Danaher Corporation

My name is Shelby, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's third quarter 2022 earning 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. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

Thanks, Shelby. 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 third quarter form 10Q, 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. Replay of this call will also be available until November 3rd, 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 third 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 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 were 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 Ryan.

Well, thank you, John, and good morning to all of you. We appreciate you joining us on the call today. So let's jump right in. Our positive momentum continued in the third quarter with 10% core revenue growth and solid earnings and cash flow performance. This strength was based across the portfolio with high single digit or better core growth in all three reporting segments. We're particularly pleased with the consistent performance of our base business, which has grown high single digits or better for nine consecutive quarters. Now, these well-rounded results were driven by our team's outstanding execution through a challenging operating environment. They've done a terrific job running the Danaher playbook to proactively reduce structural costs while continuing to accelerate high-impact growth investments. We believe our ability to deliver meaningful innovation and reliably serve customers has contributed to market share gains in many of our businesses. Now, during the quarter, we also announced our intention to separate our environmental and applied solutions segment to create a publicly traded company. This new company, which we'll refer to as EAS for now, will be well positioned in the most attractive areas of the water quality and product identification market. EAS will be comprised of outstanding businesses with strong ESG fundamentals, durable business models, and a very attractive financial profile, averaging mid-single-digit core revenue growth over the last five years with 55% recurring revenue today and an adjusted EBITDA margin of approximately 25%. Now, as a standalone company, EAS will have greater opportunities to meaningfully deploy capital towards M&A, And, of course, EAS will have the Danaher Business System as its foundation, along with a commitment to continuous improvement that will support the same outstanding results EAS has as a part of Danaher today. Of course, we look forward to sharing more details here in the coming months. As for Danaher, this separation will establish us as a more focused science and technology leader committed to innovation and making a profound impact on human health. We've got a great lineup of leading franchises positioned in highly attractive life sciences and diagnostics and markets, all united by a common set of durable, high-recurring revenue business models. We remain focused on strengthening our portfolio and competitive advantage in these areas, and we see tremendous opportunities to continue delivering sustainable long-term performance. So with that, let's turn to our third quarter results in more detail. Sales were $7.7 billion, and we delivered 10% core revenue growth. including 8.5% core growth in our base business. Respiratory testing contributed an additional 150 basis points to core revenue growth in the quarter. Geographically, we continue to see strong demand across the developed markets despite current macroeconomic and geopolitical events. North America's core revenue was up high teens with all three segments delivering double-digit or better core revenue growth. Core revenue in Western Europe grew high single digits with customer activity and funding levels remaining healthy. High-growth markets' core revenues were up mid-single digits. In China, our teams effectively managed through ongoing COVID-19 headwinds to deliver high single-digit growth in the quarter. Our growth profit margin for the third quarter was 59.8%, and our operating margin was 26.3%. We had 50 basis points of core operating margin expansion driven in part by disciplined cost management, productivity measures, and price actions. The operating environment remains dynamic across our businesses globally, but we experienced fewer supply chain disruptions in the third quarter. Logistics improved as freight costs began to stabilize. We also saw modest improvement in material availability, though certain electronic components remained difficult to procure. And despite these challenges, our teams have done an outstanding job taking proactive measures and leveraging the DBS tool set to minimize the impact of supply chain constraints and inflationary pressures. Adjusted diluted net earnings per common share of $2.50 were up 7% versus last year. We also generated $1.7 billion of free cash flow in the quarter and $5.2 billion year-to-date. 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 markets today. In our life sciences segment, reported revenue grew 4%, and core revenue was up 8%. Strength was broad-based, with most businesses achieving high single-digit or better core revenue growth. In bioprocessing, robust activity levels drove over 20% growth in our non-COVID business at Cytiva and Paul Biotech. As expected, our customers continued to transition away from COVID-19 vaccine and therapeutic programs and into programs for other modalities. We expect these trends to continue through the fourth quarter, resulting in high single-digit core revenue growth in our bioprocessing business, for the full year. In September, we hosted an investor day at Cytiva to showcase our bioprocessing business and highlighted the tremendous long-term growth opportunities we're positioned for in biologics and genomic medicine. We also announced that we're bringing together Cytiva and All Life Sciences as the biotechnology group. The combined portfolio has the broadest offering in the industry with end-to-end solutions across all major therapeutic modalities, from monoclonal antibodies to emerging cell, gene, and mRNA-based therapies. The biotechnology group will have unmatched global scale, with the industry's largest commercial team allowing us to further extend the reach of our best-in-class customer service. We also believe focused innovation across the joint portfolio will ensure our products and solutions are aligned to best meet customers' needs around quality, yield, and cost. With Paul Life Sciences and Cytiva joining forces, the biotechnology group is uniquely positioned to help our customers become more efficient and bring more life-saving therapies to market faster. Moving to our life sciences instrument businesses, they collectively delivered double-digit-based business core revenue