Danaher Corp (DHR) 2005 Q2 法說會逐字稿

Good morning. My name is Katrina and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Second Quarter Earnings Results Conference Call.

[Operator Instructions]

Thank you. Mr. Wilson, you may begin your conference.

Good morning, everyone and thanks for joining us today. With us is Larry Culp, our President and Chief Executive Officer; Dan Comas, our Executive Vice President and Chief Financial Officer; and Pat Allender, our Executive Vice President.

I would like to point out that our earnings release and 10-Q are available on our website under the heading, Investor Events. Additionally, access to a webcast presentation supplementing today's call can be found under the same heading, Investor Events. This call will be replayed through July 30th and the audio portion will be archived on our website later today and will remain archived until our next quarterly call. The replay is number is 800-642-1687, and the confirmation code is 7083582. I will repeat this information at the end of the call for late arrivals.

I would also like to note that in order to help you understand the Company's direction, we will be making some forward-looking statements during this call, 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 related to litigation and other contingent liabilities, our ability to achieve projected efficiencies and cost reductions, sales growth and earnings, economic conditions in the end-markets we sell into, our ability to expand our business in new geographic markets, commodity costs and surcharges, competition, market demand for our new products, currency exchange rates, changes in the market for acquisitions and divestitures, regulatory approvals and our ability to consummate announced acquisitions, as well as the integration of acquired businesses.

It is possible that actual results might differ materially from any forward-looking statements that we might make today. Additional information regarding the factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our 2004 Annual Report on Form 10-K, and second quarter 2005 quarterly report on Form 10-Q.

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 News.

With that, I would like to turn the call over to Larry.

Thanks Andy and good morning, everyone. We are very pleased to report this morning that our second quarter earnings per share were $0.70, a 25% increase over last year's second quarter earnings per share of $0.56 and another record second quarter. Included in these results was a gain of approximately $0.03 per share related to the share -- related to the sale of a business, as well as the collection of our retained debt interest in a previously divested business. Excluding this gain, earnings per share for the second quarter increased 19.5% versus the same period a year ago.

Revenues for the quarter increased 19% to $1.93 billion, as revenues from existing businesses, also described as core revenues grew 5.5%. Acquisitions contributed in increase of 12% and positive currency effects contributed 1.5%. Year to date, revenues also increased 19% to $3.75 billion. Core revenues contributed almost 5%, acquisitions 12.5%, and positive currency effects contributed an increase of 1.5%.

Gross margins improved to 44.1% in the second quarter from 42.3% during the same period last year. Higher gross margins from recent acquisitions, operating leverage from higher revenues and continuing cost reductions across the corporation mitigated somewhat by costs associated with facility closures, contributed to this 180 basis point improvement. Gross margins in the first half of the year improved 170 basis points to 43.3% due primarily to these same factors.

Selling, general and administrative expenses for the second quarter were 27.9% versus 25.6% in 2004, driven largely by higher SG&A costs in our recent acquisitions, as well as additional spending in growth investments. Year to date SG&A expenses were 27.9%, an increase of 190 basis points over the first half of 2004. Operating profit for the second quarter was a record $321 million, an 18% increase over the same period a year ago.

Operating profit for the first six months of the year was $593 million, representing a 19% increase over the first half of 2004. Operating margins for the quarter were 16.6% versus 16.8% last year. Absent the dilutive effect of recently acquired businesses, primarily KaVo, operating margins improved approximately 80 basis points. Year-to-date, operating margins were 15.8% compared to 15.7% last year.

Net interest expense for the quarter was $5.1 million compared with 11.9 million for the second quarter of last year. The decrease in net interest expense is primarily due to higher interest rates on larger cash balances as well as $4.6 million of onetime interest income related to the collection of the aforementioned retained debt -- excuse me -- debt interest in a previously divested business. This 4.6 million net of tax is a portion of the previously mentioned $0.03 per share gain. As expected, our effective income tax rate for the second quarter was 27.5% versus 30% in the second quarter of 2004. This reduction is principally a reflection of the growing percentage of profitability generated by our international operations.

Net income was $229 million, a 25.5% increase over the second quarter last year. Net income for the first half of 2005 was $417 million, an increase of 27.5% over the same period last year. Operating cash flow for the first half was a record $595 million, 19% higher than the same period last year. Strong operating working capital improvement contributed more than $50 million to the year-to- date performance.

Year-to-date, capital expenditures were $57 million, representing a 32% increase over last year. We continue to expect full-year CapEx spending of approximately $150 million. Free cash flow, defined as operating cash flow less capital expenditures, was $538 million year-to-date and represents an 18% increase versus last year. Our free cash to net income conversion ratio for the first six months of 2005 was 129%, firmly on track to deliver free cash flow this year in excess of $1 billion and in excess of net income this year, which would be the 14th year in a row. Our balance sheet remains strong with the debt to total capital ratio of 21% and over $800 million in cash and cash equivalents at the end of the first half.

