Danaher Corporation

Good morning. My name is Christelle, and I will be your conference operator this morning. At this time, I would like to welcome everyone to the Danaher Corporation's second quarter 2021 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 touchtone phone. 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, 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, 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 August 5, 2021. 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 second quarter of 2021, 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 only available in certain markets. During the call, we will be making forward-looking statements within the meaning of the Federal Securities Law, 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 statement except as required by law. As a result of the size of the CITIVA acquisition and its impact on Danaher's overall core revenue growth profile, we are presenting core revenue on a basis that includes CITIVA sales. References to core revenue growth include CITIVA sales in the calculation of period-to-period sales growth. With that, I'd like to turn the call over to Reiner.

Well, thanks, Matt, and good morning, everyone. We appreciate you joining us on the call today. We're very pleased with our strong start to the year with another terrific result in the second quarter. We saw broad-based strength across the portfolio, which helped us deliver over 30% core revenue growth, more than 70% adjusted earnings per share growth, and outstanding free cash flow generation. This well-rounded performance is a testament to the positioning of our portfolio and our exceptional team who are committed to leading and executing with the Danaher business system every day. During the second quarter, we continued to strengthen our competitive advantage through significant high-impact organic growth investments and enhanced our portfolio with strategic growth-accelerating acquisitions. We prioritized innovation across Danaher, and increased our production capabilities, all of which we believe contributed to the market share gains in several of our businesses. We also announced our pending acquisition of Aldebaran, which will expand our presence into the fast-growing and important frontier of genomic medicine. Putting it all together, we believe the combination of our leading portfolio, and DBS-driven execution differentiates Danaher today and provides a strong foundation for sustainable long-term outperformance. So with that, let's turn to our second quarter results. Our sales were $7.2 billion and we delivered core revenue growth of 31.5% with strong contributions from all three of our reporting segments. Geographically, high growth markets grew nearly 35%, and developed markets were up more than 25%. Revenue in each of our three largest markets, North America, Western Europe, and China, was up 30% or more in the quarter. Our gross profit margin increased by 710 basis points to 60.9%, primarily due to higher sales volumes the favorable impact of higher margin product mix, and the impact of prior year purchase accounting adjustments related to the CITIVA acquisition that did not repeat in 2021. Our operating profit margin increased to 27.8%, including 775 basis points for operating margin expansion, primarily as a result of higher gross margin and continued lower operating expense as travel and other related costs remained below pre-pandemic levels. Adjusted diluted net earnings per common share of $2.46 were up 71% compared to 2020. We generated $1.8 billion of free cash flow in the quarter, up over 40% year over year. In June, we announced our intention to acquire Aldevron, a producer of high-quality plasma DNA, mRNA, and protein serving academic, biotechnology, and pharmaceutical customers. The addition of Aldevron will expand our capabilities into the important field of genomic medicine, where we're seeing the accelerated adoption of gene and cell therapies, DNA and RNA vaccines, and gene editing technologies. We anticipate Aldevron will be accretive to Danaher on multiple levels, as we expect the business to generate $500 million of revenue in 2022 with more than 20% annual revenue growth and a strong margin profile. We look forward to welcoming this incredibly talented and innovative team to Danaher once the transaction closes. In addition to announcing the Aldebaran acquisition, we also accelerated several organic growth investments across the portfolio. One of our core values at Danaher is innovation defines our future. And we have made a significant commitment toward our research and development efforts, increasing our research and development spend by more than 30% year over year to bring more impactful solutions to our customers. At SCIEX, we launched the Xenotop 7600, a high-resolution, accurate mass spectrometry system that enables scientists to identify, characterize, and quantify molecules at previously undetectable levels, helping to advance the development of new biotherapeutics and precision diagnostics. At Beckman-Coulter Diagnostics, we recently introduced the DXA 5006, a compact automation solution designed for small and mid-sized laboratories that reduces up to 80% of the manual steps typically required for sample preparation. These are just a few great examples of how we're continuing to invest for growth across Danaher to support our customers and enhancing our competitive advantage through