growth, led by SCIEX, Leica Microsystems, and Beckman Coulter Life Sciences. Funding levels remained strong globally, and we saw solid customer demand across most major end markets. We continued our strong pace of innovation and life sciences with the introduction of Beckman Coulter's Biomek NGenius. The NGenius is a cost-effective, easy-to-use sample preparation system that reduces manual transfers and hands-on time in next-gen sequencing library construction. This is a great example of how our investments in innovation are delivering impactful solutions to our customers. Our genomics businesses had another quarter of double-digit core revenue growth led by strong demand for plasmids, RNA, and next-generation sequencing solutions. This quarter marked Aldebaran's first anniversary as part of Danaher, and we couldn't be more pleased with the team's performance. Financially, the results speak for themselves. With more than 30% year-over-year revenue growth since acquisition, The team has done a tremendous job embracing DBS tools and processes to meaningfully reduce lead time and increase capacity. Now, this capacity is certainly supporting customers' needs today, but it's equally important to support Aldebaran's long-term growth outlook. With a view towards the future, we're excited about the opportunities to collaborate across our genomics businesses and create unique solutions to help our customers accelerate the development and commercialization of mRNA and other nucleic acid-based therapies. Moving to our diagnostic segment, reported revenue was up 9.5% and core revenue grew 13.5%. led by nearly 30% core revenue growth at Cepheid. Leica Biosystems grew mid-teens in the quarter, driven by strength in core histology and advanced staining. As customers seek to improve productivity within their labs, we're seeing strong early momentum for Leica's recent innovation, Bond Prime, a fully automated advanced staining platform. Beckman-Coulter Diagnostics delivered solid results with mid-single-digit core growth despite ongoing COVID-19 headwinds in China. In molecular diagnostics, core revenue across Cepheid's non-respiratory test menu grew approximately 10%, led by double-digit growth in virology and infectious disease testing. In respiratory testing, global PCR volumes have moderated. But demand is still elevated for symptomatic testing at the point of care where Cepheid is the gold standard. Cepheid's respiratory testing revenue of approximately $875 million exceeded our expectations of approximately $325 million. A higher prevalence of circulating respiratory viruses combined with advanced purchases by customers in anticipation of a more severe respiratory season in the northern hemisphere led to both higher volumes and a preference for our four-in-one tests for COVID-19, flu A, flu B, and RSV. Now, we're starting to see our customers consolidate their point-of-care PCR testing platforms onto Cepheid's GeneXpert. The GeneXpert provides significant value to clinicians with a unique combination of fast, accurate lab-quality results and a best-in-class workflow. Customers are also increasingly interested in opportunities for broader utilization of Cepheid's leading test menus. Our opportunity funnel for non-respiratory tests has increased significantly this year, and we see opportunities to continue gaining market share moving forward. Moving to our environmental and applied solutions segment. Reported revenue grew 5%, and core revenue was up 10.5%. Water quality was up mid-teens, and product identification grew low single digits. At product identification, marketing and coding was up low single digits, and packaging and color management grew mid-single digits. VideoJet was up low single digits in part due to a difficult year-over-year comparison as the business grew low double digits in Q3 last year. Now, during the quarter, we saw strength in food and beverage as well as the consumer and markets. In water quality, Chemtreat and HAWC each grew high teens during the third quarter. Demand for analytical chemistries and consumables remained solid across our major end markets. Municipal and industrial project activity was broadly consistent with the first half of the year, driving solid equipment growth. Now, last week at WEFTEC, the annual wastewater trade show, The water quality team highlighted several solutions that are improving the efficiency and sustainability of the water treatment process. TOCS Ultra Low Range Chlorine Analyzer raises the industry standard to parts per billion chemical detection levels, helping customers extend the membrane life of their treatment systems and reduce maintenance costs. At Trojan, innovative solutions such as Trojan UV Cigna and Trojan UV 3000 Plus reduce environmental impact by treating water with ultraviolet light instead of traditional chemical disinfection methods. Every day, over 1 billion people benefit from water treated by Trojan. So these are just a few examples of how our water quality platform is supporting customers' day-to-day mission-critical water operations and making a positive impact on the world. So with that color on what we're seeing in our businesses and end markets, let's now briefly look ahead at expectations for the fourth quarter and the full year. In the fourth quarter, we expect to deliver high single-digit core revenue growth in our base business. We expect a high single to low double-digit core revenue growth headwind from COVID-19 testing, resulting in a core revenue growth being flat to down low single digits in the fourth quarter. Additionally, we expect a fourth quarter adjusted operating profit margin of approximately 30%. Now, for the full year 2022, there is no change to our previous guidance of high single-digit core revenue growth in our base business. We now expect high single-digit overall core revenue growth, which is up from our prior expectation of mid-single digits, as a result of our strong COVID-19 testing performance in the third quarter. We continue to expect operating profits fall through of approximately 25%, for the full year. So to wrap up, we're very pleased with our third quarter results. Our well-rounded performance really is a testament to our team's commitment to innovating and executing in support of our customers. These results also reinforce Danaher's strength and durability. Our differentiated portfolio is well positioned in attractive end markets with long-term secular growth drivers. And our business models are resilient, with nearly 75% of our revenue today being recurring. So putting it all together, the strength of our portfolio and balance sheet, combined with our talented team and the power of the proactive application of the Danaher business system, provides an outstanding foundation for delivering sustainable long-term results. So with that, I'll turn it back over to John.