Water Quality Businesses 2018 Sales Performance

Danaher, a global corporation that specializes in various markets such as environmental solutions, life sciences and diagnostics, held it’s 2019 Water Quality Investor & Analyst Meeting on September 17. The purpose of the event was to highlight the 2018 financial performances of the water quality business and the operational and sales strategies applied to three of the company’s water quality businesses, Hach, Trojan Technologies and ChemTreat, which are part of Danaher’s Environmental & Applied Solutions business segment. Hach will be the sole focus of this article, as it is the largest seller of analytical instruments and lab-related products for water quality analysis worldwide, according to a forthcoming report on water testing instruments from SDi. Information in this article is based on the investor presentation.

For the full-year of 2018, Danaher’s water quality business contributed significantly to both the Environmental & Applied Solutions business’ sales as well as the company’s overall revenues. Specifically, the water quality businesses recorded mid-single-digit core revenue growth in 2018 to reach approximately $2.4 billion, accounting for 56% of the Environmental & Applied Solutions segment’s 2018 revenue and 12% of Danaher’s 2018 revenues.

Demand for Danaher’s water quality testing solutions is being spurred by the increasing global awareness of the sustainability of water resources and the impact of water scarcity and drought conditions. As a result, various regions have increased governmental regulations involving water quality, inciting demand for water quality-related testing instruments. In addition, Danaher’s customer base, both private and governmental, need services and consultation for revising workflow and operational processes involving water and wastewater infrastructure.

Explaining why Danaher’s water quality businesses are a stable revenue contributor, Joakim Weidemanis, executive vice president of the Water Quality and Product Identification platforms, credited the Danaher Business System (DBS), the company’s business management model for improving financial performance. He stated, “It’s not just about acquisitions. It’s very much about using the Danaher Business System, which is our culture—how we do things. But at the same time, it’s our collection of good and best practices of how to run different aspects of our businesses.”

Another advantage of the business that Mr. Weidemanis highlighted was how the macroeconomic environment has little impact on the water quality business. “It has got a …very low level of cyclicality for a number of reasons,” he said. “One of the reasons is that regardless of the economic environment, water is an essential part of human life. And we play a big role in making sure that water is safe for us to consume, and also productive for people who use it for their manufacturing industries.” Mr. Weidmanis also emphasized the company’s instruments and related consumables portfolio, which result in a stable customer base, with 55% of revenues coming from recurring business.

Hach’s 2018 Sales Performance

For the full-year 2018, Hach sales grew in the mid-single digits to $1.5 billion, accounting for 63% of the water quality businesses’ 2018 sales and for 35% of Environmental & Applied Solutions’ full-year 2018 sales. Hach sales highlights included recurring revenues, which make up a 45% share of total sales, with the remainder being sales of new analytical instruments. By sales channels, direct sales accounted for the most revenue at 75%.

“We become intimate with the customer during that time period, get the opportunity to build service businesses, later on, software businesses. And as we get more data, we can help the customer with bigger, better outcomes over time.”

End-market wise, Hach serves a large customer base, which includes municipal water facilities that handle wastewater and drinking water usage; environmental and oceanographic federal agencies that regulate water quality laws; and private companies specializing in using water for commercial and industrial purposes. Hach President Kevin Klau noted that the municipal end-market was a revenue driver due to the company’s past collaborations with various government agencies on water quality regulatory methods. “When local, state or federal regulatory authority asses that a certain water quality parameter needs to be measured or reported on, that’s a very positive driver for Hach,” he said. “Decades ago, we helped write a lot of those methods [and that] continues to this day—we get to advise and partner with those regulatory agencies which really helps with a sustainable business.”

Hach’s product lines and services include lab and portable instruments, online analyzers, consumables and software. Mr. Klau explained Hach’s business model for maintaining its presence in customers’ work environments. “The Hach transactions and the products and services that we sell typically are [at a] much lower price point, and so that means that the decision to make that purchase can be made from lower in the organization,” he said. “That typically is an operating expense decision, not a capital budget decision. As a result, it’s not susceptible to the macro changes and investment decision that might be made from larger industrial customers or even municipalities if they have to hold back spending.”

