Danaher Corp (DHR) 2016 Q3 法說會逐字稿

At this time, I would like to welcome everyone to Danaher Corporation's third-quarter 2016 earning results conference call.

(Operator Instructions)

I will now turn the call over to Mr. Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.

Thanks, Erica. 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 third-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 investor 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 October 27, 2016.

During the presentation, we will describe certain of the 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 third quarter of 2016, and all references to period-to-period increases or decreases in financial metrics are year over year.

Today, we'll be discussing two recently announced acquisitions of Cepheid and Phenomenex. Both acquisitions are subject to customary closing conditions, including receipt of applicable regulatory approvals, and in the case of Cepheid, approval of the Cepheid shareholders. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals.

During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Tom.

Thank you, Matt. Good morning, everyone. We're pleased with our third-quarter results, as our Team continued to execute well, despite the macroeconomic environment. We delivered solid core revenue growth with very strong adjusted earnings-per-share growth and free cash flow performance. The diversity and strength of our businesses has served us well in this modest growth environment.

The recent separation of Fortive was an important step towards optimizing our portfolio, and we continue to strategically position Danaher for strong long-term growth through M&A. Since July, we have announced over $4.8 billion of acquisitions that will strengthen our Life Sciences and Diagnostics segments. In September, we announced the acquisition of Cepheid, a global leader in molecular diagnostics, and we recently announced the acquisition of Phenomenex, an outstanding chromatography consumables business that will be highly complementary to our Life Sciences portfolio.

Combined with the execution benefits of DBS, we believe these exciting strategic additions will contribute to Danaher's growth trajectory and superior returns. We look forward to welcoming the Cepheid and Phenomenex teams to Danaher.

With that as a backdrop, let's turn to the details of the third quarter. This morning, we reported adjusted diluted net earnings per share from continuing operations of $0.87, an increase of more than 20% over last year. Sales grew 17.5% to $4.1 billion, with core revenue increasing 3%. Core growth was consistent across the portfolio, as each of our four reporting segments achieved at least 3% core revenue growth in the quarter. Currency translation had minimal impact, while acquisitions increased revenues by 14.5%.

Geographically, the high-growth markets led the way, driven by high single-digit growth in China and high-teens growth in India. Developed market core revenues were up low-single digits. Modest growth in the US and Western Europe was partially offset by declines in Japan.

Gross margin for the third quarter was 55.3%, an increase of 140 basis points from last year. This increase in gross profit enabled us to increase our sales and marketing and R&D spend meaningfully in the quarter. Core operating margins were up 155 basis points in the quarter and 90 basis points year to date. This strong margin expansion helped to drive double-digit adjusted net earnings growth in the third quarter. During the quarter, we generated approximately $700 million of free cash flow from continuing operations, up 35%, and our free cash flow to net income conversion ratio was over 150%.

Now, let's take a more detailed look at the results across the portfolio. In Life Sciences, core revenues were up 3%, and reported revenues grew over 60%, largely due to the Pall acquisition. Core operating margin increased 180 basis points, and the reported operating profit margin increased to 15.4%.

At Beckman Life Sciences, low single-digit core growth in the quarter was driven by momentum in China, while developed markets were essentially flat. The backdrop of government investment in healthcare in China, coupled with Beckman's strong execution, contributed to double-digit gains in that region.

Beckman's particle counting and characterization business had another good quarter, with double-digit growth driven by global biopharmaceutical demand. The Team also launched a new product that supports drug discovery and development. The Vi-CELL MetaFLEX is a biochemistry analyzer that resulted from a collaboration with one of our diagnostic businesses, Radiometer.

Beckman incorporated the technology behind Radiometer's blood gas analyzer to create the Vi-CELL MetaFLEX, which analyzes cell cultures, a crucial component in biotherapy production. This cross pollination between Beckman and Radiometer is a powerful example of the unique opportunities we have at Danaher to bring greater value to customers by collaborating across the portfolio.

Leica Microsystems core revenue declined in the quarter. Growth was impacted by weakness in the academic and industrial end markets, particularly in North America and Western Europe. This was partially offset by double-digit gains in the high-growth markets, as China continued to be a bright spot, particularly for our confocal business.

SCIEX posted another quarter of mid-single-digit core revenue growth, led by global strength in pharmaceuticals and food, as well as environmental testing. Geographically, we saw declines in Japan and in Europe, where academic weakness impacted results. In the high-growth markets, China and India each maintained strong double-digit growth. Our service offering continues to be a differentiator at SCIEX, as the Team drove further improvements in contract renewals and attachment rates in the quarter.

