Danaher Corporation ($DHR)

[indiscernible] medical life science tools and diagnostics team, and I'm very excited to be hosting Danaher. I'm joined by Rainer Blair, Chief Executive Officer.

Good day, everyone. Thanks for having us, Mike.

Always great to have you here. Really pleasure. We'll just do a fireside chat, but if there's any really burning questions, please throw up your hand. Maybe just to kick things off. Just a couple of weeks ago, you reported 1Q. You saw 50 bps operational core growth, but there was a respiratory dynamic there as well. strong earnings growth despite that, and you provided an update for the full year guide. Maybe just talk through real quickly how the quarter played out relative to expectations? What was maybe a little bit stronger or was maybe a little bit more challenging? What surprised you?

It was a solid quarter. We saw our end markets as well as the momentum across the business to be actually a little bit better than we thought. If you take out respiratory just as you mentioned, we had 300 basis points of growth. And we thought that was pretty solid. The ILI, of course, anticipated that respiratory would be a little bit softer. And as we think about the end markets there, we look at bioprocessing. Bioprocessing came in at high single digits driven by consumables. But I think a nice point of confirmation that the activity levels are getting better was the year-over-year orders growth in equipment, which was over 30%. And the first time in nearly 2 years that we saw that type of year-over-year growth that we've been talking about sequential improvement. So I think that's a data point that is noteworthy, along with the activity level that is confirmed by the consumables. And then as you go to Life Sciences, there also we saw pockets of better activity levels. Our life science consumables business grew as you think about Abcam [indiscernible]. Those would be indicators for higher activity levels in the biotech space, especially with Aldevron Abcam is a business that's skewed a little bit more towards academic and government. They also grew, which is a nice indicator that things are starting to move there. And again, these are consumables. So it really does speak to the activity level there. And then as you think about diagnostics, here where we're looking for another quarter without respiratory and volume-based procurement to be at mid-single digits. And that again, what we saw is the eighth quarter in a row, so solid activity levels there. I think one point that's noteworthy out of China was that, one, the volume-based procurement was as expected even with the medical services guideline changes we had anticipated and framed those correctly and so that frame holds. But we also see that the sequential improvement, so the comping out of that VBP dynamic occurred in the first quarter. And I think somewhat surprising to us in a positive sense was that the patient volumes in China were higher. And that's important as we continue to comp out of volume-based procurement during the course of the year, we do see that the patient volumes are robust and growing our supportive here for the long term as well. So that's describing the activity levels. And as you think about our execution, like I said, without respiratory 300 basis points well, but also delivering 30% operating margins and nearly 10% EPS growth in the first quarter. All of that supports the guide that we've been talking about for the full year.

Okay. That's a great way to set the table. I want to double click on a bunch of those individual drivers you talked about. Maybe let's start with bioprocess. Strong consumables demand. You've seen pretty regular, pretty consistent, robust consumables growth in BP for a number of quarters now. Are we done with that? Are we done with the headwinds are we done with the fluctuations? Is consumables now rock steady back a normalized growth? Or is there still some uncertainly some volatility. There's always some swings between high mid-single, low, high single, where are we in that trajectory?

Well, I mean, the consumables business, I would say, has normalized here now for a number of quarters, the lead times are really at the pre-pandemic levels, if we can say it that way. and customers are ordering these products when they need them. Now sometimes these orders, even for consumables are very large. They can be lumpy and that explains some of that movement that you see there in high single digits. And as we then start to see higher activity levels with equipment orders ultimately turning into revenue, while equipment, of course, is lumpier on by definition. But what's really important to note is that the bioprocessing market is robust, the approval of new monoclonal antibodies as a proxy modality for biologics are strong. We see biosimilars coming to market, which will continue to drive volume. So just to say that the bioprocessing hypothesis that we are talking about for some time of high single-digit growth for the long-term holds.

I mean on the equipment side, just as you were saying greater than 30% year-over-year growth, you do have a little bit of an unusual comp dynamic. So it's not just that clear cut, but it's still clearly a positive indicator. Can you talk us through where the demand is coming from? Is it more greenfield, more brownfield, replacement, new capacity, big pharma, CDMO and also we'll have to hear so orders converting to revenues when, how?

