Danaher Corp (DHR) 2018 Q3 法說會逐字稿

Ladies and gentlemen, good morning.

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

At this time, I would like to welcome everyone to the Danaher Corporation Third Quarter 2018 Earnings Results Conference Call.

(Operator Instructions)

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

Mr. Gugino, you may begin your conference, sir.

Thank you, David.

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

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

I'd like to point out that our earnings release, the slide presentation supplementing today's call, our third quarter Form 10-Q and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the 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 October 25, 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 third 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 or are available only in certain markets.

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 risk 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.

We have built terrific momentum throughout 2018, and this continues in the third quarter with our team delivering results ahead of expectations.

We achieved 6.5% core revenue growth, solid operating margin expansion and double-digit earnings per share growth.

Our outstanding top line performance was broad-based, and we are particularly pleased with a number of our businesses that delivered 5% or better core growth.

Through the first 9 months of this year, we delivered 6% core growth, a result achieved through a combination of new product innovation, strong commercial execution and strategic acquisitions, which have increased our exposure to attractive end markets.

Our team's performance utilizing the Danaher Business System is enabling us to innovate more effectively and to get better products and solutions to our customers sooner, all of which we believe is contributing to sustainable market share gains.

So turning to our third quarter results.

Sales increased 7% to $4.9 billion, with the impact of currency translation decreasing revenue by 1.5% and acquisitions adding 2%.

Core revenue was up 6.5%, with 4 of the 5 platforms delivering mid-single-digit or better core growth.

Third quarter adjusted diluted net EPS was $1.10, representing 10% growth year-on-year.

We generated $2.3 billion of free cash flow year-to-date, resulting in a free cash flow to net income conversion ratio of 123%.

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

In developed markets, mid-single-digit growth was led by momentum in North America and Western Europe.

Our gross margin for the third quarter was 55.4% while core operating profit margin expanded 50 basis points.

During the quarter, both gross and operating margins were negatively impacted by volatile currency movements, particularly in a number of the high-growth market countries.

Year-to-date, our gross margin is up 60 basis points, and we've increased our core operating margin by 100 basis points, led by our Life Sciences, Diagnostics and Environmental & Applied Solutions segments.

So now let's take a more detailed look at our third quarter results across the portfolio.

In Life Sciences, reported revenue increased 14.5% and core revenue was up 9.5%.

Reported operating profit margin increased 190 basis points to 19.6% with 230 basis points of core margin improvement.

This is the platform's ninth consecutive quarter of more than 100 basis points of core margin improvements.

So turning to the individual operating companies.

Beckman Life Sciences delivered high single-digit core revenue growth with positive results across most major product lines and geographies.

The team's strong commercial performance and recent new product launches, focused on higher-growth biologics and genomics markets, are helping Beckman increase their customer win rate, and we believe they continue to gain share relative to the market.

At SCIEX, high single-digit core revenue growth was led by North America and China.

We saw strength across the pharmaceutical and food testing end markets in both regions, driven in part by demand for SCIEX's recently launched X500 mass spec platform.

Core revenue at Leica Microsystems was up high single digits.

The combination of strong end markets in life science research and industrial applications, along with momentum from recent product launches, drove solid demand across all major product lines.

Pall had a great quarter, producing double-digit core revenue growth.

The team's execution, combined with good underlying market conditions, contributed to positive results in every business unit.

In particular, our biotech business, including single-use technologies, was up mid-teens in the quarter.

In September, many of you braved the rain to attend our investor event at Pall's Westborough, Massachusetts facility.

We provided an update on the business and highlighted what the Pall team has accomplished with DBS since the acquisition.

We've made tremendous progress accelerating and focusing our innovation efforts, enhancing commercial initiatives and reducing costs.

In the 3 years since acquisition, Pall has already achieved more than $250 million of annual cost savings out of our 5-year $350 million target, helping to increase gross margins close to 500 basis points and operating margins by more than 800 basis points.

Pall has taken some of these cost savings and reinvested into R&D and sales initiatives, helping double the amount of annual revenue achieved from new products since acquisition and improving market visibility by 50%.

The team has done a tremendous job using DBS to drive meaningful and sustainable results across the business, and we could not be more pleased with Pall's achievements so far.

Six months ago, we acquired IDT, a leading player in the genomics consumables market, and the business is off to a great to start as part of Danaher, delivering mid-teens revenue growth in the quarter.

At the time of acquisition, we talked about IDT's opportunities to evolve their go-to-market strategy, and the team has already made meaningful progress with the help of DBS growth tools like sales funnel management.

We're excited about IDT's start as part of Danaher, and we look forward to their continued progress.

