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 second 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, and Matt McGrew, our Executive Vice President and Chief Financial Officer. I'd like to point out that our earnings release, the slide presentation supplementing today's call, and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website, www.deannaher.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 July 25, 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 second 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'll make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking 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. We're very pleased with our strong second quarter performance. We delivered 5.5% core revenue growth with continued investments in innovation and commercial initiatives contributing to share gains across many of our businesses. This marks the seventh straight quarter of 5% or better core growth, which, combined with solid operating margin expansion and strong free cash flow, is a testament to our team's focused execution and the power of the Danaher business system. We also continue to make progress on our anticipated acquisition of GE Biopharma and the planned IPO of our dental business, as both transactions remain on track relative to our previously communicated expectations. As we move into the second half of 2019, we're excited about these important portfolio moves and the opportunities that lie ahead for Danaher. So now let's turn to our second quarter results. Sales grew 3.5% to $5.2 billion, with core revenue growth of 5.5%. Acquisitions increased revenues by 1%. while the impact of foreign currency translation decreased revenues by 3%. Geographically, high-growth markets grew high single digits, led by double-digit growth in India and approximately 10% growth in China. We saw mid-single-digit growth across the developed markets, with both the U.S. and Western Europe growing in that range. Gross margin for the first quarter was 55.8%, and operating profit margin was 17.1%, down 30 basis points year over year. However, core operating margin increased 15 basis points, despite a meaningful foreign currency headwind from a stronger U.S. dollar year on year. We generated $1 billion of free cash flow in the second quarter. resulting in double-digit growth year-on-year and a free cash flow to net income conversion ratio of 137%. So now let's take a more detailed look at our second quarter results across the portfolio. In life sciences, reported revenue increased 6.5%, with 7.5% core revenue growth. This is the fifth consecutive quarter of high single-digit or better core revenue growth in the segment. Reported operating profit margin was up 190 basis points to 20.1%, with core operating margins increasing 170 basis points. This terrific margin performance was a result of the team's outstanding DBS-driven execution across the segments. Beckman Life Sciences' core revenue growth was up high single digits, as performance was led by double-digit growth in both flow cytometry and particle counting and characterization. The strength in particle counting was led by the ViCell product line, which is primarily used to analyze cell viability in biopharmaceutical applications. In addition, Beckman closed the bolt-on acquisition of Cytobank, a software solution that pairs with our flow cytometry platform to help biopharma and clinical research customers analyze complex data sets more quickly and efficiently. Core revenue at CyEx grew at a mid-single-digit rate. Good results across the pharmaceutical and applied end markets were partially offset by the continued impact of a tough comparison in our North American clinical business. We've made significant investments to improve the cadence of innovation at SIEX since we acquired the business nearly 10 years ago. The team highlighted several new products last month at ASMS, including Echo MS, a non-contact liquid handling solution with very high analytical throughput. This first-of-its-kind technology enables mass spectrometry's rich data generation to be used in new applications within the drug development workflow, helping customers in their pursuit of breakthrough disease treatments. At Paul, high single-digit core revenue growth was driven by broad-based strength across most major geographies and end markets. Paul Industrial was up mid-single digits with strong results in our aerospace and process and industrial businesses. This was partially offset by microelectronics, which declined due to a tough prior year comparison in softer end markets. Double-digit growth in Paul Life Sciences was led by our biotech business, where we saw broad-based demand across product lines. An important highlight during the quarter was the U.S. FDA's approval of a pediatric gene therapy which is manufactured using Paul's ICELIS bioreactor. Zolgensma is the first gene therapy to treat spinal muscular atrophy, or SMA, in children under the age of two. SMA is the number one genetic cause of death for infants, and Paul is proud to contribute to the breakthrough treatment for this devastating disease. The second quarter, marked the one-year anniversary of our acquisition of IDT, and we couldn't be happier with the progress the team has made so far. IDT delivered another quarter of double-digit core revenue growth, driven by broad-based strength across all major product lines and geographies. Moving now to diagnostics. Reported revenue was up 4.5%, with core revenue growth of 7.5%. reported operating margin was 17.5%, with reported and core margins down 20 basis points. This decline is predominantly attributable to the impact of foreign currency headwinds related to the stronger U.S. dollar and tariff-related costs. At Beckman Diagnostics, mid-single-digit core revenue growth was driven by high-growth markets, particularly China's. By product line, immunoassay and automation led the way. Momentum from recent product launches is benefiting Beckman in a number of key product areas, enhancing the business's competitive position and accelerating its growth trajectory. We are particularly encouraged by ongoing improvements in our hematology business, where we continue to see strong global demand for our new DXH900 high-volume analyzer. Radiometer achieved high single-digit core revenue