Danaher Management Discusses Q3 2013 Results - Earnings Call Transcript

Danaher (DHR) Q3 2013 Earnings Call October 17, 2013 8:00 AM ET

Executives

Matt R. McGrew - Vice President of Investor Relations

H. Lawrence Culp - Chief Executive Officer, President, Director, Member of Finance Committee and Member of Executive Committee

Daniel L. Comas - Chief Financial Officer and Executive Vice President

Analysts

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Scott R. Davis - Barclays Capital, Research Division

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Nigel Coe - Morgan Stanley, Research Division

Jeffrey T. Sprague - Vertical Research Partners, LLC

Jonathan P. Groberg - Macquarie Research

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Julian Mitchell - Crédit Suisse AG, Research Division

S. Brandon Couillard - Jefferies LLC, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Ross Muken - ISI Group Inc., Research Division

Operator

Good morning. My name is Debbie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corporation Third Quarter 2013 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Matt McGrew, Vice President of Investor Relations. Mr. McGrew, you may begin your conference.

Matt R. McGrew

Good morning, everyone, and thanks for joining us. On the call today are Larry Culp, our President and Chief Executive Officer; and Dan Comas, our Executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, a slide presentation supplementing today's call, our third quarter Form 10-Q and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the Investors section of our website, www.danaher.com, under the heading Financial Information, Quarterly Earnings, and will remain available following the call.

The audio portion of this call will be archived on the Investors section of our website later today under the heading Investor Events and will remain archived until our next quarterly call. A replay of this call will also be available until October 24, 2013. The replay number is (888) 203-1112 in the U.S. and (719) 457-0820 internationally. Confirmation code is 1705356.

During the presentation, we'll describe certain of the more significant factors that impacted year-over-year performance. Please refer to the supplemental materials and our third quarter Form 10-Q for additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and accompanying presentation of earnings, revenues and other company-specific financial metrics relate to the third quarter of 2013 and relate only to the continuing operations of Danaher's business. And all references to period-to-period increases or decreases in financial metrics are year-over-year.

I'd also like to note that we may make some statements during the call that are forward-looking statements within the meaning of the federal securities law, 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. It is possible that 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, whether as a result of new information, future events and developments or otherwise.

With that, I'll turn the call over to Larry.

H. Lawrence Culp

Matt, thanks. Good morning, everyone. Another very good quarter for Danaher. Our team continues to execute well, taking advantage of the strength of our portfolio and the Danaher Business System to deliver solid core growth, margin and cash flow performance.

Revenues grew 5.5% to $4.7 billion with core revenues up 3%. Acquisitions increased revenues by 3% while currency translation decreased revenues by 0.5 point. The investments we've been making in new product development and sales and marketing initiatives, particularly the rapidly expanding digital world, are driving growth and share gains across many of our businesses. Radiometer, Leica Biosystems, ChemTreat, Gilbarco, Leica Microsystems and Videojet are among the businesses that we believe increased their relative market share this quarter.

From a geographic perspective, high-growth markets grew mid-single-digits. China delivered low single-digit growth led by our Dental, Water Quality and Life Sciences & Diagnostics platforms. Most of our industrial businesses continue to see sales declines in China. Developed markets improved sequentially from the first half of the year, while year-over-year, Japan grew mid-single-digits, the U.S. was up low single-digits and Western Europe was slightly positive.

Our gross margin was 51.9% and gross profit improved $145 million. This increase, along with our holding G&A essentially flat, allowed us to grow our combined R&D and sales and marketing investments faster than our sales growth rate. We delivered outstanding margin expansion this quarter with our core operating margin increasing 110 basis points and reported operating margin improving 30 basis points to 17.4%. Our free cash flow to net income conversion was 139% in the quarter and we're still driving towards $3 billion of free cash flow for the full year.

We remain active and optimistic on the M&A front. During the first 9 months of the year, we closed more than $850 million of acquisitions, primarily in our Environmental, Industrial Technologies and Life Sciences & Diagnostics segments. We've had a number of constructive conversations with companies across all of our growth platforms and remain confident in our ability to deploy the $8 billion of potential M&A capacity available through 2014 in a strategic yet disciplined way.

Turning to our 5 operating segments. Test & Measurement core revenues were flat as growth in our mobile tool distribution business was offset by modest declines in both our instruments and communications platforms. Both core growth -- both core and reported operating margin decreased 90 basis points, primarily due to the impact of targeted growth spending, including the expansion of our network monitoring systems for next-generation LTE networks and our DdoS security offerings for our enterprise and service provider customers. Instruments core revenues declined slightly.

