Danaher Corp (DHR) 2013 Q2 法說會逐字稿

Good morning, my name is Jennifer and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Danaher Corporation second-quarter 2013 earnings results conference call.

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

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

(Operator Instructions).

I would now like to turn the call over to Mr. Matt McGrew, Vice President of Investor Relations.

Mr. McGrew, you may begin.

Good morning, everyone, and thanks for joining us.

On the call today are Larry Culp, our President and Chief Executive Officer, and Dan Comas, our Executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, a slide presentation supplementing today's call, our second-quarter Form 10-Q and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the Investor section on our website, www.Danaher.com, under the heading Financial Information Quarterly Earnings and will remain available following the call.

The audio portion of this call will be archived on the Investor section of our website later today under the heading Investor Events and will remain archived until our next quarterly call.

A replay of this call will also be available until July 25, 2013.

The replay number is 888-203-1112 in the US and 719-457-0820 internationally and the confirmation code is 552-7091.

During the presentation we will describe certain of the more significant factors that impacted year-over-year performance.

Please refer to the supplemental materials in our second-quarter Form 10-Q for additional factors that impacted year-over-year performance.

All references in these remarks and the accompanying presentation to earnings revenues and other Company specific financial metrics relate only to the continuing operation of Danaher's business unless otherwise (technical difficulty).

I would also like to note that we will be making some forward -- making some statements during the call that are 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.

It is possible that actual results might differ materially from any forward-looking statements that we make.

These forward-looking statements speak only as of the date they are made and we do not assume any obligation to update any forward-looking statements whether as a result of new information, future events and developments or otherwise.

With that, I will turn the call over to Larry.

Matt, thanks.

Good morning, everyone.

In the second quarter better than anticipated core revenue growth and outstanding execution from our team led to strong earnings margin and cash flow performance.

Core revenue growth of 2.5% was slightly higher than expected led by Hach, Gilbarco, Beckman Coulter Diagnostics and our Life Sciences platform, all of which were of mid single-digits.

Investments we made in innovation and go-to-market initiatives in the high-growth markets continue to drive growth and help us capture market share.

The impact to the Danaher business system and the quality of this growth were evident in the excellent year-over-year margin improvement in the quarter.

Our gross margin improved by $140 million or 100 basis points and our core operating margin expanded 95 basis points.

As we look to the second half we intend to make additional investments aimed at share gains and margin expansion for 2014 and beyond.

So with that as a backdrop let me move to the details of the quarter.

Today we reported second-quarter diluted net earnings per share of $0.87, a 3.5% increase compared to our diluted net earnings per share a year ago, and representing another record quarter for Danaher.

Excluding a $0.03 gain recognized in the prior year period, adjusted net earnings per share increased 7.5% year over year.

Revenues increased 4% to $4.7 billion with core revenues up 2.5%.

The impact of acquisitions increased revenues by 2% while the negative impact of currency translation reduced sales by 0.5%.

From a geographic perspective high-growth markets grew high single-digits.

In particular we saw sequential improvements in Brazil and the Middle East as each region was up more than 15% year on year.

China saw low double-digit growth in the second quarter led by our Life Sciences & Diagnostics and Dental segments, which grew in excess of 20%.

In addition, our water quality platform in China grew at a double-digit rate for the second quarter in a row.

Developed markets were up slightly with the US and Japan up low single-digits and Western Europe down low single-digits.

Our gross margin increased 100 basis points year-over-year to 52.7% driven by both volume increases and prior year-over-year productivity improvements.

This significant improvement has allowed us to increase our growth investments while still delivering excellent bottom-line results.

Our reported operating margin in the second quarter was essentially flat at 17.8% while core operating margin improved 95 basis points.

The Danaher business system continued to service us well, helping to generate yet another quarter of solid cash flow performance.

Second-quarter operating cash flow was $899 million and free cash flow was $763 million.

Our free cash to net income conversion ratio for the second quarter was 124%.

We continue to find attractive bolt-on opportunities and closed over $300 million of acquisitions in the quarter focused in our Environmental and Life Sciences & Diagnostics segments.

Given our healthy balance sheet, we have more than $8 billion of potential M&A capacity available through 2014 to expand and strengthen our strategic growth platforms.

Turning to our five operating segments, Test & Measurement core revenues increased 0.5%.

Core operating margin decreased 30 basis points while our reported operating margin declined 60 basis points to 20.9%.

In our Instruments platform core revenues declined low single-digits.

Fluke's core revenues were flat with 10% growth in high-growth markets offset by weak demand in most developed markets.

However, we are encouraged by the mid single-digit growth we saw in North American Industrial Instrument during the quarter.

At Tektronix core revenues declined low single-digits with growth rates in both developed and high-growth markets improving sequentially from the first quarter.

Core revenues for our communications platform grew low single-digits led by strength in the high-growth markets, specifically the Middle East and Latin America.

Across the platform we've increased our R&D spending by approximately 15% year to date, focusing on new product development and innovation to address the expanding needs of our wireless and enterprise customers.

