Danaher Corp (DHR) 2018 Q2 法說會逐字稿

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

At this time, I would like to welcome everyone to Danaher Corporation's Second Quarter 2018 Earnings Results Conference Call.

(Operator Instructions) I will now turn the call over to Matt Gugino, Vice President of Investor Relations.

Mr. Gugino, you may begin your conference.

Thanks, Queena.

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

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

I'd like to point out that our earnings release, the slide presentation supplementing today's call, our second quarter Form 10-Q and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website, www.danaher.com, under the heading Quarterly 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 July 26, 2018.

During the presentation, we will describe certain of the most 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 second quarter of 2018 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 might differ materially from any forward-looking statements that we make today.

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

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

Thanks, Matt, and good morning, everyone.

Before we discuss our second quarter performance, I'd first like to provide more details about this morning's announcement that we intend to spin off our Dental business into an independent publicly traded company.

We expect this transaction to be tax-free to Danaher's shareholders and to close in the second half of 2019.

We'll refer to this new entity as DentalCo for the time being, and it will be comprised of Danaher's current Dental segment, operating companies, which consist of Nobel Biocare, Ormco and KaVo Kerr.

These businesses, together, generated 2017 revenue of nearly $3 billion, had gross margins of approximately 55% and EBITDA margins in the high teens.

DentalCo will be a premier global partner for the dental community with industry-leading brands providing world-class innovation, service and solutions for customers.

We believe the business is well positioned in attractive markets with compelling secular trends that include improving standards of dental care in emerging markets, digitization of the dental practice and the increasing importance of dental aesthetics and implant solutions.

DentalCo will have a global team of approximately 12,000 associates and will be headquartered in Southern California.

The company's strong leadership team will include a number of experienced Danaher executives.

Amir Aghdaei, who as Group Executive has had responsibility for our Dental segment for the last 3 years, will become President and CEO of DentalCo.

Two other Danaher leaders will also serve alongside Amir on DentalCo's Board of Directors, while retaining their roles at Danaher.

Dan Daniel, Danaher's Executive Vice President, currently overseeing the Diagnostics and Dental segments; and Daniel Raskas, Danaher's Senior Vice President of Corporate Development.

In addition, our Chief Financial Officer, Dan Comas, will serve as a special adviser to DentalCo post spin.

Over the past couple of years, we've highlighted the progress that Amir and the team have made on a number of key metrics.

They've done an outstanding job of helping to better position our Dental segment for long-term success in what has recently been a challenging and changing market environment.

This is certainly evident in Dental's second quarter results, which we'll run through shortly.

Through a combination of recent growth investments and productivity initiatives, along with the team's strong commitment to continuous improvement in the Danaher Business System, the Dental segment is in a much better position today than it was just a few years ago.

Since 2015, Dental's gross margins have increased by more than 100 basis points, while general and administrative costs are down nearly 50 basis points.

We've consolidated a number of operating companies, from 10 to 3, and reduced the business's manufacturing and back-office footprint by 30%.

Dental's R&D spend as a percent of sales is up more than 100 basis points as we continue to invest in new product development across the portfolio.

And at Nobel Biocare, our nearly $1 billion implant business, we've increased R&D spend by approximately 20%, launched more than 25 new products and increased the sales force by 15%.

These actions have put our Dental business in a better position to accelerate its growth trajectory and drive continued margin expansion.

So today's announcement is an important step towards realizing even greater potential for both Danaher and our Dental platform.

We believe that our Dental business can be more impactful as a stand-alone entity with greater focus around organic and inorganic investment opportunities, including M&A, and that this combination will support an attractive earnings growth profile for the business going forward.

This opportunity reminds us of the Fortive spin-off we completed a couple of years ago, which has generated a tremendous amount of value, not only for the businesses, but for shareholders as well.

Most importantly, and much like Fortive, we expect the Danaher Business System to continue to have meaningful positive impact on DentalCo.

Across Danaher, we're continuously committed to maximizing long-term value for all our shareholders, customers and associates, and the establishment of our Dental business as an independent company creates a tremendous opportunity for us to deliver on that commitment.

We look forward to helping Amir and the entire Dental team for success as they become an independent publicly traded company.

As for Danaher, over more than a decade, we've built our Product Identification, Water Quality, Diagnostics and Life Sciences platforms, both organically and inorganically.

These platforms share a number of common characteristics.

They're comprised of outstanding brands with industry-leading positions.

They each have a high percentage of consumables revenue that is considered captive.

They pursue mostly direct go-to-market strategies, and they share attractive growth profiles.

Our strategy will continue to focus on building around these platforms to strengthen our portfolio and competitive position as a multi-industry science and technology company.

Now let's turn to our second quarter results.

We had an outstanding quarter, with the team delivering results ahead of expectations.

We achieved 6% core revenue growth, healthy margin expansion, mid-teens adjusted earnings per share growth and strong free cash flow.

Our performance was broad-based, and we were particularly pleased this quarter with the number of our businesses that delivered 5% or better core growth.

This marks our third consecutive quarter of 5.5% or better core revenue growth.

