Q3 2019 Earnings Call

October 24, 2019

My name is Kathy and I will be your conference facilitator. This morning at this time I would like to welcome everyone to the Danahers corporations third quarter 2019 earnings results Conference call.

All lines have been placed on me to prevent any background noise.

After the speaker's remarks, there will be a question and answer session.

He would like to ask a question. During this time simply press Star then the number one on your telephone keypad, if he would like to withdraw your question.

The pankey on your telephone keypad I will now turn the call over to Matt Katrina, Vice President of Investor Relations Mr. catching up. Please go ahead.

Thanks Cathy.

Good morning, everyone and thanks for joining us on the call with us today or Tom Joyce, Our President and Chief Executive Officer, No group, our executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, the slide presentation, supplementing todays 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 the website Www Dot Danaher Dot com.

I'd quarterly earnings.

The audio portion of this call will be archived on the Investor section of our website later today I did a events <unk> presentations and will remain archive until our next quarterly call.

A replay of this call will also be available until October 31st 20 Nike.

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 material to company specific financial metrics relate to the third quarter 2019, and all references to period to period increases or decreases in financial metrics our year over year.

All references to individual operating company operating margin to exclude the impact of intangible amortization.

We may also describes certain products in devices, which have applications submitted in any for certain regulatory approvals for our own are available only in certain markets.

During the call 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 future.

Forward looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings and actual results may differ materially from any forward looking statements that we make today.

These forward looking statements speak only as of the D. Air Me can we do not assume any obligation to update any forward looking statements, except as required by law.

With that I like to turn the call over time.

Thank you Matt good morning, everyone.

We're pleased with our strong performance in the third quarter as we delivered 5% core revenue growth and solid core margin expansion.

We believe our ongoing investments in innovation and commercial initiatives helped to continue building sustainable competitive advantages across a number of our businesses.

We also made meaningful progress on our two most recent portfolio moves the acquisition of GE Biopharma and the initial public offering of our dental business.

During the quarter, we achieved several important milestones related to the GE Biopharma business.

Earlier this week, we announced that we signed an agreement to sell certain businesses to sartorius for a purchase price of $750 million.

Revenue to be divested is approximately $140 million and consists of our label free bio molecular characterization.

Chromatography hardware and resins micro carriers and particle validation standards businesses.

All of these businesses are part of our life Science plus <unk> platform.

Well the sale to sartorius remains subject to certain regulatory approval. It represents a significant step in the GE biopharma regulatory process.

Timing around meeting certain closing conditions, such as regulatory approvals.

Of course be uncertain. However, we remain very encouraged by the progress, we're making and expect to close the GE Biopharma transaction in the first quarter of 2020.

Additionally, we recently announced that the business will be called site t., but when it officially becomes part of Danaher.

The name is derived from Greek and Latin roots, meaning sell and doing everything biopharma customers do relates to the use growth we're analysis of cells.

The name, maybe new but the site kiva logo or the drop is actually a reference to the iconic pharmacy a brand of the business going back to the 19 sixties.

Pharmacy or was a pioneer and the development of process chromatography and was one of the first businesses to become part of GE Biopharma.

We've received terrific feedback on the reintroduction of the drop logo as we look to build on its legacy under the new sites Heba brand.

And lastly, we continue to make progress on the financing of the GE transaction.

In September we raised approximately $6.8 billion in euro denominated debt.

We raised this debt at a combined interest rate of less than 1% with an average maturity of approximately 14 years.

We anticipate raising the remaining debt required to finance the transaction prior to year end.

On September 18th our dental platform now called Invista started trading as a public company on the New York stock exchange under the ticker and B S T.

I want to thank Amir I Guy and all of the invest associates for their contributions.

We wish them the very best as they embark on this exciting new endeavor.

Just a release their third quarter earnings earlier, this morning, and will be holding a conference call at 11 am Eastern time to discuss those results. We ask that you direct any questions on invest this business performance to the Invista team.

So turning to our third quarter results.