So there's a lot of different drivers here on the equipment side. I think the first one that I want to talk about is the fact that the -- the industry is under-invested in capacity for the last 2, 2.5 years, despite the fact that the activity level, so the prescription of these drugs, the manufacture of these drugs has continued to be robust, and that is manifested and the proof point for that is in the consumables. That is the activity level. So there is a need to invest in more capacity for drugs that are already on market and coming into new indications. And so we see some of that. And we see that around the world. And then secondly, we're starting to see other companies making investments here in what we believe are the early phases of a multiyear CapEx tailwind related to; one, capacity expansion, but two, the reshoring here in the United States, and that's manifested itself with the acquisition of underutilized pharmaceutical plants by CDMOs. Many of them are public. If you think about Lonza, Samsung, you think about [ Celltrion ] and others, some are investing, of course, then to refurbish those or to make them more flexible for a greater variety of drugs that a CDMO would produce. And so we're seeing those kinds of orders as well. And then what we're not yet seeing are the greenfield investments that you would associate with reshoring. Those are on the drawing books. We're starting to give quotations to the companies that ultimately construct those facilities. But that's early days, and that will continue to provide that tailwind for several years to come, several years to come.

And in terms of the lag of orders vetting the revenues, remind us sort your lead times here? And where do you see the 30% growth, where is the strongest growth in 1Q orders?

So we continue to see the majority of those orders in the brownfield area. And so those can range between 6 to 18 months in terms of their execution. Some of them are larger, some of them are smaller. And keep in mind, that time line is not always determined by our lead time to manufacture these solutions, it's often a customer site readiness that determines when you ultimately supply that. And there's some variability and lumpiness in that over time.

So you haven't updated or changed any of your assumptions on equipment revenue growth for '26?

That's right. So I mean, we continue to think there's going to be a year-over-year improvement. Last year, our sales for equipment were down double digits. In the context of our guide, we've assumed that equipment sales would be flat this year. So certainly a year-over-year improvement. And then we'll have to see how the next quarters play out here in terms of customer readiness before we would make any changes to that guide.

And I'll hold on BP. You had a couple of comments that you still think the bioprocess market is very robust, the long-term drivers are there. Once we get past some of these more near-term issues and the orders do fall into revenues, take it all together, is your view on [ biopros ] markets still the same still high single digits longer term?

Absolutely.

Easy. Let's get into life sciences and talk about that a little bit. You mentioned Alderon and Abcam grew in the first quarter. That was a little bit of a positive surprise [indiscernible].

[indiscernible] just to get a sense. And from North American academic is low single digits of total Danaher sales. So just to range find a little bit as to the size of that business. And it's really the academic market that is still softer for life science instruments, although it has stabilized. And while we didn't see the level of sales, because you'll recall in my comment the prior year was still fairly normal prior to some of these policy changes. We did see our order book moved quite nicely here in the first quarter for life science instruments. So sales down, yes, but our order book was a little bit stronger than anticipated. And we think that plays through positively here in Life Sciences, driven primarily by pharma and clinical and applied market applications, but also starting to see pockets of the academic and government market showing a little bit of life. So activity levels and the momentum in that end market and those end markets a little better.

And as you said, I mean, especially in U.S. A&G, some of the headlines last year hit in February, but you don't really see the revenue impact until March or even April because there is a lag. So tough 1Q comp maybe a little bit easier 2Q comp from U.S. AG.

Correct correct.

Okay. All right. Let's talk about -- there's other parts of that maybe are a little bit underappreciate forgotten just because they don't come up every call. We had some questions on Pall Industrial, that's still in the business is of some of the exposures there, we could size that business and how that's done recently?

