Danaher Earnings Call Nuggets: Life Sciences & Diagnostics Margin and Distribution Outlook

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

Life Sciences & Diagnostics Margin

Steve Tusa – JPMorgan: Just starting off with the Life Sciences & Diagnostics margin. It was about 100 bps lighter than, I guess, we were expecting. Can you just talk about, a, kind of what the margin looks like at Beckman, and then if there was anything else that drove that weakness?

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H. Lawrence Culp, Jr. – President and CEO: Yes. I think with respect to the — what you’re seeing there, Steve, is we knew given some of the investments in the segments that we were making, particularly on the sales and marketing and R&D side that margins were going to be tight in LS&D. That said – and I say that with respect to the Life Sciences & Diagnostics businesses as well as Dental. We had couple of big trade shows in Dental, for example, that we had room. But that said, clearly, the revenue picture in LS&D, particularly in LS was softer in the end than we anticipated and that’s certainly put some of the pressure on the margins that you see. But also in addition to the revenue, I think it’s important to point out that we had a couple of, not necessarily one-time, but I think special situations in the quarter on the expense side that we think mitigate as we go forward. One was this conversion at Leica Bio with respect to the distribution to direct sales model. We had an opportunity to move forward in that (record). I think that makes sense strategically. That didn’t help us from a cost perspective; in fact, from a volume perspective as we worked through that late in the quarter. In addition, as the regulatory front evolved over the quarter with a number of the Diagnostic businesses, we had an opportunity to accelerate some of our spending ahead of submissions and we thought again positioning ourselves to get those new products approved made sense. So we went ahead and did that.

Steve Tusa – JPMorgan: So can you, I mean, I guess R&D for the Company was up 40 basis points year-over-year; I mean 6.7% is a really big number. Can you let us know – I know you could disclose it in your Ks, but maybe in LS&D what was, I would assume was up a little bit more than the 40 basis points?

Daniel L. Comas – EVP and CFO: It was, and then also given the some this distribution transition we’re going through some of the sales and marketing was also higher. We think that will sort of begin to even out here in Q2, so you will see I think more normalized margins in LS&D in Q2.

Steve Tusa – JPMorgan: Could you give any kind of magnitude Dan around what the R&D was up as a percent of sales in LS&D?

Daniel L. Comas – EVP and CFO: We were up combined over 100 basis points between R&D and sales and marketing as a percent of revenue year-on-year.

Steve Tusa – JPMorgan: Then when you talk about these regulatory filings, I mean is this just greater than expected spending that – you know that then you would have initially thought as you fix the business or is this like – are these like, is this more proactive with new products?

H. Lawrence Culp, Jr. – President and CEO: It is probably somewhere in between. It really is about what we do and when we do. So, some of it’s strictly timing and at the same time as we work through the plans for those submissions with regulatory body, sometimes we will – as time marches on, you get a better sense of the scope and the work required. So, we thought accelerating some of that spend was frankly an opportunity despite the pressure that you alluded to here. And again I think the stronger the submissions are, the sooner they’re in, the better off we are relative to getting those products out and launched in time.

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Steve Tusa – JPMorgan: Just one last question, it’s probably a pretty stupid question, but I’ll ask it anyway. I guessed with the day sales with comp on the – tougher comp on the weather, a lot of noise going on out there and some pretty terrible reports coming out so far. On a scale of 1 to 10, if 1 is 2009 and kind of 10 is the ideal operating environment, what do you think – how do you describe kind of the current environment you’re operating in and it’s just hard to tell you know how bad the trend is here. I’m just curious as to your high level take on that?