Sales grew 4% to $5 billion with core revenue growth of 5% on a consolidated basis and 6% core revenue growth when excluding the results of our dental segment.

Acquisitions increased revenues by half a percent.

While the impact of foreign currency translation decreased revenues by 1.5%.

Geographically high growth markets increased high single digits with China growing at that rate, while Russia and eastern Europe , both grew double digits.

I'll have to markets increased mid single digits with North America, leading the way.

Gross margin for the third quarter with 55.8%.

Up 40 basis points year over year.

Operating profit margin was 16.6% with core operating margins, increasing 70 basis points led by our life Sciences and diagnostics segments.

Now for the third quarter results across the portfolio.

In life Sciences reported revenue increased 6%.

6.5% core revenue growth.

Operating profit margin increased by 60 basis points with core operating margins expanding 100 basis points.

At Beckman Life Sciences, we believe we continue to grow above the market as core revenue increased double digits.

We saw strength across most major geographies and product lines as new product introductions continued to contribute meaningfully to core revenue growth.

In particular, we believe we're gaining share in flow cytometry with the side effects Cytoflex platform and dry reagents as these innovative product lines are simplifying customer workflows.

Additionally, labs site the automated liquid handling business. We acquired earlier this year is growing double digits and has exceeded our initial expectations.

Core revenue IXI ex declined slightly in part due to a tough year over year comparison as the business grew nearly 10% in the third quarter last year.

We saw strength in high growth markets that was offset by softness in North America and Western Europe .

And Paul the team achieved high single digit core revenue growth as we saw good performance in both the developed and the high growth markets.

The biotech and aerospace businesses saw the largest increases offset by continued softness in micro electronics.

August marked the fourth anniversary of our acquisition of Paul.

Over the last four years with the application of the Danaher business system. Paul has accelerated core revenue growth ICSI expanded gross margins by greater than 500 basis points to approximately 55%.

And increased operating margins nearly 1000 basis points to above 25%.

Implementing DBS tools has not only enhance the financial performance, but also improved operational efficiency expanded commercial capabilities and increased the cadence of innovation across the business.

Turning to IBT I'd team delivered another quarter of double digit core revenue growth with solid results across all major geographies.

By product line, the business opportunity with strength in next generation sequencing and synthetic biology.

In August it continued to expand its product portfolio in these high growth areas with the launch of a new product Oh pools, the longest strands of ready to use DNA on the market.

I'd Tiv proprietary manufacturing process allows them to create DNA at the highest quality levels, enabling scientists focused on developing advanced diagnostic tests and treatment to generate more consistent and reliable results in their research.

Now moving to diagnostics.

Reported revenue increased 6.5% with core revenue growth of 8%.

Reported and core operating profit margins increased by 100 basis points.

DBS led commercial and operational execution drove performance across the diagnostics platform.

Beckman diagnostics had its fourth consecutive quarter of mid single digit core revenue growth driven by strength in high growth markets and increases in North America.

A key driver of documents improved growth performance has been it's increased cadence of new product introductions.

At the American Association for clinical Chemistry trade show in August Beckman highlighted a number of these recent innovations, including the Dx each 900 high volume hematology analyzer as well as the Dx a 5000 laboratory automation systems.

The Dx Eightnine hundred with its early sepsis indicator has been a key contributor in the improved performance investments hematology business.

In automation the Dx, a 5000, which was launched in Europe earlier. This year recently received five 10-K clearance from the FDA.

The systems key benefits of detecting pre analytical sample quality, increasing turnaround time and reducing the number of manual processing steps from 32 to four are driving early adoption and great customer feedback.

Turning to radiometer core revenue growth increased double digits led by strong results in China, and Japan as we believe the team drove market share gains in our blood gas and immuno assay product lines.

Like the Biosystems also delivered double digit core revenue growth led by North America in Japan.

Success, it like that is being driven by new product introductions combined with the implementation of growth rooms, one of our most impactful DBS commercial tools.

Growth rooms enable cross functional teams to collaborate and align actions around the businesses most critical short and long term commercial initiatives.

