Q4 2019 Earnings Call
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I would like to introduce our moderator for the call Mr., Kenneth Apicerno, Vice President Investor Relations Mr. Officer analyst. Please begin the call.
Good morning, and thank you for joining us on the call with me today is more Kasper, our President Chief Executive Officer, and Stephen Williamson Senior Vice President and Chief Financial Officer. Please.
Please note this call is being webcast slides it will be archived on the investor section of our website Thermo Fisher dot com under the heading Webcasts and presentations until February 720 Twond.
A copy of the press release, our fourth quarter 2019 earnings in future expectations is available in the Investor section of our website under the heading financial results.
Before we begin let me briefly cover our safe Harbor statement.
Here's remarks, 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 1995.
Actual results may differ materially from these indicated on 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 September 20 829.
Under the caption risk factors, which is on file with the Securities and Exchange Commission and is also available on the Investor section of our website under the heading I see she filings, while we may elect to update forward looking statements at some point in the future. We specifically disclaim any obligation to do so even if our estimates change there.
For you should not rely on these forward looking statements is representing our views as of 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 for gap.
A reconciliation of these non-GAAP financial measures for the most directly comparable GAAP measures is available in the press release, our fourth quarter 2019 earnings in future expectations and also in the Investor section of our website under the heading financial information.
With that now I'll turn the call over to Mark.
Thank you Ken Good morning, everyone. Thank you for joining us today for our 2019 Q4.
Our call I'm pleased to report that we finished the year strong and exceeded our goals for 2018.
From a financial perspective as you saw in our press release, we delivered excellent revenue and earnings growth.
From a customer once we launch many exciting new products and added a new capabilities to strengthen our unique value proposition.
Our shareholders, we continued to be good stewards of capital, making strategic acquisitions and returning capital to create significant that.
Oh It was an excellent year, we've positioned thermo Fisher very well to begin the two decades as an even stronger company.
I'll cover some of the highlights later in my remarks, but first I'll hit the financials from the quarter Andy here at a high level.
Starting with a quarter or revenue increased 5% in Q4 year over year to $6.83 billion organic growth was also 5% in the core.
Adjusted operating income increased 5% to $1.7 billion and our adjusted operating margin expanded 10 basis points in Q4 to 24.9%.
Finally, we achieved strong adjusted EPS growth in the quarter within 9% increase the $3.55 per share.
Turning to our results for the full year, we increased revenue by 5% to $25.54 billion 2019th.
Organic revenue growth was 6% for the year.
Adjusted operating income increased 6% to $5.97 billion, we expanded our adjusted operating margin by 30 basis points to 23.4% and we delivered another excellent year earnings performance in 2018 within 11% increase adjusted EPS to $12 from 35 cents per share.
As you know are strong performance was fueled by the power of our PPI business system.
Our colleagues use it across the company, who all aspects of how we work. This is not just the only be it's just from earnings but also helps us continuously make our company, even better and that creates a great experience for our customers are 75000 colleagues around the world.
Let me not give you some color underperformance by end markets for the quarter and the year, starting with pharma and biotech we have excellent performance again in the Submarket delivering 10% growth. During Q4, we saw broad based strength across our businesses serving these customers.
Oh, you need depth of capabilities gives us a clear competitive advantage and we continue to strengthen our offerings to gain share, which I'll cover later in my remarks.
Our leading position in serving pharma biotech customers, but double digit growth in this end market for the year.
In diagnostics and healthcare, we saw strong growth in our immuno diagnostics clinical diagnostics and healthcare market channel businesses in Q4.
Through this end market in the mid single digits for both the quarter and the full year.
Turning to industrial and applied broken this end market decline in the mid single digits in Q4, compared with double digit growth. We delivered in Q4 last year. This is predominantly driven by electromed across we business a dynamic consistent with what we saw in Q3 for the full year industrial and applied group in the low single day.
Digits.
Academic and government, we grew in the low single digits during the quarter and for the full year.
Finally, let me comment briefly on our performance from a geographic ones in Q4, we grew in China in the low single digits. This was driven by very strong comparisons in the year ago quarter, coupled with a slower Lisa funds for capital purchases by some of our customers.
