Danaher Corp (DHR) 2020 Q2 法說會逐字稿

Good morning.

My name is Maria, and I'll be your conference facilitator this morning.

At this time, I would like to welcome everyone to Danaher Corporation's Second Quarter 2020 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.

Thanks, Maria.

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

With us today are Tom Joyce, our President and Chief Executive Officer; and Matt McGrew, 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 2020 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 and Presentations and will remain archived until our next quarterly call.

A replay of this call will also be available until August 6, 2020.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance.

The supplemental materials describe additional factors that impacted year-over-year performance.

Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics refer to results from continuing operations and relate to the second quarter of 2020 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 only available 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 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.

As a result of the size of the Cytiva acquisition and its impact on Danaher's overall core revenue growth profile, we are presenting core revenue on a basis that includes Cytiva sales.

References to core revenue growth including Cytiva sales in the calculation of period-to-period sales growth compare the current period Cytiva sales to the historical period Cytiva sales prior to the acquisition.

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

Thanks, Matt, and good morning, everyone.

We're very pleased with our second quarter results especially in such a challenging environment.

Our solid core revenue growth, strong cash flow generation and more than 30% EPS growth are a testament to our team's commitment to the Danaher Business System and the outstanding portfolio of businesses that comprise Danaher today.

We're tackling the challenges and opportunities presented by the COVID-19 pandemic head on and are fortunate to do so from a position of strength.

These circumstances have showcased the resilience of our portfolio, a unique collection of market-leading franchises and technologies with a high level of recurring revenue and a foundation of continuous improvement.

We believe that this powerful combination differentiates Danaher and will enable us to continue generating sustainable long-term value for shareholders for many years to come.

Before we run through our second quarter results, I'd like to provide an update on a few of the ways we are directly contributing to the fight against COVID-19 today and well into the future.

Diagnostic testing has been a critical component of the global communities' attempts to better understand and ultimately curb the spread of COVID-19, and Cepheid has been a leader in this effort.

In March, Cepheid launched the first rapid molecular test for COVID-19 that provides highly accurate results within 45 minutes.

Multiple independent studies indicate that Cepheid's test performance is best in class versus other point-of-care platforms on the market today, providing superior virus detection with one of the fastest time to results.

The team has meaningfully increased production capacity since the test was launched, shipping more than 6 million test cartridges in the second quarter.

As a testament to Cepheid's commitment to tackle this global health crisis, the team recently announced the development of a rapid 4-in-1 combination test for COVID-19, Flu A, Flu B and RSV from a single patient sample.

The symptoms for each of these viruses are very similar but the treatments are very different so the test is being designed to provide critical answers within 35 minutes to ensure the best patient outcome.

The 4-in-1 test is expected to launch in the third quarter, ahead of the upcoming flu season.

In addition to ramping test production, Cepheid also delivered a record number of new instruments to customers in the second quarter.

The installed base grew double digits, and the number of new instrument placements was more than 4x that of a typical quarter.

This significantly increases Cepheid's installed base, which now totals more than 26,000 instruments globally, bringing essential diagnostic information closer to more patients and communities around the world.

Another addition to our diagnostic testing capabilities was the launch of Beckman Coulter Diagnostics' serology test in June.

This highly sensitive and specific assay can identify IgG antibodies to the virus, which typically begin to develop within the first 14 days of infection.

Antibody assays could potentially play an important role in understanding immunity and, in turn, improving the world's ability to manage COVID-19 going forward.

As we look beyond testing, a global race is on to find effective treatments for COVID-19, and we're proud to support the scientific community in their pursuit of new vaccines and therapies -- therapeutics for the virus.

Pall and Cytiva's products and solutions are involved in the majority of the more than 200 vaccine and therapeutic projects currently underway around the world, including participation on every COVID-19 vaccine that is in human clinical trials today.

Our unique offering across the bioprocessing workflow positions us exceptionally well to help bring vaccines and therapies to market faster.

In addition to our market-leading filtration, chromatography and single-use technologies, Pall and Cytiva's innovative teams provide customers with extensive technical expertise to enable breakthrough development and production capabilities.

One such example is Pall's process development services team, which is helping customers scale up their vaccine production processes significantly faster and in one instance, accomplishing in just a few weeks what typically takes months or even years.

These innovative bioprocessing solutions are just a few examples of how we're helping to accelerate the pursuit of COVID-19 prevention and ultimately a cure.

Now let's look at our second quarter results.

We generated $5.3 billion sales with 3.5% core revenue growth.

The impact of foreign currency translation decreased revenues by 2%.

We also saw strong order growth in the quarter, just under 10%, led by our Life Sciences and Diagnostics platforms.

Geographically, revenues in the developed markets was up mid-single digits, led by North America and Western Europe.

High-growth markets were up slightly, driven by a meaningful sequential improvement in China, which was up low single digits year-over-year.

