Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Danaher Corporation (NYSE:DHR)

February 20, 2013 8:55 am ET

Executives

Daniel L. Comas - Chief Financial Officer and Executive Vice President

Analysts

Scott R. Davis - Barclays Capital, Research Division

Scott R. Davis - Barclays Capital, Research Division

Okay, folks, let's get it moving. Someone mind closing the back doors? Thank you.

All right, I'll give a public service announcement just one more time so that -- for those of you who weren't sitting in the prior session. We will be wrapping up our thoughts at the end of each day in our analyst roundtables. We would love to have you attend if you can make it. We will have drinks and there'll be, I think, a lively debate of what we heard today and what we didn't hear and what stood out as interesting and what didn't stand out as interesting.

We're thrilled to have Danaher with us here as our second group for the day. And Dan Comas, I think, most of you know, is the CFO and has been for quite some time. And Matt McGrew has been carrying multiple jobs. You guys are killing the poor guy. Yes, and he's put through in Head of Investor Relations and you're CFO in one of the biggest businesses. And what else are you doing there, shining shoes in your part-time too?

Daniel L. Comas

Playing golf.

Scott R. Davis - Barclays Capital, Research Division

Playing golf. And I must apologize: If Larry is listening, I'm sorry I blew off your dinner last night. I went with the Honeywell dinner. The rubber chicken was better at the Honeywell dinner than it was at the Danaher dinner. But I'll make that up to you guys.

Danaher is an interesting company. And there's been times in the last couple of years where I've -- where we've struggled to kind of figure out where Danaher fits in, in kind of our view of simplification and view of where these industries and where these conglomerates, if you will, are moving. But if you look at our industry thesis piece, we had a bit of a caveat for companies that have an established track record of creating value. Utilizing their balance sheet, whether it be for share buybacks or M&A, will be permission, if you will, to continue to do so. The risk therein obviously lies in you're always -- you're never as -- you're only as good as your most recent deal. And I think we've seen some companies fall from grace with transactions that didn't necessarily work out. I think Dover took a hit for Sound Solutions. SPX took a hit for ClydeUnion. This goes back aways when GE took a hit for Amersham. And more recently, Amersham has taken a hit for ClydeUnion. So I think there's risks obviously inherent in the M&A model, but Danaher has done a very good job, I think, of both explaining where the risks are and how they mitigate those risks and how they think about their business and growing their businesses.

So when I think about what are the investment themes and things that are important to a Danaher investor right now, having core growth reaccelerate is critically important, in our opinion. I would say that core growth at Danaher over the last few years has been average at best and for a company that, I think, views itself as above average. I'm guessing that Dan is going to tell us that average isn't good enough and they're going to strive to be better than that. So a reacceleration of core growth and we saw some signs this quarter that we're on the other side of it, particularly with China. The business in China has turned around nicely.

Our continued M&A success. And I think there's a lot of questions due to future deals coming from the Med Tech side or they come from the traditional industrial kind of core Danaher industrial businesses, whether it be water or test or anything and, related to that, Product ID, et cetera. And then when you get to a company of Danaher's size, people start to ask the question of, "What do we do when you get too big?" And I think none of us are really smart enough to determine what too big really means. We get that question on companies much, much smaller, including names like Roper's. So again, I don't personally have a view of what too big is, but I'd be curious to see if Dan has a view.

So anyway, so those are my thoughts and things I wanted to address today. And let's start off with the core growth question. And maybe, if you want to give a state of the union or anything that you want to talk about, Dan, feel free to take it as you want, but let's get to the growth issue at some juncture.

Daniel L. Comas

Okay, well, good morning, everyone. We did have Larry last night for dinner. And I think he gave a little bit of an update 2 weeks past our earnings announcement.

I think the update was that so we don't have a lot of new news. We obviously ended the fourth quarter in December in particular and in the U.S. in particular with a fair amount of strength. I think as we peeled it back, the strength we saw at the end of the year was a combination of a couple things. Some good momentum in orders, particularly Fluke. For the first time in a number of quarters, we saw orders turn positive. I think, in the Life Science & Diagnostic, we're -- we posted a core growth number of 7%. I think we felt it was less kind of pull-forward than really some pent-up demand that was building through the second half. Maybe contrast that a little bit with Dental, with the expectations that didn't turn out to be the case. We've got some of the accelerated tax depreciation opportunities for practitioners would go away, as well as the 2013 beginning of the medical device tax. We did see a little bit of pull-forward particularly in the Dental business.