Our performance in North America in Europe was very strong driving excellent revenue growth for the total company that speaks to the strength of our portfolio in our global competitive position.
To sum up or performance market conditions continued to be good overall and our teams executed well to achieve another excellent year, we continue to effectively leverage our unique customer value proposition to deliver very strong growth.
That's a good transition to our growth strategy and all use it as a framework to recap some of the highlights for the quarter end. The year. We continued our strong momentum across all three elements of our strategy to put thermo Fisher and the best positioned to win with our customers and gain market share.
Starting with the first pillar of our strategy. It was an exceptional year for high impact innovation.
Washed exciting new products every quarter and across all of our technology focused businesses.
Hi, just a few this morning.
In analytical instruments, you will recall it was a big year for us it SMS with the introduction of our new generation of Thermo scientific Orbitrap instruments, we strengthened our mass spec leadership with the new explores for 80 and eclipse private systems, which significantly raise the bar and protein analysis.
I'm pleased to see very strong customer demand customer demand for these products.
But from across the business, we launched our new generation priority for instrument for structural biology. During the year ended Q4, we introduced Demetrios acts for industrial applications. This new system uses machine learning to automate the collection and measurement of critical data, ensuring quality and efficiency for our cost.
Yes.
Our specialty diagnostics segment, we added a number of new assets during the year, particularly in our Immunodiagnostics business. What we continue to expand our menu of immuno cap allergy tests in transplant diagnostics, we extended our family of lab screen reagents in Q4, our new single antigen expects reagents greatly expand the number of.
Charlie antibodies that lab directors can characterize the help identify the risk of organ rejection in transplant patients.
Turning to our lifestyle solutions segment, we launched a range of new products to strengthen our bioproduction and biosciences and genetic sciences offering highlighted by the new Quantstudio six and seven pro real time PCR systems. In Q4, we introduced the cubit Flex Fluorometer, which is designed to measure up to eight sampoerna.
Initially and with highly accurate and reproducible results.
The capital for next year in Q4, we launched the generics is system to extend our finance for next generation sequencing platform.
Is fully automated system is a real game changer delivering results in a single day from requiring minimal amounts of sample for analysis. We've continued to make great progress with our oncology focus ngs spreadsheet and generics is a significant milestone in our goal to ultimately bring ngs to local hospital settings.
I'm proud of the passion, our team Safra innovation and that makes real difference for our customers. This has always been a key element of our culture. So clearly another fantastic year in that regard and we look forward to continuing our momentum in 2020.
Turning to the second pillar of our growth strategy, leveraging our scale in high growth in emerging markets. We had strong performance across these key regions in 2018 and that included another great year in China with 13% growth.
Looking forward the government priorities in China are aligned with the technologies, we provide to meet customer demands for biologic drugs accredo environment in safer food supplies and we continue to build our industry leading scale to help them solve these challenges you will recall that we highlighted many new developments during the year.
Including the expansion of our clinical trials operations in China to meet growing demand during the quarter, we opened the new pharma and biotech customer solution center in Shanghai.
The center showcases our expertise in critical analytical processes and specialized workflows to help our customers accelerate the development of novel Therapeutics.
Came away from my visits in China in Q4 with incredible excitement rapidly the biotechnology markets expand there and how well positioned we are to support that growth.
Summit on Thermo Fisher has distinct advantage in China and that we're we've created by leveraging our unique industry, leading scale and that allows us to deliver an exceptional experience for our customers there.
This is a strategy that plays out across our high growth in emerging markets around the world as you heard during the year. We also continued to build on our capabilities in South Korea, India, Singapore to help our customers advanced they're working life Sciences, bio pharma and food safety applications.
The third pillar of our growth strategy start customer value proposition.
We continue to enhance it to help our customers meet their goals for innovation and productivity.
We've been talking a lot about our offering for pharma biotech because it's a great example of how we're bringing together our existing capabilities and adding new ones to be the strongest partner for these customers.
We have a proven formula for serving these customers and it resonates from large pharma the small emerging biotech we can support them from the discovery of a molecule all the way to making it a commercial medicine.
