Danaher Corporation (NYSE:DHR) Q1 2023 Earnings Call Transcript

Danaher Corporation (NYSE:DHR) Q1 2023 Earnings Call Transcript April 25, 2023

Danaher Corporation beats earnings expectations. Reported EPS is $2.36, expectations were $2.25.

Operator: My name is Ashley and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation’s First Quarter 2023 Earnings Results Conference Call. I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

John Bedford: Thank you, Ashley. Good morning, everyone and thanks for joining us on the call. With us today are Rainer 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 9, 2023. 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 relate to the first quarter of 2023 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 Rainer.

Rainer Blair: Thank you, John and good morning everyone. We appreciate you joining us on the call today. So we had a good start to the year. Our team successfully navigated a dynamic operating environment to deliver better-than-expected revenue earnings and cash flow. We are especially pleased with the strength of our base business, which grew 6% in the first quarter. Now across the portfolio, the quarter progressed largely as we anticipated. Our global supply chain has stabilized and component availability improved sequentially. Strong price realization helped offset inflationary pressures and disciplined cost management enabled us to continue our cadence of growth investments. So we believe these investments paired with DBS-driven execution contributed to market share gains in many of our businesses again this quarter.

A prime example of the power of DBS and our commitment to continuous improvement at all levels of Danaher as the CEO Kaizen, which we kicked off 2 weeks ago. With this event, our most senior leaders are joining over 700 associates at 10 of our operating companies. We are focusing on the most significant opportunities for lasting competitive advantage across our businesses, including further reducing our best-in-class lead times at Aldevron and improving resin and filter throughput in the biotechnology group. The CEO Kaizen is just another terrific opportunity for our teams to come together and drive transformative change through DBS. In fact, once we wrap up here today, I will be joining the Cytiva team at our resin facility in Uppsala, Sweden, to contribute to these efforts.

Now our results also reflect the unique positioning of Danaher’s portfolio. We just have an exceptional group of leading franchises serving attractive end markets with durable secular growth drivers. Additionally, the strength of our balance sheet provides us with the optionality to enhance our businesses both organically and through disciplined M&A. This powerful combination of our talented team, leading portfolio and strong financial position, differentiates Danaher and reinforces our sustainable long-term competitive advantage. So with that, let’s turn to our first quarter results. Sales were $7.2 billion in the first quarter and core revenue declined 4%. So as I mentioned earlier, we delivered 6% core revenue growth in our base business with three of our four reporting segments, up high single-digits or better in the quarter.

COVID-19 revenues were a headwind of approximately 10%. Geographically, core revenues in developed markets declined mid single-digits, primarily as a result of lower COVID-19 revenues. High-growth markets were up low single-digits, with a low single-digit decline in China. Results in China were better than expected driven by a quicker-than-anticipated recovery in diagnostic testing and a more favorable life science research funding environment. We expect these positive trends to continue as we move through the year. Our gross profit margin for the first quarter was 61%. Our operating margin of 25% was down 330 basis points primarily due to the impact of lower COVID volume in our biotechnology and diagnostics businesses. Adjusted diluted net earnings per common share were $2.36 and we generated $1.7 billion of free cash flow in the quarter.

Now, let’s take a closer look at our results across the portfolio and give you some color on what we are seeing in our end markets today. Reported revenue in our Biotechnology segment declined 16% and core revenue was down 13%. In bioprocessing, base business core revenue growth was in line with our expectations of low single-digits in the first quarter. Flying demand at our large customers, were primarily responsible for therapies in commercial production and later-stage clinical trials remains robust and they are steadily working through inventory they built during the pandemic. Based on our most recent customer conversations, we now expect the inventory normalization process to continue through the second half of the year. During the quarter, we also saw softer demand globally at many of our emerging biotech customers as more pronounced pressures on liquidity and funding accelerated their efforts to conserve capital leading to project delays and cancellations.

