Danaher Corporation

My name is Ashley and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Danaher Corporation's fourth 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 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.

Thank you, Ashley. 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 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 February 10, 2022. 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 fourth 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 available only in certain markets. During the call, we will make forward-looking statements within the meeting 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 Reiner.

Well, thanks, Matt, and good morning, everyone. We appreciate you joining us on the call today. 2021 was a tremendous year for Danaher, capped off by a very strong finish to the fourth quarter. Our well-rounded performance throughout the year was highlighted by outstanding core revenue and earnings growth, as well as strong free cash flow generation. We're particularly pleased with the strength of our base business across the portfolio, which was up low double digits for the year. And we believe our accelerated innovation and capacity expansion initiative has helped us capture market share at a number of our businesses. Now, these results are a testament to our team of 80,000 associates and their outstanding execution in what has been a challenging operating environment. Despite the uncertainty that has come to characterize life for all of us throughout the pandemic, our associates are showing up big every day, working longer shifts, launching breakthrough products in record time, and going above and beyond to support our customers and they remain committed, as ever, to executing with the Danaher business system. Really, their dedication to serving our customers and the global community is as humbling as it is inspiring, and we're grateful for their invaluable contribution. The circumstances of the last several years have also shined a light on the high-quality, market-leading franchises and technologies that now comprise Danaher. We're seeing the results of our purpose-driven portfolio transformation in action today through higher growth and margins, stronger cash flow, and a higher percentage of recurring revenue. We're exceptionally well-positioned to continue this trajectory going forward, and we see a very bright future ahead indeed. So with that, let's take a closer look at our full year 2021 financial results. We deliver 25% core revenue growth, 560 basis points of core operating margin expansion, nearly 60% adjusted earnings per share growth, and over $7 billion of free cash flow. We deployed $11 billion of capital towards acquisitions, closing 14 deals across all four of our platforms. The largest acquisition, Aldevron joined our life sciences segment in August, providing a fantastic beachhead for us in the important frontier of genomic medicine. It's just a great example of how we're using strategic M&A to enhance our capability and bring greater value to our customers. Now, throughout the year, we also made significant organic investments to accelerate innovation across our businesses. Our R&D spend was up approximately 30% year-over-year and is now more than $1.7 billion annually. New products, such as the SIEX Xenotox 7600 and the TripleQuad 7500, and Leica Biosystems' Aperio GT450 digital pathology slide scanner, are driving share gains in their respective markets through proprietary innovation while further enhancing our growth trajectory. Now, total capital expenditures were $1.3 billion for the year, which reflects substantial investments to expand production capacity across our businesses, particularly at Cepheid, Paul, and Cytiva. In bioprocessing, I'm really happy to report that our new single-use technology plants in South Carolina and Beijing and our cell culture media expansion in Utah all came online in the fourth quarter. And at Cepheid, we more than doubled our production capacity for respiratory tests in 2021. So near term, we believe these investments have been critical to support customer demand and have helped us achieve meaningful market share gains. And they're equally important in the long term to support the significant growth opportunities we see ahead in these very attractive end markets. So now let's spend some time on the fourth quarter results. Our sales were $8.1 billion, and we delivered 19.5% core revenue growth, with strong contributions from all three segments. We saw broad-based strength across our base business, which was up approximately 10% in the quarter. And geographically, both the developed and high-growth markets were up approximately 20%, led by nearly 25% growth in North America and high teens growth in China. Gross profit margin was 60.7% and our operating profit margin of 26.4% was up 270 basis points, including 240 basis points of core margin expansion. Adjusted diluted net earnings per share of $2.69 were up approximately 30%. And now for the full year, we generated more than $7 billion of free cash flow, up 30% year-over-year. In fact, our free cash flow to net income conversion was 112% for the full year, and it marks the 30th consecutive year this figure has exceeded 100% for Danahertz. So now let's go into more detail on our quarterly results across the segment. Life Sciences reported revenue increase 20.5% with core revenue up 17%. Now these strong results were broad-based with most major operating companies achieving low double-digit or better core growth. In fact, Aldevron delivered over 30% revenue growth in the quarter and finished the year with approximately $400 million in total revenue. That business is off to a great start as part of Danaher, and we couldn't be more pleased with the team's performance out of the gate. Now, core revenue growth in our bioprocessing businesses continued to outpace segment-level results, with Cytiva and Paul Biotech both up more than 25%. Non-COVID-related bioprocessing trends remain strong, with our businesses growing low double digits again this quarter. We continue to support significant customer activity across the development and production of COVID vaccines and therapeutics, which drove $2 billion of revenue in 2021. Moving to diagnostics, reported revenue was up 29.5%, and core revenue grew 29%. led by greater than 75% core growth of Cepheid. Non-COVID clinical diagnostic activity across all our operating companies, including Beckman Coulter Diagnostics, Radiometer, and Leica Biosystems, collectively drove high single-digit core growth, as patient and testing volumes largely remained at or near pre-pandemic levels. And we also saw an acceleration in demand across Cepheid's non-respiratory test menu. led by sexual health, hospital-acquired infections, and virology testing. CESSI has produced and shipped approximately $19 million of respiratory test cartridges during the quarter. This brought the total number of respiratory tests shipped in 2021 to approximately 60 million cartridges, more than 10 times the number of tests produced and shipped in 2019 prior to the start of the pandemic. In fact, our four-in-one combination test for COVID-19, flu A, flu B, and RSV represented approximately 50% of Q4 respiratory test shipment, while our COVID-only test accounted for the remainder. Now let's move on to our environmental and applied solutions segment. Reported revenue was up 4%, with 7.5% core revenue growth. Our water quality and product identification platforms both delivered high single-digit core growth for the quarter. Now, across our water quality businesses, strength was broad-based