Danaher Corp (DHR) 2017 Q2 法說會逐字稿

Good morning.

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

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

(Operator Instructions) Today's conference is being recorded.

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

Mr. Gugino, you may begin.

Thanks, Lauren.

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

With us today are Tom Joyce, our President and Chief Executive Officer; and Dan Comas, our Executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, the slide presentation supplementing today's call, our second quarter Form 10-Q and the reconciliation 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.

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 July 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 and the second 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.

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 may differ materially from any forward-looking statement 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 statement, except as required by law.

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

Thanks, Matt, and good morning, everyone.

During the second quarter, we delivered double-digit adjusted earnings per share growth, solid core operating margin expansion and strong free cash flow performance.

Pall and Cepheid, our 2 most recent large acquisitions, also continued to perform very well.

Looking ahead, we expect our core growth rate in the second half of 2017 to accelerate compared to first half levels, driven by improving order trends and as recent acquisitions like Cepheid and Phenomenex become part of our core revenue.

And with our continued strong free cash flow generation and strengthening balance sheet, we feel well positioned to actively pursue larger acquisition opportunities going forward.

With that as a backdrop, let's move to the details of the second quarter.

Adjusted diluted net EPS was $0.99, which represents an increase of 10% over last year.

Sales increased 6.5% to $4.5 billion and core revenue grew 2%.

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 with solid results in the U.S. and Japan slightly offset by performance in Western Europe.

High-growth markets increased at a mid-single-digit rate led by China, which delivered high single-digit growth or better in each of our 4 segments.

Reported operating profit margin declined 150 basis points to 15.2%, primarily due to the impact of charges related to the discontinuation of a product line in our Diagnostics segment and the dilutive impact of recent acquisitions.

Our core operating margin increased 70 basis points with the strong performance led by our Life Sciences, Environmental & Applied Solutions and Dental segments.

Strong free cash flow enables us to pursue high-impact growth opportunities across our portfolio, and it continues to be one of our most important metrics at Danaher.

We generated $892 million of free cash flow from continuing operations during the quarter, and our free cash flow-to-net income conversion ratio was 160%.

We now anticipate full year 2017 free cash flow to grow double digits over 2016.

On the M&A front, we closed 3 bolt-on acquisitions during the quarter totaling approximately $100 million of spend in our Product ID, Water Quality and Life Sciences platforms.

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

In Life Sciences, reported revenue increased 4% and core revenue grew 3.5%.

Reported operating profit margin increased by 150 basis points to 16%, and core operating margin was up 120 basis points.

This continued margin expansion was driven by the team's consistent execution across the Life Science platform.

Beckman Life Sciences delivered mid-single-digit core revenue growth with positive performance across all major product lines, most notably centrifugation and automation.

Beckman's recently launched Biomek i-Series Automated Workstations are gaining traction in the market, and several key automation projects contributed to strong results in North America.

We saw broad based growth geographically, and we're well positioned in China to benefit from the region's continued investment in biopharma and life science research.

One of Danaher's core values is innovation defines our future and, since we acquired Beckman Life Sciences in 2011, this has been a key area of focus for the team.

They have increased new product launches meaningfully with more than 10 new product introductions in each of the last 2 years and this cadence of innovation has been a key driver of Beckman Life Sciences' enhanced growth trajectory.

What was a flat core growth business at the time of acquisition is now a mid-single-digit performer that has continued to gain share in its markets.

Leica Microsystems core revenue was up low single digits with good performance across high-growth markets, partially offset by weakness in developed markets.

At SCIEX, core revenue increased at a mid-single-digit rate led by strength in the pharmaceutical and food testing end markets while academic demand was stable across most major geographies.

At the ASMS annual conference in June, SCIEX highlighted the market's first FDA-cleared vitamin D assay for in vitro diagnostic use exclusively on our clinical mass spec platform, the Topaz System.

Topaz and its accompanying ClearCore software are easy to learn and validate and have been specifically designed for the clinical lab.

This new solution with the SCIEX vitamin D assay will enable clinical labs to expand their in-house testing services and run more tests more efficiently while delivering more confident results to support physicians with their critical treatment decisions.

Pall reported low single-digit core revenue growth with positive performance in both our Life Sciences and industrial businesses, partly impacted by a tough prior year comparison.

At Pall Life Sciences, growth was driven by biopharma, particularly double-digit growth in single-use technologies.

At Pall Industrial, modest growth was driven by microelectronics and aerospace.

