Q3 2019 Earnings Call
Thermo Fisher scientific 2019 third quarter conference call.
Time, all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
Please be advised of today's conference is being recorded if you require any further assistance. Please press star zero I know like introduce our moderator for the call Mr. Kinda fair enough.
Vice President.
Of Investor Relations Mr. Arpus are no you may begin the call.
Good morning, and thank you for joining us on a call with me today is more Casper, our president and Chief Executive Officer.
David Williamson Senior Vice President and Chief Financial Officer. Please.
Please note. This call is being webcast slides will be archived on the investor section of our website Thermo Fisher dot com under the heading Webcasts and presentations until November eight 2019.
A copy of the press release of our third quarter 2019 earnings and future expectations that available in the Investor section of our website under the heading financial results.
So before we begin let me briefly cover our safe Harbor statement.
Various remarks that we may make about the company's future expectations plans and prospects constitute forward looking statements for purposes of the safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those syndicated by these forward looking statements as a result of various important factors, including those discussed in the company's quarterly report on Form 10-Q for the quarter ended June 29, 2019 under the caption risk factors, which is on file with the Securities Exchange Commission.
It is also available on the Investor section of our website under the heading SCC filings.
While we may elect to update forward looking statements at some point in the future. We specifically disclaim any obligation to do show even our first even if our estimates change. Therefore, you should not rely on these forward looking statements is representing our views as if any date subsequent to today.
Also during this call will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures for the most directly comparable GAAP measures and available in the press release of our third quarter 2019 earnings and future expectations and also in the Investor section of our.
Web site under the heading financial information, so with that I'll now turn the call over to Mark.
Thank you Ken.
Hello, and good morning, everyone.
Thanks for joining us today for Q3 calls.
We delivered another great quarter, achieving strong financial performance, while continuing to effectively execute our growth strategy to make thermo Fisher scientific and even stronger partner for our customers.
As you saw in our press release, we delivered excellent revenue and earnings growth.
It was another active quarter for new product innovation, and we expanded our global capabilities to enhance our unique customer value proposition.
We also continued to execute our capital deployment strategy completing strategic M&A to further strengthening our offering.
And returning capital to shareholders to stock buybacks and dividends.
We carried a strong growth momentum into Q3 by capitalizing on the continued strength or end markets and the opportunities we had to gain share with our customers.
We have a lot of pilots to cover this morning. So let me begin with an overview of our Q3 financial performance.
First we delivered excellent growth in adjusted EPS, achieving a 12% increased to $2 in 94 cents per share.
Our revenue in Q3 increased to $6.27 billion growing 6% year over year.
Our adjusted operating income increased 9% to $1.42 billion and we expanded our adjusted operating margin by 60 basis points to 22.7% in the third quarter.
So by all measures it was another excellent quarter for us.
Now I'll give you more color on the quarter, starting with an overview of our performance in our end markets.
In Q3 market conditions continued to be strong and we delivered excellent growth.
In pharma and biotech we had very strong performance in Q3.
We delivered another quarter of double digit growth with strength across all our businesses serving this end market.
We continued our excellent momentum here by leveraging our unique value proposition to help our customers accelerate their innovation pipelines and decreased productivity.
In academic and government, we delivered mid single digit growth in two three and so good growth in this end market across all of our major geographies.
Turning to industrial and applied as we expected growth here was flat in the quarter due to the very strong growth. We delivered in Q3 last year in our industrial leave focused businesses.
Good to see continued strong demand in our chromatography and mass spectrometry business from this customer side.
Finally in diagnostics and healthcare we grew in the high single digits. In Q3, we saw broad based growth in our businesses, serving the sudden market led by transplant diagnostics and Immunodiagnostics. So in summary, our teams continued to successfully execute our growth strategy, where clearly gaining market share.
And that's reflected in our strong results.
That's a good segue to a more detailed discussion of our growth strategy, which as you know consists of three elements.
Can you actually developing high impact innovative new products, leveraging our scale in the high growth in emerging markets and delivering a unique value proposition to our customers.
We continue to make great progress each of these areas in Q3 and on the cover some of the highlights.
First in terms of new product innovation, we're focused on creating significant value from our leading R&D investment we're committed to helping our customers dance their work by continuously raising the bar on speed accuracy and ease of use Q3 was another productive quarter for innovation and we kicked in.
All with a strong showing it to major industry conferences in early August .
First at the American Association for clinical Chemistry, we launched new analytical instruments for the diagnostic laboratory that ultimately help clinicians make better decisions for their patients.
Our thermo scientific portfolio of U.S. up the a class what medical devices. Now includes three new systems. The T. as Q office and quantify MD mass spectrometer is and the bank wish haven't D. H plc.
These instruments help customers in clinical labs meet their goals for sensitivity and throughput in a regulated environment.
Second during the microscopy Microanalysis conference, we unveiled a new generation biased instrument cryo OEM platforms for structural biology applications. The trials chief for makes it possible to obtain high resolution images of increasingly smaller protein structures with greater throughput and reliability.
This instrument expands the market in structural biology by adding new performance features that makes it easier to operate for both new and experienced users. In addition, but it's more compact size the cryo Steve for fits into a standard size lap. These benefits will make the cutting edge technology accessible to a broader.
Customer base.
We also had exciting new product launches in the Lifesize solutions segments, Let me highlight a couple.
