Please stand by. My name is Felicia. I will be your conference facilitator today. I would like to welcome everyone to the Danaher Corporation and Nobel Biocare Acquisition Conference. Today's event is being recorded. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question- and- answer session. If you would like to pose a question at that time, press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star key and the digit two. I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.
Thanks, Felicia. Good morning, everyone, and thanks for joining us. On the call today are Tom Joyce, our President and Chief Executive Officer, our Executive Vice President and Chief Financial Officer. This call will be recorded and posted on the Danaher website, www.danaher.com, under the heading Investor Events, and will remain on the website for one week. A replay of this call will also be available until September 22nd, 2014. The replay number is 888-203-1112 in the U.S. and 719-457-0820 internationally, and the confirmation code is 8605032.
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. With that, I'd like to turn the call over to Tom.
Thanks, Matt, and good morning, everyone. We are very pleased to announce that the Boards of Directors of Danaher and Nobel Biocare have reached an agreement for Danaher to make an all-cash public tender offer for all of the outstanding shares of Nobel Biocare at a price of CHF 17.10 per share, representing a total consideration of approximately $2.2 billion, including debt, transaction costs, and net of cash acquired.
This is a fantastic opportunity for our dental platform for a number of reasons. First, Nobel Biocare is a premier brand with a 40+ year history as a pioneer and a leader in innovation within the global dental industry. Nobel Biocare, based in Zurich, Switzerland, specializes in restorative and aesthetic dental solutions ranging from implants to digital planning and treatment software to high-precision prosthetics.
Nobel Biocare provides tens of thousands of dental professionals around the globe with state-of-the-art, evidence-based tooth-to-root solutions, helping to improve clinical outcomes and patients' lives. In 2013, the company generated revenues of approximately $750 million and had gross margin in excess of 70%. Nobel Biocare's solid gross margin reflects its leading brand and the value it provides to customers through high-quality, clinically supported solutions and superior service.
Nobel Biocare will be a cornerstone brand within Danaher's dental platform, expanding our dental portfolio and increasing dental platform revenues by over 35% to almost $3 billion, of which nearly 2/3 will be derived from high-value consumables. With Nobel Biocare, our dental business will become the world's leading provider of dental equipment and consumables. Nobel Biocare serves a $3.5 billion global dental implant market, which has several attractive long-term growth drivers, including aging population and increasing focus on cosmetic dentistry.
Notably, global dental implant penetration rates remain low, as many dental practitioners are just now receiving the proper training to perform these complex procedures. In the U.S. market alone, it is estimated that less than 1% of the population has received a dental implant, but more than 50% are missing at least one tooth. Nobel Biocare's product portfolio is well positioned to capitalize on these macro trends. Nobel Biocare has firmly established innovation as a growth driver, leading to several new products and solutions launched since 2012, further strengthening its position as a market leader.
Nobel Biocare has also significantly increased its presence in high-growth markets, particularly in China, Eastern Europe, and Latin America, which now generate nearly 20% of the company's revenue. This focus on innovation and the high-growth markets helped Nobel Biocare improve its core revenue growth rate over the last few years. With the application of DBS growth tools, we believe Nobel Biocare will be able to further accelerate this pace of innovation and growth in the future.
Second, Nobel Biocare represents a great strategic addition to Danaher's dental business. Combining Nobel Biocare's deep expertise in implant dentistry, digital prosthetics, and software with our existing extensive knowledge in 3D imaging, intraoral scanning, and CAD/CAM equipment will enable us to further optimize clinical workflows. This better integrated workflow will reduce office visits and treatment time for patients and practitioners, all while improving clinical outcomes.
Nobel Biocare's solutions not only complement our portfolio of digital dentistry and workflow solutions but also enhance our future product offerings, particularly related to our chairside computer-aided design and milling solutions that we announced at our investor day in June. Third, we believe the Danaher Business System has tremendous potential to increase value at Nobel Biocare. Over the past few years, the Nobel Biocare leadership team has done a terrific job positioning the company on a trajectory for growth and improved profitability.
