Danaher (DHR) Thomas Patrick Joyce on Q2 2016 Results - Earnings Call Transcript

| About: Danaher Corporation (DHR)

Danaher Corp. (NYSE:DHR)

Q2 2016 Earnings Call

July 25, 2016 8:00 am ET

Executives

Matthew E. Gugino - Vice President-Investor Relations

Thomas Patrick Joyce - President, Chief Executive Officer & Director

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

Analysts

Nigel Coe - Morgan Stanley & Co. LLC

Steven Eric Winoker - Sanford C. Bernstein & Co. LLC

Jeffrey Todd Sprague - Vertical Research Partners LLC

Shannon O'Callaghan - UBS Securities LLC

Tycho W. Peterson - JPMorgan Securities LLC

Ross Muken - Evercore Group LLC

Derik De Bruin - Bank of America Merrill Lynch

Julian Mitchell - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Isaac Ro - Goldman Sachs & Co.

Operator

My name is Ashley and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corp. Second Quarter 2016 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

I will now turn the conference over to Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.

Matthew E. Gugino - Vice President-Investor Relations

Thanks, Ashley. Good morning, everyone, and thanks for joining us on the call. With us today are Tom Joyce, our President, Chief Executive Officer; and Dan Comas, 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, our second quarter Form 10-Q and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website, www.danaher.com under the heading Financial Information. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until August 1, 2016.

During the presentation, we will describe certain to 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 the continuing operations of the company in the second quarter of 2016, 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.

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 may differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements.

With that, I'd like to turn the call over the Tom.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Thanks, Matt, and good morning, everyone. The second quarter was a busy and exciting one for Danaher. Despite challenging economic conditions, we are pleased with our performance as the team's consistent focus on execution helped deliver solid core revenue growth, high teens adjusted earnings per share growth and strong free cash flow performance.

On July 2, we successfully completed the spinoff of Fortive Corporation, a new industrial growth company. The earlier than expected completion of the separation is a testament to our process orientation, execution focus and exceptional teamwork. We continue to believe that the separation will provide significant opportunities for both Danaher and Fortive to independently build even greater shareholder value in the years ahead.

Since we own Fortive through the end of the second quarter, we will start with financial highlights that reflect the combined Danaher and Fortive results. We'll then provide detail for the businesses remaining with Danaher, outline our planned new reporting segments, and provide guidance for Danaher's continuing operations excluding Fortive for the third quarter and the full year. Since the Fortive team will be reporting their second quarter results separately next week, we'd ask that you please save any questions about the Fortive businesses until then.

Now, turning to the details of the second quarter. Adjusted diluted net earnings per share from continuing operations was $1.25, an increase of 17% over last year and our third consecutive quarter of mid-teens or better adjusted EPS growth. Sales grew 16.5% to $5.8 billion and core revenue increased 2%. The impact of currency translation eased this quarter but still decreased revenues by half a percent while acquisitions increased revenues by 15%. Danaher remain core revenue was up 3% while Fortive core revenue was down slightly.

Geographically, high-growth market revenues were up mid single digits led by double-digit growth in China and India. We saw better sequential performance in Latin America and Russia in part because of easier prior-year comparisons. Developed market core revenues were up low single digits led by growth in Western Europe. The U.S. remained roughly flat and we saw declines in Japan during the quarter.

Gross margin for the second quarter was 54.4%, an increase of 110 basis points from last year. Reported operating margins were 17.9% with core operating margins down 30 basis points. More than 80 basis points of core margin improvement were – we had more than 80 basis points of core margin improvement at both Dental and Life Science & Diagnostics, which was offset by declines in Test & Measurement and Environmental segments.

Free cash flow continues to be one of our most important financial metrics, enabling us to pursue organic and inorganic growth initiatives across our entire portfolio. We generated $1.1 billion of free cash flow from continuing operations in the quarter, up 14%, and our free cash flow to net income conversion ratio was over 150%.

Now, let's take a look at more detailed results across the Danaher portfolio. In Life Sciences, core revenue increased mid single digits led by strength in high-growth markets and Western Europe. At Beckman Life Sciences, we continue to outperform. High-single-digit core growth in the quarter was driven by strong demand in flow cytometry particularly in North America and China.

The robust growth in flow cytometry was largely driven by demand for our new CytoFLEX product based on the breakthrough technology, which we acquired as part of the Xitogen acquisition in 2014. This bolt-on acquisition has been a tremendous success and is a great example of how we incorporate novel technology into our portfolio to enhance our offering and expand our customer base. CytoFLEX has been a significant contributor to recent share gains in our flow cytometry business.