We've been leveraging our deep expertise in genetic sciences to expand our offering for molecular diagnostics.
Good examples from the quarter was our real time, PCR pathogen detection system and improves the diagnosis of respiratory infections and lease a better decisions about antibiotic treatment.
And finally to meet increasing demand for greater efficiency and Bioproduction, we launched a scalable by react to work for call Thermo scientific true bio discovery automation system.
Shifting to expire reactors controllers and software to help customers more easily transferred data and accelerate scale up as they move from research clinical trials and into commercialization.
Right.
Turning to the second element of our growth strategy, leveraging our scale in high growth in emerging markets. We continue to capitalize on our industry, leading presence to drive growth.
We reported strong performance in these regions in Q3 led by 13% growth in China.
Our industry is perfectly aligned with the government priorities in China as five year plan and that continues to create many opportunities for us our outlook. There remains very positive and we continue to invest to best serve our customers and distanced ourselves from the competition.
For example, Q3, we enhanced our pharma services and bio sciences capabilities to serve the growing biopharmaceutical industry in China.
Sure Joe we expanded our clinical trials capabilities to support the growing number of studies being conducted in China. This new facility further strengthens our pharma services offering in the region, where we've been successfully serving the growing pharma and biotech industry for quite some time.
It will provide high quality primary and secondary packaging solutions for these customers and ultimately patients were undergoing clinical trials.
As China encourages the formation of an innovation driven by a pharma industry locally we see exciting prospects for continued growth.
With this investments usual will become thermo Fisher's largest clinical trials logistics facility in the region.
As part of our strategy to create an integrated clinical supply chain network in China with a focus on quality cold chain logistics and advanced packaging and distribution.
In Shanghai, we opened a buyer scientist customer exploration center.
Scientists accelerate disease and translational research. It consists of two should showcase thermo Fisher laboratories that demonstrate our complete workforce solutions for diagnostics development immuno oncology and disease modeling. This center will serve as a whole for customers to gain hands on product experience.
Customized application development and technical training.
Life Sciences, and health care continue to be key focus areas for the Chinese government and these new capabilities enhance our already strong position in serving the needs of our customers.
The third element of our growth strategy is our unique customer value proposition, our leading scale and depth of capabilities puts us an excellent position to gain share and it's clear that our value proposition is resonating well with our customers.
So position our company for future growth, we continue to increase our capabilities, both organically and Inorganically.
I'll cover the quarter acquisition of my capital deployment uptick, but in terms of organic developments published a three highlights from the quarter that I participated.
And our first services business you may recall that we announced a major expansion or biologics facility in Saint Louis, Missouri last spring.
I recently visited the site and add the chance to recognize the team for completing the first GMP batch since the expansion was completed.
Going from breaking ground to shipping product to 18 months is an impressive accomplishment for biologics facility.
That said the seamless expansion is greatly increased our production capacity to support our global Biologics network. This side is now the largest CDMO North America based on single use Bioproduction platform, which is a showcase of thermo Fisher by reactors single use technologies and automated workflows.
I had the opportunity to go to grow even north Carolina's for pharma services facility for the opening of our New training Center. In Q3. This innovative center is equipped with Wilbert virtual and augmented reality technologies. The goal is to more of a bit more effectively onboard and train colleagues, who will work on sterile injectable production lines, which are.
Complex require extensive training.
These cutting edge tools that only give operators the required level of proficiency and much less time, but also benefit customers by increasing quality and efficiency. This is a great example of how we invest organically to differentiate ourselves from other CDMO shows and our customers own internal capabilities.
Last I attended the Grand opening of our new transplant Diagnostics center of excellence of Westells, California.
We want our research manufacturing and distribution capabilities together at this site to more effectively meet the needs of our customers to the patients. They serve it was great to hear first hand for plant transplant patients and their families about the impact we're having by providing diagnostic tools that effectively mats transplant owners and risk.
Yes.
I'm not going to give you an update our capital deployment activities. We continue to successfully execute execute our disciplined strategy, which as you know is a combination of strategic M&A and returning capital to our shareholders.
In terms of M&A, let me start with an update on our acquisition of Brammer Bio. This is the viral vector CDMO that we acquired in Q2.
Gration is going very well and the business is off to a good start as part of Thermo Fisher.
Our product businesses, serving the gene therapy market are already benefiting from the deep expertise that brammer bio brings to our company.
We also please our acquisition of the Glaxosmithklines site in Cork, Ireland right after quarter end.
So that produces active pharmaceutical ingredients or areas that are used to treat diseases, including childhood cancers depression and Parkinson's.
Cork site as capacity to our Apiay network support customer demands and we're very pleased to welcome 400, new colleagues to Thermo Fisher.
We're excited about the prospects for the site and look forward to leveraging this world class facility to capitalize on growing demand for development and production.
Looking forward, our M&A pipeline continues to be very active and we remain disciplined stewards of capital.
From a return of capital perspective. In addition to our dividend in Q3, we repurchased $750 million overstock, just after quarter end.
One final comment on capital deployment after quarter end, we refinanced $5.6 billion of debt or you need scale and financial track record allowed us to complete a very attractive refinancing our debt portfolio to further strengthen our company and create shareholder value.
With that I'd like to review, our 2019 guidance at a high level I Shudder press release for raising both revenue and earnings guidance for the full year.
