank you very much.

Operator

We now turn to Dan Brennan with TD Cowen. Your line is open. Please go ahead.

Dan Brennan

Great. Thank you for the questions, guys. Congrats on the quarter. If we can just go back to reagents, I know it came up earlier in the call given the size of that business for you. Could you just provide a little more color on BioLegend versus legacy and kind of how we think about reagents Q3, Q4 and kind of any visibility you can provide on that front?

Max Krakowiak

Yeah. I think we've been pretty consistent in not breaking out individual business units or sub-brands. Obviously, BioLegend, again, is more than 50% of our overall reagents portfolio. I would say, it's probably the best performing piece of our overall reagents portfolio. I think that's probably all the color we provide. And I think to further echo the comments that Prahlad previously made about the second half assumptions, we're assuming essentially the same market environment that we faced here in the first half and there's no real meaningful change in volume assumptions between the first half and second half.

Prahlad Singh

Yeah, Matt. There is nothing here that is competitive driven. I mean what we are seeing is sporadic market softness because of site closures and consolidations.

Dan Brennan

Got it. Okay. Maybe moving over to M&A. There's been more activity year-to-date kind of in the sector, some unconventional like out of Chapter 11, but Agilent recently announced pretty sizable deal. Just wondering, I know that's an important part of your go forward. Kind of can you speak to kind of what your pipeline looks like there? Maybe is it feasible something could be executed in the next six months to 12 months. And just give us some context around how sizable you're willing to go for the right deal.

Prahlad Singh

Yeah. I think the way I would look at it, Matt -- Dan is that we still feel that the valuations continue to be elevated for the M&A candidates. We continue to have a fertile pipeline and we continue to build on the relationships, but I don't think you're going to see us do any sizable side or -- size M&A in the near future. I think we talked about the share buyback where we will have a focus on to continue to deploy capital in the near term.

Dan Brennan

Got it. Okay. Thanks a lot.

Prahlad Singh

Yeah.

Operator

Our next question comes from Catherine Schulte with Baird. Your line is open. Please go ahead.

Catherine Schulte

Hey, guys. Thanks for the questions. First, just a modeling question. How should we think about growth by segment for the third quarter and the full year?

Max Krakowiak

Yes. Hey, Catherine. Hope you're doing well. So on the growth by segment for the third quarter for life sciences, we're anticipating to be roughly flat overall in the third quarter and on the diagnostics side, positive low to mid-single digits growth for the third quarter. If you were to compare that overall for the full year, that would bring life sciences then to flat to slightly down from an organic growth perspective. On the diagnostics side, it would again sort of be in the low to mid-single digit range.

Catherine Schulte

All right. Perfect. And then I guess if you do exit the year at high single to low double-digits in the fourth quarter, how do you think about how that sets you up heading into '25? I know it's still early now and there are some comp dynamics that are going on there. So how will those comps change as we head into next year as we try to level set? Thanks.

Prahlad Singh

Yeah, Catherine. I think the way I would look at this is, we really feel that the worst is behind us, as I said earlier, and we continue to see more encouraging signs just from our recent conversations with customers, particularly in the U.S., but I wouldn't say that we've gone to full normalization yet. I mean, I think in terms of what we would expect to see in 2025, I think we'll have to wait till our Analyst Day, which is in late November to give you a bigger -- deeper insight into what we think.

Catherine Schulte

Great. Thank you.

Operator

Our next question comes from Luke Sergott with Barclays. Your line is open. Please go ahead.

Luke Sergott

Great. Thanks, guys. I kind of want to follow-up on the applied genomics, that seems to be -- you continue to go through the headwinds there, but it seems to continue to get a little better and better. And so, as the confidence comes on, like, can you break out from a -- we had the Revvity OMX piece to start the year that was a slight headwind and that you're getting that coming back. And then you have the extract RNA, DNA extraction kits, things like that. So talk about the different pieces within that sub-segment that are kind of coming back and what it's going to take to continue that acceleration?

Max Krakowiak

Yeah. Hey, Luke. So just as one clarification before diving into -- the Revvity OMX piece that you referred to is actually part of our reproductive health business, not applied genomics, so just one clarification there.

Luke Sergott

[Multiple Speakers] get that. Sorry about that. Yeah.

Max Krakowiak

Yeah. It's all right.

Luke Sergott

No worries.

Max Krakowiak

And I think as you look then at applied genomics, right, I think again there's really two sort of main pieces of this business, right? You do have the RNA, DNA extraction and then on the other side, you kind of have the liquid handling portion of the business. I think as you look at those two, we've definitely seen the headwinds on the extraction piece a bit quicker right now.

I think that's again, that was the piece where it really got built up through the COVID installed base years. That part of the business has been performing better and has been returning to growth. I think where we're still continuing to see the challenges is really more so on the liquid handling side of things. And that is where I think now as we get into the second half of the year, from a comps dynamic perspective, we are expected to start to see that start to return to growth again.