With this focused approach like this core histology and advanced staining product lines delivered mid single digit core growth or better in each of the last eight quarters.

Finally at 78 core revenues increased double digits across all major geographies and product lines.

Next month will Mark said third anniversary with Danaher, and we could not be more pleased with what the team has accomplished.

Since acquisition.

Business has grown double digits annually to nearly $1 billion in revenue.

Gross margins have expanded by 1000 basis points to approximately 60%.

R&D investments have increased by over $50 million annually, while operating profit margins have increased from breakeven to approximately 20%.

Seppi It highlights another powerful example of how running the Danaher playbook.

By applying DBS to drive growth and expand margins allows for investment back into the business that helps drive compounding returns.

Moving to our environmental and applied solutions segment.

Reported revenues increased half a percent.

Core revenue growth increasing at 2%.

Operating profit margin remained constant with core operating margins expanding 10 basis points.

In product identification core revenue declined slightly driven in part by a tough prior year comparisons at Videojet, partially offset by growth in our packaging businesses.

As BJ.

Core revenue declined low single digits.

On a nearly 10% comparison to the third quarter last year.

Despite the results of the quarter, we're encouraged by a positive order growth and expect improved performance in the fourth quarter.

Last month at the annual pack Expo trade show.

Neo jet showcase some of its recent instrument and digital innovations.

On the instrument side Videojet highlighted the VJ 70, 340 laser printer, featuring the smallest marking head available on the market today, and allowing for easy integration into existing packaging lines.

Videojet also released rapid recover a digital solution that automatically troubleshoot and diagnosis printer service issues.

This functionality builds on Videojet market, leading service capabilities and improved customer uptime by increasing first time fixed rates and avoiding costly investigation time.

In our packaging businesses, which include ESCO and X right core revenue increased at low single digit rates continuing the improving trends that we referenced in these businesses last quarter.

Developed markets led the way offsetting some softness in high growth markets.

Finally at water quality.

Solid execution across the platform drove mid single digit core revenue growth on top of a double digit prior year comparison.

So looking at performance by operating company Trojan core revenue increased double digits led by North America.

The team saw strong performance in the municipal market in both its UBI and filtration product lines, driven by high win rate and service expansion initiatives.

At Hock.

Core revenue increased low single digits.

Strong performance in Europe , and North America was offset by declines in China due to a difficult comparison versus 2018 related to China's surface water initiative policy 61.

I can treat core revenue increased mid single digits, driven by strength in the oil and gas as well as the food and beverage end markets.

In September many of you attended our water quality platform Investor day at Hock and Loveland, Colorado.

I went and that day, we highlighted the key strategic initiatives of the platform.

The team provided examples throughout the day of customer focus workflow solutions innovation and go to market execution that we believe have led to share gains across water quality.

Yes stage product line, particularly for the 900 with the early sepsis indicator is making a significant difference we have literally turned that business around.

From a business where.

We were not happy with our retention in our win rates to the point, where now we're very happy with our retention in our win rates and we're seeing growth in that business now that is having a material impact on the performance improved performance that you're now seeing from from Beckman overall.

Relative to.

Improvements in our automation systems I noted the Dx Eightfive thousand which is also having impact, particularly in labs that are really challenged in terms of throughput and skilled labor will reduce where we're reducing the need for skilled labor. It's really all of those things combined that are having an impact on seeing that consistent mid single digit.

Growth rate that that Beckman is now is now moving towards and so I think its combination of things you asked specifically about China. We're seeing continued good performance in China.

Beckman as always had a strong position in China, It's always been at key growth driver for us.

And it continues to be so.

Clearly, it's a it's a highly competitive market, but we are extremely well positioned there and continuing to see good growth very high retention rates and and very solid when rates as well.

Hospitals today to drive cost reductions.

Again, that's that's underpinning that greater consistency of bit of improvement it back across the board. So hopefully I covered the waterfront if I didnt Tyco happy to take a follow up.

