Danaher Corp (DHR) 2017 Q1 法說會逐字稿

My name is Tracy, and I will be your conference facilitator this morning.

At this time, I would like to welcome everyone to Danaher Corporation's First Quarter 2017 Earning Results Conference Call.

(Operator Instructions)

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

Mr. Gugino, you may begin your conference.

Thank you, Tracy.

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 first 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 Reports & Earnings.

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

A replay of this call will also be available until April 27, 2017.

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 in the first quarter of 2017 and all references to period-to-period increases or decreases in financial metrics are year-over-year.

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

In addition, the pending acquisitions we will reference today remain subject to customary closing conditions.

During the call, we will make -- we may 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 we -- 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, except as required by law.

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

Thanks, Matt, and good morning, everyone.

We're off to a good start in 2017.

During the first quarter, our 2 most recent larger acquisitions, Pall and Cepheid, performed very well.

We drove share gains in a number of our operating companies and achieved high single-digit adjusted earnings per share growth.

We also continued to reinvest in our businesses to enhance our long-term growth trajectory, and we feel well positioned to benefit from compelling market drivers across the portfolio.

Today, you will hear a number of examples of how our focus on innovation and key commercial initiatives enable us to provide customers with new technologies and solutions that they need to improve critical processes.

By prioritizing this targeted reinvestment, we believe that we can strengthen our competitive advantage and better position our portfolio for sustainable long-term outperformance.

Turning to our first quarter results.

Sales increased 7% to $4.2 billion, and core revenue grew 2.5%.

The impact of currency translation decreased revenues by 1.5% while acquisitions increased revenues by 6%.

Geographically, revenue in the developed markets was up low single digits.

High-growth markets grew at a mid-single-digit rate, led by continued strength in China and India.

Gross margin for the first quarter was 55.5%, an increase of 30 basis points from last year.

Our core operating margin declined 15 basis points, and reported operating margin declined 80 basis points to 14.8%.

These declines were primarily due to the impact of recent acquisitions, incremental growth investments and the impact of foreign exchange rates.

In terms of M&A, we announced 2 acquisitions for nearly $100 million, both of which are subject to customary closing conditions and are expected to close in the second quarter of 2017.

As we move through the year, we will continue to focus primarily on small and mid-sized acquisitions.

First quarter adjusted diluted net EPS was $0.85, which represents an increase of 8% over last year.

Now let's take a more detailed look at our performance across the portfolio.

In Life Sciences, reported revenue was up 4% and core revenue grew 3%.

Reported operating profit margin increased to 16.2%, and core operating margin increased 165 basis points.

This strong margin improvement was broad-based across the platform, including Pall, and is reflective of the team executing well using DBS.

At Beckman Life Sciences, core revenue grew at a low single-digit rate.

Ongoing strength in our flow cytometry and particle counting businesses was modestly offset by declines in centrifugation.

Developed markets were slightly softer, mainly due to the timing of certain projects, while strong momentum continued in China where local investment in research and biopharma drove another quarter of sustained growth in the region.

Beckman reinforced its commitment to innovation during the quarter with the launch of the Biomek i-Series automated workstations.

This new automated liquid handling platform provides consistent sample preparation with greater efficiency, adaptability and reliability.

The Biomek i-Series launch is the culmination of a focused R&D process, which included obtaining extensive voice of the customer and during which the team worked with end users around the world to identify vital features for a new platform.

One of our 5 core values at Danaher is customers talk, we listen.

And by better understanding our customers, Beckman was able to deliver market-driven innovation and ensure that new products like the Biomek i-Series will provide critical solutions for scientists' evolving needs.

Core revenue at SCIEX was up low single digits, driven by growth in Western Europe and China.

We saw good demand in the pharmaceutical end market across all major geographies, with particular strength in China, where heightened regulations around generic drug production are generating greater demand for testing.

Leica Microsystems delivered high single-digit revenue growth as all major regions and product lines showed positive performance.

North America and Western Europe were driven by several key project wins, particularly in our confocal and surgical businesses.

Pall's core revenue grew low single digits, with mid-single-digit growth at Pall Life Sciences led by gains across our biopharmaceutical business, particularly in single-use technologies.

Pall Industrial's core revenue was down slightly versus a tough prior year comparison.

This was largely the result of a sizable project in the Middle East in the first half of 2016.

Our microelectronics and aerospace businesses continued to perform very well, and we saw signs of stabilization across a number of our industrial and process end markets.

We were also encouraged by strong bookings throughout the quarter.

We're well positioned in our biopharma business and expect that we will continue to benefit from the long-term trends in this end market, including the shift from small to large molecule drugs and the increasing proliferation of single-use technologies across biopharma production processes.