During the presentation, Mr. Klau used the HACH SL1000, a portable parallel analyzer, as an example. Despite being priced relatively low, the HACH SL1000 generates new revenue by customers continuously buying instrument-related consumables. In summarizing the value of the aftermarket to Hach, Mr. Klau stated, “We have a tremendous installed base, having been focused on this business for decades, and the application expertise together with that consumable pull through really created a great business model for us. “

Geographically, Hach’s sales show broad-based demand globally. North America and the combined regional sales for High Growth Markets (China, Eastern Europe, the Middle East, Africa, Latin America and Asia, excluding Japan and Australia) were evenly matched in 2018 in terms of percentage of total Hach sales. China was a sales highlight throughout the year thanks to its prioritization of water quality within its municipal and industrial end-markets.

Hach’s Strategies and Processes Applying DBS

Mr. Klau also described how the company applies the methods and principles of DBS and how the system assists in technology innovation, commercial execution and an increasingly global presence. Mr. Klau claimed that the DBS system has boosted Hach’s core revenue growth to mid-single digits in a five-year time frame, in comparison to its peers whose sales have only increased by low single digits.

Hardware and Software Innovation

Regarding technology, Mr. Klau detailed Hach applied DBS to change its processes for new instrument development and to utilize software to help serve customers’ needs. For example, the company has decreased the development cycle from more than 36 months to 18 months using the same R&D resources by utilizing a new process called Speed Design Review (SDR). What makes SDR distinct, according to Mr. Klau, is that Hach simultaneously implements the development process of hardware, manufacturing and service. As a result of the process, new instrument development has decreased by two years, while new products’ sales contribution has risen 35% from 2017 to 2019. In addition, Hach has seen a 25% increase in new product launches in the last two years. Mr. Klau said, “We think that’s not only beneficial for customers, but it helps us increase the cycle time and cadence with which we can bring new products [to market].”

About software, Mr. Klau highlighted the company’s Claros software, which assists customers in their water analysis needs, and how it has helped the company become more of a presence in customers’ online and laboratory environments. “We started solving really important point problems for customers… we expanded that to solve broader, more enterprise-level problems and really become an even bigger part of our customers’ universe,” he noted. “Not just in the laboratories or online, but connecting those environments in a way that makes our positions in those environments more sustainable and more important.”

Mr. Klau further broke down how the Claros software benefits customers in three key areas: instrument management, process management and data management. For instrument management, Claros’ predictive diagnostics model assists customers in the maintenance and troubleshooting of instruments, as well as provides remote access to and assistance in lab and process readings in real-time. Claros’ process management features include making sure a facility is compliant and efficient as well as managing the water treatment process. Mr. Klau elaborated, “We help make a process decision. We can turn on something like a fan or a blower. We can dose a chemical. And when we can do that more precisely, we can save them a significant amount in operating cost, we can also increase the environmental compliance and know that they are reducing their risk of an event, all of which they really value—so moving from our position originally as a sensor provider now to a position that is much more embedded in the customer’s enterprise through our process management efforts.”

Claros’ data management feature assists in data formatting, aggregation, visualization and reporting. “We’re bringing in disparate data from all across the enterprise, Hach sensor and other instrumentations across the customer universe,” said Mr. Klau. “And that’s where we get at some of these higher-value use cases—where we can look at things like what’s happening to their collection system, what’s happening in their source water [and] how they can manage events more effectively.”

Since the launch of Claros, the product’s sales have seen a 35% CGAR since 2016 to more than a 4,500-customer installed base globally as well as a $1 billion market opportunity with its capabilities. Mr. Klau stated the reason for Claros’ success has been Hach assisting customers in lowering cost, improving compliance and reducing risks thanks to its increased presence in customers’ environment.