At Leica Microsystems, we saw improved results versus previous quarters as recent new product introductions helped drive low-single-digit core revenue growth. Two such new product introductions included are Leica DVM6 digital microscope launched at the end of 2015 and our new Leica M530 neurosurgery microscope, which is off to a great start in China after successful launches in Europe and North America last year. The M530 is a standout combination of our high-resolution optics technology with improved ergonomics, helping neurosurgeons stay focused during their demanding high-precision procedures.

Core revenues at SCIEX were up mid-single digits, as we saw continued strength in pharmaceutical, food and environmental end markets. We had another very strong quarter in China as new regulations from the Chinese Food and Drug Administration helped drive increased demand around drug testing and food safety.

In June, SCIEX announced a number of new workflow solutions at ASMS, the American Society of Mass Spectrometry annual meeting. These solutions are geared towards fast-growing markets such as biologics, proteomics, food and environmental testing. We showcased the latest QTRAP 6500+ mass spectrometer that provides enhanced sensitivity and selectivity to create a powerful workflow solution for biologics analysis. We also rolled out BioPharmaView Software 2.0, which accelerates automated data processing and simplifies reporting, enabling biopharma researchers to make better decisions faster.

At Pall, core revenues were up mid-single digits for the quarter compared to last year as a stand-alone company. Continued strong demand in biopharma, particularly single-use technologies, led to double-digit core revenue growth in Pall Life Sciences. In Pall Industrial, revenues were down low-single digits, but we're continuing to see some signs of stabilization in those end markets.

Pall continues to ramp exceedingly well across a number of key metrics. The team's commitment to the Danaher Business System has resulted in on-time delivery improving by more than 1,500 basis points with greater productivity and quality driving improved customer satisfaction.

Since acquisition, faster-than-expected cost savings and meaningful operational gains have contributed to sizable growth and operating margin improvements. As a result of the team's impressive start, we've been able to redirect some of that benefit into R&D and sales and marketing investments. By pursuing this combination of margin enhancement and growth opportunities, we believe we can continue to drive innovation and improve Pall's competitive advantage.

The Pall team showcased a number of innovations such as acoustic wave separation in our new single-use bioreactor at the INTERPHEX biomanufacturing trade show in April. Our expanded single-use product offering has enhanced our competitive position as pharmaceutical companies look to shift from traditional large infrastructure stainless steel systems to more efficient production processes.

Pall's bioprocessing solutions help our customers save significant time, energy and money, while greatly reducing cross-contamination risk, which provides the flexibility to easily and safely make multiple products in one facility.

Moving now to Diagnostics; core revenues increased low-single digits with double-digit gains in China and India, partially offset by weakness in the Middle East and the Americas. At Beckman Coulter, core revenues were up low-single digits, driven primarily by strengthened high-growth markets. This past June marked the fifth anniversary of the Beckman acquisition. We've made tremendous progress since then, significantly improving quality, delivery and our overall customer experience, while using productivity gains to help fund new product development and add feet on the street.

Another quarter of good execution by the Beckman team contributed to healthy core operating margin expansion, and we continue to reinvest in high-impact growth opportunities. New menu additions are gaining traction, including our vitamin D and AMH fertility test in our amino assay business. Our recently launched molecular diagnostic platform, VERIS, continues to gain early traction in Europe. New product developments like these, combined with opportunities at recent bolt-on acquisitions like MicroScan, will continue to help build meaningful runway for growth at Beckman going forward.

Radiometer achieved mid-single-digit revenue growth, with healthy performance in Western Europe and China, partially offset by weakness in Latin America and the Middle East. Our growing installed base of blood gas instruments and AQT analyzers contributed to solid consumable sales in the quarter. The Radiometer team also recently launched the TCM5 FLEX, a new transcutaneous monitor design. This noninvasive monitor measures ventilation per patients in critical condition. And the TCM5 updated design is easy to use and reliable, providing nurses and doctors with improved usability while maintaining accuracy and precision. At Leica Biosystems, core revenues grew mid single digits. Results were driven by a combination of strength in high-growth markets and continued growth of instrument placements in advanced staining and core histology.

Moving now over to our Dental segment. Core revenues were up mid single digits with growth across consumables, equipment and implants. We saw particular strength in our restorative and Ormco product lines. Geographically, China had another strong quarter with double-digit growth, and we maintained positive momentum in North America and Western Europe.

Nobel had another good quarter, with mid-single-digit core revenue growth. We've improved operating margins at Nobel by more than 500 basis points since acquisition, enabling us to direct some of our savings into expanded product offerings and accelerated sales and marketing efforts. This is similar to what you've seen us achieved at other large acquisitions like Beckman and Pall, where operational improvements help fuel renewed focus on new product development and go-to-market initiatives.

The Nobel team has launched more than 20 new products since acquisition and featured a number of these recent innovations at the Nobel Biocare Global Symposium in June. Nobel's new On1 implant base remains in position during the entire restorative workflow; from implant placement to finalization and for the lifetime of the restoration. This helps simplify the dental surgeon's workflow and allows for an improved patient experience.