Turning to our reporting segments, I am pleased to announce that all three segments experienced higher organic growth as compared to the first quarter of 2005. Starting with our Professional Instrumentation segment, revenue increased 34% for the quarter, to $871 million. Revenues from existing businesses contributed 7.5%, acquisitions 24.5%, and currency gains contributed about 2%.

For the first half, revenues increased 35.5% to $1.7 billion. Revenues from existing businesses contributed 6%, acquisitions 27.5%, and currency gains 2%. Operating margin improvement initiatives for the quarter, including ongoing cost-reductions and low-cost region sourcing initiatives were more than offset by the lower operating margins of our acquired businesses.

Operating margins were 19.2% versus 19.7% last year. Without the dilutive effect of acquisitions, margins would have improved approximately 300 basis points for the quarter. For the first half, operating margins decreased 40 basis points to 18.4% compared to 2004, principally due to the same reason. Environmental revenues for the quarter improved 16.5% with revenues from existing businesses up 6%, acquisitions contributing 9%, and currency impact contributing 1.5%.

Our water quality businesses delivered another solid core growth performance for the quarter, while revenue growth at Gilbarco Veeder-Root was impacted as expected by a very strong prior year comparisons. Water quality core revenues grew at a high single digit rate in the second quarter lead by a robust performance from both our Hach Lange and Hach ultra analytics business.

Hach Lange revenues from existing businesses grew at a high single digit rate driven by growth in lab sales here in the US and process instrumentation sales in Europe and Asia. China revenues grew more than 50% over last year. Hach ultra analytics core revenues grew at a mid single digit rate, driven by strength in North America, somewhat mitigated by slower growth in Europe and in Asia.

Gilbarco Veeder-Root revenues from existing businesses improved sequentially, growing at a low single-digit rate in the quarter versus a year ago. We saw a strong performance in the US and Asia, with particular strength in our mid price point dispensers in China, up over 40% from a year ago, as well as from new products, such as our point of sales point passport, which exited June with record orders. Also during the second quarter, we completed the closure of two facilities located in the United Kingdom.

Moving to electronic test, revenues grew 22% in the quarter with revenues from existing businesses contributing 11%, acquisitions 8.5% and a favorable currency impact of 2.5%. We saw continued strength from both Fluke and Fluke Networks. Fluke's high single-digit core revenue growth was driven by strength in both the US and European industrial and electrical channels. Once again, we experienced healthy sellthrough across our key distributors, where sales of Fluke products, for example, Grainger, growing at a double-digit rate. We continue to be pleased with our sales of our thermography products, specifically the Ti30, which experienced robust double-digit growth versus the second quarter of last year.

Fluke Biomedical in the quarter realized high single-digit sales growth. In Fluke Networks core revenue for the quarter grew a nearly 20%, driven by a solid performance in North American. Our enterprise portable Network Analysis and infrastructure test product lines led the growth.

Turning to our Medical Technology platform, core revenues grew 4.5%. Please keep in mind that KaVo was acquired in the latter part of the second quarter of 2004, and as a result, had a minimal impact on second quarter core revenues. And Radiometer, a leader in critical care diagnostics, core revenues increased at a mid digit rate despite a very difficult 2004 comparison with continued strength in North America instrument placements led by our new ABL800. This strength was armored by higher growth in consumable sales, up in low teens compared to last year.

In dental, pro forma revenues improved at a mid single digit rate during the quarter. Market share gains in healthy sales in Western Europe do impart the effectiveness of our promotional activities as well as good customer acceptance of new products such as our Gentle Silence hand piece drove this performance. Cable experienced strengthened, equipment system and lab sales mitigated somewhat by softer year-over-year imaging sales.

During the quarter we finalized and began implementation of our headcount reduction plans with in the dental business. We have completed approximately 100 headcount reductions this year, with an additional 200 reductions expected to be completed by the end of this year. Savings related to this restructuring should be realized, beginning in late 2005.

Moving to Industrial Technologies, revenues increased by 14.5% for the second quarter to $750 million. Revenues from existing businesses contributed an increase of 4.5%, acquisitions contributed 8.5%, and currency gains provided an increase of 1.5%. For the first six months of 2005, revenue increased 12% to $1.4 billion. Core revenues contributed 4%, acquisitions 6.5% and currency gains resulted in an increase of 1.5%. Leverage from higher revenue and the gain related to the sale of the business were offset by lower margins of acquired businesses and incremental spending during the quarter supporting our growth initiatives.

Operating margins for the quarter were 15.3% versus 15.4% last year. For the first six months, operating margins improved 10 basis points to 14.2%. Product identification revenues improved 37% during the quarter, with core revenue contributing 10.5%, acquisitions contributing 24.5% and currency gains at 2%. Growth was driven by a double-digit performance in our Accu-Sort scanning business with Videojet improving sequentially and growing organically at a low single digit rate in the quarter.

The majority of the open sales positions have been filled, and as a result, revenues, orders and core activities are all turning positively, and we expect second half core revenues to continue the recent improvement trends. Accu-Sort core revenues were driven primarily by higher sales from postal projects with the USPS.