As I mentioned at the start of the call, we recently announced our acquisition of Phenomenex, a leading player in chromatography consumables that supports a variety of analytical testing applications in the health, research, and environmental segments. Phenomenex is 100% consumables, a high-margin business in an attractive mid-single-digit growth industry that is adjacent to where SCIEX participates. We expect to achieve a double-digit return on our investment in less than five years, and believe that Phenomenex will help us to continue creating long-term value as part of our Life Sciences portfolio.

Pall delivered another quarter of good growth and execution. Continued strength in biopharmaceutical end markets and demand for single-use technologies underpin strong growth at Pall Life Sciences. Pall's market-leading solutions are at the forefront of the biopharma evolution, and 9 of the 12 new biologic drugs cleared by the FDA last year specified Pall products in their processes. This is a tremendous testament to the quality and reliability that Pall provides to its customers every day.

Pall Industrial revenue was down in the quarter, with solid gains in aerospace and microelectronics, offset by declines in energy and machinery, as heavy industrial end markets remained challenging. August marked the one year anniversary of our acquisition of Pall Corporation, and the Team's exceptional implementation of DBS has been a critical driver of what we've been able to accomplish thus far.

Since the beginning of the year, Pall has achieved more than 150 basis points of gross margin expansion and improved operating margins by over 350 basis points. At the same time, we've been able to put some of that benefit back into sales and marketing and R&D. This reinvestment, combined with the Team's thoughtful use of DBS growth tools like accelerated product development and [obearums] has resulted in a number of key new products launching ahead of schedule this year. By delivering these impactful new solutions to the market sooner, we can deliver greater value to our customers and further enhance Pall's growth trajectory.

Moving now to Diagnostics, both reported and core revenues increased 3%. The Team's solid execution generated 250 basis points of core operating margin expansion, and reported operating margins increased to 16%. Sustained strength in China and India was complemented by modest growth in the developed markets.

Core revenue at Beckman Coulter Diagnostics was up low-single digits, with growth in emerging markets partially offset by softer demand in North America and Europe. Recent installed base growth in China contributed to strong immunoassay performance in the quarter, with the business achieving double-digit recurring revenue in the region.

One of our five core values at Danaher is: customers talk, we listen. And Beckman Diagnostics recognizes the importance of helping customers drive performance across multiple labs with different needs and different test volumes. One of the ways we differentiate our offering is to partner with customers and help them integrate Danaher Business System tools and processes into their labs and workflows. The result can be tremendously impactful: better speed to results, operational efficiency, and ultimately, improved clinician workflows.

The effectiveness of one such collaboration was recently highlighted by a customer that operates one of the largest regional lab networks in the Midwestern United States. Within six months, Beckman helped them implement over 180 analyzers and four automation lines at 30 different hospitals and lab locations without any patient disruption. This customer was recently awarded the prestigious Advanced Laboratory of the Year award for 2016, and has mentioned their partnership with Beckman and the adoption of DBS tools as a key factor in their lab's transformational success.

Radiometer achieved mid-single-digit core revenue growth, led by continued double-digit growth in both China and India, and solid performance in the developed markets. We saw robust demand for consumables across our portfolio of acute care diagnostic instruments.

At Leica Biosystems, core revenues grew mid-single digits in the quarter, led by high single-digit growth in North America. An expanding installed base and strong consumable sales contributed to double-digit growth in our advanced staining business.

Back in September, we announced our acquisition of Cepheid, a leading molecular diagnostics innovator in the fastest growing segment of diagnostics. Cepheid has the largest global installed base of molecular diagnostics instruments, combined with the broadest test menu available. We expect this highly complementary addition to our Diagnostics portfolio to accelerate our growth strategy and further differentiate Danaher's Diagnostics offering. We also foresee tremendous opportunities with the application of DBS at Cepheid, which we believe will help drive better top- and bottom-line performance.

Turning now to our Dental segment, reported revenues increased 3.5%, and reported operating margins increased slightly to 15%, with 20 basis points of core margin expansion. Core revenues were up 3%, driven by our equipment, implant, and orthodontic product lines, while we saw softer demand for consumables in the quarter. Positive gains in North America were offset by weakness in Western Europe. Strength in high-growth markets was supported by another quarter of double-digit growth in China across all of our major Dental product lines.

Since 2010, we've grown our Dental revenues in China from $15 million to over $150 million today, and we're now positioned as one of the leading players in the region. We've evolved our business model as well in China, to position ourselves as more of a localized player, by expanding our R&D teams, increasing local commercial coverage, and establishing manufacturing capabilities in the region. This approach, combined with our comprehensive product suite, enables us to provide a full-service, China-centric offering that enhances our customers' experiences and positions us well for continued growth in this market.