innovation. Additionally, we're making substantial investments to expand capacity across our bioprocessing businesses and CESIADs. Near-term, these investments are supporting existing customer demand, driven by both the market and meaningful share gain, but they're equally important to support the long-term growth of these businesses. Where we see tremendous runway ahead, even the underlying structural growth drivers in the markets they serve. We expect our total capital expenditures across Danaher to be approximately $1.5 billion in 2021 as we continue to invest in support of our customers' needs today and well into the future. We believe the strategic combination of these organic and inorganic investments across our portfolio will reinforce our competitive advantage and accelerate our growth trajectory going forward. Now let's go into more detail on our quarterly results across the segments. Life Sciences reported revenue increased 41.5%, with core revenue up 35%. This growth was broad-based, with most of our major businesses in the platform delivering 30% or better core growth. We continue to see strong demand for our bioprocessing solutions with combined core revenue growth of more than 40% at Cytiva and Paul Biotech. Our non-COVID related bioprocessing business was up low double digits, where we saw robust customer activity and order rates. COVID related vaccine and therapeutic revenues were consistent with the first quarter and exceeded $1 billion over the first six months of the year. So I'd be remiss if I didn't take a moment to reflect on Cytiva's fantastic first year as part of Danaher. We've established a new company with a new brand name, added more than 1,500 associates, and made substantial progress in the transition to Danaher, all while maintaining world-class support of our customers, significantly ramping production capacity and growing revenues by more than 50%. When we announced the acquisition, we talked about the strategic and value creation opportunities we saw, and we're excited to welcome such a talented and engaged team to Danaher. I think it's fair to say they've exceeded our expectations in every way, and that's really a testament to the Cytiva team who have embraced Danaher and the Danaher business system and continue to execute exceptionally in support of our customers. Moving to diagnostics, reported revenue was up 40.5% and core revenue grew 37%, led by more than 50% core growth at Cepheid. Beckman Diagnostics and Leica Biosystems each grew more than 30% as patient volumes and clinical diagnostic activity approached pre-pandemic levels around the world. At Cepheid, growth outside of respiratory testing was led by our sexual health and hospital acquired infection assays, particularly among newly acquired Cepheid customers. In respiratory testing, we believe we continued to gain market share as expanded manufacturing capacity enabled the team to produce and ship approximately 14 million cartridges in the quarter. As expected, COVID-only tests accounted for approximately 80% of these shipments, while our four-in-one combination tests for COVID-19, Flu A, Flu B, and RSV represented approximately 20%. This broad-based performance across Cepheid was driven by the team's thoughtful installed base expansion over the last 15 months, and it's evidence of the significant value Cepheid provides to clinicians with the unique combination of fast, accurate lab quality results and the best-in-class, easy-to-use workflow at the point of care. Moving to our environmental and applied solutions segment, reported revenue grew 15.5% and core revenue was up 13%. Revenue growth accelerated across both platforms with water quality of high single digits and product identification of approximately 20% in the quarter. In our water quality businesses, demand for analytical chemistries and consumables was driven by improving activity across municipal, chemical, food, and beverage end markets. Equipment order rates accelerated as customers got back up and running and began to invest in larger projects. In product identification, VideoJet was up mid-teens, and our packaging and color management businesses were up more than 25% in the quarter. This acceleration reflected a broad-based recovery with growth across most major geographies and end markets. So with that as a backdrop for what we saw this quarter, let's spend some time going through trends geographically and across our end markets. Looking at conditions around the world, most major regions and countries have broadly returned to or are approaching normal operations. This is reflected in the strong results we've seen across the US, Europe, and China. That said, we're mindful of the emerging COVID-19 variants driving further outbreaks and have taken action to help minimize the potential impact on our respective businesses. And at this point, we've seen no material impact from recent variants or selective lockdowns. We saw positive momentum across our businesses with order growth trending above revenue growth. Most of our end markets have largely recovered with growth rates at or above pre-pandemic levels as customers have adapted to the new environments. In-person commercial activity continues to rebound, and we're seeing our teams spend more time on site with their customers, a trend we expect to continue as we move through the year. Across life sciences, we're seeing healthy demand in most of our end markets, led by biopharma, where