At our Diagnostics platform, reported revenue was up 3.5%, with core revenue growth of 5.5%.

Reported and core operating margin declined 120 basis points to 15.6%, which was primarily driven by transactional losses stemming from the significant weakening of certain high-growth market currencies against the U.S. dollar during the quarter.

Beckman Coulter's core revenue growth was up low single digits, with strength in China partially offset by softness in the developed markets.

Looking across our product lines, growth was driven by immunoassay and strength in automation.

At the annual AACC trade show in Chicago this past July, we featured our recently launched hematology products, including the DxH 520 analyzer for low-volume settings and the DxH 900 analyzer for high-volume applications with a first-of-its-kind early sepsis indicator.

We've been very encouraged by the market reception of these new hematology products.

Beckman also recently launched the DxA 5000, a new clinical lab automation solution that reduces the number of manual steps for a lab tech from 32 to 1. We expect this advancement to help drive meaningful cost savings in the laboratory while simultaneously improving lab quality and turnaround time for faster diagnoses and better patient outcomes.

As we enhance our product offering with differentiated solutions for our customers, we believe that Beckman will continue to improve its competitive position and growth profile over time.

Radiometer achieved another quarter of high single-digit core revenue growth with solid performance across our blood gas and AQT product lines.

Geographically, results were led by China, Japan and North America, where recent customer wins contributed to meaningful gains in the U.S.

Core revenue at Leica Biosystems was up high single digits, driven by broad-based strength across the core histology and advanced stain businesses.

LBS is benefiting from recent new product launches like the PELORIS 3 tissue processing system, which addresses our pathology customers' key workflow challenges and in turn, helps improve their lab processes and efficiency.

Cepheid delivered double-digit core revenue growth and continued to be an innovation leader during the quarter.

The team added the hepatitis B assay in Europe, which rounds out Cepheid's virology test menu offering in the region.

And in July, Cepheid announced the launch of the GeneXpert Edge, a portable, battery-operated point-of-care system specifically developed for near-patient testing in developing countries, starting with tuberculosis testing in India and Africa.

TB test results on the Edge are available in less than 2 hours and supported -- and support a localized single-visit test-and-treat approach to advance the goal of eradicating tuberculosis and other infectious diseases.

Turning to our Dental segment.

Reported revenue was down 2%, and core revenue declined by 50 basis points.

Reported operating profit margin declined 200 basis points to 12.7%, and core margins were down 195 basis points.

These margin declines were due to lower sales volume, currency impact from the recent strengthening of the U.S. dollar and investment spend as we help prepare DentalCo for a successful spin-off in the second half of 2019.

Core growth in our traditional consumables and equipment business was down in the quarter, driven by expected inventory adjustments in the North American distribution channel, along with modest declines in Europe and Japan.

However, we remain encouraged by signs of end-market stabilization as North American sellout data in both the traditional consumables and equipment product lines was positive in the quarter.

Our specialty consumables business was up mid-single digits, with solid performance across orthodontics and implants led by Nobel Biocare.

At Ormco, we recently received FDA 510(k) clearance for Spark, our full-scale clear aligner system.

Ormco had initially launched Spark in Australia back in June, and obtaining this U.S. clearance is an important step to expand our offering going forward.

Moving to our Environmental & Applied Solutions segment.

Reported and core revenue both grew 8%.

Reported operating margin increased 130 basis points to 23.7%, including 160 basis points of core margin expansion.

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

Videojet delivered high single-digit core revenue growth, marking their 11th consecutive quarter of mid-single-digit or better core growth.

Earlier this week at PACK EXPO, North America's largest packaging event, Videojet showcased several new printers and technologies, including the 1580 continuous inkjet printer.

The CIJ 1580 is Videojet's newest midrange offering and was developed using technology from the 1860 high-speed printer.

The 1580 provides better connectivity and remote service capabilities for the midrange segment, helping customers reduce their total cost of ownership.

By leveraging the existing technology from the 1860 printer, Videojet was able to develop and launch the 1580 in under a year, expanding our continuous inkjet offering and providing a broader range of solutions for our customers.

In July, Esko closed the acquisition of BLUE Software, a label and artwork management software company.

Esko solutions digitize, automate and connect the packaging development and production workflow, from 3D design concepts all the way to printed packaging, point-of-sale displays and e-commerce content.

The team is constantly seeking ways to reduce time to market while improving cost and quality across the packaging value chain.

The BLUE Software acquisition further enhances Esko's unique offering in this critical process, and we're excited to have the BLUE team onboard.

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

Hach had a terrific quarter with double-digit core revenue growth.

