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Danaher Corporation (NYSE:DHR)
Q2 2018 Earnings Conference Call
July 19, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Glenna 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. If you would like to ask a question during that time, simply press * then the number 1 on your telephone keypad. If you would like to withdraw your question, please press the * followed by the 2.

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

Matt Gugino -- Vice President, Investor Relations

Thanks, Glenna. Good morning, everyone and thanks for joining us on the call. With us today are Tom Joyce, our President and 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 investor section of our website, www.danaher.com under the heading "Quarterly Earnings."

The audio portion of this call will be archived on the investor 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 July 26th, 2018.

During the presentation, we will describe certain 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 continued 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 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 law, 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. 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.

Thomas P. Joyce Jr. -- President and Chief Executive Officer

Thanks, Matt and good morning, everyone. Before we discuss our second quarter performance, I'd 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 Dental Co. for the time being. It will be comprised of Danaher's current dental segment operating companies which consist 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. Dental Co. 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 that business is well positioned in attractive markets with compelling secular trends that include improving standards of dental care in emerging markets, digitization of the dental practice, and the increasing importance of dental aesthetics and implant solutions.

Dental Co. 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 three years, will become President and CEO of Dental Co. Two other Danaher leaders will also serve alongside Amir on Dental Co.'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 Dental Co. post-spin.

Over the past couple of 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 or dental segment for long-term success in what has recently been a challenging and changing market environment. This is certainly evident in dental's second quarter results, which we'll run through shortly.

Through a combination of recent growth investments and productivity initiatives, along with the team's strong commitment to continuous improvement in 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 administrative costs are down nearly 50 basis points. We consolidated a number of operating companies from 10 to 3, and reduced the businesses' manufacturing and back-office footprint by 30%.

Dental's R&D spend as a percentage of sales is up more than 100 basis points, as we continue to invest in new product development across the portfolio. At Nobel Biocare, our nearly $1 billion implant business, we've increased R&D spend by approximately 20%, launched more than 25 new products, and increased the salesforce by 15%. These actions have put our dental business in a better position to accelerate it's growth trajectory and drive continued margin expansion.

Today's announcement is an important step toward realizing even greater potential for both Danaher and our dental platform. We believe that our dental business can be more impactful as a stand-alone entity with greater focus around organic and inorganic investment opportunities, including M&A, and that this combination will support an attractive earnings growth profile for the business going forward.

This opportunity remind us of the Fortive spinoff we completed a couple of years ago, which has 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 Dental Co.

Across Danaher, we're continuously committed to maximizing long-term value for all our shareholders, customers, and associates. 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, publicly traded company.

As for 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. They're comprised of outstanding brands with industry leading positions. They each have a high percentage of consumables revenue that is considered captive. They pursue mostly direct go-to-market strategies. They share attractive growth profiles. Our strategy will continue to focus on building around these platforms to strength 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. 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 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 or 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, resulted in more than 20% growth year-on-year, and a free cash flow to net income conversion ratio of 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 eighth consecutive quarter of more than 100 basis points of core margin improvement, driven by the team's outstanding DBS execution.

Beckman Life Sciences delivered high single-digit core revenue growth, with broad-based strength across product lines and regions led by developed markets and China. Beckman continued to benefit from strong new product introductions, like CytoFLEX in Flow Cytometry and the Biomek i-Series in Automation. These differentiated offerings, coupled with a strong go-to-market focus and execution in biologics and genomics, helped 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 provides leading imaging technology for the most complex surgical procedures in the medical end-market. Leica's effective application of DBS growth tools has helped the team develop several important new products and improved 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 has focused recent innovation initiatives on attractive end-market opportunities in mass spectrometry like biologics and food testing, producing unique workflow solutions that 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 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 a 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.

At our diagnostics platform, reported revenue was up 7.5%, with core revenue growth of 5%. Reporting 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, a 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 gained good early traction in a number of recent launches, like the BOND RX advanced stainer and the Peloris 3 tissue processing system. At Cepheid, the teams improved commercial execution and continued menu expansion with new tests like the Group A strep express 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.

