Danaher Corp

NYSE:DHR

Earnings Call Transcript 2018-Q2

[Operator]

My name is Kina, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation’s Second Quarter 2018 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.

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

[Matt Gugino, Vice President of Investor Relations]

Thanks, Kina. Good morning, everyone, and thanks for joining us on the call. With us today are Tom Joyce, our President and Chief Executive Officer; 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 Quarterly Earnings. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events & Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until July 26, 2018.

During the presentation, we will describe certain of the more significant factors that impacted the 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 2018 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 are 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 might 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, except as required by law.

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

[Tom Joyce, President and Chief Executive Officer]

Thanks, Matt, and good morning, everyone. Before we discuss our second quarter performance, I would first like to provide more details about this morning's announcement that we intend to spin-off our dental business into an independent publicly traded company. We expect this transaction to be tax-free to Danaher shareholders and to close in the second half of 2019.

We'll refer to this new entity as DentalCo for the time being and it will be comprised of Danaher's current dental segment, operating companies, which consists of Nobel Biocare, Ormco and Kavo Kerr. These businesses together generated 2017 revenue of nearly $3 billion, had gross margins of approximately 55% and EBITDA margins in the high-teens. DentalCo will be a premier global partner for the dental community with industry leading brands providing world-class innovation, service and solutions for customers.

We believe this business is well positioned in attractive markets with compelling secular trends that include improving standards of dental care in emerging markets, digitalization of the dental practice and the increasing importance of dental aesthetics and implant solutions.

DentalCo will have a global team of approximately 12,000 associates and will be headquartered in Southern California. The company's strong leadership team will include a number of experienced Danaher executives. Amir Aghdaei, who as group executive has had responsibility for our dental segment for the last 3 years, will become president and CEO of DentalCo.

Two other Danaher leaders will also serve alongside Amir on DentalCo's Board of Directors, while retaining their roles at Danaher. Dan Daniel, Danaher's Executive Vice President, currently overseeing the diagnostics and dental segments; and Daniel Raskas, Danaher's Senior Vice President of Corporate Development. In addition, our Chief Financial Officer, Dan Comas, will serve as a Special Advisor to DentalCo Post-Spin.

Over the past couple years we’ve highlighted the progress that Amir and the team have made on a number of key metrics. They’ve done an outstanding job of helping to better position our Dental segment for long-term success and what is recently been a challenging and changing market environment. This is certainly evident in Dental' second quarter results which will run through shortly. Through a combination of recent growth investments and productivity initiatives along with the team's strong commitment to continuous improvement and the Danaher business system, the Dental segment is in a much better position today than it was just a few years ago.

Since 2015, Dental's gross margins have increased by more than 100 basis points, while general and administrative costs are down nearly 50 basis points. We consolidated a number of operating companies from 10 to 3 and reduced the business's manufacturing and back office footprint, but 30%. Dental’s R&D spend as a percent of sales is up more than a 100 basis points as we continue to invest in new product development across the portfolio.

And at Nobel Biocare, are nearly $1 billion implant business, we’ve increased R&D spend by approximately 20% launched more than 25 new products and increased the sales force by 15%. These actions have put our Dental business in a better position to accelerate its growth trajectory and drive continued margin expansion.

So today’s announcement is an important step towards realizing even greater potential for both Danaher and our Dental platform. We believe that our Dental business can be more impactful as a standalone entity with greater focus around organic and inorganic investment opportunities, including M&A, and that this combination to support an attractive earnings growth profile for the business going forward. This opportunity reminds us of the Fortive spin off, we completed a couple of years ago, which is generated a tremendous amount of value not only for the businesses but for shareholders as well. Most importantly and much like Fortive, we expect the Danaher Business System to continue to have meaningful positive impact on DentalCo.

Across Danaher, we’re continuously committed to maximizing the long-term value for all our shareholders, customers and associates. And the establishment of our Dental business as an independent company creates a tremendous opportunity for us to deliver on that commitment. We look forward to helping Amir and the entire Dental team for success as they become an independent public traded Company.

As per Danaher, over more than a decade, we’ve built our Product Identification, Water Quality, Diagnostics and Life Sciences platforms both organically and inorganically. These platforms share a number of common characteristics that comprise about standing brands of industry leading positions. Each of high percentage of consumables revenue that is considered captive to pursue mostly direct go-to-market strategies and they share attractive growth profiles. Our strategy will continue to focus on building around these platforms to strengthen our portfolio and competitive position as a multi industry science and technology company.

Now let’s turn to our second quarter results. We had an outstanding quarter with the team delivering results ahead of expectations. We achieved 6% core revenue growth, healthy margin expansion, mid-teens adjusted earnings per share growth and strong free cash flow. Our performance was broad-based and we were particularly pleased this quarter with the number of our businesses that delivered 5% or better core growth. This marks our third consecutive quarter of 5.5 or better core revenue growth. And we believe we're taking market share across many of our businesses. These share gains are part of the payback we're seeing from recent growth investments and the team's strong execution utilizing the Danaher business system.

We're using DBS growth tools to develop and deliver better products for our customers, and in turn, enhance our competitive position in the markets we serve. You'll hear a few examples today of how we're doing this and taking share across our portfolio.