At Fluke, core revenues were flat as increased demand for our industrial products in the U.S. and Western Europe was offset by pockets of weakness in certain high-growth markets. Fluke has generated more than $100 million of revenue from new products introduced since the beginning of last year, including additions to our power quality thermography and calibration lines. These new products, along with productivity and cost-reduction initiatives, helped drive more than 100 basis points of gross margin expansion in the quarter. At Tektronix, core sales declined slightly as low single-digit growth in developed markets was more than offset by weakness in our China export business where we primarily serve the technology sector.

Communications core revenues declined at a low single-digit rate as strong demand for security applications in North America and Western Europe was more than offset by a decline at our network management solutions business in the same regions. Encouragingly though, bookings were up double-digit in the quarter and we expect core growth rates to accelerate in the fourth quarter. New products introduced within the last 18 months, including Arbor's Pravail enterprise security software and Fluke Networks' TruView network performance monitoring solution, accounted for more than 25% of the total third quarter platform revenue and are steadily building momentum. During the quarter, Arbor closed the acquisition of Packetloop, a developer of big data security and forensic analytics used to provide enterprises with enhanced advanced threat detection during cyber attacks. Packetloop's capabilities complement Arbor's Pravail and Peakflow products, further extending our DdoS-centric solutions toward a broader suite of advanced threat analytics.

Turning to our Environmental segment. Revenues increased 10% with core revenues up 4.5%. The segment core operating margin improved 60 basis points with reported operating margin down 80 basis points due to the dilutive effect of recent acquisitions. Our Water Quality platform's core revenues increased at a mid-single-digit rate, in part due to an improvement in North American municipal project activity at both Hach and Trojan. Hach has now seen 3 sequential quarters of U.S. municipal spending increases. Sales in China continued to grow at a double-digit rate.

Trojan's orders were up high single-digits due to several large wastewater project wins, including the city of Chicago, one of several large U.S. cities now deploying UV technology in their treatment facilities. At ChemTreat, we continue to grow faster than the market and achieved another milestone as quarterly revenue surpassed $100 million for the first time. Gilbarco Veeder-Root's core revenues grew at a mid-single-digit rate, led by demand for our payment solutions, which grew more than 25% in the quarter due to significant customer wins in Asia and Australia.

During the quarter, we expanded our highly popular Encore product line with a new compressed natural gas dispenser, which allows us to help retailers capitalize on the growing trend toward alternative fuels while also delivering superior safety features and seamless monitoring. In the quarter, we acquired Teletrac, further building out our smart transport business. Teletrac complements the previous acquisition of Navman Wireless by providing increased access to the U.S. market and key verticals, including long-haul trucking.

Moving to Life Sciences & Diagnostics. Revenues increased 10.5% with core revenues up 6%. Core operating margin was up 285 basis points, while our reported operating margin decreased 200 -- while our reported operating margin increased 250 basis points to 14.7%. Core revenues in Diagnostics grew mid-single-digits. At Beckman Coulter Diagnostics, core revenues were up low single-digits with growth in all major product lines, particularly clinical automation and immunoassay. We've seen low single-digit core growth or better for the last 6 quarters and the business is becoming more competitive each day.

As many of you know, during the quarter, we received FDA 510(k) clearance for the Access troponin assay for use on the DxI series of immunoassay systems. This clearance marks an important milestone for our customers and the Beckman Coulter team. For the first time since 2010, Beckman can offer the troponin assay to existing and new customers in the U.S. for use on all of our immunoassay and integrated chemistry and immunoassay systems.

With both troponin approvals received and many other regulatory and quality improvements made, we're better positioned to focus on retaining existing and winning new customers and to more effectively and actively increase growth investments in the business. We've launched several significant new products in the last year, including the AU 5800 and the DxH 600, and are investing in new product development and menu expansion to boost product vitality and ultimately, drive higher organic growth rates.

Radiometer's core sales increased at a low single -- at a low double-digit rate. Sales in high-growth markets were up more than 20%, led by China, which grew in excess of 35%. AQT, our cardiac care breakthrough, also had another terrific quarter, growing more than 30%.

At Leica Biosystems, core sales increased approximately 10% as advanced staining and core histology sales both grew low double-digits. Increasingly, we are finding opportunities to provide differentiated solutions to our customers. In this quarter, we had several meaningful wins as a result of the integration of our core histology capabilities with our advanced staining solutions to simplify overall pathology laboratory workflows.