With the power of DBS, we look forward to further building on the team's efforts to accelerate growth through innovation. We are confident that Nobel Biocare is an outstanding fit for Danaher, and that DBS will make a significant impact on results. We expect it to help deliver a 10% return on invested capital by 2019. Excluding the impact of acquisition-related non-recurring charges, such as transaction expenses, in-process R&D, inventory write-ups, and deferred revenue accounting, we expect that Nobel Biocare will be accretive to EPS by approximately $0.05 in 2015 and $0.10 in 2016.
After closing on the Nobel Biocare transaction and the more than $1 billion in additional acquisitions already announced in 2014, we expect our capacity for M&A to remain in excess of $8 billion. Before wrapping up, I'd like to take a moment to thank Richard Laube, Nobel Biocare's CEO, and the rest of the Nobel Biocare organization. We are very excited about the opportunity to work with this strong team. Finally, we're very pleased that the Nobel Biocare Board of Directors has recommended this transaction. I'll turn the call over to Dan, and he'll give you some more details on the financial aspects of the transaction.
Thanks, Tom. Good morning, everyone. As Tom suggested, I'll provide a little more background on the situation and the offer. We expect to launch the tender offer very shortly. As we mentioned, we will be offering CHF 17.10 per share in cash, representing an aggregate purchase price of approximately $2.2 billion, inclusive of debt, transaction costs, and net of cash acquired. The purchase price equates to approximately 3x revenues and less than 4x gross profit, which should position us well from a return perspective.
We expect to fund this transaction with our available cash on hand. The offer will be subject to customary conditions, including the tender of 67% of the outstanding shares into the offer, receipt of applicable regulatory approvals, and the absence of any material adverse effect with respect to the business. If at least 90% of the outstanding shares tender into the offer, we expect to acquire the remainder of the shares through a squeeze-out. We also expect to delist the company following the successful completion of the squeeze-out, and we anticipate completing the offer in later part of this year or early 2015.
Thanks, Dan. Felicia, we're now ready to open up the lines for any questions.
Thank you. If you would like to pose a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to pose a question, star two to withdraw a question. We also ask that you limit yourself to one question and one follow-up. We'll go first to Steve Winoker of Bernstein Research.
Thanks very much. Good morning, guys. Congratulations.
Morning, Steve.
Morning, Steve.
Hey, could you maybe talk to the premium versus discount market strategic considerations here? You guys are clearly one of the leaders with Implant Direct, and your strategy over the years has been to drive that. Maybe talk about, I know one of the debates out there for premium players is to what extent they might lose greater share to the discount segment over time, and clearly, you're making a statement that says you don't think that's an issue. Could you just talk us through that?
Sure, Steve. Thanks for that question. Steve, we're absolutely convinced that the premium market is a place to be for a number of reasons. You're right, we do have a position today in the value segment with Implant Direct, and we've actually supplemented that with a portion of the Nobel business in the value segment.
But back to the premium segment, I think the key thing to keep in mind is that the specialists continue to place more and more implants every day, and those specialists tend to buy the premium implants because along with the implant itself, the service, the support, the clinical research that backs up the implant itself, the software that supports the overall workflow, comes along with a premium player like Nobel.
I think the other thing to keep in mind is that complex cases that are not a routine kind of implant that perhaps a general practitioner might be more comfortable doing, those complex cases really benefit from the breadth and the quality that's associated with the premium players. So we see the premium market as clearly being a good market, good growth market. I think if you look at the leading players, you've seen stable growth rates from those players, and we're convinced that Nobel Biocare has what it takes to continue to grow in that market.
What's your embedded growth assumption over this five-year period?
We see this market as a market that is going to grow in the 3%-5% range if you are talking about the premium market, Steve.
Nobel specifically.