We continue to make progress at Wal-Mart with our high-speed RFID storing systems. Accu-Sort is currently working with both Wal-Mart and Target on RFID's rotation, tracking and controls as suppliers continue to incorporate our RFID tag application equipment in their distribution processes.

Revenues at Danaher motion grew 1% in the quarter with core revenues down 3%, acquisitions contributing to 2% and a favorable currency impact of 2%. As we mentioned previously, tougher comps and continued weakness in the semiconductor market have contributed to this performance, which is partially offset by the strength from our lift truck and Otis elevator initiatives. Flat panel display continues to gain market share with Asian OEMs, forecasting sales growth in the second half of this year, although at a somewhat slower pace than we saw last year.

Turning to the Tools and Components segment, revenues for the quarter were $311 million with core revenue contributing 4% led by the Mechanics' Hand Tool platform, which grew at 5.5%. Total revenue for the quarter decreased 2%, a result of the impact from the divestiture of Johnson Manufacturing in the fourth quarter of last year. Year-to-date, core revenue are up 4%, although overall revenues fell 2% to $622 million, again a result of the JMC divestiture.

Operation margins for the quarter were 14.9%, a decrease of 100 basis points over the prior year. The decrease was a result primarily of restructuring programs, most significantly the Tool Group facility closure in Springfield, Massachusetts, which is slated for completion in the third quarter of this year, which impacted margins by approximately 100 basis points.

Operating margins were 15%, essentially flat for the first six months versus last year. The 5.5% core revenue increase from Mechanic Hand Tools was led by Matco, our high end of mobile distribution brand, which again grew at a double-digit rate driven by increases in both the number of distributors as well as their daily purchase averages. Broad base strength across the product portfolio and a significant increase in average distributor purchases contributed to Matco's strong performance.

Our retail business with Sears grew at a low single digit rate in the second quarter. As anticipated, inventory reduction by Sears tempered the sales growth during that period. Last month, the Craftsmen Electrical initiative was announced to the electrical distributor channel here in the US. The existing Craftsmen Industrial product line will be enhanced with approximately 200 additional products, targeting electricians and end user market not previously targeted by Sears or Danaher.

Initial shipments are slated for late July and early August. Our sell-in and sell-through at Lowe's were both up double-digit in the second quarter. Craftsmen Industrial sell-through and industrial channels grew at double-digit rate during the quarter with particular strength at Bassano (ph) and NSC.

There were several acquisitions completed during the quarter, as well as one divestiture, and I'd like to review those quickly. The acquisition of LEM Instruments, announced in the fourth quarter of last year, was completed in June. This $45 million UK-based electrical measurement products manufacturer might complement our electronic test and power quality businesses through geographic expansion potential in Europe, as well as a portfolio of useful and exciting new products. In May, we acquired Danfoss Analytical Instruments from the Danfoss Group. Danfoss Analytical is a Denmark-based company with revenues of approximately $10 billion, and they will help expand our water quality offering with some important dissolved oxygen products.

As many of you know, July 1st we announced signing of a definitive agreement to acquire Leica Microsystems AG, which is headquartered in Wetzlar, Germany. Leica Microsystems is a $660 million leading global provider of high precision optical instruments and solutions for life sciences and medical applications. Leica manufactures and sells a comprehensive portfolio of laboratory microscopes, pathology diagnostic products and surgical microscope. We expect this acquisition to be the anchor of our life sciences offerings within our medical technology platform, and we're looking forward to the opportunity to work closely with the Leica team. The acquisition is subject, of course, to customary closing conditions, including regulatory approval. Our current estimate is that we expect to close this transaction in the third quarter of 2005.

Finally, in June we announced the signing of a definitive agreement to acquire Pelton & Crane, a leading manufacturer of dental treatment unit and related products. Pelton & Crane is an $80 million company based in North Carolina, and they add another strong and respected brand to our dental portfolio. Together with KaVo, they make Danaher the second-largest manufacturer of treatment units in the US. We recently received Accu-Sort approvals for this transaction. And closing is slated for this month.

The second quarter divestiture was a cell of M&M precision instruments, with annual revenues of approximately $70 million. With regard to our share buyback program, which announced last quarter, we have purchased just over 960,000 shares to date. And the average purchase price of $51.46. We're pleased with the progress that we made across the portfolio thus far in 2005. We expect second half core growth will improve somewhat over growth rates in the first half of this year. For the full year, we continue to expect core revenues to grow at a mid single-digit rate. Based on this revenue outlook and the continued progress made for our numerous initiatives, we are nearing the range of our full year earnings per share outlook. With earnings per share in the third quarter expected to be in the range of $0.66 to $0.71 and the full year to be in the range of $2.73 to $2.80, including the benefit of the $0.03 gain in the second quarter.

Thank you, Larry. We will now open it up for any questions you might have.

[Operator Instructions]

Your first question comes from Nicole Parent with CSFB.

Good morning, guys.

Good morning, Nicole.