At the start of the year, we thought we'd start with relatively modest growth, low single digit, call it 1.5% to 2%. I think, halfway into the quarter, I don't think we have a different point of view about that. I think Europe continues to be a challenge. We're encouraged by what we see in the high-growth markets where we grew double digit last year despite almost no help from our industrial businesses in China but I'm sure we'll talk a little bit about China. And then finally, the U.S. which we really kind of view as the swing factor. The U.S. was quite strong in the first half of '12, really de-celled starting in the summer and all the way through November. We did have a pick-up here in December. And I think we're trying to get an early read here whether that's something that's sustainable. And clearly, as many of you know, we're headquartered in Washington D.C. We're not very active in the political scene there, but the people -- [indiscernible], thank you for that. The people 6 blocks away from us obviously have some important decisions to be made. And I think both the -- what comes here in the next 4 to 6 weeks out of Washington both in what they come up with or don't come up with, I think, will have a very significant impact on the psyche of what's happening in the U.S.. And again, that's kind of why we view U.S. as sort of the swing factor in terms of the global economy here in '13.

Question-and-Answer Session

Scott R. Davis - Barclays Capital, Research Division

Can you help us understand? I want to do an audience response question after this, but can you understand the -- when you think about your 2013 plan, the different levers, you have core growth, you've got your M&A strategy, you're still -- and you're probably in the later innings of integrating Beckman, but there's certainly lots that you can still do there and margin expansion potentials. What do you -- what does the board care the most about? I mean, what does Larry care the most about? And what does -- what are you guys going to paid to execute on 12 months from now.

Daniel L. Comas

Well, it's interesting, Scott. We begin every single meeting at Danaher, whether it's a operating review or strategic review or board meeting, with 4 financial metrics: core growth; core margin expansion; working capital turns, which is our best proxy for free cash flow conversion; and return on invested capital, and we do our return on invested capital by a company-by-company basis. So for our network at Washington with the Fluke team, and they've done 5 acquisitions in the previous 3 years, in the box we'll have the name of each company, what the targeted 2013 return, what they signed up for and where they're tracking to. And I think it's really those 4 metrics and I think we always try to remind ourselves it's a balance of those 4. And clearly, investors will have a time with higher focus on core growth. And in a very tough environment, it's about protecting margins in an environment where we're obviously hit with a lot of M&A capacity and people are thinking about returns. But I think we always try to remind ourselves -- and these 4 metrics, 1 piece of pay -- 1 piece of paper, starts every meeting everywhere in Danaher, I think, really gives us the frame to look at our businesses. I mean, we very much view it as a balance and the best we can to try to not be too much swayed by a little bit of the flavor of the day because I think, as you alluded to, at different times in the market and with different companies, investors are going form of those 4 metrics putting a little bit more emphasis on 1 versus the other 3. And I think, our view, we're best served by sort of keeping the balance on that over time.

Scott R. Davis - Barclays Capital, Research Division

Right. Let's go to the first audience response question, please.

"You currently own the stock." Yes, would be overweight -- or 1 would be overweight; 2 would be yes, with equal weight; 3 would be yes, you own it but you're underweight, I think that's your benchmark, of course; and then 4 would be no.

Daniel L. Comas

Then, no, 1.

Scott R. Davis - Barclays Capital, Research Division

Please vote -- I hope so.

[Voting]

Daniel L. Comas

I'm not allowed to, right? I mean, I would, actually.

Scott R. Davis - Barclays Capital, Research Division

Okay, a little bit different than what we saw in the last meeting: more balanced. We'll have to get a few more data points to really see what this means. But let's move into the second question, then, please.

"What's your general bias towards the stock? And this is the stock, not your bias towards the company, if you can separate that at all." What's your general bias towards the stock right now: positive, negative or neutral? Please vote.