And we believe we're taking market share across many of our businesses.

These share gains are part of the payback we're seeing from recent growth investments and the team's strong execution utilizing the Danaher Business System.

We're using DBS growth tools to develop and deliver better products for our customers, and in turn, enhance our competitive position in the markets we serve.

You'll hear a few examples today of how we're doing this and taking share across our portfolio.

Turning to our second quarter results.

Sales increased 10.5% to $5 billion, with the impact of currency translation increasing revenue by 2.5% and acquisitions adding 2%.

Core revenue was up 6% with 4 of the 5 platforms delivering mid-single-digit or better core growth.

Second quarter adjusted diluted net EPS was $1.15, representing 16% growth year-on-year.

We generated $1.6 billion of free cash flow year-to-date, resulting in more than 20% growth year-on-year, and a free cash flow to net income conversion ratio of 120% -- excuse me, 127%.

Our outstanding cash flow generation sets us up well for additional capital deployment in 2018.

Geographically, high-growth markets revenue was up high single digits, with China leading the way.

In developed markets, we saw mid-single-digit growth in both North America and Western Europe, as both regions have gained momentum since the beginning of the year.

Our gross margin for the second quarter was 56.6%, an all-time high and up 160 basis points year-on-year, while core operating margin expanded 105 basis points.

Our terrific margin performance was driven by a combination of higher core growth and good execution, particularly across our Life Sciences & Diagnostics platforms.

Now let's take a more detailed look at our second quarter results across the portfolio.

In Life Sciences, reported revenue increased 16%, and core revenue was up 7.5%.

Reported operating profit margin increased to 18.2%, with core margin improvement of nearly 300 basis points.

This is the eighth consecutive quarter of more than 100 basis points of core margin improvement, driven by the team's outstanding DBS execution.

Beckman Life Sciences delivered high single-digit core revenue growth, with broad-based strength across product lines and regions, led by developed markets and China.

Beckman continued to benefit from strong new product introductions, like CytoFLEX LX in flow cytometry and the Biomek i-Series in automation.

These differentiated offerings, coupled with a strong go-to-market focus and execution in biologics and genomics, helped drive Beckman's above-market growth during the quarter.

At Leica Microsystems, low double-digit core revenue growth was driven by strength across North America, Western Europe and China and solid demand across all major end markets.

Leica had positive results across each major product line, with good momentum from new product launches, like the ARveo digital augmented reality microscope which provides leading imaging technology for the most complex surgical procedures in the medical end market.

Leica's effective application of DBS growth tools has helped the team develop several important new products and improve their commercial execution, a powerful combination that's been a key competitive differentiator for Leica.

Core revenue at SCIEX increased at a high single-digit rate, with strength in North America and China, driven by the pharma and clinical testing markets.

The SCIEX team has focused recent innovation initiatives on attractive end market opportunities in mass spectrometry, like biologics and food testing, producing a unique workflow -- producing unique workflow solutions that enhance our competitive advantage and drive continued market share gains.

At Pall, the team delivered mid-single-digit core revenue growth with similar results across both our Life Sciences and industrial businesses.

Growth was broad-based globally, and the team continued to build a strong order book across the business.

Biopharma and microelectronics led the way, each delivering double-digit core revenue growth in the quarter.

And we saw good momentum in our process and industrial business, driving mid-single-digit core growth and strong order trends.

Our most recent acquisition, IDT, is off to a great start, and increased revenue at a double-digit rate during the quarter.

The team's DBS integration is already facilitating key commercial enhancements and cost efficiencies, and we're excited about this early progress at IDT.

At our Diagnostics platform, reported revenue was up 7.5%, with core revenue growth of 5%.

Reported operating margin increased to 17.7%, including 150 basis points of core margin expansion.

Beckman Coulter grew at a low single-digit rate, led by strength across high-growth markets.

By product line, our immunoassay and chemistry businesses continued to perform well, and we had several exciting new product launches in our hematology business in the second quarter, including the DxH 520 analyzer for low-volume settings and the DxH 900 analyzer for high-volume, with a first-of-a-kind early sepsis indicator.

These new analyzers are faster and easier to use with a much smaller footprint.

The early sepsis indicator alerts clinicians to an infection sooner, a critical capability given the life-threatening nature of sepsis.

These new hematology solutions are important additions to enhance Beckman's competitive position in the Diagnostics market.

Looking across the rest of our Diagnostics businesses.

Radiometer, Leica, Leica Biosystems and then Cepheid each delivered high single-digit core revenue growth during the quarter.

We saw continued strength in North America, Western Europe and China and growth across most major product lines at each of these 3 operating companies.

Across our Diagnostics platform, recent growth initiatives have focused on improving R&D and sales and marketing processes using DBS growth tools like accelerated product development and sales funnel management to help us develop and deliver better solutions for our customers.

At Leica Biosystems, we've gained good early traction in a number of recent launches, like the BOND RX advanced stainer and the PELORIS 3 tissue processing system.

