Danaher Corp (DHR) 2003 Q1 法說會逐字稿

Good morning.

My name is Kelly and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Danaher Corporation first quarter 2003 earnings conference calm.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period.

If you would like to ask a question during this time simply press star and then number 1 on your telephone keypad.

If you would like to withdraw your question press the pound key.

Thank you.

I would like to introduce Mr. Andy Wilson Vice President of Investor Relations.

Mr. Wilson you may begin your conference.

Thanks Kelly.

Good morning everyone and thanks for joining us today.

With me is Larry Culp our President and Chief Executive Officer, as well as Patrick Allender, our Executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release and summery financials are available on our Website as well as the 10-Q for this quarter.

Our Website address is www.danaher.com.

This call will a be replayed thru Monday, April. 21st and will be archived on our website later today for two weeks.

The replay number is 706-645, 9291 with a confirmation code of 9442860.

I'll repeat this information at the end of the call for late arrivals.

I'd also like to note that in order to keep you -- to help you understand the company's direction we will be making some forward-looking statements during this call.

It's possible that our actual results might differ from those predictions that we might make today.

Durable information regarding those factors is available in our S.E.C. filings.

With respect to any non GAAP financial measures provided during the call today the accompanying information required by SEC regulation G relating to those measures can be found on our Website, www.danaher.com.

Under the section investor information.

With that I'd like to turn the call over to Larry.

Thanks Andy.

Good morning, everyone.

I'm very pleased to report that our first quarter earnings before the effect of the 2002 accounting changes improved 25%, in earnings per share increased to 65 cents per share, from last year's first quarter result of 55 cents per share.

Revenues were 19% higher than the same period a year ago, driven by acquisitions of 15%, core growth of 1%, and currency effect adding 3%.

For the quarter, gross margins improved 170 basis points, to 39.1%, from 37.4% due to the continued positive impact from the 2001 restructuring programs and the effect of cost reduction efforts in the business units acquired during 2002.

Selling, general and administrative expenses for the quarter were 25.2% of sales, an increase of 1.4% from year ago levels.

This increase is due to both additional spending to fund growth opportunities as well as the higher cost structures of newly acquired businesses.

For the quarter, operating income improved 22%, and operating margins improved 30 basis points to 14% from 13.7%.

Before acquisitions, the operating margin improvement would have been 100 basis points.

Interest expense increased from $10.9 million in the first quarter of 2002 to $11.9 million for the first quarter of 2003.

Primarily due to the impact of the Euro, U.S. dollar exchange rate on interest expense related to our Euro [Inaudible].

Interest expense increased 10% to $2.2 million for the quarter versus 2002.

As discussed on our year-end conference call, our tax rate for the first quarter of 2003 was 33.5% which is also our expected rate for at least through the second quarter forecast.

Our strong operating cash flow generation continued in the first quarter, at over two times net income or $214 million.

Free cash flow which we defined as operating cash flow less capital expenditures was $199 million or just under 200% of net income for the quarter.

CAPEX was $15 million up 20% from a year ago, and we continue to expect our CAPEX spend to approximate $100 million for this year.

As previously stated, we did not expect the rate of cash flow to net income experienced in 2002 to be maintained as business volumes increase in 2003.

However, we are clearly off to another excellent start towards achieving our 12th consecutive year of free cash flow exceeding net income.

Our balance sheet remains strong with a debt to total capital ratio of 30.5% as well as quarter end cash of marketable securities of $912 million.

We remain in an excellent position to fund an active acquisition program this year.

Moving to our business segments, process environmental controls revenues for the quarter increased over 26% year over year from $734 million to $928 million.

Core volume is up approximately 2% when compared to 2002.

Positive currency effects accounted for 4% of the year-over-year improvement with acquisitions adding 20% to the segment's revenues for the quarter.

Our environmental platform sales which represent approximately 30% of segment revenues were up 20%.

The February 2002 acquisitions of Gilbarco and Viridor represented approximately 16% of the increase.

Currency effects contributed approximately 5% with approximately 1% in core volume declines primarily due to Gilbarco, which was down nearly 20% in the U.S., 15% overall, on a pro forma basis in the quarter as a result of the geopolitical uncertainties in oil-producing regions.

North American sales weakness has been somewhat offset by international market growth, primarily in Asia, specifically China.

Veeder-Root continues to develop the China market and saw 50% growth in 2002 for the quarter.