Gross profit margin of 53.8% and operating profit margin of 15.9% were both down, primarily as a result of fair value adjustments related to the Cytiva acquisition.

Excluding these adjustments, both gross and operating profit margin increased by more than 150 basis points year-over-year.

Core operating profit margin was down 80 basis points, driven by slightly lower volume excluding Cytiva, foreign exchange rate movements and higher corporate expense.

Adjusted diluted net earnings per common share of $1.44 were up 32% versus last year.

We generated $1.3 billion of free cash flow in the quarter and $2 billion year-to-date, both up approximately 35% or more year-over-year.

Our outstanding free cash flow, combined with a strong balance sheet, positions us well to actively pursue strategic M&A opportunities in this environment.

We're also accelerating growth investments across Danaher, most notably at Cepheid and many of our life science businesses, where we are expanding production capacity to support the fight against COVID-19.

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

Life Sciences core revenue was up 8%, led by high-teens or better core growth at Cytiva, Pall Biotech and IDT.

More specifically, Cytiva achieved more than 20% core revenue growth in its first full quarter as part of Danaher, exceeding our expectations.

Demand for our bioprocessing, genomics and automation solutions was driven by ongoing global efforts to develop COVID-19 testing and treatment.

This was partially offset by declines in our more instrument-oriented businesses, SCIEX and Leica Microsystems.

Academic and research lab closures delayed installations of existing instrument orders and new capital purchases, particularly across developed markets.

But despite this difficult environment, SCIEX successfully launched multiple new products earlier this month, including the Triple Quad 7500 mass spectrometer.

The new 7500 marks SCIEX' most significant launch of the last 5 years and reinforces their market leadership in quantitative mass spectrometry.

This is another great example of how we're continuing to invest for growth across Danaher and enhancing our competitive advantage through innovation.

Moving to Diagnostics.

Reported revenue was up 2.5% with 5% core revenue growth, led by continued strength in our point-of-care businesses, Cepheid and Radiometer.

Global demand for Cepheid's COVID-19 tests and GeneXpert instruments helped drive more than 100% core revenue growth at Cepheid in the quarter.

Radiometer delivered double-digit core revenue growth as elevated levels of COVID-19 hospitalizations drove demand for blood gas testing.

A record number of new ABL blood gas analyzers were delivered during the quarter, further expanding Radiometer's market-leading global installed base.

This strong performance was partially offset by declines at Beckman Coulter Diagnostics and Leica Biosystems, our core laboratory and pathology businesses.

Patient volumes were down meaningfully as elective procedures and wellness visits resumed slowly throughout the quarter, particularly across the U.S. and Europe.

This was partially offset by improvements in China, where hospital visits began to approach pre-pandemic levels.

Moving to our Environmental & Applied Solutions segment.

Reported revenue was down 10.5% and core revenue declined 8.5%.

By geography, declines in North America and Western Europe were partially offset by double-digit growth in China.

At our water quality platform, mid-single-digit core revenue declines were driven by industrial end-market softness while municipalities remained stable.

Steady demand for our consumables and chemistries globally was offset by delayed equipment purchases, particularly in the developed markets.

However, we were encouraged by strong results in China during the quarter as activity returned to more normalized levels across the region.

Core revenue at our Product Identification platform was down double digits largely due to equipment revenue decline as mission-critical operating expenses were prioritized over larger capital investments.

At Videojet, positive consumables growth was led by demand across the consumer packaged goods and food end markets.

Service performed well as well as we continue to support customers throughout the pandemic, helping to keep their essential business operations up and running.

So with that as a context for what we saw by segment, let's take a closer look at recent trends across our end markets.

Encouragingly, the dynamics of the quarter were largely a continuation of what we outlined in early May.

April appeared to be the trough, with modest improvements as we move through May and June.

Geographically, we continue to see improving activity in China, with Europe following suit albeit at a slower pace.

Resumption of activity in the U.S. is mixed with many states only recently beginning phase 3 openings and others experiencing setbacks in the process.

Within Life Sciences, we continue to see a bifurcation across our end markets.

The recent surge in COVID-19-related research and development among our biotech and pharmaceutical customers is generating strong demand for our bioprocessing, genomic and automation solutions.

Non-COVID-related bioprocessing activity also remains very healthy, contributing to demand for filtration, chromatography, single-use and cell and gene therapy products.

Cytiva and Pall Biotech comprise the majority of our exposure to the bioprocessing end market, and collectively, these 2 businesses had more than 40% growth in their order book in the quarter, a strong indication of the longer-term opportunities we're seeing here.

Meanwhile, widespread shutdowns continue to impact non-COVID-related research lab activity.

Labs in the U.S. recently started to reopen but are operating at limited capacity and with distinct variations by region.

The story in Europe is similar to the U.S. while China is further along and activity appears to be approaching pre-pandemic levels.

