Danaher Corporation (NYSE:DHR) Q4 2022 Earnings Call Transcript

Danaher Corporation (NYSE:DHR) Q4 2022 Earnings Call Transcript January 24, 2023

Operator: Good day, everyone. 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 Fourth Quarter 2022 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there’ll be a question-and-answer session. . 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 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 February 7, 2023. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. 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 refer to results from continuing operations and relate to the fourth quarter of 2022 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 to all of you. We appreciate you joining us on the call today. Our terrific fourth quarter results rounded out another great year for Danaher. Broad-based strength across the portfolio drove nearly 10% core growth, strong earnings growth and free cash flow generation. We’re particularly pleased with the performance of our base business, which grew high single digits for the year and has now grown high single digits or better each of the last 10 quarters. Our well-rounded results this year would not have been possible without the hard work and dedication of our more than 80,000 associates. The team overcame global supply chain challenges, logistics delays, COVID-driven lockdowns and inflationary pressures to reliably support our customers.

We believe the DBS-driven execution, coupled with our proactive growth investments over the last several years contributed to meaningful market share gains in many of our businesses. Now looking to 2023 and beyond, we see a bright future ahead for Danaher. Our portfolio is made up of leading franchises of durable business models and attractive end markets that benefit from outstanding long-term secular growth drivers. We’re well positioned financially with our strong free cash flow generation and balance sheet capacity, allowing us to actively pursue strategic M&A opportunities. So this unique combination of leading businesses and financial strength all powered by the Danaher Business System differentiates us and reinforces our sustainable long-term competitive advantage.

So with that, let’s take a closer look at our full year 2022 financial results. For the full year, we delivered nearly 10% core revenue and adjusted earnings per share growth, including 8% core revenue growth in our base business. We also expanded our core operating margins by 60 basis points and generated $7.4 billion of free cash flow. Our free cash flow to net income conversion ratio exceeded 100% for the 31st consecutive year. Our strong financial results allowed us to continue our cadence of high impact growth investments throughout the year. In fact, our investments in research and development of more than $1.7 billion in 2022 enabled us to accelerate innovation across Danaher. New products such as the Leica Microsystems, Beacon, Leica Biosystems automated advanced staining platform, Bond Prime; and Hach’s Headquarter series portable meters are helping improve both human health and the environment, while enhancing our growth trajectory.

Our capital expenditures of over $1 billion included substantial investments to expand production capacity in our bioprocessing and genomics businesses. These investments have been critical to support current customer demand but they’re equally important to support the long-term growth opportunities and security of supply in these markets. With several of our customers’ biologic therapies progressing through the regulatory approval process, we anticipate the size of our bioprocessing and genomics businesses to increase meaningfully here in the coming years. Now let’s turn to our fourth quarter results in more detail. Sales were $8.4 billion, and we delivered 7.5% core revenue growth. Our base business core revenue growth was also 7.5% as our core revenue growth contribution from COVID-19 testing was neutral year-over-year.

Geographically, core revenue growth in both North America and Western Europe was approximately 10%. We saw healthy demand across our major end markets with customer activity and funding levels largely consistent with the third quarter. High-growth markets core revenue was up slightly. China grew low single digits, driven by robust demand in our life sciences instruments and acute care diagnostic businesses. However, the reopening efforts associated with the ending of zero COVID policies and subsequent increase in COVID-19 infections resulted in reduced patients and testing volumes in our clinical diagnostics business. We anticipate lower testing volumes to continue through the first quarter of 2023 before gradually recovering through the balance of the year.

Our gross profit margin for the fourth quarter was 59%, and our operating margin of 27.4% was up 100 basis points, including 105 basis points of core operating margin expansion. This strong margin performance was enabled by the disciplined cost management, productivity measures and price actions our teams implemented to help offset the impact of inflationary pressures across our business. While there continue to be supply chain disruptions and cost pressures, we saw a modest improvement in component availability again this year and this quarter. Adjusted diluted net earnings per common share of $2.87 was up 6.5% versus last year, and we also generated $2.2 billion of free cash flow in the quarter. Now before we get into the details of the quarter, I’d like to point out some updates we’ve made in our financial reporting.