And our new NobelParallel CC implant is a straightforward, highly versatile implant system providing an efficient treatment flow that can be used in a wide variety of implant cases. Both of these new innovations help us serve our customers with better solutions to improve their patients' experience and treatment.

Turning to product identification. Core revenues increased low single digits. We saw increased demand for marking and coding equipment and related consumables across most major geographies, partially offset by softness in some of our packaging and color solutions offerings.

Videojet's substantial and growing installed base contributed to mid-single-digit core revenue growth in the quarter. Strong market performance in North America, Latin America and Western Europe offset softness in certain high-growth markets. Videojet recently introduced a new service offering that enables our technicians to remotely gather data from a printer that's experiencing a fault or a failure condition. This helps our customers return to normal operation much faster, often without a site visit. With our range of comprehensive, preventive services, we're able to improve end-user productivity over the course of a printer's lifespan, ultimately reducing operating costs and enhancing customer satisfaction.

In June, Esko successfully launched a number of new products and innovations at drupa, the world's largest printing equipment exhibition, which is held every four years in Germany. This is the most important tradeshow in the industry. Esko introduced more than a dozen significant hardware and software innovations at drupa this year including a suite of powerful new software tools to help customers simplify, automate and integrate their complex packaging and label production work flows. We originated a record number of leads and orders at drupa, which we expect to help drive improved growth at Esko and across the Product ID platform in the second half of the year.

Lastly, turning to Water Quality. Core revenues grew low single digits with strength in Western Europe, India and China partially offset by lower demand in Japan and Eastern Europe. Hach had a solid quarter with mid-single digit core revenue growth. Results were driven by strength in U.S. municipal markets and Western Europe. We saw improved growth in China as Hach continues to benefit from ongoing regulations around water quality monitoring and analysis in the region.

Hach's on-line water monitoring solutions are in place in Rio de Janeiro, Brazil, for next month's Summer Olympics. Our solutions are installed at the majority of event sites, including the largest soccer stadium in the world. We'll apply our expertise to monitor water quality in order to help Brazil execute a successful Olympic Games. After the events wrap up, the Hach systems will be transferred to municipal water plants across the country, benefiting local communities for many years to come.

At Trojan, high-single-digit core revenue growth in the quarter was a result of a number of project wins in North America, Western Europe and Australia as well as robust demand in municipal markets. And finally at ChemTreat, core revenues grew low single digits despite exposure to weaker industrial and commodity-oriented end markets.

So to wrap up, the Danaher team executed well in a challenging macro environment. The thoughtful application of DBS continued to drive results with meaningful process improvements enabling reinvestment in high-impact growth initiatives. One of Danaher's core values is innovation defines our future, and the successful new product launches we've seen across the portfolio demonstrate our commitment to providing customers with truly differentiated technology to strengthen our collective competitive advantage.

Following the launch of Fortive, Danaher will be a diversified multi-industry science and technology company united by common business models and the power of DBS. We remain focused on improving growth, margins and cash flow and will continue to pursue meaningful organic and inorganic opportunities to strengthen our market-leading portfolio of businesses.

Going forward, Danaher's businesses will be organized across four segments: Life Sciences, including all of Pall; Diagnostics; Dental; and Environmental and Applied Solutions, which includes our Water Quality and Product Identification businesses. For further details, please refer to the supplemental information that we posted on our website this morning. This marks the start of an exciting new chapter for Danaher and we look forward to the exciting opportunities we see in the years ahead.

We are initiating third quarter guidance for adjusted diluted net EPS from continuing operations of $0.80 to $0.84. We are assuming third quarter core revenue growth of 3% or better. For the full year 2016, we are anticipating adjusted diluted net EPS from continuing operations to be in the range of $3.53 to $3.60, which at the midpoint would represent an increase of approximately 20% from 2015. Both our third quarter and full year guidance exclude the impact of Fortive.

Matthew E. Gugino - Vice President-Investor Relations

Thanks, Tom. That concludes our formal remarks. Ashley, we're now ready for questions. As a reminder, we just ask you to please keep your questions specific to Danaher and save any Fortive questions for their earnings call next week.

Question-and-Answer Session

Unknown Speaker

Thank you. We will take our first question from Nigel Coe with Morgan Stanley. Please go ahead.

Nigel Coe - Morgan Stanley & Co. LLC

Thanks. Good morning.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Good morning, Nigel.

Nigel Coe - Morgan Stanley & Co. LLC

Good morning, Tom. So, I just wanted to just fill in the gaps on the FY guide. You said 3% or better for 3Q. Is that the working assumption for 4Q as well? And then, what assumptions are you making in terms of the corporate dis-synergies in the back half of the year? I mean, obviously, there's a corporate line which is unallocated but then there's some corporate absorbed by the segments. I'm just wondering how that impacts margins in the second half of the year. Any color would be helpful.

