Danaher Corporation (DHR) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the 2021 Annual Meeting of Shareholders of Danaher Corporation. I am Steven Rales, Chairman of the Board. And at this time, the 2021 Annual Meeting of Shareholders of the company will please come to order. Please note that a copy of our annual meeting agenda and rules and procedures are available on the meeting site through which this meeting is being webcast. I would now like to introduce the other directors of the company who are in attendance today: Rainer M. Blair; Linda Hefner Filler; Teri List; Walter G. Lohr, Jr.; Jessica L. Mega; Mitchell P. Rales; Pardis C. Sabeti; John T. Schwieters; Alan G. Spoon; Elias A. Zerhouni; and Raymond C. Stevens. In addition, I would like to introduce [ Matt Sutton ] of the accounting firm of Ernst & Young, the independent registered public accounting firm for the company. The record date for shareholders entitled to the notice of and to vote at this meeting is, in accordance with law, March 8, 2021. Affidavit showing the proper notice of this meeting and the mailing or posting of the proxy statement have been received and along with a certified list of shareholders as of the record date will be filed with the records of the meeting. Our Board of Directors has appointed Beth VanDerbeck as the Inspector of Election, and she has taken the oath of office as required by law. The oath of office will be filed with the minutes. The inspector of election and our secretary have advised that we now have a quorum. It is approximately 3:06, and the polls are now open for voting. The polls will close upon conclusion of discussion on the last item being voted on here today. Most shareholders have already voted by proxy, and we've tallied those votes. If you haven't yet voted or if you want to change your vote, you may vote by clicking on the Voting button on the web portal and following the instructions there. In the interest of time, we will waive a reading of the minutes of the last annual meeting. There are 4 items of business to be conducted at today's meeting. Each item is described more fully in the company's proxy statement. The company has not received notice from any of its shareholders as required under its bylaws of any other matter to be considered at today's meeting. Therefore, no other proposals may be properly introduced by shareholders. We will allow shareholders the opportunity to ask questions related to each item after it has been introduced through the designated field on the web portal. If you have other questions regarding other topics, please hold them until after the meeting. The first item of business is the election of Rainer M. Blair; Linda Hefner Filler; Teri List; Walter G. Lohr, Jr.; Jessica L. Mega; Mitchell P. Rales; Steven M. Rales; Pardis C. Sabeti; John T. Schwieters; Alan G. Spoon; Raymond C. Stevens; and Elias A. Zerhouni, each of whom has been nominated by the Board to serve until the 2022 Annual Meeting of Shareholders. Are there any questions concerning these nominations? As there are no questions, we will move on to the second item of business. The second item of business is the proposed appointment of Ernst & Young as the company's independent registered public accounting firm for fiscal year 2021. Are there any questions concerning this item? As there are no questions, we will move on to the third item of business. The third item of business is the approval on an advisory basis of the company's named executive officer compensation. Are there any questions concerning this item? As there are no questions concerning this item, we will move on to the fourth item of business. The fourth item of business is a shareholder proposal, which was submitted by John Chevedden. For reasons set forth in the proxy statement, the Board of Directors recommends a vote against proposal #4. If Mr. Chevedden or his representative is online today to present the proposal, they may do so at this time.

Hello. This is John Chevedden. Can you hear me okay?

Yes, sir. Welcome, John.

Okay. Proposal 4, special shareholder meeting improvement. Shareholders asked our Board to take the steps necessary to amend the corporate documents to give the owners of a combined 10% of our outstanding common stock the power to call a special shareholder meeting. Currently, almost 1/3 of the shares that vote at the annual meeting are needed to call for a special shareholder meeting. This proposal topic won 44% support at an earlier Danaher Annual Meeting, which would represent a majority vote from the shares that had access to objective proxy voting advice. Unfortunately, small shareholders do not have access to objective proxy voting advice and are forced to be over reliant on management's biased recommendations. Since this 44% vote, there has been a dramatic development that make shareholder meetings so much easier for management. Special shareholder meetings can now be online shareholder meetings, which make it easier for management. Since the role of a shareholder meeting is diminished, it is reasonable for shareholders to have greater flexibility in calling for a special shareholder meeting. At an online shareholder meeting, almost everything is optional. For instance, a management narrative on the state of the company is optional. Also, management questions to shareholder -- also, management's answers to shareholder questions are optional even if management asks for questions. Thus, management hardly needs to prepare for an online shareholder meeting. It is astounding what management can get away at an online shareholder meeting. Thus, shareholders should rightfully have more flexibility requesting a special shareholder meeting. The core purpose of such a meeting can simply be the announcement of the vote. For instance, the Goodyear online shareholder meeting was spoiled by a trigger-happy management mute button for shareholders that was used to quash constructive criticism. AT&T would not even allow shareholders to speak at its online shareholder meetings in 2020 and 2021. The key benefit of a governance improvement proposal like this proposal is that it would not result in more cost because the mere presence of good governance serves as a guardrail to make sure that management performs well on its own because, if management fails, shareholders have a remedy with teeth to make the reforms known to management in a special shareholder meeting. The key benefit of a good governance proposal is that it does not have to be used because its presence triggers better management performance. Please vote yes, special shareholder meeting improvement, proposal 4.