The Chinese government's prioritization of water quality has generated significant demand for Hach's offering and helped drive growth of more than 30% in the region.

And we saw solid momentum across both the industrial and municipal end markets in the U.S. and Europe as well, where we believe that the team's strong commercial execution is contributing to market share gains.

On our second quarter call in July, we talked about the recently launched Claros Water Intelligence System, Hach's software platform that brings together instruments, data and process management.

Claros was recently selected by one of the nation's largest wastewater operations to support their extensive system of treatment plants.

Claros will be used to ensure accurate data collection and management from dozens of sources, helping to standardize compliance reporting and provide actionable insight for improved process operations.

At ChemTreat, core revenue growth improved sequentially to a mid-single-digit rate, led by increased demand in the metals and mining, food and beverage markets.

And lastly, Trojan's core revenue was up high single digits as we continue to see good demand across the municipal end market in North America.

We believe the Trojan team continues to take share relative to the market, driven by their differentiated product offering and recent commercial initiatives.

So to wrap up, we're pleased with our third quarter results and the momentum we generated throughout 2018.

Our performance is a testament to the team's execution and drive for continuous improvement, helping us achieve 6% core revenue growth, 100 basis points of core margin improvement and double-digit EPS growth through the first 9 months of 2018.

We continue to deliver strong top line results as recent acquisitions, investments in innovation and DBS growth tools have driven better performance and share gains across many of our businesses.

Our solid balance sheet positions us well to further enhance our portfolio through inorganic opportunities in 2018 and beyond.

The spin-off of our Dental business remains on track, and we're excited about the progress the team is making as we help them prepare to become a stand-alone publicly traded company in the second half of next year.

Looking ahead, we remain focused on building a stronger, better Danaher.

We believe the strength and differentiation of our portfolio, combined with the power of the Danaher Business System, provides us with the foundation to create sustainable long-term shareholder value.

We're initiating fourth quarter adjusted diluted EPS guidance in the range of $1.25 to $1.28, which assumes core revenue growth of approximately 4%, and we're raising our full year 2018 adjusted diluted EPS guidance to a range of $4.49 to $4.52, which would represent our fourth consecutive year of double-digit adjusted EPS growth.

Okay.

That concludes our formal comments.

David, we're now ready for questions.

(Operator Instructions) And our first question will come from Tycho Peterson with JPMorgan.

Tom, maybe I want to start off -- kicking off on your last comment there about double-digit earnings growth.

I guess, thinking a little bit further out beyond the fourth quarter in light of some of the FX moves and tariffs and maybe a later flu season, can you talk about your view of sustainability of double-digit earnings growth as we think ahead to maybe 2019?

Sure, Tycho.

Well, we don't want to get too far ahead of our ourselves here.

We still have plenty of work to do here to finish off a good -- really good 2018.

And clearly, as you point out, I mean, there are a whole series of things to be concerned about out in the market around, as you say, FX and tariffs, potentially even inflation trends as we go forward.

But in general, I mean, we feel really good about the macro environment today, and in addition to that, the positioning of each of our businesses around those macro drivers.

So I think as we look across, certainly, geographically, we see strength across virtually every major geography.

If there's any weakness at all, it might be a little bit in the Middle East.

But otherwise, if we look across, great performance in China, terrific performance across a number of the other high-growth markets despite the currency fluctuations, and good solid performance in the U.S. and Europe.

Things like FX and tariffs clearly represent some headwinds to the EPS number, but we feel good about how we're positioned to continue to drive growth and share gains in our markets.

So we don't see anything that could get in our way other than those few headwinds that we just mentioned.

Okay, that's helpful.

And then maybe just one follow-up on margins on Dental.

In particular, you talked about incremental investments ahead of the spin.

Could you maybe just parse out how much of the margin impact was FX versus some of those investments?

And how should we think about the incremental investments for Dental in the next couple of quarters?

Sure.

Well, we clearly saw some OMX headwind there.

FX, both onetime transactional losses and translation associated with the stronger U.S. dollar, were contributors to the 195 that we talked about.

Those high-growth market currency fluctuations are likely to continue as we see it today.

The FX was nearly 100 basis points of negative impact to core OMX in Dental.

The balance of that was, in some respects, related to the lower sales volume, especially the higher-margin traditional consumables business.

But again, we felt really good about what we saw in terms of the sellout in North America.

Some of the weakness that we saw was in Europe, specifically in Germany, and a little bit of disruption in Japan associated with some of the weather-related issues that we saw there.

But in general, we were actually somewhat encouraged by what we saw relative to, obviously, a large portion of the business, which is in North America, and that sellout.