Larry, I was just wondering, since you saw the acceleration of core growth sequentially in the second quarter, as you had indicated on the first quarter call and you mentioned, we should continue to see them improved to the balance of the year. Could you just give us a walk in terms of businesses, where we should see the biggest developments?

sure. Well I think that -- we are thrilled Nicole, with what we saw in the second quarter obviously, with an instrumentation. I did not think we've seen the full impact from the new process and some of the channel programs in the dental businesses, particularly in and around the -- the imaging product category. I think within Industrial Technologies, as I indicated all of the leading indicators are very positive.

We're pleased to see the positive organic growth and product ID, but more importantly those leading indicators would suggest we should continue to accelerate. I think Accu-Sort was slow down a bit, but I think in Videojet we should go momentum. As we've talked before, I think the cost get easier for us to motion particularly, around the tech markets that we serve. I don't think, we're necessarily hearing better news than we shared with you that's far this year intact, but we should see some pickup as we move forward. And I think Tools will certainly be positive as well again in the second half.

As we talked about, we'll get some positive benefit from the conversion of Sears, though the inventory correction adjustments provide a bit of an offset. So, I think we were pleased with what we saw in the second quarter. We certainly saw momentum build during the quarter with June showing particular strength. I think geographically, we were pleased with backdrop balance as what we saw in the US but also in Europe and Asia continue to be rock-solid and strong with emphasis on China, so I think we -- end of the second feeling doing good about weird things are, but obviously not trying here to get too far ahead of ourselves, hence the revenue comments and the earnings guidance that we provide this morning.

Great. And just one follow-on dental. You referred specifically to some promotional activity, could you just elaborate on that?

Well, we've -- I think that what we have been able to do both in Europe and in the US is just past some of the initial integration activity, which sometime you focus more frankly -- internally that been externally. And we are able now, certainly coming out of the idea the big show in Europe, to talk about the new products. We got the sales force realigned here in North America. So just a lot of good, good market activities that are underway. Obviously, we are investing ahead of the availability some of these new products and make sure we build the awareness and certainly the interest in purchasing in the second half and certainly going into '06.

Great. Thank you.

Thanks, Nicole.

Your next question comes from Deane Dray.

Thank you. Good morning.

Good morning Deane.

Could you give us an update on where you all stand across the businesses regarding the average increase prices offset raw material costs?

Good morning, Dean. This is Dan.

Hi, Dan.

Of our 5.5% core growth, about 1% in total was price. You know that was less -- not surprisingly less in the Professional Instrumentation, Industrial Technologies, but where we start -- where we hope to see it in tools we probably got close to 2% price in the second quarter, which was an acceleration of what we done in the first quarter. But in total it's about a 100 basis points.

And where do you stand in terms of the offsetting the raw material costs? Are you above parity now?

I think we are at or slightly above that right now. And the trend on that looks favorable both from the price side and on the product side.

Okay. And then Larry, very interested in your comment regarding Leica, does that represents the anchor acquisition and what should a life sciences platform. Could you expand on that comment. If you would, review those Life Science instrumentation sector as highly fragmented, its got fairly attractive growth expectations, but how do you expect to position Danaher in that market?

Dean, I think we have a similar view. It is clear now that our cards are all now faced up in medical technology. We are thrilled with what we have been able to put in motion and dental diagnostics in course of radiometer. And we have had our eye on life sciences, I think in March probably for the two reason you spoke to, the fragmented nature of the industry and the long-term growth potential.

I think that what we wanted to do is enter smartly, both in terms of the type of company that we brought in as a foundation in that regard. We also wanted obviously get in way that financially didn't represents under risk. I think with Leica Microsystems, we've been able to do just that. It is clearly a strong company and an extremely well respected brand, good share position in the stock market.

And they have demonstrated that they're a good mid single-digit growth, which I think potential with Danaher to be the foundation. As other companies like Microsystems have been force overtime. I think this is again consist -- this is a transaction rate consistent with our strategy in buying businesses with leadership position in fragmented markets. Clearly, they are going to be able to differentiate by way of their excellent technology and brand.

And frankly, we get a little bit of help, I think overtime or principally -- in cable. And again I think with respect to the transaction itself you saw a very attractive multiple to sales to gross margin, and we think that this going to be good-one for us. We have work to do, of course, but I think we are very encouraged by the reception that we have received not only in Germany but around the world. And see this as a, hopefully, a first of many steps in building a strong Life Sciences business.

And just last question, if your comment on the pricing looks reasonable in the Life Sciences side, we would expect to see more bolt-ons there, and I would say, in the water space where valuations seems to get a little bit frothy right now?

Well, there are lots of places where there is frost right now, Deane, as you know, not just water. But I think that we would be happy if Leica is the first and last Life Sciences acquisition we ever make, but that's obviously not the intent. And I think over time, you'll see us add to Leica Microsystems in a number of ways. We're very excited about this. I think the team is excited, should be a good partnership moving forward.

Thank you.

Thanks, Deane.

Your next question comes from Jeffrey Sprague with Smith Barney.

Thanks. Good morning,

Good morning, Jeff

Maybe actually just a start perhaps for Dan just a little bit of housekeeping on kind of some of the puts and takes in the numbers. Dan, can you just help us kind of sort through this $0.03, we kind of see the real estate but it sounds like some was in interest and how...