Let's turn to Nobel Biocare. Nobel Biocare's core revenue grew at a low single-digit rate, with demand for implant systems and regeneratives driven by recently launched new products that have quickly gained traction with customers. Similar to what we saw across our other Dental businesses in the quarter, sales in Western Europe softened at Nobel, while China continued to do well. The benefit of the Team's operational and cost improvements using DBS continues to help fuel Nobel's new product and innovation engine.

Turning to our Environmental & Applied Solutions segment, core revenues grew 3.5%, with reported revenues up 4.5%. Core operating margin expanded 60 basis points, and reported operating margin was down slightly, at 24.3%.

In Product Identification, core revenues increased at a mid-single-digit rate, and we saw strong demand for marking and coding equipment, and related consumables, across most major geographies. Sales growth of our packaging and color solutions offerings improved sequentially, and was led primarily by increased demand in the US and Latin America.

Videojet showed solid growth performance, delivering mid-single-digit core revenue growth in the quarter. Strength in developed markets and Latin America was modestly offset by declines in China, primarily due to industrial end market weakness. Videojet continued to grow the number of connected printers in the market, expanding our remote solutions offering for customers and driving high single-digit service revenue growth.

Core revenue grew low-single digits at ESKO, led by increased demand at MediaBeacon, which we acquired in 2015. As a reminder, MediaBeacon provides digital asset management software that brand owners and packaging managers use to ensure accuracy and compliance. With the help of DBS tools like funnel management and transformative marketing, MediaBeacon has generated greater market awareness and demand for our integrated solutions, which support customers across their full brand and packaging workflows. At X-Rite, core revenue grew low-single digits, with strong performance in North America and China, partially offset by the rest of Asia.

Lastly, turning to water quality, core revenue growth for the platform increased at a low single-digit rate. Hach's core revenue declined slightly in the quarter, as industrial end market weakness contributed to softer demand in North America and China. We saw similarly lackluster activity in Eastern Europe, as constrained government funding and political instability affected municipal projects. We anticipate better core growth at Hach in the fourth quarter.

ChemTreat core revenue grew at a mid-single-digit rate, as the Team delivered solid commercial execution and expanded their customer base in the US. Strength in North America, and the food and beverage end markets, was partially offset by lower demand in Latin America, particularly in the more commodity-oriented markets.

At Trojan, core revenue increased double digits, driven by consistent municipal demand across developed and emerging markets. Our increased municipal systems installed base contributed to strong replacement growth, and bidding activity was up low-single digits globally. A few key municipal project wins materialized in Asia, as ultraviolet water treatment solutions have gained interest in the region.

So, to wrap up, we're pleased with our performance in the current macroeconomic environment. We believe that the steps we've taken to reshape our portfolio positions us well for stronger growth and value creation. The diversity and strength of our businesses, combined with our Team's focused execution using the Danaher Business System, is what sustains our competitive advantage. We believe that this combination will continue to serve both our customers and our shareholders well.

We're initiating fourth-quarter guidance for adjusted diluted net EPS from continuing operations of $1.01 to $1.05, which assumes fourth-quarter core revenue growth comparable to the third quarter of 2016. For the full-year 2016, we're raising our adjusted diluted net EPS from continuing operations guidance to $3.57 to $3.61, which at the mid-point would represent an increase of approximately 20% from 2015.

Thanks, Tom. That concludes our formal comments. Erica, we're now ready for questions.

Thank you.

(Operator Instructions)

We'll go first to the line of Scott Davis with Barclays. Please go ahead.

Hi. Good morning. Good morning, guys.

Good morning, Scott.

You see the pattern that since you hired Gugino, you start putting up these big numbers? (Laughter)

He's got a big team supporting him, Scott. We love him, but, you know, big team, big team, broad-based.

Well, you know. Anyways, I'm intrigued by -- it's your one-year anniversary of Pall, and I'm intrigued on -- how have your results matched up with the deal model, and more specifically, what type of return on capital are you sitting on as you look point in time right now on that deal?

Scott, we're very, very pleased with the performance of the Team, both the Danaher Team that has joined the team at Pall, as well as the legacy Pall associates. The combination of those two teams has gotten the business off to a tremendous start in the first year.

DBS has played a huge role in the progress that we've made there. As you might recall, that team had begun the journey before we arrived on the scene, but the combination of the Danaher Team that's gone in and the Pall Team have really accelerated the pace of progress. There's been over 350 kaizens that have been completed both on the operational side as well as on the commercial side. We've seen the tremendous lift in core operating margins in that business. And as I mentioned in my remarks, we're now seeing the investment in some of the sales and marketing and the new product areas start to make a real difference in terms of getting new products, not only launched, but commercialized on time and effectively.