Finally, we are continuing to invest, and that is having some impact on the OMX there.

We think it's important that we set up that business for a better growth profile as it becomes a public company next year.

Those investments are clearly in the aligner business.

The Spark clear aligner business, we're ramping up associated with our inter-oral scanner and our digital dentistry efforts as well as the sales force expansion at Nobel and Ormco.

And so I think the combination of those things, we think, are make-sense investments that set that business up well.

And in general, we would expect some sequential margin improvement in the fourth quarter and certainly, in 2019.

So we think it's still an attractive OMX story, certainly, as growth continues.

Our next question comes from Ross Muken with Evercore ISI.

Maybe -- Tom, you called out the Pall business.

It seemed like that was a mid-teens.

I know we had some slightly easier comps, but that still seems like a fantastic result.

I guess -- I know you showed it off recently, but in terms of the sustainability of demand on kind of the filtration and bioprocess side, how are you feeling about sort of the duration of growth there?

And kind of what's driving it in terms of single use and some of the other items?

Sure.

Well, thanks for the question, Ross.

We saw broad-based strength across Pall in the quarter.

The biotech business clearly led the way with mid-teens kind of growth.

Our Life Science business specifically, if you break out biotech and the medical and food and beverage business, solid across the board but tremendous strength in single-use technologies.

Even if you look over to the industrial side of the business, better than 10% growth on the industrial side.

Microelectronics, continued strength there at double-digit growth, which, by the way, has been sustained for 7 of the last 8 quarters.

Obviously, that will start to moderate a little bit as the comps get tougher, but in general, we're seeing good growth across the industrial side, with aerospace being solid as well, admittedly off somewhat of an easier comp.

So we clearly have a tougher comp in the fourth quarter.

We did 10% or better in the fourth quarter of '17.

So -- but we've got good order trends.

We think Pall continues to be a solid mid-single-digit growth business, but the biotech business is going to continue to lead the way.

And if you think about the underlying drivers there -- and we've talked about this, I think, extensively, Ross.

The large molecule dynamic, which underpins a lot of the growth that we're seeing at Pall, throughout our Life Science businesses as well, continues to be strong.

You've got 350 drugs moving through there, but significantly more than that in the pipeline today.

And we think that bodes well for a long-term growth track around large molecule drug production -- development and production that will benefit certainly the biotech business at Pall, but will benefit us more broadly across our other Life Science businesses as well.

And I guess, how are you thinking about sort of the M&A environment and the balance sheet heading into next year?

I mean, the cash flow continues to be tremendous.

You've mainly done tuck-ins, let's say, in the last 24 months after Cepheid.

It feels like the capacity is sort of there, but obviously, valuations in this market can be tough.

How are you thinking about sort of the funnel and kind of large and small transactions?

And how do you think about your capacity?

Well, we certainly think we have tremendous capacity today.

We've basically paid off IDT with our year-to-date free cash flow to this point.

At a relatively low, kind of 2x leverage number today, and that's going to go lower with our free cash flow generation, which is likely to be in excess of $3 billion this year, we've got tremendous firepower.

The pipeline is good.

It's been solid.

We've had tremendous conversations across a number of the platforms, and we think there's opportunities in both small and large transactions.

Sure, valuations are relatively rich today, but we continue to keep our eyes open for the best and most attractive assets in the market.

And with the balance sheet being in the shape it's in and the multi-industry structure that we have today, which, as you know, gives us optionality in terms of how we deploy that capital over time, we think we're in really good shape.

And Ross, I think also, on the margin, a little bit more anxiety in the market helps.

In addition to rising interest rates, we're much less interest-rate sensitive than lower-credit companies and private equity.

So rising rates should help us here as -- towards the end of the year and going into next year as it relates to M&A.

Our next question comes from Scott Davis with Melius Research.

So we've got a couple of different headwinds we're dealing with here.

I mean, EM currency is always a challenge, I guess, in this new world we live in, but tariffs is about to smack us in the face, it seems.

And last quarter, you've talked about hopefully or trying to -- at least you implied you'd get price after 3Q.

How do you -- what's your playbook here?

I mean, do you go out with price increases now?

And -- or do you need to wait until the actual tariffs kick in and get it real-time?

And what do you think the competitive response is going to be if you guys are out there leading in this effort?

Yes.

Well, Scott, we certainly never wait on price.

Tariffs or no tariffs, our business is focused on getting price in their markets on a consistent basis.

We're seeing that price come through, particularly across Life Sciences and our Environmental & Applied Solutions business.

If you look specifically at the consumables side of those businesses where we typically have gotten price, those are high-value consumables with relatively modest cost impacts to the end customer.

