Danaher Corporation (NYSE:DHR) Q4 2023 Earnings Call Transcript
Danaher Corporation (NYSE:DHR) Q4 2023 Earnings Call Transcript January 30, 2024
Danaher Corporation beats earnings expectations. Reported EPS is $2.09, expectations were $1.9.
Operator: Good morning. My name is Todd and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's Fourth Quarter 2023 Earnings Results Conference Call. [Operator Instructions] I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.
John Bedford: Good morning, everyone, and thanks for joining us on the call. With us today are Rainer Blair, 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, the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call, and a note containing details of historical and anticipated future financial performance 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 & Presentations and will remain archived until our next quarterly call.
A replay of this call will also be available until February 13, 2024. 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 relate to results from continuing operations and relate to the fourth quarter of 2023 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 are available only 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 they are made and we do not assume any obligation to update any forward-looking statements except as required by law. With that, I'd like to turn the call over to Rainer.
Rainer Blair: Thank you, John, and good morning, everyone. We appreciate you joining us on the call today. We delivered better than anticipated core revenue in each of our segments in the fourth quarter led by respiratory revenue at Cepheid. The combination of higher than expected revenues and our team's strong execution enabled us to exceed our margin and cash flow expectations in what remains a dynamic market environment. Now before I get into the details of our performance, I wanted to briefly reflect on the progress we made to enhance our portfolio and accelerate our strategy this year. 2023 was a transformational year for Danaher as we continued to strategically enhance our portfolio and strengthen our growth and earnings trajectory.
With the successful spin-off of Veralto in September, we're now a focused Life Sciences and Diagnostics Innovator. Establishing Veralto as a standalone public company was one step in our portfolio transformation over the last several years, which has increased our exposure to end markets with durable secular growth drivers. The acquisition of Abcam, which closed in December, further increases our exposure to these highly attractive markets. Now over the long term, we believe Danaher will be a faster growing business with higher margins and stronger free cash flow generation. 2023 was also a challenging year operationally as pandemic tailwinds became headwinds in our businesses. Our team's commitment to executing with the Danaher Business System helped us navigate these challenges while maintaining a healthy cadence of growth investments and productivity initiatives geared towards improving our cost structure.
While we expect this transitional period to continue through the first half of 2024, these proactive steps paired with the transformation in our portfolio provide a strong foundation for sustainable long-term revenue and earnings growth. So with that, let's take a closer look at our full-year 2023 financial results. Sales were at $23.9 billion and core revenue declined 10%, including core revenue in our base business which was down slightly and a COVID-19 revenue headwind of approximately 9.5%. Our adjusted operating profit margin was 28.7% and adjusted diluted net earnings per common share were $7.58. We also generated $5.1 billion of free cash flow resulting in a free cash flow to net income conversion ratio of more than 120%. Strong free cash flow generation is one of the most important metrics at Danaher and 2023 marks the 32nd consecutive year our free cash flow to net income conversion ratio exceeded 100%.
We continued to accelerate investments in innovation throughout the year, which enabled us to deliver several impactful new technologies to our customers. In Biotechnology, Cytiva's new Xcellerex X-platform bioreactor is helping improve manufacturing yields and reduce the time and cost of biologic drug production. In Life Sciences, new products such as IDBS' Polar Insight and Molecular Devices' CellXpress.ai are helping accelerate the drug discovery process and bring life-changing therapies to market faster. And in Diagnostics, new solutions such as Beckman Coulter's DxI 9000 next generation immunoassay analyzer are enabling faster, more accurate patient diagnosis. These are just a few of the many examples across Danaher of how we're positioning our businesses for continued growth and delivering on our commitment to help customers solve some of the most important health challenges impacting patients around the world.
Now let's turn to our fourth quarter results in more detail. Sales were $6.4 billion in the fourth quarter and core revenue declined 11.5%, including a 4.5% decline in our base business and a COVID-19 revenue headwind of approximately 7%. Geographically, core revenues in developed markets declined low double digits driven by lower respiratory and COVID-19 vaccine and therapeutic revenues coupled with ongoing investment normalization in pharma and biopharma end markets. High growth markets were down high single digits including a mid-teens decline in China where the economic landscape remains challenging. Our gross profit margin for the fourth quarter was 59%. Our adjusted operating margin of 28.7% was down 420 basis points primarily due to the impact of lower volume in our Biotechnology and Diagnostics segments and costs related to productivity initiatives.
Adjusted diluted net earnings per common share were $2.09 and we generated $1.2 billion of free cash flow in the quarter. Now let's take a closer look at our results across the portfolio and give you some color on what we're seeing in our end markets today. Reported revenue in our Biotechnology segment declined 21% and core revenue was down 22.5%. Bioprocessing core revenue was down over 20% as anticipated and discovery and medical declined high teens. In bioprocessing, base business core revenue declined high teens in the fourth quarter and was down approximately 10% for the full-year 2023. Revenue and order trends were largely consistent with what we saw in the third quarter including our book-to-bill ratio. We were encouraged to see a modest sequential improvement in orders this quarter with some of our customers returning to normal ordering patterns, but we haven't yet seen a broad-based inflection in demand.
The environment in North America and Europe is stable with customers still working through inventory built up during the pandemic. Demand and underlying activity levels in China remain weak as customers are continuing to conserve capital and prioritize programs. For the full-year 2024, we expect core revenue in our Bioprocessing business to be down low single digits. This includes an assumption of a mid to high teens revenue decline in the first half of the year followed by a gradual improvement to a core growth rate of high single digits or better as we exit 2024. Despite the near-term headwinds from destocking, our confidence in the health and long-term growth trajectory of the biologics market remains as strong as ever. Underlying demand for biologic medicines continues to rise.
