Danaher Corporation

My name is Gretchen, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's second 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'd 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. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

Thank you, Gretchen. 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, the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call, and additional materials 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 August 4th, 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 refer to results from continuing operations and relate to the second 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 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 to all of you. We really appreciate you joining us on the call today. So let me start with we had a great quarter. In fact, our strong second quarter results rounded out a terrific first half of the year. Broad-based strength across the portfolio drove better-than-expected revenue, earnings, and cash flow. And we were particularly pleased with the performance of our base business, which grew high single digits, and believe we gained market share in many of our businesses. Now, these results are a testament to our team's strong commitment to executing in a challenging operating environment. They've done an incredible job leveraging the Danaher business system to help mitigate supply chain constraints, manage inflationary pressures, and improve our competitive positioning with impactful new innovation. Our second quarter results also highlight the strength and resilience of the businesses that make up Danaher today. Our portfolio is comprised of leading franchises positioned in attractive end markets with strong secular growth drivers, all united by a common set of durable business models. In fact, nearly 75% of our revenues today are recurring. the majority of which are consumables that are specified into highly regulated manufacturing processes or specific to the equipment that we supply. On top of that, our strong balance sheet and free cash flow generation positions as well to further enhance our portfolio going forward. We believe this powerful combination of our talented team and the strength of our portfolio, all powered by the Danaher business system, differentiates Danaher and reinforces our sustainable long-term competitive advantage. So with that, let's turn to our second quarter results in a little more detail. Sales were $7.8 billion, and we delivered 9.5% core revenue growth, including 8% growth in our base business, with strong contributions from all four of our operating platforms. COVID-19 testing contributed an additional 150 basis points to core revenue growth in the quarter. Geographically, core revenue in developed markets grew low double digits with broad-based strength across North America and Western Europe. High growth markets were up mid-single digits, including impressive high single-digit growth in China. Our results in China significantly exceeded our expectations, which is particularly notable as lockdowns continued for longer than we anticipated. So now I'd like to take a moment to acknowledge our associates in China for their extraordinary efforts and commitment during such a challenging time. To the teams that managed the approvals necessary to reopen our facilities, the supply chain and logistics teams that kept parts moving, and the manufacturing associates who spent several weeks away from their families, thank you. Thank you for supporting the reopening effort, and most importantly, thank you for supporting our customers. This is such a great example of one of our core values, the best team wins in action. Now, as we move through the rest of the year, we're keeping an eye out for further outbreaks and regional lockdowns. But we're currently seeing more normalized business operations in China and expect this positive trend to continue for the balance of the year. Gross profit margin for the second quarter was 60.9%, and our operating margin of 28.4% was up 60 basis points, including 100 basis points of core operating margin expansion. Our strong margin performance was a result of disciplined cost management and the proactive measures our teams have taken to address the inflationary pressures we've seen over the last several quarters. We're also using DBS tools to execute price actions, and we achieved approximately 400 basis points of price increases in the quarter, a significant acceleration from our historical price realizations. Adjusted diluted net earnings per common share of $2.76 were up 12% versus last year. We also generated $1.7 billion of free cash flow in the quarter and $3.4 billion year-to-date. 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 markets today. In our life sciences segment, reported revenue grew 6% and core revenue was up 7%. Strength was broad-based across the segment with high single-digit or better-based business core revenue growth at each of our largest operating companies. In our bioprocessing business, we continue to see record activity levels from early stage research to later stage development and production. which drove a combined core revenue growth rate of high single digits at Cytiva and Paul Biotech. Our backlog and our order levels remain very healthy, and as always, we're working closely with customers to ensure they have the right inventory levels to support their planned activity. We are seeing our customers continue the healthy transition away from COVID-19 vaccines and therapies, and into previously paused and new programs for other modalities. As a result, we now expect COVID-19 vaccine and therapeutic revenue of approximately $1 billion in 2022, down from approximately $2 billion in 2021. Now, that said, there's no change to our high single to low double-digit core revenue growth outlook in our bioprocessing business for the year. as customers are accelerating their investments across all other major therapeutic modalities. This acceleration, paired with improving price realization, is driving more than 20% core revenue growth in our non-COVID business, up from the low double-digit growth we've seen historically. The biologics market remains very healthy, as evidenced by the increasing number of treatments in development and production. Today, there are over 1,500 monoclonal antibody-based therapies in development globally, which is up more than 50% from just five years ago. This is being driven by both novel molecules in development and the proliferation of biosimilars, which are helping to accelerate adoption in underserved markets as patents on higher-volume therapies expire. There are also over 2,000 cell and gene therapy candidates in development today, a more than tenfold increase over the last several years. Given this backdrop of such a significant and sustained increase in activity, we expect the growth rate in this market to remain very strong for many years to come. Now, as the complexity required to manufacture these life-saving treatment increases, Customers are looking to collaborate with us to help them solve their most challenging problems and assist them as they move from lab to production scale. Cytiva recently announced a collaboration with Bayer to develop the industry's first modular end-to-end manufacturing platform for allogeneic cell