At Fluke Networks we unveiled the new Versiv product family designed for copper and fiber certification during network installation.

The DSX-5000 cable analyzer gives field technicians unmatched speed and efficiency in certifying performance in copper cables while the CertiFiber Pro provides the same certification capability for fiber networks.

At Arbor Networks demand for network security solutions remains very strong across all major geographies.

During the quarter we added over 50 new customers in both the enterprise and service provider markets, which include significant expansion orders at two large global financial institutions.

As a testament to Arbor's innovation and leadership in network security, they were recently named the best overall security company during the Info Products Guide awards at the RSA conference.

Turning to our Environmental segment, revenues increased 8% in the quarter with core revenues increasing 4%.

The segment core operating margin increased 70 basis points with reported operating margin essentially flat due primarily to the dilutive effect of recent acquisitions.

Our water quality platform core revenues increased at a low single-digit rate.

Hach grew mid signal-digits driven by core lab and process instrumentation and mid-teens growth in service.

We believe we are growing faster than the market.

Geographically the US was up mid single-digits in the quarter while China grew double digits driven by solid demand for drinking water projects.

During the quarter we launched several new products including a value line of electrochem products designed specifically for China.

We also unveiled the 5500sc Silica Analyzer which features predictive diagnostic software, allowing customers to avoid unplanned downtime caused by silica buildup on boilers and turbines in power gen stations.

Gilbarco Veeder-Root's core revenues grew mid single-digits led by healthy demand across all major productlines and most major geographies.

Sales in Asia and the Middle East were particularly robust driven by large customer site upgrades for dispensers and payment solutions.

We believe we are gaining share with our point-of-sale and payment products, both of which grew at mid-teens rates in the quarter.

GVR recently completed the previously announced acquisition of Automated Fuel Systems Group, a leading provider of fuel management solutions to government, fleet and mining customers in South Africa.

Moving over to Life Sciences & Diagnostics, revenues increased 5.5% with core revenues up 5%.

We saw outstanding margin performance with our core operating margin improving 180 basis points and our reported operating margin increasing 130 basis points to 14.4%.

This strong margin performance occurred even with a double-digit increase in R&D expenses at Beckman Coulter Diagnostics where we continue to ramp up our product development efforts.

The diagnostics platform continued their solid performance with mid single-digit core growth in the quarter.

At Beckman core sales increased at a mid single-digit rate with growth in all major product categories.

This quarter marks the second anniversary of the Beckman Coulter acquisition and we are exceptionally pleased with the progress that has been made by the team around the world.

We've seen low single-digit core growth or better for the last five quarters and the business is becoming more competitive each day.

Over the last eight quarters we've made significant improvements in our internal capabilities, specifically addressing on-time delivery, service and product quality through improved design to ensure that we're serving our customers well.

We've also made tremendous progress to enhance efficiency with second-quarter operating margin expanding 150 basis points year over year.

We've also made considerable progress on the regulatory front.

For example, we recently received FDA-510(k) clearance for the troponin assay for use on our Access 2 system.

This approval allows Beckman to offer troponin to new customers in the US for the first time since 2010 and marks an important milestone for our customers as well as the Beckman Coulter team.

As Beckman enters its third year with Danaher we are actively increasing growth investments in the business, particularly in R&D, to boost new product vitality and ultimately drive higher organic growth rates.

At Radiometer core sales were up at a high single-digit rate with growth in all major product lines.

High-growth markets were up more than 20% in the quarter led by China which grew about 45%.

Instrument placements were particularly strong in the quarter with blood gas up 25% and [AQT] up over 50%.

As previously announced, Radiometer closed the acquisition of HemoCue, a leader in hemoglobin and glucose point of care testing.

At Leica Biosystems sales increased at a mid single-digit rate led by advanced staining which was up low-teens in the quarter.

Most major geographies saw growth with particular strength in China which grew at a high-teens rate.

Further, our core histology business grew low single-digits year over year.

And we're pleased to report that Leica Biosystems can be found in 100% of the top 50 cancer centers in America as recently ranked by US News & World Report.

Subsequent to quarter end Leica Biosystems acquired Amsterdam-based Kreatech Diagnostics.

Along with Leica's advanced standing instruments, Kreatech's probes and reagents enable customers to detect genetic aberrations that may lead to cancer and other diseases.

Our Life Sciences platform core revenues increased at a mid single-digit rate in the quarter.

AB SCIEX core revenues were up mid single-digits led by robust growth in pharma and the applied markets, particularly Food and Environmental.

The 6500, our high-end triple-quad platform, continues to be very well received by customers globally in all major market segments and is inspected to generate more than $100 million in revenue on an annualized basis.

AB SCIEX recently launched its 3200MD CEI BD series of mass spectrometers for clinical diagnostic use in Europe.

This is an exciting achievement for AB SCIEX as the 3200MD expands their addressable market to include clinical care customers.

