Danaher Corporation (DHR) 2013 Investor and Analyst Meeting December 12, 2013 1:15 PM ET

Executives

Matt R. McGrew - Vice President of Investor Relations

H. Lawrence Culp - Chief Executive Officer, President, Director, Member of Finance Committee and Member of Executive Committee

William K. Daniel - Executive Vice President

Barbara B. Hulit - Vice President and Group Executive

James A. Lico - Executive Vice President

Angela S. Lalor - Senior Vice President of Human Resources

Thomas P. Joyce - Executive Vice President

Joakim Weidemanis

Mark Dickman - Senior Vice-President of Sales

Damien McDonald - President

Peter Kürstein - Former Director and Chairman of Audit Committee

Allison F. Blackwell - Senior Vice President of Human Resources

Analysts

Jeffrey T. Sprague - Vertical Research Partners, LLC

Nigel Coe - Morgan Stanley, Research Division

Scott R. Davis - Barclays Capital, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Matt R. McGrew

Okay, everybody, if we could grab our seats. We'll try to get started here on time. Okay, I'm Matt McGrew, the Vice President of Investor Relations. Welcome to the 2013 Danaher

[Technical Difficulty]

Matt R. McGrew

Okay. Could we get that to show off, I've got on the screen here, I've got the agenda that -- there we go. Okay, so off to a flying start here in New York. And evidently, there's folks -- we've got a bunch of people who've joined on us on the webcast as well, and I understand that there is some potential issues with clarity. If you guys are experiencing that on the webcast, I've been told if you just go ahead and refresh your screen, that should go ahead and make those clarity issues for you go away. So hopefully, that takes care of it.

So here's the agenda for the day. I just wanted to kind of make a couple of different remarks. So we'll have Larry come up here after I'm done and he'll kind of give his traditional opening remarks for everybody, talk a little bit about the quarter as well. And then we're going to transition after that into kind of 1 of the 2 main pieces of the day here. And the first piece is going to be what we're referring to as the DBS overview, and we're going to kind of spend some time, 45 minutes or 1 hour or so here, kind of going through all pieces of -- as we kind of think about DBS today and some of the evolution you've seen. We'll go through that with some presenters.

And then when we're done with that -- there's going to be 5 presenters. We're going to have them come back up together on stage and take 10, 15 minutes of questions. But we're going to ask just if we could keep those questions, if you will, to the content that they just discussed, i.e. the DBS portion of the day. And we'll have another Q&A here with Larry at the end where we can talk about the guide and kind of anything else.

So they'll come back up and talk about DBS, take your questions there. We'll go to break and then come back, and we'll kind of introduce some other folks here to go through kind of DBS in action, if you will. And then Larry will wrap up with closing remarks, and we'll have him up here again and do some Q&A. So that's the agenda.

You see at the bottom there, there is a -- there's no dinner this year but we're going to do a that cocktail reception downstairs for those who are not running off to something else at 5:00. That will be in the Oak Room so right in the main lobby off of on the right-hand side.

With that, I will bring up Larry.

H. Lawrence Culp

Well, good afternoon. Thanks for joining us today here at The Plaza. Thanks as well to those of you dialing in on the webcast. As Matt indicated, we put together, I think, one of the best windows on the Danaher Business System we've ever shared with the investment community.

But before we get to that, what I'd like you to do is really expand on the press release that we put out this morning and really put 2013 in context, give you a little bit of a sense as to how we think we're prepared for 2014. I'll come back up at the end of the day and talk to the guidance in more detail.

So without further delay, let me get into this. I think as we look at 2013, we're very pleased with our relative top line performance. The year's not out. Clearly, we've got some important weeks ahead here in December. I mean, I think we're really quite pleased with the way we've been able to take advantage of the quality of the markets that we serve, certainly using DBS to out-execute competition, deliver value for customers, and in doing so, grab share and do so nicely profitably.

And at the same time, as you'll see through the course of the day, really taking tangible steps forward in evolving some of our business models, which set us up, I think, very well for long-term success.

You'll hear a good bit about the investments that we've made this year. I think you see some of that reading out in that relative top line performance. You see some of that playing out frankly in our operating margin expansion.

But at the same time, both organically and inorganically, we're playing for the long haul and in making investments this year, we're prepared to do the same thing next year to make sure that over a long period of time, we're winning with customers and in turn creating value for you.

And finally again, in this slow macro environment that we're in, it's been a challenging slog the last several years, we're really pleased that we've been able to make those investments and drive expanded operating margins. And we think that has created value and it's a framework and a formula that we're committed to going forward. We think that's the way -- then in 2013, we've built a science and technology company on a global basis with the Danaher Business System and very much is the plan as we go forward.

Let me give you a little bit of a shot as to where we sit here in early December. The first couple of months have played out by and large in the way we had anticipated. On the third quarter earnings call, we were very pleased with the way November played out, particularly in the U.S. We'll take the strength in the U.S. economy, with Europe being up ever so slightly, given what we've been dealing with the last couple of years.

The high-growth markets though continue to lead the way. And while they're not ripping at the way that they were just a few years ago, we like the increased exposure we have there and the growth we're getting as a result.

Again with respect to investing in the future, for us, that's both in innovation, new technology, research and development, as well in sales and marketing. And by going through the cost structure improvements that we've seen, we've been able to do that while protecting both the gross margin, which as you see, is up 50 basis points this year, but also driving that OMX, that operating margin expansion, up 75 basis points here in 2013.

We also think that by the end of the year, we're going to be very much on pace to put another $100 million into the business in productivity enhancements, which should yield next year about $75 million of our return, giving us again the opportunity to invest and drive margins. The projects and the programs there very much on schedule.

So in some respects, not a lot of new news since the call, but I think that maybe well the news that Danaher very much on pace here in mid-December.

With respect to the guidance, we reaffirmed the $0.91 and $0.96 range for the quarter. And as you know, we also initiated 2014 at a $3.60 and $3.75 range. The primary lever there, as you would well imagine, is the 2% to 4% core number, very much I think in line with maybe a steady, somewhat conservative posture going into next year. Clearly, some of the headlines here the last several weeks have been encouraging. But we think that's the way to be prepared for next year. We don't want to get too far ahead of ourselves, but by the same token, if the economy improves a little bit more, then we currently anticipate particularly in the west, we'll be well prepared to take advantage of that.

As you know as well, those of you who follow the story, as we look into the quarter, as we look into next year, we do not include any positive effects from capital deployments. And we think we have at least $8 billion over the next year or so to deploy and continue to build the science and technology company. I know some of you use a higher number in projecting what we could do. We're going to stick with $8 billion for today, and again, let me share with you, I think, a high level of confidence so that we can put the capital to work in a strategic yet disciplined way to build our businesses and create value for shareholders. That's what we've been doing for a long time, and we see a great deal of runway ahead in that regard.

As we ramp up this year and get ready for next year, while we won't take you through a deep troll in all of the businesses as we have in other year-end meetings, we love where the Danaher portfolio is today, knocking on the door of $20 million in revenue.

And if you look at our platforms across our 5 segments, each and every one of these are outstanding businesses in their own right. In the context of the markets that they serve and the leadership positions they enjoy. So we're very bullish about this portfolio. We think it's an important part of how we've been able to power through the sluggish macro seen the last several years.

And clearly, as many of you know, as we've shed some businesses, we have our strategic platforms now representing over 90% of our total revenue. And really, all but one of these platforms are wonderful target zones for us in deploying that $8 billion of capital.

One reason we love the portfolio so much and one of the drivers behind its evolution is we wanted to make sure we were serving good markets. And one of the clear indicators of good market are the underlying macro trends, macro drivers that are there. And whether we're talking about health, environmental, safety, energy efficiency, regulatory compliance, just those trends that we see across the globe, this portfolio very well exposed to those growth opportunities.

Now you see the checkmarks in the grid, clearly, different drivers affect different segments in different ways. But the 2 important common denominators here are the digital world and all the opportunities the digitization of our end markets create. In addition to the fact that what we do for our customers is hyper-relevant in the high-growth markets. And not only China but as you'll see in a few slides, really around the world. So as we look forward, we really like where we're positioned for the world in which we operate.