The increase is based primarily on our strong Q3 operational performance and also the benefits of our refinancing activities.
We're raising our revenue to a new range of $25.34 billion to $25.50 billion, which would result in 4% to 5% revenue growth over 2018.
In terms of our adjusted EPS, we're raising our guidance to a new range of $12.28 to 12034 cents, which represents 10 step 10% to 11% growth year over year.
So to summarize our key takeaways from Q3, we executed very well to continue our growth momentum and deliver excellent revenue and earnings performance, we launched new products expand or capabilities to enhance our customer value proposition and we also continued to execute our disciplined capital deployment strategy to create value for our customers.
And our shareholders with that I'll turn the call over to our CFO Stephen Williamson Steven.
Thanks, Mark and good morning, everyone I'll begin by taking you through an overview about third quarter results for the total company that provide color on that for business segment.
Include by reviewing our updated 2019 full year guidance.
Before I get into the detailed financial performance, let me provide a high level view, how the third quarter played out but as our expectations at the time about last earnings call in July .
Just on the press release, we delivered a very strong quarter in Q3, with 7% organic growth and 12% increase and adjusted earnings per share.
The 7% organic growth was approximately $90 million more than we had assumed in our prior guidance.
Adjusted EPS was nine cents higher than we did see aimed at the midpoint of our previous guidance. This is driven by six cents from strong operational performance and three cents from a less adverse FX environment. So another excellent quarter for the company.
Now, let me provide more detail in the quarter, starting with our total company financial performance.
In Q3, we grew adjusted EPS by 12% to $2.94 GAAP EPS in the quarter was $1.88 up 7% from Q3 last year.
On the topline I reported revenue grew 6% year over year.
The components at Q3 reported revenue increase included a 7% organic growth.
The 1% contribution from acquisitions.
A 1% headwind from foreign exchange.
A decrease of 1% due to the divestiture about how much comical pathology, but.
Turning to our growth by geography, North America grew in the mid single digits.
Europe grew in the high single digits.
Asia Pacific also grew into high single digits with China growing at 13%.
And the rest of the world grew in the low single digits.
Looking at our operational performance Q3, adjusted operating income increased 9% adjusted operating margin with 22.7% up 60 basis points from Q3, 2018, we delivered strong productivity and volume pull through offset impart by strategic investments unfavorable business mix.
The headwind from foreign exchange in Q3, with just over 1% on revenue and adjusted operating income, but there's no material impact from FX on adjusted operating margin expansion or adjusted EPS in the quarter.
As a reminder, the sale of the anatomical pathology business is completed last quarter the impact of the divestiture on Q3 with a 55 million dollar reduction in revenue 20 million dollar up adjusted operating income and just over 10 basis points of adjusted operating margin and four cents of adjusted EPS.
Moving onto the details of the P. It out total company adjusted gross margin in Q3 was 46.1% down 10 basis points in the prior year in the quarter strong productivity was offset by strategic investments and unfavorable business mix.
I just asked DNA in the quarter was 19.5 incentive revenue and improvement of 60 basis point versus Q3 2018.
Total R&D expense came in at 3.9% of revenue.
R&D as a percent by manufacturing revenue in Q3 was 6.6%.
Looking at our results below the line for the quarter on net interest expense was $111 billion down approximately $10 million from Q3 last year, driven primarily by debt reduction.
Adjusted other income and expense was a net income in the quota of $26 million, which is higher than Q3 2018, primarily due to changes in nonoperating foreign exchange.
Our Q3 adjusted tax rate was 11.2%, which is 30 basis points lower than Q3 2018.
Q3 average diluted shares were 404 million, which was 2 million lower year over year, mainly as a result of the share buyback, partially offset by option dilution.
Turning to cash flow in the balance sheet cash flow from continuing operations for the first nine months of the year with $3.1 billion and free cash flow with $2.4 billion.
After deducting net capital expenditures of $619 million.
We ended the quarter with $1.3 billion in cash and investments.
Early in Q4, we repurchased 750 million of our shares trading $750 million about shares, bringing our total repurchases for 2000 $19 billion to $1.5 billion.
In Q3, we returned $76 million to shareholders through dividends.
Now turning try that portfolio during Q3 at total debt reduced $2 billion to $17.1 billion driven by strong get to take cash flow generation.
Our leverage ratio at the ended the quarter with 2.6 times total debt to adjusted EBITDA down from three times at the end of last quarter.
In addition, as Mark mentioned earlier, we recently completed refinancing $5.6 billion about that the new that has an average maturity of 15 years at an all in average interest costs of 1.48%, which is half the current adjusted PNM costs of the debt, but it replaced.
This represents an interest saving of approximately $20 million per quarter for our adjusted piano.
Wrapping up my comment not total company performance adjusted ROI see increased to 11.6% up 120 basis points from Q3 of last year. So we continue to drive excellent returns on investment.
Now provide you with some color on the third quarter performance.
Our business segments.
And with a lifetime solutions segment in Q3, both reported and organic revenue growth with 13%.
We feel very good growth across the segment led by a bioproduction and biosciences businesses.
Q3, adjusted operating income and lifetime solutions increased 19%.
Operating margin was 34.5% up 160 basis points year over year.
In the quarter, we drove very strong volume pull through which is partially offset by strategic investments.
In the analytical instruments segment reported revenue increased 2% in Q3 and organic revenue growth were 3% growth.