Turning to our second quarter results. Sales increased 10.5% to $5 billion with the impact of currency translation increasing revenue by 2.5% and acquisitions adding 2%. Core revenue was up 6% with 4 of the 5 platforms delivering mid-single digit for better core growth.

Second quarter adjusted diluted net EPS was $1.15, representing 16% growth year-on-year. We generated $1.6 billion of free cash flow year-to-date resulting in more than 20% growth year-on-year and a free cash flow to net income conversion ratio of 120 -- excuse me, 127%. Our outstanding cash flow generation sets us up well for additional capital deployment in 2018.

Geographically high-growth markets revenue was up high-single digits with China leading the way. In developed markets, we saw mid-single digit growth in both North America and Western Europe as both regions have gained momentum since the beginning of the year.

Our gross margin for the second quarter was 56.6%, an all-time high and up 160 basis points year-on-year, while core operating margin expanded 105 basis points. Our terrific margin performance was driven by a combination of higher core growth and good execution particularly across our Life sciences and Diagnostics platforms.

Now let's take a more detailed look at our second quarter results across the portfolio. In Life Sciences, reported revenue increased 16% and core revenue was up 7.5%. Reported operating profit margin increased to 18.2% with core margin improvement of nearly 300 basis points. This is the 8th consecutive quarter of more than 100 basis points of core margin improvement, driven by the team's outstanding DBS execution.

Segment Life Sciences delivered high-single digit core revenue growth with broad-base strength across prior clients and regions led by developed markets and China. Segment continued to benefit from strong new product introductions like CytoFLEX LX and flow cytometry and the Biomek i-Series in automation. These differentiated offerings coupled with the strong go-to-market focus and execution in biologics and genomics help drive Beckman's above market growth during the quarter.

At Leica Microsystems, low double digit core revenue growth was driven by strength across North America, Western Europe and China, and solid demand across all major end markets. Leica had positive results across each major product line with good momentum from new product launches like the ARveo Digital Augmented Reality Microscope which provide leading imaging technology for the most complex surgical procedures in the medical end market. Leica's effective application of DBS growth tools have helped the team develop several important new products and improve their commercial execution, a powerful combination that's been a key competitive differentiator for Leica.

Core revenue at SCIEX increased at a high-single-digit rate with strength in North America and China, driven by the pharma and clinical testing markets. The SCIEX team is focused recent innovation initiatives on attractive end market opportunities in mass spectrometry like biologics and food testing, producing unique workflow solutions but enhance our competitive advantage and drive continued market share gains.

At Pall, the team delivered mid-single-digit core revenue growth with similar results across both our Life sciences and industrial businesses. Growth was broad-based globally and the team continued to build a strong order book across the business. Biopharma and microelectronics led the way each delivering double-digit core revenue growth in the quarter. And we saw a good momentum in our process and industrial business driving mid-single-digit core growth and strong order trends.

Our most recent acquisition, IDT, is off to a great start and increased revenue at double-digit rate during the quarter. The team's DBS integration is already facilitating key commercial enhancements and cost efficiencies and we’re excited about this early progress at IDT.

In our Diagnostics platform, reported revenue was up 7.5% with core revenue growth of 5%. Reported operating margin increased to 17.7%, including 150 basis points of core margin expansion. Beckman Coulter grew at a low-single-digit rate led by strength across high growth markets. By product line, our immunoassay and chemistry businesses continued to perform well. And we had several exciting new product launches in our hematology business in the second quarter, including the DxH 520 analyzer for low volume settings and the DxH 900 analyzer for high volume with a first of a kind early sepsis indicator.

These new analyzers are faster and easy to use with a much smaller footprint. The early sepsis indicator alerts clinicians to an infection sooner of critical capability given the life threatening nature of sepsis. These new hematology solutions are important additions to enhance Beckman’s competitive position in the diagnostics market.

Looking across the rest of our diagnostics businesses, Radiometer, Leica, Leica Biosystems and Cepheid each delivered high-single-digit core revenue growth during the quarter. We saw continued strength in North America, Western Europe and China and growth across most major product lines at each of these three operating companies.

Across our Diagnostics platform, recent growth initiatives have focused on improving R&D and sales and marketing processes using DBS growth tools like accelerated product development and sales funnel management to help us develop and deliver better solutions for our customers. At Leica Biosystems, we've gained good early traction in a number of recent launches like the BOND RX Advanced Stainer and the PELORIS III Tissue Processing System.

At Cepheid, the team's improved commercial execution and continued menu expansion with new tests like the Group A's Strep Xpress test were key drivers of the business's double digit growth in developed markets. This combination of innovation and commercial improvements using DBS helps us expand and differentiate our offerings and contributed to share gains across these businesses during the quarter.

Turning now to our Dental segment. Reported revenue grew 4.5% with core revenue growth of 2%. Our operating profit margin declined to 14.3% and core margins were down 125 basis points due to continued investment spend and productivity initiatives across the platform. Our traditional consumables and equipment business grew for the first time since 2016 and we saw early signs of end market stabilization through the quarter. Growth in China and Western Europe was partially offset by modest declines in North America where inventory adjustments in the distribution channel moderated versus recent quarters.

