Danaher Corporation (NYSE:DHR) Q1 2024 Earnings Call Transcript

Danaher Corporation (NYSE:DHR) Q1 2024 Earnings Call Transcript April 23, 2024

Danaher Corporation misses on earnings expectations. Reported EPS is $1.45 EPS, expectations were $1.72.

Operator: Hello. My name is Todd, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation’s First Quarter 2024 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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: 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 and a note containing details of historical and anticipated future financial performance 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 & Presentations and will remain archived until our next quarterly call.

A replay of this call will also be available until May 7, 2024. 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 results from continuing operations and relate to the first quarter of 2024 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: Thanks very much, John, and good morning, everyone. We appreciate you joining us on the call today. We’re off to a good start in 2024 with our team delivering better than expected revenue, earnings and cash flow. We were especially pleased to see improving order trends in our bioprocessing business and believe we continue to gain market share at Cepheid in the quarter. Now this better than expected start to the year, paired with improving funnel and order trends further supports our full year outlook, which is unchanged from our previous guidance. Our first quarter results also reflect the unique positioning of Danaher’s portfolio today. Our businesses are well positioned in attractive end markets, all underpinned by long-term secular growth drivers with high margin, high recurring revenue business models.

Our strong free cash flow generation also positions us well to further enhance our portfolio going forward. Now it’s not just the portfolio that differentiates Danaher. It’s how we run the business using the Danaher Business System, or DBS. Our team’s commitment to executing with DBS enables us to deliver impactful new innovations to our customers and drive meaningful process improvements in our businesses, both of which are helping position Danaher for sustainable long-term performance. Now a prime example of the power of DBS is the CEO Kaizen, we kicked off just two weeks ago. During this pivotal annual event, our most senior leaders operating company presidents and thousands of associates come together to address some of our most significant opportunities for material and sustained improvements in our businesses.

In fact, just last week, I rolled up my fleet at one of our filtration manufacturing facilities in Pensacola, Florida to focus on increasing manufacturing throughput and reducing lead times. CBS is our culture, and this year’s CEO Kaizen underscores how our commitment to continuous improvement at all levels of the organization can contribute to a better customer experience, and lasting competitive advantage across our businesses. So with that, let’s take a closer look at our first quarter 2024 results. Sales were $5.8 billion in the first quarter and core revenue declined 4%. Geographically, core revenues in developed markets were down slightly with broad-based strength across diagnostics, offset by declines in biotechnology. High growth markets declined low double-digits, including a high-teens decline in China where the economic landscape remains challenging.

Our gross profit margin for the first quarter was 60%. Our adjusted operating profit margin of 30.1% was down 170 basis points as the favorable impact of cost savings initiatives was more than offset by lower volume. Adjusted diluted net earnings per common share were $1.92. We generated $1.4 billion of free cash flow in the quarter resulting in a free cash flow to net income conversion ratio of more than 130%. So now let’s take a closer look at our results across the portfolio and give you some color on what we’re seeing in our end markets today. Core revenue in our Biotechnology segment declined 17%, with Bioprocessing down high-teens, and Discovery and Medical down approximately 20%. In Bioprocessing, we had a modestly better than expected start to the year.

Orders increased mid-single digits sequentially from the fourth quarter of 2023 and our book-to-bill ratio increased to approximately 0.95. Now this is particularly encouraging as we typically see a seasonal order decline between the fourth quarter and the first quarter. In North America and Europe, our larger customers are making steady progress working through their excess inventory with many returning to their regular order patterns. We expect inventory levels that these customers have largely normalized exiting the second quarter. We are also encouraged with improvements in the overall funding environment, while we don’t expect these improvements to impact order activity in the near term, it is a positive indicator for the long-term health of the Bioprocessing market.

Now in China, demand and underlying activity levels remain weak as customers are continuing to conserve capital and prioritize programs. Now for the full year 2024, there is no change to our expectation of a low-single digit core revenue decline in our Bioprocessing business. And there’s also no change to our assumption of a gradual improvement through the year to a core revenue growth rate of high-single digits or better as we exit 2024. Despite near-term headwinds, robust underlying market trends reinforce our confidence in the health and long-term growth profile of the biologics market. Underlying demand for biologic medicines is projected to grow at a high-single digit or better rate again for the full year 2024. There is also an increasing number of therapies advancing through the development pipeline and reaching the market.

In setback, the number of new FDA approvals for biologic (ph) and genomic medicines grew more than 50% last year. These positive trends reinforce our conviction in the significant opportunity ahead in the high-single digit long-term core revenue growth trajectory for our leading bioprocessing franchise. Now we continue to make substantial investments in innovation geared towards helping our customers reduce the time and cost of biologic drug production. Cytiva’s recently released Xcellerex magnetic mixing system is a great example of how we are improving productivity and reducing risk in biologic drug manufacturing. This innovative single-use cell culture media mixer enables faster and more consistent mixing and specifically designed to prevent leaks common with other large-scale mixing systems that can lead to complete batch loss.