Growth in this segment was led by the chroma mass spec, but.
Q3, adjusted operating income in analytical instruments increased 6% and adjusted operating margin was 23% up 100 basis points year over year.
In the quarter, we saw very strong productivity. This was partially offset by unfavorable business mix and strategic investments.
Turning to specialty diagnostics segment as a reminder, this at the segment that used to include the anatomical pathology business that we divested last quarter.
In Q3 total revenue declined 2% organic revenue growth in the segment was 7%.
We had good growth across the segment led by the transplant diagnostics and Immunodiagnostic.
Adjusted operating income was flat to prior year due to an 8% impact from the divestiture.
Adjusted operating margin with 25.3% up 30 basis points year over year in the quarter, we saw strong volume pull through and productivity, which were partially offset by strategic investments.
Unfavorable business mix.
50 basis points impacts from the sale of the anatomical pathology business.
Finally in the lithography products and services segment, both reported and organic revenue growth was 6%.
We still strong growth this quarter across the segment led Biopharma services business.
Adjusted operating income in the segment increased 1%.
Adjusted operating margin was 11.6%, which is 50 basis point lower than prior year in the quarter. We saw strong productivity unit volume leverage, which is offset by strategic investments and unfavorable business mix.
Now I'd like to move onto our updated full year 2019 guidance.
As you saw in our press release and as Mark mentioned earlier, we are raising both our revenue and adjusted EPS guidance, Let me walk you through the details.
I'll begin with revenue, we're raising the midpoint of our revenue guidance by $20 million and tightening the range by $40 million.
The 20 million dollar increase in the midpoint consists of three elements.
First a 19 million dollar increase in our organic growth outlook for the year, which reflects the strong Q3 performance no change in our assumption for Q4.
This increases our organic growth outlook for the full yet to 6%.
The second element is $90 million more adverse FX, but is that previous guidance.
And the third element is an addition of $20 million revenue to reflect the acquisition of the Cork, Ireland AI facility.
Turning to adjusted earnings per share, we're increasing the midpoint of our adjusted EPS guidance by 10 cents and tightening the range by four cents.
The 10 cents increase to the midpoint consists of four elements.
Six cents increase from the strong Q3 operational performance.
Fourth that increase to reflect lower interest expense as result of our recent debt refinancing.
Two cents increase to reflect the benefit to the share repurchases we undertook in early Q4.
And the 2% reduction to account for more adverse FX environment, but that previous guidance.
Let me give you a bit more detail in this change the two cents reduction is comprised of three cents benefit in Q3, five cent reduction in Q4 relative to our prior guidance for foreign exchange.
To sum this up 29 team revenue guidance is now range of 25.34 billion to 25.50 billion, which represent four to five cents reported growth, but in 2018 and 6% organic growth.
And our adjusted EPS Guide for 2019 is now range of 12028 cents to 12034 cents, which represent growth of 10% to 11%, but the 2018.
Adjusted operating margin is now expected to be about 23.5%, which results in margin expansion, a 40 to 50 basis points.
A few other details behind the revised 2019 guidance.
Starting with FX.
The mix about FX rate changes since our last guidance had an adverse $90 million net impact on full year revenue $30 million adverse impact from adjusted operating income and a $20 million positive impact below the line. So the so for the full year. We're now seeing that FX will have a negative impact of approximately $500 million on revenue.
Or about 2% 10 basis points the barge and.
And 25 cents.
2.2% on our adjusted EPS.
Lets you continue to expect the year over year growth tariff impact to be approximately $30 million.
Which is just over 10 basis points of margin impact on approximately seven cents of adjusted EPS No change from our previous guidance.
Moving below the line, we're now assuming year end debt will be approximately $17.5 billion.
Net interest expense will be about $450 million down 20 million from the prior guidance, reflecting the benefit of our recent debt refinancing.
And we're seeing that other net income would be about $60 million, which is approximately $20 million higher than that July guidance, reflecting the additional benefit of nonoperating FX realized in Q3.
We continue to expect the 2019 adjusted tax rate to be 11% unchanged from our previous guidance.
We continue to assume net capital expenditures will be between 925 million a 975 million for the year.
Free cash flow is expected to be approximately $4.1 billion no change from previous guidance.
Well similar returned about $300 million the capital to shareholders. This year through dividend no change from our previous guidance.
And we now estimate our full year average diluted shares to be approximately 403 million approximately 1 million lower than our previous guidance, reflecting the recently completed share buybacks.
And our guidance does not assume any additional share buyback this year and does not include any future acquisitions or divestitures.
In summary, we continued the strong performance we delivered in the first half of the yet achieved an excellent quarter, we're very well positioned to achieve I called for the with that I'll turn the call back over to Ken. Thanks, Steven Operator, we're ready to open it up for QNX.
At this time I'd like to remind everyone. If you'd like to ask your question. Please press star followed by the number one on your Touchstone keypad in order to allow everyone in the queue an opportunity to address the thermo Fisher management team. Please limit your time on the call to one question and only one follow up.
If you have additional questions. Please return to the Q1 pause for a moment to compile the Q in a roster.
And our first question comes from the line of Tyco Peterson with JP. Morgan go ahead. Please your line is open.
Hey, Thanks, and congrats on the quarter I want to start with the fourth quarter Guide does the comp is slightly easier sequentially.