In consideration of these factors, we anticipate second quarter and full year base business core growth in bioprocessing will be largely consistent with the first quarter. That said these short-term pandemic-related dislocations have not changed our assessment of the tremendous opportunity ahead in the biologics market and for our leading bioprocessing franchise. The number of biologic and genomic medicines in development is meaningfully higher than at any point in history. In fact, there are thousands of biologic therapies currently under development, including more than 750 in Phase 3 clinical trials. With these therapies, our customers are making significant strides in addressing diseases that affect large segments of the population. For example, GLP-1s have become blockbuster treatment for obesity and diabetes and antibody drug conjugates are meaningfully improving treatment outcomes for many types of cancer.

And we are also seeing promising developments in the field of Alzheimer’s research where several novel monoclonal antibodies are nearing regulatory approval. Now to best support our customers as they pursue these life-changing breakthroughs, our biotechnology team has been accelerating investments and innovation over the last several years. Cytiva recently introduced the MabSelect VL, a new resin and ligand for bispecific antibodies and antibody fragments. The MabSelect VL’s best-in-class finding capacity and improved alkaline stability makes industrial scale purification more efficient, helping customers improve yields, decrease bioburden and reduced manufacturing costs. This is just one of the innovative solutions from our biotechnology team’s project pipeline aimed at helping customers bring more life-saving therapies to market faster and more efficiently.

Turning to our Life Sciences segment, reported revenue grew 2.5% and core revenue was up 5%, including high single-digit growth in our base business. Our Life Sciences instruments businesses collectively delivered mid single-digit core revenue growth, consistent with our expectations. Funding levels and sales funnels remained healthy across most major geographies and end markets. The demand for our advanced solutions remains strong, notably for recent innovations such as the SCIEX ZenoTOF7600 and Leica Microsystems, Mica. Our genomics consumables business had another quarter of double-digit base business core revenue growth. Robust demand for plasmids, proteins and gene writing and editing solutions was partially offset by declines in next-generation sequencing and basic research.

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During the quarter, Aldevron brought together capabilities from Cytiva and Precision Nanosystems to create a streamlined offering for the development, production and release of mRNA drug substance and drug product. This new offering will be available to customers later this year and is a great example of how we are integrating solutions from across Danaher to create differentiated offerings and deliver even greater value to our customers. Moving to our Diagnostics segment, reported revenue declined 10% and core revenue declined 7.5% with double-digit growth in our base business, offset by lower COVID-related respiratory testing volumes at CES. Our clinical diagnostics businesses collectively delivered mid single-digit core revenue growth and saw healthy market volumes globally.

At Radiometer, strong demand for blood gas testing in China drove double-digit core growth. Leica Biosystems grew mid single-digits, led by advanced staining and digital pathology. Strength across developed markets and China enabled Beckman Coulter Diagnostics to exceed expectations and deliver mid single-digit core growth. On Molecular Diagnostics, broad-based strength across Cepheid’s test menu drove more than 30% core growth in non-respiratory testing. As our customers look for ways to capitalize on the workflow advantages, the Cepheid GeneXpert delivered for COVID-related testing, they are increasingly adding additional assays from our market leading test menu. This increased menu utilization by our customers helped drive more than 50% growth in infectious disease testing in the first quarter.

We also saw good momentum for our recently introduced vaginitis panel, the Xpert Xpress MVP, which contributed to nearly 30% growth in sexual health testing. In COVID-related respiratory testing, customers continued transitioning high throughput testing to the point of care and consolidating their point-of-care PCO testing platforms onto the GeneXpert. As a result, Cepheid’s respiratory testing revenue of approximately $550 million in the quarter exceeded our expectation of $450 million. This was driven both by higher volumes and the preference for our 4-in-1 test for COVID-19, Flu A and B and RSV. We continue to expect approximately $30 million respiratory tests and $1.2 billion of revenue for the full year. Cepheid’s strong results are a testament to the significant value and unique combination of fast, accurate lab quality results and the best-in-class workflow provides clinicians.

