Danaher Corporation

Good morning. My name is Maria and I'll be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's second quarter 2020 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, Maria. 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, our second quarter 2020 form 10-Q, and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the investor section of our website, www.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 August 6, 2020. 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 supplement materials are The company-specific financial metrics refer to results from continuing operations and relate to the second quarter of 2020, 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, as applications submitted and pending for certain regulatory approvals, are only available in certain markets. During the call, we 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 statements except as required by law. As a result of the size of the Cytiva acquisition and its impact on Danaher's overall core revenue growth profile, we're presenting core revenue on a basis that includes Cytiva sales. References to core revenue growth including Cytiva sales and the calculation of period-to-period sales growth compare the current period Cytiva sales to the historical period Cytiva sales price of the acquisition. With that, I'd like to turn the call over to Tom.

Thanks, Matt, and good morning, everyone. We're very pleased with our second quarter results, especially in such a challenging environment. Our solid core revenue growth, strong cash flow generation, and more than 30% EPS growth are a testament to our team's commitment to the Danaher business system and the outstanding portfolio of businesses that comprise Danaher today. We're tackling the challenges and opportunities presented by the COVID-19 pandemic head-on and are fortunate to do so from a position of strength. These circumstances have showcased the resilience of our portfolio, a unique collection of market-leading franchises and technologies with a high level of recurring revenue and a foundation of continuous improvement. We believe that this powerful combination differentiates Danaher and will enable us to continue generating sustainable, long-term value for shareholders for many years to come. Before we run through our second quarter results, I'd like to provide an update on a few of the ways we are directly contributing to the fight against COVID-19 today and well into the future. Diagnostic testing has been a critical component of the global community's attempts to better understand and ultimately curb the spread of COVID-19 And Cepheid has been a leader in this effort. In March, Cepheid launched the first rapid molecular test for COVID-19 that provides highly accurate results within 45 minutes. Multiple independent studies indicate that Cepheid's test performance is best in class versus other point-of-care platforms on the market today, providing superior virus detection with one of the fastest time to results. The team has meaningfully increased production capacity since the test was launched, shipping more than 6 million test cartridges in the second quarter. As a testament to Cepheid's commitment to tackle this global health crisis, the team recently announced the development of a rapid four-in-one combination test for COVID-19, flu A, flu B, and RSV from a single patient sample. The symptoms for each of these viruses are very similar, but the treatments are very different. So the test is being designed to provide critical answers within 35 minutes to ensure the best patient outcome. The four-in-one test is expected to launch in the third quarter ahead of the upcoming flu season. In addition to ramping test production, Cepheid also delivered a record number of new instruments to customers in the second quarter. The installed base grew double digits, and the number of new instrument placements was more than four times that of a typical quarter. This significantly increases Cepheid's installed base, which now totals more than 26,000 instruments globally, bringing essential diagnostic information closer to more patients and communities around the world. Another addition to our diagnostic testing capabilities was the launch of Beckman-Coulter Diagnostics serology test in June. This highly sensitive and specific assay can identify IgG antibodies to the virus, which typically begin to develop within the first 14 days of infection. Antibody assays could potentially play an important role in understanding immunity, and in turn, improving the world's ability to manage COVID-19 going forward. As we look beyond testing, a global race is on to find effective treatments for COVID-19, and we're proud to support the scientific community in their pursuit of new vaccines and therapies and therapeutics for the virus. Paul and Cytiva's products and solutions are involved in the majority of the more than 200 vaccine and therapeutic projects currently underway around the world. including participation on every COVID-19 vaccine that is in human clinical trials today. Our unique offering across the bioprocessing workflow positions us exceptionally well to help bring vaccines and therapies to market faster. In addition to our market-leading filtration, chromatography, and single-use technologies, Paul and Cytiva's innovative teams provide customers with extensive technical expertise to enable breakthrough development and production capabilities. One such example is Paul's process development services team, which is helping customers scale up their vaccine production processes significantly faster. And in one instance, accomplishing in just a few weeks, what typically takes months or even years. These innovative bioprocessing solutions are just a few examples of how we're helping to accelerate the pursuit of COVID-19 prevention and ultimately a cure. Now let's look at our second quarter results. We generated $5.3 billion of sales with 3.5% core revenue growth. The impact of foreign currency translation decreased revenues by 2%. We also saw strong order growth in the quarter, just under 10 percent, led by our life sciences and diagnostics platforms. Geographically, revenues in the developed markets was up mid-single digits, led by North America and Western Europe. High-growth markets were up slightly, driven by a meaningful sequential improvement in China, which was up low single digits year over year. Gross profit margin of 53.8% and operating profit margin of 15.9% were both down, primarily as a result of fair value adjustments related to the CITIVA acquisition. Excluding these adjustments, both gross and operating profit margins increased by more than 150 basis points year over year. Core operating profit margin was down 80 basis points driven by slightly lower volume excluding CITIVA, foreign exchange rate movements, and higher corporate expense. Adjusted diluted net earnings per common share of $1.44 were up 32% versus last year. We generated $1.3 billion of free cash flow in the quarter and $2 billion year-to-date, both up approximately 35% or more year-over-year. Our outstanding free cash flow combined with a strong balance sheet positions us well to actively pursue strategic M&A opportunities in this environment. We're also accelerating growth investments across Danaher, most notably at Cepheid and many of our life science businesses where we are expanding production capacity to support