We estimate that approximately 50% to 60% of academic research labs in developed markets are now open in some capacity.

That number is closer to 90% in China, where installations have resumed and instrument order books are building.

Looking across clinical diagnostics.

We continue to see very strong demand for molecular point-of-care and acute care testing, which is also driving a significant increase in instrument placements globally.

Across hospital labs and reference labs, we were encouraged to see patient volumes ramp up as we move through the quarter, with elective procedures and wellness checks resuming across much of the developed markets.

Today, we estimate that patient volumes in North America are approximately 85% to 90% of historical levels, with Europe slightly ahead and China even further along given their earlier reopenings.

In the applied markets, the divergence of demand between consumables and equipment appears to be lessening.

Consumables remain solid as customers sustain essential business operations like testing and treating water and safely packaging consumer product goods, food and medicine.

Equipment declines are starting to moderate, and we're encouraged by recent order book trends.

In light of these recent dynamics, we expect to deliver mid- to high-single-digit core revenue growth in the third quarter.

We anticipate COVID-19-related revenue tailwinds will be similar to what we saw in the second quarter.

By segment, we expect core revenue growth at Life Sciences to be up double-digit -- low double digits, Diagnostics up high single digits and Environmental & Applied Solutions to be approximately flat.

So to wrap up, we're proud of our results this quarter.

Our team stayed focused on executing and continued to find innovative ways to tackle the challenges and opportunities presented by this pandemic.

We're excited about the portfolio that we have today and how it will continue to differentiate us going forward, and we're fortunate to navigate through this environment from a position of strength, with our solid balance sheet and outstanding cash flow generation enabling us to be nimble and opportunistic.

We believe that the combination of our talented team, DBS-driven execution and resilient portfolio uniquely position Danaher to outperform in 2020 and well into the future.

With that, Matt, I'll turn the call back over to you so that we can start taking questions.

Thanks, Tom.

That concludes our formal comments.

Maria, we're now ready for questions.

(Operator Instructions) Our first question comes from the line of Derik De Bruin of Bank of America.

I got a couple to start with.

I think the first one is, can you -- we're getting a number of questions on the margin math for the second quarter and the inventory step-ups.

Can you talk about the dynamics of that?

And the more important question is, like how do the gross and operating margins progress now that Cytiva is fully into the numbers?

And how should we think about the rest of the year?

Yes, sure, Derik.

I'll take it.

So the gross margin, we saw kind of a decline of 200 basis points sort of year-over-year.

Like Tom said in the prepared remarks, that is entirely driven by inventory step-ups related to the Cytiva acquisition in the quarter.

So if you exclude that impact, our gross margins are, I'd call it, closer to 58%, which would have been up a couple of hundred basis points year-over-year and again, I think, largely driven by Cytiva.

And that should be sort of onetime here in the quarter, Derik, that we get by as we start to move -- that's a onetime thing here in the quarter.

So going forward, you shouldn't see that.

Okay.

That's -- yes.

I just want to clarify that.

And how should we think about the SG&A and the R&D, the OpEx line?

I don't know that we had a tremendous amount of kind of step-up issues in either of those 2 lines.

So I think about the R&D line, I think -- while I do think we will continue to kind of invest and accelerate some spend here in the second half, I think, more or less, the R&D line should stay pretty constant, again, outside of the investments that we're going to make here in the second half, largely around Cytiva.

I think we're probably a little bit heavier investing there.

But generally speaking, I think we're biased here in this environment to continue to try and spend to make sure that we position ourselves not only for where we are in the short term here in '20 but to make sure that as we head into 2021 that we're in the best position possible.

So it might be how I think about it going forward.

Yes.

I would add to that, Derik.

Just echoing Matt's comments.

We're obviously very fortunate to have a portfolio that now includes businesses like Cytiva, Pall Biotech and obviously, Cepheid, driving outsized performance and with outstanding operating margins.

And I think you know our track record historically is we like to take advantage of situations like this to continue to invest for the future, and some of that investment shows up in the sales line, some in the marketing line and certainly some in the R&D line.

And I think you'll see us continue to try to do that because we feel well positioned in our markets and we think that there are selective opportunities to continue to invest with growth.

And that will set us up exceptionally well not only for the rest of this year, but most importantly, I think, for next year, as we see the environment improve.

Great.

If I can squeeze in one diagnostics question.

You mentioned the 4-in-1 test coming out.

So like how are you pricing that multiplex test?

And also just talk about Cepheid capacity expansions.

I mean you've obviously picked it up since you -- since March, but how should we think about where your cartridge development can go or your production can go over the next couple of quarters?

Sure.

Well, we're not yet at a point where we are in a position to talk about pricing on the 4-in-1 test, but certainly, this is a test that is going to be incredibly important in the market.