[Voting]

Scott R. Davis - Barclays Capital, Research Division

Okay, that's a fairly -- I think that's a fairly positive response overall, particularly versus the meeting we had prior. We're going to have to collect some data on that. And I'm thinking, should we go to the third one? No, let's wait for that forever -- for later. There was one question I wanted to ask you guys and I want to open it up to the audience. One of the things that -- things we've been be talking about is this value creation toward -- to -- in the context of simplification, right? And you've seen GE take some actions and they were rewarded lately. Dover is trying to do some things that have been rewarded lately. How do you guys think about that as you become a bigger company and hearing a lot of what I would characterize as kind of mid-tech businesses that are -- they're not ridiculously complicated but they're, for a dumb industrial guy like me, they are a little bit complicated, right? So how do you think about that? And I'll just leave it at that.

Daniel L. Comas

Well, I think that we really think about simplification in the context of DBS, Danaher Business System. So as you know, it's our operating model. It's our culture for running the business. And it really helps the board, Larry and myself, the EVPs, kind of cut across the number of businesses because there are tremendous amount of consistency with DBS. It's how the businesses are run and it's the metrics we use. And that consistency gives us a lot of latitude, for example, around people. So if you look at the Beckman acquisition: We closed that 18 months ago. The CFO came from Test & Measurement, one of the GMs -- the PGM came from Product ID. That person -- as you know, they had tremendous service problems. This -- the guy came in to fix service with both the Environmental business and the PID business. And a lot -- and a fair number of the ops people came from the industrial businesses. And I think we could not have done that without sort of the framework of DBS because they could go in there and know how we would want to run the business, what metrics we would want to use. So we are a diversed portfolio. We recognize that. But I do think DBS creates some simplification, if you will, because there's a real consistency around how we run the business and the metrics we use.

Scott R. Davis - Barclays Capital, Research Division

Makes sense. Let's open up to the audience. A lot of people here, I'm sure there's questions. The gentleman in the front row, if you can press the green button and we'll see if it works. I think you'll have to hold it in while you're talking.

Unknown Analyst

Now you can hear me. So the -- just a basic question. You guys, when you're looking at this -- the next 12 months, do you have reason for optimism other than hopefully that Washington gets their act together. Do you -- are you seeing orders coming in? Or there's still kind of that hesitancy that people are kind of like driving the free road with their foot there put on the brake? Can you kind of just give us your outlook for that?

Daniel L. Comas

Yes, I mean that it's -- we only have 6 weeks of data here. We've just gone through Chinese New Year, so I think you need to get on the other end of that as well, but I think it's a mixed environment out there. The high-growth markets continue to feel pretty good. I've -- I think we've got some optimism around China. We've had significant strength in China here, not -- in our medical businesses for the past year but not in the industrial businesses. We did start to see some of our industrial businesses, particularly PID, Product Identification, get a little bit stronger sequentially in the second half but less so in Water, Test & Measurement. I think Europe continues to sort of teeter down slightly. I don't see Europe growing in '13. And you've seen some strengthening of the euro and some incrementally positive data coming out of Europe, but I'm not particularly optimistic about it. And I think the U.S., if you look at the whole second half, which is only modest growth, a very modest growth, and I think the psyche is a little fragile in the U.S. And again, I think that's kind of the swing factor. And I don't think we've seen anything in the first 6 weeks that makes us more bullish or less bullish than we were when we talked to most of you in December.

Scott R. Davis - Barclays Capital, Research Division

Go ahead, Paul, in the middle.

Unknown Analyst

Q4 has always been a benefit, I guess, in the life sciences businesses from the product launches and the like, maybe SACs. Any update on how that's tracking so far in Q1?

Daniel L. Comas

Let -- I'll let science -- life science CFO answer that.

Unknown Executive

We are, I mean, again, a little early. I think we're 6 weeks in, but I mean, I -- so far, those -- I mean, I think you saw the strength in Q4 with both of those product launches. I mean we launched them, in essence, in the summer -- last summer and got fully up to speed here in the fourth quarter. So it's still a little bit early on to get a read, but so far from a customer feedback perspective on both of those, it's been really, really good.