While the recent decline in Gilbarco correlated closely to similar historical experiences due to disruptions in the Middle East, it is important to note that orders in the U.S. stabilized in March with dispenser orders equal with 2002, and to date, in April, orders are up double digit.

As previously announced we added the [Inaudible] business of Tokheim to our environmental platform late in the quarter complementing our traditional Gilbarco deal , [Veeder-Root] business with a product offering for non retail petroleum customers.

Our global water quality analytical instrumentation business experienced low single digit core growth as a result of strong European sales in both lab and profits instrumentation offsetting softness here in the U.S.

Hach new product pipeline is well positioned to deliver growth again this year.

With our new break through luminescent dissolved oxygen sensor and its related controller being launched this month, it's newest acquisition [Ott] is performing ahead of plan with strong organic growth in the hydrology market.

In the integration of orbit spear part of the Viridor acquisition and PSI to create an Ultra-Pure instrumentation business is on schedule.

In addition the acquisition of ARID a complementary product line for the [Inaudible] business, was completer during the quarter and integration will be finalized by the end of April.

Our projects in bio-terror detection in both water and air applications continue to gain traction, to coordinate and accelerate our progress here and to explore related opportunities more aggressively we are forming Hach homeland securities technology, a new unit within our environmental platform with Bob Life one of Hach's top executives assuming the president roll for this new and important business.

Turning to our motion platform which represents approximately 20% of the segment, revenues grew 45% for the quarter compared to last year, driven by acquisition growth of 32% due primarily to the acquisition of Thomson industries and strong core volume growth of 10% with remainder due to currency effects.

This core volume growth has been achieved with particular strength and share gains in European markets.

Our electrical vehicle initiative and increased direct drive sales here in the U.S.

We also continue to achieve share gains in U.S. distribution.

Our next generation of Serco motors, was on display last week on Hanover fair and that was very favorable responses.

The Thomson acquisition and restructuring continue on plan, and the cross-selling between our general purpose systems business and Thomson continues to build momentum and is now generating a run rate greater than $10 million annually.

Our electronic test platform representing slightly less than 20% of segment revenues grew 16%, due entirely to acquisition activity, as a favorable currency effect of approximately 3% was offset by core declines arising from continued soft demand at Fluke Networks.

Fluke saw flat demand with strength in Asia balancing out weakness in North America while Fluke Networks experienced high single digit declines.

Fluke enjoyed strong sell through in U.S. distribution up double digit from a year ago especially in the electrical channel with key partners like Wesco and Gray Bar as part of our electrical market break through.

This helps offset grow sell of higher end calibration equipment.

Europe was stable but flat while, China saw significant double digit growth/ in the quarter.

One of our recent acquisitions Raytek a leader in non-contact temperature measurement had an excellent quarter as did the Fluke Bio-med business where we start the health care market.

Fluke Networks while down continues to outperform in a very difficult I.T spending environment.

In the first quarter we enjoyed our first growth in nearly two years, in our infrastructure supervision product lines, led by our fiber installation tools.

We also saw strong growth in our distributed analysis products.

Turning to product identification, which represents approximately 10% of the segment, revenues increased 89%, including high single digit core volume growth.

The first quarter saw the addition of Willett as the second acquisition for the product identification platform with its $100 million revenue base, Willett adds significant ledge for the platform, with opening price point products and a leadership position in several fast-growing markets such as China, Brazil, Turkey, Russia, and Eastern Europe.

We are quite pleased with the integration progress to date as well as the management additions that accompanied the acquisition.

In fact the videos yet Willett team launched their first joint project in a ink jet printer called the 43 in the quarter.

The project based on Willett CIJ technology and incorporates several Videojet reliability features.

Among our non-platform businesses in the segment power quality continues to stabilize, with core revenues up low single digits and growth in our [GemCetra] business up comparable.

During the quarter we acquire two small product line.

The first pressure devices incorporated, a manufacturer of pressure switches, will provide a nice complementary extension of the current gems sensor pressure offering.

The second acquisition, [Inaudible] within our aerospace and defense business represents an extension of our [Inaudible] operation and will enhance our progress on various air bus programs.

These each represent about $3 million in revenues.

Operating margins for process environmental controls increased 30 basis points to 14.9%, primarily -- driven primarily by core growth and cost reduction initiatives completed in 2002.

The new acquisitions had a dilative impact on these increases, year-over-year improvement in the core businesses operating margins, approximated 150 basis points.