At Cepheid, the team's improved commercial execution and continued menu expansion with new tests, like the Group A Strep Express test were key drivers of the business's double-digit growth in developed markets.

This combination of innovation and commercial improvements using DBS helps us expand and differentiate our offering and continued share -- contributed to share gains across these businesses during the quarter.

Turning now to our Dental segment.

Reported revenue grew 4.5%, with core revenue growth of 2%.

Our operating profit margin declined to 14.3%, and core margins were down 125 basis points due to continued investment spend and productivity initiatives across the platform.

Our traditional consumables and equipment business grew for the first time since 2016, and we saw early signs of end market stabilization through the quarter.

Growth in China and Western Europe was partially offset by modest declines in North America, where inventory adjustments in the distribution channel moderated versus recent quarters.

Nobel Biocare led the way in specialty consumables with mid-single-digit core growth, driven by good execution in North America and China.

Our orthodontics business, Ormco, grew low single digits.

Last month, Ormco launched a full-scale clear aligner system in Australia called Spark, which has received very positive feedback from doctors and patients.

Spark aligners combine Ormco's market-leading expertise in creating digital treatment plan with a highly aesthetic orthodontic treatment option.

Spark enables dentists to treat a broad range of patients, including those with complex cases.

We're pleased with Spark's initial progress in Australia and expect to build upon this early traction to expand our offering going forward.

Moving now to our Enviromental & Applied Solutions segment.

Reported revenue was up 11% with 7% core revenue growth.

Reported operating margin declined modestly to 23%, and core operating margin declined 50 basis points as a result of accelerated growth investments and productivity initiatives across the platform.

We believe these growth investments have helped to sustain and expand our share gains across the segment.

In Product Identification, core revenue increased at a mid-single-digit rate as we saw continued share gains in our marking and coating businesses.

Videojet core revenue was up high single digits, and all major regions and product lines generated mid-single-digit growth or better during the quarter.

At our Water Quality platform, core revenue was up high single digits, with the strength of performance broad-based across our water treatment and analytical instrumentation businesses.

Hach's core revenue increased at a double-digit rate off solid momentum in both the municipal and industrial end markets.

Robust results in the high-growth markets was driven by continued demand in China as a result of their active project pipeline.

Additionally, Hach's recent innovation investments have focused on our offerings in turbidity, medical and software solutions.

Recent product launches in these areas are helping to drive Hach's continued above-market growth rate.

Last year, we highlighted Hach's release of the Claros Water Intelligence System, a software platform that brings together instruments, data and process management to provide customers with valuable operational insight to manage their water processes in real time.

The Hach team has used DBS growth tools like agile software development and commercial launch excellence to enhance Claros's capabilities and functionality and to make important go-to-market adjustments that improve targeting and messaging to drive better commercial performance.

Claros is just one example of how Hach is harnessing the power of DBS to accelerate growth and enhance Hach's leadership position in the market.

At ChemTreat, mid-single-digit core revenue growth was driven by similar results across the developed and high-growth markets.

By end market, growth in commercial facilities and primary metals was partially offset by softer results in chemical and food and beverage.

Lastly, Trojan's core growth was up high single digits, with bookings and revenue growth continuing to benefit from momentum in the North American municipal market.

Good commercial execution and recent new product introductions are enabling the team to sustain a strong customer win rate, and we believe Trojan gained further market share.

So to wrap up, we're extremely pleased at our second quarter results.

Our performance is a testament to the team's execution and passion for continuous improvement, helping us deliver 6% core revenue growth, mid-teens EPS growth, 105 basis points of core operating margin improvement and a 22% increase in year-to-date free cash flow.

We're particularly pleased with our continued strong performance on the top line as DBS growth tools and investments in innovations are helping us take share in many of our businesses.

We're also very excited about our announcement that we'll be spinning off our Dental business into a stand-alone publicly traded company.

We think this is an important step to help both Danaher and the Dental business realize greater potential and maximize value for our shareholders, customers and associates.

As we look ahead, we believe the strength of our portfolio, combined with the power of the Danaher Business System, provide us with the foundation to deliver long-term shareholder value creation.

We're initiating third quarter adjusted diluted net EPS guidance between $1.05 and $1.08, which assumes core revenue growth of approximately 4% to 4.5%.

We are raising our full year 2018 adjusted diluted net EPS guidance to a range of $4.43 to $4.50 versus our previous range of $4.38 to $4.45 and now expect to achieve mid-single-digit core revenue growth for the full year.

Thanks, Tom.

That concludes our formal comments.

Queena will now open the call.

(Operator Instructions) We'll now take our first question from Tycho Peterson from JPMorgan.

Nice quarter.

Tom, I want to start with the decision to spin Dental now, I guess.

Given the market pressures, it seems a little bit early.

I think, from most of our investor discussions, people expected this would come in the next couple of years.

So I know you have a year to prep, but is this increased confidence in the market picking up?

And can you talk a little bit about what needs to happen to get the business ready?

And also, any comments you're willing to make on M&A strategy post spin and thoughts in the distribution channel?

Is 50-50 direct distribution the right model long term for that business?