Those are -- that's an important leverage point for us, has been in the past and will continue to be, associated with any headwind relative to tariffs.

I mean, on tariffs specifically, just a baseline where we are right now.

I mean, we don't see ourselves as being significantly in the crosshairs of the tariffs that have been put out.

We said in July, at that time, that we thought it was about $10 million a quarter.

Now with the incremental tariffs that have been levied, we expect that to be closer to $12 million to $13 million a quarter.

And so on a $5 billion EBITDA base, relatively small numbers, but again, that doesn't take away any pressure we put on ourselves to continuously get price in the market.

Price is one of the actions obviously that we address, but we're also looking at where might we do some changes in supply chain, where might we ship some manufacturing to various locations.

We have some flexibility there, particularly associated with consumables.

And we are pursuing the exemption process that we talked about.

And while that's not necessarily an easy road with the U.S. trade representative, there may be some opportunities there.

So it's a multipronged effort, but price, clearly, is part of that.

I would say what we'd probably be a little bit more concerned about and a reason for a bit of caution relative to the tariff narrative would be more the second-derivative impacts on growth.

We haven't seen much of that right now.

You've seen tremendous strength in our China business to this point.

I mean, China was up double digits in the third quarter, and it was the seventh consecutive quarter of double-digit growth for us.

So right now, we feel pretty good about where we are in China, but there's certainly room for a little bit of caution relative to any, as I said, second derivative impact on growth coming out of those markets.

Got it.

It's a good answer.

And just a quick follow-up.

I -- hopefully, you can answer this, but am I to assume that Dental is a dual track, sale or spin?

No.

We are -- our intention is to spin the business A.K.A.

the Fortive transaction of a couple of years ago, where Dental becomes a stand-alone public company in the second half of next year.

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

Just a follow-up on the trade question, I guess.

Are you seeing any signs of pull-forwards in your customers amidst some of the strength attributed to just people sort of stepping up their ordering in anticipation of sort of beating the tariffs?

We have not seen anything that we could point to specifically, Derik.

That doesn't mean that there could be something deeper in the order book or the revenue side that represented a very modest level of that, but we can't point to anything of any significance there.

The biggest number that you heard me talk about in China was in the Water Quality platform at Hach, where we saw just a tremendous quarter, and we've seen a great year for Hach and Water Quality in China.

That's really more driven by policy associated with surface water in China right now, and that -- we could see some continuation of that here in the fourth quarter potentially, and then moderate a bit from there.

But I wouldn't necessarily describe that in any way as pull-forward at the moment.

Great.

And just a question -- can you talk a little bit about the biopharma end market?

I'm just curious on your SCIEX strength and what is maybe going on there and also Phenomenex.

Can you sort of talk about, is it -- the demand you're seeing, is it mostly -- is it broad-based in biopharma?

Is it big companies, small companies, U.S., China, India?

Just a little bit more color on what's going on in that market and some of the share dynamics going on there.

Sure, sure.

Absolutely.

Yes, we've seen very broad-based good performance across the Life Science business.

You asked specifically about SCIEX, so I'll touch on that for just a minute.

SCIEX posted another quarter of high single-digit core growth.

North America and China were both good markets for us.

As you know well, Derik, SCIEX has a fairly broad end-market reach.

And so it's not just in biopharma, but we're in, obviously, small and large molecule.

That was a very good market for us in the quarter and has been.

China remains very strong there, specifically.

But the applied market has been good, solid numbers in the U.S. around food testing, but China and India strength as well.

In clinical, China continues to lead the way there, but pretty good performance, I think, across the board.

Academic, not a big business for SCIEX, but Europe was solid and China was strong as well.

So I think across the board, that business is terrific.

I touched on Pall earlier and Pall being a little bit more closely aligned with large molecule drug production.

And as I mentioned, based on the drug pipeline, that's going to be pretty consistent going forward.

If you look across the other Life Science businesses, each of them performed well.

I touched on a number of them in my comments.

But as I look at the performance of that -- those businesses geographically, I mean, pretty much across the board, those businesses performed really well geographically, Leica Micro, SCIEX, Beck LS, Pall.

And then when you turn to the smaller businesses like Phenomenex, Agela, et cetera, each of those were pretty solid in the quarter.

Our next question comes from Steve Beuchaw with Morgan Stanley.

The first thing I'd like to do is -- just given the comments on currency, is follow up there just a little bit.

I wonder -- sorry if I missed this, but could you give us a view on what currency was to EBIT margins, the total company level in the quarter?

And then any view, either at the margin line or on the bottom line, as to what currency might have as an impact on the company's profile over the next 12 months or for '19, whatever makes more sense for you?