Yes, yes, sorry, Matt Tom mentioned Beckman in China that it just to give you some context on diagnostics overall in China is I think that might have been part of the question as well so from a diagnostics perspective in China, we were double digit core here in the quarter just give you some sense of the overall market.

Okay, and then just one follow up on life Sciences, 6.5% Korigan, so not an 8% comp. That's certainly stands out just curious how you think about the sustainability of that.

Lot of that I guess was Paula up high single digit as well.

Sure Tyco, we're we're we feel very good about the sustainability of our performance across life science, if if we step back and we think about both kind of more the Paul side of the house versus life Science tools life Science tools continued to be mid single digit.

Across the.

Our underlying businesses like molecular devices like the Myatt Microsystems, both mid single digit performance and then back LSW.

Really good performance, obviously, a little bit more weakness in SCIEX, but but we're very encouraged by the order trends that we see there so.

Probably only one one spot there that was maybe a little bit weaker, but overall I'd say the twin side very solid and and then across the Paul business and what we would see is really the.

The ROE of double digit core growth and the order trends look very good. We're also seeing good sustained performance across single use technologies and gene and cell therapy, which are showing double digit core growth admittedly. Some of those are smaller portions of the overall portfolio, but but really good performance that we think those.

Okay, Lastly, could you give us the Paul industrial number.

Pall industrial on the quarter was mid.

Okay. Thank you.

Did I catch you correctly in the fourth quarter guidance is 4.5% core growth ex dental.

Thats correct, Alright can you sort of walk through just sort of the market dynamic as we get there that I think thats, a little bit lower than what we would have thought on it and that sort of curious whats your sort of like assuming in terms of your end spending and one I just sort of unpack that sure what's quick walk into those numbers sure of course.

Q3, particularly for Paul.

The industrial side that that moved from Q4 into Q3 so.

Really we're talking about.

A little bit of timing impact there between Q3 in Q4, but we feel very good about our execution very good about the underlying market dynamics.

Across both life Sciences, and diagnostics as well as across.

Water quality anti D and when you then look at our fourth quarter guidance in light of the full year, we're still talking about a full year 2019 at 5.5% to 6% and that's very consistent with what we talked about for the last couple of quarters. So.

In general we would characterize that that fourth quarter relative to the third as large and more to do with timing, but still feel very good about where we're bringing the full year.

Okay. That's helpful.

Just had a curiosity can you talk a little bit about western Europe , and what's going on there and specifically just wondering if some of the bioprocess strength is you've seen or some of the stuff you've seen is potentially related to pull forwards and because people worried about Brexit and stuff we heard that from some other companies recently that there may be.

Yeah.

As we look at where those pockets of softness our I think they really speak to some of the overall.

In Europe , because when we unpack where some of the the differences are between the first half in the second half it largely looks to be around instrumentation and equipment.

Those are the areas, where we see some of that softness so I would I would attribute that low single digit performance in Europe , a little bit more to the macro softness in Europe than I would sum.

Literally dozens really exposed we're not a terrific proxy, but yes, we can certainly see a few of those pockets, whether it's in North America or in developed Europe , where some of that macro slowdown exists, but again those are those are pretty small pockets.

Faxes kind of talking about 4.5% core growth kind of normal solve 35% fall through and really NCR headwind of call. It a couple pennies is really the only change here that we've sort of made to the to the guys. If you will so.

But yes, I think you're right, we anticipate having pretty good fall through like we normally we would expect here in the fourth quarter and I suspect it will be a little bit on gross margin side and probably with with that comes the operating leverage as well thanks guys.

Thank you <expletive> .

Your next question comes from line of Scott Davis with monthly research.

Got it.

Hi, great.

It's easy covering your company every quarter, you put a decent numbers and.

Not exactly sure what you're making what you sell but it's working.

You know we loved it thanks Ivy for all of the visitors on this call.

Our goal among many.

If I might be the last industrial Guy left but you're not going to get rid of you that easily that's okay. Welcome back what's up today.

So I am I got two questions for you.

Around.

Was it U.S. regulators or was it more globally geared I mean, just a little bit more color on that.

Ladies and certainly to China and so.