Through this through a combination of continuing to strengthen our product offering by introducing relevant new technologies, leveraging our scale and the extensive customer access we have to our research a safety market channel and continuing to expand our CMO service capabilities, which also drives revenue synergies across our portfolio.
This is a formula that's working very well and the 2019, we once again delivered double digit growth with our pharma and biotech customers.
It's been over two years since we acquired PCR and we successfully completed the integration.
We were able to turn business that was growing in the mid single digits into a high single digit grower with a bright outlook.
We've already covered a lot of our former services developments one year, but at a high level. Our approach has been a combination of organic investments and strategic bolt on acquisitions organically. We've continued to expand our global network to meet customer demand, including our capacity for biologics production and sterile fill finish services. We've also.
Our new capabilities to strengthen our position.
Added the new manufacturing facility, Ireland that we acquired from GSK and we significantly increased our capabilities in the high growth gene therapy market with the acquisition of Brian Robot.
In early December I attended the Grand opening of our new viral vector facility in Lexington, Massachusetts. Our team. There is super excited about the opportunities. We now have to help our customers bring innovative new therapies to patients with rare diseases.
The integration of our bio has gone extremely well business performance is strong and I'm really excited about potential. So excellent momentum is serving our pharma biotech customers. It's clear that our value proposition is a key competitive advantage for us and we continue to gain share.
Turning now to capital deployment as you know we have a great track record here and creating value for our shareholders by being good stewards of capital and we continue to successfully execute our strategy in 2018.
First we deployed $1.8 million and strategic bolt on acquisitions second we continue to return capital to our shareholders for a total of $1.8 billion share buybacks and dividends last you'll recall that we announced in Q3 that we refinanced $5.6 billion, orica and that will generate $80 million and savings.
Annually for us so it was a great year from a capital deployment and balance sheet perspective as well.
Let me cover one last highlight from the year before I turn toward guidance and that relates to our commitment to environmental social and governance priorities. We've always been a company that's focused on doing business the right way and that's embedded in our mission, which is to enable our customers to make the will healthier cleaner and safer.
We not only bring our mission to life everyday, but we also have robust programs that connect our customers colleagues and communities. So we can make a direct impact.
This happens in a number of ways, including through our stem education, and environmental sustainability initiatives still much more to get done here, but I'm proud of the work. Our teams are doing so razor SG profile and continue to make our company even better.
Stephen on the assumptions that factor to our revenue and earnings guidance, Let me quickly cover the highlights.
In terms of our revenue guidance, we expect to deliver between 26.61 and $27.1 billion in 2020.
Which would result in reported revenue growth of 4% to 6%.
We are initiating adjusted EPS guidance for 2020 in the range of $13.49 to $13.67. This would lead to 9% to 11% growth year over year.
Before I hand, the call over to Stephen I'll leave you with my key takeaways for the year.
We have consistently achieved excellent revenue earnings growth and extended our track record with another year strong performance in 2019.
We are delivering an exceptional exceptional experience for our customers by continuing to enhance our unique value proposition and using our PPI business system to make our company even stronger we've continued to create significant value for our customers and our shareholders, which puts us in a very strong position as we began the decade.
With that I'll now hand, the call over to our CFO Stephen Williamson Steven.
Thanks, Mark and good morning, everyone I'll begin with an overview fourth quarter of full year results for the total company then I'll provide some color on export segments and conclude with a detailed review of our initial 2020 guidance.
Before I get into the details about financial performance. So it'd be helpful to provide a high level view of how the fourth quarter played out.
Our expectations the time my last earnings call.
During our press release, we had a strong finish to the a and delivered results ahead of our prior guidance on both the top and bottom line.
We delivered 5% organic growth.
Adjusted EPS that was four cents higher than the midpoint of our previous guidance, reflecting good volume go through along with incremental favorable below the line FX.
Strong performance in Q4, unable to deliver 6% organic growth for the full year 2019.
And 11% growth in adjusted earnings per share.
So accidents are nice results in 2019.
Now, let me give me more color on outperformance.
