Danaher Corporation

Good morning. My name is Lori, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Danaher Corporation's first quarter 2019 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key on your telephone keypad. I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.

Thanks, Lori. 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 FDC Regulation G related 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 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 April 25, 2019. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials describe certain 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 first quarter of 2019, 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 means of your 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 FTC 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 Tom.

Thanks, Matt, and good morning, everyone. We're off to a great start in 2019, delivering first quarter results ahead of our expectations. We achieved 5.5% core revenue growth and believe we expanded our market-leading positions at a number of our operating companies through a combination of new product innovation and strong commercial execution. Our growth was broad-based, with all four segments delivering better than expected results. We continue to see healthy conditions across our major end markets. Combined with solid, adjusted EPS growth and free cash flow generation, our performance is a testament to the power of the Danaher business system. Our team's focused execution has continued to accelerate our growth trajectory and drive long-term value creation, and we're excited about what lies ahead for Danaher. Over the past few years, you've heard us talk a lot about building a better, stronger Danaher. An important and transformational component in that pursuit is our pending acquisition of the GE Biopharma business, which we announced on February 25th. GE Biopharma is a leading global player in the attractive biologics production market and will bring complementary strengths to our life science platform across the bioprocessing workflow. We expect this acquisition will be accretive to Danaher on multiple levels, and will further advance our evolution into a higher-growth, innovation-driven company. We could not be more excited about this business, the team, and what they'll bring to Danaher. The transaction remains subject to regulatory approvals, and we're making good progress towards closing which continues to be on track for the fourth quarter of this year. Turning to our first quarter results, sales grew 4% to $4.9 billion, driven by 5.5% core growth. Acquisitions increased revenues by 2.5%, while the impact of foreign currency translation decreased revenues by 4%. Geographically, High growth markets grew high single digits, led by double-digit growth in China. Across the developed markets, we saw mid-single-digit growth in the U.S. and low single-digit growth in Western Europe. Growth margin for the first quarter was 55.7%, and operating profit margin was 14.8%. Core operating margin increased 40 basis points, despite a meaningful foreign currency headwind from a stronger U.S. dollar year-on-year. Excluding this foreign currency impact, core operating margin would have been up 90 basis points. First quarter adjusted diluted net EPS was $1.07, representing 8% growth year-on-year. Now let's take a more detailed look at our first quarter results across the portfolio. In life sciences, reported revenue was up 10%, and core revenue grew 7%. Reported operating profit margin was up 60 basis points to 19%, with core margins increasing by 100 basis points. Beckman Life Sciences' core revenue was up double digits, making this the business's seventh consecutive quarter of high single-digit or better core revenue growth. Broad-based strength across most major regions and product lines was led by double-digit growth in flow cytometry and sanctification, and we believe the team's combination of high-quality innovation plus commercial execution continues to drive market share gains across the business. Leica Microsystems achieved high single-digit core revenue growth, strength across North America and China, was driven by demand in life science research as we continue to benefit from new product introductions. Most recently, Leica launched the Thunder imaging systems, a new class of wide field instruments designed specifically for high speed, high quality imaging of 3D biology. Scientists used this imaging technology to study organisms, tissue sections, and advanced cell cultures for use in microbiology, neuroscience, and cancer research. Core revenue at CyEx was up low single digits, with good performance in pharmaceutical, academic, and applied markets, partially offset by the impact of a tough comparison in our North American clinical business, which was up meaningfully last year. Paul's core revenue increased at a high single-digit rate, with growth across all major geographies, Paul Industrial was up mid-single digits, led by Aerospace and Process and Industrial, and we continue to see solid order trends within both businesses. Double-digit core revenue growth in Paul Life Sciences was driven by our biotech business, particularly single-use technologies, where we're seeing robust demand for our ICELIS bioreactor system in gene therapy applications. The ICELIS provides excellent cell growth conditions for adherent cells, which are used to produce gene therapies, and it is the most widely used cell-adherent bioreactor on the market today. Icelis was recently highlighted at the Interpex Bioproduction Trade Show, along with a number of Paul's other market-leading bioprocessing innovations. Moving to diagnostics, reported revenue grew 1%. with core revenue growth of 5%. Reported operating margin decreased to 15.2% with both core and reported margins down 110 basis points. This decline is predominantly attributable to the impact of foreign exchange rate movements. At Beckman Diagnostics, core revenue was up mid-single digits as we saw continued improvement in North America and double-digit growth in China. Bicrotic line, immunoassay, and automation led the way. In hematology, we're seeing early signs of the positive impact from our new product introductions, including the DXH520 and the DXH900 analyzers for low to high volume settings. Beckman recently received 510K clearance from the U.S. FDA for the DXH520 and for the early sepsis indicator, to be run on the DSH-900. These additions in hematology are key examples of how we're enhancing our competitive position and accelerating our growth trajectory at Beckman. Radiometer delivered high single-digit core revenue growth, led by performance in China, and we believe the team continued to gain market share in North America. During the quarter, Radiometer expanded their installed base