And we look forward to leveraging channel synergies with our diagnostics platform to help drive growth of this largely previously focused product category from the research realm.

Leica Microsystems' core revenues were up mid single-digits led by double-digit growth in China, the Middle East and Japan.

We continue to see solid demand for our confocal microscopy systems which grew over 10% in the quarter.

Demand for our SP8 modular confocal laser scanning microscope remains robust growing at a mid -- growing at a high-teens rate.

To expand our go-to-market efforts in Latin America we acquired Aotec, Leica's distribution partner for microscopy and histopathology solutions based in Sao Paulo, Brazil.

Turning to Dental, segment revenues grew 3% in the second quarter with core revenues up 2.5%.

Core operating margin increased 90 basis points while reported operating margin expanded 90 basis points to 15.3%.

Dental consumables' core revenues grew mid single-digits led by sales of professional dental consumables across most major geographies.

In addition, our implant business grew at a high-teens rate as they continue to take market share.

Kerr recently launched the Demi Ultra curing light system, the industry's first ultra capacitor powered light curing system which provides dentists with more efficient curing and eliminates the need for battery power.

Ormco's Insignia advanced smile design received the 2013 American Technology Award in health and medical technologies from the TechAmerica Foundation.

This award is presented annually to the product that most improves the delivery of health services.

KaVo's core revenues were up low single-digits driven by demand in China and other high-growth markets.

Last quarter we highlighted the new i-CAT FLX which achieves a full 3-D scan at lower radiation doses than traditional 2-D panoramic x-ray imagers.

Reception in the market has been outstanding with the FLX receiving a Best New Product Award at the Henry Schein national sales meeting and a 2013 Pride Institute award for best-in-class technology.

In Industrial Technologies total revenues increased 2% while core revenues declined 2.5% for the quarter.

Both our reported and core operating margin increased 110 basis points with our reported opening margin at 23.5%.

Our Motion business' core revenues declined at a mid-teens rate with weakness in most major verticals.

We've begun to see signs of stabilization in North American distribution which grew modestly both year-over-year and sequentially.

As evidenced by strong profit performance, Motion continues to transition out of some of their lower margin business.

This transition will continue to impact core revenues which are expected to remain negative in the second half of this year.

Core revenues for our product identification platform were up mid single-digits with solid demand from our in-line variable printing technologies as well as our packaging and color management solutions.

Sales increased across most major geographies.

Those of you who joined us last week in Chicago at our Investor Day saw firsthand the evolution of our product ID platform from our core marketing and coding businesses into a leading provider of integrated packaging solutions spanning the entire consumer packaging value chain.

I thought our team did a great job illustrating how we use strategy and DBS to establish then build and grow a strategic platform.

For those of you that weren't able to participate, I strongly encourage you to watch the replay available on our website.

At Videojet new-product introductions have been an important driver of our share gains.

In the quarter we introduced the 1620 and 1650 lines of ultra high speed printers, capable of speeds 40% faster than the previous industry benchmark with minimal planned downtime.

Also in the quarter Procter & Gamble announced their adoption of Pantone's new cloud-based color management solution, Pantone Live, which improves operational efficiency throughout the packaging supply chain.

This is the second major consumer packaged goods company to adopt Pantone Live building on early momentum in the market.

So to wrap up, we were very pleased with our second-quarter results.

Better than anticipated core revenue growth and outstanding execution led to solid operational performance.

We are initiating third-quarter diluted net earnings per share guidance of $0.78 to $0.83 which assumes 2% to 3% core revenue growth.

We are narrowing our full-year 2013 adjusted diluted net earnings per share guidance to $3.37 to $3.42 from a previous range of $3.32 to $3.47.

As we move into the second half of the year we are maintaining a conservative macro outlook while staying confident in our ability to deliver solid operating margin expansion.

We expect investments in innovation in the high-growth markets to continue to drive growth and share gains.

Our earnings outperformance in the second quarter allows us to make additional high impact growth investments and to fund productivity and efficiency initiatives that we believe will position us well for the balance of this year and beyond.

Thanks, Larry.

Jennifer, that concludes the formal comments.

We are now ready for some questions.

(Operator Instructions).

Scott Davis, Barclays Capital.

Just talk a little bit about the investments you are making or the -- I mean, Larry, can you help us understand what -- how much of this is driving growth versus restructuring and cutting costs?

I guess the question -- the obvious question here is that are you investing more money because you are seeing or thinking there is going to be a reacceleration of growth?

Or is it more focused on getting costs out ahead of continued weak, relatively weak macro environment?

Scott, I would say that operationally this is really more of the same consistent with the path we have been on in the slower growth macro environment that we're operating in today.

And frankly I think we see ourselves working through going forward.

So, there is no macro call here to suggest we see an inflection point relative to things getting materially better and hence we want to be ready for that.

I think that, as we have seen through the first half of this year, we have been well served having, in the past, positioned ourselves not only with the step up in R&D to drive new product launches, but also our step up particularly in the high-growth markets to go grab market share where we can.