Talking about the digital frame for a moment here. For us, we're very excited, maybe this is the old software program in me. But as we look across the business, whether it's how we generate demand, our sales and marketing activity, whether it's the way in which we work in the channel partners, where we go to market through distribution as opposed to direct, let alone the evolution that the computing and communication trends suggest we ought to see in our product architecture, and in turn our business models, there's just a whole host of opportunity here, certainly some challenges as well but we think this is a net-net opportunity for Danaher in a whole host of ways in terms of how we go to market with our existing products and how we'll evolve our products and our business models going forward.

So this is a focal point for us, really throughout the company, had a better part of the day yesterday, in fact, with the extended leadership team working on these issues, having our operating companies learn from each other, share different resources and experiences to make sure we take full advantage here.

You see that on the top of the slide, in terms of the investment that we're making in some of our digital activity. Now nearly 1/3 of our software or our overall engineering headcount is in the software area. That is a marked change from where we were just a few years ago. And even in marketing, we have about 10% now of our headcount in what we would designate as specific digital activities. That number probably ought to be 3x that in a few years as we continue to use the web to make sure we're out in front of every possible customer that we can be of service to, and in turn differentiating our offering and simplifying our transactions.

I mentioned high-growth markets. It wasn't that long ago and I know a number of you have visited our businesses in China, where we fundamentally and deliberately had a China-centric strategy. So as the slide suggests, you go back to 2005, about 10% of our revenues were in China. We weren't as active elsewhere around the world because we knew China was the most important high-growth market.

We wanted to make sure we got China right, and we thought in term, we'd have time to radiate those lessons around the world.

Going in with Western brands often at high price points, the game was often feet on the street, making sure we were present not only along the coast but as far west as we could.

And in turn, once those market positions were established, those distribution partners engaged, more product localization allowed us to come down the price point continuum to mid, in many cases, opening price point offerings.

And along the way, we got a lot smarter about how to play and often win in China. We did that all organically. And once that flywheel was in motion, we were able to add to that by way of acquisitions. So in turn, those are the lessons that we are actively taking around the world today. So we're quite proud of the fact that 26% of our revenues now come from high-growth markets.

And as you see on the right-hand slide -- right-hand part of the slide, about 1/3 of our high-growth markets revenues come now from China, very good diversification here. We're really exposed to all the major economies where I think companies like ours want to play over the next 10 years. And this will continue, particularly from a business model perspective where we want to be as local as we can as we move forward.

Let's talk about share gains for a moment. You'll see throughout the course of the afternoon how we've complemented that high single-digit growth that we've seen in high-growth markets, winning in those higher growth economies with good old-fashioned share gains by way of the Danaher Business System and a host of our different businesses.

I won't take the thunder from the presenters later on this afternoon, but you can see on the slide is the whole host of wins from a commercial and from a technical perspective that the businesses have delivered. And in turn, seeing good top line and good bottom line performance.

I do want to note though that there's a very high correlation here between how these businesses are winning and the lessons that we're going to draw and extrapolate for the broader Danaher portfolio in terms of evolving the business model.

What I mean by that evolution of the business model, the differentiation of the business model, really it takes us back in time because it wasn't that long ago, and I know some of you in the room remember the story well, that we were transitioning away from a component OEM-heavy portfolio more toward end users, instruments and related consumables.

And that very much has been a pivot that has yielded a lot of benefits for us. You'll see in the upper right-hand slide, just even in this so slow macro scene what that's meant, to have 40% of our revenues in the aftermarket, largely consumables, where we seen 3% to 5% growth over the last 4 quarters has been a real blessing.

Because as you see on the lower part of that table, equipment sales have been up but ever so slightly. As capital has been tight, business owners, leaders have been hesitant to invest. It's been a really good opportunity for us to take advantage of the underlying strength of that book of business.

But as you see in the graphic, on the bottom right of this slide, that really just sets the stage for us to continue to gain more intimacy with our customers and reduce the volatility or the cyclicality of the portfolio.

So what led us from an OEM orientation to end users, from components to instruments, and in turn, the attending consumables really sets the stage for us to wrap more service and ultimately more software around those products. Not to have a Christmas tree, if you will, of different offerings but really to get embedded into the workflows of our customers, do so uniquely, so that we can be of greater service and in turn, be a part of their growth

That's not new, we've been at that. But certainly from a service and a software perspective, our efforts there are gaining speed and unfortunately because that's going to be a more important of what our customers are looking for us to do as we move forward.

That's all great. But you really have to make sure that job one is building that installed base in order to get that exposure to the aftermarket. We highlight 3 businesses here, our Water Quality, our Product Identification, Life Sciences & Diagnostics platforms, where we really have done, I think, an above-average job. You can see in the bar chart that at least 1/2 of the revenues in these businesses now are in the aftermarket, largely consumables.

And by driving that increased R&D investment in the development of new instruments where we've accelerated replacements, we've grabbed new placement market share. We've gotten good sales there but in turn, we've broadened that installed base and in some of the examples along the right side, be it at Beckman, be it at like a Biosystems, AB SCIEX. That set us up to have those 4-, 5-, 6-, 7-year contracts with our customers in the aftermarket where we end up getting sometimes 2x, 3x the revenue that we do on that initial sale through the course of those contracts.

That's good business. It's steady, it's good margin business, but at the same time, we like it because, we again, we get closer, we get embedded into those customer workflows. And it sets up some of the other opportunities around service and software.

So as we look forward, we don't want to forget the importance of driving outstanding developments and innovation with our instruments and our machines.

And what we've done at Hach is a really good example of how we've been able to take advantage of a market gap that a number of our customers' are experiences, from water quality, to industry to healthcare. And that's frankly the aging demographic of some of their service and technical support populations.

Many of those trades are seeing a broad aging, creates a window for us to go in and do some things for our customers that frankly they may no longer be staffed to do themselves or at least have the skills in order to do them and do them well.

We've added a tremendous amount, as you see on the slide, we've added over 200 people to our service organization in Hach and in turn seeing 15% compounded growth in our service business. This is separate from the chemistries at Hach as a function only at staffing but the smart deployment of the 3 resources into our customers to help them operate the instrumentation and the systems that we sell them.

On the right-hand side is a quick shot of how far we still have to go. We're pleased with this double-digit growth, but we still have a relatively modest share of that pie. We have customers doing a lot of this work still for themselves, small local competitors as well filling that gap. The Hach team, very excited about their ability to continue to grow at an outsized rate in the service realm.

Instruments, consumables, service and then software, really all part of an integrated approach. SaaS, Software-as-a-Service, clearly one of the more overused acronyms perhaps in 2013. But we see genuine opportunity to deliver more value through SaaS models going forward. We've talked with you a little bit about 2 acquisitions we've made at Gilbarco Veeder-Root, Navman and Teletrac, 2 high-growth players in a rapidly growing fleet management mobile asset tracking and deployment space.

It's a market we've had our eye on for a long time. If you will, some of these folks are existing Gilbarco Veeder-Root customers. We're just on the other side of the nozzle. Now with Navman and Teletrac, we get to help them manage the trucks, the cars, the fleets that utilize the fuel that we help distribute.

And what's neat about this is, it's not only a hot market where we've got a really nice position and will enjoy that growth. The lessons we're going to learn, the lessons that we'll radiate around the organization not only technically as to how to best set up these sorts of infrastructures and deliver these solutions, but how to craft the business models in ways that are compelling and market-leading as we've done really in the history as a company, with a lot of different aspects of DBS. That has us pretty excited.

And in 2014, I think you're going to see a whole raft of different SaaS-based solutions really in every one of our segments. As you look at digital dentistry, some of the things that we're going to do on this side of the nozzle at Gilbarco Veeder-Root, very exciting. It's really that confluence of today's communications and computing technologies to give us the opportunity to go after some of these visions that heretofore have been a bit elusive.