Declines in process and industrial were due to a large Middle East project in the first half of last year that did not repeat, but we are encouraged by healthy order growth across this business and expect improved performance in the second half of the year.

Moving now to Diagnostics.

Reported revenue increased 14.5% and core revenue grew 2.5%.

Reported operating margin declined 760 basis points to 10.9% and core operating margin was down 25 basis points.

These margin declines are largely due to the restructuring charges associated with our decision to discontinue the Beckman VERIS molecular diagnostics product line and the acquisition impact of the Cepheid transaction.

Absent the impact of the restructuring charges, Diagnostics reported operating margin was up more than 400 basis points from the first quarter.

Last month, we announced to our customers the decision to redirect our team's molecular diagnostic efforts from the Beckman VERIS platform over to Cepheid.

We are committed to providing the best solutions for our customers, and we believe that Cepheid's molecular systems provide a better long-term foundation for these efforts.

Cepheid's platform offers industry-leading throughput and the most comprehensive molecular test menu on a single system.

We believe that focusing investment on this technology, combined with Beckman's strong global market presence, will accelerate our ability to provide more comprehensive molecular solutions to benefit our customers.

As a result, we incurred total charges of approximately $76 million, of which $49 million were noncash related to the impairment of certain intangible and other related assets and $27 million in cash charges.

We expect these cash charges to result in a benefit of approximately $40 million in annual savings in 2018.

Turning to Cepheid's second quarter results.

Double-digit core revenue growth was driven by broad-based strength across most major geographies and product lines.

The team is consistently incorporating DBS tools into their day-to-day processes and their efforts have sustained the double-digit operating profit margin achieved in the first quarter.

Core revenue at Beckman Coulter increased at a low single-digit rate with growth in China and North America, partially offset by declines in Western Europe and Japan.

By product line, our chemistry and immunoassay businesses continued to lead the way.

Radiometer's core revenue grew low single digits led by another quarter of growth across our blood gas and AQT product lines.

In May, Radiometer launched the crea and urea parameters on the ABL90 platform.

These are 2 new blood tests that identify potentially life-threatening problems with kidney function.

Radiometer now offers 19 critical care parameters, the broadest range available on a compact platform that delivers crucial results in just 35 seconds.

As the most comprehensive blood gas testing provider in the world, Radiometer's innovations are helping caregivers make critical diagnostic decisions that save lives every day.

At Leica Biosystems, core revenue was up mid-single digits with growth across both developed and high-growth markets.

Leica's performance was led by another strong quarter in our advanced staining business, and we saw solid results across our core histology product line as well.

Turning to our Dental segment.

Reported revenue was down 1.5% and core revenue was down 1%.

Reported operating profit margin increased 30 basis points and core operating margin was up 50 basis points due primarily to the benefit from ongoing productivity initiatives.

During the quarter, we saw positive growth in our equipment and specialty consumable product lines including implants and orthodontics.

This was more than offset by a decline in our traditional consumables businesses, which was due primarily to continued inventory destocking by several of our distribution partners, primarily in North America and Western Europe.

We believe these channel dynamics will continue and expect our Dental core growth rates in the second half of the year to be consistent with the results we've seen so far in the first half.

Recognizing the near-term challenges, we remain focused on building greater long-term value across our Dental platform.

The team's recent operational improvements have supported reinvestment in growth initiatives to increase the cadence of product innovation, improve quality and enhance commercial execution.

Over the last 2 years, we have improved our operating profit margin by more than 100 basis points and seen consistent growth rates in several of our key product categories.

We continue to focus on positioning our Dental business for sustainable long-term growth and value creation.

Moving to our Environmental & Applied Solutions segment.

Reported revenue increased 4.5% and core revenue was up 3%.

Reported operating profit margin increased 70 basis points while core operating margin was up 120 basis points.

In Product Identification, core revenue grew at a mid-single-digit rate.

We saw continued healthy demand for our marking and coding equipment and consumables in most major geographies, led by North America.

Demand for our packaging and color solutions was driven by strength in high-growth markets.

Videojet core revenue growth was up mid-single digits and the team continued to build upon their track record of outperformance.

We saw balanced growth across North America, Western Europe and Asia.

Videojet grew across all major product lines and launched 3 new products in May including the Videojet 1860 printer, our new industrial inkjet platform.

The 1860's key differentiator is the combination of onboard predictive analytics and remote connectivity.