I think, as you've heard us update you over the last, really, couple of years or more, we've made terrific progress in the business.

And as happens in some challenging businesses and market situations, it does take some time, but we are now seeing the benefits of that work.

We're seeing those results and early indicators around improved cost structure.

The growth investments that we've made there are now generating some improved growth in our position in the market, improved competitive position.

And I think, as you've seen on a relative basis, we can show some outperformance.

And so, I think, in many respects, this is really about the progress that we've made and getting our business to a point where we think it really holds great potential for that progress to manifest itself in significant amount of shareholder value creation over time.

In addition, I think, from a market perspective, the dental market has clearly begun to stabilize.

And we think, a year from now, it will be in an even better place.

And so with another year, similar to what we did at Fortive, we have an opportunity to get the team ready and to ensure that we have all the appropriate steps completed to be a successful public company launch, just as we did with Fortive.

As a stand-alone company, and clearly off a smaller base, acquisitions and organic investments will have a magnified impact on the business.

And of course, you've seen that at Fortive as well.

Acquisitions in the $100 million to $250 million deal range can really move the needle.

And some of the investments that we've made organically around things like the I/O scanner, the work that we're doing on clear aligners now, those are all going to be more impactful over time.

So we think this is a great opportunity to create long-term value for shareholders.

It's got what we think is a very attractive earnings profile coming off of low single-digit core revenue growth, solid operating margin expansion, with plenty of opportunities to go.

And in terms of your question about capital and M&A, we're going to set this up, as you -- I hope you would expect us, as an investment-grade business with the capabilities to deploy capital through M&A.

And certainly in a way that doesn't hold us back, we continue to be focused on deploying capital at Danaher over the next year and beyond.

So this reminds us a lot of Fortive, both in terms of timing and in terms of the long-term shareholder value-creation opportunity, whether it's the comparison between the industrial cycle timing and the dental market recovery or the performance of our business getting better and being able to run the Danaher playbook consistently in an independent business.

Lastly, your question about distribution.

I mean, this is a business, obviously, that has a little bit more of a skew towards going through distribution, albeit 50-50.

Danaher, post Dental, will be more skewed towards direct, more like 75-25.

And the distribution channel is always going to play an important, right -- part, I believe, in the Dental business.

But at the same time, those direct businesses are superb.

And we love those because of the intimacy they have with customers.

So I think, all in, while the channel structures may evolve slightly over time, I think both the business and the market are in a much better shape today than they've been in recent times.

Okay.

And then for a follow-up, I just want to go back to the quarter for a minute and if you could just help us bridge the 4% guide with the 6% result.

I know you're firing on all cylinders, but can you maybe just talk if there were sources of surprise or upside relative to your own expectations?

Obviously, Life Sciences did well against the tougher SCIEX comp, but Enviromental & Applied was up 7% as well, so can you maybe just talk to some of the underlying momentum in the businesses?

Sure.

Well, I'll tell you, we have terrific momentum in the businesses.

As I mentioned, 4 out of 5 segments clearly at mid-single digits and above.

All of the segments, in addition to Dental, are outperforming our expectations.

Good performance that was a combination of both commercial execution and new product innovation pretty much across the board.

As it relates to how we look at the quarter ahead, yes, there's a little bit of moderation in our Q3 growth rate relative to Q2.

There's probably 100 basis points of tougher comp in Q3 versus Q2.

And yes, as you say, we fired on every cylinder in Q2, and we think it's probably a little bit prudent to be a bit cautious in our outlook, given some of the trade-related matters, I'm sure we'll get into this here shortly, and some of the broader macro uncertainties, if you will.

We still remain optimistic about the future, but I think the combination of a little bit tougher core growth and a tad bit of caution in the macro outlook was prudent relative to the third quarter and balance-of-year guide.

Okay.

And just to clarify, the $0.01 to $0.02, is that from the tariffs and out of the $0.06 to $0.07 headwind in the back half of the year?

Was that the right math?

Yes.

The right way to think about it, Tycho, is on currency versus April, the strengthening of the dollar probably hits our revenue -- second half revenue about $250 million at a 20% fall, so that's about $0.05.

And there's about $0.01 a quarter of transactional impact from the tariffs.

Now that's before any countermeasures, and we're working on a bunch of things, but it's probably going to take a little bit of time for us to get some of those countermeasures in place.

Our next question comes from Scott Davis from Melius Research.

I applaud the decision to spin Dental, seems to have worked in the past for you, so good luck with that.

I wanted to back up a little bit.

I can't recall seeing this strong a numbers out of Leica and Hach.

Just those 2 businesses explicitly you called out as having new products.

And how does -- help us understand that product cycle a little bit better.

I don't remember in the past seeing that kind of outgrowth.

Was there -- are there timing issues where, in fact, maybe we should see this moderate a bit?

Or has there been some -- or are these products so different or special that this is somewhat game-changing, for lack of a better word?

Tom, Scott.

These -- both Leica Microsystems and Leica Biosystems as well as Hach are businesses that have strong track records over a long period of time of creating the market leadership positions that they have created on the back of exceptional products and product differentiation and competitive advantage.