Due to changes in our organization resulting from the significant growth of our Life Sciences segment over the past several years, we have separated our former Life Science segment into two new reporting segments. Cytiva and Pall Life Sciences, which include bioprocessing and our discovery and medical businesses are now reported as the biotechnology segment. Our new life sciences segment is comprised of the remainder of the businesses in our former life sciences segment. The Diagnostics and Environmental & Applied Solutions segments are unchanged. Importantly, today’s discussion reflects these changes. So now let’s take a look at our fourth quarter results across the portfolio and give you some color on what we’re seeing in our end markets today.

Reported revenue in our Biotechnology segment declined 1% and core revenue was up 4%. In bioprocessing, robust customer activity across monoclonal antibodies, cell and gene therapies and antibody drug conjugates, or ADCs, drove another quarter of more than 20% growth in non-COVID revenue. Total core growth in bioprocessing was mid-single digits for the fourth quarter as customers continue to scale back their COVID-19 vaccine and therapeutic programs. For the full year 2022, core revenue growth in bioprocessing was high single digits, which included non-COVID revenue growth of more than 20%. Looking to 2023, we expect customers to further reduce their COVID-19-related programs. Vaccination and booster rates have been significantly lower than initially anticipated and the availability of alternative therapeutics has reduced the need for monoclonal antibody-based treatment.

In light of these dynamics, we now anticipate COVID-19-related vaccine and therapeutic revenue will be approximately $150 million for the full year of 2023, down from approximately $800 million in 2022 and lower than our previous expectation of $500 million. Our non-COVID business has averaged more than 20% growth over the past two years. Given these elevated growth rates, we spent the past several weeks speaking with our customers to better understand their planning assumptions for 2023. And based on these discussions, we anticipate non-COVID bioprocessing core growth will be high single digits for the full year 2023. This includes low single-digit core growth in the first quarter as customers repurpose inventory purchased for COVID-19 vaccine and therapeutic programs to non-COVID projects.

Now there is a bright future ahead for the biologics market and our leading bioprocessing business. The number of biologic and genomic-based therapies in development and production continues to rise, and we expect to see significant industry-wide investments in research, development and production capacity well into the future. With our differentiated portfolio, which is the broadest and deepest in the industry across upstream and downstream applications, our best-in-class scientific services and extensive global reach, we’re exceptionally well positioned to support our customers as they undertake this complex life-changing work. Now moving to our Life Sciences segment. Reported revenue grew 8%, and core revenue was up 13%. Strength was broad-based across instruments and consumables with all major businesses delivering high single-digit or better core revenue growth.

Our Life Sciences instrument businesses collectively delivered double-digit base business core revenue growth, led by Leica Microsystems and Beckman Coulter Life Sciences. Demand remains solid across our major geographies and end markets, and we’re seeing good momentum in our opportunity funnels as we begin the new year. Our genomics consumables businesses had another quarter of double-digit core revenue growth, driven by strong demand for our plasmas, RNA and gene lighting and editing solutions. During the quarter, IDT strengthened its next-generation sequencing portfolio with the acquisition of Archer DX NGS assays. These assays are foundational in researching novel cancer fusions and bring new capabilities, including an enhanced bioinformatics platform to expand IDT’s suite of sequencing solutions.

Now moving to our Diagnostics segment. Reported revenue was up 3% and core revenue grew 7.5%, led by mid-teens growth at Cepheid. Radiometer grew double digits, led primarily by demand for blood gas testing in China. Leica Biosystems was also up double digits with growth across all major product lines. In our digital pathology business, we saw record placements of the GT 450, Leica’s best-in-class digital pathology slide scanner, as customers are increasingly realizing the operational and clinical benefits of digitization. In Molecular Diagnostics, core revenue across Cepheid’s non-respiratory chest menu grew more than 20% led by infectious disease testing, sexual health and hospital-acquired infections. The acceleration in growth this quarter was due in part to increased adoption of Cepheid’s non-respiratory test menu across our nearly 50,000 instruments installed base, which has doubled since 2020.