We think there will be some revenue synergies more broadly with the business that could push us towards the high end of that. That is not going to happen out of the gate, but some of the things we think about, we talked about in June around the workflow, we think will help us bring some revenue beyond what just the core business would have on its own.
Sorry, just one last one. Dan, when you say ROIC expectations of 10% by 2019, again, are you talking cash ROIC or a non-cash ROIC by your definitions?
Yeah. It would be the non-cash, or actually we'd expect our cash returns to be higher.
Okay. Thank you.
Thanks, Steve.
We'll go next to Jeff Sprague of Vertical Research.
Thank you. Good morning.
Good morning, Jeff.
Good morning, Tom, Dan, everyone. Just on growth, just looking at historically, it looks like the company has actually had some growth issues recently and some issues in Japan. Could you just kind of address the recent growth trajectory and if there is any kind of legacy problem we need to work through here?
Well, Jeff, this is a business that has had a few challenges in the past. And some of those challenges, in fact, a number of those challenges, I think Richard and his team would tell you today have been a bit self-inflicted. There are some things that when the team came in, needed to be righted to get the business back up to market growth rates. And the team has done a nice job of that, now has a growth trajectory that I think is more in line with the overall market, and we think we can continue to improve on that over time.
Right. Then just thinking about the margin structure, you guys currently drive kind of a mid-teens margin, off kind of a 50% or so gross margin in your business. Obviously, the business you are acquiring is a richer mix of consumables. Can you give us a sense of what you would kind of view as Danaher ZIP code operating margins for a business like this?
Jeff, this is Dan. Yeah. Clearly with a 70%+ gross margin, you have already seen the existing team meaningfully move up their margins to kind of more like mid-teens today, over the last couple of years. They have stated publicly, even before this process began, that they thought there was a fair amount more room than that. We concur with them that this is, in time, we think, clearly a 20%+ operating margin business.
Okay, thank you.
We will go to Ross Muken of the ISI Group.
Just sticking maybe on the margin side. Most of the peers in this market run the business, although there's not a ton of direct compares, but most of the dental peers are in the low- 20s on an EBIT basis. As you look at where on the cost side you can attack with DBS, I mean, obviously we talked a little bit about the revenue synergies, but where do you see the biggest disconnects on the OpEx side? Or is it truly on the gross margins, getting that back into the 80% range, where it was a few years back?
Ross, I think it's a combination of those factors. Again, this management team's made a lot of progress over the last couple of years. You saw this in their latest quarterly numbers. I think that trajectory will continue. A lot of the good dental consumable businesses that make 20%+ operating margins, their gross margins are 1,500 basis points lower than what we're dealing with here.
So we and the management team think there's an opportunity to continue to do what the team's doing and taking these margins up, both on the gross margin side, but also at the bottom line, the operating margin as well. There's also a reasonable amount of public company costs here that kind of unrelated to synergies that will come out pretty quickly as well.
And maybe one just quick follow-up. I think they had mentioned, this being Nobel management recently around an NOL that was fairly sizable that could be available. Is that part of the transaction consideration? Is that something you guys could potentially benefit for from?
We did a little work on this. There may be a little bit of value there, but I think what was quoted in that report was a very lofty number. I don't think we will get that.
Got it. Thank you.
Thanks, Ross.
We'll go next to Isaac Ro of Goldman Sachs.
Good morning, guys. Thanks. I just want to talk a little bit about pricing. As I understand it, in this market, pricing's been somewhere in that mid-single-digit negative range for the last few years. So just trying to figure out what you have embedded in your assumption for that 3%-5% growth going forward.
Isaac, that's probably a little more pessimistic view of pricing than we would see. Clearly, there are some challenges in this environment from a pricing standpoint, but I think the thing to concentrate on here is the value proposition that's associated with what Nobel brings to a general practitioner or an implantologist that creates a much broader value proposition than just the implant, the physical implant itself. And I think that's where there's opportunities to do much better than the numbers that you may have just had in mind.