Switching to tools and components, revenues declined approximately 1% over the same period a year ago.

We saw modest growth in hand tool revenues, driven by increased shipments from our Asian operations.

Matco saw its first decline since the 1991 gulf war, due to a somewhat severe winter in the northeast and northwest, and timing of its annual distributors expo.

We are still taking share, however, double digit improvement versus the prior year.

We experienced a somewhat less than expected decline in our Jacobs vehicle systems business unit the after effect of the heavy duty truck pre-buy, an advance of engine emission standard changes took place in October of 2002.

Operating margins for tools and components were 12.9% or essentially flat versus 2002.

Volume related declines at Jacobs Vehicle Systems and costs associated with the startup of our new Craftsman industrial, hand loads Cobalt and task force program remediate gated by [Inaudible] improvement, Jacobs chuck resulting from restructuring programs implemented in 2001 as well as a general improvement in our tool group cost structure.

The Craftsman industrial program is well under way.

We now have nearly 40 distributors in place and we are shipping product.

Craftman industrial represent an opportunity of approximately $25 million of growth for 2003.

And additionally, the Danaher hand tool group recently received the partners in progress award recognizing the group as being one of Sears premier suppliers.

We are also now also shipping to Lowes, Cobalt and Task force products this program will generate meaningful incremental revenues in 2003 and strengthen is the made in U.S.A. brand presence across multiple brands and channels.

Looking forward to the balance of 2003, for Danaher in general, we expect volumes should stabilize.

We do not, however, see significant market growth in the near term.

As we assume the slow U.S. industrial economy of recent years will stay with us for some time.

The European markets have been somewhat more resilient of late, but do remain a concern.

As a result, we will continue to remain very tight on cost, while fully funding our best growth opportunities.

I am pleased with how the Danaher team has continued to play offense, and it is yielding results both in terms of increased tactical sales wins, share gains and continued progress with our corporate break troughs.

These are our high priority organic growth initiatives which now number 22 and represent over $600 million of annual organic growth potential.

We believe that the principal uncertainty related to the Iraq war has been effectively digested by our businesses.

And we believe incremental negative concerns specifically related to the war can now be taken off the table.

Share gain and growth programs coupled with cost reductions achieved and additional reductions possible from recent acquisitions along with the momentum of these acquisitions reinforce our comfort with the previously expressed $3.13 to $3.28 range of earnings per share for 2003.

For the second quarter, our earnings should be in the 75 cents to 80 cents range.

With that, we are now available for questions.

At this time I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone key pad.

We ask that you please limit your comments to one question, and one follow-up question.

Thank you.

Your first question comes from Nicole Pardent with Bank of America.

Good morning, guys, I was actually wondering why you noted some share gains in the U.S. distribution and motion.

Could you talk a little bit about, is that driven primarily by the sales reorganization you have there and I guess could you also provide some color on specific end market growth and contraction in motion control?

Hi, Nicole.

We can tackle both of those.

I think that what is driving the share gains in North America is really a combination of the organizational changes which you've referenced, where we have not only some new leadership, but a more integrated, more rational go-to-market structure in place.

In addition to, I think, what people are seeing from Danaher in motion, not only with the acquisitions, but also what we're doing in the factories and what we're doing in product development, I think distributors clearly see the future of this industry, and know that we are going to be a partner of choice, and I think many distributors are looking to establish that partnership with us.

And we are seeing some of the early benefits from that.

Nicole, with respect to what we're seeing in end markets, fortunately as we look at the increase, we can share with you that there was not one particular part of the business that drove the increase.

It was -- it was well spread across both products and geographies.

Clearly, in the technology end markets that we serve, it is still very tough.

We see no signs whatsoever of an up tick for later this year.

But more broadly across the industrial markets that we serve, clearly we see stability and have been the beneficiaries of the share gains we talked about a moment ago.

Great.

And then I guess just on the tools business, what was the dollar impact of the cost you absorbed related to Sears and some of the other things you mentioned?

Startup cost relative to the Sears industrial program and Lowe's program?

Exactly.

I would say in the neighborhood of one to $2 million.

Great, thank you.

Thanks Nicole.

Your next question comes from Dean Dray with Goldman Sachs.

Good morning.

If I could get more color on the announcement regarding the establishment of the homeland security business for [Hach] and be interested in hearing your plans for how you expect to develop that business.

Is this a build, a buy, a partnership, what kinds of technologies do you need to develop first?