Continuing to invest in growth. You've heard us talk about this a good bit. I think this slide was one of the -- my favorites as we were getting ready for today. It really captures what we've done the last 3 years in investing.

You see the step up, 40 basis points in R&D, 70 basis points in terms of sales and marketing. Now the numbers alone don't tell the story and money's got to be put to good use and the execution of those programs has to be flawless.

But to be able to fund that through the gross margin expansion and in turn drive operating margins again in this slow growth environment, I think, speaks volumes about the impact and the power of the Danaher Business System.

It does start with product though, and as many of you know, we've had just a wonderful year in terms of the impact our new products have had, particularly in the 4 businesses highlighted on the right. We've seen a high correlation between their improved vitality. In this case, we're looking at vitality based not on 3 years of new product sales but really in the first 18 months of those new releases. And the market share that they grabbed. And not one of these 4 businesses has acceded margins in driving these new launches and in turn capturing that market share.

And we continue to invest in things even when it doesn't look a payoff is immediate in a slow-growing economy. You've heard us talk about Ballast Water, the molecular diagnostics effort of Beckman Coulter. Some of the cloud initiatives that we have across the communications platform, all sizable investments for us in '13. We could have dialed those back, but again, in the spirit of playing the long game, we've protected them, we nurtured them and I think as we look to '14 and '15, you're going to see the early fruits of those investments.

That's organic. As you know, when we look at our inorganic investments, we've deployed a tremendous amount of capital over time. That discipline really pivots around our return on invested capital. And I know sometimes, it's hard to get at that exact number because we have so much inbound volume.

What we do on the left-hand side of this slide is frame up for you what we've seen since 2008 excluding the big deals that have created some of the more recent noise, Beckman Coulter, AB SCIEX, Esko and X-Rite.

And whether it's on a pure accounting basis or on a cash ROIC, as you can see, we're up 250, 300 basis points over that time. So steady-state, very strong improvements in ROIC, largely a function of the Danaher Business System.

On the right-hand side of the slide, you see those 4 investments. Again, very much works in process, still a lot to do, but on balance, 2.5 years in on average, we have a high single-digit returns already. So they are on or ahead of schedule. And as you think about how and where we're going to deploy that $8 billion of capital going forward, this is the discipline, this is the mindset that we're going to bring. We're going to spend it in the right places, we're going to do it in the right way to continue to build a company and create value.

Speaking of Beckman. We probably could spend all day giving you a Beckman update. 2.5 years in, I think the short story is Tom Joyce and his team -- Allison Blackwell is here today from Beckman, have done a phenomenal job. A lot still to do, but if you look at some of the early customer impacts, on-time delivery now over 90%, we've reduced past due maintenance calls dramatically. Customers are seeing that impact.

Quality both in the eyes of our customers and importantly our regulators, very much an area where we've seen real progress. We've talked about the warning letters, 3 warning letters that the key U.S. facilities have received in the past. They have been reinspected, no new 483s were filed, very proud of that. We're going to work with the agency to put those warning letters behind us.

Troponin, a key assay that was removed from the market, many of you know we got that back on both of the key machines here in the U.S., with a whole host of other regulatory gains. And perhaps as importantly, clearly, we're putting our capital to better use there, as we've seen that improvement in the top line, the cost structure has been righted. We've taken that operating margin from just over 10% to right now into the mid-teens. A lot to do still at Beckman, make no mistake, but I think, so far, so good. We're really pleased and proud of the work the team has done there.

And then just to cap off with a little bit of a commentary on the margin performance. It's tough, as many of you know, in an environment like this where the U.S. is sluggish, Europe is up been on its back, to invest in the high-growth markets, invest in innovation and still drive operating margin expansion. We think that approach really starts at the gross margin level.

And you can see, and as we go way back to 2001, we've taken that gross margin from a high-30s to 50% really through a combination of mixing the portfolio, acquiring higher-growth, higher gross margin businesses and making sure that we're just smart about costs through the application of DBS, to drive material productivity, labor productivity, reduced overhead as our friends at Toyota say, to simply rip out the muda, the waste in an operation.

Now some of the improvements have been more muted here of late from a portfolio perspective. But even the last couple of years, DBS continues to give us an opportunity to expand the gross margin, really probably the best metric of the value that we create for our customers to give us the air cover to invest to accelerate growth.

And you see here the operating margin play in effect. Last year, we had 100 basis points of operating margin expansion, thrilled with that, downtick a little bit this year but I think 75% is more than respectable in the environment that we're working in.

Many people often ask, "where do you top out?" I think in the spirit of Kaizen, you never stop, and we want to continue to drive margin expansion here. As you see, we have in the 2 Med Tech segments, Dental and Life Sciences & Diagnostics, ample opportunity to continue to drive improvement.

And they know what they're doing, they know how to do this. We've seen -- in the case of LS&D, they're up 260 basis points the last couple of years, Dental up 330. So still work to do, no doubt about it. But there's no reason those businesses, particularly given the strong market positions that they enjoy, can't be at or above the corporate average.

So again, there are going to be acquisitions that come in, and at times, temporarily dilute certain ratios, but we have very high confidence that the Danaher you see today, nearly $20 billion book of business, can and should be at 20% operating margin business. We just hope we never see that because of the opportunity to create value with the inbound acquisitions.

So to put a bow on 2013, again, we've got some important weeks ahead of us before we can call it a year, but really pleased with the relative top line performance. And we're quite content with the investments that we've been able to make to get us ready for '14 and for '15 and the way that we've been able to do that while still creating value for you through expanding margins in this low single-digit growth environment.

That's the way that we want to build a leadership position in these science and technology markets in which we operate, in a way we do that global basis with DBS going forward.

So with that stage set, let me transition into kicking off the DBS section of the day. I use the word kaizen earlier. Kaizen, Japanese for continuous improvement. That even applies to our investor relations effort, believe it or not.

I'm sure, Matt, they're laughing with me, not at you. But the thrust of the day is very deliberate. And I hope we've set this up in a way that is meaningful and valuable for you. DBS can be a bit of our Rorschach test. We can all spell it, but we all might define it somewhat differently.

What we wanted to try to do albeit in a ballroom here at The Plaza, is give you, as in-depth, a view as to what is distinctive about the Danaher Business System and why we think it is our true competitive advantage. We've had a lot of opportunities through the course of the year. Many of you know our businesses as well as we do. We thought we would save the deep dive into the platforms for another day, and rather than take that vertical look at the portfolio, really give you that horizontal window. Because that, I think, should give you the best perspective on whether this is a unique company, whether this is a company built and building for the long haul. You'll obviously hear our conviction and passion on our part through the course of the afternoon, and I just hope that we can impart that in a way that gives you the confidence that we do that DBS is real, DBS is meaningful and DBS is different.

We'll talk about DBS in a host of ways, but I want you to think of it, really, in 2 dimensions. It's who we are, it's our value set, it's our culture, it's what's in our DNA. Some people think of that as a soft side. I understand that, but it's probably the most important part. The hard side, if you will, are the tools, the techniques, the processes, what's hardcoded in the business and every business in terms of how we run the operating companies on a day-to-day basis. Many of you who have followed the company for a long time and have a pretty good command of DBS probably got your first exposure in a manufacturing facility. I think what we want to try to do today is build on those fun memories of walking those plants to give you a current view and a current definition of what the Danaher Business System is. It's not just about lean. What we do in growth and how we nurture and develop leaders is as important as our lean skill set. And most importantly is the combination of all 3 of those efforts, neatly and naturally woven together, which create, I think, the distinction in DBS.

And then finally, well, get away from a little bit of the theory, away from a little bit of the PowerPoint and really give you tangible examples of DBS in action. You'll hear that from our operating leaders, you will hear a really nice cross-section from the organization, and you judge yourselves as to whether DBS is driving impact -- positive impact in these businesses. You've seen the DBS image before. I want to just deconstruct this for a moment, particularly for those of you who may be new to the story, to understand how we define DBS at Danaher, really 4 elements, and the first is our values. Again, we're talking about the soft side, the culture. These 5 core values define for us what's important, what we expect of our leaders and what we expect of all of our leadership teams.