Yes, the real estate was in the first quarter. The $0.03, could really break it down to three individual cents, one being sale of MNM, which we completed to a recent corporation of private entity in the second quarter. The second, we have sold APIC transformer three years ago. And we have retained a subordinated note, was highly subordinated zero coupon. Basically a kind of quasi equity and I think we -- I think appropriately kind of reserved against it. Fortunately, things kind a worked out for the business, and we essentially collected on the note and three years of interest on the note. So we had a -- and because we have reserved against the note, we had gain on the note, as well as a collection of about, which was about a penny, and as well as collection of about 4.5 million of interest which was another penny.

So just looking at the P&L, this $8.5 million, I have got half down in -- I got an additional 4.5 down in interest expense.

That's correct. Yes. That's why our net interest income is higher.

Yes. Right. Within that...

By about that amount.

About 4.5 million?

Yes. The rest is above that.

So if I try to kind of rip all that out, is the effective tax rate on kind of the residual $0.67, 27.5?

Yes. Well, that will be best. Yes, that's the way to look at it.

Okay. And then, shifting gears, Larry, you kind of talked about sears a little bit mostly I think kind of sell-in comments, given their inventory correction. But could you give us a little color on sellthrough and if you have heard anything on kind of what might be next for some of the Kmart stores?

Yes, I guess, what I have heard Jeff is that, respect our customer's IR strategy here, they obviously aren't saying a lot about what's happening under the cover. And....

Having a conference call today, Larry?

I am sorry.

Not having a conference call today.

Well, I think what I can share with you, Jeff, is that we saw good sell-through in the quarter. I think that continues to be a positive sign for us. We obviously didn't get the full benefit on our own P&L given the inventory adjustment, and the conversion program is, I think, its clearly been refined as we get closer to the summertime; we're obviously in the summertime, stay closer to the key holiday period. I mean we really need to have to those conversions locked in for the fall to get full benefit come December, and that is a process which is underway. But in terms of getting much more specific than that, I think I'm going to defer it to the folks down at department of states.

Fair enough. And then, another question on dental. 3M had actually indicated that their business in Germany and most of the Europe was pretty weak, and obviously, it's more of a consumables business and not directly competitive. But are you seeing anything, reimbursements general activity that would ripple through to your business or anything to be concerned about?

Well, Jeff, mostly everybody that has a consumables position in Germany is going to be pointing to the reimbursement changes which took effect earlier this year as a source for real consternation and softness. We play on the other side of the fence and equipment, and interestingly, we've actually gotten off to a good start here in the first half, not only in Germany, but across Western Europe. Specific to Germany, I think we benefited from a number of the new product launches, and as we spoke earlier in the call some of the promotional investments that we've able to put in. So we're not unused to it, but we have -- we were positive in the quarter at a time when, obviously, other folks, one of which you mention, I've seen -- I think, some sporatic precipitous decline.

Okay. I'll pass the baton. Thanks.

Jeff, one -- well, this is Andy Wilson. For those of who are on the call, just wanted to make you aware on that; $0.03 gain, there is a supplemental financial schedule as part of the press release that Greg set down into the various components.

Thanks. I missed that myself.

Thanks, Jeff.

Your next question comes from John Inch with Merrill Lynch.

Hi. Thanks. Good morning.

Hi, John.

Larry, I notice the free cash conversion number at 110%, I think I had to go back to 1999 to see conversion rate that low in the second quarter. Maybe you could just talk a little bit about how mix is affecting cash conversion and how you are thinking about perhaps cash conversion -- how we should, perhaps, be thinking about it going forward?

John, I think what you see there is obviously still a very strong conversion performance. As I indicated, the way we saw the quarter play out, June was exceptionally strong. In fact, it was probably a bit better in a numbers of businesses than we anticipated. And obviously, when you cut off your quarter like that, the receivables position probably will be a little higher, consuming cash a little more than we would like to expect. But that's a timing dynamic, although we'll take the growth. We know we'll pick up the cash. We think we will still have an outstanding cash generation year, and obviously, as we indicated in the prepared the marks, this will be the 14th year in a row where free cash is north of net income.

Got it. I was just wondering is there anything in the quarter though that perhaps unduly depressed the number? I know the receivables were a bit of the use of cash, I mean anything else perhaps or could care to comment on?

I mean our first half cash tax payments were higher than last year; that's obviously in the bottom of the cash flow statement. So, there was a little bit of a drag as well. But I think that is a result of -- we haven't modified our internal numbers despite being a little higher receivable levels at the end of the Q2.

Okay. And then, going back to Deane Dray's question on Life Sciences, I mean the, I think one of the things that perhaps people have kind of raised some questions on and simply Leica's exposure to the German market and Danaher's own strategy with respect to acquisitions and future exposure to Germany. Why should we or should we not be concerned about your ability to move into Germany and DBS operations?