the fight against COVID-19. Now let's take a more detailed look at results across the portfolio. Life Sciences' core revenue was up 8%, led by high teens or better core growth at Cytiva, Paul Biotech, and IDT. More specifically, Cytiva achieved more than 20% core revenue growth in its first full quarter as part of Danaher, exceeding our expectations. Demand for our bioprocessing, genomic, and automation solutions was driven by ongoing global efforts to develop COVID-19 testing and treatment. This was partially offset by declines in our more instrument-oriented businesses, SCIAC and Leica Microsystems. Academic and research lab closures delayed installations of existing instrument orders and new capital purchases, particularly across developed markets. And despite this difficult environment, SIEX successfully launched multiple new products earlier this month, including the triple-quad 7500 mass spectrometer. The new 7500 marks SIEX's most significant launch of the last five years and reinforces their market leadership in quantitative mass spectrometry. This is another great example of how we're continuing to invest for growth across Danaher and enhancing our competitive advantage through innovation. Moving to diagnostics, reported revenue was up 2.5% with 5% core revenue growth, led by continued strength at our point-of-care businesses, Cepheid and Radiometer. Global demand for Cepheid's COVID-19 tests and gene expert instruments helped drive more than 100% core revenue growth at Cepheid in the quarter. Radiometer delivered double-digit core revenue growth, as elevated levels of COVID-19 hospitalizations drove demand for blood gas testing. A record number of new ABL blood gas analyzers were delivered during the quarter, further expanding Radiometer's market-leading global installed base. This strong performance was partially offset by declines at Beckman Coulter Diagnostics and Leica Biosystems, our core laboratory and pathology businesses. Patient volumes were down meaningfully as elective procedures and wellness visits resumed slowly throughout the quarter, particularly across the U.S. and Europe. This was partially offset by improvements in China, where hospital visits began to approach pre-pandemic levels. Moving to our environmental and applied solutions segment, reported revenue was down 10.5%, and core revenue declined 8.5%. By geography, declines in North America and Western Europe were partially offset by double-digit growth in China. At our water quality platform, mid-single-digit core revenue declines were driven by industrial and market softness, while municipalities remained stable. Steady demand for our consumables and chemistries globally was offset by delayed equipment purchases, particularly in the developed markets. However, we were encouraged by strong results in China during the quarter as activity returned to more normalized levels across the region. Core revenue at our product identification platform was down double digits, largely due to equipment revenue decline, as mission-critical operating expenses were prioritized over larger capital investments. At VideoJet, positive consumables growth was led by demand across the consumer packaged goods and food end markets. Service performed well as well, as we continued to support customers throughout the pandemic, helping to keep their essential business operations up and running. So with that as a context for what we saw by segment, let's take a closer look at recent trends across our end markets. Encouragingly, the dynamics of the quarter were largely a continuation of what we outlined in early May. April appeared to be the trough, with modest improvement as we moved through May and June. Geographically, we continued to see improving activity in China, with Europe following suit, albeit at a slower pace. Resumption of activity in the U.S. is mixed. with many states only recently beginning phased reopenings and others experiencing setbacks in the process. Within life sciences, we continue to see a bifurcation across our end markets. The recent surge in COVID-19-related research and development among our biotech and pharmaceutical customers is generating strong demand for our bioprocessing, genomic, and automation solutions. Non-COVID-related bioprocessing activity also remains very healthy, contributing to demand for filtration, chromatography, single-use, and cell and gene therapy products. Cytiva and Paul Biotech comprise the majority of our exposure to the bioprocessing end market, and collectively, these two businesses had more than 40% growth in their order book in the quarter. a strong indication of the longer-term opportunities we're seeing here. Meanwhile, widespread shutdowns continue to impact non-COVID-related research lab activity. Labs in the U.S. recently started to reopen but are operating at limited capacity and with distinct variations by region. The story in Europe is similar to the U.S., while China is further along and activity appears to be approaching pre-pandemic levels. We estimate that approximately 50% to 60% of academic research labs in developed markets are now open in some capacity. That number is closer to 90% in China, where installations have resumed and instrument order books are building. Looking across clinical diagnostics, We continue to see very strong demand for molecular point of care and acute care testing, which is also driving a significant increase in instrument placements globally. Across hospital labs and reference labs, we were encouraged to see patient volumes ramp up as we move through the quarter, with elective procedures and wellness checks resuming across much of the developed markets. Today, we estimate that patient volumes in North America are are approximately 85% to 90% of historical levels, with Europe slightly ahead and China even further along, given their earlier reopenings. In the applied markets, the divergence of demand between consumables and equipment appears to be lessening. Consumables remain solid as customers sustain essential business operations, like testing and treating water and safely packaging consumer product goods, food, and medicines. equipment declines are starting to moderate, and we're encouraged by recent order book trends. In light of these recent dynamics, we expect to deliver mid- to high-single-digit core revenue growth in the third quarter. We anticipate COVID-19-related revenue tailwinds will be similar to what we saw in the second quarter. By segment, we expect core revenue growth at Life Sciences to be up double-digit, low double-digits, Diagnostics up high single digits and environmental applied solutions to be approximately flat. So to wrap up, we're proud of our results this quarter. Our team stayed focused on executing and continued to find innovative ways to tackle the challenges and opportunities presented by this pandemic. We're excited about the portfolio that we have today and how it will continue to differentiate us going forward. And we're fortunate. to navigate through this environment from a position of strength, with our solid balance sheet and outstanding cash flow generation enabling us to be nimble and opportunistic. We believe that the combination of our talented team, DBS-driven execution, and resilient portfolio uniquely positioned Danaher to outperform in 2020 and well into the future. With that, Matt, I'll turn the call back over to you so that we can start taking questions.