Scott R. Davis - Barclays Capital, Research Division

Go ahead, Mike.

Unknown Analyst

We touched a little bit on this last night, in the transition to a more recurring revenue base, Danaher versus some last 10 years or so. But do you see -- from that, do you see an increased need to do more deals at a -- more rates, particularly early in the year to -- really to energize the organization and move the ball forward and particularly related to this year where it's been a little while since a marquee size deal.

Daniel L. Comas

Sure. And so a couple of things there when we talked about -- last night about our kind of evolution toward more recurring revenue. So it was not that long ago that less than 20% of our revenues occurred in the aftermarket, and today it's about 40%. That 40% -- and that cuts across pretty much all of our segments, so whether it's our water business or Beckman diagnostic business or Product Identification business; we obviously have a large consumable business in Dental. I think we like the consistency of that growth, and that 40% grew 4%, 5% last year. And clearly, our equipment and instrument businesses of course, struggled a little bit more with the rest of the sort of global economy here. I think, in terms of M&A, we have a handful of criteria we look for. It's often around gross margin branded product, leadership position; hopefully, but not always, a razor/razor blade model; a business where we think DBS is applicable; and also a business where it's in an industry where we think there's a lot of acquisition runway. So as many of you know, we bought Hach as a platform of our water business 15 years ago, but we have since done 35 acquisitions to build around that. And we really -- so it's rare we would do an acquisition where we thought there wasn't kind of much runway. If you look at the other M&A question, in the last 2 years, we've spent $9 billion on M&A, if you look at '11 and '12. So that was $7.5 billion in '11, largely Beckman; and then another $1.8 billion in 2012. If I look at the $1.8 billion, it really wasn't any one large deal of size. It was a combination of what we would call bolt-on and adjacency-type acquisitions, like our color measurement business X-Rite that is now in our Product Identification business. As we look into '13, what I would -- it's hard to have a crystal ball around M&A, but I think what I would love to see at the end of the year is that same sort of $1.5 billion, $1.8 billion of kind of bolt-on adjacencies and maybe one larger transaction. Well, what is a larger transaction? I'm not really thinking of Beckman size but something that might be $1 billion, $2 billion, $3 billion in size. This time last year, we were pretty clear that we were going to do with the bolt-on adjacencies, but given where we were in the Beckman integration, we're not really looking for a larger deal. I think the way Beckman has evolved -- as many of you know, we did our first ever bolt-on for Beckman in the fourth quarter here. I think we're comfortable that, if the right situation comes along, we'd try to step up into a larger opportunity, probably again not Beckman's size but something that would start with B, not an M, in terms of the size.

Scott R. Davis - Barclays Capital, Research Division

Dan, one of things -- I gave a talk a few years ago in 2009 was -- for a bunch of investment bankers, and I said, "Please remind your company that any transaction you do in 2009 will likely earn 100% return on capital. 2010 will be a 20% return on capital, 2011 will be a 10% return on capital and 2012 will be somewhere between 0, and probably 2013 will be 0." Because if you go back and you look at 50 years of -- essentially 50 years of M&A data, this comes out to be basically that. Your bad deals tend to be for 4 -- 3, 4, 5 years into a recovery from what we call the bottom in 2009. How do you -- and I had this question for Honeywell last night: How creative does that force you to be in the context of going a little bit out of your comfort zone and saying, "Okay, we're going to buy something like" -- I brought it up with Honeywell because they did one of the, I think, best transactions that I've ever seen in this space -- well, 2 best transactions I've seen in this: 1986 RCA, which was a conglomerate and bought for certain pieces and you sold off the rest of the pieces that payed for the deal; and then the Novar deal that Honeywell did that everybody hated was a fantastic acquisition. It took a little bit of capital markets risk but ended up selling of half the assets, and what's left of it paid probably maybe, call it, 8x EBITDA or less, probably less. Do you have to start thinking about stuff like that?

Daniel L. Comas

Well, I think it's an -- it's -- we definitely think about that. And that's one of the reasons we bought 18 companies in 2009, and in 75% of those cases had no competition. And you're right, the returns on those are among our best.