During 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. 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 combine Ormco's market-leading expertise in creating digital treatment plan with a highly aesthetic orthodontic treatment option. Spark enables dentists 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 solution 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 investments 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 businesses. Videojet 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, with 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 turbidity, 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 release of the Claros Water Intelligence System, a software platform that brings together instruments, data, and process management to provide customers with valuable operational insight to manage their water processes in real time. The Hach team has used DBS growth tools 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.

At ChemTreat, mid single-digit core revenue growth was driven by similar results across the developed and high-growth markets. By end-market, growth in commercial facilities and primary metals was partially offset by softer 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 America municipal market. Good commercial execution and recent new product introductions are enabling the team to sustain a strong customer win rate and we believe Trojan gained further market share.

So, to wrap up, we're extremely pleased with 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 in innovations are helping us take share in many of our businesses.

We're also very excited about our announcement that we'll be spinning off our dental business into a stand-alone, 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 of $4.38 to $4.45, and now expect to achieve mid single-digit core revenue growth for the full year.

Matt Gugino -- Vice President, Investor Relations

Thanks, Tom. That concludes our formal comments. Glenna, we're now ready for questions.

Questions and Answers:

Operator

Thank you. As a reminder, please press *1 to ask a question and please limit you're to one question and one follow-up question. We'll now take our first question from Tycho Peterson from J.P. Morgan. Please go ahead, your line is open.

Tycho Peterson -- J.P. Morgan -- Analyst

Thanks. Nice quarter. Tom, I want to start with the decision to spin dental now. I guess, given the market pressures, it seems a little bit early. I think from most of our investor discussions people expected this would come in the next couple of years. I know you have 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're willing to make on M&A strategy post-spin and thoughts on the distribution channel? Is 50/50 direct distribution the right model long-term for that business?

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

Tycho, good morning and thank you. I think as you've heard us update you over the last really couple of years or more, we've made terrific progress in the business. 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've made are now generating some improved growth in our position in the market, improved competitive position. I think as you've seen on a relative basis, we can show some outperformance. 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 hold great potential for that progress to manifest itself in significant amount of shareholder value creation over time.

In addition, I think from a market perspective, the dental market has clearly begun to stabilize. 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 public company launch, just as we did with Fortive.

As a stand-alone company, and clearly off a smaller base, acquisitions in organic investments will have a magnified impact on the business. Of course, you've seen that at Fortive as well. Acquisitions in the $100 to $250 million deal range can really move the needle. 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 over time. So, we think this is a great opportunity to create long-term value for shareholders. It's got what we think is a very attractive earnings profile, coming off of low single-digit core revenue growth, solid operating margin expansion with plenty of opportunities to go.

In terms of your question about capital and M&A, we're going to set this up, as I hope you would expect, as an investment-grade business with the capabilities to deploy capital through M&A. Certainly in a way that doesn't hold us back. We continue to be focused on deploying capital at Danaher over the next year and beyond. This reminds us a lot of Fortive both in terms of timing and in terms of the long-term shareholder value creation opportunity, whether it's the comparison between the industrial cycle timing and 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. This is a business, obviously, that has a little bit more of a skew going through distribution, albeit 50/50. Danaher post-dental will be more skewed toward direct. More like 75/25. The distribution channel is 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. I think all in, while the channel structures may evolve slightly over time, I think both the business and the market are in much better shape today than they've been in recent times.

Tycho Peterson -- J.P. Morgan -- Analyst

Okay. Then for a follow-up, I just want to go back to the quarter for a minute. If you could just help us bridge the 4% guide with the 6% result. I know you're firing on all cylinders, but can you maybe just talk if there were sources of surprise or upside relative to your own expectations? Obviously, life sciences did well against the [inaudible] SCIEX comp, but environmental applied was up 7% as well. Can you maybe just talk to some of the underlying momentum in the businesses?