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

So Nigel, this is Dan. So, Q3 we're talking about 3% or better core. I think if we – in that zone, in part because we have a little bit of easier comparison in the fourth quarter, core could be a little bit higher than that. Regarding the corporate on a combined basis, we've talked since the beginning and we're still sort of in that zone about $70 million to $80 million of corporate dis-synergies from the two entities, and going forward, corporate will remain in kind of the low $40 million for Danaher.

Nigel Coe - Morgan Stanley & Co. LLC

Okay. And then, does that impact the segment line as well, Dan? Or is it just within that unallocated line? So, I guess what I'm saying is the 2Q, 1Q pro forma segment numbers for new Danaher, is that a good base for the second half of the year?

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

Yes.

Nigel Coe - Morgan Stanley & Co. LLC

Okay. Great. And then just on Dental, you gave some details on the moving parts, will work out better in 2Q. But I'm just wondering, given the pretty soft acceleration from 1Q to 2Q, was there any pull forward or pull back from 1Q to 2Q? Was there some channel volatility? Or is this just natural volatility that we will see from time to time?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Nigel, we did see some core improvement without a doubt in Dental, 4% core growth in Dental, and a good part of that was clearly around better execution and to some extent, a little bit easier comp. We saw good performance in implants and equipment at mid-single-digit growth. Consumables, more like low single digit. Terrific performance in China continued. You've heard us talked to double-digit growth in China and we saw that continuing. U.S. and EU getting a little bit better and the high-growth markets, still challenging for sure but we are rounding around some easier comps. You heard me talk about good solid performance at Nobel. That continued.

That said, relative to your question about any impact, there may have been a little bit of pull forward on some revenues just based on the nature of the calendar and the way the calendar worked on the end of the quarter but, in general, I think we were very pleased with the performance. Given seasonality, we could see some moderation in the Q3 growth rates at low-single digits. That's typically a function of more European exposure and the summer tends to be a little bit slower. So, we won't necessarily see a straight line to the improved performance, but we were very, very pleased with the execution in the second quarter and we think we've got a very good trajectory behind us that bodes well for, I think, the quarters to come.

Nigel Coe - Morgan Stanley & Co. LLC

Okay. That's great. Thanks a lot.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Thanks, Nigel.

Operator

Our next question comes from Steven Winoker with Bernstein. Please go ahead.

Steven Eric Winoker - Sanford C. Bernstein & Co. LLC

Hey. Thanks, and good morning, guys.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Hey, Steve.

Steven Eric Winoker - Sanford C. Bernstein & Co. LLC

Hey, Tom. Just on the segmentation, the new segmentation front, a couple of questions here. One, why is Pall Industrial stuck in Life Sciences? And then secondly, on Environmental and Applied Solutions, I thought maybe Water Quality and Product ID would be stand-alone. Are they just not big enough yet? Or is there a strategic thought here, number of segments? I mean, how are you thinking about those two?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Sure. Thanks, Steve. Relative to Pall, we did think it was important to keep those together in a single segment. Obviously, the Life Science part of the Pall portfolio is the larger part of the portfolio. There's commonality internally at Danaher from a reporting standpoint, both in terms of both businesses, both sides of the business reporting into a President at Pall as well as an EVP overseeing all of Life Sciences. There's also commonality across R&D and supply chain and operations.

So, there's a lot of reasons operationally to keep the businesses together and therefore, somewhat from a reporting standpoint as well. I mean, realistically, we probably could have split them up, but I think we would probably reevaluate that over time. And see how we might run the businesses in the years to come. But I think for right now, that's probably the best approach is to keep them together.

In terms of Environmental and PID, I think those businesses do share some commonality in terms of serving some different applied end markets. We could have kept them separately. They would've been far smaller segments. So, I think we felt that those kind of went together and provided some flexibility for us as we defined ourselves as remaining a multi-industry company, there obviously is some flexibility maintained in terms of how we might add to that segment over time.

Steven Eric Winoker - Sanford C. Bernstein & Co. LLC

Okay. And then I suppose sticking on the same M&A or the same theme here on M&A, I know it's bumpy, but you did six last quarter I guess and zero this quarter. Was it – were you busy with separation, things just didn't come together? How's the pipeline looking going forward? What should we kind of expect in terms of momentum or pace on the M&A front?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Steve, it didn't have anything to do with being busy or in any way focused on other things. Acquisition volume kind of ebbs and flows over time and so we think the pipe – we know the pipelines remained quite good. We have active conversations in each one of the platforms, so we feel very good about where we are. We have obviously a terrific balance sheet to work with and I think we'll see good things in the quarters to come.