growth, with strength across the developed markets and China. Our blood gas and AQT product lines both performed well, with key competitive wins contributing to market share gains. Like a biosystems, core revenue was up mid-single digits. Good results across advanced staining and core histology were driven by demand for recently introduced products, and we believe LBS continued to take share relative to the market. And finally, at Cepheid, core revenue was up more than 20 percent on continued momentum in North America and strong results across high-growth markets. Cepheid's embrace of DBS growth tools and processes like transformative marketing and funnel management has enabled the team to make meaningful progress penetrating new accounts with particular success at integrated delivery networks in North America. Turning to our dental segment, reported revenue declined 3 percent and core revenue was down 50 basis points. Reported operating profit margins declined to 11.2 percent with core and reported margins down 310 basis points. This decline primarily reflects the impact of lower volume, foreign exchange rate movements, and ongoing investment spend focused on new product development. Low single-digit declines in our traditional consumables and equipment business were partially offset by low single-digit core growth in our specialty businesses. Geographically, double-digit growth in China was more than offset by continued softness in Western Europe and Latin America. As part of our expansion into clear aligners, Our orthodontics business, ORMCO, highlighted SPARC at the American Association of Orthodontists trade show in May. SPARC is made using TruGen, a proprietary material with exceptional flexibility and clarity, which provides a highly aesthetic and comfortable aligner capable of treating complex cases. Following a successful initial launch in Australia, We are previewing SPARC with a group of leading orthodontists in the US as part of our targeted expansion and expect to build on this good early traction going forward. We continue to make good progress towards the intended IPO of our dental business. We recently announced the new company's name, Invista, and have identified its key senior leaders and future operating structure. We remain on track to establish Invista as a separate publicly traded company in the second half of this year. Moving to our environmental and applied solutions segment. Reported revenue increased 2% and core revenue was up 4%. Reported operating margin increased 40 basis points to 23.4% with 45 basis points of core margin expansion. In product identification, core revenue increased at a low single-digit rate. VideoJet core revenue was up low single digits versus a high single-digit prior year comparison. Results were led by growth in Western Europe and high-growth markets with solid underlying end-market demand worldwide. In our packaging business, which includes ESCO and X-Rite, we were encouraged by better sequential performance and ongoing improvements in order trends. A few weeks ago, ESCO hosted more than 200 customers at the ESCO World user group meeting in Nashville. The event brings together brand owners and suppliers from across the packaging workflow to showcase ESCO's solutions and provides a unique forum for ESCO to gather industry insight to guide impactful product innovation. Finally, turning to water quality, Core revenue growth for the platform was up mid-single digits. At Trojan, double-digit core revenue growth was driven by strength across the developed markets and China. We saw solid demand in the municipal and industrial end markets, and the team sustained its strong customer win rate with good commercial execution and new product differentiation. Chemtree delivered high single-digit core revenue growth. The North American and Latin American markets continued to lead the way, with strong results in food and beverage, commercial facilities, and oil and gas. Lastly, at HACC, poor revenue grew at a low single-digit rate versus a double-digit prior year comparison. Good performance in North America and Western Europe benefited from demand across the municipal and industrial end markets. This was partially offset by declines in China, which was up meaningfully last year as a result of government initiatives around surface water monitoring, which generated significant demand for HAWC's unique offering. 2019 marks HAWC's 20th year as part of Danaher, making it one of the longest tenured operating companies in our portfolio today, and a tremendous example of how we grow businesses and build platforms at Danaher. Through a combination of organic execution and strategic M&A, with a commitment to DBS and a foundation of continuous improvement, HAAC has evolved from a $130 million business in 1999 to what is now the cornerstone of our $2.5 billion water quality platform. During that time, the platform has increased gross and operating profit margins by over 1,500 basis points and completed more than 25 acquisitions to augment growth and add adjacencies in water treatment, like Trojan and Chemtreat. This combination of organic and inorganic initiatives has helped drive consistent share gains and build sustainable long-term value, with the platform's return on invested capital now in excess of 20%. You'll get to hear more about this success story at our upcoming Water Quality Investor Day in September, and we hope that many of you will be able to join us for the event out at HAWC's headquarters in Loveland, Colorado. So to wrap up, we feel good about the momentum we generated in the first half of 2019. The remainder of this year will be transformational for Danaher, with the anticipated IPO of Invista and welcoming GE Biopharma to our life science platform, both incredibly important portfolio moves that we expect to maximize value for our shareholders, customers, and associates. We believe the combination of our differentiated portfolio, the Danaher team's DBS-driven execution, and our commitment to build long-term value uniquely positions us for strong performance through 2019 and beyond. We're initiating third quarter adjusted diluted net EPS guidance between $1.12 and $1.15, which assumes core growth of approximately 4.5%. We now expect full year 2019 adjusted diluted net EPS to be in the range of $4.75 to $4.80.