I'm, just wondering with a 5% guidance is there any kind of macro deterioration that you're factoring in there or is it just maybe some prudent conservatism.
Taco Thanks for the question.
When you look at the assumption for the fourth quarter.
Remains identical to what we started with the original part of the year back in January and through all the subsequent guidance, which is assuming.
The normal year end pattern of budget spending so.
As a reminder, the last couple of years 17 and 18.
We had above average or strong year end spend and you don't get visibility to that until very late in the quarter. So our convention has been normal year end is what we assume in our guidance in that positions us at best away the year plays out.
We'll have delivered a fantastic year, if you get.
Other very strong finish from budget flush then there'll be an even better year in terms of performance. So that's how we're thinking about it and.
We're not seeing anything in the macro environment Thats, giving us a change to Q4 from like a negative or conservative viewpoint.
Okay, and then for the follow up on.
Factoring obviously, you you're putting a great numbers there we did hear from one of your peers yesterday about some potential concerns over overcapacity in particular round biosimilar. So I'm curious if you could comment on you know your your thoughts there on capacity for the industry right now and then as we think about cell and gene therapy separately, obviously, there's been some mixed data points around the sarepta denial and other sparkling I'm just curious.
The pipeline there is still very robust around brommer comment on that thanks.
So take a thanks for the question so our Bioproduction business is doing race right and.
It really is performing at a very high level our customers. Appreciate the strong positions we have in cell culture media and single use technologies, where an industry where were the on the industry leader.
We had a great quarter. So that's continuing in terms of how we see the market is right. We have all the companies probably have the best insight because we have our production business, which gives you one lines. We obviously have a biologic CDMO, which gives you another lens and then we have these very deep relationship.
It's across the biotech and pharmaceutical industry and what we're seeing is a very robust pipeline of activity. So we feel good about.
What.
Future holes in terms of cell gene therapy. These are young young industry, and you're going to see individual company volatility, but the promise around cell therapy and gene therapy continues to be very strong and we're very excited about our competitive position both in our pharma services business as well as our product businesses serving that market. So.
We feel good about the outlook there. Thanks takeover the questions. Okay. Thank you.
Your next question comes from the line of Jack Meehan with Barclays. Go ahead. Please your line is open.
Thank you good morning I.
I wanted to start with the China region, So 13% growth was right around what we're looking for but obviously, there's been a little bit more noise, which has come out. So I was just wondering as you looked across the businesses are there any areas, where you have any concerns or.
What are some areas that are doing better there in areas that are doing weaker if you just walk us through we agree.
Jack Good morning, and thanks for the question in terms of China.
Another excellent quarter right when I look at how we have been performing very strong our customers value.
Capabilities that we bring to the Chinese market.
And our industry continues to be so incredibly well aligned with the government priorities around their five year plan right, which is we enable environmental protection the expansion of the healthcare system.
Building, an innovative bio pharma industry, those all things that.
Our technologies across our industry.
Benefit from Thermo Fisher as the industry leader and a very unique competitive position that we havent, China positions us even better in terms of our performance and and you see that in our results in terms of.
The the details of what's going on China really conditions continue to be very very similar to what we've seen the last couple of years and as a reminder.
The comparisons in our industrial business also played true in China meeting that we had very very strong year end finish.
The second half last year in the industrial businesses globally. So we have a difficult comparison, there and you see that.
In the results across industrial end markets, but you see that China little bit as well so the 13% very strong growth we're on track to deliver.
The mid teens growth for the years soon.
Great and then just as a follow up on the analytical instruments business the underlying growth even if you adjust for some of the timing dynamics seemed to moderate a little bit.
Could you walk us through what are you seeing in terms of the market in terms of the macro versus share gain in terms of certain products and then finally I didnt hear electron microscopy get called out you know just how are you threading the needle between.
Semi versus cryo there would be helpful. Thanks, Yes. So good question.
Jack in terms of analytical instruments.
That is the segment, where we have our most industrial exposure of our in terms of our business most industrial exposure and we had a very strong second half last year electron microscopy and chemical analysis. So we expected and we've been articulating since the beginning the year that we expect to the second half.
In our industrial businesses to have.
More muted growth because of the challenging.
Performance or the challenging comps against the amazing performance, we had last year. So that's kind of the context when I think about the more detailed below that the comment spec business continues to perform at a good level, obviously, others have not reported in our industry yet were first of the major companies. So.
It's hard to know exactly what our results are versus others, but based on the customer feedback. We have we feel very good that Q3 was another excellent quarter share gain there so that'll get validated in the next to the next week or so.
And in terms of electron microscopy.
The long term out for that business is outstanding we have great interest both in our material science applications ranging from.
Battery development semiconductor advanced materials through the life Sciences application, so when they think about.
Where that business as long term prospects are continues to be mid to high single digit growth business over the long term. So we feel good about our position and analytical instruments and how we're performing.
Okay. Thanks Mark.
Well.
Your next question comes from line of Vijay Kumar from Evercore. ISI go ahead. Please your line is open.
Thanks for taking my question and congrats on a really nice spin here.
Maybe up.
Going back to that life Science question, Biopharma, Bioproduction really strong, but we're seeing both the stack double stack acceleration in your Q on Q accelerating.
Maybe can you parse what is is this an end market growth versus how much of this if thermo just because of your scale, maybe outperforming the market.