Scott R. Davis - Barclays Capital, Research Division

100%, right?

Daniel L. Comas

I -- as I look at our body of work last year, the $1.8 billion, those types of deals that are the bolt-on or adjacencies are track record often because there's real cost benefits with existing businesses that we could take, what in this environment might be a little bit of a higher multiple, call it 11x or 12x, as opposed to 9x or 10x, and get it to 8x quickly. So I think, the better environment, the good news is it actually brings out more opportunities. And I think our confidence on the margin side on the bolt-on adjacencies, we can keep on driving the returns. I think, on the flip side, the larger deals in the better environment get a little -- get -- or inherently riskier. They're larger capital deployments. Sometimes, you don't have as much inherent kind of cost synergies. I think it's a little bit of the reason we like the diversity of the model because, though the market's stronger today, M&A goes in cycles. It even goes in cycles by sector. So when we bought Beckman 18 months ago at 8.5x, we had the industrial businesses trading from 12x to 15x. But you have to be more careful in this environment. You've got to go in, particularly when you're paying a higher multiple, have a lot of conviction about the margin, and hopefully you're getting -- you feel like you're getting a little bit compensated and not unlike the Honeywell deal. Sometimes, the better deals are the ones that don't have the best initial investor reaction because you're trying to be a little bit of a contrarian, and I think Beckman was a little a bit of a contrarian move. The initial reaction was kind of mixed on that, but I think people have understood the business, the valuation, the return profile and got more comfortable. But clearly, you've got to be more careful when you're in a little more frothy environment and you've got private equity more active as well, yes.

Scott R. Davis - Barclays Capital, Research Division

Okay, let's do the next audience response question. I believe was following number 3.

"In your opinion, true cycle EPS growth for Danaher would be: above peers, in line with peers or below peers?" 1, 2 or 3? Please vote.

[Voting]

Scott R. Davis - Barclays Capital, Research Division

All right, Dan. All right, do we got? All right, 64% above peers. I mean, that says a lot. And it's consistent with, I think, the other questions. Let's go to the next question, please.

"In your opinion, what should Danaher Corporation do with excess cash? 1 is bolt-on M&A; 2 is larger M&A; 3, share repo, then dividends, debt paydown and internal investment." Please vote.

[Voting]

Scott R. Davis - Barclays Capital, Research Division

Ah, it seems consistent with what you're saying. And well, M&A and larger M&A. Are you surprised that larger M&A is as high as it is?

Daniel L. Comas

No. I mean I -- both is expected, bolt-on being first, larger, second, just because of the return profile and the risk profile. We just talked about it.

Scott R. Davis - Barclays Capital, Research Division

Are you surprised that only 7% of people say share repo?

Daniel L. Comas

I think, if we were 52, it might be a higher number, but maybe where we are today, it'll come down a little bit.

Scott R. Davis - Barclays Capital, Research Division

Okay, fair enough. Let's do the next question while we're here.

Okay, "What multiple?" This is actually, I think, a pretty relevant question for you guys. Skip the low ones: 3, 13 to 15; 4, 16 to 18; 5, 19 to 21; or if you want to vote for any of the extremes, please. Let's vote.

[Voting]

Scott R. Davis - Barclays Capital, Research Division

16 to 18, okay. Pretty consistent. I think, maybe next year, we should -- oh, let's do number 6 while we're here -- going to say, next year, we should ask what multiple -- what would drive that multiple higher, right? Something.

All right, "What do you see as the most significant investment issue for Danaher: core growth, margin performance, capital deployment or execution strategy?" Please vote.

[Voting]

Scott R. Davis - Barclays Capital, Research Division

Core growth, okay. So let's go back to core growth. Because I happen to agree. And when you're a high-gross-margin company, you don't need a lot of growth to drive bottom line results, right? But if you can outgrow your peer group, even if it's by 1 percentage point, it can make a meaningful difference in performance. How do you drive that? I mean, what -- and said a different way, why haven't you succeeded yet on that?