Thank you, John. I appreciate your thoughtfulness and certainly, your perseverance. I also look forward to returning to live as opposed to online meetings going forward. The polls are now closed for voting, and it's time for our voting results. I call on the inspector of elections for her report, please.

Yes. Mr. Chairman, with respect to the election of directors, for each director, a majority of the votes cast were voted in favor of elections. With respect to the ratification of the selection of Ernst & Young as Danaher's independent registered public accounting firm, 98.59% of the shares represented in person or by proxy and entitled to vote voted in favor. With respect to the advisory vote on the company's named executive officer compensation, 95.34% of the shares represented in person or by proxy and entitled to vote voted in favor. With respect to the shareholder proposal, 42.15% of the shares represented in person or by proxy and entitled to vote voted in favor.

Thank you very much, Ms. VanDerbeck. In view of the results, I now declare that each of the nominees for director named in the proxy statement has been duly elected director of the company, proposals 2 and 3 have been approved and proposal 4 has not been approved. Ladies and gentlemen, that completes the business of the meeting, and I declare the meeting formally adjourned. I now have the pleasure of turning the meeting over to our President and Chief Executive Officer, Rainer Blair. Following Mr. Blair's remarks, we will take questions from shareholders.

Thank you very much, Mr. Chairman, and good afternoon, everyone, and thank you all for joining us virtually today. Next slide, please. Just waiting here for the next slide. Here we go. Thank you. Please note our advisory on forward-looking statements, should you want to review that in more detail at a later time. Next slide, please. So I'd like to kick off with a quick snapshot of Danaher and our portfolio today. In 2020, we generated more than $22 billion of revenue across 3 reporting segments and 4 strategic platforms. The 4 platforms are comprised of 20-plus operating companies united by a common business model that is characterized by strong global brands with large installed instrumentation basis, significant captive consumables providing recurring revenue and great customer intimacy. We are well positioned in attractive end markets with strong underlying secular growth drivers, and our uniquely positioned portfolio has evolved significantly over the last several years, transforming Danaher into a purpose-driven science and technology leader. Next slide, please. So let's take a quick look at some of the financial highlights from the past year. 2020 was truly an exceptional year for Danaher. Our team took the challenges presented by the pandemic and turned them into opportunities to support customers and directly contribute to the fight against COVID-19. We delivered nearly 10% core revenue growth, 170 basis points of core operating margin expansion, 43% earnings per share growth and over $5 billion of free cash flow. We also closed the largest acquisition in our history with the GE Biopharma transaction, now called Cytiva, a global leader in bioprocessing. And I'll share more about this transformative addition to our portfolio in just a few minutes. Now it's not lost on us that part of our financial performance in 2020 was driven by the work we're doing to tackle a health crisis which has had such a devastating impact on so many around the world. That said, we're also incredibly proud of our contributions to fight this pandemic, and we continue to work tirelessly to support these global efforts. Next slide, please. Here we go. Across our Life Sciences and Diagnostics platforms, we play a critical role helping to fight COVID-19. So allow me to highlight a few of our operating companies' contribution. In diagnostic testing, IDT was the first company in the U.S. to have their primer and probe kits approved by the CDC for use as a key component in testing for COVID-19. Beckman Diagnostics launched several antibody serology tests and high-throughput antigen tests to help make higher-volume mass testing possible. Cepheid, the gold standard in rapid point-of-care PCR testing, was the first to market last year and had since launched a 4:1 test -- 4-in-1 test for flu A and B, RSV and COVID. In Life Sciences, Cytiva, Pall, Beckman Life Sciences and Molecular Devices support vaccine and therapeutics development. In fact, we're involved in the majority of vaccine and therapeutic projects underway around the world today, including all of those in the U.S. that are currently on the market or in later-stage clinical trials. These are all great examples of how each of us at Danaher are living our shared purpose, helping realize life's potential. Next slide, please. As I mentioned earlier, one of the most significant portfolio moves we've made was the acquisition of the GE Biopharma business, now called Cytiva, which we closed at the end of March last year. Cytiva is an outstanding business with complementary strengths across the bioprocessing workflow, upstream and downstream. With Cytiva, biologics now represents over 50% of our Life Sciences platform revenue of over $10 billion and brings an incredibly talented, highly engaged and innovative team to Danaher. Including Cytiva, Danaher now has an advantaged position supported by several compelling long-term growth drivers, including significant runway associated with the biologic drug development pipeline and the rapid proliferation of cell and gene therapies. The business is also off to a great start as part of Danaher. In fact, in 2020, Cytiva grew over 25% and generated over $4 billion of revenue. We're also making great progress with the early transition priorities, including rebranding, standing the business up as a new Danaher operating company and introducing the Danaher Business System. In summary, the Cytiva acquisition is a transformational addition to our Life Science platform. Next slide, please. So let's move briefly to highlight the Danaher sustainability program. For clarity and direction, we've framed up our stakeholder commitments to customers, investors, associates and the communities in which we live and work around 3 pillars: innovation, people and the environment. We'll continue to accelerate our investments in innovation to develop leading-edge diagnostics, life-saving research and to protect our global food and water supplies. Regarding people, we've committed to representation goals of 40% women globally and 35% people of color in the U.S. by 2025. Regarding the environment, we will, by 2024, reduce our energy consumption, greenhouse gas emissions and landfilled waste all by 15%. We're driven by a deep commitment to continuous improvement, and we'll continue to prioritize measurable progress across the many facets of sustainability. Next slide, please. I'd like to conclude with the Danaher Business System. You heard about our portfolio, great businesses uniquely positioned in attractive end markets, but how do we run them? Of course, it's all about execution, and fundamental to that end is the Danaher Business System or DBS. Based on the foundations of our core values and our shared purpose, DBS is our source of sustainable competitive advantage across all of our businesses at Danaher. It's much more than just a set of tools and processes we use to run our businesses. The 5 core values of DBS represent what we believe in. DBS is our culture, it's who we are and it's how we do what we do. So in the spirit of continuous improvement inherent to DBS, we will strive to keep building an even better, stronger Danaher and to positively impact the world around us in meaningful ways. I'd like to thank you for your continued support of Danaher as we work every day to help realize life's potential for all of our stakeholders. And with that, I'll turn it back over to our Chairman, Mr. Steve Rales.