So Paul is about 25% of Life Science segment sales is a great business. The largest business there is microelectronics, where we're a leader in providing filtration solutions to the manufacturer of memory chips and semiconductors and so forth. So very nice end market exposure there. The growth that we're seeing for Paul in its entirety, of course, for that particular end market is accretive to Life Sciences. We're -- we have invested and are validating new capacities that we built in Asia, so that's very exciting. Then we have an aerospace business, also exposed to the expansion, not only of commercial but also military solutions, which are becoming more popular these days. And so we're seeing that business expand nicely as well. Then our energy business is one that is primarily associated not only with the manufacturer of fossil fuels and very specialized petrochemicals. Those are becoming more and more important and are also relevant to repairing gas and oil manufacturing sites. So that's an area of strength. And then we have a food and beverage business, which is a GDP grower, a smaller part of that business. So in its entirety, [ Paul ] is an attractive business. It's exposed to attractive end markets. Technologically, it provides synergies with some of our other businesses in Life Sciences and is accretive, both from growth as well as a margin perspective.

I'm trying to remember from our an initiation report from 2016, I think Pall Industrial, at the time you bought it, it was maybe like $1.3 billion in revs, something in that ballpark. What's -- given some of the some of the exposures to the finance microelectronics, but there's a lot of investment opportunities. Now what could that business grow over the sort of the medium, long term I know you don't go by opcos, but just directionally...

So we don't guide by OpCos, but I would tell you that in its current setup would be accretive to the Life Science segment.

Okay. I'll take that. Maybe while we're on the topic of LS, let me just make a quick side pivot. Let's talk about AI a little bit, comes up on and off. And I would think that would be where you'd be probably the most exposed would be within Life Sciences within pharma biotech in terms of leveraging AI for R&D. Just what have you seen from your customers over the last 3, 6 months? Is this really kind of become mainstream? How broadly are they leveraging it? And how does the inter fit into that hopefully is beneficiaries.

So when we think about our customers in AI, I think the place to start thinking about that, as you suggested, is in life science, life science research and in the pharma segment. And there, our customers are very excited about what this means. And we believe rightly so. And we see that the application of AI for pharma will result in a multiyear secure growth acceleration because it ultimately increases the speed and the effectiveness of the pharma flywheel. So what does that mean? As we think about the pharma drug development pipelines, we know that the yields of those pipelines are fairly low, and the investment intensity is fairly high, and that's very difficult to sustain over time. And now with AI, we have, as an industry, the opportunity with our customers in order to improve the yield of the development pipeline from 10% to 12% to something much higher over time. That doesn't happen overnight, but over time. And of course, that will fund them -- and fundamentally accelerate the development of those therapeutics. So that will be a real shot in the arm in terms of the profitability of pharma companies on the one hand. On the other hand, the reinvestment profile. Imagine if you have a much higher yield in your drug development pipeline, what would you do then if you can bring markets -- better products to market quickly, push you're going to reinvest a good amount of that back into the front of the flywheel. And that's so important for the life science tools industry and, of course, for Danaher. So what role do we play there? Well, we are an automation provider these models that are being built, one has to keep in mind that large language models really don't solve for the drug discovery and development topic certainly not entirely, biologic models are required. And those have to be built. And that will take some time, and it takes a great deal of testing and that testing increasingly will come through autonomous labs, some people call it lab in a loop, and we provide those kind of solutions. And you've heard about our collaboration with [ Autamana ] that's a company that helps provide an intermediate layer there to allow the connectivity between the various instruments. And of course, those would be our instruments is our automation. These are our reagents and information systems, and that's a value proposition that we're proud to share and work with our pharma customers.

Okay. Good. Let's go with diagnostics now. Maybe we'll start on the Cepheid respiratory side of things. You started the year guiding for $1.8 billion, which was prudent given what we saw over the last couple of years. You revised it on 1Q to $1.6 billion to $1.7 billion. So $150 million, I believe it's 50-50, lower 1 Q2, 2Q, 3Q. Is that sufficiently conservative you feel for [indiscernible] how much visibility do you have into how that could play out the rest of the year? Just talk about sort of confidence in that number.

