Danaher Corp (DHR) 2016 Q2 法說會逐字稿

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

At this time, I would like to welcome everyone to the Danaher Corporation second-quarter 2016 earnings results conference call.

(Operator Instructions)

I will now turn the conference over to Mr. Matt Gugino, Vice President of Investor Relations.

Mr. Gugino, you may begin your conference.

Thanks, Ashley.

Good morning, everyone, and thanks for joining us on the call.

With us today are Tom Joyce, 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, the slide presentation supplementing today's call, our second-quarter Form 10-Q, and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call, are all available on the investors section of our website, www.Danaher.com, under the heading financial information.

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

A replay of this call will also be available until August 1, 2016.

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

The supplemental materials describe additional factors that impacted year-over-year performance.

Unless otherwise noted, all references in these remarks and supplemental materials to Company-specific financial metrics relate to the continuing operations of the Company and the second quarter of 2016.

And all references to period-to-period increases or decreases and financial metrics are year-over-year.

We may also describe certain products and devices which have applications submitted, and pending for certain regulatory approvals.

During the call, we'll make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results may differ materially from any forward-looking statements that we make today.

These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements.

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

Thanks, Matt, and good morning everyone.

The second quarter was a busy and exciting one for Danaher.

Despite challenging economic conditions, we were pleased with our performance, as the team's consistent focus on execution helped deliver solid core revenue growth, high teens adjusted earnings per share growth, and strong free cash flow performance.

On July 2nd, we successfully completed the spinoff of Fortive Corporation, a new industrial growth company.

The earlier than expected completion of the separation is a testament to our process orientation, execution focus, and exceptional teamwork.

We continue to believe that the separation will provide significant opportunities for both Danaher and Fortive, to independently build even greater shareholder value in the years ahead.

Since we owned Fortive through the end of the second quarter, we will start with financial highlights that reflect the combined Danaher and Fortive results.

We'll then provide detail for the businesses remaining within Danaher, outline our planned new reporting segments, and provide guidance for Danaher's continuing operations, excluding Fortive for the third quarter and the full year.

Since the Fortive team will be reporting their second-quarter results separately next week, we'd ask that you please save any questions about the Fortive businesses until then.

Now, turning to the details of the second quarter.

Adjusted diluted net earnings per share from continuing operations was $1.25, an increase of 17% over last year, and our third consecutive quarter of mid-teens or better adjusted EPS growth.

Sales grew 16.5% to $5.8 billion, and core revenue increased 2%.

The impact of currency translation eased this quarter, but still decreased revenues by 0.5%, while acquisitions increased revenues by 15%.

Danaher RemainCo core revenue was up 3%, while Fortive core revenue was down slightly.

Geographically, high growth market revenues were up mid single digits, led by double-digit growth in China and India.

We saw better sequential performance in Latin America and Russia, in part because of easier prior-year comparisons.

Developed market core revenues were up low single digits, led by growth in Western Europe.

The US remained roughly flat, and we saw declines in Japan during the quarter.

Gross margin for the second quarter was 54.4%, an increase of 110 basis points from last year.

Reported operating margins were 17.9%, with core operating margins down 30 basis points.

More than 80 basis points of core margin improvement were -- we had more than 80 basis points of core margin improvement at both Dental and Life Science & Diagnostics, which was offset by declines in Test & Measurement and environmental segments.

Free cash flow continues to be one of our most important financial metrics, enabling us to pursue organic and inorganic growth initiatives across our entire portfolio.

We generated $1.1 billion of free cash flow from continuing operations in the quarter, up 14%, and our free cash flow to net income conversion ratio was over 150%.

Now, let's take a look at more detailed results across the Danaher portfolio.

In Life Sciences, core revenue increased mid single digits, led by strength in high growth markets and Western Europe.

At Beckman Life Sciences, we continued to outperform.

High single digit core growth in the quarter was driven by strong demand in flow cytometry, particularly in North America and China.

The robust growth in flow cytometry was largely driven by demand from our new CytoFLEX product, based on the breakthrough technology which we acquired as part of the Xitogen acquisition in 2014.

This bolt-on acquisition has been a tremendous success, and is a great example of how we incorporate novel technology into our portfolio to enhance our offering and expand our customer base.

CytoFLEX has been a significant contributor to recent share gains in our flow cytometry business.

At Leica Microsystems, we saw improved results versus previous quarters, as recent new product introductions helped drive low single-digit core revenue growth.