A great example of Pall's leadership in this space was on display at the INTERPHEX biomanufacturing trade show in March, where we featured a number of recent innovations, like the BioSMB continuous chromatography system and the Cadence Acoustic Separator, which are helping customers improve the efficiency of their bioproduction workflows.

Turning now to Diagnostics.

Reported revenue increased 17%, and core revenue increased 2.5%.

Reported operating margins declined to 11.6%, in part due to recent acquisitions.

Core operating margins decreased 240 basis points and were negatively impacted by the strengthening of both the U.S. dollar and the Japanese yen versus other currencies, along with incremental growth investments in R&D, service and commercial initiatives.

Radiometer's core revenue grew high single digits, with positive results across all major geographies.

Our blood gas and AQT product lines continued to perform well, and double-digit instrument sales helped to expand Radiometer's installed base and drive strong recurring revenue growth.

At Leica Biosystems, core revenue increased at a low single-digit rate, led by growth in the developed markets and China.

Advanced staining performed very well across both instruments and consumables while our core histology and tissue acquisition product lines declined.

Core revenue at Beckman Coulter was up low single digits, with strength in high-growth markets partially offset by weakness in Western Europe and North America.

Our business in China delivered another strong quarter as meaningful installed base expansion in the region contributed to healthy recurring revenue growth.

Cepheid is off to a great start and achieved double-digit core revenue growth in the quarter.

Through the thoughtful application of DBS, the team has implemented numerous process improvements to increase productivity since acquisition.

These initiatives have already generated meaningful operating margin expansion, and we are very encouraged by this early progress.

Cepheid also received FDA clearance for its Xpert Xpress flu and RSV, respiratory virus test, in March.

Both of these tests deliver molecular results in as little as 20 minutes, twice as fast as their predecessors and with comparable accuracy.

The first 24 hours of flu and RSV symptom onset is a critical window and Xpress test's faster turnaround time enables clinicians to access reliable diagnoses and targeted therapies for their patients that much more quickly.

Turning now to our Dental segment.

Reported and core revenue growth was roughly flat in the first quarter.

Core operating margin declined 85 basis points, and reported operating margin decreased to 13.6%.

This margin decline was largely driven by weakness in our higher-margin traditional consumables business.

Solid demand continued for our specialty product lines, including orthodontics and implants, and we saw positive growth in our equipment business.

We anticipate the weakness across our traditional consumables business will persist in the near term, leading to similar growth rates in Q2 as we saw in Q1 for the overall Dental platform.

In the meantime, we remain focused on enhancing our Dental portfolio's foundation for long-term growth.

Recent cost structure improvements have facilitated reinvestment in the business to drive growth through commercial initiatives and through innovation.

At the International Dental Show in March, we featured more than 10 new products from across our Dental platform, including the SMARTmatic handpiece and the KaVo OP 3D Pro panoramic x-ray imaging system.

We also featured DTX Studio, a single digital software platform that connects a dental office across its entire workflow, from diagnosis to design and patient treatment.

These innovative technologies enable an entire dental team to work more effectively and, most importantly, support better treatment outcomes for patients.

Moving now to our Environmental & Applied Solutions segment.

Both reported core revenue were up 4.5%.

Reported margins were 22.7%, with core operating margins up 60 basis points due to broad-based DBS execution across the segment.

In Product Identification, core revenue grew at a mid-single-digit rate, driven by positive momentum in our marking and coding equipment and related consumables businesses across all major geographies.

We also saw increased demand for our packaging and color solutions products.

In March, we announced the acquisition of Advanced Vision Technology or AVT, a leader in automatic print inspection, process control and quality assurance with over 7,000 systems installed at customer sites worldwide.

AVT's inline print inspection systems are used by the world's top packaging and label converters to improve product quality and operational efficiency, and the business is highly complementary to X-Rite's color inspection capabilities and Esko's packaging workflow.

We believe that this combination of solutions will enable us to better serve our customers by simplifying their management of complex packaging value chains, and we look forward to welcoming the AVT team to Danaher.

Videojet continued to outperform in the quarter, delivering mid-single-digit core revenue growth as the business grew across all product lines and most major geographies.

Videojet's service offering delivered another great quarter, and the team's focus on life cycle service initiatives continues to enhance customers' experience with greater productivity and more uptime to help reduce their operating costs.

The application of DBS to Videojet's equipment sales and service approach continues to drive higher service contract attachment rates at both existing and new accounts.

Core revenue at both Esko and X-Rite was up low single digits.

And a number of new products we introduced at the drupa trade show last summer have gained good traction in the market.

Finally, turning to Water Quality.

Core revenue growth for the platform increased at a mid-single-digit rate.