Steven Eric Winoker - Sanford C. Bernstein & Co. LLC

And you emphasize the multi-industry diversified nature as well as science and technology, but are you as optimistic on the Environmental and Applied Solutions I supposed in Pall Industrial front as you are on the other parts of the business?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

We are. We continue to have teams that focus as we always have in each one of the operating companies and in each one of the platforms focused on developing funnels, ensuring that we have active cultivations and yes we remain bias towards applying our free cash flow to each one of the businesses across the portfolio.

Steven Eric Winoker - Sanford C. Bernstein & Co. LLC

Okay. I'll hand it off. Thanks.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Thanks, Steve.

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

Thanks, Steve.

Operator

Next we will take Jeffrey Sprague with Vertical Research Partners. Please go ahead.

Jeffrey Todd Sprague - Vertical Research Partners LLC

Thank you. Good morning.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Hi, Jeff.

Jeffrey Todd Sprague - Vertical Research Partners LLC

Good morning. How are you doing?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Great.

Jeffrey Todd Sprague - Vertical Research Partners LLC

Congrats on getting Fortive done. Hey, just maybe a couple of business-related questions, drilling in a little bit. Tom, could you elaborate a little bit what was going on in Environmental core margins in the quarter, why they're under pressure and kind of what the trajectory is looking forward?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Jeff, thanks for the question. In general, we feel very good about where those businesses are. I'll speak specifically to the Hach business. We had very good performance in the prior quarter – in the same quarter last year. In addition, we're making some investments from a growth standpoint in those businesses. So, I think we'll continue to see margin expansion from the Water side of the Environmental segment and I think those investments overall are going to pay off in terms of good growth rates in the quarters to come. So, it's not an area of concern for us.

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

And Jeff, two things to add. One is Gilbarco had better growth than the Water business, so there's a negative mix in there for the segment and we had our best – best segment was Q2 last year was probably 150 basis points, 200 basis points better than any other quarter we had in 2015. So, a little bit of a comp issue as well. But as Tom alluded to, we are investing pretty heavily right now in the Water business organically.

Jeffrey Todd Sprague - Vertical Research Partners LLC

Speaking of investment, maybe just kind of a total new Danaher question but the idea of kind of restructuring, be it quiet or otherwise, is that likely part of the equation here as you progress through the year? And could you give us some idea how to think about that?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Jeff, as we, I think, showed last year, we've established a cadence of restructuring that has gone on, you might say quietly but I would say more consistently and appropriately throughout the course of the year. As opportunities have come up, we've taken advantage of those in each of the quarters. And so, we still have opportunities for some level of restructuring in the third and fourth quarter. But in general, we've been more balanced through the course of the year. And I think that has served us well in terms of the operating margin expansion that you've seen over time late last year and this year as well.

Jeffrey Todd Sprague - Vertical Research Partners LLC

And then finally, just back to Environmental and Water, specifically in the muni markets. So, we've been kind of hearing for a couple quarters that things are gaining traction; obviously, had a strong quarter at Trojan. Could you speak a little bit to the forward visibility there? What's going on in order activity? Do you have top-line visibility into that business now into 2017?

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

Jeff, it's probably a little bit early to kind of comment on 2017. The muni strength continues to be broad based, both at Trojan and at the Hach business. And at the Hach business, we're seeing it both in Europe and the U.S. Very consistent and healthy spending there. The offset of that both for Hach and ChemTreat is where we serve the industrial or any commodity-oriented markets. They've been challenging.

Jeffrey Todd Sprague - Vertical Research Partners LLC

Right. Thank you very much.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Thanks, Jeff.

Operator

Our next question is from Shannon O'Callaghan with UBS.

Shannon O'Callaghan - UBS Securities LLC

Good morning, guys.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Hi, Shannon.

Shannon O'Callaghan - UBS Securities LLC

Hey. Just on this emphasis on reinvesting some of the synergy upside at Nobel and at Pall into new products, go-to-market investments. What kind of lag are you expecting from that? I mean, when do you expect that to translate into improving organic growth for those businesses and just what you're seeing?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Shannon, it varies depending on where we direct those funds. I think in some cases, when we put investment directly into, say, feet on the street in either a developed market or a high-growth market, we tend to see those investments pay off in just a quarter or two. If we're talking about investments that go into new product development, those tend to have much more of a lag time. As projects get kicked off into early business case-oriented toll gates, you could have several quarters to it, at times, even a couple of years before you might see the impact of a new product investment, again, depending on how early or late stage an existing project might be in the pipeline. So, it's varied.

I think in the case of Nobel, just to talk to one of the businesses, we've seen those investments pay off relatively quickly. You've seen it in good core revenue growth consistently in that business. They have relatively shorter cycle times in terms of new product development. In businesses like Beckman, for example, and at Pall, the product development cycles are longer, certainly significantly longer at a place like Beckman where oftentimes, we'll have clinical trials and/or regulatory clearances. And so, those new product investments can take some time, obviously.

