Danaher at DB Access Conference Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“if you go back to 2001, 2 of our 5 segments were 50% gross margins. But 70% of the company was represented by businesses that have more like a 30% gross margins. And what we really noticed for us, the difference between the 50% and the 30%, the 50%, we were, by and large, selling analytical instrumentation, often with a consumable element, often a razor-razorblade model. We really felt that the customer, the professional end user of those instruments was really willing to pay us for the technology that. They were willing to pay us for the service in a way that we couldn’t kind of replicate in those lower gross margin businesses.”

“fast forward 10, 11 years later…with our Industrial business, which were largely kind of 30% gross margin businesses, we really changed that portfolio by getting to what we called Product Identification where we’re a leader in marketing encoding again, a razor-razorblade business, a model that we really like…And then we’ve gone into 2 entirely new areas, Life Science & Diagnostics and Dental. Again, both businesses with a razor-razorblade model that you can see collectively 50% gross margin. So all 5 of our segments today are at 50% or north of 50%.”

“So how do we do that? Clearly, a lot of capital had been deployed by Danaher over the past decade. We’ve deployed about over $20 billion over the past 10 years. And you can see the number of deals, I think if you add across, there’s probably about 175 deals…actually most of our deals are quite small, often typically under $100 million. We call these bolt-on deals. But I think they’ve been really important to us. They need to bring in technology, distribution or increase our exposure to high-growth markets. ”

“what we bring to capital deployment, and we really kind of comes down to really 3 simple themes for us. One is the strategy first mentality. We don’t think about businesses first. We think about markets that we want to be in and invest in, and then we think about what are the companies within those markets that we want to attempt to acquire…Two is to have a model to run those businesses, and we think that’s a Danaher Business System. Important, not only to integrate those acquisitions, big part of what we do. We normally bring in about 15 new companies a year, but to run those businesses over the long term.

And three, to bring financial discipline. We’ve had the same metrics around our return hurdles for the last 10 years. And I think keeping that discipline has really served us well. And I think it’s that combination of those 3 factors that, at least historically, have made it successful with M&A.”

“One of the things we’ve learned, which is maybe a little bit counter intuitive, we actually have found it easier to improve the gross margin of a high gross margin business than a low gross margin business. We said, well, why — that doesn’t sound like that, makes a lot of sense.

But I think we learned, as we look at some industrial businesses, that with 30%, 35% gross margins, you went into one of their facilities, they’re often pretty well run. They were thoughtful about the supply chain. You’re owning some businesses, and this is true I think on the industrial and health care side, we’d find a 50% gross margin business, and they’re really the people in R&D and they’re really the people in sales and marketing. They didn’t have the best players running the facilities, they didn’t have the best people focused on the supply chain.”

“one of the things we’ve learned is that with new products, when you’re in a razor-razorblade business, when you come up with new instruments, new equipment that use consumables, by coming up with new products faster than your — than our competitors, we’ve been able to build the installed base faster than our competition.”

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