Well, I think the primary reason that no one should be concerned because we have done it before and we're gong to do it again. I think that what we outlined here in the prepared remarks with respect to KaVo is just another good example that we can adjust cost structures in Germany and Europe, just as we do anywhere else in the world where that's required. So I think the past is very much prologue in that regard. I am encouraged frankly having spent a good bit of the time in Europe of late, obviously in concert with the Microsystems transaction that I think the political environment, the tone in a number of our businesses is actually quite pragmatic relative to the need to make some of the types of changes that we have been making in these businesses.

I think particularly with Leica, they themselves will tell you that they're not a German business, they are International Business based in Germany, a very strong indicator for me about the potential for this business to continue to grow and change. I think a particularly interest, John, in situation at Leica is that, as you know, we bought the company from a private equity firm over there. We are not introducing change on the scale that sometimes we are in other situations in Europe or in the US where companies have operated under family ownership. This is a company that has a very sober and very pragmatic view of the world. Obviously looking forward to working with a strategic partner like Danaher.

But I think if you look across our European businesses, you look at Lange, which has been a wonderful foundation for us there in Berlin for the entire water quality effort overtime. What we have been able to do in sensors and controls really of the back of the Hengstler acquisition years ago. What we're doing in Radiometer and what we have done in the UK, what we are going to put in motion here with Microsystems. We think we know how to operate in Europe. The businesses that we buy like Leica are not European businesses; they are based in Europe, but they serve a global market. That's really why we're there.

And we see frankly better value in many instances today in Europe than we do elsewhere. So when the opportunities presents itself to buy leadership positions with critical mass in global markets that we find attractive, we have the confidence, we have the conviction, to make those best and to execute upon them. So we felt good about the investment of Microsystems. We think the early signs at KaVo suggest that was a prudent move, Radiometer as well. Obviously, I think the track record in Hengstler and Hach Lange speak for themselves.

Yes. Thanks Larry. One more just -- ITT has been making a lot of noise around its water projects wins. May be I am just wondering if you could give us an update on Trojan since you have purchased it? What kind of wins has it been experiencing and sort of how is the strategy playing out there.

John, we are not the type of company who puts a press release that in time to get an order. We could do that but I think we have chosen not to do that. If you look at what's happening at Trojan, I am very pleased with the win rate, the progress that we're making there with respect to DBS implementation. So I think we are going to see very good growth at Trojan in the second half. The pipelines, the win rates look particularly good. I still like our chances. We think all the folks at Metco the ITT business; they are a good competitor, obviously going for a lot of change off late. But, frankly, the opportunity is not to take share versus Metco. The way to think about that business, John, is that both companies, as well as some other players, really have a tremendous opportunity to push the ultraviolet technology. So, for us, we're really more interested in growing the market and getting our fair share of it, rather than engaging in some share battle with them in a smaller market.

Right. And Trojan's been growing at what kind of rate?

Trojan, I mean it's a lumpy business, John. And if you look at Trojan over the last year, the core growth is in the mid single digit range, and we would expect to see some acceleration off that run rate in the second half based on what we've seen from a backlog or from a bookings perspective.

Okay. Great, thank you, guys.

Thanks, John.

Your next question comes from Ann Duignan with Bear Stearns.

Hi. Good morning.

Good morning.

Could you just give us an update on your strategic initiatives in the different businesses and how they're progressing, and if you've had any wins with those new initiatives?

Well, I think I'll probably take the rest of the call going through the wins. I think within the Professional Instrumentation area, Ann, if I start, we're very pleased with what we've seen, particularly Fluke in the area of demography. As we've discussed before, we see that thermal imaging technology really coming down the cost curve at narrow point. We're taking that into a number of our channels with the Fluke brand to the classic Fluke user is a big opportunity for us. Again, not unlike the conversation we just had with John, it's really a market creation opportunity as opposed to a share gain.

And as we indicated in prepared remarks, we're off to an excellent start and very encouraged about what we see with respect to the backlog being built for the second half. I think within the Industrial Technologies, Ann, if I just take one; I'll speak to Videojet, we've talked before about our vision there to really broadened the product offering and leverage the world's largest sales and service infrastructure to provide a broader solution set to include other technologies beyond just continuous inkjet.

Two key technologies for us, thermal transfer relay and lasers, are both product categories where we saw exceptional double-digit growth in the quarter with good momentum, really, again, leveraging the go-to-market infrastructure that we have. So we're very pleased with what we're seeing there, and I think will continue to build that momentum given the significant investments that we've made to drive the growth with more feet on the streets, if you will, in both in sales and in service. I think within Tools and Components, certainly the Tool group opportunities around Craftsmen in the industrial channels continue to be an opportunity.

We indicated that we are in the process now of rolling out the electrical initiative. You'll recall we did -- initially, with the brand is take the product set that Sears had been targeting the industrial customer with into the industrial distribution channels that we had already been serving. We've augmented the offering with the electrical channel and the electrical customer in mind. We are rolling out here in the third quarter. That's another good opportunity for us to work with seniors to take that -- that I want to go after that craftsman brand into a channel of distribution that we serve already with Fluke to a lesser degree with Tool Group to drive more growth. So a lot of good things from where I can go on and on.