The best team wins. There's a tremendous premium not only on talent, but talent that plays well together. And we will forgo the individual contributor of the things that they alone can carry today, to make sure that we have, in our businesses, teams that love to play and know how to win together. So a big distinction for us. It's a high bar, not everybody clears it. It's an intense environment, it's not for everyone. But that maniacal bias, as Jim -- our friend, Jim Collins, says, to make sure we've got the right people on the bus and we've got them on the right seats is an important part of our value set.

Customers talk, we listen, very straightforward. Kaizen is a way of life and there's a mindset at Danaher that no matter how well we do, and as many of you know, we've had our successes, we can always do better. That fuels an intensity, a level of expectation, a pace that, again, isn't for everybody. But we know that even if we won yesterday, there's no guarantee that we're even going to be invited to play tomorrow. We need to be compete, we need to be prepared to win. My old basketball coach used to tell me, "You either get better or you get worse. You don't stay the same." It's that Toyota mindset, that's what kaizen means to us.

Innovation defines the future. Kaizen's great, but you just can't keep improving what you've always done. There are times when you need to leapfrog. And sometimes that's in products, sometimes, that's in process. Sometimes, I think people don't realize how innovative Danaher is, not only from a new product perspective, but in terms of the process. And I think as you go through the afternoon, think about the evolution of DBS, and think about the innovation involved and inherent in taking what we learned from Toyota in Bloomfield, Connecticut in a manufacturing operation to how we do research and development today in business that's serving Verizon, AT&T, the leading laboratories around the world.

And finally, we compete for shareholders. We're a public company, it's a real world. We know you have other places to invest. We're going to create value, we're going to be a leadership business, we need to be stay mindful to those responsibilities. And that's why that idea has a place in our top 5 core values. Not something we just talk about. These are values we live. It's a value-based approach.

Customer-centric. Customers talk, we listen. We've reinforced that here in the graphic by putting customers right smack in the middle with us. That's the most important relationship that we have. We can't help ourselves, we can't serve you if we're not taking very good care of customers.

And sometimes, that customer maybe an internal customer. It may be that next manufacturing cell on the production line or maybe that service tech, somewhere at 2 a.m. who needs to park, needs an answer, needs some technical support. Making sure that we are maniacally focused on customers, first and foremost, is a key tenet of the Danaher Business System.

Process-oriented. Because we're building the business for the long haul, we want to deliver great results, but we don't want to have to muzzle those every quarter. A lot of companies operate that way, MDO, a couple of different descriptions. What we want to do is make sure all of our businesses have the tools and the capabilities so they can deliver outstanding results as a matter of course, if you will. We want to build that aerobic capacity in our leadership teams and in our businesses so we can do great things without breaking a sweat. Now we don't always get that right, there are plenty of days that we're sweating bullets. But it's that mindset towards doing things in a sustainable way, first by making sure we've got the right people on the bus, people, that they've got a winning game plan for their businesses, the plan, and in turn, the process, the tools that they use to make those plans a reality are robust and sustainable.

And that's what delivers the performance. It allows us to recruit more people, to invest in new businesses and makes us very much, not only a process-oriented, but a self-sustaining approach to running the business.

And then finally, it's results-oriented. A lot of folks come talking about values, a lot of folks come talking about process, and I'm sure your eyes just roll in the back of your head and you may nod off. We get that. We love to acquire those types of companies because they're really close to being right where we are, but they may not have the edge to make sure at the end of the day, people are calling to question as to whether results are the true focus of all that activity. And for us, we try to define these results in a very straightforward way, and we really, again, start with the customers: quality, delivery, service, cost or value and innovation. Pretty simple, 4 points. It's the way customers tend to think about their vendors, their partners, their suppliers. If we're doing well in their eyes along those 4 dimensions, we have a high likelihood of winning.

Any one of those approaches doesn't really cut it. What we try to do is weave all of this together, that values-based approach, that maniacal focus on customers, that process orientation, with that drive for results. And by putting that together in a whole plot, really, in a top-down way, makes DBS something that's very real and tangible to us. So I get a little excited, forgive the energy, forgive the passion. We don't know other way to run these businesses. We're often asked, "What would you do if you didn't have DBS?" We have no idea. It's not a question we can even conceive. It's, again, who we are, it's how we do what we do.

It came by at being something that we all fervently believe in, and I hope you'll see equal passion from the presenters here today, because it comes from top-down as opposed to something that might come in by way of a consultant. There's no flavor of the day at Danaher. This is the only way. And again, we don't get it right every time. We like to win, we're not undefeated, but we think this in an approach that applies to our entire portfolio, and we will never let a business in to the portfolio, unless we think the Danaher Business System is applicable and can create value.

As its history would suggest, as we've gone from $1 billion to nearly $20 billion, there are a number of businesses that fit and a number of situations where the Danaher Business System has been more than applicable. And we're thrilled with the fact that we're knocking on the door of $20 billion in revenue. But as you've heard me say for a long time, we never wanted to get big if we weren't strong, and the Danaher Business System gives these businesses that strength. Lots of different ways in which the portfolio has evolved and where DBS has shown its relevance, right? As we left the U.S., crossed the greatest ocean, went into Western Europe, people wondered whether DBS will work in Germany, let alone, when we went to China. It did. We began to move up that gross margin scheme, and in doing so, we got in these more technical businesses. Some people thought that DBS, DBS that need seeing at Jacobs Brake or Jacobs Chuck didn't apply in higher growth, higher technology businesses. It does. And I think that's, in turn, how you've seen the sort of impact that we've been able to have on the businesses that we've acquired, the businesses that we've built.

And I think along the way, we not only got bigger, but the bottom right of the slide suggests we've added a whole host of people, too, to the team, nearly 70,000. And again, I'm not sure everyone would pass a litmus test relative to passion around DBS, but a great majority of them would, and that is what keeps us going and I think gives us the enthusiasm we have about moving forward.

We go back just one last time and talk about the origins of the Danaher Business System. Some of you may know that in the late 1980s, a small business, an important business for us Jake Brake -- Jacobs Vehicle systems was really on its back. Up in Bloomfield, Connecticut, very difficult industry, lots of challenges, the path forward wasn't clear. We were very fortunate at that point to be one of the first, if not the first, U.S. companies to have some of the Toyota masters join us on the shop floor and began to teach us the art of kaizen and the science of continuous improvement. And what we learned in Bloomfield, and then in Clemson, and really throughout that sub-$1 billion Danaher, is there really was something to this Japanese miracle that was being lauded in a whole host of ways back in late 1980s. But I think over time, as a lot of us went to Japan and we've studied these techniques and had success, one of the things we realized, this was not only an approach and a toolkit that was wildly impactful on the shop floor, but there were fundamentalists that didn't apply strictly to manufacturing, but they were DBS fundamentals that could be applied more broadly. And we first applied these fundamentals, and Dan Daniel will come up in a moment and walk through these in more detail with you.

In other areas of the business where we could root out waste, reduce cycle times, reduce inventory, get rid of that root-out [ph], I mentioned earlier. And as we were able to do that out of manufacturing into the back office, those same ideas very quickly took root in our R&D and our sales and marketing organizations, and really was the foundation for a whole set of growth-oriented tools that help us execute in the marketplace more effectively than we had previously. It's really easy for us to show you these tools in a manufacturing situation. And frankly, it's the best way we teach it to new people. It's harder to take it to salesforce, right? It's hard taking on a sales call and show you how these in fundamentals alone, some functional specific tools are deployed. But we really want you to walk away today understanding that DBS is not just about lean anymore. And that's not something that just happened today, this has been, again, part of the evolution. But we think whether you're going into one of our labs, you go out with our sales, our marketing, our service organizations, you'd see these fundamentals and then some as part of DBS in full display.

But I think most importantly is the leadership element that brings all these various pieces of the puzzle together. There are a number of companies out there, a number of which you invest in, that deploy what I refer to as a paint by numbers approach. A lot of central control, a lot of financial belts and suspenders, and that's the way the businesses are run. We have our controls, we have a very good finance team, but we are hyper-focused on making sure we have outstanding leaders in our businesses, complemented by leadership teams who know which aspects of the Danaher Business System to deploy at the right time in pursuit of those operating company-specific strategies.