Daniel L. Comas

I think if you look at kind of the body of work at Danaher over the last couple of decades, I mean, it's no big surprise that, I think, the initial focus of Danaher was around margin improvements or the cash flow. And I think it's really been in the past decade where we've sort of tried to evolve the Danaher businesses into being not just about margins and the cash flow but growth as well. I think we've also tried to evolve a portfolio that -- maybe not so much, I think. First consideration, less volatility; second consideration, for the higher growth. I think you saw some of that play out in 2012. We spend a lot of time with our businesses on how they've done competitively. Because in the end of the day, we are in the markets we are. Now that will change, we'll divest some businesses, we'll bring in some businesses. But day to day, we need to operate in the markets we're in. Actually, think, if you look at 2012, we were as pleased as, I think, at any point in our history on a relative basis in the markets that we performed on how we did. If we look at Test & Measurement, not firing on all cylinders everywhere; but our tech communications business, 4 years in a row of double-digit growth, I think it's been a real success story. If you go to the next segment, our Gilbarco business, not a high-growth business, we grew 5% last year. There's no way the overall market is growing 5%. We talk about ChemTreat, 10 quarters in a row of double-digit growth. In our life science business, we saw a lot of the peer companies come out. And clearly, the numbers that SCIEX put up were very good. We're behind the curve in Beck. I think we're behind the market, though we're actually pretty close to the market in Q4. I think we were pretty clear, when we made that acquisition in '11, it will take a couple of years, so that's kind of on course. PID, we've just gone through all of the numbers and that 2012 will mark the fourth year in a row where we've taken share. So I think the body of work, I think our focus on it, I think we're pretty pleased with what we did on a relative basis in 2012. Now if we're truly in a low-global-GDP environment, which I think we are today, and we may be for a while. We may have aspirations of 5% to 7%, that may not matter. It may more matter how we're doing on a relative basis. And again, I think, if you look at the body of work in '12, on a competitive basis, we did pretty well. And I think that, coupled with the fact that, in a low growth environment, we've got a good track record around margin expansion and cash flow and capital deployment. Again, core growth doesn't have to become the star of those 4 metrics. It needs to be a solid contributor, and I think we've kind of -- we felt we did that in '12. But I hear your point and I think that's something we feel we need to sustain over time as well, yes.

Scott R. Davis - Barclays Capital, Research Division

Well, you came through with a pretty good quarter this quarter, on that regard. Some of us think forward, admittedly but still much better. The average in our group was 2% core growth in the quarter, and you came in at 4%. And even if you take 1% off, you still came in at 3%. And 1% may be the difference...

Daniel L. Comas

Yes, yes. And particularly, you outperform global GDP of 2%, 2.5%...

Scott R. Davis - Barclays Capital, Research Division

So in context: We -- I've spent a fair amount of time in China just over the last dozen years, and this -- a group of us went over in November. And I've always been impressed with your people over there dating back from -- I think we're the first people to visit your Sata tools plant. Again, it was a long time ago. And I'm quite convinced you're employing child labor, by the way, and gave them a day off. I think that plant is sold, right? It doesn't matter anymore? Okay.

Daniel L. Comas

It matters.

Scott R. Davis - Barclays Capital, Research Division

I'm joking. There's a regulator on the phone. Anyway, the -- I don't want you and I in an article at the Wall Street Journal.

Daniel L. Comas

I'm big in the press lately. It makes the job fun.

Scott R. Davis - Barclays Capital, Research Division

Your China business is different. It's better. They're -- when we go and we visit companies in China and our standard trip will be, let's just say, 12, 13 companies, Danaher always stands out as 1 of the 2 or 3 best. Many of you won't believe this, but Honeywell has worked its way up that ladder and has done a great job. And even GE has come back. In the last couple of years, they're doing a much, much better job in China. But there's still a lot of companies that are struggling with scale issues and local competition and just seem to be targets of government. The governments want to be in their business for one reason or another. And you guys have been able to fly under that radar screen. I mean, is that -- in your opinion, is that still the case that you're just as well positioned, if not better positioned, in China. That we should expect a higher growth out of you guys than your peers; and you're starting to build scale across such a broad group of products that you get more influence at the government level?