We're going to continue to produce stand-alone tests as well, but there's no question our customers have expressed very strong interest in a targeted respiratory panel that brings together COVID, Flu A, Flu B and RSV.

So we'll be sizing up the opportunities relative to pricing over the next several weeks and coming back with that.

So we think there's a tremendous opportunity there.

Relative to Cepheid capacity, we continue to build on our output capabilities.

You'll recall, in the first quarter, I think we were at about 2 million tests and we were just ramping.

We ramped well throughout the course of the quarter to 6 million tests, and we're going to -- we've released a significant amount of capital to continue to build that capacity.

Some of that capital that we've released is going to take a little bit of time to come online.

We'll see some modest growth in the third quarter here and even more significant growth as we go into the fourth quarter and then certainly throughout 2021.

I think key to this, Derik, is our view that there's a tremendous amount of durability and sustainability to the testing benefits that Cepheid delivers to the market.

Certainly, there is a lot of variables.

There's plenty of competition.

But when you look at the speed and the accuracy that we deliver and the value that we deliver associated with the diagnosis, there's no doubt that, that demand is going to be sustained over time.

So we're going to continue to ramp that capacity and sustain our strong positions in the market.

Our next question comes from the line of Tycho Peterson of JPMorgan.

Tom, on the COVID tailwinds, you noted 3Q [will be similar to] 2Q.

But (inaudible), you have a whole plenty (inaudible) vaccine and therapy work, so why shouldn't it be more material on 3Q versus 2Q?

And then of course, the comment on Cepheid, how much of the volume do you expect to go to 4-in-1 versus stand-alone COVID testing going forward?

Tycho, I'm assuming you can hear me clearly.

We couldn't hear anything on your question unfortunately, except for the very last part of the question around 4-in-1.

So I'm going to try the 4-in-1 answer, and then we'll see if you come through clearer.

So I think your question was how much volume is going to move to the 4-in-1.

We do not know the answer to that at this point.

It's -- we believe it will be significant and material, but in terms of putting a number on it quite yet, we just don't have enough voice of customer yet.

Obviously, we haven't developed the pricing model yet, and we're building capacity.

So we'll have to come back to you probably in the next couple of months with a better sense of how we see that volume ramping.

Again, we'll continue to produce the stand-alone tests so there'll be a balance there.

Time will tell on the overall volume.

So let's try the earlier part of your question again.

Yes.

It's just (inaudible) vaccine and therapy work.

Why shouldn't you see a more material COVID tailwind in 3Q?

Okay.

We only caught -- we really apologize.

We only caught the tail end of that.

I'm looking at my team on video, and they can't -- they couldn't hear that either.

But let me just try to -- let me try to hit it a bit because I think you asked about vaccines and the...

Why wouldn't the 3Q tailwind be more material than 2Q for COVID?

Why -- let me see if I got that.

You were asking about the Q3 tailwind...

For COVID, why isn't that more material given how much you've grown the Cepheid installed base and you've got Cytiva and Pall?

Why wouldn't it be more material in 3Q versus 2Q?

Sure, sure.

Absolutely.

Sorry, I apologize that the transmission was so poor, but I think we've got it now.

We're going to see that volume continue to track.

I think there was an outsized impact certainly at Cepheid during the course of the second quarter with that instrument volume boosting at the rate that it did.

We don't expect that, that necessarily will continue to grow quite at that rate, so I think that's one mitigating factor.

And I think -- as it relates to both Pall Biotech and Cytiva, I think we'll see continued traction there, but at the moment, we think that what we're seeing from customers is a demand that is -- again, given the quick ramp that was associated with the 200-or-so vaccine- and therapeutic-related efforts that are going on, that those are likely to be more consistent in the third quarter rather than differentially higher.

So those are just some of the factors.

Perhaps that's a little bit conservative.

If so, we'll take that.

But in line, that's our best estimate at the moment.

And the top, can you clearly -- go ahead, Matt.

Yes.

No, I just wanted to kind of get at -- we are expecting -- from a tailwind perspective, we are expecting a modestly higher benefit here in the quarter for everything Tom talked about, sort of more or less the same volumes at Cepheid, but with a bit of a tailwind or a headwind here on the instrument side.

But I mean I think if you think about what we're going to be doing here in the fourth quarter and into '21, particularly around the build-out on Cytiva and if you think about our tailwinds, the build-out in Cytiva -- sorry, the build-out on Cepheid capacity that's coming online and then probably as importantly, we had 40% growth in orders at both Cytiva and Pall Biotech here in the quarter.

And while we don't expect all of that to show up here in Q3, that does portend well for what we think the second half will sort of look like and as we head into '21.

And that was not just on vaccines, but that was sort of kind of evenly split between vaccines and the therapeutics, which you know are a big part, too.

So while we may have a more modest expectation for the third quarter, I think that there's a ramp as we head through the second half and in particular to '21.