Thank you very much, Rainer. Much appreciated. At this point, I would like to open the meeting for general questions. Shareholders may submit questions through the designated field in the web portal.

Steve, we have our first question. The question is please give examples of product innovations in the past year.

Thank you, Jim. That list is long, but I think in the interest of time, I would ask Rainer to maybe step forward and address a couple of the high points.

Thank you, Mr. Chairman. The list of innovation is truly long. And I'd like to focus on just 3 innovations that exemplify not only the investments we have made in solving real and tangible customer problems but also the process improvements that they bring along. I'll start with Leica Microsystems and the THUNDER imager, which allows molecular imaging of live organism and is truly a new capability introduced to life science research, particularly for cellular analysis. At Cepheid, we launched the Xpert Xpress COVID-19 test, which sets the gold standard for COVID testing at the point of care. And at Videojet, we launched the 6230 TTO printer, which allows printing on flexible packaging and can be fully controlled by a smartphone, the only type of -- this type of printer in the world. With that, back to you, Mr. Chairman.

Additional questions, please?

Steve, we have our second question. What type of businesses might Danaher acquire in the year ahead?

Thank you, Jim. Anyone familiar with our history knows that acquisitions play a key role in our growth, and we don't expect that to change in the foreseeable future. I think more than ever, consistent with our strategy, principally built around the platforms of Life Sciences and Diagnostics, shareholders can expect that we remain active in those areas. We may even be particularly robust in earlier-stage technologies. But for the most part, we will stay true to our corporate strategy around science and technology and expand our capabilities beyond just larger acquisitions to smaller and faster-growing earlier-stage companies.

We have our third question. What are examples of cost-cutting measures taken in 2020?

Thank you, Jim. I'm pleased to say that there were principally no cost-cutting measures taken in 2020, particularly in the face of the pandemic. To the contrary, what we chose to do with a very long view is invest in our human capital, our associates and in our businesses, which is what we will continue to do in this -- in the subsequent years ahead.

Our next question, what is the total [ CEO pay for ] 2020 and for 2019?

Thank you, Jim. In 2019, our total CEO pay was $18.2 million. In 2020, which was a bit of an anomaly because it's a year of succession and transition, CEO transition, we had 2 CEOs in effect in place at different times during 2020. Rainer Blair's compensation was $10.4 million, and his predecessor, Tom Joyce's compensation was $16.8 million.

Next question, when were the last share buybacks?

Thank you, Jim. For anyone familiar with our history, share buybacks are not something that we engage in with any frequency. And I can say that with the exception of 2 split-offs, one a number of years ago relating to our communications business and another more recently, the spin-off of our dental business to a new company named Envista, apart from those transactions in which we did reacquire some shares, we have had no share buybacks since, I believe, 2012.