Two such new product introductions included our Leica DVM6 digital microscope, launched at the end of 2015, and our new Leica M530 neurosurgery microscope, which is off to a great start in China, after successful launches in Europe and North America last year.

The M530 is a standout combination of our high resolution optics technology, with improved ergonomics, helping neurosurgeons stay focused during their demanding high-precision procedures.

Core revenues at SCIEX were up mid single digits, as we saw continued strength in pharmaceutical, food, and environmental end markets.

We had another very strong quarter in China, as new regulations from the Chinese Food and Drug Administration helped drive increased demand around drug testing and food safety.

In June, SCIEX announced a number of new work flow solutions at ASMS, the American Society of Mass Spectrometry annual meeting.

These solutions are geared towards fast-growing markets such as biologics, proteomics, food and environmental testing.

We showcased the latest QTRAP 6500+ mass spectrometer, that provides enhanced sensitivity and selectivity to create a powerful workflow solution for biologics analysis.

We also rolled out BioPharmaView software 2.0, which accelerates automated data processing, and simplifies reporting, enabling biopharma researchers to make better decisions faster.

At Pall, core revenues were up mid single digits for the quarter, compared to last year as a standalone Company.

Continued strong demand in biopharma, particularly single-use technologies, led to double-digit core revenue growth in Pall Life Sciences.

In Pall Industrial, revenues were down low single digits, but we're continuing to see some signs of stabilization in those end markets.

Pall continues to ramp exceedingly well across a number of key metrics.

The team's commitment to the Danaher Business System has resulted in on-time delivery improving by more than 1,500 basis points, with greater productivity and quality, driving improved customer satisfaction.

Since acquisition, faster than expected cost savings and meaningful operational gains have contributed to sizable gross and operating margin improvements.

As a result of the team's impressive start, we've been able to redirect some of that benefit into R&D, and sales and marketing investments.

By pursuing this combination of margin enhancement and growth opportunities, we believe we can continue to drive innovation and improve Pall's competitive advantage.

The Pall team showcased a number of innovations, such as acoustic wave separation, and our new single-use bioreactor at the Interphex biomanufacturing trade show in April.

Our expanded single-use product offering has enhanced our competitive position, as pharmaceutical companies look to shift from traditional large infrastructure stainless steel systems to more efficient production processes.

Pall's bioprocessing solutions help our customers save significant time, energy and money, while greatly reducing cross-contamination risk, which provides the flexibility to easily and safely make multiple products in one facility.

Moving now to diagnostics, core revenues increased low single digits, with double-digit gains in China and India, partially offset by weakness in the Middle East and the Americas.

At Beckman Coulter, core revenues were up low single digits, driven primarily by strength in high growth markets.

This past June marked the fifth anniversary of the Beckman acquisition.

We've made tremendous progress since then, significantly improving quality, delivery, and our overall customer experience, while using productivity gains to help fund new product development and add feet on the street.

Another quarter of good execution by the Beckman team contributed to healthy core operating margin expansion, and we continued to reinvest in high impact growth opportunities.

New menu additions are gaining traction, including our vitamin D and AMH fertility tests in our immunoassay business.

Our recently-launched molecular diagnostic platform, VERIS continues to gain early traction in Europe.

New product developments like these, combined with opportunities at recent bolt-on acquisitions like MicroScan, will continue to help build meaningful runway for growth at Beckman going forward.

Radiometer achieved mid single digit revenue growth, with healthy performance in Western Europe and China, partially offset by weakness in Latin America and the Middle East.

Our growing installed base of blood gas instruments and AQT analyzers contributed to solid consumable sales in the quarter.

The Radiometer team also recently launched the TCM5 FLEX, a new transcutaneous monitor design.

This non-invasive monitor measures ventilation for patients in critical condition.

And the TCM5 updated design is easy to use and reliable, providing nurses and doctors with improved usability, while maintaining accuracy and precision.

At Leica Biosystems, core revenues grew mid single digits.

Results were driven by a combination of strength in high growth markets and continued growth of instrument placements in advanced staining and core histology.

Moving now over to our Dental segment.

Core revenues were up mid single digits, with growth across consumables, equipment and implants.

We saw particular strength in our restoratives and Ormco product lines.

Geographically, China had another strong quarter, with double-digit growth, and we maintained positive momentum in North America and Western Europe.

Nobel had another good quarter, with mid single digit core revenue growth.