Thanks, Tom. That concludes our formal comments. Lori, we're now ready for questions.

Thank you. At this time, I would like to remind everyone, if you have to ask a question, please press star, then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, press the pound key. Our first question comes from the line of Tycho Peterson of J.P. Morgan.

Hey, thanks. Congrats on another solid quarter. You know, Tom, on the more industrial-focused markets, it doesn't sound like you're flagging any sort of softness or issues there. I know you had the tougher video, JetCom, but you did mention, I think, better quarter over quarter in order trends and packaging. So can you just talk on, you know, the outlook for Paul Industrial, Product ID, you know, packaging some of these more industrial-focused markets, given some of the macro data points?

Sure, Tycho, happy to. You know, as I think you probably know well, we don't have a lot of truly industrial exposure left in the portfolio today. Call it 10% or less of the overall portfolio. So admittedly, we're perhaps not a great read, but I'm happy to share with you some of the details behind some of the specific businesses that you asked about. You know, in terms of the trends we're seeing broadly defined across these businesses in In general, they're still pretty solid. Let's call it low single digit, mid single digit growth rates across these businesses that I'll tell you about in a little bit more detail. So maybe let's start with, say, with a portion of HACC. So HACC has some industrial exposure. The industrial side of HACC was up mid single digits in the quarter. The order trends remain pretty solid across both the US and Europe. You know, overall, Hawk was low single digits in the second quarter, but again, that was against that big double-digit comp last year that impacted us in China. So again, just looking at the industrial side, you know, pretty solid. You mentioned Paul Industrial. Again, another portion that maybe is worth a little bit of a read. Paul Industrial up mid-single digits in the quarter, so pretty good performance. Where we saw a little bit of softness was certainly in Micro E. Micro Atlantic, that's right, that was expected. We clearly have some difficult comps there, two years of double-digit growth, and that market has clearly softened up based on, you know, a lot of what's going on in terms of the trade dynamics. And that market's probably not likely to improve much in the second half of the year. But So that's a little bit of a soft spot there. But at Paul Industrial, that was more than offset by our aerospace business and what we call FTAP, which is Fluid Technologies and Asset Protection. Both aerospace and FTAP were up double digits in the quarter. So, again, put that all together, mid-single-digit growth, Paul Industrial, you know, pretty solid. BJ, you mentioned BJ. Again, a little bit of exposure there, BJ. That was up, again, depending on the sub-segment, low single-digit to mid-single-digit. Pretty small numbers at BJ, but again, the order trends were pretty solid. And BJ's overall comp was, although low single-digits in the quarter, was against the high single-digit prior year. Net-net, you know, we keep a very close eye on what's going on in these sub-markets. We do think they, you know, can be indicative of maybe some broader trends. But our order trends remain pretty steady. And, again, we don't have a ton of exposure. But, you know, happy to keep bringing those indicators forward for everybody so that you have a broader sense of the macro.

That's helpful. And maybe similar, you know, a lot of question on China. I mean, you had 10% growth, double-digit in dental. You're under-indexed to maybe food and 4 plus 7 generic headwinds. But as we think about, you know, the back half of the year in the China picture, any reason that that couldn't continue at double-digit levels for you guys?

Yeah, thanks. We feel very good about where we are in China. You know, obviously that starts with the nature of our platform positions there. When you think about life sciences, diagnostics, water quality, the concerns around the environment, certainly even our dental business, which continues to be really well positioned there and growing strongly. Starting in the broad sense of the platform position, we love where those businesses and how that platform is positioned for the secular growth drivers in China. And despite the headlines, which clearly indicate that there's some slowing in China, we continue to see pretty good underlying conditions. And I think just to go through a few of the specifics, you know, diagnostics was very strong. We're talking, you know, mid-teens kind of growth there, especially at Cepheid, which is, again, off a small base, but continued to grow nicely. Beckman doing well there. Another strong quarter at Life Sciences, up high single digits. And, of course, dental demand continuing at double-digit growth. So, good performance there. Product ID, again, a smaller position in China, but pretty solid mid-single-digit growth. But as I mentioned, there's, again, probably a couple more puts and takes there in China than We might normally have seen water quality being one of those against this federal mandate that existed last year around surface monitoring. So that's a little bit of an impact. And, again, what I mentioned about micro-E down and even that FTAP business, probably a touch lighter. So, you know, a few little pockets there, but, again, if we step back broadly – I think we're in good shape there. As we look forward, I think we'll continue to see, you know, mid-single-digit to high-single-digit growth in Q3. But again, that's only because of really this tougher comp where we had high teens growth in Q3 of 18, largely driven by the water quality business. So we don't really see a meaningful slowdown in our businesses at this point. But, you know, clearly given the headlines and the The data that's been put out more recently, the ongoing trade tensions, we're watching these businesses very, very closely, and we'll continue to update as we see things.

