Danaher Corporation

and I will be your conference operator today. At this time, I would like to welcome everyone to the Danaher Corporation's third 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 at that time, please press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.

Thanks, Christelle. Good morning, everyone, and thanks for joining us on the call. With us today are Reiner Blair, 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 third 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 Investors section of our website, www.danaher.com, under the heading Quarterly Earnings. The audio portion of this call will be archived on the investor section of our website later today under the heading events and presentations and will remain archived until our next quarterly call. A replay of this call will also be available until November 5th, 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 supplemental materials to company-specific financial metrics refer to results from continuing operations and relate to the third 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 have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make forward-looking statements within the 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 may 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 statement 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 are presenting core revenue on a basis that includes Cytiva sales. References to core revenue growth including Cytiva sales in the calculation of period-to-period sales growth comparing the current period Cytiva sales the historical psyche of the sales prior to the acquisition. With that, I'd like to turn the call over to Ryan.

Well, thanks, Matt, and good morning, everyone. We delivered an outstanding third quarter with results in the mid-teens, core revenue, over 60% adjusted EPS growth, and more than doubled our year-over-year free cash flows. This strong performance is a testament to our team's dedication as they stay focused on executing for our customers during the COVID-19 pandemic. Since the onset of the pandemic, we have met the challenges presented and turned them into impactful opportunities to support patients, our customers, and the global community. So before we run through our third quarter results, I'd like to update you on how we are directly contributing to the global fight against COVID-19. CECIAD continues to be a leader in the global diagnostic testing effort, and the team's commitment to tackle this global health crisis was further demonstrated by the recent launch 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 differ greatly. and this test will provide clinicians with critical answers in approximately 35 minutes to help ensure the best patient outcome. Now, as we head into flu season, we believe Cepheid's easy-to-use rapid four-in-one test will be a critical tool in clinicians' testing arsenal, and we are incredibly proud of the Cepheid team's fast and innovative response to the pandemic. We further enhanced our diagnostic testing capabilities with Beckman-Coulter Diagnostics' new IgM serology and IL-6 assays. The IL-6 assay can help identify severe inflammatory response in COVID-19 patients, a crucial consideration as clinicians evaluate the risk of intubation with mechanical ventilation. The IgM serology assay can detect IgM antibodies to the virus, which typically begin to develop shortly after symptoms appear, and it's complementary to Beckman's IgG test, providing greater insight over the course of a patient's infection and immune progression. While the use of COVID-19 antibody testing is relatively limited today, In the future, it may play a critical role pre- and post-vaccination for population surveillance and clinical trial studies. We're also proud to support the scientific community's pursuit of new vaccines and therapeutics for the virus. Paul and Cytiva's products and solutions are involved in the majority of the more than 400 vaccine and therapeutic projects currently underway globally, including every Operation Warp Speed COVID-19 vaccine in the U.S. As a market leader across the bioprocessing workflow, the breadth of our offering and technical expertise are key differentiators that enable us to contribute meaningfully to the development and production of COVID-19 vaccines and treatments. So now let's take a look at our third quarter results. We generated $5.9 billion of sales with 14% core revenue growth. COVID-related revenue tailwinds contributed approximately 1,000 basis points to third quarter core revenue growth, while our underlying base business was up approximately 4%, a sequential improvement from an approximate 3% decline in the second quarter. Geographically, revenue in the developed markets was up mid-teens, led by North America and Western Europe. High-growth markets were up approximately 10%, driven by sequential improvement in China and India. Our gross profit margin was 54.8%, and our operating profit margin of 18.5% was up 80 basis points. Our core operating profit margin was up 310 basis points, with each of the three segments achieving 75 basis points or more of core margin expansion. Adjusted diluted net earnings per common share of $1.72 were up 62 percent versus last year. We generated $1.5 billion of free cash flow in the quarter and $3.5 billion year-to-date, up 110 and 59 percent respectively with 174% free cash flow to net income conversion in the quarter. This outstanding cash flow generation, combined with our strong balance sheet, positions us well to actively pursue strategic M&A opportunities. We also continued to accelerate organic growth investments across Danaher, with a particular focus on expanding production capacity at Cessid, Cytiva, and Paul Biotech to support increasing demand driven by COVID-19. So now let's take a more detailed look at our results across the portfolio. Life Sciences' core revenue was up 18.5%. led by core growth rates of 20% or more at Paul Biotech and Beckman Life Sciences, and more than 35% at Cytiva and IDT. We continued to see strong demand from customers building out their genomics and automation capabilities, and from our biopharma customers working on COVID-19 vaccines and therapeutics. In our more instrument-oriented life science businesses, declines moderated as academic and research labs continued to reopen, driving increased installations and better order trends. SCI-X benefited from this improving environment, achieving low single-digit core revenue growth, driven in part by demand for new products, such as the Echo MS and the Triple Quad 7500, the most sensitive mass spectrometer on the market. Moving over to diagnostics, reported revenue was up 18% and core revenue was up 17.5%, led by more than 100% core growth of Cepheid as a result of COVID-19 testing volumes and record gene expert system