Danaher Corporation

Good day. My name is Leo, and I'll be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's first quarter 2022 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 1 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. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

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 May 5th, 2022. During the presentation, we will describe certain of the more significant factors that impacted year over year performance. 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 relate to the first quarter of 2022, 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 our 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. With that, I'd like to turn the call over to Reiner.

Well, thank you, John, and good morning, everyone. We appreciate you joining us on the call today. We're off to a good start in 2022 with the first quarter coming in ahead of our initial expectations. The team navigated a challenging operating environment to deliver strong revenue, earnings, and cash flow growth. And our performance was broad-based with high single-digit or better core revenue growth in each of our three segments. Now, during the first quarter, we continued to strengthen our competitive advantage through high-impact growth investments in innovation and bioprocessing production capacity, both of which we believe are contributing to market share gains. Now clearly our well-rounded results are really a testament to our team's commitment to continuous improvement and to the unique positioning of our portfolio. We just have an exceptional collection of businesses, all powered by the Danaher business system that serve attractive end markets with durable, secular growth drivers. And it's this combination that differentiates Danaher today and provides a strong foundation for the future. So with that, let's turn to our first quarter results. Sales were $7.7 billion in the first quarter, and we delivered 12% core revenue growth. Our base business was up 8%, with broad-based strength across the portfolio and COVID-19 testing contributing 4%. Geographically, Revenue in both the U.S. and Western Europe grew mid-teens, while high-growth markets were up low single digits. China declined low single digits, but was up high single digits, excluding the impact of a previously called-out significant bioprocessing project delivered in the prior year. The COVID-19-driven lockdowns that began in late March had a very modest impact on our first quarter results in China. However, as these lockdowns extend further into April, we're seeing more of an impact in our businesses, and we anticipate the situation will begin to ease in the coming weeks with an eventual return to normalized activity levels by the end of June. Our gross profit margin for the first quarter was 61.2%. The operating margin decline of 80 basis points to 28.3% is largely due to year-over-year changes in foreign currency exchange rates and product mix primarily within our life sciences segment. Now adjusted diluted net earnings per common share of $2.76 were up 9.5% versus last year, and we generated $1.7 billion of free cash flow in the quarter. So now let's take a look at our results across the portfolio. and give you some color on what we're seeing in our end market today. Let's start with life sciences, where reported revenue grew 9.5% and core revenue was up 7.5% with broad-based strength across the segment. In bioprocessing, we're seeing very robust activity levels. Customers are accelerating their investments in research and production across all major therapeutic modalities. Poor revenue in our bioprocessing business at Cytiva and Paul Biotech grew high single digits and was up low double digits, excluding the impact of that significant one-time project in China last year. The orders remained very healthy, and we continued to build backlog across both businesses during the quarter. Now, over the last two years, our customers prioritized the development of COVID-19 vaccines, and therapies to rapidly accelerate their time to market. Today, these programs require less investment in manufacturing capacity as they mature and become a part of our customers' core business. And as a result, our customers are starting to reallocate resources back to previously paused and new programs for other modalities. Notably, monoclonal antibody-based therapies, or MABS, cell and gene therapies, and mRNA-based technology. In bioprocessing today, monoclonal antibodies are the largest investment area for our customers as they're becoming the standard of care in the treatment of many diseases. Customers are adding manufacturing capacity to support both novel masks in clinical trials and the rapid growth of approved treatments. Biosimilar development and production are also increasing. as patents on higher volume therapies expire. This trend is making life-saving treatments more accessible and helping to accelerate adoption in underserved markets. Now, we continue to make substantial investments in manufacturing capacity to help meet our customers' accelerating demand in bioprocessing. An important focus area of our expansion has been with single-use technology. which are key enablers to scale the development and manufacturing of biologic and genomic-based medicines. In this first quarter, our newest plant, dedicated to the manufacturing of single-use technology, came online in Cardiff, Wales. Now, this plant, along with recently opened facilities in South Carolina and Beijing, are critical to support our customers' demand today. Long-term, they provide additional capacity for one of the fastest-growing product categories within bioprocessing. So turning to our life sciences instrument businesses, we're seeing strong levels of activity in all major end markets. Demand is particularly robust at our pharmaceutical, CRO, and academic research customers, where a healthy funding environment is accelerating the initiation of new projects. In the first quarter, Leica Microsystems, IDT, and SCIEX each grew over 10%. At SCIEX, the Xenotop 7600 and TripleQuad 7500 continue to perform well and are great examples of how our investments in innovation are driving market share gains and enhancing our growth trajectory. At Leica Microsystems, MICA is another example of impactful innovation for our customers. MICA integrates wide fields and confocal imaging in a single instrument, while leveraging machine learning and automation to dramatically simplify the imaging workflow for our researchers. So clearly, across the life sciences portfolio, we're investing in innovation to bring meaningful solutions to our customers and to strengthen our competitive