2023 was another record year of FDA approvals for biologic and genomic medicines and the development pipeline is meaningfully higher than at any point in history. These positive market trends reinforce our conviction in the tremendous opportunity ahead and the high single-digit long-term growth trajectory for our leading bioprocessing franchise. Over the last several years, Cytiva has been accelerating investments in innovation to bring impactful new solutions to customers as they advance therapies from the lab through to commercial production. A great example is the recently launched Cytiva protein select technology, an affinity chromatography resin designed to optimize recombinant protein purification. This new technology simplifies the purification process in recombinant proteins, of which there are currently more than 1,800 in development, and enables faster and more efficient process development.
Turning to our Life Sciences segment, reported revenue declined 1% and core revenue was down 4% including a low single-digit decline in our base business. Our life sciences instruments business collectively declined mid-single digits with trends in the fourth quarter largely consistent with the third quarter. We saw continued growth from academic and life science research customers globally while investment levels at pharma and biopharma customers remain constrained, particularly in China and in North America. We also expanded our capabilities and portfolio with the acquisition of Abcam, which closed in December 2023. The addition of Abcam to our Life Sciences segment expands our presence in the highly attractive proteomics market and is furthering our strategy to help map complex diseases and accelerate the drug discovery process.
We couldn't be more pleased to welcome this highly talented and incredibly innovative team to Danaher. Our genomics consumables base business was essentially flat in the quarter. Robust demand across plasmids, proteins, and gene writing and editing solutions was offset by decline in next generation sequencing and basic research. During the quarter, IDT opened a new cGMP oligonucleotide manufacturing facility at their Coralville, Iowa campus. IDT can now offer a complete CRISPR workflow from design to analysis that supports cell and gene therapy customers in all stages of therapeutic development. This expansion of our capacity and capabilities is both enabling our customers important work today and fulfilling IDT's vision of improving patient lives by facilitating faster development and commercialization of life changing therapeutics.
Moving now to our Diagnostics segment. Reported and core revenue both declined 8.5% with high single-digit growth in our base business more than offset by lower respiratory revenue at Cepheid. Our clinical diagnostics businesses collectively delivered high single-digit core revenue growth. Beckman Coulter Diagnostics led the way with over 10% core revenue growth, including double-digit growth in both instruments and consumables and notable strength in clinical, chemistry, and immunoassay. This strong performance in the fourth quarter rounds out a terrific year for Beckman where the team has been doing a fantastic job improving their competitive positioning through new product innovation and enhanced commercial execution. In molecular diagnostics at Cepheid, increased menu utilization by customers paired with recent new product innovation helped drive low teens core revenue growth in our non-respiratory business, including high teens or better core revenue growth in Group A Strep and sexual health.
In our respiratory business, Cepheid's revenue of approximately $650 million in the quarter exceeded our expectation of $350 million. The high prevalence of circulating respiratory viruses drove both higher volumes and a preference for our 4-in-1 test for COVID-19, flu A, flu B, and RSV. Based on what we saw the last two years and discussions with customers and public health experts, we believe annual respiratory revenue in a typical respiratory season will be approximately $1.5 billion. This increase from our initial assumption of $1.2 billion per year is driven by an expectation of modestly higher volumes and a greater mix of our 4-in-1 tests. The durability and continued share gains at Cepheid are a testament to the significant value that Gene-Xpert provides customers at the point-of-care, close to patients where the most impactful diagnostic and treatment decisions are made.
Cepheid's 4-in-1 test has become the standard of care for clinicians given its ability to provide a fast accurate lab quality diagnosis for four distinct respiratory illnesses with a single easy-to-use cartridge. Looking ahead with our differentiated positioning and respiratory testing, a leading installed base of more than 55,000 systems, and with growing adoption of the broadest molecular diagnostic test menu on the market; Cepheid is well-positioned to help customers meet their clinical needs and continue gaining market share. Now let's briefly look ahead at expectations for the first quarter and the full-year 2024. Beginning with the first quarter of 2024, we will provide guidance for core revenue growth, but will no longer report base business core revenue as the pandemic has transitioned to an endemic state.
Now in the first quarter, we expect core revenue to decline in the high single-digit percent range. Additionally, we expect the first quarter adjusted operating margin of approximately 28%. Turning to the full-year 2024. We anticipate core revenue to decline in the low single-digit percent range, which assumes a core revenue decline in the first half of the year before returning to growth in the second half of 2024. Additionally, we expect our full-year adjusted operating profit margin to improve by approximately 50 basis points versus the full-year 2023. So to wrap up, we're pleased to deliver fourth quarter results ahead of our expectations in what remains a dynamic environment. Despite the challenges we saw throughout 2023, we continued to strengthen our portfolio with M&A and took proactive steps focused on improving our cost structure.
Our team's consistent application of the Danaher Business System also drove lasting process improvements in our businesses and enabled the launch of several breakthrough solutions. Reflecting back on the past few years, it's clear that Danaher is exiting the pandemic a much better stronger company. We established our dental and environmental and applied solutions segments as standalone public companies in Invista and Veralto. We largely replaced their revenue contribution with higher growth, higher margin annuities with the acquisitions of Factiva, Aldevron, and Abcam. Additionally, Cepheid's respiratory franchise is now six times larger today than it was prior to the pandemic and we expect this to be sustainable. So putting it all together, we've improved our long-term growth trajectory, significantly expanded margins, and strengthened our free cash flow generation.
So, our future is bright and I'm excited about what lies ahead for Danaher. The unique combination of our incredibly talented team, differentiated science and technology portfolio, and balance sheet optionality all powered by the Danaher Business System provides us with a strong foundation to maximize value for our customers, our associates, and our shareholders. So with that, I'll turn it back over to you, John.
John Bedford: Thanks, Rainer. That concludes our formal comments. Operator, we're now ready for questions.
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