And in turn, to make sure we are being smart about our cost structure; we can make those investments and drive the margin expansion and the earnings growth that you've seen.

So what we are really talking about here in terms of taking the beat and putting it back into the business, if you will, in the second half is really a combination of stepping up those growth investments both in R&D and sales and marketing as well as in those productivity efforts that you've typically seen us put through in the second half.

And we flag last year on that point -- or the end of last year that we probably had dialed in about $70 million this year in the back half to do that.

We're going to step that up here certainly as we look to the second half.

But again, it's really a balanced approach to make sure we are making the investments for share gains and margin expansion as we work our way through the second half of this year.

And as a follow up to that, Larry, when you think about the step up you've had in R&D.

you are already a fairly -- you've always been a fairly large investor in R&D, so it's not as if you under invested in the past.

But the step up in 2013 versus 2012, do you anticipate this being an ongoing trend and then you have another step up in 2014 or does this reset the bar and you kind of hold to this level versus sales longer term?

I have just a quick follow-up to that.

Just conceptually every company we cover is raising R&D as a percent of sales and I think even in the medical world that is happening.

Has this become a little bit of a tax, if you will; that it just costs more to drive incremental growth and you don't really get that much net benefit because everybody is investing more?

So it's a bit of an arms race or is there really some differentiation that you think can occur with that added investment?

Scott, this is Dan.

As we look back at Q2 we really saw the benefit across a number of the businesses and the step up in R&D.

So we talked about Hach, Gilbarco, PID, all businesses where we think we took share in the quarter.

Their new product revenues improved sequentially 50% Q1 to Q2 and we think that was a big driver of the share gains.

So I think we are seeing -- we are not seeing it everywhere, but some of this targeted step up we've made in R&D, we are seeing the payback for that.

And I think as long as we continue to see that and we are taking share our bias would be to spend more.

Sure.

That was the crux of my question, right, I mean if you can gain share it is definitely worth it.

If it's just grow in line with the market when you have to spend more, then it starts to -- industry structure starts to come into question I guess.

And, Scott, to the structural question I would just add -- I think Dan is spot on there -- that if you were in the sessions with us as we talk to the businesses, the tone is really fundamentally an offensive one.

We see opportunities to do things no one else does, we see opportunities to help a customer in a way that maybe we uniquely can and that really drives the agenda, the budget and any step up that you see.

There are really not a lot of examples where we are sitting there saying, gosh, there is catch up to be made, a tax, as you say, to be paid.

So I think that qualitatively combined with the quantitative market share impact that we are seeing suggests these are good investments for us.

But we will continue to be prudent to make sure we are getting those returns as we put this additional money in.

It looks like it is working.

So I will pass it on.

Thanks, guys, appreciate it.

Steve Tusa, JP Morgan.

Just on the second quarter, I understand that it is kind of a similar revenue seasonality if I'm kind of doing the math correct on the core as last year.

Is that right, first of all, just a sequential decline?

Yes.

Okay.

I mean last year we were down about $140 million Q2 to Q3.

We probably have become a little bit more seasonal, a little weaker in Q3, given some of the acquisitions we've done over the last couple of years.

I don't think we will be down $140 million sequentially, but maybe we are down -- call it $100 million.

Okay.

I mean, when I look at like Beckman, for example, I think if you go back historically with their business it was kind of flat to up seasonally.

And then last year I think -- I thought you had kind of the initial drop-off in some of the more cyclical businesses, as well as that Life Sciences call it, I don't know, an air pocket or whatever you want to call it on the product side.

So, I guess that is the difference between $100 million and the $140 million.

Is that -- I'm just struggling to -- this is probably -- last year was probably your biggest sequential decline, and I'm just kind of struggling to figure out what has changed here relative to 10 years of history.

Well, I think part of the history is a number of years where we have done Q2 acquisitions.

So the organic decline we've had historically over the last five years, Q2 to Q3, is larger than our printed numbers.

Got you, okay.

There's an acquisition element.

So the seasonality was more severe last year, but not -- less out of line than the numbers would suggest because of M&A.

Okay.

Is there any change in the level of restructuring this year as well, like I think you talked about the couple of pennies of investment in third quarter, but I guess just the fourth quarter?

Yes, that is what I was trying to suggest in response to Scott's question, Steve.

So we are stepping up both the growth investments and the productivity moves.

Okay, perfect.

Thanks a lot.

Shannon O'Callaghan, Nomura.

Larry, interested on the somewhat better North American industrial -- I mean you talked about the distribution piece.

Any more color on that?

I mean was it a restock or a pickup in in-demand or anything you could make out of it?

I think we flagged that both at Fluke and in Motion.

I'm not sure we are ready to extrapolate too much from that, at least at this point.

I think we were encouraged to see Fluke improve sequentially in that regard.

But I think we need to see this play out for another quarter or so to think we have got legs there.

There was some inventory movement at Motion, which is part of what we saw there.

But again, I think it is early signs, but we will see how the third quarter plays out.

