Danaher Corporation

Good day, everyone. My name is Emma, and I will be your operator today. At this time, I would like to welcome everyone to the Danaher Corporation Third 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 during that time, simply press the 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 would now like to turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, please go ahead.

Thank you, Emma. Good morning, everyone, and thanks for joining us on the call. With us today are Reiner Blair, our President and Chief Executive Officer, Matt McGrew, our Executive Vice President and Chief Financial Officer, and John Bedford, our Director of Investor Relations. 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 November 4, 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 third quarter of 2021. And all references to period-to-period increases or decreases in financial metrics are year-over-year. We also may 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 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. 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 including CITIVA sales, and the calculation of period-to-period sales growth. With that, I'd like to turn the call over to Reiner.

Matt, thank you, and good morning, everyone. And we really appreciate you joining us on the call today. Our team delivered another outstanding result in a third quarter with over 20% core revenue growth, nearly 40% adjusted earnings per share growth, and strong free cash flow generation. This well-rounded performance is a testament to the unique positioning of our portfolio and our exceptional team who are committed to leading and executing with the Danaher business system every day. I'd like to thank all of you who joined us last month for our virtual investor day, where we had the opportunity to showcase the strong foundation we've built for generating sustainable long-term outperformance. We highlighted our fantastic portfolio of market-leading franchises and highly attractive end markets, the exceptional team we have out on the field every day, and how we differentiate with the Danaher business system. And we certainly saw this powerful combination in action during the third quarter as our results attest. Now, we also talked about our sustainability efforts. And just last week, we published our 2021 sustainability report. This year's report reflects the measurable progress we've made across the three pillars of our sustainability program, which are innovation, people, and the environment, and how we use the Danaher business system to execute on this increasingly important strategic priority. Now, I hope you all get a chance to read through the report and learn more about the important work that we're doing across Danaher to positively impact the world around us for generations to come. So with that, let's turn to our third quarter results. Our sales were $7.2 billion, and we delivered 20.5% core revenue growth with portfolio-wide strength led by diagnostics and life sciences. Geographically, high growth markets grew approximately 25%, and developed markets were up nearly 20%. In fact, revenue in each of our three largest markets, North America, Western Europe, and China, was up approximately 20% or more in the quarter. Our gross profit margin increased by 550 basis points to 60.3%, primarily due to higher sales volume, the favorable impact of higher margin product mix, and the impact of prior year purchase accounting adjustments related to the Cytiva acquisition that did not repeat in 2021. Now adjusted diluted net earnings per common share were $2.39 and were up 39% compared to 2020. And we generated $1.7 billion of free cash flow in the quarter, bringing our year to date total to 5.2 billion, which is up 46.5% year over year. We continue to accelerate organic growth investments across the entire portfolio and increased our research and development spend by approximately 30% year over year. At our investor day recently, we highlighted how we use DBS growth tools and processes to accelerate innovation and bring more impactful solutions to our customers faster. In fact, recently launched products like the Cy-X Xenotop 7600 and the Triple Quad 7500 and Beckman Life Sciences Cytoflex SRT Benchtop Cell Sorter are just a few great examples of how we're driving market share gains through proprietary innovation and enhancing our growth trajectory going forward. We're also making substantial investments to expand production capacity across our bioprocessing businesses, and at Cepheid. Near term, these investments are supporting existing customer demand and driving meaningful share gain. But they're equally important to support the long-term growth of these businesses, where we see significant runway ahead, given the underlying structural growth drivers in the sectors they serve. And 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. So now let's go into more detail on our quarterly results across the segment. Life Sciences reported revenue increased 24.5%, with core revenue up 20%. This growth was broad-based across the segment, with most major operating companies achieving high teens or better core growth. Now, these strong results were led by continued demand for bioprocessing solutions, as in Cytiva Bioprocessing and Paul Biotech both grew more than 30% in the quarter, including low double-digit non-COVID-related core growth. COVID-related vaccine and therapeutic revenue continued to be strong and now exceeds $1.5 billion year-to-date. At Cytiva, we passed an important milestone last month when we exited the last of our transition services agreements with GE. We successfully completed this process ahead of schedule, which is a testament to the entire Cytiva and integration team and their collective commitment to the Danaher business system. Cytiva also added more than 1,500 new associates to the global team since joining Danaher, to help ensure that we're supporting our customers today and continue meeting their needs well into the future. Now, in August, we successfully closed our acquisition of Aldebaran, and we are thrilled to officially welcome the team to Danaher. Aldebaran is a leading producer of high-quality plasma DNA, mRNA, and proteins, and provides a fantastic beachhead for us in our genomic medicine enterprise. We're seeing the rapid development of gene and cell therapies, DNA and RNA vaccines, and gene editing technologies. And Aldebaran expands our capabilities in these areas to ultimately help our customers bring more life-saving therapies and vaccines to market faster. So we're really excited about the quality, the scale, the turnaround time, and the reputation that Aldebaran brings to the Danaher portfolio. Now, in diagnostics, reported revenue was up 29.5%, and core revenue grew 28.5%, led by more than 60% growth at Cepheid. Each of our other major diagnostic businesses, Beckman Coulter, Radiometer, and Leica Biosystems grew low to mid-teens in the quarter as clinical diagnostic activity and patient volumes around the world largely returned to pre-pandemic levels. In respiratory testing at Cepheid, we further expanded manufacturing capacity, which enabled the team to produce and ship approximately 16 million cartridges