Commercial Execution

During the presentation, Mr. Klau highlighted the DBS 5 Point Commercial Model as being an important feature in Hach’s 2018 financial performance. The Model outlines the level of engagement Hach has with customers via various channels: 1) Key Accounts, 2) Field Direct, 3) Inside Sales 4) E-Commerce and  5) Distribution Partners. Mr. Klau noted how Hach benefits from DBS methods, especially through Funnel Management, which is the streamlining of sales. “From a growth perspective, we’ve been excited because funnel management, or how we manage opportunities through the funnel, is something that we’ve seen tremendous opportunities in accelerating our customers’ journey, and really condense the cycle time that they spend considering whether to make a purchase decision with Hach,” he commented. “It has driven significant efficiencies so that our sellers can spend more time with customers, and it really has eliminated a lot of waste in the sales process. Much the way we applied the same thinking in the factories years ago.” Consequently, where implemented funnel management has spurred a 20% revenue increase for Hach in 2018.

Mr. Klau also discussed Hach’s e-commerce platforms. “We have a lot of customers that want to drive more business through e-commerce channels. They want to make more efficient buying decisions. They want to be on their own. We met them there. We have a thriving e-commerce business.” Hach’s response to this trend has been creating an e-commerce page to both sell its products and give customers the opportunity to research a product before deciding whether to buy it. Darin Stell, vice president of Global Sales, provided commentary on why e-commerce is growing. “Importantly, it got us into the pre-purchase phase. Customers nowadays are not visiting exhibitions or not using so much printed material. They’re doing their pre-research online,” he said. Thanks to this growing trend, Hach’s e-commerce sales have risen more than 30% since 2015.

Mr. Stell also pointed out two other achievements of Hach’s sales team when applying DBS to the 5-Point Commercial Model. The number of key accounts has risen in the double digits and inside sales growth is in the high single digits. The increase in inside sales was credited to Hach forming local sales teams in regions and having those teams focus on small- and medium-sized customers. Hach did this by tripling the number of sales associates in North America and continuing to expand its presence by establishing a European team across six countries this year.

High Growth Market

The High Growth Market has become a significant revenue driver for Hach over the past five years, with core revenue rising by high single digits during that time frame. In the High Growth Market, Hach has established local teams working on sales, service and R&D. “We’ve seen great success by bringing in our talent and our teams and making them more local. In some ways, investing in growing those teams organically … in other ways, acquiring distribution partners which really helps us accelerate that and get more traction in a more critical mass quickly.” In this way, Hach applied the DBS 5 Point Commercial Model.

Regarding R&D, Hach partners with local OEM companies to co-develop products to provide solutions to a customer’s specific needs. These strategies have engendered Hach to participate in custom projects in the High Growth Market, as well as sell both global and local products on more than 40 country-specific e-commerce websites.

Mr. Klau used China as an example since it has become Hach’s second-largest market regionally due to sales to the municipal and industrial end-markets. Solid demand in China in part resulted in Hach’s full-year 2018 revenue growing 10%. “We have an R&D team in China developing products for that local market. They’re also able to take some of what we done with acquisitions in other regions,” explained Mr. Klau. In the presentation, AppliTek, a wet chemical and biological online analyzer manufacturer acquired by Hach in 2017, was highlighted as an example.

Mr. Klau forecast that the High Growth Market will continue to be a significant source of revenue, stating, “The High Growth Market has been a consistent growth driver for us [and] part of why we think we’ve over-delivered in terms of core growth relative to our peer group and [why we]  expect that to continue.”

Long-Term Outlook

Though none of the presenters provided a sales forecast for Hach, throughout the conference, the presentations emphasized how Hach’s position in the water quality market will make the business a stable revenue contributor in the years to come. Mr. Weidemanis reiterated the key reasons why Hach has succeeded so far. “We, in terms of where we’re positioned, … [have] the most attractive parts of the water cycle in terms of growth and margin opportunity. And the business model that we have is consistent with the rest of the Danaher companies.” Discussing the recurring revenue stream, he said, “We become intimate with the customer during that time period, get the opportunity to build service businesses, [and] later on, software businesses. And as we get more data, we can help the customer with bigger, better outcomes over time.”