Danaher Corporation

My name is Kathy, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Danaher Corporation's third 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 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 on your telephone keypad. I will now turn the call over to Matt Gugino, Vice President of Investor Relations. Mr. Gugino, please go ahead.

Thanks, Kathy. 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.danaher.com, under the heading Quarterly Earnings. The audio portion of this call will be archived on the Investors 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 October 31, 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 third quarter of 2019, and all references to period-to-period increases or decreases in financial metrics are year-over-year. All references to individual operating company operating margins exclude the impact of intangible amortization. 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 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.

Thank you, Matt, and good morning, everyone. We're pleased with our strong performance in the third quarter as we delivered 5% core revenue growth and solid core margin expansion. We believe our ongoing investments in innovation, and commercial initiatives helped to continue building sustainable competitive advantages across a number of our businesses. We also made meaningful progress on our two most recent portfolio moves, the acquisition of GE Biopharma and the initial public offering of our dental business. During the quarter, we achieved several important milestones related to the GE Biopharma business. Earlier this week, we announced that we signed an agreement to sell certain businesses to Sartorius for a purchase price of $750 million. The revenue to be divested is approximately $140 million and consists of our label-free biomolecular characterization, chromatography hardware and resins, microcarriers, and particle validation standards businesses. All of these businesses are part of our life science platform. While the sale to Sartorius remains subject to certain regulatory approval, it represents a significant step in the GE Biopharma regulatory process. Timing around meeting certain closing conditions, such as regulatory approvals, can of course be uncertain. However, we remain very encouraged by the progress we're making and expect to close the GE Biopharma transaction in the first quarter of of 2020. Additionally, we recently announced that the business will be called Cytiva when it officially becomes part of Danaher. The name is derived from Greek and Latin roots, meaning cell and doing, as everything biopharma customers do relates to the use, growth, or analysis of cells. The name may be new, but the Cytiva logo, or the drop, It's actually a reference to the iconic Pharmacia brand of the business going back to the 1960s. Pharmacia was a pioneer in the development of process chromatography and was one of the first businesses to become part of GE Biopharma. We've received terrific feedback on the reintroduction of the drop logo as we look to build on its legacy under the new Cytiva brand. And lastly, we continue to make progress on the financing of the GE transaction. In September, we raised approximately $6.8 billion in Euro-denominated debt. We raised this debt at a combined interest rate of less than 1%, with an average maturity of approximately 14 years. We anticipate raising the remaining debt required to finance the transaction prior to year-end. On September 18th, our dental platform, now called Invista, started trading as a public company on the New York Stock Exchange under the ticker NVST. I want to thank Amir Agday and all of the Invista associates for their contributions. We wish them the very best as they embark on this exciting new endeavor. Invista released their third quarter earnings earlier this morning and will be holding a conference call at 11 a.m. Eastern time to discuss those results. We ask that you direct any questions on Invista's business performance to the Invista team. So turning to our third quarter results, sales grew 4% to $5 billion, with core revenue growth of 5% on a consolidated basis and 6% core revenue growth when excluding the results of our dental segment. Acquisitions increased revenues by half a percent, while the impact of foreign currency translation decreased revenues by 1.5%. Geographically, high-growth markets increased high single digits, with China growing at that rate, while Russia and Eastern Europe both grew double digits. Developed markets increased mid-single digits, with North America leading the way. Gross margin for the third quarter was 55.8%. up 40 basis points year over year. Operating profit margin was 16.6%, with core operating margins increasing 70 basis points, led by our life sciences and diagnostic segments. Now for the third quarter results across the portfolio. In life sciences, reported revenue increased 6%, with 6.5% core revenue growth. Operating profit margin increased by 60 basis points, with core operating margins expanding 100 basis points. At Beckman Life Sciences, we believe we continue to grow above the market as core revenue increased double digits. We saw strength across most major geographies and product lines as new product introductions continued to contribute meaningfully to core revenue growth. In particular, we believe we're growing in core cytometry, with the Cytoflex platform and dry reagents, as these innovative product lines are simplifying customer workflows. Additionally, LabSite, the automated liquid handling business we acquired earlier this year, is growing double digits and has exceeded our initial expectations. Core revenue at SCIEX declined slightly, in part due to a tough year-over-year comparison as the business grew nearly 10% in the third quarter last year. We saw strength in high-growth markets, and that was offset by softness in North America and Western Europe. At Paul, the team achieved high single-digit core revenue growth, as we saw good performance in both the developed and the high-growth markets. The biotech and aerospace businesses saw the largest increases offset by continued softness in microelectronics. August marked the fourth anniversary of our acquisition of Paul. Over the last four years, with the application of the Danaher business system, Paul has accelerated core revenue growth, expanded gross margins by greater than 500 basis points to approximately 55%, and increased operating margins nearly 1,000 basis points to above 25%. Implementing DBS tools has not only enhanced the financial performance, but also improved operational efficiency, expanded commercial capabilities, and increased the cadence of innovation across the business. Turning to IDT, IDT delivered another quarter of double-digit core revenue growth with solid results across all major geographies. By product line, the business saw particular strength in next-generation sequencing and and synthetic biology. In August, IDT continued to expand its product portfolio in these high-growth areas with the launch of a new product, Opools, the longest strands of ready-to-use DNA on the market. IDT's proprietary manufacturing process allows them to create DNA at the highest quality levels, enabling scientists focused on developing