Yes. I mean we think that we understand, based on the infection rates here in the first quarter, discussing with epidemiologists as well as with our customers, how they view the first 3 quarters of the year, as you just suggested. So we've adjusted that. The rest of the portfolio makes up for that adjustment. So that's not the concern. And then for the fourth quarter, we're assuming a normal respiratory season as well. And that's a reasonable assumption because hospital systems, in particular, try to get ahead of what might happen in a flu season. And as you know, it straddles the fourth quarter of 1 year in the first quarter of the next. And so there is a stocking phenomenon there in the first quarter to ensure that during the peak of those seasons, they are appropriately stocked to meet the needs of their patients. So we feel comfortable with that assumption. -- and continue to see a share gain for Cepheid, even in respiratory as people just see the solution, the ease of use and the turnaround time of these solutions to be critical for their patients.

On the nonrespiratory side, I think you saw mid-teens growth in [ Sofia ] [indiscernible] has done really well for a number of quarters. You kind of talked about going back to your Analyst Day, the nonrespiratory getting bigger and bigger and bigger until it starts to really show up in numbers. What's been driving that growth, menu expansion, installed base execution.

The nonrespiratory business is about as large now as the respiratory business. So it's grown nicely. As you mentioned, mid-teens growth here for '26 and we believe in the long term. And what's been driving that is the thoughtfulness of the Cepheid strategy where during the pandemic, we really focus on placing our instruments in care settings that ultimately would be able to take advantage of our expanded menu. So what turned out -- started as a COVID test and then a 4-in-1 respiratory panel has been expanding, and we have over 40 now approved -- regulatory approved tests by far, the largest menu and now have taken the next step technologically by opening up the mid-plex segment. So what that means is that we can test for more analytes. The 4-in-1 test in respiratory was the first example of that, the MVP test and now the gastrointestinal panel is the next test. And you can expect many more of those come to come for the next 12 to 18. And that's exciting for us because really, there's the high plex segment and sort of the lower plex segment, but the sweet spot for clinicians is the mid-plex segment. They really don't like stacking all these codes in the high plex because it tends to be more expensive and it's an overkill in terms of the type of data it provides. So we've opened up our addressable market significantly by now being able to handle these mid-plex tests, and we're super excited about that. And that's going to continue to drive mid-teens plus growth in the nonrespiratory segment.

Okay. All right. Maybe kind of taking a step back and rolling it all together, when we think about the outlook for the rest of the year for fiscal year '26, you talked consistently about how you're not anticipating any end market improvement and the ramp as you go through the year, it was 0.5% organic in the first quarter, you got into 2 in the second quarter, sort of the mid-single digits in the second half. A lot of that or all of that comes from headwinds fading as you go through the year, taking that risk out of the model. And that seems prudent and appropriate. But I think at the same time, we've had we've got questions that headwinds are unanticipated, right? I mean if we go back 2 years, the headwind with Aldevron, that was unanticipated. The headwind with BP was unanticipated and this year, the headwind with respirators are anticipated. So while you're retiring risk and headwinds fade, is there -- how would you answer the question of what if there's new headwinds pop up, whether it's from Middle East, conflict, anything in farmland market specifically, do you have a cushion or a buffer in the guy to absorb those if there are any headwinds? Or maybe what levers could you pull to sort of offset some of that?

So we provided this guide with the assumption as you just suggested that we're retiring some of these headwinds here in the second half. And that's real. That's over 300 basis points of headwind that we will have retired here in the first half to the second half. And that's what takes you then from the Q1 to Q2 acceleration takes you to that mid-single-digit exit rate as we then head into 2027. And so then the question arises, okay, if there is anything else that happens, where do we sit with that? And of course, when we build a guide, there's 2 things that we do. One, we ensure that not everything has to be perfect for us to be able to deliver on that. So we take the necessary measures in our guide to ensure that if unforeseen things occur that we can handle those. That's the first one. But the second point is that this is the Danaher leadership team that I'm very proud of. And we have the levers and we demonstrate that we can take care of these issues should they arise, because our focus is on outcomes and results as opposed to activity. And that's part of our brand, and that's what our leadership team commits to.