So we're off to a good start. We took the improvements from a cost standpoint up from $60 million in the first year to $100 million. So we're a little bit ahead of schedule in that respect, and I think obviously, that lifts the returns here in the near term.

Relative to where we'll end up on a four-, five-year basis and beyond, I think, again, we're off to a very good start. I think we have a lot of opportunity to lift those returns. But it's still early days, and there's a lot of hard work to be done in the months and quarters and years ahead, but a great start.

And just sticking on Pall, when Pall industrial comes back -- and I'd love to hear your view on when you think you move into positive territory there -- but when Pall industrial comes back, would you expect outsized operating leverage on a cost-out, or how would you think about it if you were in our shoes?

First of all, I think we've seen -- while not the beginnings of growth on the Industrial side, I think we've -- we have not seen another leg down, in other words. We've seen some stability. The Industrial side was still down mid single digits in the quarter while the Life Science side was up mid single digits.

And so as those businesses begin to improve, both from the standpoint of our execution -- and DBS is playing a role there from a new product execution standpoint and a commercialization perspective -- when those improvements kick in and we get some lift from the macro, I think the big benefit you're going to see is in terms of the core growth of that business and the read-through on an operating-margin basis from that core growth.

I don't know that it necessarily changes trajectory from a cost-out perspective. We're working on the cost structures both on the Life Science side and on the Industrial side, as well as across the horizontal components of G&A. So I think the real lift comes when we start to see that core growth turn positive and we start to he see the read-through from that growth.

Makes sense. Thanks, guys.

Thank you, Scott.

We'll take our next question from Steve Winoker from Bernstein. Please go ahead.

Thanks, and good morning.

Good morning, Steve.

To echo Scott, I wouldn't -- team is important, but don't forget Matt in all this, okay? Listen, I want to just start with the actual fourth-quarter core growth that you just talked about at about the same as third quarter. Just looking for where you might see signs of acceleration, how you think about that trending into next year.

I know if I look at 2015, the third quarter was up year on year 3%; the fourth quarter was up only 1.5%. So just wondering, is this conservative in terms of how you're thinking about it? Give us some sense about the fourth quarter, if you could.

I wouldn't describe it as conservative, Steve. I do think, though, there's a number of considerations that go into how we look at the fourth quarter. It starts with how pleased we are with the performance to this point in the third quarter, with all four segments driving at least 3% core growth. And I think now, with a portfolio where greater than 60% of the revenues are in the aftermarket and where there's some stability in these markets but not necessarily anything positive to write home about macroeconomically, there is cause for some degree of caution in the outlook.

You're reading the same macroeconomic news that everybody else is and certainly that we are. There's a number of sources of uncertainty in the market today, whether that's the election uncertainty in the US, the Brexit uncertainty throughout Europe, the questions around turns in some of the high-growth markets -- or previously known as high growth markets, as I sometimes say -- around places like Latin America, the Middle East, Russia, and particularly those markets with a good deal of commodity exposure and certainly those with a high degree of industrial exposure.

So it's hard not to be appropriately concerned with some of those sources of uncertainty, but that being said, we think we've got an incredibly resilient portfolio right now, again, underpinned by that level of aftermarket position and a portfolio we think that will continue to perform well despite those uncertainties.

And as you think about extending that through next year, what would be the biggest things that would drive you from that 3% level to, say, something higher, even another 50 basis points? What are the few things we should be looking for?

Well, first of all, we still have plenty of work to do left here in 2016 before we get into 2017. And we'll be going through a process here in the fourth quarter around budgets and be in a much better he position to give you some specifics when we're together in December.

But if you really stand back and you look at us today, I just mentioned the strength of the portfolio and the repositioning and the level of aftermarket that gives us a strong foundation. But I think we're encouraged about the continued improvement in performance at Pall, with the addition of Cepheid and Phenomenex coming into the Life Sciences & Diagnostics portfolio and continuing to help us both from a growth rate standpoint as well as from an operating margin lift.

And then as we've mentioned before, we think there's plenty of opportunity for continued improvement in growth in our Diagnostics business, in a number of our Life Science business as well as in Dental. Clearly, we could use a little bit of macroeconomic headwind, but I think there's -- or excuse me, tailwind, but I think we have plenty of opportunities to play offense and make our own way in a good deal of the portfolio.