Nobel Biocare led the way in specialty consumables with mid-single digit core growth, driven by good execution in North America and China. Our orthodontics business, Ormco, grew low-single digits. Last month, Ormco launched a full-scale clear aligner system in Australia called Spark, which has received very positive feedback from doctors and patients. Spark aligners combined at Ormco's market leading expertise in creating digital treatment plan with the highly aesthetic orthodontic treatment options. Spark enables Danaher to treat a broad range of patients including those with complex cases. We're pleased with Spark's initial progress in Australia and expect to build upon this early traction to expand our offering going forward.

Moving now to our Environmental & Applied Solutions segment. Reported revenue was up 11% with 7% core revenue growth. Reported operating margin declined modestly to 23% and core operating margin declined 50 basis points as a result of accelerated growth investment and productivity initiatives across the platform. We believe these growth investments have helped to sustain and expand our share gains across the segment.

In product identification, core revenue increased at a mid-single digit rate as we saw continued share gains in our marking and coding business. Videojet's core revenue was up high-single digits and all major regions and product lines generated mid-single digit growth or better during the quarter.

At our Water Quality platform, core revenue was up high-single digits with the strength of performance broad-based across our water treatment and analytical instrumentation businesses. Hach's core revenue increased at a double digit rate of solid momentum in both the municipal and industrial end-markets. Robust results in the high growth markets was driven by continued demand in China as a result of their active project pipeline. Additionally, Hach's recent innovation investments have focused on our offerings in servility, medical and software solutions. Recent product launches in these areas are helping to drive Hach's continued above market growth rate.

Last year, we highlighted Hach's rel0065ased of the Claros Water Intelligent system, a software platform that brings together instruments, data and process management to provide customers a valuable operational insight to manage their water processes in real time. The Hach team uses DBS growth tool like agile software development and commercial launch excellence to enhance Claros capabilities and functionality and to make important go to market adjustments that improve targeting and messaging to drive better commercial performance. Claros is just one example of how Hach is harnessing the power of DBS to accelerate growth and enhance Hach's leadership position in the market.

The chemistry mid-single-digit core revenue growth was driven by similar results across the developed and hybrid markets, by end market growth and commercial facilities and primary metals was partially offset by software results in chemical and food and beverage.

Lastly, Trojan’s core growth was up high-single-digits with bookings and revenue growth continuing to benefit from momentum in the North American municipal markets. Good commercial executions and recent new product introductions are enabling the team to sustain a strong customer win rate and we believe Trojan gain further market share.

So to wrap up, we’re extremely pleased our second quarter results. Our performance is a testament to the team’s execution and passion for continuous improvement helping us deliver 6% core revenue growth, mid-teens EPS growth, 105 basis points of core operating margin improvement and a 22% increase in year-to-date free cash flow. We’re particularly pleased with our continued strong performance on the top-line as DBS growth tools and investments and innovations are helping us to take share in many of our businesses. We’re also very excited about our announcement that will be spinning off our Dental business into a standalone publicly traded company. We think this is an important step to help both Danaher and the Dental business realize greater potential and maximize value for our shareholders, customers and associates.

As we look ahead, we believe the strength of our portfolio combined with the power of the Danaher business system provide us with the foundation to deliver long-term shareholder value creation. We’re initiating third quarter adjusted diluted net EPS guidance between $1.05 and $1.08, which assumes core revenue growth of approximately 4% to 4.5%. We are raising our full year 2018 adjusted diluted net EPS guidance to a range of $4.43 to $4.50 versus our previous range for $4.38 to $4.45. And now expect to achieve mid-single-digit core revenue growth for the full year.

[Matt Gugino, Vice President of Investor Relations]

Thanks, Tom. That concludes our formal comments. Kina, we’re now ready for questions.

[Operator]

Thank you. [Operator Instructions]. We’ll now take our first question from Tycho Peterson from JP Morgan. Please go ahead. Your line is open.

[Tycho Peterson, JP Morgan]

A nice quarter. Tom, I want to start with the decision has been Dental now, I guess, given the market pressures, it seems a little bit early, I think the most of our investor discussions people expected this would come in the next couple of years. So I know you've a year to prep. But is this increased confidence in the market picking up? And can you talk a little bit about what needs to happen to get the business ready? And also any comments you want to make on M&A strategy post in and thoughts in a distribution channel 50-50 -- direct distribution rate model long-term for that business?

[Tom Joyce, President and Chief Executive Officer]

Tycho, good morning, and thank you. I think as you heard us update you over the last, really couple of years or more, we've made terrific progress in the business. And as happens in some challenging businesses and market situations, it does take some time but we are now seeing the benefits of that work. We're seeing those results and early indicators around improved cost structure. The growth investments that we made there are now generating some improved growth in our position in the market, improved competitive position. And I think if you've seen on a relative basis where we can show some outperformance. And so I think in many respects, this is really about the progress that we've made and getting our business to a point where we think it really holds a great potential for that progress to manifest itself and to get them on a shareholder value creation overtime.

In addition, I think from a market perspective, the dental market has clearly begun to stabilize. And we think a year from now it will be in an even better place. And so with another year similar to what we did at Fortive, we have an opportunity to get the team ready and to ensure that we have all the appropriate steps completed to be a successful profitable company launch just as we did with Fortive. As a standalone company and clearly off a smaller base, acquisitions in organic investments will have a magnified impact on the business, and of course you've seen that at Fortive as well. Acquisitions in the $100 million to $250 million deal range can really move the needle. And some of the investments that we've made organically around things like the IO scanner, the work that we're doing on clear aligners now, those are all going to be more impactful overtime.