Okay, and then just one last clarification. You had guided for dental margins to be flat. I know they were down 300 basis points. How much of that was incremental investment, and how should we think about dental margins for 3Q and 4Q?

Well, we're clearly continuing to invest around new products in that business. But the lower volumes, I think, are meaningful here, Tycho. Certainly the investment is a function there, and we think it's important to set this business up effectively for the growth to come. And you've seen us lift R&D spending by 100 basis points over the last couple of years. And so that portion of it we think is really essential to the future growth trajectory of the business. But the volume trend is really what we need to get those new product innovations to begin to turn, along with some just tailwind in that market. I think as we see that volume come back a bit, that's going to be the incremental jump that we're going to need in terms of the OMX. So I think it's really a combination of those things. that we'd be looking for, certainly as we turn the corner into next year. I think as we look at the balance of this year, we're going to continue to drive some of those investments. We're still going to have some challenges in terms of the overall growth in this market. But I think we remain very, very bullish about the prospects for this business to improve both the growth trajectory and the operating margins as we head into 2020 and beyond.

Yeah, and Tycho, it's Matt. I mean, some of the volume there too is on, if you think about specialty in the quarter was kind of low single digits, that typically is some of our better margin business. And so I think from a mixed perspective, like Tom said, that lower volume and kind of where it happened here in the quarter was a big piece of it. Okay, thank you. Thanks, Tycho.

Your next question comes from the line of Ross Muecken of Evercore ISI.

Good morning, Ross.

Good morning, guys. Congrats. So maybe I just want to go back to diagnostics. I mean, it felt like Cepheid, you know, was probably north of 20 in the quarter. I mean, obviously, Q1, you had some tough flu comps. But I guess that's a pretty remarkable growth. It feels even above sort of, you know, trailing 12-month levels. So I guess help us understand whether it's sort of new product or some of the gene experts or just placements or new menu or geographic. Like, where is that? upside sort of coming from? And are we sort of at the, you know, sort of key stages of the DBS flywheel sort of getting this business kind of churning at the rate it maybe should get to?

Sure. Thanks, Ross. You know, your term, the flywheel, is one we love a lot. And obviously, from the standpoint of turning the flywheel, I would say it's still early days at Sepia. And yet, we've begun to turn that flywheel at a pretty good rate, but there's still opportunities to continue to enhance the RPMs, if you will. So let me take you through a few of the details. You know, as I mentioned in the prepared remarks, you know, we were up north of 20% in the second quarter. And, you know, some of that continues to come from our what we call our HPDC market or that high burden developing country growth. But if you even backed out the high burden developing countries where we continue to see good growth, Cepheid continued to be up mid-teens in many of the core areas and core assays. So that growth continues to be really broad-based. Infectious disease led the way. Flu, RSV, strep, all strong. Sexual health, also very good. The flu season, and normally by the time we get into July here, we're not usually talking about flu, but just to go back a second, it did last, you know, it lingered a little bit longer into April, which probably on the margin helped growth a bit as well. So I think a combination of things, but very good performance in the core assays and the developed markets, and then continued good performance in HPDC. From a From a DBS perspective, a number of key things going on from an innovation and commercial execution perspective that are helping us to continue to drive share gains. We've netted over 300 new customers since acquisition, which is really meaningful in terms of not only the install base that that has built, but obviously the annuity stream that's associated with those captive consumables. So that market-leading installed base is now north of 20,000 instruments. We've closed, as I mentioned in the prepared remarks, I mentioned IDNs. We've closed a number of major health systems or IDNs, and that is, again, continuing to drive the installed base with strong annuity streams. You know, the anchor assays like flu and strep A are key to driving those wins. And I think over time, we're going to see some penetration into physician office labs in an even deeper way with our CLIA waived express offerings, because I think those will be an important part of this. So, you know, overall, I think the team's in great shape. I was with the team at Sepia in the earlier part of the year, and they continue to perform exceptionally well, but I think it's still early days. I think one way to think about the early days is in terms of geographic penetration. You know, we're still coming off a relatively small base in China, but the molecular diagnostics opportunity in China is really strong. You know, today China is still probably sub-5% of Cepheid, and it's going to be significantly bigger than that as years go on. We're working on getting beyond the initial tests that we have approved in China, which are really around MTB and CDIF, HIV viral load, et cetera. And we continue to build the sales force. It's up by 3x where we started. And, you know, we got four or five times the revenue. So, again, small base, early days, but I think plenty of room to go.