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

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 100 basis points of tougher comp in Q3 versus Q2. As you say, we fired on every cylinder in Q2.

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 some of the broader macro uncertainties, if you will. We still remain optimistic about the future, but I think the combination of a little bit tougher core growth and a tad bit of caution in the macro outlook was prudent relative to the third quarter and balance of year guide.

Tycho Peterson -- J.P. Morgan -- Analyst

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, was that the right math?

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

Yeah, the right way to think about it, Tycho, is on currency versus April, the strengthening of the dollar probably hits our second half revenue about $250 million at a 20% fall through, that's about $0.05, and there's about $0.01 a quarter of transactional impact from the tariffs. Now, that's before any countermeasures 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 countermeasures in place.

Tycho Peterson -- J.P. Morgan -- Analyst

Okay, thank you.

Operator

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

Scott Davis -- Melius Research -- Analyst

Good morning, guys. I applaud the decision to spin dental. It seems to have worked in the past for you, so good luck with that. I wanted to back up a little bit. I can't recall thing strong of numbers out of Leica and Hach. Those two businesses explicitly you called out as having new products. Help us understand that product cycle a little bit better. I don't remember in the past seeing that kind of outgrowth. Are there timing issues where, in fact, we should see this moderate a bit? Or are these products so different or special that this is somewhat game-changing, for lack of a better word?

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

Scott, both Leica Microsystems and Leica Biosystems, as well as Hach, are 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.

I think what you're seeing, not just in the businesses that you asked about, but really across a number of our businesses, is a manifestation of a couple of years of work in improving the execution from that front end of bringing ideas in, all the way to the back end, execution and launch and commercialization.

Leica Microsystems, in particular, has broadened their new product innovation scope beyond what historically has been a confocal launch cycle. I think that's making a real difference. At Leica Biosystems, what I mentioned there, whether it's microtomes, tissue processors, advanced stainers, all of things are a product of a number of process-related steps using the tools of DBS to do those simultaneously, as opposed to somewhat more sequentially.

At Hach, a business that now is focused much more on ensuring that we deliver higher quality answers to customers through data and data analytics information, and the Claros software system, I think you're starting to see the culmination of a 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 front end to the back end.

Scott Davis -- Melius Research -- Analyst

Okay, fair enough. Then, I know it's early days in this tariff trade nonsense, but when I think of 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? Do you 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, laying the groundwork at least for the fact that you're probably going to have to raise some prices at some point?

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

Scott, as you can imagine, we're sort of in the early days of all that. We don't feel that we're in the crosshairs of what they're really going after. And, in fact, there's no one business at Danaher that this has a significant impact, but it's a bunch of little impacts across all the businesses. That adds up to that roughly sort of $0.01 a quarter impact.

We're really thinking about countermeasures in four different ways. One would be price. Two would be thinking about supply chain changes. Three would be thinking about modification of manufacturing location, because we're getting hit tariffs both ways. U.S. into China, China into the U.S. Then fourth, there are opportunities to sort of seek exemptions around certain areas around the tariffs. They've actually just outlined the process to do that. I think between those four categories, including price, it'll take us a couple quarters. I think we'll be able to bring that number down.

I think the broader question is does it have a larger impact to the macro environment and that's outside the realm of my specialty.

Scott Davis -- Melius Research -- Analyst

Mine as well. Okay, thank you, guys.

Operator

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

Ross Muken -- Evercore -- Analyst

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

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

Thanks, Ross. We feel very good about the life science end market right now. Generally, across the board, they look very healthy to us and we are executing quite well in those life science end markets, specifically, around your question, on pharma and biopharma. It has normalized, I guess 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 has sort of returned to normal.