globally, across both our blood gas and AQT product lines. We acquired Radiometer in early 2004, and the first quarter marked their 15th anniversary as part of Danaher. During that time, the team has become a champion of DBS, helping to evolve the tools and processes that are shared across Danaher today. As a result of this strong DBS execution and leadership, Radiometer has achieved tremendous results, including more than 1,000 basis points of operating profit margin expansion. And over the last five years, the business has averaged high single-digit core revenue growth compared to low single-digit growth at the time of acquisition. As one of our longest tenured operating companies today, Radiometer provides a terrific example of the long-term power of DDS. Through a balanced approach implementing growth, lean, and leadership tools, Radiometer has established a market-leading position that it continues to enhance today. Leica Biosystems also had an excellent start to the year, with core revenue up high single digits, led by advanced staining and core histology across the developed markets and in China. At Cepheid, Core growth was down slightly against a prior year comparison of over 40% growth, which was primarily driven by last year's severe flu season. The team continued to expand Cephia's market-leading install base and is gaining momentum in North America with integrated delivery networks, or IDNs. Cephia's cartridge-based molecular test is a uniquely well-suited solution for IDNs and their patients, as it ensures consistent results across the network, whether the test is done in a large hospital lab or in a physician's office. Turning now to our dental segment, reported revenue declined 2%, while core revenue grew 2.5%. Reported operating profit margin declined to 7.3%, with both core and reported margins down 30 basis points. This decline primarily reflects the impact of ongoing investment spend focused on new product development. We saw growth across our specialty and traditional product lines, and we remain encouraged by the stabilization we have seen in the North American end markets. High-growth markets led the way geographically, with China up double digits. The dental team continues to pursue one of its key strategic priorities, That is accelerating growth through innovation. At two recent industry trade shows, IDF and Chicago Midwinter, we featured more than 20 new products and technologies from across the dental platform. Really the culmination of strategic investments in R&D and sales and marketing over the last few years. At Nobel, Zeal, and Chi-Ultra, our new implant surface technologies that enable better bone and tissue integration while improving aesthetic results. And the CAVO OP3D is a scalable modular imaging system that provides clinicians with the flexibility to upgrade to the latest 3D imaging technology as they expand their capabilities and grow their practices. So we're excited about this cadence of new product introductions and believe that this expanding portfolio of solutions will further distinguish our dental business going forward. We're also making good progress as we work to establish the platform as a separate publicly traded company in the second half of this year. Moving to our environmental and applied solutions segment. Reported revenue increased 3% and core revenue was up 5.5%. reported operating margin increased 110 basis points to 23.2%, with 140 basis points of core margin expansion due to outstanding execution across the segment. In product identification, core revenue increased at a low single-digit rate. VideoJet core revenue was up mid-single digits, led by results in the developed markets. Growth was broad-based across all major product lines, with good traction for more newly introduced products like the remotely connected CIJ1580 industrial inkjet printer. Using DBS growth and innovation tools, VideoJet has continuously expanded its product portfolio and getting higher impact products to market faster. This strong innovation execution differentiates VideoJet's customer solutions and is a key driver of the team's consistent market outperformance. Core revenue in our packaging business, which includes ESCO and X-Rite, was flat, but recent order trends are improving, and we expect better performance as we move through the year. Finally, turning to water quality. Core revenue growth for the platform was up high single digits. Hot core revenue increased at a mid-single digit rate, as end market demand remained healthy. Europe and China led the way, and we continue to see solid order trends across both municipal and industrial applications globally. HACC has consistently grown above the market over the last several years, in part driven by best-in-class commercial execution. The team has aligned their go-to-market strategy to better meet customers' needs, and a great example of this is the expansion of of Hawk's e-commerce platform. The team's double-digit e-commerce revenue growth in the quarter is a testament to how our innovative commercial strategy is delivering even greater value to customers. At Trojan, core revenue increased by more than 20% as a result of a few large municipal projects in North America and in China. The team sustained a solid customer win rate and continues to benefit from recent new product introductions like UV Sigma and UV Flex. Lastly, Chemtree delivered mid-single-digit core revenue growth, with the team's sales execution driving strong performance in North America. By end market, chemicals, metal processing, and oil and gas led the way. So, to wrap up, we're very pleased with our first quarter results. and look forward to building on this momentum as we move through the year. Our team's commitment to continuous improvement helped us achieve our sixth consecutive quarter of 5.5% or better core revenue growth, high single-digit adjusted EPS growth, and solid operating margin expansion. We are initiating second quarter adjusted diluted net EPS guidance between $1.13 and and $1.16, which assumes core growth of approximately 4% to 5%. We now expect full-year 2019 adjusted diluted net EPS to be in the range of $4.72 to $4.80, which reflects the dilutive impact of our recent equity offerings partially offset by our first quarter performance. Looking ahead, 2019 will be a transformational year for Danaher. We will be welcoming the GE Biopharma business to our life sciences platform and are establishing our dental platform as a separate publicly-trained company. These are incredibly important portfolio moves that we expect will maximize value for our shareholders, customers, and associates and help all of us realize greater potentials. With DDS as our foundation, we're well positioned to continue building on our growth trajectory and are excited about the opportunities to come.