And maybe just on the pharma side, you know, I know you called out biotech, at least relative to Paul, but More broadly, I guess, how would you kind of characterize small versus large molecule demand across the portfolio, and specifically, you know, to Taiko's point before, in China, any sort of anecdotal things? I mean, when we were there, it seemed quite like biologics and biomanufacturing was on absolute fire, so just any color would be helpful.

Sure. You know, I think in terms of small versus large, I think we continue to see solid growth from the segment of the market that's more oriented towards small molecule. You know well, Ross, that that's sort of our legacy. If we looked at the Cyax business as an example of that, continued solid performance across the the small molecule business. Large molecule biologic is where the faster growth is, and we see that in our Paul numbers. You know, the Paul Life Science business, up double digits, the biotech part of that was really led by our single-use technologies, and those single-use technologies are significantly oriented, if not exclusively oriented, to the biologic side of the house. ICELIS, I mentioned ICELIS and the ICELIS bioreactor. continues to be a big source of growth for us. We look at the areas of cell and gene therapy as huge opportunities, and again, still early days in those markets. So I'd say cutting through it all, small molecule, solid, pretty consistent, large molecule, continued strong growth. You asked specifically about China. Thanks for your recent visit. That market is going quite well, but again, I think that's still a market that is in development. A lot of the history there began in the small molecule area. Some of what's going on there around biosimilars is clearly a source of growth, but that market will continue to evolve over time. There's a tremendous amount of government investment that's going on, as you also probably found when you were there. And so we're very bullish about how our business in life sciences, not just on, by the way, the process technologies you might say around filtration and ultimately around chromatography, but I think our tools business as well, whether we're talking about Cyax and the evolution of the use of mass spectrometry in large molecules or the use of our other life science tools around biologic drug development, and discovery, those businesses are all tracking well. Super helpful. Thanks, Tom. You bet, Ross.

Your next question comes from the line of Derek DeBruyne of Bank of America Merrill Lynch.

Derek, good morning.

Good morning. How are you all doing?

Great, thanks. Nice to hear from you.

Thank you, yeah. A couple of questions. So I guess the first one would be, you know, you mentioned in your comments about like a bio that You were seeing some share gains there, and given that you only have a couple of real competitors that market, I'm just sort of curious if you have any additional color on what's driving the share gains, and just any information on that would be a good place to start.

Sure. Yeah, you bet. Happy to. You know, first of all, we have a terrific team on that business today. Melissa Aquino, who I've worked with for a long time, actually came out of our water quality business, ran our DVS office prior to this role. is leading that business today and just doing a wonderful job, both in terms of driving new product execution as well as the commercial side of the house. One of the things that I've been particularly impressed with as I was with that business earlier this year, Derek, is they've got the new product engine now working in that business. We struggled a bit three, four, five years ago with getting products out of R&D on time. They were great products. They ultimately were targeted at the right market. We are now getting those out faster. The rate of new product introduction is higher than it's ever been before, and we're seeing the impact of that in the growth rates both in histology, the core microtome tissue processor, What you might think of as kind of the more pedestrian stuff that's at the front end of anatomical pathology, as well as faster growth rates and more product innovation around advanced staining. We still have work to do around path imaging. You recall years ago we did the acquisition of Aperio. We think there's tremendous opportunities around the evolution of digital pathology We have, I think, much of the tool set that it takes to move pathology imaging into the mainstream, if you will, of anatomical pathology. But we've got some product development that continues to need to be done. And frankly, it's a market that's slow to adapt to those technologies. And we'll need to be a little bit patient as those transitions take place within the community of pathologists. A lot of good things going on there, but I would point primarily to the new product development engine now running far more smoothly and efficiently.