So we think this is a great opportunity to create long term value for shareholders. It's got a -- what we think is a very attractive earnings profile coming off of low-single digit core revenue growth, solid operating margin expansion with opportunity, plenty of opportunities to go.

And in terms of your question about capital and M&A, we're going to set this up as you -- I hope you would expect as an investment grade business with the capabilities to deploy capital through M&A. And certainly in a way that it doesn't hold us back, we continue to be focused on deploying capital at Danaher over the next year and beyond.

So this remind us a lot of afford both in terms of timing and in terms of the long term shareholders value creation opportunity whether it's the comparison between the industrial cycle timing in the dental market recovery or the performance of our business getting better and being able to run the Danaher playbook consistently in an independent business.

Lastly, your question about distribution, I mean this is the business obviously that has a little bit more of a skew towards going through distribution. Albeit 50-50, Danaher post Dental would be more skewed towards direct more like 75-25, and the distribution channels always going to play an important part I believe in the dental business. But at the same time those direct businesses are superb. And we love those because of the intimacy they have with customers. So I think all in, while the channel structures may evolve slightly overtime, I think both the business and the market are in a much better shape today than they've been in recent times.

[Tycho Peterson, JP Morgan]

Okay. And then for a follow up, I just want to go back to the quarter for a minute. And if you could just help us bridge the 4% guide with the 6% result, I know you're firing all cylinders, but can maybe just talk if they were sources of supplies are upside relative to your own expectations. Obviously Life Sciences did well against the tougher SCIEX comp, both Environmental & Applied up 7% as well. So can you maybe just talk through some of the underlying momentum in the businesses?

[Tom Joyce, President and Chief Executive Officer]

Sure. Well, I tell you we have terrific momentum in the businesses. As I mentioned 4 out of 5 segments clearly at mid-single-digits and above all of the segments in addition to Dental outperforming our expectations. Good performance. That was a combination of both commercial execution and new product innovation pretty much across the board. As it relates to how we look at the quarter ahead, yes, there’s a little bit of moderation in our Q3 growth rate relative to Q2. There’s probably a 100 basis points of tougher comp in Q3 versus Q2. And yes, as you say, we fired on every cylinder in Q2. And we think it’s probably a little bit prudent to be a bit cautious in our outlook given some of the trade related matters. I’m sure we’ll get into this here shortly and then some of the broader macro uncertainties if you will. We still remain optimistic about the future. But I think the combination of little bit tougher core growth and it had bit of caution in the macro outlook was prudent relative to the third quarter and balance year guide.

[Tycho Peterson, JP Morgan]

Okay. And just to clarify the $0.01 to $0.02, is that from the tariffs and out of the $0.06 to $0.07 headwind in the back half of the year. Is that the right math?

[Matt Gugino, Vice President of Investor Relations]

Yes. The right way to think about that Tycho is on currency versus April, the strengthening of the dollar, probably hit our revenue, second half revenue, about $250 million at a 20% fall so that’s about $0.05, and there is about a penny a quarter of transactional impact from the tariffs. Now that’s before any counter measures and we’re working on a bunch of things, but it's probably going to take a little bit of time for us to get some of those counter measures in place.

[Operator]

Our next question comes from Scott Davis from Melius Research. Please go ahead. Your line is open.

[Scott Davis, Melius Research]

I applaud the decision to spin Dental. It seems to work in the past 4 years so good luck with that. I wanted to backup a little bit. I can’t recall seeing the stronger numbers out of Leica and Hach, just those two businesses explicitly you called out as having new products. And how does -- to help us understand that product cycle a little bit better, I don’t remember in the past team that kind of outgrowth. Was there -- are there timing issues where in fact maybe we should see this moderate a bit or is there’s been some or these products so different or special that this is somewhat game changing for likely better orders?

[Tom Joyce, President and Chief Executive Officer]

Scott these -- both Leica Microsystems and Leica Biosystems as well as Hach, our businesses that have strong track records over a long period of time of creating the market leadership positions that they have created on the back of exceptional products and product differentiation and competitive advantage. We have made some significant progress across not just these businesses but a number of businesses over the last couple of years in improving the approaches that we take to bringing in innovative ideas from the end user and then to execute on those ideas in a more timely and cost effective way. And I think what you're seeing not just in the businesses that you asked about but really across the number of our businesses, the manifestation of a couple of years of work in improving the execution from that front end to bring ideas in all the way to the backend execution and launch and commercialization. Leica, in particular, Microsystems has broadened their new product innovation scope beyond what historically has been a confocal launch cycle. And I think that's making a real different.

At Leica Biosystems, what I mentioned there whether its microtomes, tissue processors, advanced strainers, all of those things are product of a number of process related steps using the tools of DBS to do those simultaneously as appose to somewhat more sequentially. And at Hach, a business that now it's focused much more on ensuring that we deliver higher quality answers to customers through data and data analytics, information and the clearer software system. I think you saw anything to combination of hardware, consumables and data and analytics that is further differentiating that business. So it's a variety of different things but I think the general theme across Danaher has been improving new product execution all the way from the frontend to the backend.