We've improved operating margins at Nobel by more than 500 basis points since acquisition, enabling us to direct some of our savings into expanded product offerings and accelerated sales and marketing efforts.

This is similar to what you've seen us achieve at other large acquisitions like Beckman and Pall, where operational improvements help fuel renewed focus on new product development and go-to-market initiatives.

The Nobel team has launched more than 20 new products since acquisition, and featured a number of these recent innovations at the Nobel Biocare global symposium in June.

Nobel's new On1 implant base remains in position during the entire restorative work flow, from implant placement to finalization, and for the lifetime of the restoration.

This helps simplify the dental surgeon's workflow and allows for an improved patient experience.

And our new NobelParallel CC implant is a straightforward, highly versatile implant system, providing an efficient treatment flow that can be used in a wide variety of implant cases.

Both of these new innovations help us serve our customers with better solutions to improve their patients' experience and treatment.

Turning to Product Identification, core revenues increased low single digits.

We saw increased demand for marking and coding equipment and related consumables across most major geographies, partially offset by softness in some of our packaging and color solutions offerings.

Videojet's substantial and growing installed base contributed to mid single digit core revenue growth in the quarter.

Strong market performance in North America, Latin America, and Western Europe offset softness in certain high-growth markets.

Videojet recently introduced a new service offering that enables our technicians to remotely gather data from a printer that's experiencing a fault or a failure condition.

This helps our customers return to normal operation much faster, often without a site visit.

With our range of comprehensive preventative services, we're able to improve end user productivity over the course of a printer's lifespan, ultimately reducing operating costs, and enhancing customer satisfaction.

In June, Esko successfully launched a number of new products and innovations at Drupa, the world's largest printing equipment exhibition, which is held every four years in Germany.

This is the most important trade show in the industry.

Esko introduced more than a dozen significant hardware and software innovations at Drupa this year, including a suite of powerful new software tools to help customers simplify, automate, and integrate their complex packaging and label production workflows.

We originated a record number of leads and orders at Drupa, which we expect to help drive improved growth at Esko and across the product ID platform in the second half of the year.

Lastly, turning to Water Quality, core revenues grew low single digits, with strength in Western Europe, India, and China, partially offset by lower demand in Japan and Eastern Europe.

Hach had a solid quarter, with mid single digit core revenue growth.

Results were driven by strength in US municipal markets and Western Europe.

We saw improved growth in China, as Hach continues to benefit from ongoing regulations around water quality monitoring and analysis in the region.

Hach's online water monitoring solutions are in place in Rio de Janeiro, Brazil, for next month's Summer Olympics.

Our solutions are installed at the majority of event sites, including the largest soccer stadium in the world.

We'll apply our expertise to monitor water quality, in order to help Brazil execute a successful Olympic games.

After the events wrap up, the Hach systems will be transferred to municipal water plants across the country, benefiting local communities for many years to come.

At Trojan, high single digit core revenue growth in the quarter was a result of a number of project wins in North America, Western Europe, and Australia, as well as robust demand in municipal markets.

And finally, at ChemTreat, core revenues grew low single digits, despite exposure to weaker industrial and commodity-oriented end markets.

So to wrap up, the Danaher team executed well in a challenging macro environment.

The thoughtful application of DBS continued to drive results, with meaningful process improvements enabling reinvestment in high-impact growth initiatives.

One of Danaher's core values is innovation defines our future, and the successful new product launches we've seen across the portfolio demonstrate our commitment to providing customers with truly differentiated technology, to strengthen our collective competitive advantage.

Following the launch of Fortive, Danaher will be a diversified multi-industry science and technology Company, united by common business models, and the power of DBS.

We remain focused on improving growth, margins, and cash flow, and we'll continue to pursue meaningful organic and inorganic opportunities to strengthen our market-leading portfolio of businesses.

Going forward, Danaher's businesses will be organized across four segments: Life Sciences, including all of Pall, Diagnostics, Dental, and Environmental and Applied Solutions, which includes our water quality and product identification businesses.

For further details, please refer to the supplemental information that we posted on our website this morning.

This marks the start of an exciting new chapter for Danaher, and we look forward to the exciting opportunities we see in the years ahead.

We are initiating third-quarter guidance for adjusted diluted net EPS from continuing operations of $0.80 to $0.84.

We are assuming third-quarter core revenue growth of 3% or better.