Starting with the earnings results just doing a press release, we grew adjusted EPS in Q4 by 9% to $3.55.
For the full year adjusted EPS with $12 from 35 cents up 11% bus in 2018.
GAAP EPS in the quarter with $2.49 up 12% from Q4 last year in 2019, 40, a GAAP EPS with $9 in 17 cents up 27% prior year.
On the topline our Q4 reported revenue grew 5% year over year in Q4.
Components by Q4 reported revenue increase included five cents organic growth approximately 1% growth from the net of acquisitions and divestitures and a foreign exchange headwind of approximately 1%.
For the full year 2019 reported revenue increased 5% year over year. This includes a 6% contribution from organic growth of 1% positive impact from the net of acquisitions and divestitures.
And a 2% headwind from foreign exchange.
Turning to our growth by geography during the quarter North America grew in the mid single digits Europe grew in the high single digits Asia Pacific grew in the low single digits, including China, which also grew in the low single digits and rest of the well grew in the mid single digits.
For the full year North America grew in the mid single digits, Europe , and Asia Pacific growth. Both grew in the high single digits and rest of the world grew in the mid single digits.
Thank you our operational performance Q4, adjusted operating income increased 5% adjusted operating margin was 24.9% up 10 basis points from Q4 of last year, we saw strong productivity from our PPI business system and good volume leverage this was partially offset by strategic investments business.
And the impact of acquisitions in the divestiture of our analytical pathology business.
Q4 margin expansion was 30 basis points lower than we assumed in the last guidance half of that was driven by FX and the other half by incremental investments to fuel future growth.
For the full year adjusted operating income increased 6% adjusted operating margin with 23.4%, which is 30 basis points higher than 2018.
Yes drop productivity and volume pull through.
Josh the upset by strategic investments business mix.
And the impact of acquisition and the.
For the full year FX was a headwind to present on revenue 10 basis points on operate adjusted operating margin and 2% on adjusted earnings per share.
As a reminder, divestiture of the anatomical pathology business at the end of Q2 was nine cents dilutive in 2019 on a year over year headwind of approximately $120 million on revenue.
$2 million when adjusted operating income and 10 basis points on adjusted operating margins.
Moving on to the details of the piano total company adjusted gross margin in the quarter came in at 46.3% down 60 basis points from Q4 of the prior year.
50 basis points of this was the impact of acquisitions in the divestiture.
For the full year adjusted gross margin was 46.4% down 30 basis points from 2018.
So both the quarter on full year strong productivity and volume pull through more than offset by business mix strategic investments and the impact of have acquisition and the divestiture.
Adjusted EPS DNA in the quarter was 17.6% of revenue an improvement a 70 basis points versus Q4 2018.
Total R&D expense came in at 3.8% of revenue 10 basis points lower than Q4 last year.
For the full year, adjusted EPS, DNA, with 19.1% and imprudent to 60 basis points compared to the full year 2018, R&D expenses were 3.9% of sales 10 basis points lower than the prior year.
R&D is obsessed by manufacturing revenue for the full year with 7.1 person.
Looking at results below the line for the quarter, our net interest expense was $97 million down $30 million from Q4 last year.
Net interest expense for the full year was $450 million a decrease of $18 million from 2018.
A reduction in net interest expense was driven by debt reduction and our refinancing actions.
Adjusted other income and expense was a net income in the quarter of $60 million higher than Q4, 2018, primarily due to changes in nonoperating foreign exchange.
Our adjusted tax rate in the quarter was 11.7% down 50 basis points versus Q4 last year.
Full year adjusted tax rate with 11% in line with previous guidance is 90 basis points lower than the full year 2018, primarily due primarily reflecting the beneficial impact us tax reform and I continue tax planning initiatives.
As I mentioned on the Q3 call, we repurchased $750 billion as much as in early Q4 were bringing the total repurchases between $19 billion to $1.5 billion.
Average diluted shares were 402 million in Q4, and 403 million for the full year both in line with that prior guidance.
Turning to cash flow in the balance sheet for the full year cash flow from continuing operations with $5 billion and free cash flow with $4.1 billion. After deducting net capital expenditures of approximately 900 million.