But normal in the case of biopharma means a very good growth market. You saw that based on the broad-based strength at Pall. Certainly, the exposure we have to biopharma is Beckman LS, it's SCIEX, and at MolDev. All would indicate that things are very much tracking as you would expect in the biopharma market. We had double-digit growth in Pall in the biopharma market, led by continued strength in single-use technology. I think 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. 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, pretty solid, China up nicely. We don't have -- as you know, we've talked about this in the past -- a lot of direct funding that comes from NIH, but NIH funding obviously trickles down through the market and increase in NIH funding should bode well.

Then, in the areas where we have a bit more of what 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. A market that I think is pretty steady, but our performance continues to improve. 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 had terrific performance in China across a number of our businesses, but life science across clinical, academic, and pharma is strong and the developed market is pretty stable. Interestingly, just a side note, we had probably one of the best quarters in Japan that we've had certainly in any kind of recent memory. So, on the life science side, double-digit core growth. So, good performance there.

Ross Muken -- Evercore -- Analyst

Great. That's super helpful. Then maybe second, you've done a number of interesting transactions the last few years that were highly growth accretive and it seems like they're doing quite well. So, maybe just an update on IDT, which seems to be off to 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 seems like the RemainCo the traditional Danaher that this year would've been growing north of 5. How do we think about the new growth profile of the business now that dental, which it had obviously a number of years of some challenges is going to be its own entity to create value on its own. How do you think about what Danaher looks like from here on out, top line-wise at least?

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

As I mentioned very briefly in my prepared remarks, and believe me, I could've given them many 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 quarter and very much what we expected. I think a continued very good trajectory for that business. 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. Then Cepheid, you mentioned, absolutely had a good quarter. But also, against actually a challenging comp at Cepheid and still had a good quarter. We expect to see Cepheid's growth rates tick up in the third quarter off the second quarter numbers. 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 their 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, the 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. 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. That day in and day out execution, particularly around new product innovation that I just mentioned to Scott is a contributor.

We think we've positioned the portfolio in exceptional markets. Life sciences, diagnostics, water quality, the proliferation of packaging and packaging configurations around the world. All of those are terrific positions to be in. And with a 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.

Then finally, the balance sheet remains in terrific shape. We will have virtually paid off a good deal, if not all, of IDT already this year. So, the balance sheet is ready, willing, and able 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.

Ross Muken -- Evercore -- Analyst

Excellent. Thanks, guys, and congrats again.

Operator

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

Doug Schenkel -- Cowen & Co. -- Analyst

Thank you and good morning. 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 mixed macro data coming out of Europe?

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

Doug, looking at it geographically in the developed markets, it was pretty broad based across the portfolio. Just thinking about a couple of businesses, just to name a few that grew double digits in North America in the quarter. In life sciences, Leica Microsystems grew double digits. The other businesses in North America were mid single-digit growth or slightly better. In the case of Europe, the life science businesses across the board were pretty well solidly in the mid single digits.

If we look in diagnostics, clearly Leica Biosystems performed well in both those markets. Cepheid in both those markets. It's hard to pick out businesses where there was some particular weakness in the developed markets. 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 --

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

Doug, maybe I would add Hach tends to be a reasonably good bellwether because it gets both to the industrial and to sort of the government, the municipal side of it. They were up, I think, high single digits both in the U.S. and Europe in the quarter. Now, some of that's clearly share. We don't think the market's growing that well. But it does suggest reasonable stability in those regions right now.

Doug Schenkel -- Cowen & Co. -- Analyst

Okay.

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

If I look at another broad-based player, just in a very macro context, Doug, if I look at Videojet, mid single-digit growth, solidly so in North America. And actually, double-digit growth in Europe. That's in the quarter. That's not necessarily the long-term trend there, but at this point in time, good performance.

Doug Schenkel -- Cowen & Co. -- Analyst

Okay. That's helpful. Just for my follow-up, in quickly flipping from the 10-Q this morning, it appears pricing was more of a tailwind this quarter that we've seen recently in both life sciences at 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 how are you factoring this into guidance for the balance of the year?

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

Doug, unrelated to tariffs. We clearly are seeing the benefit on the industrial side. You've seen that tick up both across our water and PID businesses. 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 offsets to the tariffs. But that's not going to kick in here in Q3.