And I think you also mentioned in Lps.
Your your services business is up strong, but what about the non services business, maybe just commentary on on.
Those end markets that they would be helpful. Starting point.
Sure. So so these are things with question.
First of all pharma biotech if you step back from.
At how we're doing you know another quarter of double digit growth consistent what we've seen now for a number of quarters.
The markets are good, but our competitive position is truly unique right and we're clearly growing faster than the industry and gaining market share and thats because our customers understand that we really do have a unique value proposition that helps them accelerate their innovation and at the same point help.
Them drive their productivity and all of our businesses did well serving their customer set.
So we feel good about that and as I highlighted earlier Bioproduction continues to perform at a very very high level also so pharma biotech continues to be very.
Very good when I think about.
Some of the the other segments led products and services.
When I think about that.
Across all of the businesses, there, which includes our lab products businesses are pharma services business and our channel business they'll have very solid quarters with good growth, so nothing particularly differentiated between those businesses. They all had strong quarters and top line.
Thanks, and then maybe one not big picture question.
You know you guys have been phenomenon when it comes to cap deployment over the years.
Just given where the rate environment is when you look at validations across the sector, maybe talk about how the funnel is looking and I'm going to appetite for M&A.
Yes.
Thanks, No in terms of capital deployment.
We have a very active phone right. It continues to be very active.
And.
The way, we think about it is we have a very disciplined process and where we have been his.
The successful is doing the right transactions that is very much valued by our customers strengthens the company's long term strategic position and ultimately creates meaningful shareholder value and when I look at the pipeline I feel very good about what the prospects or are there in the key for US is that we've always been disciplined and we will.
It will be disciplined right. So we'll we'll do the right things when I think about this year you know what a great year in terms of strengthening the balance sheet for the long term right with getting an average duration 15 years on our new debt and doing that at half the interest costs that positions us well.
Gives us tremendous financial flexibility in at the same point, we've done one one mid size bolt on and Brammer, we've done the Cork acquisition, a few small deals as well and cleaned up a one aspect of our portfolio, which was selling off the anatomical pathology business. So so a very solid year. There we've returned capital as well and I feel.
Great about what the M&A pipeline looks like.
Thank you guys.
Thanks Rich.
Your next question comes from the line of Derek Brown from Bank of America Merrill Lynch Go ahead. Please your line is open.
Great Hey, good morning.
And our.
Hey, Steven I've a question for you so.
Every since you guys bought paid beyond you the other threet seem to be Mis modeling. Your gross margin number I mean every quarter every quarter I get a call that thermal pdps and I have ever conversation about how well the gross margin numbers came in lower and like in like that and I think there just seems to be that some its model.
And that goes on with it.
Can you just sort of walk people through the dynamics on the gross margin line and.
Sort of how the Knicks in plaques everything like this and ultimately at the question on how should we think about on any one quarter through like year over year gross margin expansion or how to look into like that that there is consistently to.
Debate we have.
Every quarter on what the right margin number is ins or like how to model it.
Derek Thanks to the question is so let's take a long look backs the yet the pace.
Scaled business with significantly lower gross margins in the average for the company. So every year to anniversary that into our numbers that you saw that for 12 12 months over four quarters of some pressure on reported gross margins. It's still good business performance underlying that from the pharma services business.
Then the mixed by revenues being such that the lower growth margin.
Businesses in the company, but lower cost to serve below that there's still decent profit margin businesses have been growing the fastest so by production.
And then the channel business and then from assesses the growing very well as well so that the continued pressure on reported margins, but still very good in terms of generation of adjusted operating income dollars.
So you see seating that dynamic play out an no recently, we're investing fairly significant into our pharma services business for future revenue growth.
That.
One other elements and then this quarter, you'll see it over the next couple is.
Selling the at Amazon nickel pathology business that also little bit of pressure on the company's gross margins on reported basis.
I don't think about modeling going forward will I expect the company to to get there was some benefit in terms of margin expansion coming out of out of gross margins, but not significant and that is really SNA leverage.
But the strong revenue growth on top line this would even be driving the overall operating margin expansion for attempting.
The long term outlook and this for years.
Great. Thanks for clarifying that and you mentioned the anatomical pathology sale.
Can you remind us how a little bit hit on the margin what was the sort of like that.
The drag on the gross margin.
Brad on Dragon organic revenue growth on that business, and then where I'm getting at 7% growth in diagnostics in the quarter very strong how much of that was anatomical coming coming out plus how much of that with realized gains from some of the delays and the second quarter just on incremental volume.
So Eric in terms of the strong performance in health care and diagnostics and the strong performance in our specialty diagnostics business, we have really broad base momentum trend in terms of really excellent growth in transplant in immuno diagnostics and very strong.
Since in our health care market channel, so the divestiture of anatomical pathology.
Which was a slower growing business actually had a minimal impact on the organic growth performance and offset the.
The tailwind from Q2 and send to the.
Revenue was delayed shipments that.
On a significant impact overall when you look on a net basis.
Great and.
I can continue since you mentioned transplant diagnostics, which haven't really talked about the for while I think back there was a time a couple of years ago. When people were worried that one lambda was going to get whack from next gen sequencing coming into market and obviously you are now being facilities can you talk about how you sort of that has expanded.
For curious the see that because I remember that was a debate we had several years ago with people.
Yes, so in terms of transplant diagnostics.
