Danaher Corporation

Good morning. My name is Christy, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's fourth quarter 2018 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.

Thanks, Christy, and good morning, everyone, and thanks for joining us on the call. With us today are Tom Joyce, our President and Chief Executive Officer, Matt McGrew, our Executive Vice President and Chief Financial Officer, and Dan Comis, our Executive Vice President. I'd like to point out that our earnings release, the slide presentation supplementing today's call, and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the investor section of our website, www.danagher.com, under the heading Quarterly Earnings. The audio portion of this call will be archived on the investor section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until February 5, 2019. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to the continuing operations of the company in the fourth quarter of 2018, 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 only available 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 FCC 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 statement except as required by law. With that, I'd like to turn the call over to Tom.

Thank you, Matt, and good morning, everyone. Our fourth quarter results round out a tremendous 2018 for Danaher. During the year, strong revenue growth and operating margin expansion delivered double-digit adjusted EPS and mid-teens free cash flow growth. We delivered 6% core revenue growth for the full year, which was a meaningful step up versus prior years, led primarily by the impact of new product innovation and commercial initiatives. The Danaher business system continued to serve as the driving force behind our execution and our ability to take share in many of our businesses. We generated $3.4 billion of free cash flow in 2018, resulting in 16.5% growth year-on-year that helps position us for significant capital deployment going forward. Our free cash flow to net income conversion ratio was 127%. representing the 27th consecutive year in which our free cash flow has exceeded net income. We deployed over $2 billion of capital during the year, including the acquisitions of IDT and Blue Software. IDT joined our life science platform, adding best-in-class genomics consumables capabilities, and Blue Software, now part of ESCO, enhances our offering across the packaging development and production workflow. We're excited to have both these businesses as part of Danaher. Turning now to the fourth quarter. Sales grew 5.5% to $5.4 billion as the impact of foreign currency translation decreased revenue by 2% while acquisitions increased revenues by 2%. Core revenue increased 5.5% with all five platforms delivering better than expected results. Geographically, high-growth markets grew high single digits, led by double-digit growth in both China and India. Across the developed markets, we saw high single-digit growth in the U.S., while Western Europe was up low single digits. Gross margins for the fourth quarter. Gross margin was 55.1%, and operating profit margin was 17.9%. Core operating margin declined 15 basis points, driven primarily by accelerated investment spend, foreign currency impact from a stronger U.S. dollar, and tariff-related costs. Full-year gross margin was a record high, 55.8 percent, and we increased our core operating margin by 70 basis points. This marks the fourth consecutive year that we increased our core operating margin by 70 basis points or more. Fourth quarter adjusted diluted net EPS was $1.28, bringing full year adjusted diluted net EPS to $4.52, our fifth straight year of double digit growth. Now let's take a more detailed look at our fourth quarter results across the portfolio. In Life Sciences, Reported revenue increased 10.5% and core revenue was up 7.5%. Operating profit margin declined 30 basis points to 19.7% as a result of foreign currency impact and accelerated growth investments. For the full year, Life Sciences delivered an outstanding 180 basis points of core operating margin expansion, a testament to the team's strong DBS execution. Turning to the individual operating companies, Beckman Life Sciences achieved high single-digit core revenue growth for the quarter. More than 20% growth in automation was driven by demand for new products like the Biomech i-Series, Beckman's sample preparation platform launched last year. We further enhanced our automation capabilities with our recent bolt-on acquisition of LabSight Corporation. LabSight brings complementary technology to the core Beckman offering with an acoustic dispensing method that is used for liquid handling in life science applications. The non-contact, low-volume dispensing technique eliminates cross-contamination risks and greatly reduces fluid loss, helping scientists around the world achieve better results. These organic and inorganic growth investments are helping us provide best-in-class solutions for our customers, and contributing to Beckman Life Sciences' above-market growth rate. Leica Microsystems' core revenue was up mid-single digits, with positive performance across most major end markets and regions, led by life science research in North America. Over the last few years, the Leica team has significantly improved their cadence of innovation through the use of DBS tools, Leica introduced three times the number of new products and technologies in 2018 versus the prior year, while improving their project on-time delivery by more than 2,000 basis points. The combination of better R&D processes, along with enhanced commercial execution, has contributed to a meaningful step up in Leica's core revenue growth over the past few years. Core revenue at SIEX was up high single digits Strong results in North America and China were broad-based, driven by demand across the clinical, food testing, and forensic end markets. Phenomenex, our separations consumables business, achieved high single-digit core revenue growth. It's been two years since we acquired Phenomenex, and the team has made tremendous progress with a number of DBS commercial initiatives, including funnel management and transformative marketing. Through these and other DBS-driven growth initiatives, Phenomenex has increased the size of their addressable market by 30%. At Paul, high single-digit core revenue growth was driven by similar results across both our life sciences and industrial businesses. Biotech was up double digits, led by strong performance in single-use technologies, where demand for new products like the Icelis bioreactor system continues to help drive share gains. IDT delivered mid-teens revenue growth with positive performance across all major regions and product lines. The team continued to build upon early progress with DBS, and the business has consistently exceeded our initial performance expectations. Moving to diagnostics, reported revenue increased 3.5%, and core revenue was up 6%. For the full year, diagnostics delivered 6.5% core revenue growth, a meaningful step up versus prior years, driven by both organic growth investments and the continued evolution of our diagnostics portfolio. Reported operating margin declined by 70 basis points