For the full year 2016, we're anticipating adjusted diluted net EPS from continuing operations to be in the range of $3.53 to $3.60, which at the midpoint would represent an increase of approximately 20% from 2015.

Both our third quarter and full-year guidance exclude the impact of Fortive.

Thanks, Tom.

That concludes our formal remarks.

Ashley, we're now ready for questions.

As a reminder, we just ask you to please keep your questions specific to Danaher, and save any Fortive questions for their earnings call next week.

(Operator Instructions)

We will take our first question from Nigel Coe with Morgan Stanley.

Please go ahead.

Good morning, Tom.

I just wanted to just fill in the gaps on the FY guide.

You said 3% or better for 3Q.

Is that the working assumption for 4Q, as well?

And then, what assumptions are you making in terms of the corporate dissynergies in the back half of the year?

Obviously, there's a corporate line which is unallocated, but then there's some corporate absorbed by the segments.

Just wondering how that impacts margins in the second half of the year.

Any color would be helpful.

Nigel, this is Dan.

So Q3, we're talking about 3% or better core.

I think if in that zone, in part because we have a little bit of easier comparison in the fourth quarter, core could be a little bit higher than that.

Regarding the corporate, on a combined basis, we've talked since the beginning, and we're still in that zone, about $70 million to $80 million of corporate dissynergies from the two entities.

And go-forward corporate will remain in the low 40s for Danaher.

Okay.

And then does that impact at the segment line as well, Dan, or is it just within that unallocated line?

I guess what I'm saying, is the 2Q, 1Q pro forma segments numbers for new Danaher, is that a good base for second half of the year?

Yes.

Okay.

Great.

And then just on Dental, you gave some details on the moving parts, will work out better in Q2.

I'm just wondering, given the pretty fast acceleration from 1Q to 2Q, was there any pull-forward or pull-back from 1Q to 2Q?

Was there some channel volatility, or was this just natural volatility that we'll see from time to time?

Nigel, we did see some core improvement, without a doubt, in Dental.

4% core growth in Dental, and a good part of that was clearly around better execution, and to some extent, a little bit easier comp.

We saw good performance in implants and equipment, mid single digit growth.

Consumables, more like low single digit.

Terrific performance in China continued.

You've heard us talk to double-digit growth in China.

And we saw that continuing.

US and EU, getting a little bit better, and the high growth markets still challenging for sure, but we are rounding around some easier comps.

You heard me talk about good, solid performance at Nobel.

That continued.

That said, relative to your question about any impact, there may have been a little bit of pull-forward on some revenues, just based on the nature of the calendar, and the way the calendar worked on the end of the quarter.

But in general, I think we were very pleased with the performance.

Given seasonality, we could see some moderation in the Q3 growth rates, at low single digits.

That's typically a function of more European exposure, and the summer tends to be a little bit slower.

We won't necessarily see a straight line to the improved performance, but we were very, very pleased with the execution in the second quarter.

And we think we've got a very good trajectory behind us that bodes well, for I think, the quarters to come.

Okay.

That's great.

Thanks a lot.

And our next question comes from Steve Winoker with Bernstein.

Tom, just on the segmentation -- the new segmentation front, a couple of questions here.

One, why is Pall Industrial stuck in Life Sciences?

And then secondly, on environmental applied solutions, I thought maybe water quality and product ID would be standalone.

Are they just not big enough yet, or is there a strategic thought here, number of segments?

How are you thinking about those two?

Sure.

Thanks, Steve.

Relative to Pall, we did think it was important to keep those together in a single segment.

Obviously, the Life Science part of the Pall portfolio is the larger part of the portfolio.

There's commonality internally at Danaher from a reporting standpoint, both in terms of both sides of the business reporting into a President of Pall as well as an EVP overseeing all of Life Sciences.

There's also commonality across R&D and supply chain and operation.

So there's a lot of reasons operationally to keep the businesses together, and therefore, somewhat from a reporting standpoint, as well.

Realistically, we probably could have split them up, but I think we would probably re-evaluate that over time, and see how we might run the businesses in the years to come.

But I think for right now that's probably the best approach, is to keep them together.

In terms of environmental and PID, I think those businesses do share some commonality, in terms of serving some different applied end markets.

We could have kept them separately, they would have been far smaller segments.

So I think we felt that those went together, and provided some flexibility for us, as we defined ourselves as remaining a multi-industry Company.

There obviously is some flexibility maintained in terms of how we might add to that segment over time.

Okay.