[Scott Davis, Melius Research]

Okay, fair enough. And then I know you -- it's early days in this pair of trade non-sense. But when I think it’s some of your businesses where you're buying a fair amount of components from Asia or even shipping in from Asia to developed markets. Can you start to prepare the markets for price increases to pass that stuff through? I mean how -- if your competitors have similar dynamics, I imagine they do, but I don't know entirely. How do you start to think about at least whether it's through distributors or otherwise getting playing the ground work at least for the fact that you're probably going to have to raise the prices at some point?

[Tom Joyce, President and Chief Executive Officer]

Scott, as you can imagine we're sort of in the early days of all of that. We don't feel that we're in the cross-hairs of where they're really going after but, and in fact there is no one business at Danaher that has a significant impact, but it's a bunch of middle impacts across all the businesses and that adds up to that roughly sort of penny a quarter impact.

We're really thinking about countermeasures in four different ways: one would be price; two would be thinking about supply changes; three would be thinking about modification manufacturing locations because we can hit tariffs both ways U.S. to the China and China to the U.S.; and then fourth, there are opportunities sort to seek exemptions around certain areas around the tariffs. They've actually just outlined the process to do that. So I think between those four categories including price, it'll take us a couple of quarters. I think we'll be able to bring that number down. I think the broader question is here does it have a larger impact to the macro environment? And that's more of a -- that's outside the realm of my specialty.

[Scott Davis, Melius Research]

Mine as well. Okay. Thank you, guys.

[Tom Joyce, President and Chief Executive Officer]

Thanks, Scott.

[Operator]

Our next question comes from Ross Muken from Evercore. Please go ahead. Your line is open.

[Ross Muken, Evercore]

Good morning, guys, and congrats on both the fantastic quarter and the spin. Maybe first you called out sort of pharmaceutical strength look like math spec as well had a fantastic quarter. It feels like at least last event using gain share in kind of that market and you had really strong product momentum. Maybe just give us a little color on kind a how you're thinking about pharma overall given some of the noise in that market seems like you're growing right through it and it seems like also on the product cycle or share basis. That's an area for outperformance.

[Tom Joyce, President and Chief Executive Officer]

Thanks, Ross. We feel very good about the life science end markets right now. Generally, coming across the board, they look very healthy to us and we are executing quite well in those life science and market. Specifically around your question on pharma or biopharma, it is normalized, yes, is one way to think about it. A year ago, you saw some softness in that market, you saw issues with a couple of big customers, not just ours, but customers that were broadly served through the market, you saw some inventory adjustments. I think a lot of that is past now. So I think we’re in a market that is sort of returned to normal. But normal in the case of biopharma means a very good growth market and you saw that based on the broad-based strength at Pall. Certainly the exposure we have the biopharma at Beck LS, at SCIEX and Mol Dev, all would indicate that things are very much tracking as you would expect in the biopharma market with double-digit growth in Pall, in the biopharma market led by continued strength and single-use technology. So I mean we’re in a very, very good place in a strong market.

On the broader pharma side small molecule continued strength in China certainly due to generic drug regulations. And I would say generally steady growth in the developed markets. Outside of those specific areas around LS, if you think about the applied market, pretty solid there certainly food testing continues to be a good market. The academic market is pretty solid, China up nicely. We don’t have, as you know, we talked about this in the past. A lot of direct funding that comes from NIH. But NIH funding obviously trickles down to the market and the increase in NIH funding should bode well. And then in the areas where we have a bit more of, you might say industrially oriented exposure in life science. For example, if you looked at our mid single-digit core growth at Pall Industrial, good performance there. Market, I think, is pretty steady. But our performance continues to improve. So I think on balance, we feel very good about the life science end markets and specifically the ones you asked about. Geographically, I think, China continues to be the strongest area with double-digit growth there. We’ve added terrific performance in China across the number of our businesses but life science across clinical academic and pharma is strong, in the developed markets pretty stable. And interestingly, just a side note, demand -- we had probably one of the best quarters in Japan we’ve had in certainly, in any kind of recent memory. So on the life science side double-digit core growth so the performance there.

[Ross Muken, Evercore]

And then maybe second, you’ve done a number of upcoming interesting transactions last few years that were highly growth accretive and it seems like you’re doing quite well. So maybe just an update on IDT, which seems to be after a very strong start in Phenomenex, it seems like Cepheid also had another good quarter. And how you feel like sort of post spin, it feels like the RemainCo, the traditional Danaher that this year would have been growing north of 5. How do we think about the new growth profile of kind of the business now, the Dental, which it had obviously a number of years of some challenges is going to be its own entity to kind of create value on its own? How do you think about what Danaher looks like from here on now the top-line wise at least?

[Tom Joyce, President and Chief Executive Officer]

Sure. As I mentioned very briefly in my prepared remarks and believe me I couldn't given them very more verbal high-5s. The performance at IDT has been terrific thus far. We're thrilled with what the team is doing there. It was a double digit recorded and very much what we expected. And I think that continued very good trajectory for that business. And we have lots of opportunity to improve the commercial execution of that business and continue to work on how we expand that business particularly geographically.