Throughout the first quarter, we were encouraged by improved momentum across our more industrial-oriented businesses, and we believe that we continued to gain share relative to the market across the entire platform.

At Hach, mid-single-digit core revenue growth was supported by growth in North America and Western Europe, off improving order trends that we started to see through the end of last year.

In the high-growth markets, China performed well while Latin America and the Middle East declined.

Solid growth across most of Hach's major product lines was led by instrument sales as we expanded our installed base.

For decades, Hach has pioneered an advanced chlorine analysis for municipal and industrial water treatment.

The team continued to build on a long tradition of innovation and new product development with the recent announcement of the CM130 chlorine monitoring system, the first of its kind cleared by the FDA for use in the medical field.

The CM130 automatically test chlorine levels at dialysis centers every 5 to 20 minutes, providing frequent analysis and immediate notification of high-chlorine events via remote indicators in the patient treatment area.

It was developed in collaboration with one of the leading dialysis providers in the U.S. and is a tremendous example of how Hach partners with customers to deliver connected instruments that provide actionable insights and decision support.

In our water treatment businesses, both Trojan and ChemTreat achieved mid-single-digit core revenue growth in the quarter.

Growth at Trojan was driven by key project wins in Western Europe, Asia and Latin America.

And ChemTreat's growth was led by gains in both North and Latin America, which were largely driven by incremental improvements in the oil and gas sector.

So to wrap up, this was a good start to the year.

Pall and Cepheid both performed well.

We drove share gains at a number of our operating companies, and we continued to reinvest in our businesses in order to enhance our portfolio's growth trajectory.

There are compelling secular market drivers across each of our 5 platforms, and we feel very well positioned to take advantage of these going forward.

At the same time, we see tremendous opportunities to enhance our growth and margin profile through focused execution across the portfolio, and with the Danaher Business System continuing to serve as our foundation, we believe that we will be able to deliver long-term outperformance for shareholders.

We're initiating second quarter adjusted diluted net EPS guidance between $0.95 and $0.98, which assumes second quarter core revenue growth comparable to the first quarter of 2017.

We continue to expect full year 2017 adjusted diluted net earnings per share to be in the range of $3.85 to $3.95.

Thanks, Tom.

That concludes our formal comments.

Tracy, we're now ready for questions.

(Operator Instructions) And we'll go first to Scott Davis with Barclays.

Maybe I'm a little dense, but can you help walk through the diagnostic core margin deltas?

So it was down 240 basis points, and you said some of that is currency.

Can you help us understand how much of that is currency?

Well, we know you're not dense, so let's start with that.

Scott, the -- starting with the FX impact, which is in the neighborhood of 100 basis points of impact year-on-year, really has virtually everything to do with the year-on-year strengthening of both the U.S. dollar and the yen, especially the yen through the first quarter.

If you think about our diagnostic business, we manufacture a great deal of our product in the U.S. and in Japan, particularly at Beckman Diagnostics.

But with revenue spread as globally as it is, the high cost impact of the impact of that currency, given the strength in both -- given the strengthening of both those currencies, had an impact on that ratio between where our cost structure is from a manufacturing standpoint and where those revenues are ultimately translated.

So that's the core of the FX impact.

In addition to that, obviously, growth was a little softer.

That largely came through in March, somewhat at Beck Dx in North America certainly and a little bit at Leica Biosystems in the high-growth markets.

So the slightly lighter core growth in a business that has a high level of recurring revenue certainly had an impact, and we're probably talking about in the neighborhood of 75 basis points of impact there.

And then we did have a little bit of a mix impact at Beck Dx with a couple of larger automation-related deals shift in the first quarter.

And when we have a high level of automation equipment associated with both those projects, that tends to be a little bit of a margin headwind.

That's ultimately, over time, good news for us.

When we sell automation with the equipment, that automation gets bolted to the floor, and that becomes an outstanding long-term account situation because, obviously, it's a very sticky situation when you have that much equipment wired to an automation line, running high-volume; recurring revenue.

So those are the major components there, Scott.

Hopefully, that's helpful.

Yes.

No, it is.

It sounds like some timing issues there.

So I probably ask this question in multiple quarters, but on Dental, the -- do you get a sense of whether there was inventory destock at the distributor level or whether the end market's just soft there?

Or is there any price pressure there?

I mean, how do you -- just trying to reconcile kind of flat revenues and down margins when you've been taking costs out of the business.

Yes.

Well, you have a little bit of both the major factors that you pointed to at the outset there.

Definitely, you have some softness in the end market.

That phenomena began in the latter part of, certainly, the second half of last year, and we think it continued here in the first quarter.