position. Aldebaran continued its great start as a part of Danaher, delivering over 40% growth in the first quarter. Since joining Danaher in late August, the team has embraced the Danaher business system and is putting DBS tools to work. Recently completed Kaizen events, which focus on increasing throughput and further reducing lead time, are already generating terrific results. So we're excited about the early progress at Aldebaran and thrilled with the great work the team is doing. So now let's move to diagnostics, where reported revenue was up 21.5%, and core revenue grew 22.5%, led by over 50% growth at Cepheid. Our non-COVID clinical diagnostic businesses collectively grew mid-single digits, notably Leica Biosystems delivered their seventh consecutive quarter of double-digit order growth driven by strength in core histology, advanced staining, and digital pathology. In clinical diagnostic markets, volumes remain in healthy levels in most geographies as patients are returning for wellness checks, routine screenings, and other elective procedures. Our customers are effectively managing through periodic outbreaks by adapting their protocols and procedures, allowing them to continue providing critical healthcare services. Now, in China, we're currently seeing regional lockdowns impact patient volumes, and we expect our diagnostics business to be the most affected in the second quarter. In molecular diagnostics, respiratory testing volumes have moderated globally as the Omicron outbreak has subsided in most regions. However, demand for Cepheid's testing at the point of care remains very strong, and we believe we're taking market share. Our continued growth in share gains are a testament to the significant value of the unique combination of fast, accurate lab results and a best-in-class workflow is providing to clinicians at the point of care. As COVID-19 moves towards an endemic disease state, we're seeing increased demand for Cepheid's broader test menu. In the first quarter, non-respiratory testing revenue grew double digits, led by hospital-acquired infection, virology, and infectious disease testing. Customers, including several who initially purchased our GeneXpert system for COVID-19 testing, are expressing increased interest in expanding their menu utilization. As our customers' free capacity from respiratory testing, we believe there are significant opportunities to leverage our market-leading installed base and testing menu to drive broader utilization and demand for Cepheid's point-of-care molecular testing solutions. Now, respiratory testing revenue of $900 million in the quarter exceeded our expectations as customers showed an increased preference for Cepheid's 4-in-1 combination test during the respiratory season. Our combination test for COVID-19 flu A, flu B, and RSV represented approximately 65% of the 17 million respiratory cartridges shipped in the quarter. with COVID-only tests accounting for approximately 35%. So now let's move to our environmental and applied solutions segment, where reported revenue grew 2.5%, with core revenue up 6.5%, including high water quality and mid-single-digit growth at product identification. At water quality, Chemtreat delivered its fourth consecutive quarter of double-digit core growth. Accelerating demand for our analytical chemistries and consumables was driven by activity across municipal, chemical, food, and beverage end markets. Equipment order rates also remained strong as customers are continuing to invest in larger municipal projects. Now, product identification Our marking and coding business was up high single digits, partially offset by slight decline in our packaging and color management business. VideoJet was up high single digits with strong demand in food, beverage, and industrial end markets. So stepping back, our water quality and product identification platforms have done an exceptional job of leveraging the Danaher business system to improve their positioning, both from a cost and growth perspective. While supply chain pressures have been modestly more pronounced in EAS, our teams are using DBS tools such as daily management to work with suppliers and ensure production component availability. We're also using visual project management to help us re-engineer our products faster with a focus on moving from difficult to source electronic component to newer, more cost-effective next-generation chipsets. Now, we believe DBS enables us to deliver faster and more reliably than many of our competitors. Now, our teams are also using DBS growth tools to accelerate innovation and deliver more impactful solutions to the market. Innovations such as VideoJet CIJ1880 printer and HOX HQ Series portable meters are helping our customers solve the many challenges they face, from increasing regulatory requirements to skilled labor shortages. And we're seeing the impact in our core growth, which has averaged mid-single digits annually over the past 10 years at EAS. So we believe this combination of the rigorous application of DBS tools paired with our proactive growth investments is driving meaningful market share gains and enhancing our long-term competitive advantage. So now let's briefly look ahead to our expectations for the second quarter and the full year. In the second quarter, we expect to deliver mid-single-digit core revenue growth in our base business, which includes a headwind of approximately 200 to 300 basis points from the ongoing COVID-19-related shutdowns in China. For the full year 2022, there is no change to our previous guidance of high single-digit core revenue growth in our base business, as we expect the shutdowns in China to normalize as we move through the remainder of the year. We continue to expect both a low single-digit core growth headwind from COVID-19 testing and overall mid-single-digit core revenue growth. So to wrap up, We had a good start to the year and look forward to building on this foundation as we move through 2022. Our first quarter results are a testament to the dedication of our outstanding team and their commitment to executing with the Danaher business system. And these results also reflect the unique positioning of our portfolio and the exceptional collection of high quality franchises that comprise Danaher today. We believe the durability of our businesses, where consumables now represent 75% of revenues, positions us exceptionally well in today's dynamic operating environment. So this powerful combination of our talented team, the strength of our portfolio, and the Danaher business system differentiates Danaher and reinforces our sustainable long-term competitive advantage. So with that, I'll turn the call back over to you, John.