We have made some significant progress across not just these businesses, but a number of businesses over the last couple of years, in improving the approaches that we take to bringing in innovative ideas from the end user and then to execute on those ideas in a more timely and cost-effective way.

And I think what you're seeing, not just in the businesses that you asked about, but really across a number of our businesses, is a manifestation of a couple of years of work in improving the execution from that front end to bringing ideas in all the way to the back end execution and launch and commercialization.

Leica, in particular, Microsystems has broadened their new product innovation scope beyond what historically has been a focal launch cycle, and I think that's making a real difference.

At Leica Biosystems, what I mentioned there, whether it's microtomes, tissue processors, advanced stainers, all of those things are a product of a number of process-related steps using the tools of DBS to do those simultaneously, as opposed to somewhat more sequentially.

And at Hach, a business that now is focused much more on ensuring that we deliver higher-quality answers to customers through data and data analytics, information and the Claros software system, I think you're starting to see the culmination of a combination of hardware, consumables and data and analytics that is further differentiating that business.

So it's a variety of different things, but I think the general theme across Danaher has been improving new product execution all the way from the front end to the back end.

Okay, fair enough.

And then I know it's early days in this tariff trade nonsense, but when I think of some of your businesses, where you're buying a fair amount of components from Asia or even shipping in from Asia to developed markets, what -- can you start to prepare the markets for price increases to pass that stuff through?

I mean how -- do your competitors have similar dynamics?

I imagine they do, but I don't know entirely.

How do you start to think about, at least, whether it's through distributors or otherwise, getting, laying the groundwork, at least for the fact that you're probably going to have to raise some prices at some point?

Well, Scott, as you can imagine, we're sort of in the early days of all that.

We don't feel that we're in the crosshairs of what they're really going after.

But -- and in fact, there's no one business at Danaher that has a significant impact, but it's a bunch of little impact across all the businesses, and that adds up to that roughly sort of $0.01 a quarter impact.

We're really thinking about countermeasures in 4 different ways.

One would be price; two would be thinking about supply chain changes; three would be thinking about modification of our manufacturing location because we're getting hit tariffs both ways.

U.S. into China, China into the U.S. And then fourth, there are opportunities to sort of seek exemptions around certain areas around the tariffs.

They've actually just outlined the process to do that.

So I think between those 4 categories, including price, it will take us a couple quarters.

I think we'll be able to bring that number down.

I think the broader question is, does it have a larger impact to the macro environment, and that, that's more of -- that's outside the realm of my specialty.

Our next question comes from Ross Muken from Evercore.

Congrats on both the fantastic quarter and the spin.

Maybe, first, you called out sort of pharmaceutical strength.

Looks like mass spec as well had a fantastic quarter.

It feels like, at least, last bit, you've been gaining share in kind of that market and you've had really strong product momentum.

Maybe just give us a little color on kind of how you're thinking about pharma overall, given some of the noise in that market.

It seems like you're growing right through it and it seems like also, on a product cycle or share basis, it's an area for outperformance.

Well, thanks, Ross.

We feel very good about the Life Science end market right now.

I think across the board, they look very healthy to us, and we are executing quite well in those Life Science end markets.

Specifically around your question on pharma and biopharma, it has normalized, I guess, is one way to think about it.

A year ago, you saw some softness in that market.

You saw issues with a couple of big customers, not just ours, but customers that were broadly served through the market.

You saw some inventory adjustments.

I think a lot of that is past now, so I think we're in a market that has sort of returned to normal, but normal in the case of biopharma means a very good growth market.

And you saw that based on the broad-based strength at Pall.

Certainly, the exposure we had to biopharma at Beck LS, at SCIEX, and at Mol Dev would indicate that things are very much tracking as you would expect in the biopharma market.

We had double-digit growth in Pall at -- in the biopharma market, led by continued strength in single-use technologies.

So I think we're in a very, very good place in a strong market.

On the broader pharma side, small molecule, continued strength in China, certainly due to generic drug regulations.

And I would say generally steady growth in the developed markets.

Outside of those specific areas around LS, if you think about the applied market, pretty solid there.

Certainly, food testing continues to be a good market.

The academic market, pretty solid, China up nicely.

We don't have a, as you know, we've talked about this in the past, a lot of direct funding that comes from NIH, but NIH funding obviously trickles down through the market, and the increase in NIH funding should bode well.

And then in the areas where we have a bit more of, you might say, industrially oriented exposure in Life Science, for example, if you looked at our mid-single-digit core growth at Pall Industrial, good performance there, a market that, I think, is pretty steady, but our performance continues to improve.

So I think, on balance, we feel very good about the Life Science end markets and specifically the ones you asked about.

Geographically, I think China continues to be the strongest area with double-digit growth there.

We've had a terrific performance in China across a number of our businesses, but Life Science, across clinical, academic and pharma, is strong in the developed markets, pretty stable.

And interestingly, just a side note, Japan -- we had probably one of the best quarters in Japan that we've had in certainly in any kind of recent memory.