The advanced maintenance analytics can alert operators well before common downtime issues arise, and the remote service capability enables operators to recover quickly from production line interruptions without an on-site service visit.

The 1860 printer has been specifically designed to help our customers improve their uptime and productivity and drive lower operating costs.

Customers rely on Videojet solutions to print on more than 10 billion products daily, and we now have the largest installed base of remotely connected printers worldwide.

Core revenue at Esko was up mid-single digits with growth driven by an acceleration in Europe and the high-growth markets.

Finally, turning to Water Quality.

Core revenue growth increased at a low single-digit rate with particular strength in our water treatment businesses.

At Hach, core revenue increased at a low single-digit rate.

We saw solid growth in our core municipal and industrial end markets and another good quarter of performance in China.

This was partially offset by weakness in Latin America and project timing in our Environmental businesses.

Looking ahead, we expect that Hach will show improved core growth in the second half of the year.

Trojan delivered mid-single-digit core revenue growth, a result that the team has now achieved in 8 of the last 10 quarters.

We saw healthy demand across the municipal end markets in North America and China with robust project activity in those regions.

An important factor in Trojan's project win rate has been the ability to provide our customers with outstanding technology solutions.

Trojan recently expanded the capabilities of one of its core wastewater product lines, TrojanUVSigna, to broaden its application, and it can now be used at nearly any-sized wastewater facility and for water reuse.

This advancement enhances Trojan's competitive advantage and has been a key driver of recent demand.

ChemTreat continued to outperform with high single-digit core revenue growth, driven by positive momentum in North and Latin America.

We saw particular strength across the food, steel and oil and gas end markets and the team's consistent execution contributed to additional share gains across the businesses.

So to wrap up.

The team executed well during the second quarter, driving double-digit adjusted earnings per share growth, 70 basis points of core operating margin expansion and strong free cash flow performance.

As we look to the second half of the year, we expect our core growth rate to accelerate versus the first half levels off improving order trends and as recent acquisitions, like Cepheid and Phenomenex, become part of our core revenue.

We believe that the power of the Danaher Business System, significant opportunities across our portfolio and strengthened balance sheet position all come together to position us well for the remainder of 2017 and beyond.

We are initiating third quarter adjusted diluted net EPS guidance between $0.92 and $0.96 and expect core revenue growth of approximately 3%.

We are raising our full year 2017 adjusted diluted net earnings per share guidance, which we now expect to be in the range of $3.90 to $3.97.

Thanks, Tom.

That concludes our formal comments.

Lauren, we're now ready for questions.

(Operator Instructions) Our first question comes from Ross Muken with Evercore ISI.

So maybe just, first, touching on sort of the sequential growth acceleration you're looking for, a lot of moving parts in the business.

It feels like maybe in Environmental or Water, there was also maybe a bit of order pushout.

Can you just give us some color and help us bridge back to a growth rate for Danaher that would be more consistent with what we would think about for these businesses?

Again, you've had a lot of comp noise and some order movement and you've obviously got the acquisitions, as you've said.

So help us sort of walk through the parts and then your confidence level in turning some of the pieces like Dental where the growth rates are obviously not where you want it to be.

Obviously, that doesn't happen overnight, but that you've got the right sort of plan and that you understand why it's underperformed, and in turn, can get back to that more normalized rate.

Thanks for the question.

Let's start with the jumping off point, Ross, of sort of the second quarter and the first half.

We look at the 2% in the quarter and really look through that to the order rate and we're actually rather encouraged by the core orders, which were 100 basis points better than our core growth.

When we look at the second quarter number that we put up, that was mostly obviously due to Dental.

Our expectations were in line with Dental being closer to a flat number, came in lower than that, down slightly.

And the result of that really represented the difference between the 2% we put up and the 2.5% that we expected.

So it was really largely around the Dental.

I'll come back to water in just a second and your point about timing.

We are seeing the continued destocking that I mentioned and that's primarily around the traditional consumables side.

And we look at the rest of the Dental portfolio, and as I mentioned, we continue to see good performance across our specialty consumables businesses as well as equipment.

And so I think we need to get through these adjustments relative to the channel before we can see some better performance from the Dental platform, and as a result of that, we thought it was a relatively prudent approach to think of that as being consistent in the second half of the year with the first half of the year until we can get through those.

I'll come back to the forward look here in a second, but I thought there was a number of encouraging things around the jumping point -- jumping off, or starting point here in the second quarter and the first half.