globally across industrial and municipal end markets. Customer activity accelerated with the support of a strong funding environment and many projects that were put on hold during the pandemic have now resumed. Chemtreat delivered low double-digit core revenue growth in the quarter to close out its 53rd consecutive year of growth. This is a tremendous accomplishment and a testament to the team's best-in-class commercial execution and commitment to continuous improvement. It's truly a differentiating combination which has driven consistent market outperformance. In product identification, Our packaging and color management businesses were up mid-single digits, and marking and coding was up approximately 10%. VideoJet had its third consecutive quarter of double-digit core growth led by strong demand in industrial and food and beverage end markets. So with that as a backdrop for what we saw in the quarter, let me highlight the trends we're seeing both geographically and in our end markets. So a return to pre-pandemic levels of activity is driving healthy customer demand across most major geographies. This is reflected in the strong results we've seen throughout both the developed and high growth markets and our strong order book growth, which continues to trend above revenue growth. While certain regions have implemented targeted lockdowns to address recent COVID-19 outbreaks, we're not seeing any widespread declines in our customer activity. Now, given the size and scope of our business, we're certainly not immune to ongoing supply chain constraints and inflationary pressures, but we're proactively addressing these challenges across Danaher, leveraging the Danaher business system and tools such as daily management and working closely with our customers and suppliers to mitigate the impact. We're also using DBS to accelerate price action and manage cost pressures. In fact, we've achieved nearly 150 basis points of price each of the last three quarters, which is approximately double our historical price realization. Now, in life sciences, we're seeing robust demand across all major end markets. Lab and customer site access is holding at pre-pandemic levels. evidenced by more normalized customer productivity, equipment installation, and project initiation supported by a strong funding environment. Biopharma continues to be our strongest performing end market within the life sciences. The structural shift in treatment for biologics as the standard of care and the accelerating focus on genomic therapies are driving significant investment in research, development, and production capacity across the sector. And we believe we're well positioned to support this work across our $7.5 billion bioprocessing franchise. Now, in addition, we continue to see significant demand related to development and production of COVID-19 vaccines and therapeutics. And we expect this activity to persist longer term. Our customers are planning for ongoing production with the assumption that there will be an enduring need for effective treatment and prevention as the world transitions to approaching COVID-19 as an endemic virus. And more broadly, our customers increasingly view the potential applications of new mRNA modalities, including vaccines and other therapeutics, as an important area for future investment. In the clinical diagnostics market, patient volumes remain at or near pre-pandemic levels. Our customers have largely adapted their protocols and procedures to manage through recurring outbreaks, allowing them to continue wellness checks, routine screenings, and other diagnostic procedures. While selective lockdowns are causing modest disruptions in certain regions like pockets of China and Europe, we're not experiencing any material widespread negative impact from these measures. In molecular diagnostics, global demand persists for Cepheid's point-of-care PCR respiratory test, further heightened as a result of the recent global surge of the Omicron variant. Additionally, we're seeing a more active respiratory season in the northern hemisphere, driving customers' preference for our four-in-one combination test. And we expect both of these trends to continue into the first quarter. Now, in light of these dynamics, and conversations we're having with our customers about their expectations for the upcoming year, we anticipate shipping the same number of respiratory tests in the first quarter as we did in the fourth quarter and approximately 50 million tests for all of 2022. In 2021, Steffi had placed a record 10,000 new GeneXpert systems, bringing the total install base to more than 40,000 systems worldwide. The team's thoughtful approach to placing systems throughout the pandemic is focused on both the near and long-term value this technology can bring to our customers. More recently, we've seen several existing healthcare system and integrated delivery network customers adding new instruments at sites further out in their networks and closer to their patients facilitating faster diagnostic and treatment decisions. The scalability and unique architecture of the GeneXpert where the same test cartridges are used on higher and lower throughput instruments with the broadest test menu in the market provides our customers with the confidence that they will achieve consistent reference lab quality results whether they're testing in an urgent care clinic or a central hospital lab. So now 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. Given Cepheid's leading test menu and installed base, combined with an advantage positioning around speed, accuracy, and workflow, we believe Cepheid will continue to gain share in an endemic environment. So moving on to the applied markets, customer activity is largely back to pre-pandemic levels, which we see in robust order rates for both consumables and equipment. In fact, project-oriented activity is accelerating with an improving funding environment, and more normalized site access has prompted the resumption of many projects and installations that were put on hold in the throes of the pandemic. So now let's look ahead to our expectations for the first quarter and full year. Beginning with the first quarter of 2022, we will now include the impact of COVID vaccine and therapeutic-related revenue as part of our base business core revenue growth. This change is driven by our greater confidence in the durability of our COVID-related vaccine and therapeutic revenue as the virus turns endemic. So now for the first quarter and full year 2022, we expect our base business core revenue growth to be in the high single-digit percent range. Additionally, we expect to generate operating profit fall through 35 to 40% in the first quarter and for the full year 2022, up from historical and pre-pandemic rates between 30 and 35%. So now to wrap up. 2021 was another terrific year for Danaher. Our team successfully executed through a challenging environment to deliver outstanding financial performance, all while supporting our customers and directly contributing to the global fight against COVID-19. We're seeing the results of our purpose-driven portfolio transformation in action to faster growth, expanded margins, stronger cash flow, and higher recurring revenue. We're a better, stronger company today, and there's tremendous runway ahead for us to continue building upon this foundation. With the Danaher business system as our driving force, our talented team, and resilient portfolio of businesses, we believe Danaher will continue generating sustainable long-term shareholder value for years to come. And with that, I'll turn the call back over to Matt. Thank you.