Incredibly important capabilities that we serve the healthcare community globally, which is we help match.
Recipients with donors and we help clinicians monitor transplant.
Health right in terms of Oregon.
Except in sort of rejection rates so.
Critical part of the medical decision.
Process, there that business has performed well as highly profitable it's been good growth and truly an inspirational opportunity I love, what I do but the opportunity to talk to patients.
Recognize the role we play the doctors that make those decisions. So laboratorians that do the work to match.
The recipients with the donors I had that opportunity in August when we opened up our new facility Westells, which is an amazing set of capabilities. We have hundreds of people attend there was really an awesome experienced and highlights the competitive advantage. We have right. There wasn't a customer that didnt leave their saying Okay. This is the industry leader in.
Adjusting for a bright future we have our next gen sequencing were close by the way in transplant diagnostics. So we've made that transition as well and we continue to be very strong performance.
And then just one follow up since ill.
To take advantage of being on the call here.
We one of your competitors has been making a big push into the third party services market can you sort of talk about your unity lab services business and sort of like the dynamics that industry and what's going on with it. It's one of those areas were just where you isn't really have a lot of visibility and so I'm just trying to reconcile that with.
With some of that some of the trends and commentary from some other competitors.
Performing well.
Growing.
Grew around the company average probably will hire someone in that range. So performing at a good level very value by our customers radio we wind up with.
A large number of our colleague and working at customer sites to ensure effectiveness of how they operate their laboratories, and making sure that getting great experiences with our products and.
Good good business in terms of building customer regions and continues to perform with a good luck.
Great. Thank you.
I wonder.
Your next question comes from the line of Doug Schenkel with Cowen and company.
Please your line is open.
Good morning, and thank you I want to talk about Europe run through a Q3 clean ups and then just talk for a couple of yearend into 2020 dynamics. So starting on Europe in a quarter, where you had strength and a lot of different area areas I'd I'd argue one of the most surprising things was your robust reps.
New growth performance in Europe .
Based on what we read and heard from others high single digit growth is pretty impressive and surprising, especially given your high single digit comp.
Can you provide a bit more detail on Europe performance by segment and.
Also share if there's anything interesting in terms of monthly cadence.
Yes, Doug Thanks for the question.
It's been interesting right. If you read you know.
The sort of popular press about Europe you have this.
Quite some time you have is very bleak view right of sort of everything is slow and so forth. If you then look at our performance over the last number of years or performance Europe has been very.
Right, so and thats, because our value proposition resonates right, there's a big pharmaceutical industry presence there that we're very well positioned to serve we have strong presence serving the diagnostics market.
Our high end instrumentation is valued by customers and and the business performing well the high single digit growth.
Reflects very good performance of the team.
We've been delivering strong growth in Europe . So when we did our reviews with our European leadership and myself and members of our company leadership team spent time with the commercial team at the end of the quarter in Europe and.
Market conditions, where we serve continue to be good and our share gain momentum is excellent. So nothing really jumped out to me as being particularly surprising I was pleased with the job well done by the team.
Okay. That's great now for the cleanups on the data storage outage I just want to confirm was that the impact of recapturing revenue lost in the second quarter about $50 million.
And if so would you break that down by segment and comment on whether or not there is anything more to recapture related to that between now and year end.
Yes. Thanks.
As we outlined in the last call approximately $50 million or revenue shifted from Q2 to Q3 lead or what is that we're ready to shift to customers right at the ended the quarter there laid by the masses and there were shifting that in Q3 so.
Basically across the line.
Okay and then the other cleanup was on Bioprocessing, just just wondering if you'd comment on whether or not our math is right, which leads us to conclude that you might have grown 20% to 25% in a quarter or re underwrite neighborhood.
You are in the Randy.
Okay.
And then just the closing.
Okay. Good neighborhood.
Alright, and then just a couple looking ahead questions. There's there's been I guess the first one is there's been lots of focus on the outlook for year end budget flush.
How important it has a budget flush spend to the last few years and how important is in the context of this years guidance. So that's the first one on budget flush.
The second is in terms of your visibility heading into 2020 do you think your customers are likely to compete I'm, sorry, complete 2020 planning and budgeting later than usual given the macro backdrop and just all the uncertainty out there and if so how does that impact youre planning.
And then than the third is kind of a higher level question for you Mark.
10 to 15 years ago, if we were heading into an election year, where there were heightened concerns about the environment for biotech and pharmaceutical companies regardless of size and also by extension concerns about the availability of capital for relatively smaller but higher growth emerging companies I think it.
Fair to say you know a decade deck in a decade and a half ago that that we'd be concerned about the possibility of a moderation in spending for that end market. We may be facing some of those dynamics looking ahead to 2020.
Is it fair to say that the complexity of your Biopharma end market exposure or really just the overall nature of that end market has changed enough over the last decade, where you can say at these dynamics materialize that they'd be less problematic today for thermo than they were 10 to 15 years ago. Thank you.
Sure Great Great question, Let me, let me take a shot at that and.
The first one is.
The will customers do planning later.
Macro environment.
No.
Hi, This is something I thought a lot about actually in preparation for this earnings call.
And when I think back over the last two decades here.
It actually doesn't feel that there's any more uncertainty or challenges then really the normal level of noise right and I remember discussing terrorism risk in discussing dramatic changes in FX and sequestration all of these things and when I sit there and say, yes, there's a lot.