And lastly, is there any color you can put on the vaccine and therapy work for Pall and Cytiva?

I mean you're not doing fill/finish work so there's no kind of per-dose calculation, but can you just help us think about the magnitude of that work?

There are -- gosh, I mean, we're certainly working on that.

And given our exposure across the broad range of human clinical trials that are going on right now, we're starting to get a handle on those opportunities, but there are still so many unknown that make sizing it tough.

I mean it's the number and different types of winning vaccines and therapeutics, questions about production volumes, number of steps in each process.

So I mean there's no question that it's going to be a large and sustained opportunity, but it's just become -- it's a very hard number for us to wrap our minds around today, but I'm sure we'll get a handle on it as it becomes clearer who the winners are and how that production volume will ramp within any individual winner.

We're not going to have dozens and dozens of winners here.

I think we'll have several winners.

And once we have more line of sight to where the winners are, then obviously we can get a better sense of their dosage, production volumes, our position there and what that means when you translate that into sales volume.

Our next question comes from the line of Vijay Kumar of Evercore ISI.

Congrats on a solid execution here.

Maybe I'll start with Cytiva.

40% order growth, the implication of that is -- I mean if that business is contributing about 400 basis points of growth right now and the order book is running 2x that of the growth rate right now, the implication is the business should contribute 400 to 500 basis points of growth in fiscal '21, assuming all of the orders that we're seeing flow through get recognized as revenues in fiscal '21.

Does that math make sense?

Yes.

I mean I think it's -- this is Matt.

I mean I think the issue with that -- the math can make sense, but it's the assumption around the timing, I think, that we just are still kind of TBD on, Vijay, whether that starts to flow real hard here in the third or fourth quarter or if it starts in the first half of '21.

I think that's the only question, is really around the timing.

But like I said earlier with my comments, I mean, I think we're pretty encouraged by the start of Cytiva both on the top line, the core business outside of COVID and the COVID opportunity that's starting to emerge that you saw with that level of orders growth.

And just on the margin itself, Matt.

I mean if you look at -- I think the deal model had Cytiva running at mid-30s.

It looks like it came in well above 40%.

Is that -- is there any timing element on those margins?

Or how sustainable is the Cytiva growth on the margin side?

Yes, sure.

Cytiva margins did come in north of 40% in Q2, which is obviously, like you said, better than sort of the recent performance that we had seen out of them.

I think there's 3 things to think about on the reason for that.

One, we had higher volume here.

North of 20% core growth does give you lots of opportunities from a fall-through perspective, from a VCM perspective so we did have higher volumes.

The other thing -- the second thing is there's probably a very favorable mix element here.

We had -- sort of the higher-margin businesses like process chromatography grew double digits while more of the equipment-heavy businesses were, call it, low single digits, which was kind of a very favorable mix impact in the quarter.

And then the third thing is, and I think you've seen it in a lot of places, we just had a lot lower OpEx spend given the stay-at-home orders, right?

Travel, trade shows, et cetera, was sort of much lower.

So I think if you add it all up, that's how we sort of went from where we thought it would be to sort of north of 40%.

But I would sort of maybe temper some expectations here as we head into margin -- think about the margins in Q3.

Like I said, Q2 is sort of a perfect storm with everything going the right way.

But there's 2 things that I think -- to think about as we head forward into Q3 and the second half.

One is this is a business that we are going to accelerate the growth investments in, not unlike we have done with our other businesses, we alluded to that earlier in the call, but in particular, this business, one -- given the plethora of growth opportunities that are out there and across all of their businesses, not just bioprocessing.

And frankly, [it's not] a business that have got to invest as much as it would have liked maybe in the past, and we're very eager to make sure that they have every opportunity afforded to them.

So that's one.

And then two, we're 90 days into this, from kind of standing it up on its own, if you will.

And so our stand-up costs, the number of people we've hired, the costs that we've put into the business so far to get it stood up and off of sort of the GE kind of apparatus, that is going to ramp as we go through the second half, and that will have an impact here on the margin profile as well.

So good start for sure, a little bit better than we thought on a perfect storm, but I do think there's some moderation coming.

That's helpful, Matt.

And now one big picture for Tom.

Tom, if you look at the balance sheet, $5-plus billion of cash in hand.

Free cash looks like we're run rating well above $5 billion.

I'm just curious.

I think at the time of secondary, you guys made comments about the waves being opportunistic.

I'm just curious how your thoughts on cap deployment are evolving in the current environment.

Sure, Vijay.

Thank you.

Yes, we're in a very strong and fortunate position relative to our balance sheet, and that position continues to be reinforced by a really exceptional free cash flow.

A $2 billion cash flow number on a year-to-date basis really continues to put us in a great spot.

When I talk about opportunistic, that's a term that we would typically use associated with a very uncertain sort of disrupted environment like we were coming through in the first quarter and continue to see in the second quarter.