So on the Life Science side, double-digit core growth, so good performance there.

Great, no, that's super helpful.

And then maybe, second, you've done a number of kind of interesting transactions in the last few years that were highly growth-accretive, and it seems like they're doing quite well.

So maybe just an update on IDT, which seems to be off to a very strong start, and Phenomenex.

It seemed like Cepheid also had another good quarter.

And how do you feel like, sort of post spin, it feels like the RemainCo, the traditional Danaher, this year would have been growing north of 5%.

How do we think about the new growth profile of kind of the business now that Dental, which had, had obviously a number of years of some challenges, is going to be its own entity that kind of creates value on its own?

How do you think about what Danaher looks like from here on out top line-wise, at least?

Sure.

Well, as I mentioned very briefly in my prepared remarks, and believe me, I could have given them many more verbal high-5s, the performance at IDT has been terrific thus far.

We're thrilled with what the team is doing there.

It was a double-digit quarter that -- and very much what we expected, and I think a continued very good trajectory for that business.

And we have lots of opportunity to improve the commercial execution of that business and continue to work on how we expand that business, particularly geographically, so we're off to a very good start.

Phenomenex, continuing to perform very well.

And then Cepheid, you mentioned, absolutely had a good quarter, but also against actually a challenging comp at Cepheid, and still had a good quarter.

And we expect to see Cepheid's growth rates tick up in the third quarter off the second quarter number.

So I think each of the new acquisitions, which, as you appropriately mentioned, have all been accretive to sort of the [fleet] average core growth of the business prior to their acquisition, all those are tracking quite well.

As we think about Danaher going forward, I think there are a number of factors that I think will contribute to improving our growth profile and are contributing today.

Clearly, the acquisitions, we just talked about those, but it is about our day in and day out execution as well in businesses that we've owned for some time.

And we see continued good performances for businesses that we've owned for 3 or 4 years and businesses that we've owned for 10 and 12 years and more.

And so that day in and day out execution and particularly around new product innovation, that I just mentioned to Scott, is a contributor.

We think we've positioned the portfolio in exceptional markets.

Life Sciences, Diagnostics, Water Quality, the proliferation of packaging and packaging configurations around the world, all of those are terrific positions to be in.

And with a strong position in the high-growth markets and each of those secular drivers I just mentioned contributing in a magnified way in the high-growth markets, we think we have a great position there.

And then finally, the balance sheet remains in terrific shape.

We will have virtually paid off a good deal, if not all, of IDT already this year.

And so the balance sheet is ready, willing and able to get after continued deployment.

And obviously, our bias would be to continue to look for opportunities where near-term and/or -- and certainly long-term growth prospects are at or accretive to the portfolio, so I think it's a combination of things as we think about the portfolio ahead.

Our next question comes from Doug Schenkel from Cowen.

In your prepared remarks, you noted that Europe and North America have gained momentum since the beginning of the year.

Are there any key end markets or product areas that are worth noting in a little more detail?

And how would you characterize the outlook for this building momentum to be sustained moving forward, especially given some of the mixed macro data coming out of Europe?

Doug, looking at it geographically in the developed markets, I mean, it was pretty broad-based across the portfolio, just thinking about a couple of businesses that, just to name a few that grew double digits in North America in the quarter.

In Life Sciences, Leica Microsystems grew double digits.

The other businesses in North America were mid-single-digit growth or slightly better.

In the case of Europe, the Life Science businesses across the board were pretty well solidly in the mid-single digits.

If we look in Diagnostics, clearly, Leica Biosystems performed well in both those markets, Cepheid in both those markets.

So it's hard to pick out businesses where there was some particular weakness in the developed markets.

And that's not to say that they're all at the same rate, but generally, as I look across each of the businesses, there was quite broad-based.

And, Doug, maybe I would add.

Hach tends to be a reasonably good bellwether, because it gets both to the industrial and to sort of the government, the municipal side of it.

And they were up, I think, high single digits both in the U.S. and Europe in the quarter.

Now some of that is clearly share, we don't think the market is growing that well, but it does suggest reasonable stability in those regions right now.

If I look at another bell -- if I look at another, say, broad-based player, just in a very macro context, Doug, if I look at Videojet, mid-single-digit growth, solidly so in North America, and actually double-digit growth in Europe.

And that's in the quarter, I mean, that's not necessarily the long-term trend there, but at this point in time, good performance.

Okay.

That's helpful.

And just for my follow-up, in quickly flipping through the 10-Q this morning, it appears pricing was more of a tailwind this quarter than we've seen recently in both Life Sciences and EAS.

Anything to talk about there?

Really, what were the key drivers?

Was there anything related to tariffs, say, price increases that were dropped into the quarter, although I would think that would be pretty early?

And then how are you factoring this into guidance for the balance of the year?

Doug, yes, not unrelated to tariffs.

I mean, we clearly are seeing the benefit on the industrial side, and you've seen that tick up both across our Water and PID business.

In the healthcare businesses, it has been more challenging, it was a little bit better sequentially.