And then I suppose sticking in the same -- on the same M&A or the same theme here, on M&A, I know it's bumpy, but you did six last quarter, and zero this quarter.

Were you busy with separation, things just didn't come together?

How's the pipeline looking going forward?

What should we expect in terms of momentum or pace on the M&A front?

Steve, didn't have anything to do with being busy or in any way focused on other things.

Acquisition volume ebbs and flows over time, and so we think the pipeline -- we know the pipelines remain quite good.

We have active conversations in each one of the platforms.

So we feel very good about where we are.

We have obviously a terrific balance sheet to work with, and I think we'll see good things in the quarters to come.

And you emphasized the multi-industry diversified nature, as well of science and technology.

Are you as optimistic on the environmental and applied solutions, I suppose in Pall Industrial front, as you are on other parts of the business?

We are.

We continue to have teams that focus, as we always have, in each one of the operating companies, and in each one of the platforms, focused on developing funnels, ensuring that we have active cultivations.

And yes, we remain biased towards applying our free cash flow to each one of the businesses across the portfolio.

I'll hand it off.

Next we will take Jeffrey Sprague with Vertical Research Partners.

Please go ahead.

Congrats on getting Fortive done.

Just maybe a couple business-related questions, drilling in a little bit.

Tom, can you elaborate a little bit what was going on in environmental core margins in the quarter?

Why they were under pressure, and what the trajectory is looking forward?

Jeff, thanks for the question.

In general, we feel very good about where those businesses are.

I'll speak specifically to the Hach business.

We had very good performance in the prior quarter -- in the same quarter last year.

In addition, we're making some investments from a growth standpoint in those businesses.

So I think we'll continue to see margin expansion from the water side of the environmental segment.

And I think those investments overall are going to pay off in terms of good growth rates in the quarters to come.

So, it's not an area of concern for us.

Jeff, two things to add.

One is Gilbarco had better growth than the water business, so there's some negative mix in there for the segment.

And we had our best segment was, Q2 last year was probably 150, 200 basis points better than any other quarter we had in 2015.

So it was a little bit of a comp issue as well.

But as Tom alluded to, we are investing pretty heavily right now in the water business, organically.

Speaking of investment, maybe just a total new Danaher question, but the idea of restructuring, be it quiet or otherwise, is that likely part of the equation here as you progress through the year?

And could give us some idea how to think about that?

Jeff, as we I think showed last year, we've established a cadence of restructuring that has gone on, you might say quietly, but I would say more consistently and appropriately throughout the course of the year.

As opportunities have come up, we've taken advantage of those in each of the quarters.

And so we still have opportunities for some level of restructuring in the third and fourth quarter.

But in general, we've been more balanced through the course of the year, and I think that has served us well in terms of the operating margin expansion that you've seen over time late last year, and this year as well.

And then finally, just back to environmental and water, specifically in the muni markets.

We've been hearing for a couple quarters that things are gaining traction, obviously you had a strong quarter at Trojan.

Can you speak a little bit to the forward visibility there?

What's going on in order activity?

Do you have top line visibility into that business now in 2017?

Jeff, it's probably a little bit early to comment on 2017.

The muni strength continues to be broad-based, both in the Trojan and the Hach business.

And at the Hach business we're seeing it both in Europe and the US, very consistent and healthy spending there.

The offset of that both for Hach and ChemTreat, is where we serve the industrial or any commodity-oriented markets, they've been challenging.

Great.

Thank you very much.

Our next question is from Shannon O'Callaghan with UBS.

Just on this emphasis on reinvesting some of the synergy upside at Nobel and at Pall into new products, go-to-market investments.

What lag are you expecting from that, when do you expect that to translate into improving organic growth for those businesses?

And just what you're seeing.

Shannon, it varies, depending on where we direct those funds.

I think in some cases when we put investment directly into feet on the street, in either a developed market or a high growth market, we tend to see those investments pay off in just a quarter or two.

If we're talking about investments that go into new product development, those tend to have much more of a lag time.

As projects get kicked off into early business case oriented tollgates, you could have several quarters to it, at times even a couple years, before you might see the impact of a new product investment.

Again, depending on how early or late stage an existing project might be in the pipeline, so it's varied.

I think in the case of Nobel, just to talk to one of the businesses, we've seen those investments pay off relatively quickly.

You've seen it in good core revenue growth consistently in that business.

They have relatively shorter cycle times, in terms of new product development.