Constructive discussions with regulatory bodies across the world and with a clear understanding of what the rationales were from their perspective as well as ours.

And this was simply something that regulatory bodies, along with US came to the point, where we thought where both parties thought that this made sense.

And so it really was a series of globally oriented conversations and made sense to take that step.

Promise.

Once you hit that your five approaching your six are you on targeted at the original targets that you laid out.

For years here.

The innovation side and really changing that fundamentally.

No food egos.

Thank you for that and very quick follow up related to the deal as well and following up on the last question on divestitures based on where you are in the regulatory process and the fact that you did announce those divestitures earlier. This week, how would you characterize the probability that additional divestitures could be required from here on out.

As you saw in the announcement first of all those those divestitures are pretty modest yes on a relative basis at $140 million of less than 5% of the of the revenues that we are going to acquire but of course the regulatory process is is a fluid one.

So while we believe this was a significant a major step.

Towards approval at this point, we just we can't comment on.

This any further it was an important milestone but.

As we commented that we don't expect either these deals to this deal to close nor the actual formality of those approvals to be completed until the first quarter and therefore closing immediately following that.

We can't comment any further about any prospects for any further actions okay totally understood maybe just a couple on the quarter.

First on diagnostics core margin expanded 100 basis points and was ahead of our forecast could you talk through some detail on that performance and specifically I'd be curious how step you had margins are progressing on how growth improvement at Beckman is really contributing to this performance and then just on Paul.

It seems like the bio processing market is growing broadly at a very strong 15 plus percent rate based on what some of your peers have reported over the last few days.

I think you noted that Paul biotech grew double digits is it reasonable to believe that you're growing Paul biotech at least that 15% plus level that we're hearing from others.

Thank you.

I dug out your I'll take a bio pharma Pittsburgh than now now ill jump back in on that on the Dx margins.

Yes. The simple answer is what you are hearing from other sources around the growth as bioprocessing market overall as being a double digit growth rate market very attractive one and one by the way that we and obviously others believe is is sustainable in terms of its growth prospects.

We at Paul are clearly.

Benefiting from that and taking advantage of that opportunity to drive that kind of growth, we did put up double digit growth.

Within that business and Thats, a crop obviously, our filtration business, which is which is fundamental to biological biologic drug production. But also includes growth in the really innovative ends of the spectrum around biopharma, which is really around single use technologies, which are becoming.

We have again, it's sort of similar to the Paul story.

I think the team there has done a fantastic job of really balancing growth. While also focusing on on the margin side of it and they've done a really nice job, it's kind of embracing DBS and leading from the front.

Today, those margins or call it 20% or so from a from an EBITDA perspective.

But more about what you're seeing and then for the quarter SCIEX is a little bit unique relative to some tools businesses in that you have a clinical exposure would be nice to hear how you saw the relative trends in that business between clinical some of the core applied markets, where you have a good presence and then to the extent you have any comment on what you're seeing on pharma on the art.

The that would be really helpful. Second question is just more of a global question on.

Municipal and broader government project demand uniquely well positioned to kind of view on on how that's tracking and then I'll go ahead.

Matt ask you just want.

More of a prospective big picture question, you have a lot of moving parts in the model given that were divesting dental and we have GE coming in.

Sure Steve Thanks, So let's start with SCIEX.

You heard my comment accurately that.

While SCIEX was down slightly in the quarter, we worked we arent back encouraged by.

Some softness in North America, a little bit a little bit of that with timing of some larger deals in the in the second half between Q3 in Q4.

We are seeing the consolidation of some small and midsize reference labs, and and that has created a bit of a headwind there.

You asked about specifically the clinical market and SCIEX has certainly had a position in clinical overtime, but over the last couple of years, we've seen a number of challenges in that market that are not unique to SCIEX, just broadly defined challenges around changes in reimbursement and guidelines around.

Pain management for one example, and certainly the impact.

Reasonably good.

Particularly biopharma, which obviously is a growth segment.

Core small molecule pharma was was much more modest is growth globally.

Really across North America in China.