therapies, which will help to improve the treatment of a broad array of diseases, including cancer. This collaboration is just amazing. Another great example of how our scientific expertise and leading positions in upstream and downstream applications are helping these cutting-edge therapies advance from the laboratory to the clinic. Our more instrument-oriented life science businesses collectively delivered high single-digit-based business core revenue growth. We're seeing a healthy funding environment and solid demand across most major end markets. SIEX core revenue was up more than 10% in the second quarter, driven by an acceleration of new projects at our biopharma, CRO, and academic research customers. We continued our cadence of innovation with the introduction of several new solutions that improve the accuracy and efficiency of genomics and proteomics research. Notably, SIEX introduced the Xenoswath VIA, an innovative software solution which doubles the number of proteins that can be discovered versus previous swath approaches, helping researchers discover more potential biomarkers and better understand the cause and treatment of diseases. Now, in our genomic businesses, customers are making significant investments in the development and production of cell and gene therapies, DNA and RNA vaccines, and gene editing. IDT had its 10th consecutive quarter of double-digit core revenue growth, led by robust activity in next-gen sequencing and gene writing and editing. Aldevron, more than 20%, while also making significant progress on the capacity expansion projects needed to support their long-term growth outlook. Now, moving to our diagnostic segment, Reported revenue was up 9.5%, and core revenue grew 12.5%, led by nearly 30% growth at Cepheid. Our other diagnostic businesses, including Beckman Coulter Diagnostics, Radiometer, and Leica Biosystems, collectively delivered mid-single-digit core revenue growth, despite headwinds from the COVID-19-related shutdowns in China. In China, our diagnostics core revenue was flat year over year. Site access and patient volumes slowly improved as the quarter progressed with a more pronounced recovery in June. Patient volumes remained slightly below normal levels, but we expect continued recovery as we progress through the remainder of the year. Now, outside of China, patient volumes across hospital and reference labs held up well during the quarter, and remain at or above pre-pandemic levels despite recent outbreaks of emerging COVID variants. Our diagnostics customers continue to face skilled labor shortages and are increasingly seeking to improve automation and productivity within their labs. This quarter, Leica Biosystems introduced its next generation, fully automated advanced staining platform, Bond Prime. to help address these needs in the pathology lab. Bond Prime facilitates a continuous pathology lab workflow and delivers the high-resolution stains needed for a definitive diagnosis with an industry-leading average turnaround time of only 90 minutes. As I mentioned earlier, core revenue growth at Cepheid was up nearly 30% in the quarter. Low teens growth across our non-respiratory test menu was led by sexual health, hospital-acquired infections, and virology. In respiratory testing, strong global demand persisted for Cepheus point-of-care assays, and we believe we continued to gain market share. Respiratory testing revenue of approximately $750 million in the quarter exceeded our expectations of approximately $400 million. The spread of highly transmissible COVID variants and greater incidence of other respiratory infections, such as RSV and flu, led to both higher testing volume and a preference for our four-in-one combination test. As a result, our four-in-one test for COVID-19, flu A, flu B, and RSV represented about 50% of the 16 million respiratory cartridges shipped in the quarter with COVID-only tests accounting for the remaining 50%. Now, as COVID-19 shifts to an endemic disease state, we're seeing more customers begin to consolidate their point-of-care PCR testing platform onto the Cessia GeneXpert. This preference for the GeneXpert, both within hospitals and across healthcare networks is evidence of the significant value the unique combination of fast, accurate, lab-quality results and an easy-to-use, best-in-class workflow provide clinicians. In addition, as our customers begin freeing capacity from respiratory testing, they are increasingly interested in discussing opportunities for broader utilization of CEFIA's leading point-of-care molecular testing menu. Moving to our environmental and applied solutions segment, reported revenue grew 6.5% and core revenue was up 10% with double-digit core growth at water quality and mid-single-digit core revenue growth at product identification. In water quality, Chemtree, Trojan, and Hawk each grew double digits during the second quarter. Robust growth in our analytical chemistries and consumables was broad-based across all major end markets. Equipment sales remained strong with healthy levels of project activity at both industrial and municipal customers. At product identification, marking and coding was up high single digits, and packaging and color management grew mid-single digits. VideoJet was up high single digits, led by North America, where food and beverage sales were particularly strong. Our EAS team are leading the charge and writing the newest chapter in the DBS playbook to counter the supply chain and inflationary pressures we're seeing every day. They've been reengineering products to reduce our reliance on hard-to-source electronic components and using daily management to work closely with suppliers to ensure production part availability. These efforts, along with our accelerated price actions, are also helping improve our margin position. We saw the impact on our results this quarter with more than 100 basis points of core operating margin expansion at EAS. Our strong performance also highlights the resiliency and the durability of the high-margin recurring revenue business models that make up our EAS portfolio. With that color on what we're seeing in our businesses and end markets, let's now briefly look ahead at expectations for the third quarter and the full year. In the third quarter, we expect to deliver high single-digit core revenue growth in our base business. We expect a mid single-digit core revenue growth headwind from COVID-19 testing, resulting in low single-digit core revenue growth overall. For the full year 2022, there is no change to our previous guidance of high single-digit core revenue growth in our base business and mid single-digit core revenue growth overall. Given our strong second quarter performance, we now expect operating fall through at the high end of our previously communicated range of 20 to 25% for the full year. So to wrap up, we're really pleased with our strong second quarter and first half performance. Our results are a testament to the team's consistent execution in a dynamic operating environment and to the durable balanced position of our portfolio today. Looking ahead, our team's commitment to executing with the Danaher business system, our differentiated portfolio of businesses serving attractive end markets, and our strong balance sheet all position Danaher to continue delivering sustainable, long-term performance.