And then the guide for the year is still, as you reiterate 3% to 6% organic, we've been anchored to the low end. We continue to be anchored to the moment of that. But we do get questions of sort of what gets you to 4, what gets you to 5, what gets you higher as you go through the year. I think it was on the earnings call, in the Q&A, you identified a couple of points. in terms of end market improvements, whether it's biotech, pharma, China, et cetera. Are there any -- are there a couple that you would say you could potentially be seeing green shoots already? Or were you a little bit more optimistic about those to come through? And we always see some as more likely to happen versus something a little bit more aspirational or out of your control. Where do you see things being a little bit better already?

Well, at the top of our chat here, I talked about activity levels being better and the momentum being better across the portfolio. That said, if I had to pick 2 where I say, okay, this is probably the area to look for. I would say that the bioprocessing equipment area as well as in Life Sciences is the area that I would focus on.

Maybe just a couple of minutes left. Let's talk about capital deployment. Another area where we've had a lot of interest. Traditionally, your preference is towards M&A for capital deployment, there's not often that we see buybacks from Danaher. But you have done a couple of times in prior years. You did a sizable back buyback. Two years ago, I believe it was around $260. You did some more last year. I think the stock was around $200 million sitting where we are today, the stock is in the 160s, 170s. Does that factor into your appetite to maybe move away from M&A a little bit and deploy capital? So what's the thinking on that? And what would it take for you to do that?

So we don't think about it in terms of moving away from M&A to do something else. And we think of all of our capital deployment in the context of the return on invested capital that it will generate and the compounding effect that it can have over the long term. And that is why our bias tends to be towards M&A. And that continues to be the case as values pull in here across the industry that is the kind of time that we have made some of our best deals historically. That said, anything we do anything we do, whether that's a buyback, whether that's M&A, whether that's CapEx, we're going to look at that return on invested capital and the compounding effect that it delivers for our shareholders. And so that's where we sit today in terms of capital allocation. As you suggested, we've done share buybacks in the past, somewhat of a departure of the more distant past, and we maintain that flexibility. But the driving factor is what is that return on invested capital.

Maybe just last couple of minutes just on the topic of M&A and balance sheet recently announced Massimo. It's been a couple of months. deals still not even closed yet, but balance sheet will still be in a good place beyond that. Any other particular areas where you think -- where you think complement the portfolio? What's the market like out there? And just specific on Massimo, any early feedback from customers?

Well, let's start with Massimo. And we're anxious to get the team on board here. We saw the shareholder vote, which, of course, went very, very well. And we're hopeful that we can close here in the second half of the year. And we're really excited to bring this really important strengthening of our acute care portfolio on board. You know how much we like that. A company, we've been following it for a long time. And this is really a company that is in mission-critical applications, really with proprietary set technology, and it is accretive at all levels for us. And so that, together with the synergy that we see cost synergies important, but put those aside for a minute, the synergies that we've see in the acute care settings are exciting. They're important and we're looking forward to having them on board. And just to share an anecdote, we recently were with an IDN, a large IDN, our EVP of Diagnostics, [ Julie Sorin Montgomery ] was speaking with them about our Danaher solutions, and they indicated that they only buy half of their pulse oximetry solutions from Massimo and they said, "Well, look, would you be interested in having the entire business." So that's kind of a nice situation to be in, does have somebody recognize that the leverage of the Danaher portfolio and our ability then to bring those kind of solutions to that IDN is actually proactive in the conversation rather than a push. So we're excited about that. And as it relates to capital deployment for the rest of the portfolio, we have 3 segments that are very attractive. We're excited about their end markets and they compete for capital. And all 3 of them compete and we're happy to invest in any one of them always if they meet our 3-dimensional model, end market company with value reserves and the financial model has got to make sense.

And even with Massimo, I think net book-to-bill was to, net debt-to-EBITDA 2.5x.

[indiscernible] that's right.

Great. With that, Rainer, thank you very much. Really appreciate it. Thanks, everyone, for listening.

Thanks, Mike.