During the quarter, Cepheid expanded their competitively advantaged test menu with the launch of the Xpert Express MVP. The Express MVP rapidly diagnoses three distinct health conditions that cause overlapping vaginitis symptoms in women using a single sample. This addition to our sexual health portfolio enables physicians to quickly diagnose the patient’s infection and prescribe a targeted treatment regimen, reducing the need for multiple office visits. Now this is a great example of how bringing accurate, easy-to-use molecular testing closer to patients is improving health care outcomes and driving long-term growth at Cepheid. In respiratory testing, global PCR testing volumes continued to moderate. The demand for Cepheid’s point-of-care PCR testing remained robust.

Cepheid’s respiratory testing revenue of approximately $1.1 billion in the fourth quarter significantly exceeded our expectation of approximately $375 million. The respiratory season got off to an earlier-than-anticipated start with a high prevalence of circulating respiratory viruses, notably COVID-19, flu and RSV leading to both higher volume and a preference for our 4-in-1 test for COVID-19, Flu A&B and RSV. Now based on discussions with our customers, we believe COVID-19 will enter an endemic disease state in 2023, and as a result, expect to ship 30 million respiratory tests and generate $1.2 billion of revenue for the full year. As hospitals and health systems begin planning for their endemic testing needs, we’re increasingly seeing customers consolidate their point-of-care PCR testing platforms on to Cepheid’s GeneXpert.

Our customers’ preference for the GeneXpert for both respiratory and non-respiratory testing is a result of the significant value of the unique combination of fast, accurate lab quality results and a best-in-class workflow provide clinicians. The combination of these advantages, the broadest molecular diagnostic test menu on the market and our leading global installed base creates significant opportunities ahead for Cepheid’s point-of-care solutions. Moving to our Environmental & Applied Solutions segment. Reported revenue grew 1% and core revenue was up 5.5%. Water quality core revenue growth was high single digits and product identification was flat. At product identification, marking and coding was up slightly while packaging and color management was down low single digits.

Core revenue at Videojet was up slightly due in part to a difficult year-over-year comparison as the business grew low double digits in Q4 last year. In December, Pantone announced Viva Magenta as the 2023 Color of the Year. The color of the year and the billions of media impressions it generates solidifies Pantone’s iconic brand and was one of the drivers of high single-digit full year core revenue growth in X-Rite color standards business in 2022. In water quality, Hach delivered their third consecutive quarter of double-digit growth. ChemTreat was also up double digits in the fourth quarter, capping its 54th consecutive year of growth, a remarkable accomplishment and a testament to the team’s best-in-class execution and their commitment to continuous improvement.

During the quarter, demand for analytical chemistries and consumables remained strong across municipal and industrial end markets, but we did see a slight moderation of larger project activity at Trojan. Throughout the year, our teams and EAS did a great job leveraging the Danaher Business System to overcome supply chain challenges and manage inflationary pressures. They were at the forefront of identifying potential constraints and quickly deployed DBS tools like daily management to work with suppliers and ensure production part availability. They also use visual project management to rapidly reengineer products and to reduce our reliance on hard-to-source electronic components. Also, strong price performance helped the team expand operating profit margins by more than 80 basis points in 2022, while continuing their cadence of growth investments.