Luke Sergott

Great. Thanks. And then as you think about on the life sci and with the licensing comp on the reagents that you guys face, can you talk about what that licensing or technology license was for actually? Because I thought that you guys mostly did your own internal antibodies and you license them out and I guess you license them out to others. But kind of just walk us through the various details there and get a better understanding of what goes on.

Prahlad Singh

Yeah. From a comp perspective that Max pointed out earlier, Luke, that was the one that we had announced the pin-point base editing technology, which we had licensed to AstraZeneca in the second quarter of last year. So specifically, that was the one. The other licensing technologies that we license are around AAV vectors, viral vectors and lentiviruses that we license out from our SIRION Biotech acquisition. So, there are three or four components where we focus around licensing opportunities, just to sort of give you a sense of what they account for.

Luke Sergott

Yeah. That's helpful. Thanks.

Operator

We now turn to Michael Ryskin with Bank of America. Your line is open. Please go ahead.

Michael Ryskin

Great. Thanks for taking the question, guys. Max, a couple of times in your prepared remarks and in your Q&A, you talked about seasonality in the fourth quarter and how that explains a lot of the ramp from 3Q to 4Q, both for total company and for some of the instruments business. I'm just curious what's driving that and what exactly do you mean by that.

I mean, obviously, we know your typical seasonality, but is that attributed to budget flush? Is that attributed to customers coming back because if pharma and biotech is still a little bit pressured and it sounds like it's going to be pressure through the rest of the year and if China is a little pressured, maybe that seasonality won't come back to the normal effect that you see in prior years? Just trying to delve deeper into what's driving that confidence. Thanks.

Max Krakowiak

Yeah. Hey, Mike. So I would say, it's probably a little bit of a combination of the things that you mentioned in your opening question there. I think one is the conversations we are having with our customers and what the pipeline looks like. I think, two, just from a normal buying behavior standpoint, instruments are the largest volume-wise in the fourth quarter. And so, I think it's a combination of those two things that's really leading to our expectations for the fourth quarter.

Michael Ryskin

Okay. Thanks. And then on China specifically, you talked a little bit about ImmunoDx and reproductive health, but excluding those, it sounded like China got a little bit worse as the quarter went on. I think you specifically said that. I mean, it sounds like your expectations for China are now lower than they were before. I realize a lot of this hinges on stimulus timing and magnitude and that's still a lot unknown. But just curious your thoughts on China, bigger picture, not just the next couple of months, the ability of that end-market to come back in 2025, the various outcomes possible with the stimulus. Just take a step back and sort of holistically talk us through what you're seeing in China. Thanks.

Prahlad Singh

I think my -- the way to look at it as we take a step back and strategically for us, China continues to be a very important market at, 16% 17% of your -- our revenue, as you know. Immunodiagnostics continues to be very strong in that market. 10% of our business there is diagnostics. Our reproductive health, as we've talked about earlier, we expect this year to see a bump up in birth rates, given the year of the dragon.

And I think overall, if you take a step back, especially with the stimulus funding coming in, either by the end of the year or early next year, it is continuing -- it is going to continue to drive growth and that -- I don't believe that, that is going to slow down. Keep in mind, our product portfolio is differentiated enough that we had high single-digit growth last year. So, we are coming off that comp in that marketplace. So, we feel very good about China and we -- it is one of our strategic markets. So nothing strategically has changed for us based on what you saw in the second quarter.

Michael Ryskin

Thanks.

Operator

Our next question comes from Paul Knight with KeyBanc. Your line is open. Please go ahead.

Paul Knight

Hi. Thanks for the question. The BioLegend business, we're seeing on our side growth in clinical trials, Phase 1 since 2018. So maybe that's a sign things better. Does BioLegend win off of Phase 1, or are they more later-stage winner? I already...

Prahlad Singh

They tend to be earlier stage -- they tend to be a bit earlier stage in the pipeline, Paul. They tend to be more in the preclinical and discovery side. As we are moving into the GMP capabilities, that's where -- there was the whole strategy around us moving into the pilot plant and then Phase 1 side. So that is where we are heading towards, but primarily the -- the primary domain the BioLegend plays is in discovery and early -- preclinical.

Paul Knight

Do you think we're seeing the effect of better funding in the therapy -- in the biopharma market?

Prahlad Singh

Yeah. I mean, we've started seeing signs of the pre-revenue biotech capital funding influx coming in. And as Max pointed out during one of the questions, increased conversations with our customers around opening programs and starting programs with that funding, but I think it will take a quarter or two before that materializes.

Paul Knight

Okay. Thank you.

Prahlad Singh

Yeah.

Operator

We now turn to Rachel Vatnsdal with JP Morgan. Your line is open. Please go ahead.