[noise]. During 2019, we also continued to return significant capital to shareholders with $1.5 billion the share buyback $300 billion in dividends.
And as Mark mentioned, we successfully deployed $1.8 billion their capital through strategic acquisitions.
We ended the year with approximately $2.4 billion in cash and $17.8 billion total debt.
Total debt was up $700 million ended Q3, driven by the completion of our debt refinancing activities, which began in the prior quarter.
Our leverage ratio at the ended the year with 2.7 times gross debt to adjusted EBITDA inline with our expectations.
Wrapping up my comments not total company performance adjusted ROI see was 11.8% up 20 basis points from last quarter and up 90 basis points from Q4 last year as we continued to generate very stronger.
Now I'll provide you with some color on the performance of our full business segments for the quarter and the full year.
Starting with lifetime solutions in Q4 reported revenue this segment increased 8% and organic revenue growth was 9%.
In the quarter, we continue to see strong growth in the segment led by five production by appliances and genetic sciences businesses.
For the full year reported revenue increased 9% and organic revenue growth with 10%.
Q4, adjusted operating income Lifeline solutions increased 11% and adjusted operating margin was 37.5% up 70 basis points year over year.
In the quarter, we drove very strong productivity and voting pull through which was partially offset by business mix and strategic investment.
For the full year 2019.
Adjusted operating income increased 13% and adjusted operating margin was 35.7% an increase of 130 basis points over 2018.
In the analytical instrument segment reported revenue decreased by 3% in Q4 and organic revenue declined 2% in this segment all businesses had a very strong year over year comps given the 12% organic growth we delivered in Q4 2018, particularly in our electron microscopy that.
In addition, the slower released the funds for capital purchases in China impacted Q4 growth for the businesses in this segment.
For the full year reported revenue in the segment increased 1% and organic growth was 3%.
Q4, adjusted operating income in analytical instruments decreased 5%.
Adjusted operating margin with 26% down 60 basis points year over year.
In the quarter, we still very strong productivity, which is more than offset by business mix strategic investments and volume.
For the full year adjusted operating income was 23.1% 30 basis points higher than the prior year.
Turning to the specialty diagnostics segments. As a reminder, that this is the segment that previously included the anatomical pathology business, which we divested at the end of Q2.
In Q4 total revenue declined 1% or organic revenue growth was 7%. We saw strong growth in this segment led by our immuno diagnostics and clinical diagnostics businesses with continued strong growth in our healthcare market channel.
For the full year reported revenue was flat on an organic growth was 5%.
Adjusted operating income decreased 5% in Q4, adjusted operating margin with 23.7% down 80 basis points in the prior year due to the impact of the divestiture.
In the core do we still a strong productivity and volume leverage. However, this is more than offset by strategic investments and the impact of the divestiture and business mix.
The full year 2019, adjusted operating income declined 2% just operating margin was 25% contracting 60 basis points year over year to the divestiture representing the thanks.
Finally in the refractory products and services segments Q4 reported revenue increased 9% organic revenue growth was 7% in the quarter. We saw strong growth across all about businesses within the segment led by the pharma services business and the reset some safety market channel.
For the full year, both reported and organic revenue grew 6%.
Adjusted operating income in the segment for Q4 increased 15%.
Adjusted operating margin was 13.8%, which was higher than the prior year by 70 basis points.
In the quarter, we saw very strong productivity volume leverage contributions from acquisitions and favorable business mix. This was partially offset by strategic investments.
For the full year adjusted operating margin with 12.5% flat 2018.
With that I'd like to review the details of our initial 2020 guidance and as Mark mentioned earlier, we are initiating a 2020 adjusted EPS guidance range $13.49 to $13 than 67 cents, which would result in 9% to 11% growth over 2019.
In terms of revenue guidance ranges 26.61 billion.
$7.01 billion, which would result in reported growth of 46% over 2019.
Our initial guidance for 2020 assumes 5% organic revenue growth for the year.
With regards to add backs in 2020, we're assuming that is a year over year headwind of approximately a 100 million dollar revenue of 0.4%.