Great. And then just two related questions. One, can you just give us any update on, you know, sort of the GE and timing on that whole process? And also just sort of a follow-up on Ross's question. you know, when you think about small molecules and large molecules and then cell and gene therapies, can you compare it sort of like the profitability of some of those markets? And the question I'm getting to is like, you know, as you move into, you know, providing products for those little GEMSA and just some of these other ones that are out there, I'm just curious if those are going to be a higher margin, higher, you know, product for you, more profitable product for you than going and then doing, than Phenomena supplying columns or, you know, supplying resins and filters for the biologics business?

Sure. Lots to take in there, but let me give it a shot. So let's start with GE. You know, first of all, we continue to be really impressed with the GE team. We mentioned that when we announced the deal, that we found that coming through diligence. But, you know, as we normally do with large acquisitions, we put a transition team together The soon-to-be-acquired business has a transition team. And so we continue to get some exposure to that team, and we remain really impressed by them. It's a highly passionate and talented group with great industry experience. As you saw in Q1 from them, the business is off to a great start in 2019. What we've heard a little bit, just sort of very anecdotally, that things continue to to track quite well. Their first quarter had core growth above where they'd been the last couple of years, so all indications are the business is in wonderful shape. From a transaction standpoint, you know we issued the equity in Q1. Clearly, the debt financing ought to be helped by what we're seeing now in lower rates, assuming those kind of hold. in both the US and Europe. And, you know, that's just in comparison to when we announced the deal. So, you know, overall, we feel very good about where we are. No change to our expectations. We've had a good and constructive dialogue with the regulators, and we're working with them like we would on any other deal. And so we're continuing to drive towards a fourth quarter close and feel good about that. Relative to your second question, which was around small molecule versus large molecule cell and gene therapy and profitability. And then you made specific reference to Zolgensma and the recent introduction of that breakthrough product by the division of Novartis. Your question was really around profitability, I guess. First of all, going back to the core, you know, we've always seen good profitability in our business around small molecule related applications. And large molecule, I would say no difference. Obviously, as we continue to develop breakthrough new products associated with the evolution of biological drug discovery development and processes, we continue to focus on enhancing gross margins as we drive new product development. And so obviously the value that we deliver to shareholders is directly associated back to the gross margin that we're able to achieve. And so we continue to really keep the long horizon in mind in terms of what the market needs are and continue to drive products that will help to enhance gross margins, which they've done. And so we feel good about that. Now, when it comes to cell and gene therapy, it's so early in the evolution of that market today that that it's hard to say anything that's particularly material or quantitative around overall profitability. Even our Icelis product line, which is doing exceptionally well, is still early days in its market penetration, as fast as that pickup has been, and as unique as that product is in the market. So more to come over time, but in general, our outlook is profitability looks very solid across this market. You know, Zolgensma, as you mentioned, and you probably know from what's been publicized, is a unique therapy. It's a breakthrough. It's incredibly impactful to children under the age of two. And it's a very costly therapy. And, you know, that's a challenge in healthcare today is the cost of developing these therapies and so on. But, you know, that's a dynamic that we're quite a number of steps removed from when it comes to to drug pricing and the relationship with the payors. And so I think the continued evolution of the technologies associated with these breakthroughs is going to be imperative for our customers today. And, you know, we're proud to be a part of it. But, you know, we certainly recognize the challenges that are associated with how costly these have become. You know, just one last point. You know, many of you have probably heard me say that at Danaher we have a what we call our shared purpose. And it's four simple words. Helping realize life's potential, whether that's the potential for our associates, our customers, our shareholders, ultimately, in many respects, patients. And there's probably no better example of how we help realize life's potential when it comes to health care than when a tool of ours can play a role in really impacting the quality of life for a patient. We're proud to be a part of that. There's more to come, and it's still early days.

Great. Thanks.

Thanks, Derek.

Your next question comes from the line of Doug Schenkel of Cowan.

Hey, Doug. Hey. Good morning, guys. I want to touch base to start on a few loose ends on Paul. How would you characterize win rates for Paul Biotech, especially in the gene therapy space? I guess the second part is I believe it was last quarter you mentioned some building backlog for iCellus. What's the status of that? And I guess the third part is I'm curious if customer anticipation of the GE Bio acquisition is having any impact on Paul demand. Clearly, you're doing well there, and you have been for a while, but just wondering if there's any attribution to anticipation of the GE Bio deal as customers think about the possibilities associated with you having a broader portfolio and whether or not that is impacting demand at all.