So we're off to a very good start. Phenomenex continuing to perform very well. And then Cepheid as you'd mentioned absolutely had a good quarter. But also again it's actually a challenging comp at Cepheid and still had a good quarter. And we expect to see Cepheid's growth rates pick up in the third quarter off the second quarter numbers. So I think each of the new acquisitions, which as you appropriately mentioned, have all been accretive to sort of the fleet average core growth of the business prior to your acquisition, all those are tracking quite well.

As we think about Danaher going forward, I think there are a number of factors that I think will contribute to improving our growth profile and are contributing today. Clearly, acquisitions, we just talked about those, but it is about our day in and day out execution as well in businesses that we've owned for some time. And we see continued good performances for businesses that we've owned for 3 or 4 years and businesses that we've owned for 10 and 12 years and more. And so that day in and day execution and, particularly around new product innovation that I just mentioned to Scott, is a contributor. We think we positioned the portfolio in exceptional markets, Life Sciences, Diagnostics, Water Quality, proliferation of packaging and packaging configurations around the world, all of those are terrific positions to be in and with the strong position in the high growth markets. And each of those secular drivers I just mentioned contributing in a magnified way in the high growth markets we think we have a great position there.

And then finally, the balance sheet remains in terrific shape. We will virtually paid off a good deal if not all of IDT already this year. And so the balance sheet is ready willing enable to get after continued deployment. And obviously our bias would be to continue to look for opportunities where near term and, certainly long term growth prospects are at or accretive to the portfolio. So I think it's a combination of things as we think about the portfolio ahead.

[Operator]

Our next question comes from Doug Schenkel from Cowen. Please go ahead. Your line is open.

[Doug Schenkel, Cowen]

Okay. Thank you and good morning.

[Tom Joyce, President and Chief Executive Officer]

Good morning, Doug.

[Doug Schenkel, Cowen]

In your prepared remarks you noted that Europe and North America have gained momentum since the beginning of the year. Are there any key end markets or product areas that are worth noting in a little more detail? And how would you characterize the outlook for this building momentum to be sustained moving forward, especially given some of the mix macro data coming out of Europe?

[Tom Joyce, President and Chief Executive Officer]

Doug, looking at geographically in the developed markets, I mean, it was pretty broad-based across the portfolio. Just thinking about a couple of businesses that just to name a few that grew double digits in North America in the quarter, in Life Sciences like Microsystems grew double-digits. The other businesses in North America were mid-single-digit growth or slightly better in the case of Europe life science businesses across the board, we’re pretty well solidly in the mid-single-digits. If we look in Diagnostics, clearly Leica Biosystems performed well in both of those markets, Cepheid in both of those markets. So it’s hard to pick out businesses where there was some particular weakness in the developed markets. And that’s not to say that they’re all at the same rate. But generally, as I look across each of the businesses there was quite broad-based.

[Matt Gugino, Vice President of Investor Relations]

Maybe I would add, clock tend to be a reasonably good bellwether because they get both to the industrial and to sort of the government, the municipal side of it. And they were up, I think, high-single-digits both in the U.S. and Europe in the quarter. Some of that's clearly share. We don’t think the markets growing that well. But it does suggest reasonable stability in those regions right now.

[Doug Schenkel, Cowen]

Okay.

[Tom Joyce, President and Chief Executive Officer]

If I look at another say broad-based player just in a very macro, in context, Doug, if I look at Videojet, mid-single-digit growth solidly, so in North American and actually double-digit growth in Europe, and that’s in the quarter, I mean that’s not necessarily the long-term there, but the point in time good performance.

[Doug Schenkel, Cowen]

Okay, that’s helpful. And just for my follow-up and quickly flipping through the 10-Q this morning, it appears pricing was more of a tailwind this quarter than we seen recently in both Life Sciences and EAS, anything to talk about there really. What were the key drivers? Was there anything related to tariffs say price increases that were dropped into the quarter although I would think that would be pretty early? And then how are you factoring this into guidance for the balance of the year?

[Tom Joyce, President and Chief Executive Officer]

Doug, that's unrelated to tariffs. I mean, we clearly are seeing the benefit on the industrial side and you’ve seen that tick up both across our water and PID business. In the healthcare businesses, it has been more challenging. It was a little bit better sequentially. Those businesses, I think will remain challenging to get a lot of price and we’ll continue to be leaning more on the industrial business for price. So I think it’ll take a little bit of time but hopefully we’ll get a little bit more price as potential offset to the tariffs. But that’s not going to kick in here in Q3.

[Operator]

Our next question comes from Steve Beuchaw from Morgan Stanley. Please go ahead. Your line is open.

[Steve Beuchaw, Morgan Stanley]

In the backdrop of the really strong operational performance and interesting transformational opportunity for Dental, I wonder if we could get an update on a question that has been in a more to forefront over the last several months, which is capital deployment for RemainCo. I wonder to what extent it any does the management bandwidth commitment associated with getting Amir and the team ready to Spin. Does that in anyway impact your thinking about capital deployment? And if you could give us any broad-stroke views on how your views on how capital deployment should be executed this year that would be really helpful.