Given Cepheid’s leading global installed base and growing adoption of the broadest molecular diagnostic test menu on the market, we are well positioned to help customers meet their testing needs and continue gaining market share for years to come. Moving to our Environmental & Applied Solutions segment, reported revenue grew 5% and core revenue was up 6.5%. Water quality core revenue grew low double-digits and product identification was up low single-digits. In water quality, Hach delivered their fourth consecutive quarter of double-digit growth, and ChemTreat was up double-digits for the eighth consecutive quarter. Strength was broad-based across both equipment and consumables, particularly in our industrial end markets. This performance highlights the resilience of the high-margin recurring revenue business model that make up water quality and the significant value our solutions provide in support of customers’ day-to-day mission-critical water operations.

At Product Identification, marking and coding was essentially flat, while packaging and color management was up low single-digits. Videojet was up low single-digits despite a difficult year-over-year comparison as the business grew high single-digits in Q1 last year. Our growth investments are driving a healthy cadence of new product innovation at Videojet. In fact, in March, the team released the 15 ADC continuous inkjet printer the industry’s first dedicated soft pigmented solution. The 15 ADC uses soft pigmented inks to print codes with consistent quality, excellent contrast and strong durability to avoid degradation and fading during production runs, helping customers reduce production downtime. So this is the first of several new product introductions Videojet has planned for the year and is a great example of how our teams are bringing impactful solutions to our customers.

In February, we announced that our environmental and applied segment will be named Veralto, when it is launched as a stand-alone company and that it will be headquartered in Waltham, Massachusetts. This is an exciting milestone for the team, and they are making considerable progress towards becoming a separately traded public company. And we remain on track for our fourth quarter 2023 separation and look forward to sharing more details in the coming months. So now let’s briefly look ahead to our expectations for the second quarter and the full year. In the second quarter, we expect core revenue in our base business to be up mid-single digits. We also expect total core revenue to decline high single digits as a result of lower demand for COVID-19 testing, vaccine and therapeutics.

Additionally, we expect a second quarter adjusted operating profit margin of approximately 26% and which reflects efforts to adjust our cost structure and capacity in response to COVID transitioning to an endemic state, particularly within our Diagnostics and Biotechnology businesses. Now turning to the full year 2023. Despite the near-term and temporary challenges within bioprocessing, we anticipate mid-single-digit core growth in our base business. We also expect total core revenue to decline high single digits for the year as a result of lower demand for COVID-19 testing vaccines and therapeutics. Additionally, we expect a full year adjusted operating profit margin of approximately 30% and which reflects the previously mentioned efforts to adjust our cost structure and capacity in response to COVID-19 transitioning to an endemic state.

So to wrap up. We’re pleased with our strong first quarter results. Our well-rounded performance is a testament to the durability and balanced positioning of our portfolio and our team’s commitment to leading and executing with the Danaher Business System. While the transition of COVID-19 from a pandemic to an endemic state is causing near-term disruption, there is no doubt that the past 3 years have helped shake Danaher into a better, stronger company. We meaningfully changed the scale of our bioprocessing business, with the addition of Cytiva and the creation of the biotechnology group and Cepheid’s expanded installed base that significantly improved their competitive advantage. We’ve also increased our cadence of innovation and strategically deployed capital through M&A, including the acquisition of Aldevron to accelerate our future growth trajectory.

So there is a bright future ahead for Danaher, the combination of our talented team, differentiated portfolio of businesses and strong balance sheet, all powered by the Danaher Business System provide us with a strong foundation to create value for many years to come. And so with that, I’ll turn the call back over to John.

John Bedford: Thank you, Rainer. That concludes our formal comments. Ashley, we are now ready for questions.

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Q&A Session

Operator: We will take our first question from Michael Ryskin with Bank of America. Please go ahead.

John Bedford: Good morning, Michael.

Michael Ryskin: Good morning. Thanks for taking the questions, guys. First, I want to start on the bioprocessing inventory challenges. You’ve been dealing with this issue for almost a full year now and you’ve had to revise your outlook lower for fiscal year ‘23 a number of times. Why is the visibility there into inventory is so challenging? And how do you know that this latest view of plus low single digits for the year is the right view and there is not further cuts going down the road?