Daniel L. Comas

I think, obviously, we've had a lot of success here last decade. And while we're a lot bigger there, I think we're still very well positioned. I think a lot of it goes back to DBS, in the way -- if you sit in an operating review of 1 of our China businesses, it feels remarkably similar to sitting in Woodell, with the Videojet team in Chicago, at that Chicago. And I think the consistency of how we run our business, the metrics, one; two, I think we've -- some of the early success we had with Test and Measurement, particularly Fluke, developed a lot of good managers. And Fluke has exported a lot of good managers who understand DBS, who've gone on to the other companies that have helped get them going as well. I think we've had a -- very much a China strategy around our businesses. They have their own strategy. We've accelerated our localized product. And I think a lot of the share we've taken in Product ID has really been the result of local products, lower price points. But again, that razor/razor blade business, you're okay taking a little lower gross margin if you can keep the stream of the consumables. And so I think, between DBS, the talent, kind of the strategies we've employed across our businesses, not just skimming at the top with kind of high price point, but really trying to operate in a mid-price-point market have served us well.

Scott R. Davis - Barclays Capital, Research Division

Let's open up to the audience and get a couple of more questions in while we still have time. One in the middle, please.

Unknown Analyst

You've got -- you've been doing a very good job in terms of expanding your gross margins, but you're operating margins have been basically flattish because of the depreciation. Can you talk about when do you expect to see operating margin expansion?

Daniel L. Comas

Sure. Well, in some ways, I'm not sure I ever want to see that margin expand because we've had 5 years in a row where we've averaged 100 basis points, or 1 full point of operating margin expansion. The reason you don't see that is we're operating at 17% but we bring in a Beckman at 10%. But if we -- if our friends down the street from us in Washington, if they outlaw an acquisition tomorrow, hopefully that won't be the case, my expectation is -- today, we're 51%, 52% gross margin business, about a 17% operating margin, and that's after amortization, after everything that will, just a GAAP operating margin. My view in that, in a 4- to 5-year period, that 52% gross margin would be up a couple of hundred basis points, maybe 54%, and that operating margin would grow steadily 50 to 75 basis points a year and we'd be a 20% operating margin company again after other noncash charges as well. So I think we've been very pleased with our operating margin expansion. That's why we report core margins excluding acquisitions, but I think we're set up here with that gross margin and SG&A leverage to bring us up to a 20% operating margin as a corporation in 3 to 4 years. Whether we actually report that, I actually hope not because I like bringing in those 10% businesses that we can then bring up over time.

Scott R. Davis - Barclays Capital, Research Division

Next question? Well, let's talk briefly about Beckman. I mean, is it -- Beckman is -- obviously, the jury is no longer at it. Its acquisition was well timed. It was extraordinarily well executed. My understanding is, I'm guessing there was a fair amount of risk there that some of us didn't see. And now 18 months into it, that risk is gone. Can you talk -- I mean, or at least, it has been addressed. I mean, can you talk about the risk side of that?

Daniel L. Comas

Yes, it was interesting. As we've got into the diligence there, the high-profile case with the FDA, the CEO left. As we actually got into the diligence, it was clear that there are a lot more issues in the company than was even out there publicly. That's sort of good and that's bad. I do think that, in our diligence process, we really figured out a half-dozen issues that we needed to address. And I think we felt we had a game plan and a team that we could sort of knock those off. A lot of it -- I mean, they -- again some high-profile issues with the FDA that I think caused the company to eventually go up for sale. But the issues were wider than that, but a lot of those were right up our power alley. I mean, their on-time delivery was just awful. So the lab technician in a hospital would be upset that he can't get this one test because the FDA pulled it off the market, sure, but he is really pissed off that the delivery that's supposed to be there Monday is not there. They were also really pissed off that, their section box instrument that's supposed to be getting serviced on Friday, the service person not only doesn't come, they don't even call to say they're not going to come. There was a lot of blocking and tackling around service, around quality, around on-time delivery that we've made tremendous strides. We've done that with a lot of acquisitions. It's not -- it's hard but it's something we do well. And I think the momentum we got with that, and there's still risks out there, we just felt we could garner some customer confidence. And I think, if you polled customers, they'd say, "Okay, Beckman is on the right track." So it's -- these are things that you didn't see as an investor in Beckman but we got to see in the inside, that these are areas we know we could fix. We're good at that. And if we can do that, we'll get -- we'll narrow the list down and be able to tackle some of the other issues.