This also marks another significant milestone for Cytiva as the first new product release to be developed, leveraging the capabilities of our recently combined Pall Life Sciences and Cytiva R&D team. Now let’s turn to our Life Science segment, where core revenue decreased by 3%. Core revenue in our Life Sciences instruments businesses collectively declined mid-single digits with trends in the first quarter, largely consistent with what we saw in the second half of 2023. In developed markets, pharma and biotech activity remained stable, but at lower levels of demand. We did see improving funnel activity as the quarter progressed, but this increased activity has not yet translated to orders. Academic and applied markets performed comparatively better, particularly for our more advanced instrumentation.

In China, the [indiscernible] were driven by difficult comparisons as a result of the prior year stimulus programs and lower demand as a result of weaker underlying activity levels. Our genomics consumables business delivered low-single digit core revenue growth in the quarter, double-digit growth across plasmids and protein was partially offset by declines in next-generation sequencing and gene writing and editing solutions. While current end market conditions remain challenging, our Life Sciences businesses are well positioned for the long term. A combination of investments in innovation and strategic acquisitions over the last several years has increased our exposure to attractive end markets in Life Sciences and accelerated our growth trajectory.

Additionally, with high-margin recurring revenue now comprising more than 60% of the segment, we see opportunities for future margin improvement. Let’s move to our Diagnostics segment, where our core revenue increased by 7.5%. Our clinical diagnostics businesses collectively delivered mid-single digit core revenue growth. Beckman Coulter Diagnostics was up mid-single digits for the fifth consecutive quarter with solid growth in both instruments and consumables. Segment’s recent strong performance is a direct result of leveraging the Danaher Business System to improve both innovation and commercial execution, new product introductions over the last few years, including the DxI 9000 immunoassay analyzer, the DxC 500 chemistry analyzer and the DxA 5000 Fit automation system have expanded our offerings and improved Beckman’s competitive positioning.

We’re also seeing better win and retention rates across the portfolio. At Leica Biosystems, the Aperio GT450 DX digital pathology slide scanner recently received FDA 510(k) clearance. Now with this significant milestone, the GT450 can now be more widely used in pathology labs, moving digital pathology one step closer to becoming the standard of care for clinicians. Digital pathology provides many benefits to clinicians, including improving analytical capabilities through predictive algorithms, enhancing slide imaging and increasing productivity. All of which help provide a more accurate and timely diagnosis of patients. So this clearance also highlights how proprietary innovation is driving long-term core growth at Leica. In Molecular Diagnostics, Cepheid’s core revenue increased double-digits.

And as I mentioned earlier, we believe the team continued to gain market share during the quarter. Cepheid’s respiratory revenue of approximately $675 million in the quarter exceeded our expectation of $575 million, driven by both higher volumes and a favorable mix of our four-in-one test for COVID-19, Flu A, Flu B and RSV. Now based on current global trends and respiratory infection rates, we continue to expect respiratory revenue of approximately $1.6 billion for the full year of 2024. Cepheid’s installed base continued to grow in the quarter to over 55,000 systems globally, a more than three-fold increase since 2019. The team’s thoughtful approach to placing systems that customers with clinical use cases beyond the pandemic has continued to drive increased menu adoption and utilization.

We’re seeing this today through growth rates in assays such as Group A, stress and sexual health, which were each up more than 40% in the first quarter. We’re also seeing customers return to testing protocols that were suspended during the pandemic, which helped drive mid-teens growth in hospital acquired infection assays. Now in January, Cepheid received expanded FDA clearance with a CLIA waiver for the expert Xpress MVP test, which is the latest addition to our growing women’s health portfolio. With the addition of the CLIA waiver, Cepheid’s customers can now provide critical testing in care settings that are more easily accessible to patients, like a physician’s office or a local clinic, reducing the need for multiple office visits and significantly narrowing the tested treatment gaps often associated with therapeutic failure.

This is a great example of how bringing accurate, easy-to-use molecular testing closer to patients is improving treatment outcomes and driving long-term growth at Cepheid. So now let’s briefly look ahead at expectations for the second quarter and the full year 2024. In the second quarter, we expect core revenue to decline in the mid-single digit percent range. Additionally, we expect a second quarter adjusted operating profit margin of approximately 26%. For the full year 2024, there is no change to our previous guidance. As a reminder, we anticipate a core revenue decline in the low-single digit percent range and a full year adjusted operating profit margin of approximately 29%. So to wrap up, we’re pleased to deliver first quarter results ahead of our expectations and look forward to building on this momentum as we move through the year.

Our team’s commitment to innovating and executing with DBS is driving meaningful improvements in our businesses and enabling us to deliver more breakthrough solutions to our customers. So there’s a bright future ahead for Danaher. The transformation in our portfolio paired with our organic growth investments has created a lineup of outstanding franchises that are all well positioned in highly attractive end markets. We are a focused Life Science and diagnostics leader positioned for higher long-term growth, expanded margins and stronger cash flow. So we believe this unique combination of our incredibly talented team, the strength and differentiation of our portfolio, and leading financial profile provides us with a strong foundation to create sustainable, long-term shareholder value.