And that sometimes creates opportunities that, for whatever reason, we may not have seen coming, businesses that get into a spot where all of a sudden they have a change of heart about their future and we're able to take advantage of that.

But with the strength of the balance sheet that we have now on the back of the equity offering that we did, the strength of the free cash flow here in the second quarter and what we see as continuing strength in that free cash flow in the third and fourth quarters, that positions us to really continue to work hard on the strategic opportunities that we focus on consistently throughout the course of the year.

And that goes across each one of our platforms, Life Sciences, Diagnostics, water quality and PID, each of them continuing to focus on key market segments where there are unique opportunities, key product and technology opportunities where we can complement the strength of our existing portfolio and, in some cases, bring on a unique and differentiating leg of the portfolio that allows us to add greater value to customers every day.

And so I think we're in a great position.

We're starting to see some improvement in the environment in the second quarter.

One example of that is a deal that we did for our water quality platform, Aqua Informatics, in the second quarter.

That was a deal that was essentially put on hold earlier in the first quarter as things tightened up, but as things started to improve, we were able to reengage and were able to consummate that acquisition in the second quarter.

And that's a tremendous add of a key data management and software capability for our water quality platform, and we're looking forward to that team playing a significant role.

So that's just one example.

But I would say we're generally seeing an improving environment, one that we can not only be opportunistic but I think continue to drive to our strategic objectives at the same time.

Our next question comes from the line of Scott Davis of Melius Research.

Is this the author?

Is this actually the author?

Well, no comment.

I should have done it under a pseudonym, I guess, sort of anonymous.

I'd get less hate mail.

I've gotten through the introduction.

I didn't skip directly to the Danaher chapter, but thank you.

Welcome, Scott.

Well, each -- wow, thanks, Tom.

It's very kind.

But hopefully, the book helps you sleep at night.

That's a couple of pages and you're out like a light.

But anyways, I -- a lot of good detail already, and you just talked a little bit about M&A.

And what do you envision, Tom, in the next kind of 12 months?

I mean this is a strange environment.

Is it a better environment for bolt-ons?

Is it a better environment to take bigger bets like you did with Cytiva?

Is it -- I mean just a little bit of color around that just given how strange things are right now.

Yes.

Well, first of all, Scott, I think, over the next 12 months, I think we'll see, without any question, an improving environment from an M&A and capital deployment perspective.

I mean we all know that March, April probably -- I mean things were essentially locked down.

And to a great extent, people were frozen in place in many different ways.

And so there's no doubt that you come off of a situation like that and I think we'll see improvement.

We're already seeing a little bit of that already.

I would say, normally, what happens particularly on the back of a very large acquisition like Cytiva that we had done, you have historically seen us do more small, mid-sized bolt-on acquisitions to our platforms.

And I know the teams are working actively on those.

Some of those smaller situations can get a little unhinged here in an uncertain environment, and that tends to serve us well.

But also in terms of just the way we manage our resources internally on the back of a big deal, we tend to do a few smaller deals.

Now all that being said, when the balance sheet is as reinforced as it is right now, we're in much better shape than we might have been had we not done the equity offering and had the tremendous advantage of the current free cash flow.

Certainly, Cytiva is helpful.

So in general, I think we can be pretty balanced in our approach.

I mean, obviously, Cytiva was outsized, but I think we can be pretty balanced in terms of taking advantage of an improving environment.

And Scott, it's Matt.

Maybe to put some numbers to the context of what Tom just talked about.

We've got pro forma EBITDA this year that's going to be close to $6 billion.

And as of right now, we're less than 3x net debt to EBITDA.

So to Tom's point, we've got some flexibility to be aggressive with larger or the smaller stuff.

Yes, for sure.

So a natural follow-on just again in the context of this is kind of a strange environment and you've got amazing growth rates in so many of your businesses, how do you integrate Cytiva for the long term, I mean, in this environment?

And I mean really specifically bringing in DBS tools and really culturally -- I mean bringing the best of the Danaher culture kind of into that organization even.

Obviously, you talk about standing it up as kind of a decentralized business.

But how do you do it?

And is it at all -- delayed at all and you don't want to kind of disrupt the business flow right now given how high the growth rates are?

Or has it already begun and you're really -- it's a similar playbook as maybe your past acquisitions?

Yes.

Scott, we have had to -- we certainly had to be creative in this environment, and I think we've been able to do that.

I'll describe what I mean by that here in a minute.

But obviously, with the restrictions on travel and being -- and what would normally be very much a face-to-face environment with a newly acquired business, particularly a new one, we've had to come up with new and different approaches to achieve the same objectives in the early going around DBS orientation and getting a business off to a great start.

So I think this all starts with the fact that the Cytiva business brings with it to Danaher really an exceptional team of people.

