Danaher Earnings Call Insights: Growth vs Restructuring and Sequential Decline

Danaher Corporation (NYSE:DHR) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Growth vs Restructuring

Scott Davis – Barclays Capital: Talk a little bit about the investments you are making on the – Larry, can you help us understand, how much of this is driving growth versus restructuring and cutting cost? I guess the question. The obvious question here is that, are you investing more money because you are seeing or thinking there is going to be reacceleration of growth or is it more focused on getting cost out ahead of continued weak – relatively weak macro environment?

H. Lawrence Culp, Jr. – President and CEO: Scott, I would say that operationally this is really more of the same consistent with the path we’ve been on in this slower growth macro environment that we’re operating in today, and frankly I think we see ourselves working through going forward. So, there is no macro call here to suggest we’ve seen inflection point relative to thing getting materially better and hence we want to be ready for that. I think that as we’ve seen through the first half of this year, we’ve been well served, having in the past, position ourselves, not only with the step up in R&D to drive new product launches, but also our step up particularly in the high-growth markets to go grab market share where we can and in turn to make sure we’re being smart about our cost structure, we can make those investments and drive the margin expansion and the earnings growth that you’ve seen. So, what we’re really talking about here in terms of taking the beat and putting it back into the business if you will in the second half is really a combination of stepping up those growth investments, both in R&D and sales and marketing as well as in those productivity efforts that you’ve typically seen us put through in the second half. We flagged last year on that point – at the end of last year that we probably had dialed in about $70 million this year in the back half to do that. We are going to step that up here certainly as we look to the second half, but again, it’s really a balanced approach to make sure we’re making the investments with share gains and margin expansion as we work our way through the second half of this year.

Scott Davis – Barclays Capital: As a follow-up to that, Larry, when you think about the step up you had in R&D, I mean you already fairly – you’ve always been a fairly large investor in R&D. So it’s not if you underinvest in the past, but the step up in 2013 versus ’12, do you anticipate this being an ongoing trend and then you have another step up in ’14? Or is it reset the bar and you kind of hold this level versus sales longer-term? I have just a quick follow-up to that, just and conceptually every company (recover) is raising R&D as a percent of sales and I think even in the medical world that’s happening. Has this become a little bit of a tax, if you will that it just cost more to drive incremental growth and you don’t really get that much net benefit, because everybody is investing more? So it’s bit of an arms race or is there really some differentiation that you think can occur with that added investment?

Daniel L. Comas – EVP and CFO: Scott, this is Dan. As we look back at Q2, we really saw the benefit across a number of the businesses in the step-up at R&D. So we talk about Hach, Gilbarco, PID, all businesses where we think we took share in the quarter. Their new product revenues improved sequentially 50% Q1 and Q2, and we think that was a big driver of the share gains. So I think we are seeing – we are not seeing it everywhere, but some of this targeted step-up we’ve made in R&D, we are seeing the payback for that. I think as long as we continue to see that and we’re taking share, our bias would be to spend more.

Scott Davis – Barclays Capital: (Multiple Speakers) my question, all right. I mean if you can gain share, it’s definitely worth it. If it just (NASDAQ:GROW) in line with the market, but you have to spend more than it starts to – industry structure starts to come in to question, I guess?

H. Lawrence Culp, Jr. – President and CEO: Scott, to the structural question, I would just add, I think being spot on there that if you were in the sessions with us as we talk to the businesses, the tone is really fundamentally an offensive one. We see opportunities to do things that no one else does. We see opportunities to help our customer in a way that maybe we uniquely can and that really drives the agenda, the budget, any step up that you see it. Really not a lot of examples where we’re sitting there and saying, gosh, there is a catch-up to be made or taxes you say to be paid. So I think that qualitatively combined with the quantitative market share impact that we’re seeing suggest these are good investments for us, but we’ll continue to be prudent to make sure we’re getting those returns as we put this additional money in.

Sequential Decline

Steve Tusa – JPMorgan: Just on the second quarter, I understand that it’s kind of a similar revenue seasonality if I’m kind of doing the math correct on the core as last year. Is that right first of all? Just a sequential decline?

Daniel L. Comas – EVP and CFO: Yes. I mean last year we were down about $140 million Q2 to Q3. We probably have become a little bit more seasonal, a little weaker in Q3 given some of the acquisitions we’ve done over the last couple of years. I don’t think we’ll be down $140 million sequentially, but maybe we’re down, call it, $100 million.

Steve Tusa – JPMorgan: When I look at like Beckman, for example, I think (DA) it was pretty – if you go back historically with their business, it was kind of flat-to-up seasonally and then last year, I think I thought you had kind of the initial drop-off in some of the more cyclical businesses, as well as that Life Sciences, call it, I don’t know, an air pocket or whatever you want to call it on the product side. So, I guess, that’s the difference between the $100 million and $140 million is – I am just struggling to – this is probably – last year was probably your biggest sequential decline and I am just kind of struggling to figure out what’s changed here relative to 10 years of history…

Daniel L. Comas – EVP and CFO: Well, I think part of the history is number of years where we’ve done Q2 acquisitions, so the organic decline we‘ve had historically over the last five years Q2 to Q3 is larger than our printed number. There is an acquisition element, so the seasonality was more severe last year, but less out of line than the number would suggest because of M&A.

Steve Tusa – JPMorgan: Is there any change in the level of restructuring this year as well, like I think you talked about the couple of pennies of investment in the third quarter, but I guess just the fourth quarter?

H. Lawrence Culp, Jr. – President and CEO: That’s what I was trying to suggest in response to Scott’s questions Steve, so we are stepping out both the growth investment and the productivity moves.

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