And how about on the Tech side of things?

I mean any movement in either direction in terms of customers' sort of attitudes around equipment spending on that side?

No, clearly sequentially things improved.

We're still negative from a core perspective.

I think we have got the potential to be positive in the second half in large part because of the comps.

But as you know, one geography in particular that we are watching closely, particularly in T&M on the Instrument side, is China.

China has been a real struggle, particularly as the export base has struggled there.

The comps help us probably more than necessarily the underlying demand does.

But I think that combination should help us get positive there in the second half, but not wildly or overly so.

So you haven't seen any sort of significant change in behavior yet?

Not yet.

We are looking -- believe me, we are looking.

(Laughter) all right, thanks.

Nigel Coe, Morgan Stanley.

Just a couple quick follow-ons to some previous questions.

So, Dan, I think you referred to the step up in R&D.

Obviously it makes sense if you are getting a payback.

But the 40 bps in the quarter; is that indicative of the kind of step up you expect in the back half of the year?

In that range, Nigel.

Okay.

And then, Larry, the restructuring expense, you mentioned a couple of cents in 3Q.

But the 4Q -- I mean, how do we think about that?

Do you have a number in mind or is that number fungible depending on how the backup plays out?

Nigel, I think we are still a little fluid in that regard.

As Larry highlighted, we talked about $70 million in our plan in the second half.

That will be more fourth quarter than the third quarter, that is pretty typical.

But we are going to spend more than that $70 million here.

And we are still sort of figuring that out, we are trying to embed that in our guidance.

But more than $[70] million in the fourth quarter rather than the second half?

Yes -- well, it tends to be our -- it tends to be more Q4 focused, yes.

There will be some Q3 but it will be more biased to Q4.

And then switching to the performance at Beckman, obviously very encouraging to see single-digit growth so early.

Can you maybe just give a little bit more color in terms of what is driving that?

Is it a fall-off in attrition?

Are we seeing more gross adds?

Any help there would be interesting.

Nigel, it's really not any one thing, but I think the program that we have been working to improve our retention and win rates in North America, I think our step up in terms of the investments in the high growth markets, which really have been driving most of the growth at Beckman.

And certainly as we fixed the quality issues, [witness] troponin and others, but also bring on some additional new products, every little bit helps, right.

So, to see a mid single-digit quarter here isn't necessarily in any way a declaration of victory, but having been out there here in the last couple of weeks I just think we have got a lot of progress and momentum building in the commercial execution and new product development, which bodes well for the business.

But again, as you heard me say, they're still a lot of work to do.

But we are highly confident we're going to continue to improve Beckman and make that as good as any Danaher business that we have.

And how have you treated the upside of Beckman for the second half of the year?

Have you assumed that -- great quarter but let's see if it continues or have you rolled forward some of that upside in the second half of the year?

Nigel, I think we are still working with a low single-digit focus in the second half here, but clearly a little bit more encouraged given what we've seen -- not only the numbers we have printed but just the general tone of the business.

Thanks.

Steve Winoker, Sanford Bernstein.

Just -- first question, the T&M core margin decline of 30 basis points, was all of that due to operating leverage or what other -- any other dynamics in that?

Steve, really -- it's really a combination of two things.

One, as we noted, instruments is down.

Instruments is the higher margin piece of that segment, so that hurts.

And communications is an area where we are stepping up our growth investments.

Clearly not the best growth quarter they have ever registered.

But, as you know, probably one of our best growth businesses here the last couple of years with a tremendous amount of runway given their focus and mobility, their opportunities in security and certainly building up more of a position with the enterprise customer base.

So it's really the instruments volume and the R&D step up, really the OpEx step up in [comms] which creates that pinch.

Okay.

And then -- talked about Beckman a bunch.

But if you step back now two years later, how are the financials compared to your original expectations both for ROIC and accretion at this point now?

Steve, we are right on track.

Probably the revenue is a little better.

Margins are ahead of where we thought they would be, we thought we would have $250 million of cost by the end of this year; we are north of $300 million.

So a little ahead on the margin and a little bit ahead on the revenue line as well.

Okay, and maybe just a little bit of overarching commentary on any changes in the M&A environment is always helpful on these calls.

Yes, I don't think we've really seen a change, Steve, in the last 90 days.

I think we are encouraged and fundamentally optimistic about our ability to deploy the capacity that we have, the $8 billion or so that you've heard us talk about in terms of the next couple years.

Clearly valuations are up, that means we can't buy every company we might want to buy.

But that is never our MO, right?

We are looking for great fits where we can add value where we can generate a return for our shareholders.

And the silver lining in an environment like this, particularly for a strategic well-capitalized buyer like ourselves, is you can have high-quality conversations with high-quality companies.

We are doing just that.

So we continue to I think of that level of optimism, of confidence that we will smartly deploy that capital to help build out the businesses as we move forward here.

But again, not a dramatic sea change 90 days on.

Okay, thanks.

Jeff Sprague, Vertical Partners.