We haven't administration that is very publicity oriented, but when I think about the big picture issues science is great.
Economy is pretty good around the world and our industry is doing very well. So when I think about planning I think it's going to be pretty normal in terms of the process across the industry in terms of you know biotech and funding in all of those things you know.
The end market continues to be strong the science is excellent.
If you have the view into my changes so for our company mix has changed trade. If you think about a decade ago foreign exposure in biotech and pharma would have been more purely on the research side of the equation.
And today, you have more of a balanced with clinical trials capabilities development and production. So so the mix is different and that latter stages typically stickier in terms of the movement.
And then in terms of budget spending and so forth.
Something that it's hard to have a scientific view of it are best view of the difference between a normal year and a strong year in terms of organic growth in the quarter.
Probably two points, meaning that if you go from normal to strong about two points of growth additional represents roughly half a point of growth for the full year and as that could be off a little bit but it gives you at least the magnitude of the difference between normal and strong.
Yes, and digest that you Tim what comes about kind of planning.
No I wouldn't even back in this environment, it's about being flexible and it's about interactive planning and making sure that you're up to date in terms of how you're thinking about operating through an environment with the things that sainsbury rapidly. So.
The company that becoming more and more used to so that environments and operate accordingly.
We're ready for the next question.
Your next question comes from the line of Steve Bushaw with Wolfe Research go ahead. Please your line is open.
Hi, good morning, Thanks for the time here.
One actually for Stephen and then I'll follow up with a broader question from our.
Steven in for obviously good reasons, you guys have stepped up investments in.
Capex for CDMO capacity, and then broadly capital deployment for CEO CDMO capacity, how should we think about modeling that over the next few years are we stable at this new level.
Or do we see grows over time.
Yes.
So Steve Great questions. If you want to think about a pharma services business, we've got great opportunities to capture long long term organic growth with the customers that we have both large pharma and biotech and small biotech come customers. So we recognize that we're adding the right capacity and take.
Is that help continue to fuel that growth for the long term. So that gets is we think about that business being kind of mid to high single digit business and I'm, putting in investments its and maintained at the high end to that level of growth.
And there are a future opportunities that that the for themselves to be able to get great returns that will add appropriately in terms of capex.
The there this year and next year slightly heightened level of Capex in that business.
Links to these great great customer prospects than.
We'll see how that pans out from that going forward, but is ready to maintain the great organic growth.
Yes, I know one thing I would add just kind of at one level off which is.
We did refinancing and it really huge savings in earnings right and we took the $20 million of Q4 benefit to the bottom line as I think about next year, we have another $60 million benefits from the lower interest costs, we will likely reinvest a little more than half of that.
So we continue to accelerate our growth.
Momentum not per se just in pharma services, but we have amazing prospects given our share gain momentum so I think you'll see us.
Likely reinvest some of those savings into fueling.
Continued amazing future for the company.
Got it very very helpful. And then Mark I Wonder if you could talk about proteomics for for a minute I know there's.
Again for good reason a lot of optimism about the growth trajectory there, but over the last let's say nine months or so theres been more competitive noise in this space and historically have been not just a good grower, but a share gainer in proteomics can you talk about that trend and how if at all your view on those trends evolve.
Downstream of the 2019, where some others have entered the space. Thanks a bunch.
Yeah, the business, our Orbitrap franchise is performing very well.
And when I look at the product launches, we had an SMS American society of mass spectrometry in Q2.
Very strong customer interest we've had good order shipments performing very well and there's always competition.
But we're very well positioned to continue to drive growth funding and produce very good right. It is if you think about the has the genomics revolution.
Beyond which is really where you know a huge level of funding is right now in looks to continue to happen. We are the industry leader and well positioned to drive good growth in that part of our business.
I appreciate the color here. Thanks, Steve operating we have time for just one more.
And your last question comes from the line of Brandon Couillard with Jefferies. Go ahead. Please your line is open.
Thanks, Good morning.
Mark just curious if you can speak to pay the encore growth in the third quarter and perhaps share an update on where you stand terms the revenue synergy pull through from that asset.
Yes, so the integration is complete.
The business has performed at an excellent level.
Exceeded the cost synergies.
Really driven by excellent impact from our PPI business system revenue synergies.
Right on track and interestingly enough the funnel of wins, which is future revenue you can see it in the number of expansions that we're announcing across our network that really is driven by revenue synergies right that we basically have sold out or.
At work and we acquired the court facility, you sauce announced expansion of sterile fill finish and biologics and.
It works and that really is just a reflection of how strong customer interest is because of thermo Fisher's reputation in the excellent performance from pharma services. The business grew about the company average in terms of our performance.
In the.
Unless I'm presuming you share net pricing in the quarter and which baked in for full year. Thanks.
Yes, and net pricing continues to be good. So just under one of the hop defense across the company.
Thats in line, but how would be performing for this year.
To continue we ever.
Good job of offsetting some of the tariff impact with pricing and.
Being disciplined elsewhere.
Great. Thanks, Brendan So let me wrap up here.
With a strong nine months behind us, we're really to create physician to achieve another excellent year.
As always thank you for your support of Thermo Fisher scientific we look forward to updating you early in 2020, thanks, everyone.
This concludes todays conference we do thank you for your participation you may now disconnect.
Oh.