And so with that, I’ll turn the call back over to John.

John Bedford: Thank you, Rainer. That concludes our formal comments. Operator, we’re now ready for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question will come from Jack Meehan with Nephron Research. Please go ahead.

Jack Meehan: Thank you. Good morning. I wanted to focus on the bioprocessing business here. So orders to start the year bucking seasonal trend in a positive way. Rainer, can you unpack for us what do you think is driving that? Any commentary across customer types, like, pharma versus CDMO? And any comments on cancellation trends would be great.

Rainer Blair: Good morning, Jack, and thanks for the question. Maybe we start off with Q1 and what we’re seeing today. So as we talked about from a revenue perspective, we had a modestly better than expected start to the year. And looking at orders, we grew mid-single digits sequentially and typically order decline from Q4 to Q1, so that’s encouraging. And our book-to-bill increased to approximately 0.95, which was right in the middle of our expected range, Jack. So — we’ve also gotten some questions here regarding recurring versus equipment orders and sales. I thought I’d talk about that for a minute. And I’d characterize both our equipment and recurring orders and revenues as in line with our expectations. Our recurring business was better than equipment growth in both orders and revenue, and grew sequentially versus the fourth quarter.

And our equipment was down sequentially versus the fourth quarter and while we saw some modest headwinds, those were as we expected. So there’s really no new news here. Geographically, our larger customers in North America, Western Europe are increasingly returning to pre-pandemic ordering patterns. So we continue to expect destocking to be largely behind us as we enter the second half of the year. Now while the emerging biotech funding environment is improving, we’re not yet seeing it translate into orders, so early days, but helpful. Moving on to China. Demand and underlying activity levels remain weak. So if you put it all together, the first quarter was an encouraging start to the year. As we look ahead to the second quarter and the rest of the year, there’s really no change to how we’re thinking about the full year.

We expect the first half to be down mid-teens. As we talked about in January, we continue to believe we’ll exit the year with high-single digits or better core revenue growth.

Matthew McGrew: And Jack, as far as cancellations goes, I know you brought that up. So I would say that during the quarter, like, Rainer said, the book-to-bill was kind of 0.95-ish right around there. It wouldn’t have been much different. Cancellations really were pretty minimal here this quarter, which I think is another sort of positive sign. I mean, I think, we saw the last several quarters, they were much, much bigger than they were here in the quarter, so a little bit of a tailwind there as well.

Jack Meehan: Excellent. And another bioprocessing question, as we get back to the new normal or I guess, what is the new normal here? Everybody is trying to compare and contrast your commentary versus others. I was curious how you see competitive dynamics shifting at all in the industry. Just if you think back over the last couple of years, there is this narrative that second-tier players were picking up some share when Cytiva and others were out of stock. I’m curious, if there’s anything you would call out in that regard that you’re seeing?

Rainer Blair: Jack, I really wouldn’t. I would tell you that through the acquisition of the GE Biopharma business and now bringing Pall Life Sciences and that business together in Cytiva, we really feel like we have a very strong bioprocessing franchise. And we continue with the Kaizen mantra, the continuous improvement mantra to improve what we do every day. And so we believe that we have a highly competitive franchise, and that will not only continue to be this case, but increasingly so as we move through the year and the near future.

Jack Meehan: Appreciate it. Thank you.

Operator: Thank you. Our next question comes from Michael Ryskin with Bank of America. Please go ahead.

Michael Ryskin: Hey. Thanks for taking the question, guys and congrats on the strong print (ph). I’m going to ask one follow-up on bioprocess, and then I’ll move on from that topic. So just to start, I mean, Rainer, as you were saying, you were surprised that orders improved 4Q into 1Q and it seems like you had some positive commentary on inventories exiting the second quarter. So why aren’t you raising the bioprocess guide for the year, just given where you are sitting at the end of 1Q? Is there any additional conservatism you’re putting in or just like what are you waiting to see from the market to feel more confident than you did three months ago, just given the progress you’ve seen so far?

Rainer Blair: Thanks, Michael. Good morning. Well, I mean, like, we said, we had an encouraging start to the year, but it’s still early. There’s really no change, as you said, to our full year core revenue growth of down low-single digits. And what we’re really looking for here is, the order momentum to continue to build through the second quarter and some continued stability in the run rate consumables. And of course, longer term — with a view towards the longer term, we’d like to see equipment demand improve while that’s a small part of the business, only about 15%, of course, it’s important for the long term. And it’s good to see then the emerging biotech funding solidify, stabilize but we don’t see that materializing in orders yet. So there’s a little bit more to go here, and we think we’re properly positioned with the guide.

Michael Ryskin: Okay. I appreciate. That’s helpful. And then switching over to the margin side of things, again, really, really solid quarter. When we think about how you came in ahead in 1Q versus expectations, it seems like a combination of just overall volume, but then also mix from Cepheid and Bioprocess, I’m sure contribute. Anything we should think about as you go through the rest of the year, you’re pointing to 26% margins in the second quarter, and then 29% for the year unchanged. I mean, in terms of mix that’s leading to that or just how do we think the key pieces there?