I am wondering if we could just try to put a little finer point on some of this incremental spending.

Dan, I guess you made it pretty clear the $70 million is in flux, you don't know where it goes.

But I guess first point -- would we be talking about it if it is only $5 million or $10 million?

No, we would not be.

So if it was $10 million $15 million more we wouldn't be talking about it.

Okay.

So maybe it is in that $90 million to $100 million range.

Okay.

And then, just trying to get my head around the incremental R&D and SG&A growth spending.

You gave the basis points in R&D to Nigel.

But relative to what you were thinking how bunch is that changing?

We heard the story of 170 new marketing people just at Videojet alone last week.

It seems like there is a lot going on.

But was that all kind of baked in the plan or is there a real increase there too?

In terms of what we are talking about for the second half there are real increases both in R&D and some on the sales and marketing side.

We have mentioned the high-growth markets, you flagged some of the marketing initiatives there as well, Jeff, that you fortunately saw in Wood Dale.

It's really a step up.

Because as we go through the year we obviously are reading and reacting, we are learning, we are developing skills and we don't want to be too static in those growth investments.

So really, when you hear us talk about dynamic resource allocation, we are really trying in real time to fund the opportunities as quickly as we can as opposed to being slaves to an annual budget.

Right.

So even if there we are not talking about single-digit millions, and we are probably talking [$5 million's] and [$10 million's] sort of thing?

That is probably correct.

That is fair.

Yes.

And then just back to kind of Q3.

I get the whole sequential discussion, but on a year-over-year basis the comp is really easy against obviously what was a pretty disappointing Q3 last year.

Why wouldn't you accelerate a little bit against that, just a 0.8 organic last year?

Right.

Well, there is no question, Jeff, there is an easier comp in the third.

I think what we're trying to share with you today is in essence what we are seeing customers and markets saying and doing today, right.

So as we work through what is happening at point of sales, we talk to our distribution partners, we go through our sales pipelines with our direct business as we take the pulse of both the headwinds and the tailwinds out there externally I think we come up with a top-line figure that would suggest that on a core basis we are likely to be in that 2% to 3% range here in the third quarter.

It is really as simple and as straightforward as that.

Great and then just finally, can you just size in basis points or dollars, whatever is easier, just how significant the Motion headwind is it just from kind of unwinding the lower margin products?

There is probably call it 400 or 500 basis points of core revenue headwind within Motion as a result of that I think appropriate and smart transition out of some of that lower margin business.

So we take the core revenue hit, you clearly see the resilience of those Motion revenues as the positive offset.

A trade we will take any day.

The Motion part.

Yes, excuse me.

Yes, okay, great, thank you very much.

Jon Groberg, Macquarie Capital.

So you have talked a bunch about Beckman, Larry.

On Leica -- I just remember last quarter, Leica Bio, you had the control issue, Europe distribution change, worried a potentially new competitor coming to market.

Can you just give a little bit of an update on each of those issues and kind of where you stand on Leica Bio in the quarter and for the rest of the year?

Sure, I think in terms of the control issue for the broader audience we have seen in the US some policy guidance changes which has negatively impacted some of our underlying volume in the business.

I think that is modest and kind of working its way through the business.

Our European distribution change there continues, but I think we certainly had a better quarter in that regard than we did in the first and continue to believe strategically we are heading in the right direction and financially we should see less headwind as a result.

And you mentioned competition -- I have no idea who you are thinking of there, Jon, but we haven't really seen any material competitive pressure change here of late and continue to believe that, particularly in advanced staining, we saw very strong underlying growth vis-a-vis the market.

So would you expect kind of what you saw in the second quarter here to continue in the second half for that Leica Bio?

We would -- we certainly have that expectation with LBS as we drive into the second half.

Okay.

And then just one more.

If I do the math on the core diagnostics at Beckman, it looks like you said -- in your Q I think you said North America and Europe were actually down low single.

So it was looking like high-growth in probably China is still kind of plus 20%.

Anything at all you are seeing there given what is going on in China that makes you concerned that that could slow some?

Just maybe an update geographically on that business.

Thanks.

Yes, Jon, I think it's hard not to be a little bit cautious on that front, just the number of quarters we put back to back to back with 20% in China and other parts of the high-growth market.

So we think they will continue to be very good.

Could there be some tempering?

I think that's a possibility.

And while Europe and the US were down, they were down less than they were the last couple quarters.

So hopefully we can get a little bit of improvement in the developed markets because I think there is some likelihood we will have very good growth in the high-growth markets, but it's going to probably be hard to sustain at these levels.

So do you think North American and Europe should be getting to the point where they actually turn positive within the next few quarters here given some of the successes that you talked about at Beckman?

We are not yet prepared to forecast, but we like the trend line.

Okay, thanks a million.

Julian Mitchell, Credit Suisse.

Just on the operating cash flow, it was down 2% in Q1, it was down 14% in Q2.

And you talk in the Q about timing of customer deposits in T&M and so on on the network com side.