Shannon O'Callaghan - UBS Securities LLC

Okay. Great. And then, yeah, maybe a follow-up to that. I mean, in terms of – in diagnostics, you talked about Beckman's growth being driven by high-growth markets. What's going on in the developed markets and then maybe it kind of gets to some of your comments you just made there but maybe fill out what's it going to take to get some better growth in developed markets for Beckman?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Sure. Yeah, a little bit slower growth in the developed markets. I mean, in general, the developed markets, from an overall perspective, are slower growth markets to begin with. We've always seen better market growth in the overall in places like China and India and the Middle East. So in general, I think we're tracking closer to the market growth rates than anything else. Still have work to do; there's no question about it. We have improved our retention rates and our competitive win rates, but there's still work to do in terms of both go-to-market as well as new product development. And over time, we do believe those will pay off and better growth rates in the developed markets.

Shannon O'Callaghan - UBS Securities LLC

Okay. Great. Thanks, guys.

Operator

And our next question is coming from Tycho Peterson with JPMorgan. Please go ahead.

Tycho W. Peterson - JPMorgan Securities LLC

Hey. Thanks. Tom, just wondering if you can talk about some of the gives and takes, where you're feeling a little bit more constructive by segment in the back half of the year. You talked to the gives and takes on Dental, so maybe you can pass on that. But is Pall Industrial kind of bottoming out here? Could you see some improvement there? Obviously, the academic fund flows may pick up in the back half of the year and that could help SCIEX. So, could you just talk by division where you're feeling a little more constructive for the next couple quarters?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Sure. Good morning, Tycho. Thanks for the question. We do think that we're – as you mentioned, we've seen good performance in Dental. Again, not necessarily a straight line but we're very encouraged by the performance we're seeing. In terms of the other businesses across the second half, I think we'll see continuing better performance across the Diagnostic businesses in particular. We're starting see the benefit of a number of the investments across those businesses. I think we'll see continuing good performance from Water Quality. PID has been pretty consistent along the way, so I think we will see that continue. Our Life Science businesses have also performed well particularly SCIEX as well as Beckman Life Science.

So, I think we'd see some modest incremental growth there. I would also remind you that we're coming around through some easier comps in the second half as well and so we will get a little bit of benefit from those easier comps really across the entire portfolio.

Tycho W. Peterson - JPMorgan Securities LLC

And since you called out Europe as a source of strength for Life Sciences and Radiometer, are you kind of comfortable with the macro plan in the back half of the year for these markets?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Well, I think the Brexit situation certainly has created uncertainty around not just the U.K. but across European theater at large. Uncertainty is rarely a good thing for markets in terms of people's willingness to make investments particularly in instrumentation and higher cost instrumentation. So, I think that uncertainty could potentially result in some slowness in the second half but it's very early to tell.

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

Tycho, we've been (38:43) on Western Europe. We've been consistently in kind of a pretty healthy low-single-digit number across Western Europe. It's been pretty broad-based. It is an area where I think because of some of the uncertainties in the last couple of years, we've probably taken a fair amount of share as we've seen some people kind of pull back in Western Europe over the last couple of years. So, it's been a good market for us and we're also seeing Pall doing quite well in Europe but those are, obviously, not in the core numbers yet.

Tycho W. Peterson - JPMorgan Securities LLC

Okay. And then, just lastly on the capital deployment question, earlier you touched on the framework a little bit. Can you just remind us where you're comfortable picking up leverage? And maybe, just any comments on what you're seeing in terms of valuation given how much of this space is run?

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

Well, Tycho, we've obviously spent the last year in a significant effort on deleveraging. We're in really good shape. We're south of two-and-a-half times at this point. Initially, we're close to four times leverage. So, we're back to a mode of spending our free cash flow plus and we talk about a couple billion of capacity for this year but going into next year, you're back to more $3 billion to $4 billion of capacity per year. And that's not without – that's without really stretching the balance sheet.

Tycho W. Peterson - JPMorgan Securities LLC

Okay. Thank you.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Thanks, Tycho.

Operator

Our next question is coming from Ross Muken with Evercore ISI. Please go ahead.

Ross Muken - Evercore Group LLC

Good morning, gentlemen.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Good morning.

Ross Muken - Evercore Group LLC

So I appreciate, I know you gave us already some color on Pall single use and on SCIEX, but I'd love it if you could tease out at all sort of pharma demand based on sort of customer types of sort of separate maybe pharma from biotech or emerging biotech to see if there's any sort of discernible trend you've seen amongst and it's clear Pall, obviously, having pretty strong growth across the board. But I was wondering if any of the end of markets, whether it's generic or CRO, et cetera, you're seeing any change in demand.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Good morning, Ross. SCIEX is probably the best business to think about when you think about your question about pharma versus, say, biotech. SCIEX has exposure to both those end markets and we're seeing good performance, healthy demand and fairly consistent demand from both sides of the house there. I'd have to do some follow-up to get you some detail on anything to do with the generics or the CROs, specifically. But clearly in the aggregate, these markets are doing quite well. Pall, as you mentioned, we've talked about the growth that we're seeing in the Life Science side, specifically around our single use technology product offering, where we're seeing continued double-digit growth rates in that area, and that clearly is associated with the growth in biopharmaceutical specifically in the growth in large molecule drugs.