Doug Schenkel -- Cowen & Co. -- Analyst

Okay. Thank you, again.

Operator

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

Steve Beuchaw -- Morgan Stanley -- Analyst

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

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

Sure, Steve. We remain absolutely committed to continuing to deploy our free cash flow and beyond in the interest of the four 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 during the similar period, the year that we worked to stand up Fortive. We continued to have that bias and focus on deploying capital. So, nothing really changes about either our commitment to or our ability to deploy capital in the interest of those four platforms going forward. 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 -- Analyst

Okay, great. Good to hear. Then just two very small points I wanted to follow up on the businesses. First is at SCIEX. You called out clinical as a growth driver. Once upon a time, there were some reimbursement changes that were tough for the clinical business. Can I take your comments to mean in that part of the business in applied clinical that's not really working now subsequent to those changes? Maybe does that include any benefit from the Topaz launch? 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, given some of the comments that you made about the improving trends, stabilizing trends that you see in the space? Thanks a bunch.

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

Sure, Steve. On SCIEX, you're right. We did comment specifically about clinical. The reference that you made, just for others on the call, I know you're knowledgeable, Steve, around reimbursement, really had to do with what the industry knows and we refer to as pain panels or pain management. Changes in reimbursement that go back a couple of years now had an impact on a portion of the SCIEX business associated with testing for pain management.

As that reimbursement changed, we saw some slowdowns, some declines actually in that clinical business. We have rounded the corner 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 over time. Yes, we're very pleased with how Topaz has come out of the block. Still somewhat early days post that launch, but that and other new product introductions at SCIEX are continuing to contribute to good growth.

Relative to dental going forward and in the back half, I think our view continues to be 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. We saw that in the second quarter. But it's 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 fact of what may still be a challenging end market should certainly have us on an improving track.

Steve Beuchaw -- Morgan Stanley -- Analyst

Really appreciate all that. Thank you.

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 -- Analyst

Good morning. A couple questions. Just notice that Cepheid grew high single digits this quarter, which certainly is lower than it has in the most recent quarters. Can you guys talk about anything unusual there? Comps, just moving from that. Then I've got a follow-up.

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

Sure, absolutely. Sorry, I made a passing 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 a challenging comp in the high growth markets or what was formerly referred to as the HBDC or high burden developing countries arena. We had some pretty big numbers a year ago on that in one market in particular. We fully expect that Cepheid will return and you'll see an up-tick in that growth in the third quarter back to the 10% range or better that we'd seen in the past.

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

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

Derik de Bruin -- Bank of America Merrill Lynch -- Analyst

Okay. That's actually what I was looking for, great. That makes sense. Because if I remember correctly, you had a big [inaudible] order last year or [inaudible] order.

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

Yeah, we had a huge, yes.

Derik de Bruin -- Bank of America Merrill Lynch -- Analyst

Okay, that puts it into perspective. As we're sort of at mid-year, have you seen any pushback from hospital labs due to PAMA? Just sort of thinking about what's capital spending at the hospital labs and just thinking about are they watching their budgets? Are they pushing back? Just some sort of update now that they've had some time to digest.

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

Sure. They are clearly watching their budgets and there are certainly 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 diagnostic market, at least in the large central labs. There has always been a basis for some level of pricing pressure, particularly when you are seeking either new business or renewing your existing business. So, there's certainly some of dynamics are afoot, but in the overall scope of our diagnostic platform and relative to margins, the impact is very modest to marginal.

Derik de Bruin -- Bank of America Merrill Lynch -- Analyst

Great. Thank you very much.

Operator

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

Steven Winoker -- UBS Securities -- Analyst

Good morning and congrats. Dan, I first wanted to follow up on the tariff comments you made. That tariff that you've contemplated, is that only the $50 billion so far or includes the other $200 billion on top of that?

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

That's the higher number.