And then could you frame that in the context of a week and a half ago we saw that interesting article in the Journal regarding the mandated plans for all water utilities to have plans in place to protect facilities and do additional testing.

So is this part of that opportunity?

Let me see if I can weave through that for you, Dean.

If I miss something come back at me.

I think what we see clearly is a tremendous opportunity across both the air and the water technologies that we have.

We are now at a point where three projects that we have been funding for some time, the postal anthrax project, the air monitoring and subway applications, and the water distribution monitoring project that we've talked about since the Salt Lake games are all continuing to gain traction.

And what we want to do is move beyond managing these [efforts are important to win enough] projects and really put them under one roof, with a dedicated team, with a dedicated leader, making sure that we maximize these opportunities.

To your other question, about where we go from here, I wouldn't begin to suggest to you that we know exactly all that we need to go or could do in this space.

That's part of the reason for the establishment of the new business.

But I would anticipate, Deane, that as we leverage the momentum and the current technology base that we have, we'll be out looking for acquisitions, we'll be out talking to technology partners, again, to be that partner of choice in this space.

Because clearly, there's a lot that we can bring, and we don't necessarily need to do it all in-house, ourselves.

With respect to the Journal article, I think as you know well, we are front and center of virtually every water safety discussion going on.

And while we won't get 90% of some of the moneys that are being discussed, all we're looking for is our unfair share.

And I think the long history that Hach has with the regulatory community, the installed base and the technology reservoir that we have, we should be able to do that as these efforts go beyond words to actual spending.

But it's still early, and we just want to be in position, should it materialize, to benefit from it.

Larry, just a quick follow-up to that.

When you talk about actual spending, have there been sales of the new water distribution monitoring system that was developed for the Olympic games?

Yes.

We actually had additional orders here in the first quarter.

And that's part of the traction I referred to earlier, Deane.

I think we're in motion now, and the establishment of the new business is really intended to accelerate that momentum.

Great, thank you.

Thank you, Deane.

Your next question comes from Jim Lucas with Montgomery.

Thanks, good morning, guys.

Good morning.

Two questions.

The first is on the breakthrough with 22 being funded currently and your comment of hoping to raise your CAPEX this year.

Can you provide a little color on where exactly you see that 100 million falling in terms of growth initiatives, or just maintenance spending, just a little bit more color?

Jim, we'll -- as you know, we'll work hard to spend that much money this year.

And I think if we look at where we're likely to spend money for the year, clearly the platforms will get a significant chunk of that investment.

We're clearly looking to fund the growth opportunities that are referenced in that roster of 22 corporate break troughs.

There are whole hosts of other smaller but just as important growth opportunities that we're funding.

Clearly, there are some IT projects that we would like to put in place this year, in motion particularly.

And there are certainly some maintenance CAPEX in there.

But I think the vast majority of the increase is really geared around investing in growth vehicles for the business.

And I think frankly, Jim, I think relative to the breakthroughs, the spending is really more in the R&D side than it really is in equipment.

The new product opportunities, the new distribution opportunities really aren't necessarily that capital-intensive.

Really, and that was really the heart of the question, that Danaher has really -- the capital intensity of the business just -- you guys have proven through DBS that it is not as prevalent as maybe some other companies, so that's why I'm trying to just get a little color of where exactly that money might be spent.

I'm looking at the plan right here, Jim.

And it's a very broad distribution.

Okay.

Really hard to point to one or two things on the parade chart if you will to say this is 80% of the increase.

The second question is, can you bring us up to speed in what you're seeing in the acquisition environment that, you know, clearly, you know, a lot of the companies would love to have the problem you have of having this balance sheet to spend right now.

But just from a valuation perspective pipeline et cetera what you're seeing out there right now?

Sure, Jim.

I don't think that the environment today is frankly materially different than what we talked about when we were together in December.

I think that the internal posture here is still one of aggressive intent.

We're talking to a lot of folks.

The pine line remains very robust.

And I don't think valuations are necessarily the likely impediment force in the near term.

So we're obviously I think of a view that we could have another record year this year, but by the sake token we may not do another deal this year.

It's just the nature of the game.

But frankly, I'd be surprised if we didn't have other announcements to talk about before the end of this calendar year.

So if you build on that last comment where valuation is not your main impediment, is there something that you're seeing out there that's preventing you?

No, I didn't mean to imply that.

Apologize if I did.