But when you have that phenomena, obviously, the channel becomes that much more concerned about inventory levels, and it's going to try to bring down inventory levels commensurate with how they think that end market -- the sell-through is happening.

So you have a combination of both those factors that, to some extent, from a manufacturer perspective, compounds themselves somewhat.

The phenomenon is generally oriented towards the North American market, a little bit in Europe but more North American in terms of its impact, and it's primarily around the traditional consumables market.

And so when you have that impact, obviously, on the consumables end of our portfolio, that's where a significant impact comes through on the margin side.

Now on the good news side, if you look at the parts of the portfolio, and it's a good deal of the portfolio, that is not in the traditional consumables end of the product lines and does not go through distribution, those product lines generally performed very well.

Ormco, our orthodontic business, continued to perform well.

Implants, that -- and Nobel, both of those go direct, were both low single-digit, mid-single-digit quarter performances.

Equipment was up low single digits broadly.

So I think there's some positive things there, but they were outweighed by that impact of the traditional consumables business and, obviously, the commensurate impact on the margins.

We feel very good, to your point, about the costs that we have taken out in the business.

You saw very good margin improvement throughout the course of the last 12 to 18 months.

We continue to take cost out of the portfolio, but at the same time, you've heard us talk about the Danaher playbook.

We are continuing to invest in that business.

We believe that the long-term growth drivers are there, and so I think it's important that we continue to focus on ensuring that we are well positioned commercially across a number of geographies and that we're continuing to invest in innovation.

So it's a tough balancing act, but we believe it's in the -- it's right for the long term.

And we'll go next to Ross Muken with Evercore ISI.

So I just wanted to talk first maybe a bit about Cepheid.

It looked like, when I teased out the number, it was quite a very strong start to the year for them, relative to what we were expecting at least.

As you look at sort of the pipeline there and your channel opportunities and you start to understand, with some of the new products, the momentum that business could have, obviously, you've talked about 10% plus.

It seems like it was much more of that in Q1.

I guess, how are you thinking about the variety of drivers?

And then what drove some of that outperformance or what appears to be in this quarter?

Sure.

Thanks, Ross.

Yes, we did have a very good quarter at Cepheid.

We're extremely pleased with how that business has performed and how the team has come together and adapted to the Danaher environment, have utilized the tools of the Danaher Business System to drive improvements not only in terms of the way they're driving business commercially, but I think, importantly, the way they are taking cost out of various areas of the business and redeploying some of those savings back into investments for growth.

And we're starting to see the impact of that, obviously, across the top line, where we've talked about double-digit growth, and meaningful margin improvements as well, now margin improvements that are in the double-digit range for sure.

So in terms of what's driving that growth, it's pretty well -- it's pretty broad across the portfolio.

Infectious disease, sexual health continued to perform quite well.

Hospital-acquired infections, while growing a little bit more modestly than the rest of the portfolio, we think, are in a very sustainable position over time, and we're very encouraged by the investments that are being made around advancing the menu and as well as the new instruments that come out.

So I think the business is off to a great start.

We've seen some good performance, and we very much expect that to continue.

And maybe just a follow-up on China.

It seems like that market continues to be white-hot, and sort of the demand is greater than many were sort of estimating 3, 6, 12 months ago.

I mean, how do you think about the duration?

There's so many moving parts at the macro level there.

I mean some of the underlying drivers in the health care businesses seem pretty secular, but on the cyclical side, how are you thinking about how much longer that market can kind of continue to accelerate and then maybe remain elevated?

We feel very good about how we're positioned in China, Ross, across really each of the 5 platforms.

Our Diagnostic platform continues to perform very well, and we continue to invest there.

We see that growth coming through really across the board, Beckman Diagnostics, Radiometer, Leica Biosystems.

And now as we're investing more aggressively in Cepheid in the high-growth markets, China will become an increasingly important part of Cepheid's geographic profile.

As you know, they've been under-penetrated in a number of those markets.

Our Dental business, Ross, continues to drive consistent double-digit growth each quarter and has for quite a period of time.

We think the underlying drivers in the dental market as well as our outstanding execution and the breadth of that portfolio speak well to the long-term potential in Dental.

The life science investments continue to be a priority for the Chinese government.

While those can sometimes shift occasionally between end markets, for example, from the food market to maybe primarily basic research, in general, I think the underlying drivers around life sciences are quite, quite good.

Water Quality, I think we all have an appreciation for the challenges around the environment in China, and the Chinese government has continued to make the environment and water a particular priority.

And we've seen some good performance so far this year from our Water Quality business in China.

And PID, I think also is well positioned.

So across the portfolio, we feel great about the Chinese market and the opportunities we have there for sustained double-digit performance.