And Steve, just to add a few things. One, on a year-to-date basis, Pall is up mid single digits. That's not been in the core number. As Tom alluded to, that's with no benefit from the industrial side of Pall. So even if industrial stabilizes a little bit, Pall should be a net contributor to our core growth next year.

Our industrial instrumentation business at Hach has been weak. Our experience, that tends to not last very long. I think that would be -- we would expect sort of better numbers out of Hach here in the fourth quarter going into next year. So even those two items, even before Cepheid comes in. Again, Cepheid won't impact our reported core number but will help our pro forma core number in 2017 as well.

That's helpful. I'll pass it on. Thanks.

We'll go next to --

Thanks, Steve.

Apologies. We'll go next to the site of Jeffrey Sprague from Vertical Research. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Jeff.

Good morning. Could we build a little bit more on your discussion about the uptick in muni activity? It feels like that has been building for a couple quarters now. I just wonder if you could give us a little bit more color on geographically what's going on and what the pipeline of business looks here for the next, call it, six to 12 months.

Jeff, specifically, in the muni world?

Yes, muni world.

Sure, sure. I think the brightest spot that we've seen in the municipal world around water, our municipal water business, has been at Trojan where we've seen good performance this year, where we've seen double-digit growth in the last quarter. We've seen increasing win rates and a reasonable lift in bidding activity, but I wouldn't say that bidding activity necessarily suggests that double-digit growth rate is a sustainable one. This is more of a -- probably a mid-single-digit type of market.

But we have been very encouraged by the performance at Trojan. Their competitiveness, I think, has read through in terms of their win rates, and so we're in a reasonable market right now. I think we're winning share. So that's encouraging from an equipment and an infrastructure perspective, and we're seeing that globally.

I think there's a different side of the story, though, which is on the municipal business in North America. The day-to-day consumables business is not showing the kind of strength that I just represented at Trojan. We're seeing low-single-digit growth in that market right now. Still a very good market, and Hach continues to be gaining share there, but not nearly at the rate that we're seeing some of the infrastructure buildout in certain markets.

And then just on Phenomenex, I don't know a lot about the company, obviously, but interesting that it's 100% consumables, and I always think about the strength of your consumable business being tied to the inherent strength of your platform and equipment businesses. Are there other assets like this that are tuck-ins? Are these 100% consumable companies under strategic and competitive threat as folks like yourself build an equipment business? And even just any perspective on how to think about just the dynamics of that company and how (multiple speakers) the landscape is there.

Sure. Phenomenex it's a great franchise, and it is virtually a 100% consumables business with great gross margins, gross margins in the 70% neighborhood and mid-20%s operating margins, but still with opportunities for improvement via DBS.

We're thrilled to be able to acquire this asset. We've admired that business for a long time. We were able to acquire it at an attractive valuation, and I think for those who have asked us about return thresholds in the past, this is clearly a business that we believe we will achieve double-digit return on invested capital in in less than five years. And that, obviously, for us is very typical for a large bolt-on or a mid-size adjacency deal and really opens up a number of other possibilities.

Jeff, this is a business, to your point about installed base versus consumables, where Phenomenex has become the leader they are largely because they actually are equipment agnostic and they focus on specific applications and workflows that address unique customer problems and, therefore, create unique customer value. We've had a partnership with Phenomenex at SCIEX for a number of years, and it's been a very successful one, but as some of you may recall, we're also consumables agnostic in the sense of chromatography columns at SCIEX, and so what this allows us to do essentially is bring a greater variety, a broader set of solutions to our customers without necessarily having to have those consumables be captive by that installed base.

Obviously, that can be very attractive strategically when you have it. But in the particular case of the Life Science world, being able to customize solutions for these unique applications and customer challenges is a real competitive advantage.

Tom, that doesn't create a channel conflict for all the other folks they were agnostic with, and there's some bleed-away on their other business as a result of it?

It really doesn't, Jeff. Again, we have excellent relationships with other partners in the consumables world in Life Sciences. We had source from multiple -- I shouldn't even say source. We had customized solutions for customers across a number of different consumable suppliers for a long period of time, and we expect to maintain those relationships and continue to be focused on what are the specific needs of the customers today and how do we serve them best.

Thank you.

Thank you, Jeff.

We'll go next to the site of Tycho Peterson from JPMorgan. Please go ahead.

Wondering if you could comment on the academic markets. The NIH data was pretty negative for September. I think budget is down 13%. I know you called out some softness for Leica Microsystems. So can you maybe just talk a little bit about what you're seeing on the academic markets specifically?