Yes.

Steve, the impact in the third quarter was our core margins were up 50 basis points.

We think, excluding currency, they would have been up kind of well over 75 basis points, so call that 30-plus basis points.

That's a combination of the translation, which is just the strengthening of the dollar, particularly in high-growth markets where we have a fair amount of revenue, and very modest cost base.

But that was exacerbated in the quarter by a bunch of transactional items, the swings in whether it's Brazil or Turkey or Argentina, where you had 20% swings and all of a sudden, we're marking to market -- sorry, I got a cold here, but marking to market the receivable and you're taking an FX hit.

So my guess is we've got a couple of quarters to kind of bleed through all this, but more on the translational side.

The transactional side is what happens intra-quarter, but it will be a little bit of a headwind over the next couple of quarters.

I think we can overcome it, but it will be a little bit of a headwind here.

(technical difficulty)

bottom line.

I wonder if you could frame up for us, in an environment in 2018 where the top line has been very, very strong, to what extent you might have stepped up any commercial investments that position you for better top line [growth] next year and maybe set you up for potentially some moderation of growth investments such that we could see a slightly different profile in terms of drop-through from top line to EBIT.

Well, Steve, we've continued to take advantage of the strength that we've seen in the top line and the terrific operating margin expansion that we've had to continue to invest in our businesses for exactly the purpose that underlie your question, which is continuing the momentum of building on growth the way we have.

Obviously, the comparison between growth rates of 2016 and 2017 versus 2018 suggest that those investments have been well placed to this point, and we've continued to do that throughout 2018 to set ourselves up well for a continuation in 2019.

We've already talked about a couple of headwinds here today.

Obviously, as we go into the beginning of next year, those growth investments are going to become that much more important.

We've got a pretty challenging comp in the first quarter, maybe even in first half.

Certainly, a strong flu season this year.

And the Diagnostic business sets up for a more challenging comp going into the first quarter of next year.

But hey, we've got to continue to play offense, drive growth.

We've seen tremendous progress relative to new product innovation across our businesses.

Business by business, platform to platform, we've seen every one of our businesses increase their investments in new product innovation and the commercialization associated with those, and that's been a contributor.

And that's -- we've talked -- referenced in the past the term the Danaher playbook, where we're continuing to stay tight on the G&A side and continuing to take some of that growth fall-through that's associated with operating margin expansion and put that back into sales and marketing and R&D.

And so far, so good.

Our next question comes from Doug Schenkel with Cowen.

Just a handful of Diagnostic questions.

First, you indicated in your prepared remarks that Beckman faced some headwinds in developed markets.

I'm curious if this was just more of the same or whether there were some more pronounced headwinds that occurred during the quarter and -- that were kind of unique from recent trend, and if so, if you'd provide a little more detail.

Second, you indicated FX was having a more pronounced impact on Diagnostic margins than some of your other segments in your prepared remarks.

I'm just wondering if FX is impacting demand in emerging markets as well, and if so, what steps you're taking to mitigate the demand effect.

And then third, based on the 10-Q, our quick read of that, it looks like the impact of pricing was negative for Diagnostics for the first time in at least 7 quarters.

Could you provide a bit more detail on what drove the pricing pressure, particularly as it relates to lab reimbursement pressures, and if this is really a U.S. dynamic versus something you're seeing in other geographies?

Doug, that is a handful.

I actually had to be taking notes during your questions.

I hope I got it right.

So let me take a swing at it.

If I missed something, I know you'll bring me back.

I will help you out.

Okay, sounds good.

Okay.

Thanks.

I have to admit, Doug, on the first one, I don't -- I'll have to go back through my prepared remarks.

I do not recall talking about anything in particular that was a headwind to the top line at Beck Dx.

I -- we've got pretty solid performance there both geographically and across product lines.

I know I highlighted the strength in immunoassay as well as automation.

I'm going to come back to automation in a minute.

We've seen -- we're seeing good customer retention at Beck Dx.

We're seeing continued improvement in our customer win rates.

And so in general, I feel pretty good about that, but you'll bring me back if I missed something there.

Doug, our overall developed market demand at Beckman in Q3 was comparable to what it was in the first half.

Okay.

So nothing...

We didn't mean to suggest any shift.

Yes.

Moving to Dx margins, we did note that the Dx core OMX was down 120 basis points.

Significant impact there on the currency side, and we'll get into more of that in your questions in a minute, both transactional and translational due to the strong U.S. dollar.

Dan just talked about the differences between those 2. And we'll probably see some continuing effect in the fourth quarter and/or the first half driven by the stronger U.S. dollar.