In businesses like Beckman, for example, and at Pall, the product development cycles are longer.

Certainly significantly longer at a place like Beckman, where oftentimes we'll have clinical trials and/or regulatory clearances, so those new product investments can take some time, obviously.

Maybe a follow-up to that.

In terms of in diagnostics, you had talked about Beckman's growth being driven by high growth markets.

What's going on in the developed markets, and maybe against some of your comments you just made there, maybe fill out what it's going to take to get some better growth in developed markets for Beckman?

Sure.

A little bit slower growth in the developed markets.

In general, the developed markets from an overall perspective are slower growth markets to begin with.

We've always seen better market growth in the overall, in places like China and India, and the Middle East.

So in general, I think we're tracking closer to the market growth rates than anything else.

Still have work to do.

There's no question about it.

We have improved our retention rates and our competitive win rates, but there's still work to do in terms of both go-to-market, as well as new product development.

And over time, we do believe those will pay off in better growth rates in the developed markets.

Okay.

Great.

Thanks.

Our next question is coming from Tycho Peterson with JPMorgan.

Please go ahead.

Tom, just wondering if you can talk about some of the gives and takes, where you're feeling a little bit more constructive by segment, in the back half of the year.

You talk through the gives and takes on Dental.

Maybe you can pass on that.

Is Pall Industrial bottoming out here?

Could you see some improvement there?

Obviously, the academic fund flows may pick up the back half of the year, and that could help SCIEX.

Could you talk by division where you're feeling more constructive for the next couple quarters?

Good morning, Tycho.

Thanks for the question.

We do think that we're -- as you mentioned, we're seeing good performance in dental, again, not necessarily a straight line, but we're very encouraged by the performance we're seeing.

In terms of the other businesses across the second half, I think we'll see continuing better performance across the diagnostic businesses, in particular.

We're starting to see the benefit of a number of the investments across those businesses.

I think we'll see continuing good performance from water quality.

PID has been pretty consistent along the way, so I think we will see that continue.

Our Life Science businesses have also performed well, particularly SCIEX, as well as Beckman Life Science, so I think we'd see some modest incremental growth there.

I would also remind you that we're coming around through some easier comps in the second half as well, and so we will get a little bit of benefit from those easier comps, really across the entire portfolio.

And since you called out Europe as a source of strength for Life Sciences and Radiometer, are you comfortable with the macro in the back half of the year for those markets?

I think the Brexit situation certainly has created uncertainty around, not just the UK, but across European theater at large.

Uncertainty is rarely a good thing for markets, in terms of people's willingness to make investments, particularly in instrumentation and higher-cost instrumentation.

So I think that uncertainty could potentially result in some slowness in the second half, but it's very early to tell.

Tycho, we've been -- on Western Europe, we've been consistently in a pretty healthy low single digit number across Western Europe.

It's been pretty broad-based.

It is an area where I think, because of some of the uncertainties the last couple years, we've probably taken a fair amount of share, as we've seen some people pull back in Western Europe over the last couple years.

So it's been a good market for us, and while -- and we also see Pall doing quite well in Europe.

Those are obviously not in the core numbers yet.

Just lastly on the capital deployment question, earlier you touched on the framework a little bit.

Can you just remind us where you're comfortable taking up leverage?

And maybe just any comments on what you're seeing in terms of valuation, given how much the space has run?

We've obviously spent the last year in a significant effort on deleveraging.

We're in really good shape.

We're south of 2.5 times at this point.

Initially, we were close to 4 times leverage.

We're back to a mode of spending our free cash flow plus.

And we've talked about a couple billion of capacity for this year, but going into next year, you're back to more $3 billion to $4 billion of capacity per year.

And that's not without -- that's without really stretching the balance sheet.

Okay.

Thank you.

Our next question is coming from Ross Muken with Evercore ISI.

Please go ahead.

So appreciate -- I know you gave us already some color on Pall single-use and on SCIEX.

But I'd love if you could tease out at all pharma demand based on customer type.

So separating maybe pharma from biotech or emerging biotech, to see if there's any discernable trend you've seen amongst -- it's clear Pall obviously having pretty strong growth across the board.

But I was wondering if any of the end markets, whether it's generic or CRO, et cetera, you're seeing any change in demand?

Good morning, Ross.

SCIEX is probably the best business to think about, when you think about your question about pharma versus, say, biotech.