Good morning, Tycho. We certainly participate in the academic market in our Life Science businesses, but we don't have enormous direct exposure to NIH. If you really looked at the direct exposure across a number of our businesses, we're probably in the $150 million or less with direct exposure to NIH funding.

Now, there's more than that in terms of indirect funding, but I would say that funding issue that you mentioned clearly has had an impact on a broad basis when you talk about a variety of things that are indirectly funded or go through a number of different stages before they ultimately get to a supplier like us.

We have seen weakness in that market. We have not seen any particular cause for optimism in the academic market, particularly in the US. Europe has hung in there in pockets. Japan is weak and certainly continues to be that way. So it's not an area of strength right now, and clearly, the NIH funding issues have not been net particularly helpful.

Tycho, I would add that we probably saw a little bit more of a bifurcation in Life Science in the quarter, meaning that biopharm remained very strong. Traditional pharm, food, and environmental remained solid, consistent with what we saw in the first half. We did see both academic and industrial markets, particularly at Leica, weaken in the third quarter.

That's helpful. And then on Beckman, if I go back to your comments last quarter, I think you had talked about growing at a market rate. If we look at the results from some of the peers, they're still growing a little bit faster, including in the high-single-digit range for one of them. Could you maybe talk a little about your view of whether you can get Beckman back to maybe a mid-single-digit growth trajectory.

We absolutely believe that we can do that, Tycho. We've made terrific progress thus far. We've seen improvement, certainly, in our clinical chemistry and our immunoassay business. Our urinalysis business continues to perform very, very well. That business is up double digits in the third quarter.

And I think with the addition of Cepheid and a broader position in molecular diagnostics, particularly with the potential growth that's available at the point of care and potentially ultimately in the physician office lab, we do believe that both the core legacy business of Beckman will improve its growth trajectory over time, with the addition of those higher-growth segments that we've acquired, will be accretive to that growth profile.

Then just one last quick one. Can you quantify the biopharma growth from Pall that you saw in the quarter?

The Life Science business overall was up mid single digits on the quarter, and the single-use business continues to grow --

It's growing double digits.

At double-digit rate. So we continue to see good and consistent performance on the biopharma side.

Thank you.

Thank you, Tycho.

We'll go next to the line of Ross Muken from Evercore ISI.

Good morning, gentlemen. So on Dental, it's interesting. The macro has been all right, I would guess, in the US, but it feels like on North American consumables, we're seeing a little bit of choppiness. Curious your thoughts for that.

Ant then conversely, it seems like overall, the segment is doing quite well, but it's equipment, which I guess doesn't correspond with the macro question. And then on the implant side, where it seems like you're doing quite well with the Nobel acquisition. So help us make sense of what you're seeing in the segment and how much is market related and how much is better execution on your end in some of the segments that are outperforming.

Thanks, Ross. Good morning. We're pleased with how the Dental business, the segment performed in the quarter, at up 3%. And there was clearly some better execution on our side in a number of different areas.

You've heard us speak in the past about some of the changes that we've made, both organizationally and operationally. We have realigned our investments into some key areas from a new product perspective, and we're seeing the benefits there.

Relative to the specific portions of the business that you mentioned, we are seeing strength in our equipment business, up mid single digits, and yes, the consumables business up more like low single digits. And really, I think that has to do with a couple of different factors.

We are executing well in the equipment side. We have new product initiatives that are making a difference there, and overall, I think we're well positioned from a portfolio perspective.

You've heard the narrative from a number of different folks in the market around some softness during the course of July and August. I think we, as the quarter came to a close in September, we started to certainly see some of that play through, and I think that absolutely varies by geography as well. I had mentioned double-digit growth in places like China and India, but the US much slower, and certainly, we're seeing some softness in Europe, as well as Latin America and the Middle East. So definitely a tale of two cities.

You asked also about the equipment, the implant side. Nobel continues to perform very well. They've got a number of new products in the market right now which are helping in that growth rate. And they're executing well just on a commercial basis day in and day out. And some of that, obviously, has been a function of the implementation of DBS on the cost side where we've been able to reallocate some of those funds into investments in sales and marketing as well as in R&D. Particularly in the third quarter, we made some significant investments in sales and marketing, and I think that will continue to pay off at Nobel with even improving growth rates.

And maybe just moving back to the capital allocation, you guys have obviously been quite busy, and obviously, since you've taken over, there's been a distinct bias towards growth. What should we learn about your vision of what Danaher will be over the next five or 10 years, based on these assets.

You've obviously gotten some real crown jewels within the tools complex in Phenomenex and Pall, and obviously in Cepheid, you get a high-growth potential. How should we think about how you're reshaping this portfolio and what the -- I'm not looking for quantitatively, maybe more qualitatively, how you think about the evolution of this asset at this point?