Steve, next question. Will management commit to not coercing our employees into getting the COVID vaccine?

Well, implicit in that question is the fact that we are engaged in coercion, which I would like to think we are not. Perhaps, Rainer, you could comment briefly on our policy around COVID and vaccines.

Thank you, Mr. Chairman. Can you hear me?

Yes.

It is our policy to not coerce our employees. We recommend that our associates receive the vaccination in accordance with the World Health Organization and the CDC's recommendation. But notwithstanding, there may be, in this global business, requirements in local jurisdictions that we may have to follow for vaccination guideline, but we do not coerce our associates. Thank you.

Yes. Steve, next question. Mr. Chairman, the Carpenters Pension Funds hold a total of 386,200 shares of the company's stock. As long-term investors, we strongly believe that the compensation plan should be designed primarily to drive the successful execution of the Board's long-term strategic business plan. Today's public company executive compensation plans are largely formulaic, peer-related plans with simplistic annual say-on-pay voting, reinforcing planned homogeneity. Would you or the chair of the Compensation Committee speak to whether Danaher might be better served by an executive compensation plan tailored specifically to the company's particular circumstances and its unique long-term strategic business plan. Thank you.

Thank you, Jim, and thank you to the representative of the Carpenters Pension Funds. Alan, I may ask you to chime in if you have anything else to add. But at the end of the day, I'd like to think that we have an unusually long perspective as it relates to compensation and an unusual perspective as it relates to driving strategy away from just financial performance. And I would like to think that our incentive compensation programs driven toward the long term and driven toward our strategy are the key pillars that help drive the company's financial performance going forward as opposed to the other way around. So while we continue to be open to new ideas and want to be a properly aligned, the company has a reputation for building its compensation around long-term performance and strategy as opposed to purely just financial results. One of our Directors and Chair of the Compensation Committee, Alan Spoon. Alan, would you have anything to add there? Here we go.

Steve, thank you, and thanks for that question. I don't have really anything to add other than to note that our long-term plans reflect our desire and expectation that we'll outperform the market over a long period of time. And to accomplish that, obviously, we would have fulfilled a strategy that was developed by the Board and supported and executed by management through execution over several years. So that's my -- those are my comments that I think complement what Steve just said.

Thank you, Alan.

Steve, next question. Mr. Chairman, the topic of stakeholder capitalism as an alternative to shareholder capitalism has received considerable attention recently. As long-term pension fund investors, the carpenter funds appreciate the sentiments in [Audio Gap] capitalism perspective, but feel that execution could be complicated. Could you [Audio Gap] perspective on the concept of stakeholder capitalism and what principles the Board would use to balance the interests of varied stakeholders as it develops and implements the company's long-term business strategy? Thank you.

My thanks again to the engagement by the carpenters fund. Always nice to see that interest. I would say more generally that we believe that in considering the interest of all of our stakeholders, we are being consistent with fulfilling our responsibility to all of our shareholders. And I would add more specifically that we take a very holistic view around all stakeholders as part of the enterprise. As I mentioned earlier, as it relates to executive compensation and incentive compensation, our perspective is no different. We have a very long horizon, and we continue to think about all of our shareholders and that interconnection -- excuse me, all of our stakeholders and that interconnectedness, if you will, with the organization and its long-term objectives. And as I said at the outset, I believe that's entirely consistent with our objective of shareholder performance as a byproduct of considering the interest of all stakeholders. Thank you again for that question.

Steve, next question. What improvements have been achieved for accelerated product development? And what are the improvement targets for the coming year?

Well, I would say, generally speaking, that we have a robust innovation model, and that model has been in place in a very serious way for the last several years. And I think anyone studying the company, and that includes any of our platforms, will see the transformation that's taking place with newer technologies, whether they be digital or otherwise. But I would also ask our CEO, Rainer Blair, if he has anything to add here.

Thank you, Mr. Chairman, and thank you for that question. As you may know, one of our core values is that innovation defines our future, and we invest significantly not only in content but also process improvements in our accelerated process for innovation and commensurate with that core value. Ultimately, we measure the effectiveness of our new product development process by measuring the new product revenues that we generate post launch over a given period of time, and we continued to make material progress in that metric in 2020. And of course, in 2021, we had further designed to improve upon our new product revenues as well. Thank you, Mr. Chairman.

Thank you, Rainer.

Steve, we have no further questions.

As we have no further questions, that concludes the 2021 Annual Meeting. I would like to thank all of you for your support, ask you to have a good afternoon or evening and most importantly, try and stay safe during these difficult times. Thank you again, and good evening.