So we'll take these fundamentals into our leadership development programs. Angie Lalor will come up here in bit and walk you through some of this in detail. But again, it all comes together in this way, lean, growth and leadership, to make that current definition of Danaher and the Danaher Business System so impactful.

The way we've set the day up in turn is very much along these lines. Again, Dan will come up and talk through the fundamentals. As you know, Dan is one of our 3 executive vice presidents with operating responsibilities across the organization. Jim Lico will come up and talk about lean. Jim used around the Danaher Business System office, one of the great lean minds in the organization.

And then later on, Peter Kürstein, President of Radiometer, will share with you what the lean tools mean at his highly successful business, Radiometer. We'll talk about growth. Barbara Hulit, who used to run Fluke now runs the Danaher Business System office, will come up and talk about the evolution of the growth toolkits. And then we've got 3 operating leaders: Joakim Weidemanis from Videojet; Mark Dickman from ChemTreat; and Damien McDonald from Kerr. They'll come up and show you how this is all coming to life with real impact in their businesses. And then finally, Tom Joyce and Allison Blackwell. Tom, one of our Executive Vice Presidents; Allison from Beckman Coulter, they'll complement the framework that Angie gives you with, again, real-life examples of how our leadership tools and approaches are delivering value.

So it's a very full afternoon. That's the overall construct. We'll give you the conceptual framework. It's the start and then we'll double back and take you through a whole host of very specific details.

So with that, Dan Daniel. Thank you.

William K. Daniel

Well, thank you, Larry, and thanks to all of you for coming to join us this afternoon in this very busy time of year. Before I talk about DBS, I want to take a minute and talk about color. Last Thursday, the top of the front page of the Wall Street Journal, all over the front page of the Personal Journal section. That was not pink, that was not purple. It was radiant orchid, the 2014 Pantone Color of the Year.

So I know with this fashion-conscious group, you're going out and changing your wardrobes from last year's emerald green to this year's radiant orchid, and I'd encourage you to continue to do so. And I'd add that X-Rite and Pantone continue to be outstanding examples of how DBS can really transform a business. You'll hear a handful of examples today from our X-Rite and Pantone team about how DBS has really changed those businesses, and we're just as excited about them as we were 18 months ago when we acquired those 2 businesses.

So DBS. As Larry said today, it's really about growth, leadership and lean. Those are the 3 things that all of our operating leaders use to help us build businesses successfully for the long term. They're all equally important. And our growth processes, our leadership processes on top of our very rich heritage around lean improvements, are what make our Danaher Business System what they are today. It's how we work, it's who we are, it's really our culture.

There are some fundamental tools that are part of the DBS toolkit. They apply equally across every business we have in each of our segments all around the world and even across the major functions within a business. We've listed those DBS fundamental tools here, and at the top of the list is voice of the customer. We expect our leaders not just to make a significant amount of customer visits each month, each quarter, which we do, but it's a structured approach to problem-solving and helping find the unmet needs for customers.

Standard work is a term that you hear a lot, often thought about on the factory floor. But it applies equally within administrative processes as well. It's about defining consistent work processes, but also having those be the baseline for continuous improvement across our businesses.

5S. Many of you have had the opportunity to visit our facilities. Those are about clean, safe, orderly work environments, again, that provide the foundation for continuous improvement across the business. And you'll hear, over the next few hours, a number of examples where visual management, value stream mapping and daily management really help drive results across the businesses. So we look for consistent execution across businesses. They're not executed exactly the same, but very similar and in a consistent way regardless of the business, regardless of the region. And those are the fundamental tools that really help drive results across Danaher.

But as I said, it's not just about growth and operations. We'll share a lot of examples this afternoon with you in those areas. I want to take a couple of minutes and just share with you what it means in the administrative area, particularly in R&D and around product development, where an example of our Kollmorgen team, as part of their strategic plan to target the food and beverage industry, goes out with a structured voice of customer process, where the development team, the marketing team, the sales team are out making 100 customer visits, with a structured approach to problem solving, to help find an unmet need around hygienic motors and drives; and 60 days ago, launch a product, serving customer's unmet needs and now have a $25 million funnel of opportunities.

It's how the Tektronix teams, through our structured tollgate process, with standard work and value stream mapping is able to take the development time for the printed circuit boards down by 35%. So the standard work and the value stream mapping and the improvements apply across the functions as well. In finance, for example, what we often find when we acquire companies as financial closing cycle that is 1 to 2 weeks long. And at Danaher, we close the books in 2 weeks -- or 2 days, excuse me. So we implement a value stream map, some standard work, often and includes prework before the end of the close that helps us close the books and companies in 2 days.

Just a couple of months ago, we took a group of senior operating leaders and senior financial leaders in the business, value stream mapped our financial forecasting process. What we found was we could eliminate roughly 30% of the people hours involved in our financial forecasting, improve the results and be able to take those hours and spend them on driving business improvements and especially around the areas of growth. Certainly, the financial area is an area that these tools apply, just as much and do in the factory floors and with our growth processes as well.

I know many of you had a chance to visit our facilities. What you see, not just on the factory floor, but in our office environments, visual management around purchasing project improvements, supply chain management and things like daily cash collection. So certainly, these tools and techniques fundamentally apply across the entire organization, and we have a number of wonderful examples that we'll share with you later on this afternoon.

Now any business, there's lots of things that you can measure. And certainly, in a data-driven organization like Danaher, we do measure a lot. But we have 8 key metrics that we measure exactly the same across all of our companies in the same way, the same business each and every month. We call those the 8 core value drivers. This was really a result of a kaizen that the senior leadership team had 5 years ago at about this time. We brought together all the reports and all the metrics and posted them on the wall and they filled up probably 1/2 of this room. But we took that and said, what really matters, and we settled on these 8 core value drivers. They remain in place exactly the same way today.

So there's 4 financial metrics and 4 nonfinancial metrics. We start again with the customer and quality and delivery, and making sure we're exceeding expectation for our customers. Next is around associates where our internal fill rate, where we target a very high percentage of our open rules to be filled with Danaher associates as part of their development plan. And then with retention, making sure we have a low level of turnover across the businesses.

And then for our shareholders, we have 4 financial metrics. Clearly, at the top of the list is core growth, where the single most important financial metric for every operating company, every leader within Danaher, is core growth. Obviously, we have margin expansion. And then as part of our very strong cash flow generation in Danaher, we use working capital turnover as the key metric and the proxy for cash flow within an operating company.

And last and certainly not least, where we make an acquisition, we're measuring our return on invested capital each month compared to our plan for 3 years after we make the acquisition. So these 8 metrics are in place exactly the same across all of our businesses, they're measured the same way. We start every operating review, every budget discussion, every strategic plan review with a conversation about where we are in these 8 core value drivers, how -- where we're doing well, where can we improve so we can focus our conversations about how we get better.

You'll see examples this afternoon of visual and daily management. What you see here is a very common, consistent chart that you've seen all of our assembly cells. I know many of you were with us in Chicago in July for our Product Identification Investor Day, and we shared with you what that looks like in marketing with demand generation. And Joakim Weidemanis will spend some time updating you on that. But we, first and foremost, look for a quick visual view of where we are. We call it the 3-second rule. You want to be able to lock up, see where you're on plan, where you're off plan, so you can focus the conversation around how you can get better.

It's a team-based approach. It often happens in a stand-up manner, in front of the board, in front of the cell, in front of the marketing area and it's a team-based conversation around where are we off plan, how do we develop a problem-solving process that first starts with defining the problem, goes through a root cause analysis and finally, development of an action plan that helps lead to improvement. It's really about taking urgent action. This typically happens in a daily manner. So tomorrow, we'll be back in the same place at exactly the same time to have conversation about what did we say we were going to do yesterday, what did we do and what was the impact that we saw from that.