Ross Muken - Evercore Group LLC

I guess what I was getting at is more on the zero charts (41:57), so maybe I'd ask it differently. In terms of just the high-growth markets and it's clear China has been good but outside of China, how would you sort of characterize the rest of the key markets? Obviously, LatAm has kind of been a mixed bag overall, but India and some of the other key geographies.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

I'd say China in particular, India as well, are very good markets for us. But I would say that there's still a long runway ahead for those markets. Some of the generic and the CRO movement into those markets has been on balance, a positive, but there are also components of the market that are still relatively nascent, particularly in terms of what might be going on there in the future relative to large molecule drugs. So, I think there's still a pretty good runway ahead.

Ross Muken - Evercore Group LLC

Great. Thanks, Tom.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Thank, Ross.

Operator

Our next question comes from Derik de Bruin with Bank of America Merrill Lynch.

Derik De Bruin - Bank of America Merrill Lynch

Hi. Good morning.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Good morning, Derik.

Derik De Bruin - Bank of America Merrill Lynch

So, could you talk a little bit about capital deployment? I'm just curious now that sort of Fortive has spun out. How do you sort of view your overall strategy in the Life Sciences space? Do you still feel like you want to stay focused on the core – stand-alone core brands or do you feel the need to sort of become a more integrated provider in the space? Do you think you need to add anything to your Life Sciences & Diagnostics armament?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Derek, I think, first of all, starting at a Danaher level, our bias towards M&A is not – and the use of our free cash flow to M&A is not specifically skewed towards any of the four segments that I mentioned. We've had a consistent track record of capital allocation across each of those four segments that we'll be reporting on in the future, and I think you'll continue to see us do that. Now specifically to your question around Life Sciences & Diagnostics, what you've seen us do in Life Sciences is continue to broaden our product offering over time and I think you'll continue to see us do that. We have had a bias and we continue to have a bias towards businesses with not only strong brands and significant installed bases, but installed bases that drive good, consistent recurring revenue and consumables growth.

The diagnostic business is inherently that way, typically, and you've seen us buy businesses with those same characteristics; strong brands, significant installed bases and strong recurring revenue and consumable streams. I think you'd see us continue to do that. We think there is certainly room to continue to expand our Diagnostic product offering and provide hospitals with broader bundles of product. Today, we provide products obviously to the central laboratory, the core clinical laboratory as well as anatomical pathology and to the acute care areas of the hospital. And with expansion of MicroScan into microbiology with IRIS opening up urinalysis for us, I think those types of expansions of our footprint would certainly be characteristic of the types of things that we would hope to do in the future

Derik De Bruin - Bank of America Merrill Lynch

Great. That's really helpful. Just one quick follow-up. It's been over a year since you launched the VERIS platform in molecular. Could you talk a little bit about what you see in terms of installed base and competitive wins and essentially, where is that going? What's the customer type? And then, I assume you're taking share from people because most hospitals have molecular platforms of that size, could you just talk a little bit more and some color on that?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Sure, Thanks, Derek. Just for everyone's benefit, the VERIS platform is a high-volume, random-access molecular diagnostics instrument that was commercialized for the first time in Europe in the second half of last year. That product line serves the core or central clinical laboratory of major hospitals. And again, as I mentioned, it's a high-volume platform. We're very pleased with the early traction that we've gotten. It is still early. During the first year of a significant new product introduction like that, the first of its kind by Beckman Coulter, it does take a while to build the funnel, but we've been very happy with how that funnel has built the sales opportunity funnel in the last year.

The installations that we have thus far are running very well. We have four assays in the market right now, but the four assays really are just the beginning. There's a significant roadmap of assay development ahead that will ultimately be commercialized both in Europe as well as in the U.S. That product will need to go through regulatory clearance in the U.S., so it'll be some time before we see the volumes ramp beyond the early days here in Europe. But the feedback from customers has been very strongly positive, and we feel good about the start we have.

Derik De Bruin - Bank of America Merrill Lynch

Great. And when is FDA approval expected? Thanks.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

I usually hesitate to try to put any bets on FDA clearance. There's a fair amount of work to do, even before we file for that clearance. So, I'll probably have a better sense of that in the quarters to come but I couldn't put a date on it today.

Derik De Bruin - Bank of America Merrill Lynch

Thank you.

Operator

Our next question comes from Julian Mitchell with Credit Suisse.

Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker)

Hi. Good morning.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Good morning, Julian.

Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker)

Morning. Just a question on margins, firstly. So, the core margin in total Danaher fell about 30 bps in Q2. Could you give that comparable number for the remaining business and how you think that will trend in the second half? And tied to that, I guess going back to the Environmental and Applied Solutions segment, the headline margin there was down 300 bps plus in Q2. Should we see that coming back in the second half as the comps on margins get much easier?

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

Sure. Sure, Julian. On the last one, yes. And as I mentioned earlier, part of the Environmental issue was a comp issue that margins, on a historical restated basis for the Environmental and Applied Solutions were 200 basis points higher in Q2 a year ago. So, you expect that to sort of normalize. Core margins were relatively flat for Danaher. Ex Fortive, that was again somewhat of a function of the prior-year compare. For our full year, we continue to expect 50 to 75 basis points of core margin expansion for Danaher, ex Fortive, and you'll see better performance. So, very good performance in the first quarter. You'll see better performance in Q3 and Q4.

Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker)

Great. Thanks. And then, just on Pall Industrial, you called out the overall organic sales trend year-on-year. Is there any sort of color you'd give there on specific verticals or markets within that? Any changes?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

No. I wouldn't say we've seen necessarily any changes, Julian. I think to the extent that there's good news there, I think it would be that we've seen some stability found in those markets. We continue to make some excellent progress in terms of our go-to-market initiative. We've done over 40 growth-related kaizens at Pall since we acquired the business. And a number of those kaizens have been going on in the industrial markets. And that involves installing DBS tools such as funnel management and transformative marketing that we think is improving our execution in those markets. So, I think the combination of seeing some stability across each one of those end markets in combination with the application of DBS tools, I think has gotten us to a pretty good place. So, I would hope to see some incrementally better performance late this year and certainly entering next year. But I think in general, we're pleased that things have stabilized.

Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker)

Great. Thank you.

Operator

Our final question is coming from Isaac Ro with Goldman Sachs. Please go ahead.

Isaac Ro - Goldman Sachs & Co.

Good morning, guys. Thank you. I just want to ask another question on Pall Industrial. If we look back prior to the acquisition, that business was obviously growing a little slower than the Life Science side. But curious if you could maybe take a bigger step back and give us a sense of what you think it will take for Industrial to return to growth. Is it mostly a function of end markets, or is there really more of an execution issue?

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Isaac, good morning and thanks. I think it's both. As I was just mentioning to Julian, I think we've seen the markets themselves from a macro standpoint stabilize a bit; in other words, not get any worse. And we will need to see some improvement in the macro environment to see some meaningful or step function improvement in growth. But we're not waiting for that. Our focus is on ensuring that we have the best sales team on the field, that we're providing those teams with exceptional new product development, that we've got our coverage set up appropriately across geographies and across each one of those verticals. And I think the combination of good market coverage, DBS tools, new product development and some improvement in those end markets is what it's going to take. Obviously, the majority of that we hope to be in our control but a little help from the end market certainly wouldn't hurt.

Isaac Ro - Goldman Sachs & Co.

Yeah, that's helpful. And then one other question on Beckman. If we – just trying to square up kind of what we saw last week with some of the peer groups in Diagnostics with what you said. Obviously, you've got VERIS and CytoFLEX helping out. If we pull those out, just trying to get a better sense of how you think you're pacing versus the overall market for Diagnostics. And any color there, especially in North America, would be helpful. Thank you.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Sure. Thanks, Isaac. Well, as you know, we had come from behind here from the standpoint of the big five in the overall market. I think from a pacing standpoint, we've now gotten to a point where we are very close to, if not at market growth rates with a couple of the competitors as you mentioned that reported last week posting better growth rates. And in doing so, in some cases, as a function of their positions in certain higher growth markets but, in other cases, we simply have work to do in terms of continuing to drive our new product development and our go-to-market initiatives. We're ahead of a couple other competitors in that market and we have demonstrated where, from a competitive win perspective, we've become far more competitive in the overall market.

So, I think we've made a ton of progress but clearly work to do, and that work is, as you've referenced, is represented by some folks that are still putting up some pretty good numbers. So, I think we've got the initiatives and the investment levels in the right place to continue to make progress, and it'll take a bit of time, but I think we're on the right track.

Isaac Ro - Goldman Sachs & Co.

Got it. Thanks very much.

Thomas Patrick Joyce - President, Chief Executive Officer & Director

Thanks, Isaac.

Operator

And that concludes our question-and-answer session. I would like to turn the conference back over to Matt Gugino for any additional or closing remarks.

Matthew E. Gugino - Vice President-Investor Relations

Thanks, everyone, for joining us. We're around all day for questions.

Operator

And that concludes today's presentation. We thank you all for your participation.

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!