Those businesses, I think, will remain challenging to get a lot of price, and we'll continue to be leaning more on the industrial business for price.

So I think it'll take a little bit of time, but hopefully, we'll get a little bit more price as potential offset to the tariffs, but that's not going to kick in here in Q3.

Our next question comes from Steve Beuchaw from Morgan Stanley.

In a backdrop of a really strong operational performance and an interesting transformational opportunity for Dental, I wonder if we could get an update on a question that has been more at the forefront over the last several months, which is capital deployment for RemainCo.

I wonder, to what extent, if any, does the management bandwidth commitment associated with getting Amir and the team ready to spin, does that in any way impact your thinking about capital deployment?

And if you could give us any broad stroke views on how your -- your views on how capital deployment should be executed this year, that would be really helpful.

Sure, Steve.

We remain absolutely committed to continuing to deploy our free cash flow and beyond in the interest of the 4 platforms that we will have in RemainCo over the next year.

Life Sciences, Diagnostics, PID and Water all stand at the front of the line for capital deployment, and so that has been and will continue to be our bias.

As was the case, frankly, during the period -- the similar period, the year that we worked to stand up Fortive.

We continued to have that bias and focus on deploying capital.

So nothing really changes about either our commitment to or our ability to deploy capital in the interest of those 4 platforms going forward.

So we feel good about where the balance sheet sits today, and we see some interesting opportunities in the pipelines that we continue to review.

Okay, great.

Good to hear.

And then just 2 very, very small points I wanted to follow up on, on the businesses.

First is at SCIEX, you called out clinical as a growth driver.

Once upon a time, there were some reimbursement changes that were tough for the clinical business.

Can I take your comments to mean that, that part of the business in applied clinical, that, that's [not] really working now subsequent to those changes?

And maybe does that include any benefit from the Topaz launch?

And then on Dental, I wonder if you could give us just an update on what you're thinking about organic growth or core growth for the back half of this year, given some of the comments that you made about the improving trend, stabilizing trends that you see in the space.

Sure, Steve.

So on SCIEX, you're right.

We did comment specifically about clinical, and the reference that you made, just for others on the call, I know you're knowledgeable of this, Steve, around reimbursement, really had to do with what the industry knows and we refer to as pain panels or pain management.

And changes in reimbursement that go back a couple of years now had an impact on a portion of the SCIEX business associated with testing for pain management.

And as that reimbursement changed, we saw some slowdowns and declines, actually, in our -- in that clinical business.

We have rounded the corner on that, if you will.

We lap over those comps now.

So to some extent, we have an easier comp as that reimbursement dynamic is now behind us.

And we'll see some incremental growth in our clinical business over time.

And yes, we're very pleased with how Topaz has come out of the blocks.

Still somewhat early days post that launch, but that and other new product introductions at SCIEX are continuing to contribute to good growth.

Relative to Dental going forward and in the back half, I think our view continues to be that, that will be a low single-digit growth rate in the back half.

Again, we saw some early indications that we'll see some incremental growth, and we saw that in the second quarter, but it's still going to be a low single-digit growth as that market continues to stabilize.

But our continued improvement in our performance associated particularly with new product innovation and good commercial work, we think, even in the face of what may still be a challenging end market, should certainly have us on an improving track.

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

A couple of questions.

So just noticed that Cepheid grew high single digits this quarter, which certainly is lower than it has in the most recent quarters.

Just can you just talk about anything unusual there, comps, just movements in that?

And then I've got a follow-up.

Sure.

Absolutely.

And sorry, I just made a big -- just a passing reference to that just a couple of minutes ago.

Yes, Cepheid grew high single digits.

Actually, a number of very positive factors in terms of new customer acquisition and penetration of new products behind that high single-digit number.

But you're right, lower than the trend line we had.

That's really just a function of a challenging comp in the high-growth markets or what was formerly referred to as the HBDC or hybrid and developing countries arena.

We had some pretty big numbers a year ago on that, in one market in particular.

And so we fully expect that Cepheid will return, and we will see an uptick in that growth in the third quarter, back to the 10% range or better that we have seen in the past.

Yes, Derik.

If you looked at the business ex HBDC, and that's out of what, 20%, we're up mid-teens in the core business.

Okay.

That's actually the number I was -- that's what I was looking for, great.

That makes sense.

Because you -- if I remember correctly, you had a big ND order last year, or Schein order (inaudible) okay, okay, that puts it into perspective.

And as we're sort of at midyear, have you seen any pushback from hospital labs on, due to PAMA, just sort of thinking about what's capital spending at the hospital labs and just thinking about, are they watching their budgets, are they pushing back, just some sort of update now that they have had some time to digest.

Sure.

They are clearly watching their budgets, and there are certainly situations where we have -- we've seen some pricing pressure.

But I think as I mentioned, right when PAMA became a reality, Derik, in many respects, this is sort of standard operating procedure in the Diagnostic market, at least in the large central labs.

There has always been a basis for some level of pricing pressure, particularly when you are seeking either new business or renewing your existing business.

And so there are -- certainly some of those dynamics are afoot.

