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.