Life Science, in particular, at 3.5%, a little bit better than expectations, really good performance at Beck Life Science and at SCIEX as well, both mid-single digit, very good quarters.

And despite the lower number that we put up at Pall, and you mentioned this briefly in your question, a very challenging comp at Pall both in terms of the Life Science side as well as the industrial side relative to the first half of last year and specifically the second quarter.

So I think there's a number of things to point to that would suggest that there are some things that underlie the first half, which once we get past, would suggest better performance in the second half.

So the first half, you're really looking at a 2.5% sort of start, again, encouraged by the core orders that were about 100 basis points better than that.

We get past the comp issues at Pall, we see Cepheid and Phenomenex coming into the core and some modest improvement in Water Quality particularly as it relates to this timing in Hach Environmental, which were some larger orders, I think that 3% number that we're looking for in the third quarter and some better numbers than that in the fourth quarter all feel quite reasonable to us.

If I step back, even further back for a second, Ross, we've got a portfolio here that's demonstrated over the last couple of years the ability to drive 3%, 3.5% core growth as a starting point.

And so I think with some of these further factors, again, we're relatively encouraged about the potential here.

At a macro level, we think the exposures that we have to high-growth end markets like biologics, like food and environmental, our growing position in molecular, even the opportunities that we have in the Dental platform around the digitization of dentistry, all are strong macro drivers that underpin this platform.

Recent acquisitions are clearly faster-growing businesses than in the underlying portfolio that they came into.

And again, the improvement at more recently acquired businesses that we've talked about for a period of time here, the newness of this portfolio and our ability to drive core growth that we've demonstrated in the past with newer businesses, I think you put all those things together and I think there's a lot of reasons to be optimistic for the acceleration that we're looking for in the second half.

So I know that's a bit of a long-winded answer, apologize for that, but hopefully that gives you a sense of things.

No, that's helpful.

And just maybe as you're thinking about -- again, you made the comment around the balance sheet and obviously the ability, at this point, given where you are with Cepheid and other assets to potentially contemplate other M&A.

Can you kind of remind us given the current environment and sort of where the business mix and how the different pieces are performing kind of what your bias is right now in terms of the style of assets you're looking for and maybe at all on sort of size limits, et cetera?

Well, Ross, just in terms of the balance sheet, I mean, we feel very good about it, particularly given the exceptional free cash flow that we delivered here in the quarter.

Nearly $900 million of free cash flow and great conversion continues to position the balance sheet exceptionally well for further acquisition efforts.

We've talked to $500 million to $1 billion worth of opportunities here in the second half, but by the time we round the corner with this level of free cash flow generation, around the corner into 2018, we'd be back to spending certainly at a free cash flow level or beyond.

So I think our bias from a size standpoint continues to increase as the balance sheet returns to fighting shape.

Relative to our business model and our preferences, obviously our past track record here in the last couple of years would suggest we look for businesses with strong underlying growth capabilities and growth trajectory in strong market positions, leading positions in those markets.

You've seen us build our position relative to the consumables and aftermarket in our businesses, today at roughly 65% consumables, and we think that underpins a level of market and volumes visibility and stability and also underpins good gross margins and strong operating margins.

We look for global businesses and exposure and opportunities to high-growth markets.

I think Cepheid is a great example of a business that has tremendous opportunities in high-growth markets, but largely underpenetrated in those markets.

And so I think a continued bias towards strong growth rates, good consumables businesses, balanced with exceptional installed bases that are anchored by strong brands, global positions and high-growth market opportunities, I think all represent the kind of model that we'd be looking for in future acquisitions.

So hopefully that helps.

Our next question comes from Tycho Peterson with JPMorgan.

Tom, in the 10-Q, you called out a softness in the U.S. clinical markets, both from mass spec and Beckman.

Is that all ACA, PAMA noise?

And I guess with Beckman still stuck in kind of low single-digit growth, what gives you comfort in an acceleration in the back half of the year for that business?

Thanks, Tycho.

Tycho, we actually, on mass spec, we had a very good quarter in mass spec with good performance, particularly in pharma and in the applied markets.

The only softness that we saw around mass spec, which is not really new news, we've seen it earlier this year and it really is a comp versus prior year, is really around the clinical -- a historical clinical position in mass spec around pain panels.

And as some of the reimbursement changed in pain panels, we saw a headwind there and we'll get through that headwind in the balance of this year.