Okay. That's helpful. Thanks for the clarification. Then just one other on the DBS. What would you say the biggest opportunities are to apply DBS to this company, given the earlier commentary on margins? And maybe if you could specifically comment on the plans for their CAD/CAM business, how does that fit into the picture? Thanks.
Well, it's a little early to tell, quite frankly, Isaac. I'd love to be more specific with you on both those counts right now, but it'll take us a little time, as it normally does, to team up with Richard and his team to get their sense at a more granular level where those DBS opportunities are. We always want to be careful in a newly acquired business not to assume too much about where to apply DBS tools.
It's usually a team effort with the existing management team to be able to apply those in the right way. So we'll need a little bit of time on that score. And frankly, as we will, relative to the CAD/CAM initiatives, because obviously there's some things that we still have to learn, frankly, on both sides, Nobel learning about some of our initiatives and vice versa. I think more to come on that front as the weeks roll on.
Isaac, the company's been public on the CAD/CAM business, that they're already taking some actions that we fully support to put that business in a better position.
Got it. Okay. Thanks a bunch, guys.
Thanks, Isaac.
We'll go next to John Inch of Deutsche Bank.
Morning, everyone.
Hey, John.
Hey, John.
Morning, guys. Hey, stepping back from Nobel. When Danaher bought Beckman, there was this perspective that the company was going to redress the healthcare versus industrial balance. Now you have done Siemens, and now you have done Nobel. I guess, Tom, given that you are new in the chair, how are you thinking about the portfolio? Particularly, I guess if opportunities are still abundant in healthcare, as I am sure they are, why would it not make sense to kind of separate Danaher into a healthcare versus industrial entity?
Well, John, I think it is really important not to read too much into two deals. We continue to have active cultivations and active funnel reviews across the entirety of the portfolio and across each of the segments and each of the platforms. I am sure optically, based on my background, plus the two deals that you cite, people might come to some conclusions about a given direction, but I would not necessarily support any of those conclusions at the moment, knowing what I know about how active we are on a broad basis across the whole portfolio.
Then just back to Nobel, does this fill in the whole implants prosthetics business, or are there follow-on gaps that you guys still possibly see, or do you think you can fill those out organically?
I think we have got a very good shot. The gaps are narrowed dramatically, as you might imagine, with a market leader like Nobel Biocare added to the portfolio, and then combining that with the capabilities that we have in the existing platform. So that is not to say that there are not some things that we would not need, but the workflow looks very comprehensive from where we sit today.
Got it. Thanks very much.
Thanks, John.
Thanks, John.
We'll go next to Steve Tusa of JP Morgan.
Hey, good morning.
Hey, Steve.
Morning, Steve.
I recall talking about implants with you guys earlier, either this year or maybe it was last year. I think there was another implant guy that was for sale at some point, and you guys had passed on that. I think the comment was that our position and where we are today with what you had with your existing implant business, I think the comment was kind of like, "That shows you how we kind of feel about the implant market." Did something change strategically with regards to implants? Is it just that there's a lot more to this asset in and around implants? Or was I just misreading that comment from the past around your desire to be in the business?
Well, Steve, hopefully a year from now, I will remember everything I said today about the implant business. Given that I kind of missed out on those conversations back in those days, I cannot obviously be terribly helpful or responsive. I do know that the team on the dental platform has felt good about the overall implant market for a long time. Our Implant Direct acquisition was certainly, the JV was certainly an indication of that at the time we did it. But I'm afraid I can't give you much more history there, but I'll do my best to chase that down on time.
Okay.
Steve, one of the very important things is we thought about the premium market. It was important to get after one of the very top players, and Nobel clearly fits the bill. And it's not just about their share position, it's what they do from a broader software capability, service capability that goes well beyond just the implant that we really think is the value add to the customer that helps them differentiate themselves, and you see that in their gross margin.