We believe this outstanding execution paired with our proactive growth investments drove market share gains and enhanced our long-term competitive advantage in both product identification and water quality. So with that color on what we’re seeing in our businesses and end markets, let’s now look ahead to our expectations for the first quarter and the full year. Beginning with the first quarter of 2023, we are updating our base business core revenue growth definition to exclude the impact of COVID-19-related testing and the impact of COVID-19 vaccine and therapeutic revenue. In the first quarter, we expect core revenue growth in our base business to be up mid-single digits. We also expect total core revenue growth to decline mid-single digits as a result of lower demand for COVID-19 testing, vaccines and therapeutics.

Additionally, we expect the first quarter adjusted operating profit margin of approximately 30%. Now for the full year 2023. We expect high single-digit core growth in our base business. And we also expect total core revenue growth to decline mid-single digits for the year as a result of lower demand for COVID-19 testing, vaccines and therapeutics. Additionally, we expect the full year adjusted operating profit margin of approximately 31%. So to wrap up, 2022 was another terrific year for Danaher. Our team successfully executed through a challenging environment to reliably support our customers and deliver outstanding financial results, all while investing for the future. As we look ahead, we believe the combination of our talented team, differentiated portfolio of businesses and strong balance sheet, all powered by the Danaher Business System, position Danaher to outperform well into the future.

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

John Bedford: Thanks, Rainer. That concludes our formal comments. Todd, we’re now ready to open up the line for questions.

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Q&A Session

Operator: We’ll take our first question from Derik De Bruin with Bank of America.

Derik De Bruin: Hey, good morning. And thank you for taking my question. So, a couple of questions to start. I guess the first one would be just on the inventory situation and sort of like how we should think about that working through and just sort of your expectations on the bioprocessing front on the non-COVID bioprocessing. Just some sense of timing. Is this a 1Q, 2Q phenomenon? Just general thoughts there.

Rainer Blair: Derik, as it relates to the inventory situation, let’s think about sort of our Q1 guide here as a starting point and the context for that. We expect for our overall guide to have a base business growth of mid-single digits, and we expect COVID testing, including now vaccine and therapeutics to have high single-digit and low double-digit headwind, giving us that decline of mid-single digits in the first quarter. Now let me come back to the base business because, of course, that’s where your question resides. And once more, we have to be clear that we have now excluded vaccine and therapeutic revenues from the base business, right? So our mid-single-digit base business is down from the comparable low double-digit core growth we saw in Q4 and most of 2022.

And that’s due mainly to bioprocessing, ex-COVID, and I want to dig into that a little bit, but also because we’re expecting lower patient volumes here in China as zero COVID policies are ended. So that’s what’s happening there in that base business in Q1. Now if we look, and we dig in a little bit deeper into bioprocessing, we anticipate that our non-COVID bioprocessing business will be low single digits, and that’s really for two reasons. One, we’re coming off of 30% growth in Q1 of 2022. But we’re also working through the inventory pockets that we spoke about that was related primarily to COVID programs. And we do expect Q1 to be an inflection point there that we work through the majority of that in Q1 and then after that, continue to see improvement.

Derik De Bruin: Got it. Okay. And I have to ask the obligatory analytical instrumentation demand, SCIEX demand coming off of some really strong growth this year. What are your sort of expectations on instruments? And I would expect you would see some slowdown in the back half of the year is embedded in your numbers.

Rainer Blair: I think that reflects our perspective. We saw low double-digit plus core growth in our instrument businesses here in 2022 and believe that we definitely took share there. And frankly our funnels are still very strong here going into the new year. But as we look to the total year, we would expect that low double-digit plus to moderate to the more normal growth of mid-single digit plus certainly towards the back end of the year.

Derik De Bruin: And what’s embedded in sort of like an overall pricing expectation just to get your sense of…

Rainer Blair: So as you know, in the fourth quarter on pricing, Derik, we came in over 400 basis points, with the teams really executing very well. And that represents roughly where we were for all of 2022. As we look forward then into 2023, we continue to expect some cost pressures there, and we’ll look to have pricing of 200 to 300 basis points, probably closer to 300 basis points.

Matthew McGrew: Derik, that’s for total Danaher, not just instruments