placements. Radiometer and Leica Biosystems, our acute care and pathology businesses, delivered mid-single-digit core revenue growth. Declines at Beckman Coulter Diagnostics moderated as elective procedures and wellness checks continued to resume throughout the quarter. Moving to our environmental and applied solution segments, reported revenue and core revenue were down 1%, with similar results at both our water quality and product identification platforms. Across our water quality businesses, municipal activity and projects continue to resume, driving growth in North America and China. And this was offset by softness in the industrial end markets globally. Demands for consumables and chemistries remain steady, supporting customers' mission-critical day-to-day water operations. And equipment declines moderated, and we were encouraged by equipment order trends in the quarter as more customer facilities got back up and running. Now, during the quarter, Hawk closed the acquisition of Aquatic Informatics, a leader in water-focused software solutions. Aquatic Informatics solutions collect, manage, and analyze large volumes of water data, and these capabilities combined with Hawk's deep applications expertise will help us bring greater operational efficiencies to customers' workflows. At our product identification platform, low single-digit core revenue growth at VideoJet was driven by strong demand in North America, particularly across the consumer packaged goods, food and beverage, and pharmaceutical end markets. Consumables and services performed well globally as VideoJet continued to help customers keep their essential businesses operating through the pandemic. Now with that as context for what we saw by segment during the quarter, let's take a look at recent trends across our end markets. Geographically, customer activity continues to increase in the U.S. and Europe as phased reopenings proceed across these regions. We're keeping an eye on areas that have recently experienced setbacks in the process of reopening, but we have not seen any material impact so far. And China is progressing well with activity in most regions approaching pre-pandemic levels. Within life sciences, bioprocessing demand continues to lead the way. COVID-19 vaccine and therapeutic activity increased meaningfully during the quarter, with development and production scale-up occurring at an accelerated pace. Viteva and Paul Biotech comprise most of our bioprocessing exposure, and collectively these businesses increased orders by more than 60% in the quarter, driven by our comprehensive offering across the bioprocessing workflow. Non-COVID-related bioprocessing activity remains healthy and in line with what we saw over the last several quarters. Now, as I mentioned earlier, academic and research labs around the world are continuing to reopen at reduced capacity as social distancing measures limit the number of people allowed in the lab at any one time. And we estimate that approximately 60 to 70 percent of academic research labs are now open in some capacity. And in China, that number is closer to pre-pandemic levels. Moving to clinical diagnostics, we continue to see strong demand for molecular testing in both hospital labs and point-of-care settings. Since launching the first rapid molecular test for COVID-19 in March, CESIID has meaningfully increased production capacity and shipped more than 7 million test cartridges in the third quarter. The team continues to ramp test production, and we now expect to ship more than 8 million tests in the fourth quarter. SETI had also delivered another record number of new systems in the third quarter, expanding their market-leading global install base by approximately 35% over the past year. Across hospital and reference labs, patient volumes increased through the quarter as elective procedures and wellness checks resumed across much of the developed markets. We estimate that global patient volumes are currently 90 to 95% of pre-pandemic levels with China slightly ahead of North America and Europe given its earlier reopening. In the applied markets, consumables remain solid as customers sustain essential business operations like testing and treating water and safely packaging food, medicine, and consumer products. Previously delayed equipment installations are starting to resume, and we're seeing our equipment order books improving as customers start to initiate new projects and capital investments. So as we look ahead, we expect to deliver low double-digit core revenue growth in the fourth quarter. Modest sequential improvement across our businesses will be offset by the impact of three fewer selling days versus last year, which represents a core growth headwind of more than 300 basis points. We anticipate COVID-19 related revenue tailwinds will be similar to what we saw in the third quarter. So to wrap up, We're really pleased with our results this quarter, and we're proud to play a pivotal role in tackling COVID-19 head-on. Our team has turned unprecedented challenges into tremendous opportunities, and our strong performance is a testament to our associates' focused execution and commitment to our customers. With the Danaher business system as our driving force and the powerful combination of our talented team, exceptional portfolio of businesses, and strong balance sheets, We believe Danaher will continue to outperform through the remainder of 2020 and well into the future. Now, before I go on to the Q&A, I just want to take a moment to share a few thoughts after my initial month as CEO. First, I always knew we had an exceptional portfolio and extraordinary team, and that conviction has only been reinforced over the last few months as I've had the opportunity to spend more time with more of our businesses and leaders. And in doing so, a couple of things really stand out. One is the considerable amount of innovation happening across the organization. Our investments in R&D and commercial initiatives are allowing us to continue building sustainable competitive advantages all across our businesses. The other standout for me is the caliber and the depth of talent we have across Danaher. Our associates are innovative and passionate about their work and committed to the Danaher business system and our culture of continuous improvement. It's clear that DBS is what drives it. It's who we are. It's how we do what we do. It's our ultimate competitive advantage, and I see it alive and well everywhere. So our future is bright, and I'm excited about what lies ahead for Danaher. I believe that the combination of our investments and innovation, outstanding team, and strong balance sheet, all powered by the Danaher business system, will enable us to keep building an even better, stronger company as we move forward. So with that, I'll turn the call back over to Matt.