But ex the FX impact, core OMX would have been roughly flat year-on-year, so you have a pretty significant impact there.

In the meantime though, coming back to what I was just commenting on about some investment spend, we continued to ramp up investment spend around, particularly, hematology because that's an area where we need to enhance our competitiveness, and the 900 and the 520 are big parts of that; as well as investments in automation.

And that's really critical because we compete most importantly in those large high-volume accounts where bolting automation to the floor for long-term customer retention is pretty, pretty important.

So overall, we feel good about how we're investing, particularly at Beck Dx.

Coming, though, to your question about demand effects.

Right now, we couldn't point to anything in particular associated with those FX impacts relative to demand.

So far, demand looks pretty steady across our markets.

And finally, relative to pricing, in general, we have not seen PAMA have any significant impact from a pricing standpoint.

We know and have always acknowledged that there are pricing pressures in the Dx market consistently.

Every time there's a jump ball associated with retaining or competing for new accounts, pricing and total cost of ownership is critical.

But specific price-related impacts associated with PAMA have been quite, quite modest to this point.

One of the impacts that we did see in the quarter associated with what might be considered price within OMX, but really isn't, is associated with that automation business, where we had a particularly strong quarter in terms of automation.

That comes in at a slightly lower margin but is so important strategically, because when you install automation in large-volume accounts, it creates a tremendous long-term relationship associated with that capital infrastructure.

So in terms of how we balance pricing relative to our competitiveness, we feel pretty good about how the team's doing there.

Our next question comes from Julian Mitchell with Barclays.

Just the first question maybe on Environmental & Applied Solutions.

We haven't touched on that too much yet.

Your margins in that business or the core margins had been under some pressure.

They came back very, very strongly in the third quarter.

Just wondered if you now think that we're past those headwinds on investments for the next sort of year or so, and whether there was anything on mix particularly helping the margins in Q3 or if this kind of decent sort of triple-digit core OMX increase may be sustainable for some time.

Julian, I think we have gone through a period of very heavy investments, both in water and PID.

We've seen the benefit of that in the number of new products.

You can see it -- saw it in the [growth] number.

We did get a mix benefit here at Hach.

Hach had an exceptionally strong quarter.

As you know, that's one of our most profitable businesses.

So I don't think we'll necessarily replicate what we did in Q3 going forward, but I think we're back to a point of more normalized, call it, 50 basis points kind of annual margin expansion in that segment.

Understood.

And then my second question, just around Dental.

The issues in the U.S., I guess, are fairly well understood and not particularly new.

But you talked about some softness in Europe, and maybe Germany in particular.

Maybe just give a little bit of color as to how that played out in recent months, what you think drove that and where you see sort of sell-in versus sell-through dynamics in Europe right now in Dental.

Sure, Julian.

Yes, the softness in Europe was largely associated with Germany.

That market is a bit more skewed towards the equipment side of the house, and there were some underlying dynamics associated with costs that dental organizations were having to deal with, unrelated to our business in Germany, during the course of the last quarter or 2. And so we saw that impact in terms of a pullback on purchasing, particularly of capital equipment, and again, largely in Germany.

So we don't see necessarily a broad-based issue in Europe.

In fact, over time, we've actually worked to improve our competitive positioning in Europe and have seen the fruits of some of those labors and investments to this point.

So we think we'll get through this German phenomenon here in the third quarter -- in the fourth quarter, but it was fairly isolated.

Our next question comes from Daniel Brennan with UBS.

So I was hoping you could spend a little more time on China.

Seven consecutive quarters of double-digit growth, impressive.

So I guess, 2 questions.

First, beyond Hach, were there any big deviations in the growth rates amongst your different businesses in China in this quarter?

And then secondarily, from what you're seeing, is there anything that would lead you to think that double-digit growth can't be sustained going forward?

Sure.

Thanks, Dan.

Again, it was really broad-based.

I've looked at it literally operating company by operating company, and almost without exception, we saw strong growth in China.

And in many, many of those cases, that double-digit growth was driven across a number of different operating companies.

So we've talked about the strength that Hach delivered, but if you look across a number of our other businesses, you'd see that double-digit growth in China and you'd see examples of that in each of the 5 segments.

In terms of the sustainability of it, yes, as you point out, I've mentioned 7 consecutive quarters of double-digit growth.

I think that's likely to be sustained at least in terms of what you might consider to be very high single-digit growth to low double-digit growth.

There's the uncertainty that we talked about earlier in Scott's question associated with what a second-derivative impact might be associated with growth rates in China if the trade issues and associated narrative starts to impact psychology a bit more.