Got you. And I guess I didn't mean to call out a specific comment, it's just that I recall there was another implant guy out there that was for sale, and I think you guys had talked about you passed on it or whatever, it wasn't of interest. So I'm just curious, if I'm wrong about it, this being a change in strategy, then I'm wrong about that.
So totally understood. When we think about now the acquisition firepower, I think you guys have said, I'm sorry I jumped on late, you may have already answered this, but you guys have said obviously $8 billion+ . Yeah. Do we just take $8 billion ± $2 billion now or
You know what I'm going to say here, Steve. I think it's still $8 billion+ .
Okay. Great. Thanks a lot. Talk to you soon.
Thanks, Steve.
Steve, one of the things we love about Dan is he's so consistent.
We'll go next to Brandon Couillard of Jefferies.
Morning.
Good morning.
Morning, Brandon.
Dan, could you speak to the free cash flow accretion in 2015 and 2016 from the deal, and could you quantify the amortization? On the ROIC target, if my math is right, from both underlying growth and synergies, would that suggest that the profit contribution here actually doubles over the next four to five years?
First of all, on the cash flow aspect, the numbers that Tom quoted, the $0.05 of adjusted EPS next year and $0.10 the following year, we think on a per share basis, that will be probably at least $0.05 more than that. So if there was a cash flow per share equivalent, it would be $0.10 in 2015 and $0.15 in 2016. Still finalizing the amortization numbers, but that obviously would be a big contributor to that.
We think there are other cash flow dynamics here vis-a-vis the working capital and some other things. So, we are pretty excited about the cash flow we are going to generate out of this business. Regarding the return, your number is roughly right. It is a combination of both. We think the continued growth, the continued margin expansion that they are already driving today, sustaining that, and as we mentioned, we think there are other synergies more broadly across the platform that will help us get to that 10% return.
Thanks. Tom, just philosophically, with over half of the business, I guess now in healthcare and a sector in which a number of the comps report more on a cash EPS basis and with the gap between GAAP and cash EPS widening here, just philosophically, give us your view on how you look at that metric, and if at some point, we move to a cash EPS standard.
Brandon, this is Dan. Given Tom's been in the role for seven days, we haven't had the tutoring program on cash EPS yet. You know us. As Larry used to say, if we only got to report one metric, it would be free cash flow. We know there are obviously accounting conventions, and they're important, but our focus is driving free cash flow, and we think, in that regard, Nobel's going to stack up quite well.
Super. Thank you.
We'll go next to Charlie Brady of BMO Capital Markets.
Hey, thanks, guys. Nobel has been in the midst of a new strategy they launched early of 2012, a nd I wonder, you know, and obviously seen some pretty good pickup on results over the past 12, 18 months, and am wondering, as you looked at the company during the due diligence phase and you looked at this current strategy they are looking at and what is going on, as you apply DBS to that, do you see structurally changes that you can apply to that to enhance that? To what degree? I guess in the interim, until this transaction gets completed, does anything within Nobel as far as what they are in process right now, does that slow or change or maybe get put on hiatus for a little bit?
Charlie, I think we have to recognize that Nobel Biocare will remain a public company until the transaction has closed. This is a very good management team, terrific management team. If you look at some of the background of the leadership there and familiar with what they have done from a performance improvement perspective, particularly over the last three years or so. There are a lot of reasons to be confident that this is a team that will continue to make progress on the growth trajectory that they are on, continuing to go after improvements in profitability.
We can certainly do some things in terms of sharing some thoughts around where DBS might be applied. There are some things obviously that we can share from a training and orientation perspective. But I think putting those things aside, we have an enormous amount of confidence in Richard and his team that they are going to continue to carry forward the good performance of the business until we are working that much closely together following the closing.
Thanks.
Thank you, Charlie.
And this concludes today's question and answer portion of the call. I'll turn the conference back to Mr. Gugino for any closing remarks.
Thanks, Felicia. Thanks, everyone, for joining us this morning, and we're around all day to take any questions.