Sure. Thanks, Doug. So, first of all, on Paul and around win rates and gene therapy, and you mentioned specifically Icelis, and that's a good place to start when it comes to gene therapy. You know, Icelis is a unique product, not to suggest that there's only one way to affect what Icelis affects in terms of a bioreactor, but its capabilities are particularly unique in the market. And as a result of that, the leaders in that market segment associated with the production steps in gene therapy have chosen iCellus at a pretty consistent rate. And so while I won't begin to quote right now a specific win rate percentage, I would tell you it's very high, and that has to do with the unique capabilities that iCellus delivers in this market. that is difficult to do with the quality and the efficiency and the cost effectiveness that iCellus allows for. So we feel very good about that. But again, it's still, because the gene and cell therapy market is so nascent today, we can feel great about that, but the materiality of that is something that will only build over time. It'll build at a reasonably rapid rate, but again, a nascent market today. Your question specifically about the customer reaction or anticipation, I guess, as you framed it, for the GE deal and impacting appalled demand, I don't know today that we would point to anything specific in that regard, Doug. I would tell you a quick story, just an anecdote. You know, I was in China a couple of months ago and was with a significant Paul customer They happen to be a GE customer as well, as most large customers that I might meet with either in China or any high growth market or even in the U.S. or Europe. But in this particular case, there was an appreciation for the fact that the combination of those two businesses in terms of the type of service and support that that Customer would expect the fact that we become more meaningful to one another in a positive and constructive way was something that they felt very good about. And so those are just anecdotes. I don't know that there's anything we would point to today that is a demand impact today that we could see into relative to the top line.

Okay, thank you for that. Pivoting to Beckman Diagnostics, where you guys grew mid-single digits for the third consecutive quarter, do you think this is the new norm? And specifically in North America, there's clearly been some improvement there over the last couple of quarters. How did things fare in North America this quarter for BeckmanDX?

Sure, Doug. And we obviously, as that's an important battleground, we pay a good deal of attention to that. As you said, third-string quarter of mid-single-digit growth. We feel very good about that. Some of the things that led the way are we continue to see very good growth in our immunoassay business in the core central lab. You'll recall that we developed and launched a new automation system, the DXA system. which has taken our competitive advantage in particularly high-volume accounts to a new level. And so we feel very good about that. But probably one of the key things that is a difference today is our hematology business. And for those of you, Doug, and others who have followed us for a number of years, you know that even going back to the acquisition of Beckman to begin with, hematology was the headwind. And so we've made a significant amount of investment in new product development. We have transformed that product line now. Those new products, specifically around both high and mid-bind, specifically in the high bind, the DXH-900, as well as the early sepsis indicator capabilities that we have now launched, are contributing together to turn the tide. We continually look at retention and win rates, and we have seen those increment upward consistently over the last, particularly over the last two years. And those new products around automation and hematology have clearly been a big part of it. China continues to be a strong driver for us at north of 10%. That's a plus as well. So combination, still work to do. There's still menu gaps that we're working on, a couple of critical ones that we will look to close more likely in 2020. And so I think we're continuing to see good performance. I think if you step back just for one second and think about the impact this has had on the diagnostic platform, If you think about the improvement in Beck DX now at mid-single digits, with the addition of Cepheid now with its terrific performance, we now have a diagnostic platform with core growth at 7.5% that we think will, as the comps come out, will stack up reasonably well. And now a platform that's been solidly mid-single digits for eight straight quarters. So I think Beckman's important. Certainly, but the combination of Beckman with solid performance at radiometer, like the biosystems, and the high growth rate at Cepheid is really what solidified that stronger overall platform position. And it's really the platform together when we look at clinical chemistry, immunoassay, hematology, urinalysis, microbiology, and across the other modalities in anatomical pathology and acute care that really is the right comp against some pretty good competitors.

Okay. Sorry to try to sneak in one more, and then I'll let you talk back into the queue. I'll short my answer, Doug. No, this is all me. I've had a handful of investors ask me for updates on timing of the debt financing and if there's any real change, and I think by extension upside to what you guys embedded into the your original deal model for interest expense assumptions. Could you speak to timing and whether there's any change in how you're thinking about maybe upside associated with interest expense? Thank you.

Sure. Yeah, I mean, from a timing perspective, I still think, you know, we've kind of talked about trying to, you know, be in the market a little bit closer to when we close, Doug. So, I mean, I think we're still talking about a Q4 close here. So, I think the timing will be a little bit closer to that. But, you know, as Tom kind of said, you know, we talked about the GE update. You know, we issued the equity in Q1. And, you know, the debt financing here is clearly going to be helped by the lower rates. There's no question about that. I mean, we're probably not going to, you know, update any of our guidance that we kind of provided to you earlier. But I think the combination of the tailwinds that the business is, you know, the GE business is off to a pretty good start and And where the rates are right now likely will have some sort of benefit. But I think from a timing perspective, you know, still sort of TBD, but a little bit closer to when we bring the, you know, kind of when we get to close here.