I think we're in a great time in the market cycle to be a buyer.

And with over $900 million in cash on the balance sheet, with a very strong point of view about what fits at Danaher strategically and where we can add value with DBS, we intend to be very much be out there trying to take advantage of this environment.

Okay.

Thanks a lot.

Thank you, Jim.

Your next question comes from Paul Knight with Thomas Weisel.

Hi, Larry.

How are you?

Good.

The advice you have given on Hach on the quarter, I don't think you gave guidance on the order trend in the first quarter and then tone in April.

Could you give us any there?

Yeah, I mean, we -- it was really not marketley different than what we talked about for the quarter.

At [Hoch and Longa]and certainly the tone, we were with the business last week, in fact in Loveland.

Paul, the tone was good here in the first part of the month.

But I -- frankly, I don't put a lot of weight in some of the week to week numbers, saying a business like that as I would at Matco or at Sears.

Okay.

Your next question comes from Matt Suemerville with McDonald Investments.

Hi, guys.

Hi, Matt.

Couple of questions .

You know u talked about volumes stabilizing across the majority of the Danaher businesses kind of an all inclusive thing and an given the expectation for relatively flat markets overall and also considering some of the internal things you have under way whether it be the lift trucks in motion, the things that are happening in tools, should we now be expecting Danaher to post positive organic growth for the year 2003?

I think that we've posted positive growth here in the first quarter.

We're pleased by that, Matt.

And I think that we'd certainly like to have a higher number.

But in this environment, I think we're out performing.

Our internal assumptions and obviously our public comments are geared around frankly more of the same, but not necessarily at an accelerated rate.

We clearly have some tough comps to work against, still here over the next couple of quarters, and a couple of businesses.

And we'll do that, but I think we feel good to have that about our prospects of having that organic number be a positive one, not only here in the recently completed quarter, but throughout the rest of this year.

As you know, Matt, we did sequentially improve, as year over year basis, each quarter last year.

So while not a steep hill, we do have a slightly steeper hill as we progress through the year, but we still think, you know, we're in a position to, you know, at least keep the pace that we're going right now.

Right.

I think there's a range there Matt of flattish to low single digits where we're likely going to be, barring a positive external catalyst in the markets that we serve.

Okay.

And then one follow-up, just on the Lowe's program you briefly hit on that.

Can you talk about how that transpired, in terms of how you were able to go in and get that business and whether it erases any competitive issues perhaps with Sears, and also, if you can, you know, talk about the magnitude of opportunity and which, you know, this presents you guys.

Sure.

Let me try to hit on those questions.

We're excited about the Lowe's program.

The merchandise being around these products, I think, is just top-notch.

And when you see it in the stores, Matt, hopefully you'll agree.

Basically, with the and tool program that Lowe’s had in place prior to our partnership, I think they were disappointed in the results.

And I won't get into the root causes but as they began to evaluate options, I think they were anxious to have somebody who can help bring an innovative targeted merchandising and product strategy to the stores, somebody they could do that with a differentiated brand position.

Which is where made in U.S.A. fits in.

And do that in a way on the execution side that meets their high standards.

And we were very pleased obviously that they chose us.

So I think what we have now is a product offering targeted to the Lowe's customer.

And while the DIY mechanic that would head for a Sears store on a Saturday afternoon is the target customer there at Sears, the Lowe's product as you'll see is really targeted more on a one-off project type purchase.

So it may sound like a fine segmentation but I think it's an important one, one that relates well to the Lowe's strategy, and as a result, Sears has understood all along what we're doing with Lowe's and understands frankly how that complements our own effort with them by reinforcing the strong made in U.S.A. brand promise out there and yet another channel of distribution as opposed to seeing this as a threat to their own franchise.

Matt, I think you also asked what the magnitude of the opportunity was.

Unfortunately Lowe's has been -- has requested that we not quote any numbers on that.

So while we have a pretty positive expectation, we can't quote any numbers.

Matt Summerville Okay, great, thanks a lot guys and congratulations.

Thanks Matt.

Ladies and gentlemen, that concludes the question and answer session.

Mr. Wilson, are there any closing remarks?

Sure.

I just want to remind everyone that the replay number for the call is 706-645-9291, confirmation code 9442860.

If there are -- if there is anyone out there who is not able to ask a question or would like to follow up on detail, Pat Allender and I will be available later today.

Thank you.

This concludes today's Danaher conference call.

You may now disconnect.