[Matt Gugino, Vice President of Investor Relations]

Sure, Steve. We remain absolutely committed to continuing to deploy our free cash flow and beyond in the interest of the 4 platforms that we will have in RemainCo over the next year. Life Sciences, Diagnostics, PID and Water all stand at the front of the line for capital deployment. And so that has been and will continue to be our bias. As was the case for every during the period, the similar periods, the year that we work to stand at Fortive, we continue to have that bias and focused on deploying capital. So nothing really changes about either our commitment to or our ability to deploy capital in the interest of those 4 platforms going forward. So we feel good about where the balance sheet sits today and we see some interesting opportunities in the pipelines that we continue to review.

[Steve Beuchaw, Morgan Stanley]

Okay, great. Good to hear. And then just two very similar points I wanted to follow up on the businesses. First is a SCIEX, you called out clinical as a growth driver. Once upon a time there were some reimbursement changes that were tougher to clinical business. Can I take your comments to mean that is that part of the business in applied clinical to that not really working now subsequent to those changes maybe. Does that include any benefit from the Topaz launch? And then on Dental, I wonder if you could give us just an update on what you're thinking about organic growth or core growth for the back half of this year and given some of the comments that you made about the improving trends, stabilizing trends that you see in this space? Thanks so much.

[Tom Joyce, President and Chief Executive Officer]

Sure, Steve. So on SCIEX, you're right, we did comment specifically about clinical. And the reference that you made just for others on the call, I know, you're knowledgeable to Steve. Around reimbursement really had to do with what the industry knows and we referred to pain panels or pain management, and changes in reimbursement that go back couple of years now had an impact on portion of the SCIEX business associated with testing for pain management. And as that reimbursement change we sought some slowdown, some declines actually in that clinical business. We have rounded the corn on that if you will. We lap over those comps now. So to some extent we have an easier comp as that reimbursement dynamic is now behind us. And we'll see some incremental growth in our clinical business overtime. And yes, we're very pleased with how Topaz has come out of the blocks. So somewhat early days post that launch, but that and other new product introductions at SCIEX are continuing to contribute to good growth.

And relative to Dental going forward and in the back half, I think our view continues to be that that will be a low-single-digit growth rate in the back half. Again, we saw some early indications that we'll see some incremental growth and we saw that in the second quarter. But it still going to be a low-single digit growth as that market continues to stabilize. But our continued improvement in our performance associated particularly with new product innovation and good commercial work. We think even in the face of what may still be a challenging end market should certainly have us on an improving track.

[Steve Beuchaw, Morgan Stanley]

Really appreciate all that. Thank you.

[Tom Joyce, President and Chief Executive Officer]

Thanks Steve.

[Operator]

Our next question comes from Derik De Bruin from Bank of America Merrill Lynch. Please go ahead. Your line is open.

[Derik De Bruin, Bank of America Merrill Lynch]

Dan, good morning.

[Dan Comas]

Good morning.

[Derik De Bruin, Bank of America Merrill Lynch]

Couple of questions. So just noticed that Cepheid grew high-single digits this quarter, which certainly is lower than it has in the most recent quarters. Just -- can you guys talk about anything unusual there comps just moving from that? And I’ve got a follow-up.

[Dan Comas]

Sure, absolutely. And sorry, I just made a big -- just a path in reference to that, just a couple of minutes ago. Yes, Cepheid grew high-single-digits, actually, a number of very positive factors in terms of new customer acquisition and penetration of new products behind that high-single-digit number. But you’re right lower than the trend line we had. That’s really just a function of challenging comp in the high growth markets or what was formerly referred to as the HBDC or hybrid and developing countries arena. We had some pretty big numbers a year ago on that in one market in particular. And so we fully expected that Cepheid will return and we will see an uptick in that growth in the third quarter back to the 10% range or better that we’ve seen in the past.

[Tom Joyce, President and Chief Executive Officer]

Derik, if you look at the business ex-HBDC and that’s out of 20%, we’re up mid-teens in the core business.

[Derik De Bruin, Bank of America Merrill Lynch]

Okay. That’s actually the number that's why I was looking for. Great. That makes sense, because you know and if I remember correctly, big NDA order last year or China order?

[Tom Joyce, President and Chief Executive Officer]

Yes.

[Derik De Bruin, Bank of America Merrill Lynch]

Okay. That puts it into the perspective. And as we’re sort of at mid-year, have you seen any pushback from hospital labs on due to PAMA, just sort of thinking about what capital spending at the hospital labs and just thinking about. Are they working their budgets that they're pushing back to some sort of update now that we have some time to digest?

[Tom Joyce, President and Chief Executive Officer]

Sure. They are clearly watching their budgets. And there are certain situations where we’ve seen some pricing pressure. But I think as I mentioned, right, when PAMA became a reality, Derik, in many respects, this is sort of standard operating procedure in the diagnostics market at least in the large central lab. There is always been a basis for some level of pricing pressure, particularly when you are seeking either new business or renewing your existing business. And so there’s certainly some of those dynamics aren't put, but in the overall scope of our Diagnostics platform and relative to margins, the impact is very, very modest to marginal.

[Operator]

Our next question comes from Steven Winoker from UBS. Please go ahead. Your line is open.

[Steven Winoker, UBS]

Dan, I just, first want to follow up on the tariffs comments you made. That tariffs that you’ve contemplated, is that the only the $50 billion so far or includes the other $200 billion on top of that?