Sure. Ross, we have gotten quite a bit done here in the last couple of years with the separation that took place with Fortive and getting Fortive off to a great start, but then making some very important and strategic acquisitions to shore up really what were three of the most important strategic needs or opportunities that we had. Nobel on the implant and consumable side, as you mentioned, Pall to enhance our Life Sciences, specifically biopharmaceutical production position, and then Cepheid to improve our position relative to molecular diagnostics. We've had a focus strategically on the consumables side of Life Science, and Phenomenex, to use your term, a crown jewel in the consumable side of Life Science.

So I think we feel very good about where we are right now. I wouldn't trade our portfolio, the four segments that we have today of Diagnostics, Life Science, Dental, and Environmental, and Applied Solutions for any portfolio in the market. And I think the game plan in the years ahead, as it has been in the past, is continue to deploy our free cash flow strategically with a strong bias towards M&A into these highly attractive segments.

And I think the game plan, at least in the near term here, given the current position of the balance sheet and all that we have to do operationally with these acquisitions, is to focus on probably smaller, mid-size bolt-ons that are strategically important to our position that hopefully will -- as these have done -- will be accretive to our growth rates and improve our growth trajectories. Hopefully, that will be the case certainly on the margin side, if not initially, certainly over time. I think that's the game going forward. It's been the plan over the last couple of years.

Great. Thank you.

Thank you, Ross.

We'll go next to the line of Doug Schenkel from Cowen.

Great. Good morning. Thank you for taking the questions. My first question is on high- growth market trends. In the third quarter, high-growth market revenue growth was around -- I think you said mid single digits. As you describe it, there continue to be some headwinds relative to what we've seen, at least compared to historical trends. Recognizing a lot of this is out of control, I'm just wondering if you'd speak a little bit about the actions and investments you're taking to better position these markets for better growth in 2017?

Sure. Thanks for that question. As we look at the high-growth markets today, I'm not sure we would necessarily say there was much of a change recently in those markets.

We continued to see strength in China across a number of our businesses, if not all. Business in China is high single digits. Real strength in Life Science, in Dental, in Diagnostics, some softness in Hach and Videojet. Those are businesses where that softness largely comes from equipment and more industrially oriented end markets. And you've heard me mention a number of times the strength that we've seen in India, which has been very consistent level of strength over the last couple years.

And with those two markets being what they are, both the scale of those markets, the inherent growth rates in those markets, and the strength of our positions, those are really where a great deal of our investment are going. We're largely doubling down in the markets where we have the greatest opportunities for growth in the near term.

What improvement we've seen, and it's been very modest in places like Latin America, Brazil specifically, and Russia, are really more about easier comps than materially improved market conditions, and the Middle East continues to be weak. And so while we've sustained our positions there in terms of our feet on the street and our investments in commercializing new products in those markets, those have not been markets where we are significantly accelerating our investments today. Instead, the biggest incremental investments are going into those markets where we're seeing continued strength.

Great. That's helpful and insightful. Thank you for that. My second question is on diagnostic core margins. They improved 250 basis points year over year in the quarter. There was some nice improvement in the first half of about 210 basis points year over year, so got even better in Q3. Some of this may be a function of comps, but to the extent it isn't, could you provide a bit more detail on what's really driving accelerating improvement and how we should think about sustainability?

We're certainly seeing continued improvement in the margin performance at Beckman Diagnostics. Across our Diagnostics portfolio, you have Radiometer, Leica Biosystems, both businesses we've owned for a number of years and have made tremendous progress in enhancing their operating margins. Beckman, obviously, a more recent acquisition, but still five years ago. We've seen great lift in those operating margins to this point.

But as I mentioned, Beckman represents a large business that still has quite a bit of head room for margin improvement. And so we've seen it to this point, but we think there's more runway ahead.

Really (multiple speakers) -- go ahead.

Doug, it's Dan. We did benefit in Q3. It was a slightly easier comp despite having said that. Again, it was a very strong quarter of core margin expansion.

What we're seeing is continued increase in the gross margin side, continued leverage on the G&A side, while we're also stepping up R&D and sales and marketing. So we're seeing the mix you'd like to see from a margin perspective where we're getting the expansion, but we're taking part of that and putting that into more growth investments.

That's great. That's what I was getting at. Is it a continuation of trend, which has been good, or are things actually getting a little bit even better, which it sounds like they are.