Okay. Thanks again.

Yep.

Your next question comes from the line of Steve Bouchard of Wolf Research.

Morning, Steve. Morning. Thanks so much for the time here. Just a couple for me, I mean, a couple clarifications. for Matt, and then one on the commercial side for Tom. Matt, it sounds like the thinking for the core growth of the total company level is going higher relative to what we had before. Is it fair to say that that, well, fair to say that, first of all, and second of all, is that a reflection of a fairly balanced view across environmental applied diagnostics life sciences? Second clarification for Matt is, anything meaningfully changed in terms of the non-op or tax rate outlook for the full year that you'd flag here? And then I have one for Tom.

Sure. So from a guide perspective, I think, you know, for the full year we had talked about, you know, at the beginning of the year, kind of in December, we had talked about approximately 4% core for the whole year. Obviously, you know, a pretty good start here in the first half and what we've, you know, our guide here of approximately 4.5%. So I think from a full year perspective, our thoughts now are that we're probably approximately 5% here for the full year from a core guide. As far as a balance on that, yeah, no, I think, you know, where we've seen in the first half, as you see, life sciences and diagnostics have been a touch better, and, you know, EAS, I think EAS would be the one piece in the second half, given the water comp and the comp at PID, they're both here in Q3 going to be comping kind of their toughest comps of the quarter. But other than that, I suspect that it's been pretty balanced. I don't think we, you know, see a vast difference here in the first half or the second half. I think we just have had a little bit better start than we may have thought, you know, in December. As far as non-op stuff and tax, I don't think there's anything that I would call out, Steve, that would be different here in the second half.

Okay, thanks, Matt. And then Tom, I wonder if you could reflect a little bit more on IDT, and not that business in isolation, but what IDT and the broader life science portfolio is doing in terms of cross-selling opportunities. There's probably some synergy between IDT and Beck LS, just to pick one example. I just would be interested to hear about where you think you might be doing better in terms of share gains not just as a function of the commercial investments you've made, but in terms of product synergies, whether it's around IDT or maybe Phenomenex, because we've been hearing more about Phenomenex on checks here of late. Thanks a bunch.

Sure, Steve. You know, it probably will come across as somewhat surprising that despite what you might think across a broad set of analytical modalities that we provide in life sciences, that there aren't a really significant number of cross-selling situations that we would point to that where there's real materiality. And the reason for that, and I'll come back to IDT in a second, but the reason for that is that our operating company centric model that we have maintained for virtually the entirety of Danaher's history is one that puts an extremely high value on an individual operating company and its commercial organizations being uniquely focused on the specific needs of that customer set. And we've seen a number of situations looking across different industries where businesses have hoped for commercial synergies by bringing sales organizations together and creating heavier bags for their commercial organizations, thinking that customers actually were looking for to buy a broader suite of instrumentation from the same sales team, when the reality is that only served to dilute the focus, the technical capability, the level of service and support. And so we've actually maintained much more focus within our individual operating companies on the unique needs of that end market's customers and really, I think, continue to maintain that, even in particular with newly acquired businesses. Going back to IDT, that approach to maintaining a unique focus of a commercial organization on their unique customers is particularly important for newly acquired businesses for us because it's so easy to get a commercial organization confused by adding additional products to their bags from another operating company that ultimately dilutes that sales force's effectiveness. And so we look clearly for situations where we can deliver higher value I think you mentioned Phenomenex. Phenomenex and CyEx are clearly a closer opportunity where the synergy between chromatography column, obviously, and the sample preparation associated with mass spectrometry is much more technically and workflow-orientedly synergistic. And so, that's probably a better example of where we see that. And then, in certain cases in high-growth markets, I think I would point, for example, to our dental business, where having a unified sales organization bringing a consolidated set of products to a single end market, meaning the dental market in China, which is structured a little bit differently than the end markets in the developed countries, that's really delivered value. And that's actually one of the things that has helped drive that double-digit sales growth in China. But again, those are unique situations, and we only do that where there is clarity around how we bring real value to customers.

Well, that's great, Culler. I really appreciate the time here this morning.

Thanks, Steve.

Thank you. I'll now return the call to Matt Gugino for any additional or closing comments.

Thanks, Lori, and thanks, everyone, for joining us this morning. We're around all day for questions.

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