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.
Photo by Austin Distel on Unsplash
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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