during the quarter. COVID-only tests accounted for approximately 80% of those shipments, and our 4-in-1 combination tests for COVID-19, flu A and B, and RSV represented approximately 20%. And non-respiratory core growth at Cepheid was up double digits as well, led by demand for hospital-acquired infections, sexual health, and virology testing. We also saw strong growth in our installed base as system placements continued to exceed pre-pandemic rates. And we believe the team's thoughtful placement of the GeneXpert and Infinity system over the last 18 months is setting up Cepheid very well for future growth opportunities. So let's move to our environmental and applied solutions segment. Reported revenue was up 7%, with core revenue up 7.5%. Water quality grew mid-single digits, and our product identification platform was up low double digits. Across our water quality businesses, we saw good underlying market strength, particularly in food and beverage and various industrial applications, as activity returned to more normal levels. Municipal projects picked up given the improving funding environment and as more customers returned to in-person work. On product identification, both VideoJet and our packaging and color management businesses were up low double digits in the quarter. Comparable strengths across consumables, service, and installed-based growth was driven by more normalized levels of customer activity and investment. We believe that our ability to meet our customers' needs, particularly on the equipment side at VideoJet, enable us to gain market share and expand our industry-leading installed-based printers. So with that as a backdrop for what we saw this quarter, let's spend some time going through regional and end-market trends. Most major regions and countries around the world are largely back to pre-pandemic activity levels. Customers have adapted to the current operating environment and protocols and broadly resumed in-person commercial activities and site access. Now, this is reflected in the strong results we've seen across the US, Europe, and China. And this momentum is also reflected in our strong order book growth, which is trending above revenue growth. Now, we're mindful of potential COVID-19 variants or outbreaks and selective lockdowns. but we're not currently seeing any material negative impact from these scenarios. And while we are seeing some global supply chain constraints, we're leveraging the Danaher Business System tools, like daily management, and actively working with our customers and suppliers to help mitigate any impact. Across life sciences, we're seeing robust customer activity and demand across all major end markets. lab, and other site access is largely back to pre-COVID levels, and we're seeing this through more normalized productivity levels, installations, and project initiations driven by a strong funding environment. Now, biopharma continues to lead the way. As the number of life-saving biologic and genomic-based therapies in development and production continues to rise and is augmented by the ongoing work around COVID-19 vaccines and therapeutics, And at our recent investor day, we spent time covering how well positioned we are to support this complex, life-changing work that our customers are pursuing. Our combined bioprocessing portfolio across Cytiva and Paul Biotech is the broadest offering in the industry with leading positions in upstream and downstream applications. And we further support our customers with best-in-class scientific services, partnering to solve their most challenging problems as they move from the lab to production scale. And our global reach enables us to reliably and consistently meet our customers' needs. Now, in addition to the industry-wide opportunities in biologics and genomic-based medicine, we continue to see significant demand related to the development and production of COVID-19 vaccines and therapeutics. Our customers are working to address emerging variants and increase global supply And given that only about a third of the global population has been vaccinated, we believe we'll see durable growth in this biopharma segment for the foreseeable future. We continue to expect about $2 billion of COVID related vaccine and therapeutic revenue in 2021. And since we spoke at our yesterday, we now expect to enter 2022 with approximately $2 billion in COVID related backlog versus our previous expectation, of $1.5 billion of backlog. This increase is driven by the recent enhanced visibility for booster shots and the likelihood of vaccine availability for children under 12 years old in the US. And moving to the clinical diagnostic market, non-COVID testing volumes are essentially back to pre-pandemic levels in most major regions, as patients are returning for wellness checks, routine screening, and other elective procedures. In molecular diagnostics, strong global demand persists for Cepheid's point of care PCR respiratory testing as a result of the Delta variant and outbreaks, along with lower vaccination rates in many regions. As I mentioned earlier, we shipped approximately 16 million respiratory tests during the third and we now expect to ship approximately 55 million tests in 2021 versus our prior expectation of 50 million. Now, as we head into the traditional respiratory virus season, we're hearing from customers that they expect this to be a much more active season than last year's. In preparation, their preference is for our four-in-one combination test, so we're seeing an uptick in demand for those cartridges, particularly given the recent outbreaks of RSV across the U.S. Cepheid's 4-in-1 test was also recently approved with a third gene target for SARS-CoV-2 detection, ensuring it can continue to accurately detect future COVID-19 viral mutations and reinforcing Cepheid's competitive advantage in the respiratory testing market. Now moving to the applied market. Customer activity has largely rebounded to pre-pandemic levels, which we see in robust order rates across both consumables and equipment. In the global municipal market, consumables demand remains solid and the pace of instrument-oriented project activity continues to pick up with the improving funding environment and broad return to work. So now let's look ahead to our expectations for the fourth quarter and the full year. We expect to deliver fourth quarter core revenue growth in the low to mid-teens range with high single-digit core revenue growth in our base business and a mid to 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 fourth quarter, a similar level to what we achieved in the third quarter. Now, for the full year 2021, we now expect to deliver more than 20% core tailwinds, and our base business will each contribute more than 10% to our 2021 core revenue growth rate. So to wrap up, we're proud to deliver another terrific result here in the third quarter. Our performance is a testament to the power of our unique portfolio, the strength of our end markets, and our team's commitment to leading and executing with the Danaher business system. And this unique combination differentiates Danaher today, and it reinforces our opportunities ahead for sustainable, long-term outperformance. So with that, back over to you, Matt.