Last one. There's clearly been a lot of questions about what's going on in different geographies and different end markets, and you guys have been great at providing a lot of directional qualitative information to help us out there. I just figured I would ask in case you guys would be willing to, whether or not you could just give us core revenue growth by end market and by developed geography in the quarter across all businesses.

Well, we don't give quite that level of detail, but we did talk about continued double-digit mid-teens growth in India, high-single-digit growth in China. Both the US and Western Europe were up low single digit. That's been pretty consistent.

I would add as a footnote, probably seeing some incremental signs of weakness in Western Europe, where our overall numbers in Q3 were pretty comparable to what we had in the first half. Tom alluded to the academic comment, seeing a little bit of that industrial weakness in places like Hach. Not a big change, but probably on the margin, the tone is a little bit cautious in Western Europe. And Japan, we continue to be down low to mid single digits.

Thank you again.

Thanks, Doug.

We'll go next to the line of Derik de Bruin from Bank of America. Please go ahead.

Hey, good morning.

Derik.

So before I ask another geography question, I just wanted to ask a Diagnostics question. You've closed the Cepheid -- or you haven't closed it, but you've announced the Cepheid transaction. You've had a little bit more time to think about it.

Any further additional thoughts on where you think you can ultimately get the gross margin on the Cepheid products? That was a topic when we did the call the last time. I just wonder if you had any further thoughts on it.

Derik, thanks. I don't know that he we have a lot more to offer. During due diligence, we were able to spend a good deal of time with the team and understand the road map that they had laid out for gross margins. You've heard a lot of that from the business in terms of the opportunities around improving the cost structure of the cartridge.

We think those are very credible. We think they've got a solid road map for executing on those improvements. And obviously, once we've closed the transaction and we can engage directly with them, we'll be bringing the tools of the Danaher Business System that we've used successfully in a number of other businesses to improve gross margins.

You just heard Dan comment about what we've done at Beckman, and we'll obviously bring that to bear at Cepheid. And I think you'll see those improvements come through.

Great. And just want to go one more Western Europe question. Are you seeing -- is it budget delays that you're seeing or people just canceling orders or people just hesitating on spending? Just a little bit more color on what's going on in terms of specific trends, if there's anything you can draw from what you're seeing across the businesses.

Was that a Europe question? I'm sorry.

A Western Europe question, yes.

Much more in terms of delays than cancellations. We tend to see, both at the tendering level as well as at the purchase order level, folks hanging back. In certain cases, it's because budgets haven't been fully approved yet. In other cases, they're just trying to get paperwork through approvals, and normally, that's a circumstance where, because of some levels of austerity, folks are just slowing things down.

Great. Thanks.

And our final question comes from Nigel Coe with Morgan Stanley.

Thanks, guys. Good morning.

Good morning, Nigel.

I feel like we've covered a lot of ground, so I want to keep this relatively quick. But I did want to come back to Dental. There's obviously a lot of noise from some of your competitors regarding the US channel. So I'm just wondering, given the recovery we've seen, the large recovery we've seen in core growth rates in Dental, how confident are you that you can sustain this level of growth in the 3%-plus bracket?

Well, clearly, there's some cause for concern or caution around that given some of the narrative that we heard from the channel during the course of the quarter. We saw some of that in the month of September come through in terms of the order rates on the consumable side. I think we feel pretty good about continuing to improve our own execution, particularly on the equipment side, also at Nobel, but I think on the consumable side, we'll need to make sure that we're seeing some improvement in the sell-out, either from a programmatic perspective or just from an overall macroeconomic perspective.

And then Diagnostics, we don't have a great history on the quarterly performance of Diagnostics, but it does feel like last year we saw maybe an unusually large Q-to-Q stepdown on margins in 3Q followed by a pretty big pick-up in 4Q. Would you expect to see a similar 4Q buildup versus 3Q?

Then more broadly on 4Q restructuring across the portfolio, in the past Danaher had the very heavy restructuring actions in 4Q. I know this year is not going to be anywhere like that, but maybe just comment on how you see 4Q restructuring actions across the portfolio.

Nigel, on Diagnostics first, seasonally Q3 tends to be a little lighter, so that played out again this year, though a big improvement versus Q3 a year ago, and we do expect a nice seasonal pick-up in Q4, would expect margins above where they were a year ago, Q4, which was north of 18%.

Regarding restructuring, we continue to take actions throughout the year. We don't really call those out. I would expect our overall restructuring spend to be in the same ballpark as last year, again, probably a little bit more evenly distributed through the year.

Okay, guys. Thanks a lot.

Thanks, Nigel.

And at this time, we would like the to thank everybody for their participation on today's conference call. Please feel free to disconnect your line at any time.