But otherwise, good performance -- very good performance at SCIEX generally, across a number of the end markets.

At Beckman, Beckman Diagnostics, we were very encouraged by the continued improvement, particularly in North America, with improving retention rates that we track very consistently as well as competitive win rates.

That being said, we do believe that there is some uncertainty in the end market today around ACA and what ultimately happens there.

We've seen some hesitation on the part of some customers to make some decisions and we're going to need to get through that.

I don't think the happenings of the past week have done much to eliminate that uncertainty, but in the meantime, I think we're driving what we can control well, which is ensuring that we serve our current customers well and drive increasing levels of customer retention and enhancing our win rates.

And that's coming partly on the back of the work that we've done in terms of new products, both in terms of our hematology platform as well as assays that we've launched around AMH and vitamin D. So we are encouraged by the performance there.

We think that the rationalization of the product portfolio between VERIS, the VERIS platform, and the Cepheid platform is going to enhance our position in what is arguably the fastest-growing segment of a diagnostic market, which is molecular.

Okay.

And then, geographically, the PMI indicators have actually been better out of Europe.

You called out softness there.

Can you maybe just talk a little bit about what you're seeing in some of the leading indicators?

Sure.

Well, both in terms of the leading and the lagging, Western Europe actually is -- our softness there is largely around our Dental platform.

We had a number of businesses that performed quite well in Europe, but we would put the bulk of that softness in Western Europe around Dental.

Okay.

And then just, lastly, on Dental, you called out pricing in the 10-Q.

It seems to be a bit of a new dynamic.

Just can you quantify how much of an impact that had versus destocking?

Tycho, it's very, very modest.

We're talking 20 basis points and we were flat in pricing in Dental.

In the first quarter, we were just down ever so slightly.

A little bit of that is mix, given consumables where we tend to get more pricing was so weak in the second quarter, but I don't think there's any meaningful change in pricing in Dental.

Our next question comes from Derik De Bruin with Bank of America.

A couple of questions and I'm going to focus on Diagnostics.

It looks like the core operating profit margin on Diagnostics was down 25 bps when you exclude everything.

And I think this is the second quarter in a row it was there, just some talk -- some comments on the margin trend there and what's impacting it.

Then other question is it looks like Cepheid is growing 18-ish percent on an -- if I look at the numbers.

That's definitely, last quarter and this quarter, definitely your Cepheid numbers are above what we had modeled as a standalone for the company when we -- when the company was still public.

Could you talk a little bit about it?

Is it instrument placements?

Is it higher utilization on Cepheid?

Just some color on the revenue trends, if it's bulk market -- developing markets, high-burden markets, just a little bit more color on what the Cepheid numbers are.

Sure, you bet, Derik.

So let's start with the Dx operating margin, or [DEI].

What we put up is a negative 25 basis points.

If you look at the FX impact on that, which in the case of Diagnostics was probably one of the more notable impacts of FX in the quarter: net of FX, Diagnostics actually put up positive 50 basis points of operating margin.

So underlying operating margin -- and that is, if you looked at the improvement from the first quarter, that's where my comments earlier represent a 400 basis point improvement over our operating margin performance in the first quarter.

So good trajectory there, good underlying performance so we feel pretty good about what's going on there.

Turning to Cepheid.

You're right, we put up some pretty significant double-digit growth rates there at Cepheid so far through the first half of this year, and those are higher growth rates than what we've seen historically.

Derik, that's largely a function of some fairly large orders that we had, both in the first and the second quarter, largely associated, but not exclusively, but largely associated with the high-growth markets.

We continue to believe that Cepheid on a go-forward basis is a solid 10% kind of growth business.

So we love the fact that we're putting the numbers we are and we continue to go aggressively towards large tender wins.

But obviously, those are a little less predictable and -- but we feel very comfortable with a sustained 10%/double-digit growth rate going forward.

Utilization remains quite good.

We track utilization sort of account by account.

So I think the underlying performance of the business both in terms of placements in the developed markets as well as utilization across the breadth of the menu remains consistent, and in some cases, actually improving through some growth initiatives that the team's putting forward.

Our next question comes from Doug Schenkel with Cowen.

Starting on guidance.

For the year, what is your core revenue growth target?

And what are you targeting by business?

And then related to that, could you just speak to how ongoing Dental weakness is impacting your growth outlook for the year as we sit here today relative to where we were, say, 90 days ago?

Doug -- go ahead, Dan.

So I'll start.