And Ross, as Tom noted, the acceleration from sort of high single-digit growth last year to the double-digit growth we saw in the first quarter was more of the breadth.

It wasn't that the health care businesses got stronger.

It's more that -- the consistent double-digit growth across all the 5 platforms.

And we'll take our next question from Tycho Peterson with JPMorgan.

Tom, I want to start with biopharma.

We've got some mixed data points.

Certainly, this year, [ Roche ] have gotten in trouble, and we even heard from Sartorius and some of the other European companies about some softness.

So given mid-single-digit growth in Pall Life Science for you guys, can you maybe talk about some of the trends you're seeing and what you're hearing from customers?

Obviously, there's been more noise on drug pricing this week with J&J and others kind of calling that out.

Sure, sure.

Tycho, we don't -- we play such a vital role in the biopharma manufacturing process at a relatively low cost to that manufacturing process.

The filtration as a component of the overall manufacturing cost is relatively modest, arguably even marginal, but the value is so high that we think filtration is a very sustainable position across biopharma over the long term.

Relative to the overall trends, I think both the high growth of large molecule drugs today that are in the market as well as the pipelines being skewed towards large molecule drugs both speak well to the long-term growth trajectory of biopharma.

There's no question that's where all the investment is going over time, and filtration is used more intensively in large molecule drug production than in small molecule drug production.

So I think when we look at it from a macro perspective, we still feel very positive about how the biopharma, particularly manufacturing rates, will be sustained over time and how that will benefit Pall and, frankly, others of our Life Science businesses that participate in that market.

So certainly, some concerns about that relative to drug pricing, but we think we're relatively well positioned in terms of the impact there.

And then can you maybe comment on SCIEX up low single digit?

I know only 40% of that business is biopharma, but can you maybe just talk about trends for that and what your outlook is for the remainder of the year?

Sure.

SCIEX business has performed exceptionally well over a long period of time.

We did post low single-digit growth here in the quarter.

We have a pretty big service business at SCIEX, and that was impacted a bit by the one less selling day.

So our outlook is pretty consistent with our past performance, more like mid-single-digit growth in Q2 and beyond.

From an end market perspective, pharma was an excellent growth driver during the course of the quarter, double digits.

Led -- it led the way at double-digit growth.

Applied was more flattish, but finished the quarter a little bit better.

So the growth rate -- the order rates were improving through the course of the quarter.

China is a very good market there for us, particularly in the applied markets, meaning food and environmental.

We have had a bit of a tough comp on the clinical side, given some of the changes to -- in physician office lab, reimbursement and so on.

And academic has been a tough comp as well.

So those were a little bit of the pluses and minuses, but in general, as we look forward, given the one less selling day, the service business, how we've seen the installed base grow, the order rates, we feel good about SCIEX in the quarters ahead.

Okay.

And if I could just ask one last clarification on Pall Industrial.

You had the Middle East project you called out for Pall Industrial.

Would Pall Industrial have grown excluding that?

Yes.

In fact, orders were up mid-single digit in Q1 for Pall , all up, as opposed to the low single digit on a revenue basis because of this prior year equipment install that we had in the Middle East, both in Q1 and we'll also have that -- a piece of that in Q2 as well.

Tycho, maybe one last point.

I know you didn't ask about it, but probably just a quick mention relative to Phenomenex, which was an acquisition that was led by the SCIEX team.

And that business is off to a great start.

We closed that in the fourth quarter and has been up mid-single digits since we acquired that business.

A little bit of a challenging comp in the first quarter, but we're -- we'll lap right over that.

So that team is doing a wonderful job, and we couldn't be happier with the start we have there.

And we'll go next to Derik De Bruin with Bank of America Merrill Lynch.

I'm going to follow up on Tycho's question there.

So any signs at all in the U.S. academic market in particular that there's any hesitation in terms of ordering or wanting to spend money just given some of the uncertainties in Washington around funding?

Derik, it's a -- peering into the psychology is a challenging thing for me.

These -- we've seen what's going on in terms of the proposed budgets and so on.

So I think there has to be a little bit of concern and hesitation out there, but it's not like we can point to something very specific that's impacted our order rates.

In terms of NIH funding specifically, we don't -- as I think you probably know already, we don't have a very high degree of direct exposure to NIH funding.

Less than 5% of our Life Science sales comes directly from the NIH, and somewhat more than that indirectly.

But when you step back and you look at our Life Science business, approaching half the business is in -- goes into pharma, mostly biopharma and applied, food and environmental.

And then, of course, you have actually some more industrially-oriented exposure in our Life Science business.

And so our academic and research exposure is probably sub 20%.