But I think, at this point, things look pretty consistent.

Underlying order rates that we look at across the 5 segments all look pretty good.

So at this point, I think we're okay.

Great.

And maybe just one follow-up on a different topic, just on Beckman.

I know we just addressed it in one of the prior questions.

But when you think about the outlook for Beckman to go from low single where it is today towards improving, I know you said hematology, but maybe can you give us a little bit of a pathway towards where Beckman could get to over the next couple of years and what are the drivers?

Sure.

I think you mentioned one of the key ones, and we have talked about this before, that across the various product lines where Beckman competes, hematology has been the weakest.

And the investments that we've made over the last several years and now with these new products coming to market, while it will take a while for those to ultimately impact the core growth, that -- hematology certainly is a lever of ours.

In addition, as we continue to perform well in immunoassay, we will continue to, you might say, mix upward our core growth rate.

As you probably know, we're more highly indexed to clinical chemistry at Beckman than some of our diagnostic competitors.

And as result of that, with a lower growth rate associated with the clinical chemistry market versus immunoassay, that is a little bit of a drag on our growth rate.

As we continue to grow at or above the market in immunoassay, we will mix up our relative growth rate to the market.

And I think the combination of those 2 things are 2 of the biggest factors that will continue to drive us more close -- or closer to mid-single digits.

One last point though, I think, that's important to recognize.

We're often compared with the larger player -- the large players in the diagnostic market.

You know those names well.

The numbers that they tend to put up, it's important to probably compare those numbers broadly to an equivalent portfolio at Danaher, which really is the combination of Beckman, Radiometer, Leica Biosystems.

And importantly, now with our higher exposure to molecular diagnostics at Cepheid, you now look at a portfolio that I think, on a full year basis, and Dan or Matt will correct me if I'm wrong, is about a 6.5% growth rate on a full year basis if you look at that combined portfolio in Diagnostics.

And so we feel very good about how that portfolio has evolved in terms of now positioning us in a very competitive way relative to the overall diagnostic market.

Our next question will come from Erin Wright with Crédit Suisse.

A couple of questions on Dental here.

I guess, are we past some of the distributor destocking headwinds, I guess, at this point?

And how would you characterize underlying demand trends in the U.S. in particular and visibility thereon and how some of those relationships are progressing from a Dental distribution standpoint?

Sure.

Thanks, Erin.

I think we are past the most significant adjustments associated with inventories in the channel.

So in other words, that is largely behind us.

It doesn't mean that they're gone forever.

I know you know well what life is like in large distributors, inventories are critically important.

There are always going to be pressures associated with adjusting inventories appropriately, particularly with large distributors like we have in the dental industry.

But we're through the big impacts there, and we're particularly encouraged by the underlying demand that you asked about.

And that's specific to North America.

We had very good transparency associated with sellout in North America, and the recent numbers associated with sellout in North America, both in consumables and in equipment, have us quite encouraged in terms of the stabilization of the overall dental market in, obviously, a very important market, that being the North American market.

The relationships with distribution have settled down.

Much of the inventory adjustments that were associated with the shifting of exclusives between large manufacturers and large distributors, that's behind us.

Sales organizations have settled into place in terms of the focus of the product lines where we compete.

And I think that disruption, again, is largely, if not completely, behind us.

Okay.

And then one last quick one.

I guess, how quickly can you ramp up the clear aligner offering?

And do you anticipate that being a meaningful driver for you near term in the Dental segment?

And how would you characterize the rollout and some of those incremental investments that need to be made, I guess, on this front that you alluded to?

Sure.

We're going to continue to invest in Spark, both in terms of the evolution of the product line as well as its commercialization.

But in terms of its -- the meaningful level of impact, it's going to be a while.

Obviously, there's a geographic expansion that we will be very thoughtful about.

We started in Australia, and that's going exceptionally well.

But we want to make sure that we are building sales organizations appropriately, training sales organizations, training our customers so that as we enter incremental geographies, we do that in a very thoughtful and ultimately, very successful way.

So there's a journey ahead.

We think the journey is certainly a worthwhile one because we all know that the clear aligner market is an exceptional market, has great growth rates.

And there's tremendous opportunities there, particularly with what we think is a highly competitive product, and very attractive from a value-creation perspective associated with our customer set.

So step by step, I think it will become meaningful over time, but there's a road to go ahead.

Ladies and gentlemen, that concludes our allotted time for Q&A.

I'll now turn it back to Mr. Gugino for closing comments.

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

We're around all day for questions.

Ladies and gentlemen, that concludes this morning's presentation.

You may now disconnect your phone lines, and thank you for joining us this morning.