Some very interesting really stage opportunities taking shape. At Danaher, we had a review a few weeks ago. I like the product pipeline the rebuilding. We put one of our high potential executives in charge of which will, which we might call an advanced technology group there. So I don't want to run on, but a lot of good opportunities taking form. I think that helped drive this sequential improvement. It's not the core growth in the second quarter. More important, it gives us the confidence we have in our ability over the long term to demonstrate to anyone who is still asking that we can grow organically at an above average rate and will complement that with our acquisition program.

Bob, you've but -- you just answer my, the second part of my question, sorry. Your 5 to 7% long-term organic growth rate is therefore still intact?

Yes. I don't see we just delivered a quarter to net zone and we've announced a number of acquisitions for all of which I think improve the overall growth trajectory of the corporation. That's plus I think the skills we continue to build in innovation and growth as we broadened the scope of DBS, I think it all bodes very well for us to be in above average organic growth company. We wanted the quality growth of course so we get cash. So we put that cash to work in acquisitions to 4 to 5 competitor's position. So we just keep -- just keep moving on. So long way of saying that no change in that outlook again.

Okay, thank you.

You bet. Thank you.

Your next question comes from Ajit Pai with Thomas Weisel Partners.

Good morning.

Good morning.

Good morning.

In terms of geography, I know your company has become much more international now than it used to be five years ago, the percentage of your business mix and sales. Could you give us some color as to what you are seeing in some of your key end markets right now like Europe and China particularly and relative to the beginning of the quarter in those markets broadly whether things have been better or worse?

I would say that if we start in Asia, where we obviously saw the best performance as was in China. I think China was just strong. There were a couple of areas where the business accelerated at the end of the quarter, but on balance, China was again a strong performer for us. The rest of the region, Japan for us has been sluggish quite frankly, I think it has been for some other folks. In Europe, I think we saw some sluggishness early in the quarter. We saw good acceleration. In fact, in many case, it probably surprise ourselves in a couple of areas in June. So good performance in Europe, particularly against the backdrop, obviously, from a map indicators which indicate some sluggishness in some key countries like Germany, Italy and France.

And looking at Latin America right now, is that an area that you are paying close attention to? You're much more focused on Europe and most of the acquisitions right now been more European and sort of growth has been targeted in Asia? Is that something you're looking at?

I would say that at this point from an organic, potential from an organic investment view, Latin America does rate behind Asia and Europe at Danaher. From an acquisition perspective, quite frankly, we currently have very few targets on our list that are headquartered in Latin America. We aren't necessarily happy about that. I think we just find the good entry points leveled on the bolt-on for the types of businesses that we're to be primarily headquartered in the US and in Europe, and to a lesser degree Asia, to a much lesser degree than in term in Latin America.

And the last question would be about commodity prices. Over the past three to four months, we've actually seen some relief in certain key commodities. Could you give us some color as to, what your set of sourcing strategy over there and when some of this benefits might come through in your cost structure?

Sure. I think that - perhaps try to get this answer to Deane but we have seen some reduction in commodity prices. It varies by area, a little bit of offset with higher petroleum pricing and shipping expenses. But net-net I mean it's probably been a slight negative in the first half, but as we catch up, as we talked about some price increases and I think they trend downwards as well as some sourcing opportunities that you mentioned that we are taking advantage of and have increased our LCR sourcing here in a first six month of the year. So we think it's going to be actually kind of slight positive here in the second half.

But you're not locked into any pricing for extended period of time as far as steel and some of the other items go?

By and large, our businesses do not go into forward contract. I mean there is some exceptions for instance specific materials, but it's a small component.

Well, thank you so much gentlemen and congratulations on a solid quarter.

Thank you.

Your next question comes from Richard Eastman with Robert W. Baird.

Good Morning.

Good morning, Rick.

Just a couple questions surrounding the product ID business. And Larry, we have been through this multi month process here of reorganizing the sales structure. Have we -- could you just give us a little bit of insight into that process. It sounds like we are at the tail end of that. Did we consolidate the various sales organizations between Videojet, Altec, Linx, Willett, or did we add bodies in each of those, or do we pull them together into more of a unified sales force?

Let me take you through that Rick. What we did fundamentally in the US and in Europe is merged the Videojet and Willett sales forces. Linx serves a different channel of distribution. So that really hasn't been part of the integration, if you will, from a go-to-market perspective. Leica and Altec, the two technology acquisitions really haven't been part of go-to-market changes. What we did, in attempting to move quickly integrate Willett and Videojet is that like in some instances end up with, if you will, territories that weren't adequately covered. Parallel with that, as I mentioned and what we were trying to do was make sure that we had field sales and service organization that could cover a much broader product line. And that obviously creates opportunity by getting there, sometimes it can be challenge, again, on a territory-by-territory basis.

Since we've gone through that process, I think what we saw in the first quarter and what is -- what have subsequently been corrected is that is we consolidated, we moved aggressively to the point where I think we ended up with quite frankly some geographies that wasn't as well covered as we would have like. I think we picked that up and in turn have been augmenting the sales and service organizations. So that we have a much, maybe we got a larger team on the field today, then we had 6 months ago, nine months ago. And in turn, we have been watching leading indicators quite close in these and these are net source to make sure that we are moving the inputs to the top line in the right way. And as I indicated we've seen progress there.