Rachel Vatnsdal

Great. Good morning, you guys. Thanks for taking the questions. So I wanted to ask another one here on instruments. You talked about how the instruments in China have been pressured from some of this air pocket related to China stimulus. So could you remind us within your instrument portfolio, how much of it is exposed to China versus rest of world? And then just to dig in on those rest of world trends, can you talk about how customers outside of China are thinking about their capital budgets? Has that improved at all, or is that continued to be pressured here as well?

Max Krakowiak

Yeah. Hey, Rachel. So as a reminder, our overall instrumentation in China is 3% of total company revenues. So it is in the grand scheme things still relatively small to the overall portfolio. Yeah. As I mentioned, I think it was a challenging second quarter. We'll see what happens here in the second half with stimulus. I think as we look outside to the rest of the world, we do continue to see sequential improvements in our instrumentation from the first quarter of this year. And I think as we look towards the second half, again, the conversations we're having with the customers are providing increased visibility on those pipelines and is alluding -- sort of leading us to our expectations for the second half of the year.

Rachel Vatnsdal

Great. And then on my follow-up, just in terms of activity levels throughout the quarter, can you walk us through what did you see within the life sciences side and specifically really within reagents throughout the quarter? Was June any better than April? And then how is that going to continue to trend into the month of July as well?

Prahlad Singh

Yeah. I don't think we want to get into intra-quarter guidance, Rachel. I would say that over the last 45 to 60 days, we have seen continued to see the stability that we have seen. And as I mentioned, the sporadicness that we had was related to two or three site closures that happened in the West Coast and then those programs have now shifted to other sites. So it's more a matter of that and headcount reduction than any continued trend.

On the other -- previous question that you had on the instrument side, I think one thing to add. As you -- if you recall, we totally revamped our in vivo imaging portfolio that was launched towards the end of the last year. And that's where we started to see increased conversations from customers. Particularly in the U.S., we continue to be more optimistic around this being the first market where we will start seeing signs of turnaround on the life sciences instruments side.

Operator

Our next question comes from Tycho Peterson with Jefferies. Your line is open. Please go ahead.

Tycho Peterson

Hey, thanks. Good to talk to you, guys. So maybe, Prahlad, I want to go back to the buyback. And no, I appreciate you have $330 million left in your current program and you did $20 million in the second quarter. I guess, why not do something bigger? We've seen some of your peers kind of do multi-billion-dollar buybacks. And then on M&A, I guess you're saying multiples are high, but can you maybe just talk about digesting prior deals? I think in the past, you talked about reverse integration of BioLegend. So maybe just talk about kind of integration of some of the deals you've done.

Prahlad Singh

Sure, Tycho. Good to hear your voice. On the buyback, I will say that you are right, the existing authorization, that's why I said is for $330 million. We will -- we do plan to go back to the Board for authorization at the next Board meeting. But I think from a valuation perspective, if you recall, Tycho, most of the acquisitions that we tend to do and our private founder entrepreneur-owned companies and that's where I say that the impact of the market really has not had an effect on valuation. I mean, those founder entrepreneurs do not get impacted by publicly-listed company valuations and that's where we still see elevated valuations.

So I think from that perspective, we will continue we see that in the short-term, it makes a whole lot more sense to deploy capital around buying back stock than for looking at M&A candidates. And when we find the right one, we will be. But as you pointed out, we've done several acquisitions and we are starting to see the synergistic benefits as we continue to integrate them into the company.

Tycho Peterson

Okay. And then maybe a follow-up, you've had a number of questions on pharma. I'm just wondering thinking ahead about IRA and kind of what happens in the next six months here, can you maybe just talk a little bit about how you're thinking about that impact in particular?

Prahlad Singh

Yeah. I think, Tycho, it's a great question, but I think that has already been planned out as pharma biotech has looked at their P&L and strategic plans for '25 and beyond. I mean, that was the exercise I believe that they went through the fourth quarter of last year and the first quarter of this year. So that has already been in the planning stages for, I would say, about two, three quarters ago.

Tycho Peterson

Okay. And then before I hop off, just one quick clarification. I think on value-based pricing, you previously expected about a 500 basis point headwind. Is that still accurate in China?

Max Krakowiak

Yeah. It wasn't necessarily tied into VBP program specifically. It was just related to, I think, some of the pricing challenges we have in China overall. And that was related to our immunodiagnostics portfolio that we made that comment about, as it has not been brought into scope of VBP. So, it was more just a general comment of what we're seeing on the industry.

Tycho Peterson

Okay. Thank you.

Operator

That's all the time we have for questions. I'll now hand back to Steve Willoughby for closing remarks.

Steve Willoughby

Thank you, Elliot. We look forward to catching up with everyone over the next few weeks. Talk soon.

Operator

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.