Daniel L. Comas – EVP and CFO: Steve, I’d say that we came into the quarter knowing that we were going to be missing a day. I think we came into the quarter knowing that the Good Friday would be the last day of the quarter. So, all of that was knowable. What it what we saw through the quarter was frankly that our consumable business which as you know represents about 40% of our overall sales was very much in line with our expectations. And if you adjust for the day that we missed and put aside all the end of March noise I think we were good. I think where we felt a little bit short here with respect to the quarter was really in equipment, right I mean that 60% we thought would be up by a couple hundred basis point and that’s where we got squeezed, particularly in the U.S. as we saw some business soften in March when we thought we would finish more strongly. I wouldn’t say it’s bad, I think we saw the normal uptick in March just wasn’t pronounced in equipment again in the U.S. principally around some of the higher ticket products. We mentioned Tex. I think we mentioned motion as well in the distribution. So in the grand scheme of things I don’t think we’re not necessarily excited about the macro numbers that came out here in the last three or four weeks but that said we missed the top end of the core range by about $30 million. If we’d hit that I don’t think we would be talking about some of the OP and EPS shortfalls here. But that’s the way it played out. I think at this point our sense is that while it’s early and we don’t have everything that we’ll haven’t time the shortfalls began more clear macro dynamic March didn’t finish as strongly as we would have anticipated. But on a relative basis business-by-business we think we’re doing pretty well. I think as we look at April, things have come back in a couple of pockets in the wake of some of that  softness, but again, probably too early to read too much into that. Certainly too early to read much into first couple of weeks of April relative to the equipment side of the business because while things get pushed to right at times, it may just be a couple of weeks, sometimes those customer decisions may take longer.

Distribution Outlook

Scott Davis – Barclays Capital: A couple of things, first, the big pullback you saw on Motion was a little bit of a surprise when you had that bit of negative, I mean with the timing issues there that customers just wanted to destock, I mean I think you mentioned some weakness in distribution, U.S. technology. Is that something that’s going to restart here in 2Q, or we had some greater underlying weakness here that’s more sustainable?

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H. Lawrence Culp, Jr. – President and CEO: I think that’s, it’s a bit of a mix bag, Scott, as we read it today, when you mention distribution and Tex, I mean those are two different markets for us clearly where we go to market through distribution. We saw soft sellout as well as own cell in. Certainly the tech OEMs that we deal with tend to be customers we deal with directly and we certainly saw pockets in Tex that were soft. I think our view is it as we look at the second quarter, if you wanted to pick a segment that’s likely to be down, it will be Industrial Technologies and it will be down largely on the back of motion softness, certainly not softness in Product Identification which we think will continue to be one of our better performing businesses here in the near-term.

Scott Davis – Barclays Capital: Let me move to two other quick things. I mean, the medical businesses have been strong couple of quarters in a row here in China. Are you seeing that broadening out at all to the other businesses like Fluke, for example, and the more shorter-cycle businesses?

H. Lawrence Culp, Jr. – President and CEO: Yeah, we certainly saw, I think a broadening of the strength in China. Again, the first quarter is a little hard to read sequentially, given the timing of the new year there. But that said, I think we were pleased with the overall print in China both the depth and its breadth. And as we have worked through our reviews of late with our teams there, I think by and large there are few exceptions where guys aren’t feeling good about the year. It’s really more a matter at this point of calibrating what sort of growth to expect there, but those definitely (here) I think one of our better high-growth markets here in the rest of the way.

Daniel L. Comas – EVP and CFO: I’d say, Scott, on the industrial side, it was, instead of all being down or flat, it was mix. So, I guess, that’s a little bit encouraging. PID and Water had real good starts to the year in China, but I’d contrast that. That’s a little bit of a positive sign, but I would say that T&M and Motion; their numbers were down and sequentially did not feel any better. (indiscernible) but in a couple of pockets a little better.

Scott Davis – Barclays Capital: Sure. And then just last question on price, when we have this type of a slow macro environment and it’s been largely, probably seven of the last 10 years, it’s been a pretty good price environment. Now we’re seeing some weakness in commodities. I mean, what’s the outlook for price from here?

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H. Lawrence Culp, Jr. – President and CEO: Well, I think the price outlook in and around point of price, as we forward ought to be something that we should achieve. I think on the price cost equation, Scott, in general pretty pleased and clearly having the gross margin up 50 basis points here, 90 million in dollar terms year-over-year would suggest we are executing pretty well not only in the price cost side but also in terms of productivity our Danaher procurement activities, as well as frankly bringing new products to market with higher gross margins, which give us the benefit of the mix up. So, if it’s one thing and we are particularly comfortable with it’s that affect and clearly we’ll get, I think additional impact from the 2012 restructuring in the gross margin mix as we move through the year.

A Closer Look: Danaher Earnings Cheat Sheet>>