And I think overall, we think SCIEX is continue is going to continue to be a leader in that market a real innovator.

And one where over time, we'll see a pick up off the offer third quarter.

You asked about the municipal market and our exposure to the municipal market or that the government market is for the most part.

Associated with our water quality platform and and in that case. The term municipal is probably more appropriate to our position really than any broader.

Constructs at least in the U.S.

And what we've seen we see most recently in the U.S. and in Europe .

Be that municipal spending has generally been pretty consistent and that's what's driven the the mid single digit growth rates that we put up at water quality across the U.S. in western Europe , and that applies certainly to hock it applies to Trojan and and a bit to can treat although country tends to be more associated with with UBS.

Markets.

In China, where we continue to see good performance for our water quality platform, albeit against a very tough comp associated with whats called policy.

That will continue to be a positive dynamic across water quality. So right now, we see pretty consistent and steady performance around both municipal spending in developed markets as well as a little bit more governmental oriented attention to environmental issues in the high growth markets.

And Steve as far as you're kind of your question on the moving pieces with GE dental I think maybe the way I think about it sort of that from an EPS perspective, obviously Q4, Theres no GE impact.

There will be in and we talked a little bit here earlier about all the moving pieces that are there and obviously as we get a little closer to close what we will update all of that for 22 as far as Q4, obviously nothing nothing to think about.

As far as Q4 goes for EPS for fourth Vista, the NC I'd kind of put in place holder of maybe two cents in there for the NCR for the fourth quarter.

Then as far as kind of cash flow goes I think that was your next question. If you think about we sort of talked about.

GE coming in at maybe roughly $1 billion with cash flow.

And in Vista will.

Be out there I think talking to you guys about their own 2020 cash flow projections when when they get closer so I don't want to kind of speak for them, but I think you can kind of pencil in that GE of call. It a billion.

Well, let in just the talking about 2020 cash flow when that when they when they talk to guess later today.

Okay, Great details really appreciate the time here. Thanks.

Your next question comes from the line Damn Piira, Brandon with Us Bank.

Thank you.

Great. So maybe a question just on.

Q3, Q4, Tom I think you mentioned a few times.

Maybe a little bit a timing benefit or timing push out and obviously with the size of Don I'm sure. There's always lots of small shifts, but just wanted to understand was there more pronounced timing benefit this quarter and maybe could you just help US then think about bill implicit in your fourth quarter Guide how do we think about kind of life science diagnostics and kind of Eas.

Sure again.

Yes, I think perhaps.

The little bit a timing issue between Q3 in Q4 here.

And on the margin would have been a little bit more pronounced than what we've seen but I think if you look at the fundamentals underneath each one of the platforms life science diagnostics and Eas.

Each one of them continued to perform quite well again, our exposure to the macro environment is.

You know somewhat limited in the sense of being a good proxy for a for in industrial slowdown.

Don't have a lot of industrial exposure left and so we generally feel very good about how the overall platform will perform going through the fourth quarter and how we're set up for 2020.

Okay, Great and then and then and then you kind of touched upon my second part of the question maybe could you help us think about like maybe between your 70% recurring business and the instrument side of the house, where there you mentioned earlier in the call that theres been a pressure there from what you're seeing globally to question. We got a lot like differentiating between danaher another players in the broader tools space.

Getting softer side, how do we think about kind of your instrument kind of growth rate kind of as we look out here with PMI is being a bit weaken the global economy slowing thanks, Tom sure. So here's one sort of way to think about it.

Dan using some specific numbers you look at the third quarter.

Our consumables business was up call it 6% versus the equipment side of the houses up more like 4% and so.

Cross of business like Videojet for example, or SCIEX or possibly like a microsystems probably to name three examples of businesses, where the equipment side of the house is a higher percentage of the balance of sale than on average across the portfolio.

Great. Thank you.

Debt.

We have reached the allotted time for questions ill now turn the call back over to Matt Good teeing up for closing remarks.

Thanks, Cathy and thanks, everyone for joining us for around all day for questions.

Okay.

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