And yes, I think there's some hesitation out there, but I can't point to specific projects.

Interestingly, I think maybe one counterpoint would be Leica Microsystems had a terrific quarter, and those products, particularly confocals, can be the types of high CapEx expenditures that can give some folks pause in the academic and the research area, and we saw good growth there over the course of the quarter.

So a little bit of a counterpoint that would make for uncertainty.

Yes.

And just one follow-up on this.

R&D expense in the quarter is 6.4% of sales.

How should we look about this rolling across for the rest of the year?

Well, part of the step up was organic, and part of it was now the inclusion of Cepheid in the number.

But we should be in that sort of ZIP code through the year.

And we'll take our next question from Shannon O'Callaghan with UBS.

Tom, just wondering how you view the path from this kind of organic level up to something closer to 4%.

I guess some of the acquisitions going organic maybe is a piece and getting this dental consumables off the mat, but you also mentioned several times investments in innovation and commercial initiatives.

Are -- the investments you're making, are the payoffs going to ramp from those type of things?

Do you have visibility into that?

Just wondering sort of the path from 2.5% up to 4%.

Yes.

Shannon, you've hit on a number of the key drivers even within your question.

Clearly, the acquisitions will have some impact.

As Cepheid and Phenomenex come into the core later on this year, we would expect to see some impact there.

Yes, absolutely, we need -- we will need to see some improvement in the dental consumables market.

As we've said in the past, these types of slowdowns tend to right themselves over time, both in terms of the channel inventories as well as the overall sell-through, if you will.

So I think we will see some improvement there, probably not in the second quarter but more likely in the second half.

And yes, we've made -- we continue to make investments.

Derik asked us about R&D as a percent of sales.

We continue to invest in R&D as well as in commercial initiatives, and we do see payoffs there.

We've seen them in the past.

We've seen -- for example, at SCIEX, where we've increased R&D as a percent of sales from 7% years ago around the acquisition now to 10% and where the flow of new products has been dramatically increased, and that's led to the sustained growth rates and the improvement in share gains.

I think Videojet is another tremendous example of where not only the power of DBS but the investments in R&D and commercial initiatives globally have expanded their service offering, their remote capabilities.

We often refer to them as the life cycle initiatives that have driven better service contract attachment.

We've seen mid-single-digit growth at Videojet consistently over a 7-year period, and that's the impact of work that was done a number of years ago in terms of new products and commercial investments.

So as we get to some of the more -- investments that we're making more on a near-term basis, it will take time for those to pay off, but it's clear that investments that we've made in the past have had real impact.

So that's what gives us confidence that over time -- and over time is longer than a couple of quarters, even though we do expect to see a ramp in the second half of the year, but we know these investments pay off in time.

Okay, great.

And then just on cash flow, operating cash flow is down a little bit year-over-year, and the CapEx was up.

Maybe just a little color on the dynamics of both of those components.

Shannon, the primary driver of the operating cash flow is really just the timing around tax payments.

Our tax payments were $60 million, $70 million higher Q1.

As you remember, we had relatively modest tax payments the first 3 quarters of last year and then very, very heavy tax payments, over $400 million, in the fourth quarter.

So I think you'll see more normalization of that as we go through the year.

I think we're set up for, again, high single digit, 10%, sort of growth in free cash flow for the full year.

The CapEx increase, primarily the new acquisitions, Cepheid, Phenomenex and, again, just some timing issues as well.

We'll take our next question from Doug Schenkel with Cowen and Company.

I want to start by going back to Pall.

Mid-single-digit Life Science revenue growth is good, but weaker than we had in our model and a moderation below recent trend.

I just want to be clear that you would attribute the moderation in growth to a tougher double-digit revenue growth comparison rather than any change in market conditions.

And relatedly, what assumptions for Pall growth are embedded into guidance for the balance of the year, especially given some of the strong bookings commentary that you shared earlier on the Q&A?

Sure.

Doug, that mid-single-digit growth at Pall Life Science really had some impact of the one less selling day.

So that's probably the first impact that we would point to.

Overall, we see that market, as I mentioned earlier, continue to have great underlying and very fundamental drivers, utilization of filtration continuing to be an important part of large molecule drugs.

So we don't see anything that would suggest that there'd be any moderation in that business.

In fact, we would see it as being a pretty consistent performer over time, so we feel good about that.

Doug, remind me, I'm sorry.

What was the second part of your question?

He's asking about what's embedded in the guidance for the full year.

We would expect comparable low single-digit growth in the second quarter.

Again, absent the project that we shipped half of it in the first quarter, half of the equipment in the second quarter of last year, we expect to be mid-single digits.