Do you foresee a similar series of steps occurring in the medical platform? Again is there an ability, some of that obviously on the demo side goes to distribution, but as, you know, with Leica, now coming into the fold with Radiometer, are there opportunities there on the direct sales side to better penetrate the market?

I would say that within dental, yes. It's not as simple as putting all those companies in one basket and going to market with one sales force. It is much more new lines -- it's frankly to more lines good at market strategy in dental than it is across ID but we will be doing some of that, we have done some of that. For instance, the integration of the KaVo and the Gendex sales forces, which I alluded to

Yes.

As you look -- if you look at Leica, if you look at Radiometer, frankly what will happen is that those businesses will maintain their better market organizations. But where we have opportunities to cooperate, not unlike what we do, say between slop in a two group in particular channels, we will do that.

Some of these businesses are perceived -- you know so many of newer businesses are perceived to have a higher technical sales component, and I'm just -- I guess what I'm getting at is there an ability to leverage that capability or are these businesses still dissimilar enough that will keep separate sales forces for the time being?

Well, I think you will suddenly keep the separate sales forces at Lieca and at Radiometer for that very reason, but I don't think that the sales process is necessarily higher tech than what we've been doing. If someone has that frame of reference -- I know you don't Rick -- but if they have that frame of reference, I think they are really comparing us to the Danaher of 1992. All of what we sell today in motion or in fluke, it's just sophisticated technical sales. So this is a -- these are types of businesses that we're quiet comfortable with. I think over time, as we have done in dental, you'll see us add to the position of life science and add to the position of diagnostics, which is where you'll get more leverage potential.

Okay. And then just a quick question for Dan. In the -- in the text here of the Q, you do flag on to the SG&A component to growth initiatives as one factor in the increase in SG&A. Can you just put a number on that roughly year-over-year to Delta? Is that more difficult to do the ...

I would have to talk offline for the business-by-business but, you know, probably the biggest relative to prices business was the additional.

Hit on the 3 to the Vidoejet business.

No, I just mean that if we look at the SG&A number in total?

Yes.

You know is it a -- what size number is the delta for growth initiatives this year versus last year?

I have to -- I can talk business to business, but I am not sure.

Okay. I understand.

I look at it and we can talk offline.

Okay. Very good, thank you.

Thanks, Rick.

Yep.

Your next question comes from Steve Tusa with JP Morgan.

Good morning.

Good morning, Steve.

I have a quick question for you on the guidance. You know looking back 10 years and kind of the seasonal trends of your business, which could use the $0.67 number this quarter as a barometer or as the starting point. You know, there is only one time in the last 10 years when your earnings for second and third quarter have actually been down. Is there some reason that you guys are incrementally concerned? There's only one time and that was in 2001 that they were actually down quarter-over-quarter. Is there some reason that you guys are being incrementally conservative or can we just kind of blow out the lower end of the range?

I think, it is -- okay, I'll take a first shot of that. Incrementally conservative of much but we did without lowering our guidance for the year but I think we are tightening the low end of the range. But we are -- we do have a dynamic with a more European businesses and I think that has some impact going forward Q3 and Q4. We kind of, tend to have more of the, kind of, the summer holiday season across Europe that have been impacted the business and it looks like you tend to have relatively stronger fourth quarters in Europe than in kind of typically US business.

Okay.

There is a little bit of a trend there because of the mix of the business that will suggest over time, relatively weaker Q3 and a stronger Q4.

Got you. And I guess, also the questions you guys were assuming your guidance some $0.3 benefit from currency this year, how does that look with their recent movement and exchange rates?

It hasn't helped. No I think that it's a slight drag.

Okay.

Going from 130 to 120, just doing the math, you know, you hurt us a couple of pennies now. They tend to be some natural offsets there, but it does hurt us and it will more hurt us in the second half. We are not obviously tempering guidance for that, though.

And then one more quick one just on the situation at Sears and Kmart. You talked in your 10-Q, little bit more cautiously than you had talked last quarter about the second half, saying that there could be further adjustments at Sears and Kmart during the second half of 2005. Is this just -- you know you are talking about just near term as the second quarter you rolls off, or is this a little more extensive than you would have thought three months ago?

Well, I think it is a fluid situation, Steve. We are just trying to share with you what we can. Again, they've asked that we not communicate for them. So they'll do that, themselves. But obviously, the offset to the growth we would expect in the second half through conversions is the inventory adjustments, and that is a process they continue to evaluate and reevaluate. So, we think, we're obviously getting closer to that being resolved, but they're working hard to bring inventories down and generate cash flow.

Great, thank you.

Thanks Steve.

Thank you, Steve.

Ladies and gentlemen, we have reached the end of the allotted time for questions. Mr. Wilson, are there any closing remarks?

Yes, just to reiterate. The replay number is 1-800-642-1687 confirmation code 708-3582 and as always there were some questions that weren't answered on this call. Dan and I would available after the call to take those. Thank you.

This concludes today's conference. You may now disconnect.