Core revenues in our Life Sciences platform grew high single-digits with solid sales in most geographies, particularly Japan, China and Western Europe. AB SCIEX core revenues grew high single-digits, led by particular strength in pharma and in applied markets. The 6500 Triple Quad continues to build momentum and has generated more than $100 million in revenue since its launch last year.

AB SCIEX continues to expand its digital capabilities with multiple new and enhanced launches this year, including its new MasterView Software, which allows the mass spectrometer to be used for routine analysis in food safety, environmental and forensic toxicology laboratories with minimal training needed for lab personnel. This is just one of the many new applications introduced this year that simplify workflows and enable greater efficiency and cost savings for our customers. Of note, today, approximately half of AB SCIEX R&D associates are dedicated to software development, with nearly 1/3 of the total R&D spend focused on these digital efforts.

Leica Microsystems core sales increased mid-teens, with sales of our confocal microscopes up more than 30%. Our SP8 modular confocal laser scanning microscope has generated over $150 million of revenue since its launch last year and continues to be very well-received. We're very proud of the fact that all 3 winners of the 2013 Nobel Prize in Physiology or Medicine cited Leica microscopes in their publications during the period in which they carried out the work that contributed to their awards. This is the third year in a row that Leica microscopes have been cited in Nobel Prize-winning work in the field of physiology or medicine. We're pleased to support such important and pioneering work.

Turning to Dental. Segment revenues increased 4.5%, while core revenues were up 3.5%. Core operating margin increased 70 basis points and reported operating margin increased 60 basis points to 16.1%. This marks the first quarter Dental segment margins have exceeded 16%, evidence of our team's ability to drive and sustain improvements.

Dental consumables core revenues grew mid-single-digits with solid demand in most geographies and product lines. In particular, we saw outstanding traction in our implant business, growing over 20%. Revenues from products introduced during the last 18 months have doubled since the first quarter, as adoption ramps for our new products, including the Lythos Digital Orthodontic Impression System and our TF Adaptive endodontic file.

KaVo core revenues increased low single-digits as double-digit growth in the U.S. was partially offset by weakness in project business in Western Europe. During the quarter, KaVo launched the DIAGNOcam, a handheld, X-ray-free digital imaging system that uses light technology instead of radiation to provide doctors with unsurpassed imaging quality.

In Industrial Technologies, total revenues increased 1%, while core revenues decreased 1%. Due to a weak top line, core operating -- or despite a weak top line, core operating margin expanded 100 basis points and reported operating margin increased 80 basis points to 22.6%. Motion core revenues declined at a high single-digit rate. However, we have seen improvements in the North American industrial automation and distribution markets.

We've also had commercial success with several new design wins, including a contract from a major material handling company for critical motion control capability worth over $15 million annually at full volume production. The team's execution on the margin front has been excellent, as operating margin increased more than 100 basis points from the first 9 months of the year. Motion continues to transition out of some of their lower-margin business, negatively impacting sales performance in the short term but positioning us for better and more profitable growth longer term.

Core revenues in our Product Identification platform were flat as mid-single-digit growth at Videojet and X-Rite was largely offset by a significant nonrepeating consumer electronics laser order last year, which created a difficult prior year comparison. We believe the investments we've made in digital marketing lead generation and in innovation at Videojet, combined with our expanding commercial DBS capabilities, continue to drive relative outperformance. We're now deploying the same lead gen growth tools to many of our other businesses.

During the quarter, Esko announced their first acquisition as part of Danaher, acquiring CAPE Systems, a software developer that specializes in packaging design, pallet optimization and truck and container loading solutions. This acquisition expands Esko's capabilities to provide an end-to-end offering to its packaging customers from packaging design all the way through to point of sale.

So to wrap up, our team continues to execute well with the Danaher Business System, delivering solid core growth, operating margin expansion and cash flow performance. We believe our new product and go-to-market investments, our continued focus on productivity and efficiency initiatives and our optimism on the acquisition front position us well for the balance of 2013 and beyond.

We are initiating fourth quarter diluted net EPS guidance of $0.91 to $0.96 and confirming our full year adjusted diluted net EPS guidance of $3.37 to $3.42. We are assuming fourth quarter 2013 core revenue growth to be in the range of 2% to 3%.

Matt R. McGrew

Thanks, Larry. That concludes the formal comments. Debbie, we're ready to take some questions.

Earnings Call Part 2:

Source: http://news.yahoo.com/danaher-management-discusses-q3-2013-155008562.html
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