Can you maybe talk a little bit about how quickly you expect the operating cash flow to normalize and what has driven that customer deposits issue?

Sure.

There are -- Julian, there are probably three factors driving the first half cash flow being down slightly year on year.

I will come back to the customer deposits in the third point -- one of which is just the timing of tax payments.

We've had relatively higher tax payments here in the first half, that will normalize through the year.

The second element is we have slightly higher inventory levels.

Part of that is related to a number of new products launches.

We talked about some of the benefits we're seeing of that at Hach, Gilbarco, product ID.

Again, we expect the inventory levels to normalize through the year.

And then finally, customer deposits last year on some large projects we were able to get some up-front payments.

That will probably not normalize through the year, so that will be a slight headwind.

But these other two factors will help and you should see an acceleration back to a more normalized level of cash flow through the balance of the year.

Okay, thanks.

And then within the environmental you talked a bit about municipal spending being down.

Not a surprise, but I guess any sense on the pace of the declines or how you think that will trend as we go through the year?

Well, it was a little bit bifurcated.

So the lower ticket municipal spending actually got sequentially better Q1 to Q2.

We're probably a little cautious of that because the governments have year ends of June 30.

So we may have seen a little bit of benefit.

But it's okay, it's not great, but again probably a little better than what we saw in Q1.

Continue to see the high ticket stuff to be challenging, and I don't think we are calling for a turn in that part of the business.

Thanks.

And that [call] was really focused I think in the US and to a degree in Europe.

We were pleased with the China growth that we saw for now two quarters here coming in no small part from the Muni side which had been a bit more sluggish for us over the last couple of years.

Okay, great.

And then just lastly on Europe, there has been some hope around slightly higher PMIs and so on.

It doesn't sound like you've seen anything at all around any kind of inflection point in any end market in Europe.

Is that fair or --?

Julian, we were down a point or two in Europe which is comparable to maybe slightly better than what we have been seeing.

We've seen a few of our businesses -- PID had a better quarter in Europe, but I would say generally speaking we are not seeing much of any turn here.

Okay, thank you.

Brandon Couillard, Jeffries.

Larry or Dan, could you give us view around the book to bill in T&M in the quarter?

And how would you expect that business to trend in the second half, particularly for Tech Instruments?

And to what degree are you beginning to see any change in demand trends out of China?

Yes, T&M book to bill was flat.

I think as we look at tech for the second half and really Instruments more broadly, I think we have the opportunity to grow.

It would be call it low singles if all goes well.

China is really important; China is important both at Tech and at Fluke.

And as I mentioned earlier, we have seen softness, prolonged softness both with the export base, which we largely serve at Tech, and frankly in a host of other verticals that deal with domestic infrastructure principally at Fluke.

But as we have gone through those reviews recently with the teams, again in part because of the comps, in part because of some of our own execution opportunities, we think we can go positive here in the second half and we are working hard to do that.

But China will be an important swing factor for that instruments platform, no doubt.

Thanks.

And then, Dan, in terms of the overall core revenue growth experienced in the quarter, can you give us a breakdown between equipment and consumables?

Sure.

The consumables stayed right in that -- consumables and aftermarket stayed right in that 3% to 4% range all up.

And equipment and instruments were a little better than Q1, so we were essentially flat in Q1 and we were up 1% to 2%.

Again, we talked about some of that -- Gilbarco, some of the Life Science businesses benefiting on the -- benefiting to that number.

Great, thank you.

Isaac Ro, Goldman Sachs.

Just on Industrial Tech, I wanted to put your comments on Motion in context to the core growth targets 0% to 3% you put out last December.

You guys trended a little bit lower than that in the first half.

So I just want to make sure I understand what is embedded in your assumptions for the back half of the year.

Back half we are looking at Industrial Tech to be flat to slightly down in the third quarter, the biggest driver of that would be Motion which we expect to be down high single-digits.

Most of that will be getting out of some of this very low margin business.

And then the fourth quarter we would expect a sequential improvement from that.

Got it, okay, that makes sense.

And then just in China, maybe qualitatively we touched on that issue a couple different ways here, but I did want to spend a minute with regards to the nature of your customers in China, specifically with regards to capacity utilization.

I mean I think we all know a lot of the growth in China has been driven by fixed asset investment.

And I think one thing that is hard for us to read is sort of what your customers' capacity utilization looks like on your products over there just qualitatively.

Can you maybe comment on that and just how you think about what your customers' underlying demand looks like just given the current environment there?

Isaac, I admittedly can't give you a figure as to our diagnostics customers -- our Chinese diagnostic customers' utilization of our installed base over there.

But I would say that, as you might anticipate, it's higher closer to the coast.

Those new installs that have gone in are ramping, but there are probably very few places outside of the major coastal cities where our installed base is anywhere close to capacity.

So we are proud to be part of this healthcare initiative in China.

And certainly as that install base is utilized more actively in the delivery of enhanced care, that will be good for those patients and it will be good business for us.