We got to know them unbelievably well during diligence.

Certainly, we had a whole year through regulatory approvals to get to know one another.

We've gotten a sense of their command of the business, their ability to drive performance, their focus on continuous improvement, the level of humility they bring, all of which sets up for a team and a business that adapts very rapidly to a Danaher environment because they are so culturally like us right at the outset.

Add to that the fact that the team reports in directly to Rainer.

Rainer will continue to have that team report directly into him.

And he's maintained that relationship and continued to build those relationships and bring the tools and processes to that team on a virtual basis.

So we've gone through what we call ECO.

You've heard of that before, executive champion orientation.

A lot of that is very familiar to that team because they are well downfield in a number of the tools and processes of DBS.

So yes, we also have some of our teammates going into that business, and that obviously further accelerates the DBS orientation.

So net-net, the combination of using virtual -- our electronic and digital tools to conduct DBS training and orientation and communications, along with having an outstanding team already, plus some folks from Danaher going into that business, we can safely say right now we're very much on track to where we would like to have been if we were in a face-to-face environment.

Okay.

Good.

Congrats, Tom.

Congrats, Matt and Matt, and good luck for the rest of the year.

Thanks, Scott.

Thanks, Scott.

Our next question comes from the line of Doug Schenkel of Cowen.

Starting with another one on Cytiva.

Growth even excluding COVID-19 was definitely a bit above your deal model assumptions.

Of course, the role you're playing in advancing COVID solutions helps the growth profile as well.

It's early, but I'm [curious] how these trends impact your view on Cytiva accretion and returns longer term, especially given the early and pronounced non-COVID strength.

Well, Doug, I'll start with the top line, and then Matt will jump in with how we see that flowing through.

I mean you're accurate.

They're off to a start that is better than what we anticipated in the growth model.

You heard us talk to numbers that were in the 10% range.

And that core growth in 2019, if you go back to that, was about in that range.

And yet, as we come into this year, they came in with a strong order book, good backlog, and then you had the COVID impact on top of that.

And so when you then kind of separate that, you see there what you might say their non-COVID base business growth being in the mid-teens and the COVID volume obviously taking that volume growth over 20%.

So I think the key message there is this is a business as a base business, put COVID aside for a second, that is off to a phenomenal start, that continues to lead in its market and is continuing to build the order book day in and day out.

That's helpful.

Actually, a good segue to my second question.

In your remarks, you commented on the Cytiva and the Pall Biotech order book, what your order book looks like for capital equipment.

It's like the reason (inaudible) a lot of airtime in the Q&A today, but it was clearly better than expected in (inaudible) end market, some momentum building in academic research.

But in both categories, it seems like (inaudible) consumable and service versus capital equipment.

So the reason I'm asking about the broader order book, and answer however you want, of course, but I'm just wondering if you think there's pent-up capital demand heading into the second half and if there's evidence that this could start to turn into revenue over the course of the year.

So Doug, there was a part of that question early on that we didn't catch.

It broke up, but I think we definitely caught the back end of your question.

So I'm going to hit that assuming we didn't miss anything at the front end, which is really around -- you were talking about consumables and service versus equipment, my prepared remarks and you were asking about pent-up capital demand.

And I think the simple answer to that question is, yes, there will absolutely be some pent-up capital demand in a number of different areas.

I might cite one example.

If I turn to our Environmental & Applied Solutions business segment and I look at Videojet in PID, while you have our consumables business tracking really well, you've seen -- we've seen much more weakness in our -- in the equipment side of Videojet.

But we know over a long period of time that, that equipment has a life cycle, it requires replacement, it requires a certain level of maintenance.

You certainly had an expanded utilization of much of that equipment as consumer packaged goods volumes have grown.

And so I would very much expect to see that -- to use one example, that Videojet equipment start to track back in short order.

I think ditto on as labs reopened in the life science market, we're going to see some improvement there.

And in fact, we've dialed some of that improvement in -- even in the third quarter.

As we start to see labs reopening, we're going to see some of those orders that would have normally flowed through in the first and second quarter come through in the third.

Yes.

And Doug, again -- Doug, it's Matt.

Again, sorry, I just want to kind of again put maybe some numbers in context to the overview Tom gave.

I mean you saw here in Q2 our order book grew nearly 10% from an order perspective.

So that's an encouraging sign to what Tom just talked to.

And we've got the core business, if you will, without the Cytiva -- or sorry, without the COVID tailwinds, was down kind of 3% here in the quarter.

And as Tom just mentioned at the end, we're sort of anticipating -- because of that nearly 10% order growth, I think you will see an improvement of that minus 3% sort of going to flat here in the quarter.

Okay.

That's super helpful.

I'll try to sneak in one last one, just a cleanup question.

Hopefully, you can hear me okay now.

In the second quarter, you delivered adjusted earnings growth that was 70% or so higher than reported revenue growth.