Rainer Blair: Thanks, Michael. Look, undoubtedly, visibility has been choppy here on the way up as COVID tailwinds fueled our growth. And now as we try to drive the soft landing visibility has been impacted. And I would tell you that normally, we have visibility of 9 to 12 months that’s very solid. But it is so that in the last quarters, that has been probably more like 3 to 6 months related to a number of factors. And let me lay some of those factors out for you here, Michael. Sort of starting with the first quarter. So in the first quarter, our base business in bioprocessing grew about 100 basis points, 1%. And if you unpack the growth there, large accounts that are responsible for commercial production and later-stage clinical trials are growing at mid-single digits.

So they are burning off inventory. And I’ll come back to that. And then you have sort of emerging biotech and those companies that are more involved in discovery and earlier-stage clinical trial phases, which represent about 20% to 30% of our business and they are down mid-teens. So overall, this is what gets us to this sort of low single-digit growth view for the year. Now let me come back to the larger accounts here for just a second. We see in large biopharma that, in fact, the demand is there, the inventory is burning off, but it is slower than expected. And the reason for that is that we’re starting to see larger pharma companies as well as larger CDMOs replan and recalibrate their own production plans as they start to conserve working capital and cash.

And we saw some of that also back in 2016. So we’re seeing larger customers also look at their own finished goods, if you will, inventories and starting to adjust their production plans in order to bring those down as well. So if you then transition over to, again, emerging biotech, so the companies that are working more in discovery and earlier stage. There – we have been observing funding headwinds for, call it, since the second half of the prior year. But those funding headwinds became significantly more pronounced here in the first quarter. And so we’re seeing these accounts looking to conserve cash by prioritizing projects. We see that with lower OpEx and CapEx expenditures, also see a number of layoffs happening in that particular segment.

And that’s not just happening in the U.S. We also see that happening in China. And so we’re assuming that barring any other sort of wildcards here, that it doesn’t get significantly worse, but that this continues to play out for the remainder of the year.

Matt McGrew: Mike, it’s Matt. Maybe we could give you a little bit of kind of context around January to kind of the guide in January to where we ended up. I know Rainer sort of mentioned it, but I think it’s important to kind of think about it in the two buckets. So we’ve got the larger biotech – or the larger customers that we’ve got, most of their stuff is sort of Phase 3 clinical on market. In January, our assumption was that, that was going to be kind of, call it, high single-digit growth from those customers. So 70% or so of our customers kind of growing at 7%, 8%. And then kind of the remaining 20%, 25% of the customers, which we’re sort of referring to as emerging biotech, not everything in there is probably technically emerging, but that other piece of the customers in January, we thought that was going to kind of be about low double digits to kind of low teens growth.

And you add all that up and that would have been the high single-digit growth that we thought we were going to see here for the year. Like Rainer said, what we saw in Q1 was just, frankly, not that supportive of that kind of ramp as we think about what we would need to build in Q1 and Q2 be able to hit those types of numbers for the full year. And so if you think about what we’re looking at and seeing now in April, those large customers instead of being 7%, 8%, they have been growing still nicely, but more mid-single digits, right? And the big change here is this emerging biotech, another 20%, 25%. And instead of being up kind of mid-teens, they are actually down mid-teens and that comes back to everything that Rainer talked about with people really reprioritizing projects, conserving cash.

That happened both in the U.S. and we saw it in China as well. And I think I’d probably say it we saw modest headwinds as we entered the year. And those are just more pronounced now as we move through the quarter. So just as a – to maybe put some numbers to what Reiner said.

Rainer Blair: And then just to reiterate, to support a significant second half ramp, we would start to see that activity level increasing now and in the second quarter. And we’re just not seeing it to the degree that would support that.

Michael Ryskin: Okay. Thanks. And on the emerging biotech, just really hope to clarify. Are you seeing that softness in bioprocessing specifically or across in the life sciences segment as well? And then maybe I could transition that to a question on the instrument. You saw 5% growth or mid-single-digit growth in instruments in the first quarter. What’s your expectation for the rest of the year? Any particular pockets of weakness or strength you can call out?