So what we're talking about is an acceleration to 3% -- ballpark at 3% core growth in the third quarter and better than that here in the fourth quarter.

Tom talked about the underpinnings about better order growth.

We did have the unusual dynamic in the second quarter that core order growth was better than shipment growth in every one of our 4 reporting segments, and that's part of the encouragement we have kind of going into Q3 and the second half here.

On a high-level perspective, if we look at the second half, we expect 3 of the 4 platforms excluding Dental to accelerate here from where we are in the second quarter.

Dental, we expect, which was relatively flat in the first quarter, we have a pretty conservative assumption here around Dental here for the balance of the year given the comments that Tom already made.

Okay, understood and that's helpful, but to be clear, you don't want to give specific by-segment or full year core growth targets, and you don't want to comment on how Dental has changed relative to what you're embedding into guidance, if it has changed relative to where we were a quarter or 2 ago, correct?

I think I kind of gave you numbers on the total company Q3, Q4.

We tend to give directional numbers around the segments.

And clearly, Dental is a lower number here then we were thinking in April.

Again, having said that, some of the other businesses performing a little -- expectation for a little better than we thought here in April on the heels of what we've seen in terms of order growth and clearly, better performance around margins as evidenced in the second quarter.

Okay, that's helpful.

On Dental, a real basic question and I know it's one that comes up probably in every meeting, so I'm just looking to get educated again.

How is it possible that distributors can still be destocking?

It seems like this has been going on for better part of a year, and it seems like you expect this to continue for the balance of the year.

I guess, just practically speaking, how much longer do you think this can take?

Again, I'm just trying to get educated on this dynamic and also trying to, I guess, at least get a better understanding of how confident you can be that there's not more going on than just destocking.

Well, I think, Doug, I think what's a little bit different about the scenario today versus probably 9 months ago is that, 9 months ago, we were really talking about a phenomenon that the channel first began talking about, which is that the disconnect between what was being sold in and what was being sold out started to create an inventory issue.

So as the consumables market began to slow down, distributors began to adjust their order patterns later last year.

I think what's different today that's enhanced this, Doug, is that there are some channel dynamics going on right now with some shifts in terms of manufacturer and distributor alignment.

All that's been made public, and I think that has further exacerbated some of the shifts we're seeing right now.

So I don't think it's simply a continuation of something that began last year.

I think it's probably a little bit of what went on last year as well as the increased turbulence that's been associated with some of the shifts in the channel alliances.

Okay.

And one last cleanup question pivoting to capital deployment.

What do you define as a larger deal, and I know you talked about your capacity in the context of free cash flow.

Is the right way to do the math here just look at our free cash flow projections and assume a reasonable leverage ratio and that's how big you could go in the aggregate over the next year or so?

Sure.

I mean, we would be -- when we talk larger deals, it's a -- we view Cepheid, a $4 billion deal, as a larger-type deal.

Okay.

And then is that math logic pretty safe?

Yes, I mean that's about a year -- a little bit more a year of free cash flow plus the earnings you bring on from the acquisition.

Our next question comes from Steve Beuchaw with Morgan Stanley.

First one is that -- one that normally comes up early, which is can we just spend just a minute on a couple of areas in terms of the end market matrix that tend to be high focus and somewhat controversial.

One is pharma, I thought the commentary in your prepared remarks on pharma was very, very positive.

I mean, is it fair to say that pharma is holding up and we're sort of past any concerns about a slowdown tied to drug pricing or any other bogeyman?

And then, I think with the NIH, I think the commentary you called out was stable, but I suppose there might be rays of hope for 3Q because we have an NIH budget, or rather a federal budget, should we be thinking about 3Q possibly being a little better?

And then for Dan, shifting gears, I wonder if you could comment on just a couple of things.

One, Easter timing, do you think that was at all material in terms of not necessarily selling days, but activity in the quarter?

And then, Dan, how should we think about the tax rate for the second half?

Thanks for humoring my many, many questions.

Not a bit, Steve.

Thanks.

So let's start with pharma.

We continue to remain very positive on the pharma market and specifically, the biologics portion of the pharma market.

As you may have heard us mention in the past, we have about $1.5 billion worth of revenue that's attached to the pharma market and specifically, in the biologics area and these are largely around the bulk of that at Pall and at SCIEX as well as a couple of our other Life Science businesses.