Is it fair to think that it's going to be lower than that in Q3 as the mix starts to evolve a bit more towards capital and as you're ramping some of the opportunistic investment you described earlier in this call?

Yes.

I mean maybe the way to think about kind of the third quarter and VCM, et cetera -- I mean it is a little tricky.

I think you do need to sort of look at core business that is Danaher ex Cytiva.

Maybe the way that I think about it is that, from a fall-through perspective, that Danaher non-Cytiva piece is probably going to have a 30% to 35% variable margin on it fall through, if you will, as we do make some of the investments we've talked about in Cytiva and elsewhere.

I think if you then include the assumptions around Cytiva, put those in, I think that sort of gets you, from an EPS perspective, sort of south of where we were here in Q2 but probably closer to what I think we're going to end up with.

Our next question comes from the line of Steve Beuchaw of Wolfe Research.

Hoping you could just put a little bit of perspective on -- in terms of the recovery trajectory.

And then I had one less exciting model question.

There are 2 things that we focused on, on the call here, where we have good reason to be at least directionally optimistic about how things evolve.

One is vaccines.

In the vaccine space, while it's certainly tough to know exactly how it's going to look and how big it's going to be, it'd be really helpful if you could just give us a little perspective on what the slope of the curve looks like.

If we're at X today, which is a sort of preliminary investment in scaling up in anticipation of vaccines, when we get out to '21, is it still X?

Or is it X times 2 or X times 3?

What does that look like?

And then the other ramp-related question I was going to ask actually relates to health care utilization.

So Tom, you gave some really helpful commentary on how people are getting back to getting health care, to some extent, in doc office settings; to some extent, in hospitals.

That's encouraging.

Should we take this to mean you feel good about -- this sort of dovetails off of Doug's question.

But the ramp for hardware spend on some of the Beck Dx and Leica products that might have been under a little bit of pressure in 2Q, do we get that back starting in 3Q?

Or given everything that's going on in the hospitals, that should take a little bit longer?

Yes, you bet.

So your broader question started out with recovery trajectory.

And I want to just hit one quick theme, and then I'm going to get to your question about vaccines.

One of the key things we haven't really touched on, on this call even though I mentioned it in my prepared remarks on the recovery trajectory was China.

We saw a significant improvement in our China business over the course of the second quarter.

And if you looked at that, the breadth of that improvement that span not just across Life Sciences and Diagnostics and not just across Cytiva and Pall but -- or Cepheid but our other businesses like Beck LS and LMS, our EAS businesses like Hach and Videojet, all performed extremely well in China, benefited from the kind of trajectory of recovery that we're seeing broadly there and, across the board, delivered positive low single-digit growth in China in the second quarter.

So that -- I think that's an important dynamic of this recovery trajectory that we haven't really touched on today.

But let me get to the core of your question.

In terms of the vaccine multiples, again -- yes, you're right, it is.

As I said earlier, it's very hard to gauge.

But at this point, I mean, you're talking about a really high multiple of volume versus today.

Let me give you an example.

I mean today, all of these -- all of our revenues associated with this are in the early stages of Phase I, Phase II, early-stage human trials, small volumes, et cetera.

I mean we're nowhere near the stage of talking about tens of, let alone hundreds of millions of doses of either a vaccine or a therapy.

And so again, hard to put a number on it, but I can only say it's certainly a high multiple of where we are today but with a lot of variables attached to how high that number is.

Relative to your question about health care utilization, I think the simple answer is yes, we will be seeing an improvement in our -- in the hardware equipment side of the house.

And yes, it is associated with Beckman Diagnostics and Leica Biosystems...

Brief musical interlude?

Brief

A brief musical interlude.

Maybe that was associated with the recovery in health care utilization.

But the issue has been not just around health care utilization relative to equipment, but it's really been about the fact that in a COVID-19 environment, access to hospitals in any area, whether it's the reference lab area, anatomical pathology, microbiology, access to those labs for hardware installations has been limited, if not, in certain cases, 0.

And so just as we're seeing academic and research labs opening up on the life science side, as we've started to see hospitals opening up a bit relative to elective procedures and overall utilization, we are now starting to see our ability to get in and install equipment that's in the order book come along.

So we will see some improvement there.

It will take some time for that to happen because hospitals are still highly restricted in their access.

But as we go into late this year and early next year, we'll start to see that return to a more normal growth rate.

Okay.

That's incredibly helpful.

I know we're top of the hour here, so I'll take my financial question offline.

Really appreciate all that.

Okay.

Thanks so much.

Thanks, Steve.

And ladies and gentlemen, we've reached the allotted time for questions.

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

Thanks, everyone, for joining us today on our call.

We're around all day for questions.

And thank you, ladies and gentlemen.

This does conclude today's conference call.

You may now disconnect, and have a wonderful day.