So we talk about Daily Management everywhere. We know you measure us on how we do each quarter, how we do each year. We know that our teams help deliver those results day by day, week by week. So Daily Management everywhere, across the business and across all function is how we deliver those results.

We'll talk to you about some growth examples across our businesses. Esko has certainly been one of those within Product Identification, a business we acquired 2 years ago, a solid team, a business that had been growing at low single or mid-single-digit growth rates. Without processes around demand generation. So before we could focus on demand generation with Esko, we had to lay out a lead management process. So when we receive leads, we're able to process them quickly and deliver results. We've put that in place in the last 12 months. It's been all about demand generation. We've been able to improve our search engine optimization, our visibility on the Internet and now, are generating over 200 leads a month. And Esko has been a high single-digit growth business.

So this is how standard work, value stream maps and consistent daily management can help take a business that is a low- to mid-single-digit grower and they get a high single-digit growth business, and we're now doing that across many of our companies inside Danaher. So today's DBS is very much about growth, leadership and the development of our associates on the team and our historical legacy of lean. And we've got some examples we'd like to share with you. And to spend more time on the growth side of DBS, I'd like to introduce Barbara Hulit, who's the Senior Vice President in charge of our DBS office. Barbara?

Barbara B. Hulit

Good afternoon. It's great to be here today and talk to you about growth, which is obviously a topic that we're all very, very passionate about.

When we think about how DBS and growth come together, our objectives here are very, very simple. We want to accelerate growth, we want to outgrow the markets that we compete in so that we can gain share. And so as we go through the examples today, and I'm going to give you a little bit of an overview of what's in that growth toolbox, if you will, and then as Larry mentioned, we have some colleagues that will come up and show you in action.

But I think one of the things you'll see as we go through these examples, for those of you who have been sitting in these seats for a while, is a lot of the core principles that you have traditionally seen on the lean side of DBS are alive and well in action, and have been for some time on the growth agenda as well.

So we usually start and think about the scope of DBS growth using a 3D framework for growth, and the Ds for dream, develop and deliver. So on the dream side, what we're basically trying to do is derive better insights about our markets so that we can create winning ideas.

The develop part of the framework is all about creating those ideas, turning them into something. It could be a product, it could be a service. It might be something that we develop within our own 4 walls, it might be something that we develop in partnership with somebody externally.

And then the deliver part of the equation is all about commercializing those great ideas and insights that come from the earlier Ds in the process.

And so the framework that we use is pretty holistic around the growth agenda, and one that applies equally to all of our businesses, be they some of the more traditional businesses or even some of the newer businesses like you see in software.

If you look underneath that framework, there are a lot of tools. And you're going to see a lot of tools today. We've put up a sampling of many of them. And the thing to know about the tools and processes, they are generally developed within an operating company, not within an ivory tower someplace.

And so one of the great benefits we have is that operating companies are doing different things and experimenting everyday. We have a chance to see what works around that and put some of the standard work that Dan mentioned around those things that are working and share it more broadly. And that's really where most of these tools originated.

If you then look at this list in particular, it's a combination of both innovations that our operating companies have driven, as well as demand that our operating companies might have when they think about their own growth agenda and how they're going to accelerate growth and outperform those markets.

So to draw out some of the pieces here, on the dream side, things like market segmentation will help us find those insights and figure out where there are pockets of disproportionate growth in the marketplace. Brand and tools will help us figure out where our brands currently sit with regards to awareness and different characteristics and how we want to build on that.

If you think about some of the tools that are in the develop side of the equation, some of them around product and project management. So how do we make sure that all the pieces are coming together in the right way? Tools that today help us go faster, have fewer quality issues, lower cost and better meet customer needs, all sit within the develop part of the framework.

And then lastly on the deliver, where we're trying to commercialize those ideas, you'll find tools that help us figure out positioning messages. So how do we get messages that the market is likely to respond to? Web marketing is used quite broadly, as Larry mentioned, as a tool to be able to get our ideas across and in front of as many customers as we possibly can.

Marketing that does lead generation for us or funnel management which helps us increase those conversion rates of things that are in the funnel. One of the things that I think is interesting about these toolsets is they themselves go through a Kaizen process or continuous improvement process. So if we backed up and we're sitting here some years ago, you likely wouldn't see as much on the software side. You likely wouldn't see as much on the website. So as we go through the day and look at the various toolkits within the entire agenda here, growth, lean and leadership, you'll see an evolution that we go through within those as well.

So I wanted to give you an example of one tool, and you'll certainly see some more as my colleagues come up later. Setting pricing is pretty critical around the growth agenda, knowing where to price a product, how to make sure that you've got features and benefits at a point that makes sense.

Managing price leakage can also be an important growth driver as well. And so the tool that I have here in front of you helps us understand what price leakage might look like. And in this case, on the blue bar, it goes from a list price down to a pocket margin.

And our operating companies will typically use this in a Kaizen fashion to figure out things like discount levels. They might use it to figure out things like warranty policies, maybe return policies, maybe freight policies. Typically, what will happen is the operating company will use these tools to go through a series of analytics and have discussions around where do we seek leakage and is it consistent with the value that's being created in the marketplace.

More importantly though is at the end of these Kaizens, in many cases, during the Kaizens, we figured out a way to try-storm or try-test this, but we always leave with a very specific plan of what we're going to go do to make sure that we're driving the results home.

And let me give you one example of what that looks like in practice. So this example comes to us from Tektronix, which is one of the companies in our Test & Measurement segment. And in the case of Tektronix, they looked at the market for basic scopes and said, "I've got an objective here, which is I want to expand margins in those basic businesses, so that I can redeploy back into growth. So I'm going to look at price leakage here in the Kaizen in China and Europe to sort through what that looks like."

So going through the tool in the process in the Kaizen, they identified a lot of levers that they had that would help them expand margins without compromising growth. And in the end, both identified and delivered $1 million, freed up $1 million that was then reinvested back into growth against that core scope segment in those markets.

And so that's one example of how using a Kaizen and a tool in operating company that can create value that further drives the growth agenda. And certainly, you're going to see more of that when we get into some of the examples here in a minute.

I want to take us here into an introduction of Jim Lico, who's an EVP for Danaher, so you can get a sense of what the lean agenda looks like as well. Jim?

James A. Lico

Yes, thanks. Good afternoon. I think, hopefully, by now with Larry's introduction and a view from Barb, you can really see how DBS is really unique. You're starting to see the aspects of growth. Dan, obviously, shows you a lot of the fundamentals and how those fundamentals are really interrelated.

What I would try to do is give you a little bit of a picture of how lean is unique and then -- in our approach to lean is unique as well. A lot of companies have -- will have embraced lean over the years, and we'll talk about lean, and so I think sometimes maybe that only looks the same and really sort of seems the same. So I think what you'll really see from us, hopefully, is a few things that are very different.

As Larry pointed out in his pitch, one of the things that is unique is our culture. And I think as you really think about 25 years from our start in Connecticut to really embracing lean throughout the world, one of the things you really understand is that our culture really makes a difference. In fact, the continuous improvement has been a value of ours -- core value of ours, is unique as well and the fact that it really never -- it doesn't change.

The action and relentlessness that we have and the passion that we have from -- in putting lean into our organizations is very unique. And it's not -- a lot of places, you'll hear about lean advocacy. I think what you'll see today is not lean advocacy, but a passion in practitioners in our leadership positions here in Danaher. We're not just people who think lean is a good thing to do. We're leaders who want to help our teams and our organizations implement lean on a regular basis. And lean really means more than just what is traditional in the way you think about it.

I think as historically, we thought about it in the operations, and lean conversion and Kaizen and kanban and some of those kinds of tools are things that we often think about lean, but we don't normally think about how it gets applied everywhere.

And I think what you really see from us is as our portfolio has changed and as our portfolios grown, lean has really taken on a new definition, a definition that allows business leaders to really apply lean to all of their business principles, all of their business operations for improvement. Dan gave you some examples of how we do it in the forecasting process from a value stream mapping standpoint to take out lead time.