Got it.

All right, thanks so much, guys.

John Inch, Deutsche Bank.

Troponin -- is that going to be significant to growth in the segment?

Or is it -- like when does that kick in do you guys think?

Well, I -- those are two different questions, John.

I think it is kicking in now that we have that 510(k) approval.

And frankly it is kicking in not only in terms of the resumption of being able to sell that product, but it's another box that is checked in terms of the commitments we made to not only our regulators but our customers which helps the overall business.

I think we have tried to downplay the specific quantitative or financial impact, John, of getting those assays back on the market just because largely I think that was overdone.

I think this was more a reputational issue and as we have gone through this hoop and others, I think people understand that we are getting Beckman back in the shape that it once was in and will be again.

And that helps us with retention, that helps us with new customer wins, not only here in the US where this issue was most acute, but more broadly as well.

Yes, no, Larry, I'm just wondering is there sort of a short-term pop up, if you will, that maybe is significant to Beckman's results that you could see sort of near-term associated with troponin?

I would say if there is any near-term pop it will be muted and immaterial.

Okay, so that makes sense.

Can I ask you about just -- maybe Dan is aware of this -- pricing trends perhaps just juxtaposed with some declining raws?

How are you guys sort of seeing that across your portfolio or say across significant differences in geographies if anything is noteworthy?

John, I just probably have a top-level point of view.

Our prices remained about 70 basis points the last two, three quarters.

Again, getting it on the consumables and the aftermarket relatively flat on the equipment -- on the instruments.

So part of that 100 basis points of margin improvement is the cost actions we took last year, but clearly we are seeing some price/cost benefit right now.

Not getting a lot of price, getting a little bit of price and seeing some benefit on the cost side.

Are there any discernible differences, Dan, in terms of pricing trends sequentially that would be noteworthy?

No, I mean we did say -- and this started a couple quarters ago that it got tougher to get price on equipment and instruments.

And we went from maybe slightly positive to kind of flattish -- slightly negative price, but overall flattish instrument and equipment, and that has stayed relatively steady here at least through the second quarter.

Yes, okay, that's helpful.

And just lastly, Larry, as you think about emerging markets, and you guys obviously are doing extremely well in China.

Part of the playbook I think had been to sort of broaden that success into the India's and Latin America's of the world.

But clearly the world looks perhaps different today than it did even a year ago in terms of the run rate for those markets.

How are you, Danaher, strategically thinking about that?

And why not maybe go for even more penetration in China?

Some of these markets around the world, maybe with the exception of the Middle East, look like they could be significantly more challenged in the coming few years in terms of realizing growth rates?

Well, I think, strategically, John, as you rightly point out -- and you know this as well as anyone -- what we've tried to do is build on our China First strategy the last couple of years and taking the successes we have had and learnings that we've taken to all the other high-growth regions of the world.

I think the evidence that we are having good traction in that regard for all the examples peppered through our prepared remarks in terms of the successes we are having in the Middle East, what we're seeing in Brazil, Eastern Europe, right on down the line.

India has been a little softer for us this year to be sure, Latin America in part because of a couple of tough comps was tough in the second quarter.

But that basket, which is no longer a China only basket, was up what -- high singles here.

I think we are mindful of the headlines relative to that basket as we think about the second half.

I think that is part of our conservative posture on the macro.

But strategically you hit the point; these markets may slow in their overall growth, but they are still going to be the best game in town.

And the penetration levels of most of our products in these parts of the world are still pretty modest.

So you pick your market, take 2, take 500 basis points of growth off of the top, yes, that will define how much investment monies we have to put into play.

But that underlying growth, our penetration opportunities to grow in excess of those market rates still makes those spaces -- those places incredibly important targets for us.

And that is the way we are operating.

Yes, perfect.

Thanks, guys.

Deane Dray, Citi.

We covered a lot of ground here already and maybe just some closing comments regarding guidance.

And Larry, last quarter you had some specific commentary about having more of a midpoint bias to earnings guidance.

Now you put up a solid second quarter, playing a little bit more offense by making some growth investments.

So how would you characterize that bias today and then same question for core revenue growth for the second half?

Yes, I think that what we have done here, Deane, with the update on guidance is really stayed true to that midpoint mindset that you heard me express back on the first-quarter call.

So being at the halfway point here, having a little bit more clarity as to the puts and takes, doesn't really change our outlook materially in that regard and we thought we could tighten up the guidance accordingly.

I really think it is that simple.

In terms of the core outlook, I think we are looking at a low single-digit environment here in the second half.

We have quantified that as two to three as best we can figure it here for the third quarter.

But in essence I think what we saw in the second quarter is on balance likely what we are dealing with here in the second half.

We wish it were otherwise, but it is what it is and we are going to outperform accordingly.

Understood, thank you.

At this time I would like to turn the call back over to Matt McGrew for any additional or closing remarks.

Thanks for joining us, everybody.

We will be around all day for follow-ups.

That does conclude today's conference.

Thank you for your participation.