to 18.8% in the fourth quarter, However, core operating margin expanded by 20 basis points. At Beckman Diagnostics, core revenue increased at a mid-single-digit rate, led by China, and improved results in North America. By product line, immunoassay led the way, and we saw good growth in automation as well, driven by early success in Europe with our recently launched DXA5000 automation system. In hematology, We're encouraged by early customer feedback on our new DXH900 high-volume analyzer and the DXH520 for low to mid-volume settings. These are two of the many new products that Beckman introduced this year that expanded our offering and improved our competitive position in the core lab. At Radiometer, high single-digit core revenue growth was driven by a strong quarter in North America, Western Europe, and China. Our blood gas and AQT product lines delivered outstanding results, and we believe Radiometer continued to take share in the acute care market. Like a biosystems, core revenue was up mid-single digits, with broad-based strength across most major regions and product lines, led by double-digit growth in advanced staining. And at Cepheid, double-digit core revenue growth was driven by North America and Western Europe, The business achieved a significant milestone in the fourth quarter, placing its 20,000th instrument globally, further expanding Cepheid's market-leading install base. Continued innovation around our test menu has also been a meaningful contributor to Cepheid's outstanding results. The team maintained their cadence of innovation with the recent CE-IBD marking of the expert HBV viral load test, a new rapid test for the quantitation of the hepatitis B virus that delivers results in less than an hour. With the addition of this test, Cepheid now offers a complete virology test menu, suitable for any laboratory setting, making high-quality testing and disease monitoring accessible to even more clinicians and patients. Turning now to our dental segment, reported revenue was flat and operating profit margin increased by 70 basis points to 13.8%. Core operating margins declined by 185 basis points, primarily as a result of ongoing investment spend focused on new product development. Dental core revenue was up 2.5%, one of our better quarters in some time. We remain encouraged by signs of end market stabilizations, particularly in our North American traditional consumables and equipment business, where we saw another quarter of positive sellout data. Our dental business in China, now over $200 million in annual revenue, saw double-digit growth again this quarter. Our approach as a more localized player, offering a comprehensive product suite, positions us well for continued growth in the region. Our specialty consumables business, was up low single digits versus a tough prior year comparison with solid performance across orthodontics and implants. Growth was led by performance in high-growth markets with particular strength in China and Eastern Europe. At the Greater New York Dental Show in November, we featured a number of new technologies from across the dental platform. These included the DEXIS titanium interoral sensor, and Nobel's X-Guide for computer-guided dental implant surgery, both important products that support the team's focus on providing customers with a best-in-class, fully integrated digital workflow. In addition, Ormco's full-scale clear aligner system, SPARC, continues to be very well received in Australia. And as a reminder, the team obtained FDA 510K clearance for SPARC earlier in the fourth quarter. This is obviously an important step as we continue our expansion of our clear aligner offering. Moving to our environmental and applied solutions segment. Reported revenue was up 4.5% and core revenue increased 5%. Reported operating margin decreased 40 basis points to 22.7% with modest core margin expansions. In product identification, core revenue increased at a mid-single-digit rate, led by demand for marking and coding equipment and related consumables. VideoJet core revenue was up high single digits, with positive performance across all major regions and markets and product lines. The team continued to expand VideoJet's powerful install base, which now includes more than 10,000 remotely connected printers. Using data analytics, we're able to help customers run their packaging processes and plans more efficiently and with fewer instances of disruptive downtime. VideoJet's industry-leading connectivity provides unique insights to help us serve customers more effectively, and this differentiated offering is a key contributor to VideoJet's above-market growth race. 2018 marked VideoJet's ninth consecutive year of mid-single-digit or better core growth. Our packaging business, which includes ESCO and X-Rite, was down low single digits, but we're encouraged by recent order trends and feel well-positioned for improved performance in 2019. Finally, turning to water quality, core revenue growth for the platform was up mid-single digits. Core revenue increased at Hawk at a high single-digit rate, off momentum in both municipal and industrial end markets. Geographically, the developed markets and China led the way. For the full year 2018, Hawk achieved 10% core revenue growth. The Hawk team has consistently combined outstanding commercial execution with innovative new products to deliver this market-leading growth. HACC develops a best-in-class digital marketing platform that we've now rolled out across our other water quality businesses. And the team has meaningfully expanded HACC's addressable market with new products like the CM-130 Chlorine Analyzer for dialysis applications and the CLEROS water intelligence software system. The team's commitment to continuous improvement has helped HACC differentiate its customer value proposition and further strengthen its competitive advantage. At Trojan, core revenue declined due to a tough prior comparison, but we saw healthy levels of project bidding activity during the quarter and were encouraged by the underlying momentum in the market. Lastly, Chemtreat's high single-digit core revenue growth was driven by strength across North America and Latin America, primarily in the food, chemical, and oil and gas end markets. The team's commitment to commercial excellence has helped Chemtreat sustain a remarkable track record, with 2018 marking their 51st consecutive year of core revenue growth. So to wrap up, 2018 was a tremendous year for Danaher, and we're well positioned as we begin 2019. Over the past several years, through a combination of organic and inorganic growth initiatives, We have transformed Danaher into a higher growth, higher margin, and higher recurring revenue company with strong footholds in attractive, fast-growing end markets. Our portfolio today, combined with the power of the Danaher business system, positions us well as we focus on delivering long-term shareholder value in 2019 and beyond. We are initiating first-quarter adjusted diluted net EPS guidance between $1 and $1.03, which assumes core growth of approximately 4%. We continue to expect full-year 2019 core revenue growth of approximately 4% and adjusted diluted net EPS to be in the range of $4.75 to $4.85.