There's a lot of strong macro drivers, I think, underlying the continued optimism around pharma, specifically around the growth of biologic drugs, the shift from small molecule, investments in small molecule development to large molecule development.

I think you've heard us mention a number of the statistics that are supportive of that in the past.

You mentioned drug pricing, Steve.

That does get some airtime these days.

I think drug pricing in combination with just broader uncertainty around ACA, I think, certainly has to have some impact on pharma companies today.

We've certainly seen some of our customers manage inventories a little bit more tightly, I think make sure that they're managing their cost structures.

We feel very -- pretty well insulated from a lot of that because we produce a very high-value consumable at relatively low cost to the overall manufacturing process of a biologic.

But nevertheless, these are factors that have to influence these customers in the macro.

So while we feel extremely positive about the biologics market continuing, clearly you'll hear a little bit of noise in the market about uncertainty associated with some of those factors.

You did hear me mention accurately about our business in the academic market being relatively stable, I think that was specifically probably around SCIEX.

That being said, you mentioned NIH.

NIH, direct NIH spending is a relatively small portion of our overall Life Science business.

And so while it's always encouraging to see NIH spending increase, the absolute impact on that given the -- our small direct NIH spending presence means it's a good thing, but ultimately doesn't really move the needle that dramatic.

I think it's a good macro indicator, but I probably wouldn't go much further than that.

And Steve, just on the other questions.

We expect our tax rate to remain about 20.5% for the balance of the year.

We do expect our cash tax payment to be down materially versus prior year.

We had exceptionally high cash taxes last year somewhat related to separation.

Because of that and because of our strong year-to-date free cash flow, I know we had talked in April about a sort of an expectation of high single-digit growth for free cash flow.

We now expect double-digit growth for free cash flow for the full year.

Regarding Easter timing, we did hear a little bit of noise from our European businesses of that having some modest impact to them in the second quarter, but I'm not sure we want to go more than that.

Our next question comes from Deane Dray with RBC Capital Markets.

Was hoping to visit the decision on the VERIS product line, shutting that down.

What was the tipping point?

And just to be clear, this was shut down and not sold.

And might you be considering other similar actions elsewhere?

Deane, this was a product line discontinuation.

It was not a sale or in any form of a transaction like that.

In terms of a tipping point, I don't know that there'd be necessarily a single point.

This was something that we knew or thought about, I should say, as a possibility when we were going through diligence.

Obviously, it was well understood that we were going to have an additional product line in molecular diagnostics.

What we couldn't necessarily fully understand until we got beyond diligence, closed the transaction and really got underneath the product road map was the ability for us to continue to scale the GeneXpert platform and Infinity over time, both in terms of menu as well as in terms of daily volume or throughput, if you will.

And so as we came to understand the potential that was represented by the Cepheid platform and that unique architecture that they've developed, we then were able to really map that against the capabilities of the VERIS platform, the runway in terms of menu expansion of VERIS and the associated process for FDA clearance and other regulatory approvals.

And we found that not only did we have a tremendous opportunity in terms of scalability throughput and assay development, but really it accelerated our position beyond what we anticipated in due diligence.

And so it really was through what I think was a pretty thoughtful analysis that really was a team effort between the Cepheid team and the Beckman Diagnostics team.

They came to a unified conclusion that this was in the best interest of our Diagnostic portfolio.

That's good color.

And then just as a follow-up and I hope I don't get flagged for piling on, on Dental here, but we've been dancing around this destocking question.

And interestingly, one of your biggest competitors has been talking recently about taking share in this space and I just was hoping you could comment on that.

So beyond the channel alignment noise, have you lost share in the consumables side?

Deane, no flag thrown.

Happy to take questions on Dental in any dimension.

There's no question because -- about the impact of destocking here because we have a relatively high level of transparency with our major distribution partners around sellout by product category for us and against the house.

So it's a mathematical equation.

We also have outstanding dialogue and transparency with our channel partners around what their current inventory levels are in terms of weeks and months and what their internal targets are managing their own balance sheet situation.

So I think we're on firm ground factually.

I think from a product line standpoint, I mentioned that we've actually seen good growth in the number of our Dental product lines.

I think in those areas where, on the traditional consumables side, where clearly there's been the weakness that we've noted, while the destocking is pretty mathematical, could there be shifts between individual competitors inside the house that we don't get full transparency to?

Certainly, it's possible.

But I would say today, if we lost any share in the consumables side, it would be very marginal.

Our next question comes from Erin Wright with Crédit Suisse.