[Dan Comas]

That’s the higher number.

[Steven Winoker, UBS]

The higher number, okay. And presumably, should that go to the full about beyond the $200 billion. Have you take, right, not the demand factor. We can’t -- and so we do not, I mean, I don’t know if we can double it, we don’t -- have you quantify that yet?

[Dan Comas]

We’re taking it like you guys as it comes hourly.

[Steven Winoker, UBS]

Okay.

[Tom Joyce, President and Chief Executive Officer]

Sitting here at six blocks in the White House doesn’t mean we get the info any quicker than you guys do.

[Steven Winoker, UBS]

Yes, I figure one of you withstanding outside sitting with there. Anyway, okay. So now on the Dental split, Tom, I understand the rationale for that. But one of the comments you had made and we’ve seen it play out as the larger impact on M&A on a smaller entity when you do this and given the importance of M&A to the whole model and how that plays out. But why can't I extent that logic even further to the rest of what system side of RemainCo? In other words, if it's true for Dental, why wouldn't that be true for ENAS?

[Tom Joyce, President and Chief Executive Officer]

Well, I think, first of all we love those businesses in terms of their consistencies that those businesses have with the model across the portfolio. They have very similar growth profiles across the 4 platforms. You have very similar margin profiles. You have, in the most cases, much more captive levels of consumables associated with those businesses. And you have a science and technology orientation to those businesses that I think unifies them into a common business model. And so while you certainly can make a case that depending on the size of business, M&A can make more magnified difference in one versus the other. The commonality of the business model I think is what unifies the four platforms going forward.

[Steven Winoker, UBS]

Okay, that's very clear. And then just if I could on the business units on Pall, I mean, can you talk a little bit more about the puts and takes on the growth rate there around the different components? And particularly focused on some of the things that maybe kind of holding it back a little bit?

[Tom Joyce, President and Chief Executive Officer]

Well, I think we've seen as I mentioned good performance across Life Sciences with Biopharma very strong, single used technology is very strong. If it was an area in what we broadly describe is Life Sciences that wouldn't be really growing at quite the rates that we see in Biopharma and SET. It probably would be the smaller portions of the Life Sciences segment which are life science businesses at Pall which will be the lab food and beverage business and the medical businesses. And again those are smaller but obviously are not posting the same growth rates.

And then as I mentioned on the industrial side, really good performance in Micro that's been consistent for a long time. And then the fluids oriented process business, we're starting to see some better performance there and that's largely more a function of our execution. If there was a softer part of the industrial side of Pall, probably would be on the aerospace side. But we have a very strong competitive position there nevertheless.

[Dan Comas]

And Steve, as we've alluded to, bookings have been very strong. And part of that play down Q2. Q2 was 200 basis points better than Q1. And we expect another kind of comparable sort of step up here in Q3. So we feel a lot of momentum there and our shipments actually sort of understate what we're really seeing in the business today. As you know that can be a little bit more of the lag business.

[Steven Winoker, UBS]

Right, that's helpful. And then finally that core operating margin contraction in the 2 businesses Dental and EAS, in terms of you explained that that was investments and productivity spending, but how much longer should we anticipate that continuing?

[Tom Joyce, President and Chief Executive Officer]

Well, I mean, it's a little bit dependent on what we're seeing in the quarter because we saw a lot of strength by mid-quarter and businesses like Dental and EAS that had both productivity opportunities and growth opportunities, we sort to say go after to where things are trending well, so little bit of that dynamic. But I think on the EAS, we'll begin to sort to see that get better. Dental, we're going to be doing some things to really, to make like we did in Florida to make sure we're set up welcome next July.

[Operator]

Our final question comes from Brandon Couillard from Jefferies. Please go ahead. Your line is open.

[Brandon Couillard, Jefferies]

Just one question on Dental. I would be curious to hear if the channel dynamics were still a negative drag on the top-line in 2Q? And if you could elaborate kind of on traditional consumables sellout trends in both the U.S. and Europe?

[Tom Joyce, President and Chief Executive Officer]

Sure. Brandon as I mentioned, I think we’re in a much more stable environment right now, relative to the channel dynamics that you asked about. As I mentioned in my prepared remarks that what we talked about in the past about channel related inventory adjustments had moderated significantly during the course of the first half of this year. So I think the vast majority of that is behind us. I always had to take to say that we’ve never seen the inventory adjustments. Again, because I think that the distribution channels always going to be somewhat sensitive the distribution based on what sellout looks like. And so I think, in general, we’re in a much better place and the vast majority of that is behind us.

The realignment of the sort of the preferential exclusives or the unwinding of those exclusives is better said, I think now is largely behind us. There’s still obviously some ramp of new sales forces in with different distribution partners could have an impact on growth rates. But in general, I think, that’s starting to normalize as well. So I think when you take those things together and then you look at what was our core growth rate and some improving sellout, I think we’re just in a much better place today

[Operator]

That will conclude today’s question-and-answer session. I will now turn the call back to Mr. Gugino. Please go ahead.

[Matt Gugino, Vice President of Investor Relations]

Thanks, Kina, and thanks, everyone, for joining us today. We’re around all day for questions.

[Operator]

That will conclude today’s call. Thank you for your participation, ladies and gentlemen. You may now disconnect.