We'd expect order growth closer to mid-single digits in the second quarter, and we think that tees us up for mid-single-digit growth at Pall in the second half of the year.

Okay.

And that's a good segue to, I guess, my follow-up.

Your guidance for the second quarter for core growth is around 3%.

This is against a slightly more difficult year-over-year comparison versus what you faced in the first quarter.

Can you help us tease out in which segments or end markets you expect growth to improve in the second quarter versus what you saw in the first quarter?

Well, Doug, I think what we said in the script is we expect growth comparable to what we -- core growth comparable to what we've had in the first quarter.

And looking across the 4 segments, we would expect roughly similar performance for each of the 4 segments in the second quarter.

Okay.

Last real -- just quick one.

Did flu contribute meaningfully to Cepheid growth in the quarter?

There are some commentary out there and some data out there that suggest that, that could have been an outsized driver in the quarter.

Could you comment on whether that was the case?

Fluke?

Flu, not fluke.

I think we -- flu, yes.

We're not -- Doug, we're not [ firing off ] beyond the separation of words to have not thought that you...

We all misheard that.

Now we understand.

Sorry.

If there was a pregnant pause there, now you know why.

Yes, sorry.

Influenza, sorry about that.

Influenza.

You've probably all seen the publicly available market data on flu, it was "a good flu season." I'm not sure I'd describe it as an outsized impact, but in general, it was a good flu season, and that contributed to the overall growth.

We'll go next to Steve Beuchaw with Morgan Stanley.

The -- so I have an easy one for Dan, and then I'll apologize, I have a more complicated one for Tom.

The easy question for Dan is, Dan, can you just help us understand, and you've alluded to this a little bit in discussions around service and around Pall, where the selling day impact in the quarter might have been more or less significant across the businesses just so we can tune up the models appropriately?

And then a question for Tom.

The question for Tom is you're uniquely qualified to think about multilayered distribution strategies across the businesses given your experience, not just at Danaher but what is now Fortive.

And so I wonder how you're thinking, as you work with your -- particularly your Life Sciences and Dental teams, about e-commerce.

It seems to be one of the more important questions that management teams in this space are thinking about, what's the right time to use e-commerce as a way to get closer to customers and potentially to think about it as a lever to improve margins in those businesses.

So I wonder if you could give your -- the wisdom of your experience across the businesses that you might be sharing with those management teams as they think about how and when to become more active with e-commerce partners.

Thanks, Steve.

You want me to take -- I'll take the first one, sure.

So Steve, I'll take the first one, and then Dan will come back to you on the impacts of the selling days and so on.

Thank you for the comment.

I'm not sure how uniquely qualified I am, but I do have some perspectives, for certain, about how we think about layered distribution strategies or you might say multipronged distribution strategies across each of our platforms.

You asked about Life Sciences and Dental, but let me talk broadly first.

When we think about e-commerce, when we think about selling directly to customers through either our own portal or someone else's portal, we think about how customers want to buy.

That's first and foremost.

There's no point in having an e-commerce strategy if you've determined the customers have no interest in buying that way for a variety of different reasons.

So the typical characteristics of products where we've had great success strategically using e-commerce have been lower dollar value products; high-usage, high-turn products, products that are ordered somewhat routinely that requires somewhat limited or more limited technical support and, certainly, more -- lower levels of service.

So when you have products like that, customers generally want it to be easy to buy, and a great example of that, for us, is our Hach business.

The Hach business sells to municipalities and industrial facilities.

We install an instrument, and then there's a routine level of usage of consumables that the customer is really familiar with.

They're relatively low-cost consumables, but they're high-value consumables.

Customers are super familiar with them, so they don't need a lot of technical support and they don't need any service.

And as a result of that, Hach has grown their e-commerce business high single digits to double digits consistently over, frankly, as many years as I can remember.

Admittedly, we started off a small base a number of years ago, but we continue to invest there.

I think that's a great example of where we've used it very strategically and aligned e-commerce with the way customers want to buy.

Now if you go back to some of the areas specifically in your question.

There's a whole bunch of products in our Life Science platform where e-commerce isn't terribly well suited to, procurement of a confocal microscope from Leica Microsystems or a mass spectrometer from AB Sciex.

But clearly, consumables for our flow cytometry business would be a great example.

In the Dental platform, there are lots of opportunities for e-commerce.

What we've generally found is that the channel as it exists today, particularly in North America, provides those e-commerce capabilities.

Whether you're talking about Schein or Patterson or Benco or any one of a number of others, they do quite a nice job with relatively low-cost, low-tech, quick-turning consumables on an e-commerce basis.

And so one angle is to align yourself strategically with distribution that has that capability, and in another case, it may be to have that capability yourself if you're the right player and you are the destination of choice.