the pace of customer activity remains elevated. Biotech funding levels are robust, and the number of lifesaving biologic and genomic-based therapies in development and production continues to rise, and it's further augmented by the work around COVID-19 vaccines and therapeutics. Today, there are over 1,500 monoclonal antibody-based therapies in development globally, which is more than 50% increase from just five years ago. We also see over 1,000 gene therapy candidates in development today, a tenfold increase over the last several years as these technologies mature and therapies gain regulatory approval. Given that many of these candidates are still in early stage research, we expect the growth rate of this market to remain strong for many years to come. In addition to the growth in biologics and genomic-based medicines, there is significant demand related to COVID-19 vaccines and therapeutics, both on the market and in development today. Given the interest we're seeing from customers looking to address emerging variants and increase global supply, as well as evolving vaccination guidelines globally, we expect to see durable growth in this segment of the biopharma market for the foreseeable future. At the current pace of vaccination, it's clear that vaccine demand will continue well into next year. We expect to recognize $2 billion in COVID-related vaccine and therapeutic revenue in 2021 and anticipate entering 2022 with approximately $1.5 billion in COVID-related backlog. These assumptions do not include the potential contribution from booster shots, or an expansion of availability to populations under 12-year-olds due to the level of uncertainty around each of these scenarios. Given the growing numbers of drugs being developed and the increasing scientific sophistication required to discover and manufacture these complex therapies, customers are looking to partner with vendors who can reliably supply them with solutions for their most challenging problems as they move from the lab to production scale. Our comprehensive bioprocessing portfolio and scientific expertise positions us well to do just that. And we're confident our proactive investments in innovation and capacity will help us meet this growing customer demand now and far into the future. In the clinical diagnostics market, patient volumes are at or near pre-pandemic levels in most major regions as patients are returning for wellness checks, routine screening, and other elective procedures. In molecular diagnostics, while PCR respiratory testing volumes in the U.S. have declined, we're seeing persistent demand for Cepheid's testing at the point of care. Outside of the U.S., which makes up approximately half of Cepheid's revenue, we continue to see strong demand for our testing as vaccination rates lag and emerging variants drive outbreaks. Now, as I mentioned earlier, we shipped approximately 14 million respiratory tests during the second quarter, up from 10 million shipped in the first quarter, and we now expect to ship approximately 50 million tests in 2021. Looking ahead, with the assumption that COVID-19 will be an endemic disease, We believe that the point of care molecular respiratory testing market will expand significantly from where it was prior to the pandemic. And given Cephia's leading positioning around speed, accuracy, and the ease of use workflow advantages, we believe we'll continue to gain market share. The combination of these market share gains, the expansion of Cepheid's leading global installed base, and the broadest molecular diagnostic test menu on the market creates significant opportunities ahead for broader utilization and demand for Cepheid's point-of-care molecular testing solutions. Moving to the applied markets, we're seeing a continuation of the steady improvement over the first half of the year. Customer activity is accelerating in line with broader economic activity, which we see in healthy order rates for consumables and increasing investment in equipment. Across municipal markets globally, consumable demand remains solid as customers continue to test and treat water, and instrument-oriented project activity is accelerating with the improving funding environment. Now let's look ahead to our expectations for the third quarter and the full year. We expect to deliver third quarter core revenue growth in the mid to high teens range. We anticipate high single-digit core revenue growth in our base business and a high single-digit core growth contribution from COVID-related revenue tailwinds. Additionally, we expect to generate operating profit fall-through of approximately 40% in the third quarter and for the remainder of 2021. For the full year 2021, we now expect to deliver approximately 20% core revenue growth. We anticipate that COVID-related revenue tailwinds will be an approximately 10% contribution to the core revenue growth rate. And in our base business, we now expect that core revenue will be up 10% for the full year, an increase from our prior expectation of high single digits. So to wrap up, we've had a great start to the year, and we've seen meaningful opportunities across Danaher to build upon this outstanding performance. Our second quarter results reiterate the power of our portfolio and our exceptional team, a unique combination that differentiates Danaher today and provides a strong foundation for sustainable long-term outperformance. And with that, back to you, Matt.