One of the things -- one of the best ways to think about lean is really you're really trying to streamline, right? And value stream mapping is a really great tool and it can be applied in any transactional process, and a lot of people might do that. As our portfolios change though, as our technologies become more broad and more global, global supply chains become more important.

So how do you not only put lean into your own organizations, but how you do it with your extended supply base as well. And we've been on the forefront of doing that kind of thing with our suppliers over the years, no matter where they are in the world.

And really, and as our portfolios changed more in the medical side, applying lean into regulatory processes as well. So that we make sure we can make improvement, but also be consistent with those markets as well. And so a real growth innovation. Larry talked about putting innovation into our continuous improvement process, and I think what you see here is the constant evolution, the constant continuous improvement of our process in and of itself.

And then finally, on the quality side. We've always had a big focus on quality. You saw it's one of our core value drivers. Quality has always been a focus. Customer satisfaction has always been a focus for us. But as we've really taken a broader approach to that to try to extend it through our entire organization.

And let me give you an example of that, what we call the Danaher Reliability System. This is really a comprehensive approach to improve reliability. And what does that really mean? Well, we really think about the Danaher Reliability System, which has come to us as really accumulation of great best practices, of great companies that have become part of Danaher over the years.

As I said, we've always focused on quality but by bringing in new organizations, we've really been able to bring in more tools and really take everything from the design side and design it for reliability, the best thing you can ever do is to design in quality. Then to really make sure that it extends into our supply base and our manufacturing operation but it really extends theirselves into customer service and support.

You saw one of the charts is where we continue to expand the business into different business models, whether it's SaaS business models or service business models. And really, quality really means something different in those processes. And so the evolution of us is to apply lean into those processes to not only be -- improve productivity and improve quality, but also to accelerate growth.

It's a comprehensive approach, as I mentioned, and I think one of the things that makes us most proud about this is that our teams are implementing this, maybe a company that's been around 10 or 15 years. Some of our best practitioners are the companies that have been around a long time. And I think that, for us, is the best test of a new -- of something new.

This is a few years old and -- bringing this all together, and I think what's a great testament to the success is the fact that our -- a lot of our companies that have been around and successful companies that have been around for a long time are some of our best practitioners and some of our companies that we really continue to benchmark throughout the corporation.

So where is that in action? And again, we come back to lean and we think about it in the factory floor. Many of you have been on our shop floors and you've seen lean in the real world and on the shop floor. But here's a great example of lean in the software world.

In some respects, the development of software is very much a factory process. And traditional processes of implementing a designing software can very often be -- have batches to them. There's even some names and things like lean software and that kind of thing.

But DRS is really focused on improving quality in the software development process. Here, you've got an example in our Industrial Technologies segment at Kollmorgen, where they applied it in one of their new software versions.

You can see the number of defects, a 95% reduction in defects from their first version 2.1 to their current version 2.7. So dramatic impact in the business by applying these tools aggressively, relentlessly. And I can tell you that the leaders of that business understand DRS at the same level as the engineers who implemented it on a daily basis.

This not only gives you a great reduction in quality or a great improvement in quality and a reduction in defects, and not only is it better cost, but now being through that, it's a better improved time-to-market, bring solutions to customers faster and bringing solutions, particularly in this business, bringing solutions to customers faster means taking market share and better growth.

So with that, hopefully, you get a good picture of what lean really means today for us. I hope you got a sense that it's unique. It's not just on the shop floor, it's applied in every aspect of our business. It's applied with vigor by all of our business leaders and it really drives success in the business.

We can't do that without real -- making sure that our leaders understand it, understand it at a practitioner level and that we develop and all of that is in our recruiting and interviewing and development processes that are critical to developing our talent and developing leaders in Danaher over the next few years.

Angie Lalor, our Head of HR, is going to come up and give you a sense of that. Angie is relatively new to Danaher and I think she's a great example of our ability to recruit people who really get it and then very quickly not only get it but then practice DBS and then drive DBS processes into every part of our organization, including how we develop leaders. Angie?

Angela S. Lalor

Well, thanks, Jim. Well, I'm going to talk about the third leg of DBS, which is leadership. And leadership in this context is really more than just about the leaders that we put in place to drive DBS throughout the organization, which as Larry mentioned, is critically important.

But it's also about the leadership that we expect every one of our associates to take in integrating DBS into their day-to-day activities, and I think Jim gave some great examples of how that happens.

So how do we do that? Well, like with lean and growth, we really have a broad array of resources that our business leaders pull on to help define how they're going to run their business and also really give our associates and our leaders the capabilities that they need to successfully thrive in a Danaher and a DBS culture.

So on the left-hand side of this, you see a number of really critical tools that our business leaders use to set the strategic direction for their businesses and then to bridge that to execution through policy deployment, which Tom Joyce is going to talk more about in a little bit.

On the right to side there -- the right side of the page, you do see 2 columns that really show you array of processes and tools and programs that we utilize to fundamentally assess talent in the organization, develop that talent, not only for their current jobs, but jobs that they can move into in the future and then really engage them in the work of the business, the vision of the business and make sure that we are -- have good strong retention plans in place to keep them within the company.

One of the most critical tools on this page is talent and organization review. And in this talent planning process, it's really a set of standard work and a cadence of dialogue and discussions that every one of our presidents has with his leadership team, whereby they are assessing, not only the performance of the associates in the organization, but also the potential of those people to move into more senior levels of leadership within the organization.

And in doing so, they're really identifying the population of people that are in our leadership talent funnel. And once we know who that group is, we can take really specific actions to develop them against a set of succession plans that we have in every one of our businesses for every one of our critical roles.

And it's really important that every one of our presidents do this because, not only do they have responsibility for building the leadership pipeline for their business, but we expect them to export talent elsewhere into the company so they can feed the organic growth of Danaher generally and also help make sure that we have leaders to put in place into the acquisitions that we're bringing in to the company.

So our method of developing leaders, we have a number of ways we do it. We use the 70-20-10 model where the vast majority of what they're doing to get ready for bigger jobs is through stretch assignments. And here again, this is where our talent planning process is really important because we can architect those experiences, those jobs, the succession of those jobs, so that they're getting the experiences that they need to be ready to run our businesses.

And it's really critical as well that along the way, they're getting the development that they need through coaching, formal and informal coaching, and then also a smaller amount of it, but an important amount of it through the leadership programs that we have in place.

So we have a lot of examples of this happening across the organization. I think one, just to give you peek at one, if you look at Ron Voigt, he's running our X-Rite business today. Ron came into Danaher maybe 5 or 6 years ago. He had a lot of automotive background. He came into on operations role within our Kollmorgen business, did really a fantastic job.

We wanted to develop his commercial skills, so we moved him cross-platform into the instruments platform in tech as a sales and service leader to give him that commercial experience. And then earlier this year, he was ready for us to put him into X-Rite, where he's doing a phenomenal job integrating that business into Danaher and driving a DBS culture throughout.

Talk about the leadership programs. We really have an array of these, and they're really designed to meet the leaders where they are within their career, starting with front-line supervisor skills for those people that are new to supervision or new to Danaher, all the way up through programs that we have targeted at very specific populations, such as our platform and group business leaders, where we're trying to keep -- teach them what's unique and different about running a platform business beyond what they did as a leader running a single P&L.

And throughout all these programs, we had DBS woven into the fabric of the content. And the faculty for these programs, by and large, are the folks sitting in the back of the room, our leaders, our presidents across the company, because those are the folks that have the experience of running businesses and the DBS culture, and they can teach based upon their experience at success. And sometimes what's even better is through their experiences with mistakes.

Before I turn it over to Tom, I just want to spend just minute talking about immersion. And an immersion is an approach that we take to on-boarding new leaders into the company. It's very unique. I think it differentiates us incredibly from our peers, and it's a really significant investment that Danaher makes.

Any new leader into the company, before they spend day one on their job, they spend 3 months in immersion. And their only responsibility during that 3 months is to learn the company, to learn the culture, to understand DBS and to build that network of resources that they're going to pull on when they go into their role, to help them thrive in a DBS environment.