SCIEX has exposure to both those end markets, and we're seeing good performance, healthy demand, and fairly consistent demand from both sides of the house there.

I'd have to do some follow-up to get you some detail on anything to do with the generics or the CROs specifically, but clearly, in the aggregate, these markets are doing quite well.

Pall, as you mentioned, we've talked about the growth that we're seeing in the Life Science side, specifically around our single-use technology product offering, where we're seeing continued double-digit growth rates in that area.

And that clearly is associated with the growth in biopharmaceuticals, specifically the growth in large molecule drugs.

I guess what I was getting at is more on the CRO generic side, maybe I'd ask it differently.

In terms of just high growth markets, it's clear China's been good, but outside of China, how would you characterize the rest of the key markets?

Obviously LatAm's been a mixed bag overall, but India and some of the other key geographies?

China in particular, India as well, are very good markets for us, but I would say that there's still a long runway ahead for those markets.

Some of the generic and the CRO movement into those markets has been, on balance, a positive.

But there are also components of the market that are still relatively nascent, particularly in terms of what might be going on there in the future relative to large molecule drugs.

So I think there's still a pretty good runway ahead.

Thanks, Tom.

Our next question comes from Derik de Bruin with Bank of America-Merrill Lynch.

So could you talk a little bit about capital deployment?

I'm just curious now that Fortive is spun out, how do you view your overall strategy in the Life Sciences space?

Do you still feel like you want to stay focused on the core -- standalone core brands, or do you feel the need to become a more integrated provider in the space?

Do you think you need to add anything to your Life Sciences or Diagnostics armament?

Derik, starting at the Danaher level, our bias towards M&A is not -- and the use of our free cash flow to M&A, is not specifically skewed towards any of the four segments that I mentioned.

We've had a consistent traffic record of capital allocation across each of those four segments that we'll be reporting on in the future, and I think you'll continue to see us do that.

Now, specifically to your question around Life Sciences & Diagnostics.

What you've seen us do in Life Sciences is continue to broaden our product offering over time, and I think you'll continue to see us do that.

We have had a bias, and we continue to have a bias, towards businesses with not only strong brands and significant installed bases, but installed bases that drive good, consistent recurring revenue and consumables growth.

The diagnostic business is inherently that way typically, and you've seen us buy businesses with those same characteristics, strong brands, significant installed bases, and strong recurring revenue and consumables streams.

I think you'd see us continue to do that.

We think there is certainly room to continue to expand our diagnostic product offering, and provide hospitals with broader bundles of product.

Today, we provide products obviously to the central laboratories, the core clinical laboratories, as well as anatomical pathology and to acute areas of the hospital.

And with the expansion of Microscan into microbiology, with IRIS opening up urinalysis for us, I think those types of expansions of our footprint would certainly be characteristic of the types of things that we would hope to do in the future.

Great.

That's really helpful.

One quick follow-up.

It's been over a year since you launched the VERIS platform in molecular.

Could you talk a little about what you see in terms of installed base and competitive wins, and essentially where's that going, what's the customer type?

And I assume you're taking share from people since most hospitals have all your platforms of that size.

Could you talk a little bit more, some color on that?

Sure, thanks, Derik.

For everyone's benefit, the VERIS platform is a high volume random access molecular diagnostics instrument, that was commercialized for the first time in Europe in the second half of last year.

That product line serves the core or central clinical laboratory of major hospitals.

And again, as I mentioned, it's a high-volume platform.

We're very pleased with the early traction that we've gotten.

It is still early.

During the first year of a significant new product introduction like that, the first of its kind by Beckman Coulter, it does take a while to build the funnel.

But we've been very happy with how that funnel has built, the sales opportunity funnel in the last year.

The installations that we have thus far are running very well.

We have four assays in the market right now.

But the four assays really are just the beginning.

There's a significant road map of assay development ahead, that will ultimately be commercialized, both in Europe as well as in the US.

That product will need to go through regulatory clearance in the US, so it will be some time before we see the volumes ramp beyond the early days here in Europe.

But the feedback from customers has been very strongly positive, and we feel good about the start we have.

Great.

And when is the approval expected?

Thanks.

I usually hesitate to try to put any bets on FDA clearance.

There's a fair amount of work to do, even before we file for that clearance.

So I'll probably have a better sense of that in the quarters to come.

But wouldn't -- I couldn't put a date on it today.

Thank you.

Our next question comes from Julian Mitchell with Credit Suisse.