But in the overall scope of our Diagnostic platform and relative to margins, the impact is very, very modest to marginal.

Our next question comes from Steven Winoker from UBS.

Dan, I just first wanted to follow up on the tariff comments you made.

That tariff that you've contemplated, is that the, only the $50 billion so far or includes the other $200 billion on top of that?

That's the higher number.

The higher number, okay.

And presumably, should that go to the full amount beyond the $200 billion, have you taken...

It would be big.

Right, not the demanding type.

(inaudible) We can't -- so it's not -- I mean, I don't know if we can double it, we don't -- have you quantified that yet?

We're taking it like you guys, as it comes, hourly.

Sitting here 6 blocks from the White House doesn't mean we get the info any quicker than you guys do.

Yes.

Well, I figured one of you was standing outside, seeing what's afoot there -- intercepting Tweets.

Anyway, okay.

So now on the Dental split, Tom.

I understand the rationale for that, but one of the comments you've made and we've seen it play out is the larger impact on M&A on the smaller entity when you do this.

And given the importance of M&A to the whole model and how that plays out, but why can't I extend that logic even further to the rest of what sits inside of RemainCo?

In other words, if it's true for Dental, why wouldn't that be true for E&AS?

Well, I think, first of all, we love those businesses in terms of their -- the consistency that those businesses have with the model across the portfolio.

They have very similar growth profiles across the 4 platforms.

You have very similar margin profiles.

You have, in most cases, much more captive levels of consumables associated with those businesses.

And you have a science and technology orientation to those businesses that I think unifies them into a common business model.

And so while you certainly can make a case that, depending on the size of a business, M&A can make a more magnified difference in one versus the other, the commonality of the business model, I think, is what unifies the 4 platforms going forward.

Okay, that's very clear.

And then just if I could, on the business units, on Pall.

I mean, can you talk a little bit more about the puts and takes on the growth rate there around the different components and particularly focus on some of the things that may be kind of holding it back a little bit?

Well, I think we've seen, as I mentioned, good performance across Life Sciences, with biopharma very strong; single-use technologies, very strong.

If there was an area in what we broadly describe as Life Sciences that wouldn't really be growing at quite the rates that we see in biopharma [and FCT] it probably would be the smaller portions of the Life Science segment, which are -- or Life Science businesses at Pall, which would be the lab, food and beverage business and the medical businesses.

Again, those are smaller, but obviously are not posting the same growth rates.

And then, as I mentioned on the industrial side, really good performance in MicroE, that's been consistent for a long time.

And then the fluids-oriented process business, we're starting to see some better performance there, and that's largely more a function of our execution.

If there was a softer part of the industrial side of Pall, it probably would be on the aerospace side, but we have a very strong competitive position there, nevertheless.

And Steve, as we've alluded to, bookings have been very strong, and part of that played out in Q2.

Q2 was 200 basis points better than Q1, and we expect another kind of comparable sort of step up here in Q3.

So we feel a lot of momentum there, and our shipments actually sort of understate what we're really seeing in the business today.

As you know, that can be a little bit more of a lag business.

Right, right.

That's helpful.

And then finally, that core operating margin contraction in the 2 businesses, Dental, E&AS, in terms of -- you explained it with investment spend and productivity spending, but how much longer should we anticipate that continuing?

Well, I mean, it's a little bit dependent on the -- what we're seeing in the quarter because we saw a lot of strength by mid quarter.

And businesses like Dental and EAS that had both productivity opportunities and growth opportunities, we sort of said go after it because things are trending well.

So it's a little bit of that dynamic.

But I think on EA&S, we'll begin to sort of see that get better.

Dental, we're going to be doing some things to really make sure, like we did at Fortive, to make sure we're set up well come next July.

Our final question comes from Brandon Couillard from Jefferies.

Just one question on Dental.

Would be curious to hear if the channel dynamics were still a negative drag on the top line in 2Q.

And if you could elaborate kind of on traditional consumables sellout trends in both the U.S. and Europe.

Sure.

Brandon, as I mentioned, I think we're in a much more stable environment right now relative to the channel dynamics that you asked about.

And as I mentioned in my prepared remarks that what we talked about in the past about channel-related inventory adjustments had moderated significantly during the course of the first half of this year, so I think the vast majority of that is behind us.

I always hesitate to say that we will never see any inventory adjustments again because I think that the distribution channel is always going to be somewhat sensitive to distribution, based on what sellout looks like.

And so I think, in general, we're in a much better place, and the vast majority of that is behind us.

The realignment of the sort of the preferential exclusives, or the unwinding of those exclusives as better said, I think now is largely behind us.

There's still obviously some ramp of new sales forces with different distribution partners that have an impact on growth rates, but in general, I think that's starting to normalize as well.

So I think when you take those things together and then you look at what was our core growth rate and some improving sellout, I think we're just in a much better place today.

That will conclude today's question-and-answer session.

I will now turn the call back to Mr. Gugino.

Please go ahead.

Thanks, Queena, and thanks, everyone, for joining us today.

We're around all day for questions.

That will conclude today's call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.