We do that through a number of tactics. Some of it is in the classroom, but the vast majority of it is very active learning, where we're putting people into our operating companies, having them do the work of DBS through things like Kaizens on the factory floor and having them go through and watch businesses conduct their business using DBS so they can pick up best practice examples that they can carry back into their role.

In 1.5 years, I was the fortunate recipient of this process, and I can tell you it was an incredibly powerful experience. And I went from thinking early on that it was quite a luxury, and it didn't take me very long to realize that it was really an absolute necessity for me to truly understand the DBS culture in Danaher so that I could be effective and really hit the ground running once I did go into my role.

And we see it as one of the key ways that we can sustain the DBS culture as we grow. So that leaders that have been in the organization for 2 or 3 years can be just as strong at championing DBS and the culture as somebody who's been in the business for much longer.

So hopefully that gives you a bit of an overview around leadership. You'll hear some more examples later, but I'm going to turn it over to Tom Joyce, who's going to spend a little bit more time talking about one of those tools, a very important tool, which is policy deployment. Tom?

Thomas P. Joyce

Thanks very much, Angie, and good afternoon. Angie has just given you a pretty comprehensive, albeit a brief overview of our leadership processes. And what I'm going to spend the next few minutes doing is talking to you about one of the most powerful tools in leadership at Danaher today and how that tool helps us to drive DBS throughout the organization.

That tool is policy deployment. And what I'll take you through is a bit of what policy deployment is, why we use it and then a quick snapshot of an example of how we put it into action. You'll see more of how policy deployment impacts our businesses later this afternoon as additional presenters share with you some of their experiences in driving great performance across each of our operating companies.

The term policy deployment, probably unfamiliar to most, and a term that is not intuitively obvious from its connotation, the words themselves, really actually comes from a literal translation of the Japanese term hoshin kanri. Hoshin kanri was a management tool developed in the 1950s that became an integral part of how the Toyota management system ultimately drove the kind of performance that you saw from that terrific benchmark.

What we'll go through now and looking at what policy deployment is, is how that tool really embodies the culture of Danaher that Larry talked about earlier, that customer-centric, process-oriented, results-driven culture.

It starts with our strategic plan. Policy deployment builds off of and essentially is the bridge through which we take strategy and drive towards execution. So we take a 3- to 5-year strategic plan at an operating company level and we identify where in that strategic plan do we have true breakthrough opportunities, opportunities to create real differentiation in how that business performs in its marketplace and where there are opportunities for tremendous competitive advantage.

We then look at those breakthroughs and we break them down into a manageable portion of process improvements that can be achieved in the first year of executing that plan. Then we look at what processes need to be built in order to be able to make the kind of progress that will lead to that 3- to 5-year breakthrough down the road.

This is a key step in understanding where do we apply the tools of the Danaher Business System in a thoughtful way? Not every tool is applied in the same way in every operating company. But policy deployment helps us determine where can those tools be applied most effectively in the interest of creating real breakthroughs.

Finally, what policy deployment sets up is a way of measuring our progress against those very ambitious goals. And ultimately at the end of a first year of the cycle, really do a self-assessment, determine where we've made some great progress, where perhaps we've got shortcomings, how do we course-correct, so that as we go into the second year of pursuing that ambitious objective, we're resetting our processes and again, making those adjustments that will ensure that ultimately we'll be successful.

Policy deployment at its heart is the way we drive world-class sustainable performance, and it is that bridge from strategy to execution.

So why do we use it? Well, we use it, first and foremost, because it's a very powerful tool, but it comes from a recognition that Daily Management, a lot of the fundamentals that you heard about earlier today, and Kaizen, those processes that we drive against point solutions and issues, ultimately won't drive the kind of breakthrough performance that we sometimes need to drive true differentiation.

And so what policy deployment allows us to do, think of it almost as a turbocharger, when we go after a really ambitious initiative. So this graphical example could be used against any particular initiative in any particular operating company, where Daily Management is going to move us up the curve at a somewhat of an incremental rate.

And Kaizen is going to give us perhaps the boost we need from time to time. But when we layer on the power of policy deployment, that chance to really develop a truly ambitious agenda and apply DBS tools in a process-oriented way, we can really take performance to a very, very different place.

Second reason that we use policy deployment is because it helps us align our resources and focus our resources on those breakthroughs. And it allows us to differentiate across our organization structure about who's doing what. So if we look at this graphic representation of time allocation against our leadership structure, our front-line associates are those associates who are driving Daily Management and who are participating in Kaizens.

Our middle management team is increasingly involved in driving continuous improvement over and above Daily Management. But our leaders, their primary objective is to ensure that strategy moves to execution. So our leadership teams are the ones who spend more of their time essentially ensuring that the policy deployment initiatives are the ones that get the lion's share of their resource allocation. So aligning resources and focusing those resources is a key reason why we use policy deployment.

I used the term breakthrough. Looking at our strategic plan and identifying where those true opportunities for differentiation come from through truly ambitious initiatives. We define a breakthrough, while certainly not trying to put a man on the moon, as an initiative that requires a true stretch, that represents a real game changer, a game changer that customers value, where multifunctional efforts will be required, where it's not likely to take simply one function, the sales function or the R&D function or the administrative function to get it done, but where we'll need to pull together a cross-functional team, where we'll need to align the entire organization in order to get there.

And finally, the odds are when we set out towards a policy deployment breakthrough, we probably won't actually know how to get there. And as uncomfortable as that feels for our organization, what's really powerful is when you see the teams embrace that opportunity. That willingness to say, we don't know how to get there, but we're going to define new processes, we're going to set aggressive goals, we'll be willing to fall short from time to time and course correct, but ultimately, if we stay at the course, if we deploy the resources the way we should, we know we'll get there.

So what does it look like in action? Here's just one example, and there are literally hundreds of examples across Danaher today, and we could spend the entire afternoon taking you through policy deployment breakthroughs across each one of our operating companies. This one, many of you maybe familiar with, you've heard us talk about one of our terrific water quality businesses, Trojan Ultraviolet Technologies. Marv DeVries and his team, 3 or 4 years ago, identified that there was an opportunity outside of the normal boundaries that they had defined at Trojan. Those boundaries being generally the municipal drinking water, wastewater and industrial markets for disinfection. They found an opportunity through the voice of a unique customer set, namely shipbuilders and regulators, that there was an opportunity for treatment of the ballast water used on ships, the water that's used essentially to adjust for the tonnage that is being carried on those ships when crossing the oceans. This opportunity, they scaled at somewhere between $25 billion and $30 billion over the next decade. But no daily management process, no Kaizen, no incremental work at Trojan would ever put us in a position to really achieve the breakthrough of penetrating this market and establishing a leadership position. So it was only by establishing a policy deployment objective, by aligning a new set of resources, by really focusing on a whole new set of processes, processes that involve a whole new approach to product development, a whole new approach to how we went to market. And how do we address opportunities around regulations? Things that Trojan had never done before, in fact, didn't know how to do. But we knew the opportunity was worth it. And so policy deployment proved to be the right tool to get after something as extraordinary as this opportunity, was when it was first developed and still remains today and one that we're quite optimistic about seeing the benefits of in the years to come.

So in summary, policy deployment is a leadership process. It's one of the most powerful management processes that we have at Danaher. Policy deployment is the way we bridge from strategy into execution. It does add by focusing us in on what the true differentiating breakthroughs are for an operating company. It helps us align resources appropriately to achieve those objectives, and it helps us rigorously measure our progress along the way and make adjustments as we need to so that we ultimately achieve what will be a differentiator, superior performance and truly ultimately competitive advantage. And that is policy deployment.

So with that, that brings us to the end of sort of the first section of the day. And I'm going to ask Angie and Barb and Jim and Dan to join me up on stage for a few minutes. We're going to take a few questions that you may have. We're going to stick to the sort of morning subject matter, if you will. And I think Megan is in the audience and probably a few others that have microphones available. And if you have questions, we'll be happy to take those for the next few minutes.

Earnings Call Part 2:

• Q&A with Danaher Corporation CEO