So those are some of the ways we think about it, Steve.

Hopefully, that gives you some insight in terms of the way I think about it.

Steve, in terms of the days issue, it really impacts our consumables business.

So the 35% of our business that's instrumentation and equipment, we typically don't see an impact when we have a change in a day or 2 in the quarter.

But across Beckman Diagnostics and dental consumables, Videojet, Hach, Pall, filtration, that -- where they are shipping consumables on a daily basis, we tend to feel that.

In the first quarter, our equipment sales were up 2.5%.

That's been pretty consistent the last couple of quarters.

But our consumables, which tend to be maybe 100 basis points, 50 to 75 basis points better than that the last couple of quarters, they were also 2.5%, and we think part of that impact was because of the days.

And we'll go next to Isaac Ro with Goldman Sachs.

I had a question on the Diagnostics business.

I was wondering for a bit of an update on the Cepheid Omni platform.

And the reason I ask is that CLIA-waived market is a huge opportunity.

It's still very early, but it does look like you have a couple of strong first movers making progress here.

I think Roche recently got theirs going as well.

So I'm just curious, kind of if you put all that in context, how important that platform will be to sustaining double-digit growth you're seeing in that franchise over a longer-term period.

Sure.

Thanks, Isaac.

We -- post acquisition, where we've really gotten up close and personal with the Omni platform, we were very excited about its potential.

We think it has exceptional opportunities to extend the already well-characterized Cepheid menu to lower-volume environments, to physician office labs and closer to the point of care, certainly at what we think will be an attractive instrumentation cost level as well.

We got a chance to work directly with the R&D teams and the product management teams that are on Omni right now, and we're very confident in the potential of that platform.

I think realistically, there were a couple of things that we wanted the team to shore up technically around that product and a couple of things that we wanted to make sure were in place commercially as well.

And so right now, I think we're looking at probably the first -- early part of next year, maybe even as early as first quarter next year for that launch just to make sure that we have that in the best shape possible.

Great.

And then just maybe a follow-up on your earlier comments regarding the Dental business.

Just trying to kind of weight which of the 2 factors here are maybe more important to driving better top line growth.

Is it end market performance?

Or is it maybe more of an internal kind of product line sort of issue?

And I know you guys have made some changes there over the last year so I want to be patient, but just sort of curious if it's a market environment thing or more of a Danaher thing.

Well, I think in the area where the softness has been most acute, the traditional consumables business, it's really a combination of seeing some better sell-through that's a function of just the overall market as well as the channel being comfortable that they've rightsized inventories and have sort of lapped over that adjustment.

So I think that's -- those are probably the most important things on a near-term basis.

I think from an internal Danaher perspective, our goal has continued to be invest in innovation in the traditional consumables side as well as to continue to improve the performance in the businesses that, quite frankly, are already performing quite well at a mid-single-digit rate, like Nobel and our equipment business, particularly with the investments that we've made in digital dentistry, where -- going back to a question that was asked earlier about investment levels that we've made.

We've 2x-ed the number of software engineers that are focused on digital dentistry across the platform, and I think that's an example of something we're working on internally that's an investment that will pay off over time.

And we'll take our last question from Deane Dray with RBC Capital Markets.

Just had a couple of cleanup questions here.

For the Fortive spin, for Dan, is there anything to call out regarding shared service agreements and anything on -- or might be some remaining stranded costs?

They're relatively -- we're pretty far to being completed with that.

There are a few small services back and forth.

But I think either side, they are relatively de minimis.

Got it.

And then any comments on what the product line transfer from Life Sciences to Environmental are?

That was the Pall water business.

So we've been waiting for this.

Is there anything in terms of new product launches?

There's been discussions at some of the trade shows that you might be -- that you're launching a mobile water treatment, truck-based.

Should we be looking for that in the near term?

Deane, it's Tom.

Thanks for the question.

It's early days.

We literally just transferred the responsibility for that product line here in the first quarter over to the water platform, and so -- almost as if it were a newly acquired business.

That team is going through I'm not sure I'd say 100-day strategic plan, but they're looking at that business strategically and trying to figure out where the right investments are across that portfolio.

There are a lot of different opportunities there, but we have to be selective about those.

It's not a huge business.

It's sub $100 million.

But it does need some work, and making the right investments from a product standpoint is going to be important there.

So it's a little too early to say, but maybe in a quarter or 2, we can give you some more insight.

That concludes today's question-and-answer session.

I'd like to turn the call back to Matt Gugino for any additional or closing remarks.

Thanks, Tracy, and thanks, everyone for joining us.

We're around all day for questions.

This does conclude today's conference.

We thank you for your participation.

You may now disconnect.