Just a question on margins, firstly.

So the core margin in total Danaher fell about 30 bps in Q2.

Could you give that comparable number for the remaining business?

And then maybe also how you think that will trend in the second half.

And tied to that, I guess going back to the Environmental and Applied Solutions segment, the headline margin there was down 300 bps plus in Q2.

Should we see that coming back in the second half as the comps on margins get much easier?

Sure, Julian.

On the last one, yes.

As I mentioned earlier, part of the environmental issue was a comp issue, that margins on a historical restated basis for the Environmental and Applied Solutions were 200 basis points higher in Q2 a year ago.

So you expect that to normalize.

Core margins were relatively flat for Danaher, ex-Fortive.

That was somewhat of a function of the prior-year compare.

For full year, we continue to expect 50 basis points to 75 basis points of core margin expansion for Danaher ex-Fortive, and you'll see better performance -- we saw very good performance in the first quarter.

You'll see better performance in Q3 and Q4.

Great.

Thanks.

And then just on Pall Industrial, you called out the overall organic sales trend year-on-year.

Is there any color you'd giving there on specific verticals or markets within that, any changes?

No, I wouldn't say we've seen necessarily any changes, Julian.

I think to the extent that there's good news there, I think it would be that we've seen some stability found in those markets.

We continue to make some excellent progress in terms of our go-to-market initiatives.

We've done over 40 growth-related Kaizens at Pall, since we acquired the business, and a number of those Kaizens has been going on in the industrial markets.

And that involves installing DBS tools such as funnel management and transformative marketing, that we think is improving our execution in those markets.

So I think, the combination of seeing some stability across each one of those end markets, in combination with the application of DBS tools, I think has gotten us to a pretty good place.

So I would hope to see some incrementally better performance late this year, and certainly entering next year.

But I think in general, we're pleased that things have stabilized.

Great.

Thank you.

Our final question is coming from Isaac Ro with Goldman Sachs.

Please go ahead.

Just want to ask another question on Pall Industrial.

If we look back, prior to the acquisition, that business was obviously growing a little slower than the Life Science side.

But curious, if you could maybe take a bigger step back and give us a sense of what you think it will take for industrial to return to growth.

Is it mostly a function of end markets, or is there really more of an execution issue?

Isaac, good morning, and thanks.

I think it's both.

As I was just mentioning to Julian, I think we've seen the markets themselves from a macro standpoint stabilize a bit.

In other words, not get any worse.

And we will need to see some improvement in the macro environment, to see some meaningful or step function improvement in growth.

But we're not waiting for that.

Our focus is on ensuring that we have the best sales team on the field, that we're providing those teams with exceptional new product development, that we've got our coverage set up appropriately across geographies, and across each one of those verticals.

And I think the combination of good market coverage, DBS tools, new product development, and some improvement in those end markets, is what it's going to take.

Obviously, the majority of that we hope to be in our control, but a little help from the end market certainly wouldn't hurt.

That's helpful.

One other question on Beckman.

If -- we just trying to square up what he we saw last week with some of the peer groups in diagnostics, with what you've said, obviously you've got VERIS and CytoFLEX helping out.

If we pull those out, just trying to get a better sense of how you think you're pacing versus the overall market for diagnostics, and any color there, especially in North America would be helpful.

Thank you.

Sure.

Thanks, Isaac.

As you know, we had to come from behind here, from the standpoint of the big five in the overall market.

I think from a pacing standpoint, we've now gotten to a point where we are very close to, if not at market growth rates, with a couple of the competitors as you mentioned that reported last week.

Posting better growth rates, and doing so, in some cases as a function of their positions in certain higher growth markets.

But in other cases, we simply have work to do, in terms of continuing to drive our new product development, and our go-to-market initiative.

We're ahead of a couple of other competitors in that market, and we have demonstrated where, from a competitive win perspective, we've become far more competitive in the overall market.

I think we've made a ton of progress, but clearly work to do, and that work, as you referenced, is represented by some folks that are still putting up some pretty good numbers.

I think we've got the initiatives and the investment levels in the right place, to continue to make progress, and it will take a bit of time, but I think we're on the right track.

Got it.

Thanks very much.

Thanks, Isaac.

That concludes our question-and-answer session.

I would like to turn the conference back over to Matt Gugino for any additional or closing remarks.

Thanks everyone, for joining us.

We're around all day for questions.

That concludes today's presentation.

We thank you all for your participation.