Scott R. Davis - Barclays Capital, Research Division

Does it sound like you're through?

Daniel L. Comas

No, but at least we're in a good place. We're still paying inheritance tax, and the problem is we lost contracts in 2010 at hospitals and we're going to pay for losing that 'til '13, '14, '15. So there's a little bit of a lag effect. The flip side, in terms of our retention rates, our win rates, they're where they should be. And the good news about -- one of the good news about Beckman is they had done a tremendous job in the emerging market, huge footprint in China. And I think we've been able to sustain that.

Scott R. Davis - Barclays Capital, Research Division

Have you guys been surprised at all that the Water business in general, when you look across all the companies that cover water is proving to be more cyclical than people thought? And you take a look at companies like an ITT, for example -- or really Zion, more than ITT, because Zion had a tough quarter, lower muni spend. You run a business where -- when they broke up, they said, "We'd never go negative because it's -- there's water tariffs, as such, that pay the bills." I mean, have you been surprised at all that...

Daniel L. Comas

I mean, I've been working on water acquisitions for 20 years. And I mean, I think, early on, we just had to buy it, but there could be a role for kind of high-ticket equipment but a base in more instrumentation and consumables. That's where you get the steady performance. And our Trojan business, we had great growth drivers over 7 years, but it's a high-ticket item. And if you're a municipality and you've these constraints, you can push that out. But you're going to test for -- you're going to test the water everyday in Miami. If you are the municipal water industry here. So I think being -- and I think we were grew pretty far when we built our water business to really get into an area that was high margin and high consumables and relatively steady. And clearly, Trojan has added a little bit of volatility, but that, we can accept that because it's 15% and they're not the majority of that segment. All right?

Scott R. Davis - Barclays Capital, Research Division

All right, let's take the last question from the audience. Anybody? All right, I'll -- okay, I'll ask the last question if there isn't one. You referenced private equity as a new source of potential deals. And we see it firsthand on our side of the business and -- but it doesn't surprise me. Well, I would -- the question I would have for you, though, is quality. A lot of these are vintage 2007, 2008. Private equity overpaid for them, maybe didn't add a lot of value, and the revenue base is now lower. What do you see out there in that regard that's interesting and generally, obviously?

Daniel L. Comas

Well, I think a couple of things in terms of the environment and then specifically on private equity. The fact that -- the negative of the -- fact, the negative of the dynamic of private equities getting more leverage and they're more competitive is they push up the floor on price. Now if there's a situation where we really think there's margin opportunity, we're not going to get beat by private equity, but they'll push up the floor a little bit. I think the positive there is it tends to bring out more sellers. In fact, since you had a couple of high-profile cases -- deals recently in Wall -- front of the Wall Street Journal, people know that private equity back -- is more back in the game. Actually, I think it will help sort of increase deal flow, which is a good thing. It's -- you have to be careful buying from anyone, probably a little bit more careful from buying from private equity. But some of them, some of the firms do a better job. Some of the private equity firms do a better job of running their businesses and know that their best value creation is actually selling to a strategic. And some of them are pretty thoughtful about, "I got to be careful about that R&D," because you can see if R&D has gone, 5%, 4%, 3%. Their metrics -- those PE guys are metric oriented. They know that, and they know that's a killer when they're trying to sell to a strategic. So you'll run into some cases where we look at a business and say it's 20% OP, and we'll say, we can take 500 basis points of G&A manufacturing overhead but we're going to have to ramp up R&D and sales and marketing 500 basis points so we're at the same points. We actually run into those. So there are the business that are well run, and we think DBS can add value beyond what PE has done, all right?

Scott R. Davis - Barclays Capital, Research Division

Okay, let's wrap it up there. Thank you, guys.

Daniel L. Comas

Thanks, Scott.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Danaher Corp. Presents at Barclays Industrial Select Conference, Feb-20-2013 08:55 AM
This Transcript
All Transcripts