Steven Winoker -- UBS Securities -- Analyst

The higher number, OK. And presumably, should that go to the full amount beyond the $200 --

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

It's be bad.

Steven Winoker -- UBS Securities -- Analyst

Right. Not the [crosstalk]. So, it's not, I mean, I don't know if we can double it. We don't, have you quantified that?

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

We're taking it like you guys, as it comes hourly.

Steven Winoker -- UBS Securities -- Analyst

Okay, I'll take that as a no.

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

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

Steven Winoker -- UBS Securities -- Analyst

Yeah, well I figured one of you was standing outside seeing what's there. Intercepting the Tweets. Anyway, OK. Now, on the dental split, Tom, I understand the rationale for that. But one of the comments you've made and we've seen it play out is the larger impact on M&A on a smaller entity when you do this. Given the importance of M&A to the whole model and how that plays out, but why can't I extend that logic even further to the rest of what sits inside of RemainCo? In other words, if it's true for dental, why wouldn't that be true for E&AS?

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

Well, first of all, we love those businesses in terms of the consistency those businesses have with the model across the portfolio. They have very similar growth profiles across the four platforms. You have very similar margin profiles. You have, in 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.

While you certainly can make a case that, depending on the size of a business, M&A can make a 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 Securities -- Analyst

Okay. That's very clear. Then just if I could on the business units, on Pall, 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 may be holding it back a little bit?

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

Well, I think we've seen, because I mentioned good performance across life sciences with biopharma very strong. Single-use technology is very strong. If there was an area in what we broadly describe as life sciences that wouldn't be growing at quite the rates that we see in biopharma and SCT, it probably would be the smaller portions of the life science segment or life science businesses of Pall, which would be the lab, food and beverage business and the medical business. Again, those are smaller, but obviously are not posting the same growth rates.

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

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

Steve, as we've alluded to, bookings have been very strong and part of that played out in Q2. Q2 was 200 basis points better than Q1. 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 a lag business.

Steven Winoker -- UBS Securities -- Analyst

Right. That's helpful. Then finally, that core operating margin contraction in the two businesses, dental, E&AS, in terms of you explained it with investment spend and productivity spending, but how much longer should we anticipate that continuing?

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

Well, 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 E&AS that had both productivity opportunities and growth opportunities, we sort of said go after it because things are trending well. So, a little bit of that dynamic, but I think on E&AS, we'll begin to see that get better. Dental, we're going to be doing some things to really make sure, like we did at Fortive, to make sure we're set up well come next July.

Steven Winoker -- UBS Securities -- Analyst

Okay, guys. Thanks.

Operator

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

Brandon Couillard -- Jefferies -- Analyst

Good morning. 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? If you could elaborate on traditional consumables sell-out trends in both the U.S. and Europe.

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

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, 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 hesitate to say that we'll never see any inventory adjustments again because I think the distribution channel is always going to be somewhat sensitive to distribution based on what sell-out looks like. I think in general we're in a much better place, and the vast majority of that is behind us.

The realignment of the preferential exclusives or the unwinding of those exclusives, as better said, I think now is largely behind us. There's still obviously some ramp of new sales forces with different distribution partners that have an impact on growth rates, but in general, I think that's starting to normalize as well. 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.

Brandon Couillard -- Jefferies -- Analyst

Very good. Thank you.

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, Investor Relations

Thanks, Glenna, 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.

Duration: 63 minutes

Call participants:

Thomas P. Joyce, Jr. -- President and Chief Executive Officer

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

Matt Gugino -- Vice President, Investor Relations

Tycho Peterson -- J.P. Morgan -- Analyst

Scott Davis -- Melius Research -- Analyst

Ross Muken -- Evercore -- Analyst

Doug Schenkel -- Cowen & Co. -- Analyst

Steve Beuchaw -- Morgan Stanley -- Analyst

Derik de Bruin -- Bank of America Merrill Lynch -- Analyst

Steven Winoker -- UBS Securities -- Analyst

Brandon Couillard -- Jefferies -- Analyst

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