Can you give us an update on the Cepheid integration?

Are you tracking ahead of plan?

And do you think you've seen some more low-hanging fruit in terms of synergies than maybe you initially anticipated?

Thanks for the question.

Cepheid integration has gone extremely well.

We have a wonderful team of longtime Cepheid associates, many of whom are in the top leadership positions around the business.

And we've supplemented that team with a small number of key leaders from the Danaher side, one in operations, one in finance, just to name a couple.

And I think the combination of that long-term Cepheid leadership team as well as some of the Danaher associates have continued to make exceptional progress.

That progress has really come on the back of a consistent use of the tools of the Danaher Business System.

Some of that has come in the form of manufacturing productivity improvement, higher levels of volume being moved through given manufacturing cells at lower headcount levels in some cases, but in other cases, simply a function of being able to keep up with the growing demand at the same level of headcount and therefore driving higher levels of productivity.

So we're thrilled with the progress that the team is making operationally.

In terms of some of the low-hanging fruit that you asked about, I think it's been pretty consistent with the expectations that we had.

Low-hanging fruit in an acquisition integration typically starts with public company costs, and those company costs have come out of the business.

We've seen very good improvement in areas that we focus on like indirect costs, which were not managed as tightly over time there as we would typically do at Danaher.

We focus on purchase price variance and looking for supplier, either rationalization or combinations with existing Danaher suppliers where we have outstanding quality and delivery.

And some of that integration of suppliers has led to improvement in gross margins from a material cost perspective.

And we continue to drive those improvements over time.

In addition to that, I think, commercially, the teams are working very well together.

While we maintain an independent commercial team at Cepheid, we have a tremendous lead-sharing process going on between the businesses across the balance of our Diagnostic platform.

We're enhancing our feet on the street in high-growth markets, specifically in China.

I've talked about that in a couple of our past conversations.

And so we think the opportunity for using the tools of DBS commercially, terming -- driving higher market visibility, leveraging the commercial reach and capabilities of the balance of the Diagnostic platform, all set us up very well for continuing good performance at Cepheid.

So we couldn't be happier about the performance both in terms of core growth, operating margin and free cash flow at Cepheid thus far.

Excellent.

And a follow-up on acquisition pipeline and the regulatory environment, specifically on timing.

Do any other regulatory uncertainties derail or alternatively expedite your decision-making process when it comes to acquisitions?

How aggressive can you be on the M&A front near term?

I wouldn't say we see anything in the regulatory environment that would create any undue uncertainty or create any hesitation.

We talked earlier today about the capabilities we have with the tremendous free cash flow and the strength of our balance sheet.

I think we're extremely well positioned to put that balance sheet to work during the balance of this year and certainly into next year.

Our next question comes from Dan Arias with Citigroup.

Maybe just quickly on Pall.

Unless I missed it, hoping you can maybe put some numbers around the revenue impact that the Middle East project comp had on the quarter and then how that compares to the headwind that you saw there in 1Q.

It was about a $10-plus million project both in Q1 and in Q2 and that -- we will not have that comparison here in the third and fourth quarter.

Okay, great.

That's helpful.

And then maybe just a quick follow-up on Cepheid and the pipeline there.

I think we're coming up on the period where the prior team was targeting a point-of-care launch with the Omni.

Obviously, you guys have your own plan and your own time line there.

But just wondering if you might be willing to comment on how you're thinking about that product and that market, what our expectations there should be especially as AACC comes in the corner here.

Sure, Dan.

Thanks.

You're asking about the Omni product line, which we -- the prior management team put in play from an R&D perspective before we acquired the business.

We got a chance to get inside the Omni product launch opportunity in great depth.

We think it's an exceptional product with tremendous opportunities.

We challenged the team to really make sure that they had done the type of diligence on the technology as well as the commercial side of launching that product.

We did that partly through due diligence and then certainly through the strategic plan and the product road map reviews that we've had.

That product is -- we're confident we can launch that product in the first half of next year.

I think that product has an exceptional opportunity to drive point-of-care positions and an exceptional level of assay capability that will truly revolutionize the point-of-care market.

So we feel very good about Omni, and we feel good about the launch schedule that we've established.

And that concludes today's question-and-answer session.

At this time, I will turn the conference back to Mr. Gugino for any additional or closing remarks.

Thanks, everyone, for joining this morning.

We're around all day for questions.

Thank you, and that does conclude today's conference.

We thank you for your participation.