advanced diagnostic tests and treatments to generate more consistent and reliable results in their research. Now moving to diagnostics. Reported revenue increased 6.5%, with core revenue growth of 8%. Reported and core operating profit margins increased by 100 basis points. DBS-led commercial and operational execution drove performance across the diagnostics platform. Beckman Diagnostics had its fourth consecutive quarter of mid-single-digit core revenue growth, driven by strength in high-growth markets and increases in North America. A key driver of Beckman's improved growth performance has been its increased cadence of new product introductions. At the American Association for Clinical Chemistry trade show in August, Beckman highlighted a number of these recent innovations, including the DXH-900s, high-volume hematology analyzer, as well as the DXA5000 laboratory automation systems. The DXH900, with its early sepsis indicator, has been a key contributor in the improved performance in Beckman's hematology business. In automation, the DXA5000, which was launched in Europe earlier this year, recently received 510 clearance from the FDA. The system's key benefits of detecting pre-analytical sample quality, increasing turnaround time, and reducing the number of manual processing steps from 32 to 4 are driving early adoption and great customer feedback. Turning to Radiometer, core revenue growth increased double digits, led by strong results in China and Japan, as we believe the team drove market share gains in our blood gas and immunoassay product lines. Leica Biosystems also delivered double-digit core revenue growth, led by North America and Japan. Success at Leica is being driven by new product introductions, combined with the implementation of Growth Rooms, one of our most impactful DBS commercial tools. Growth Rooms enable cross-functional teams to collaborate and align actions around the business's most critical short- and long-term commercial initiatives. With this focused approach, Leica's core histology and advanced staining product lines delivered mid-single-digit core growth or better in each of the last eight quarters. Finally, at Cepheid, core revenues increased double digits across all major geographies and product lines. Next month will mark Cepheid's third anniversary with Danaher, and we could not be more pleased with what the team has accomplished. Since acquisition, the business has grown double digits annually to nearly $1 billion in revenue. Gross margins have expanded by 1,000 basis points to approximately 60%. R&D investments have increased by over $50 million annually, while operating profit margins have increased from break-even to approximately 20%. Cepheid highlights another powerful example of how running the Danaher playbook by applying DBS to drive growth and expand margins allows for investment back into the business that helps drive compounding returns. Moving to our environmental and applied solutions segment, reported revenues increased half a percent, with core revenue growth increasing at 2%. operating profit margin remained constant, with core operating margins expanding 10 basis points. In product identification, core revenue declined slightly, driven in part by a tough prior year comparison at VideoJet, partially offset by growth in our packaging businesses. At VJ, core revenue declined low single digits on a nearly 10% comparison to the third quarter last year, despite the results of the quarter, were encouraged by a positive order growth and expect improved performance in the fourth quarter. Last month, at the annual PAC Expo trade show, VideoJet showcased some of its recent instrument and digital innovations. On the instrument side, VideoJet highlighted the VJ7340 laser printer, featuring the smallest marking head available on the market today and allowing for easy integration into existing packaging lines. VideoJet also released RapidRecover, a digital solution that automatically troubleshoots and diagnoses printer service issues. This functionality builds on VideoJet's market leading service capabilities and improves customer uptime by increasing first time fix rates and avoiding costly investigation time. In our packaging businesses, which include ESCO and X-Rite, core revenue increased at low single-digit rates, continuing the improving trends that we referenced in these businesses last quarter. Developed markets led the way, offsetting some softness in high-growth markets. Finally, at water quality, solid execution across the platform drove mid-single-digit core revenue growth on top of a double-digit prior year comparison. So looking at performance by operating company, Trojan core revenue increased double digits led by North America. The team saw strong performance in the municipal market in both its UV and filtration product lines, driven by high win rates and service expansion initiatives. At HACC, core revenue increased low single digits. Strong performance in Europe and North America was offset by declines in China due to a difficult comparison versus 2018 related to China's surface water initiative, Policy 61. At Chemtree, core revenue increased mid-single digits, driven by strength in the oil and gas, as well as the food and beverage end markets. In September, many of you attended our Water Quality Platform Investor Day at HACC in Loveland, And in that day, we highlighted the key strategic initiatives of the platform. You also saw details on the sustainable business model that's common across Danaher, including strong underlying secular growth drivers, exceptional margin profiles, and high recurring revenues. The team provided examples throughout the day of customer-focused workflow solutions, innovation, and go-to-market execution that we believe have led to share gains across water quality. Finally, the day showcased a variety of tools within the Danaher business system to accelerate the cadence of innovation and drive sustainable long-term results across the platform. The presentation and webcast are available in the investor section of our website, and I encourage those who weren't able to attend the event to take a look. So to wrap up, we're very pleased by our third quarter performance and the hard work the team has put in throughout the year. It's also worth highlighting the steps we've taken over the last several years to transform the portfolio. Through acquisitions, we've brought in fundamentally higher growth businesses with significant consumables and aftermarket positions. Today, we consider 70% of our revenue to be recurring, with much of it being captive to our installed base and mission critical to our customers' daily operations. Combined with our significant organic investments in innovation, an outstanding team in the Danaher business system. We're excited about the opportunities through the end of 2019 and beyond. So we're initiating fourth quarter adjusted diluted net EPS guidance of $1.32 to $1.35. We anticipate core revenue growth to be approximately 4.5%, which excludes our dental segment. We now expect full-year 2019 adjusted diluted net EPS to be in the range of $4.74 to $4.77. Both our fourth quarter and full-year EPS guidance include the dilution from non-controlling interest related to the 19.4% of Invista we no longer own.