And six cents of adjusted EPS will 0.5% largely in Q1 and to a lesser extent in Q2.
We expect six cents of dilution from the sale of the anatomical pathology business, which reflects revenue and operating income headwinds of 105 million $30 million respectively.
Resuming that the acquisitions, we completed in 2019 will contribute approximately $160 million to our reported revenue growth in 2020 .
Turning to adjusted operating margin, we made the decision to reinvest $40 million last year's debt refinancing back into the business. This reinvestment impact 2020 adjusted operating margins by 15 basis points.
In addition, we expect to have about 10 basis points of margin impact in 2020 from our decision to review key commercial contracts for at TCT test business, which is part of our specialty diagnostics segment.
In exchange for some royalty rate concessions, we successfully negotiated long term contract extensions most about PCT commercial palms.
For 2020, this creates a headwind of about $30 million revenue and adjusted operating income.
But in return extent the revenue stream for is highly successful test franchise for many years to come.
Factoring in the impact of these two decisions and the benefits of strong volumes fall through on the organic growth and continued strong productivity from our PPI business system, we expect to extend adjusted operating margin by 30 basis points in 2020 , resulting in adjusted operating margin of approximately 23.7%.
Moving below the line, we expect net interest expense in 2020 to be approximately $340 million.
This is a $110 million lower than 2019 from reflects the debt refinancing activity. We completed this past year into lower average debt level.
We are assuming adjusted.
Other net income will be about $60 million, we expect the adjusted income tax rate to be 10.5% in 2020 the improvement from our 11% rate in 2019 is primarily driven by the continued realization that benefits associated with us taxable.
Receiving net capital expenditures in the range of 1 billion to $1.1 billion. This represents an increase investments of approximately $150 million over 2019, driven by capacity and capability expansions in our pharmacy services Bioproduction businesses.
Free cash flow was expected to be approximately $4.5 billion in 2020 .
The increase there between 19 is primarily driven by our expected strong earnings growth.
In terms of capital deployment I Guide a guidance includes a total of $1.5 billion of share buybacks in 2020 , which we assume will be completed throughout the year.
We're also assuming that will return approximately $350 million or capital to shareholders. This year through dividends.
We estimate of the full year average diluted share count will be between 400 401 million shares.
Our guidance does not assume any future acquisitions or divestitures.
It's also worth noting that guidance does not include any potential impact from the Corona virus outbreak. It is too early to gauge the impact we're fully focused on doing everything we can to help our customers and our colleagues addressed the situation.
And finally, I want to the Textron quarterly phasing for the year or there are several factors to consider.
First note that we have one less day in Q1 and two extra days in Q4 this year.
Organic growth standpoint, we expect Q1 to be a couple of points lower than the full year due to the days impact and the prior year comps, particularly in the analytical instruments segment.
We expect Q4 to be higher than the full year for the same reasons.
Adjusted operating income margin standpoint.
We expect Q1 to be 40 basis points lower in Q1 2019.
This is driven by the phasing of organic revenue and the timing of investments not 2019 acquisitions.
Acquisitions, and divestitures or approximately 60 basis points dilutive in Q1.
Accretion for the rest of the yes, a net neutral for the year.
Due to this phasing of revenue and margins in the year, we expect adjusted EPS in Q1, we just over 21% the full year in Q4 to be approximately 30%.
Q2 in Q3 are expected to be about equal.
So at a high level to start the year guidance assumes 5% organic revenue growth and 9% to 11% adjusted EPS growth a continuation of excellent financial performance track record.
As always we'll strive to deliver the best possible results and I look forward to updating you on our progress as we go through the year with that I'll get the call back over to Ken. Thanks, Steven Operator were ready to open it up for today.
Thank you as a reminder to ask a question.
Press Star one on your telephone to withdraw your question press, the pound or hash key in order to allow everyone Q 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 Q. Please standby will become pilot Q and a Ross.
Sure.
And our first question today comes from the line of Tyco Peterson from JP Morgan Your line is open.
Hey, good morning.
I want to start with performance in the analytical instruments business.
Difficult comp last quarter in other notable quarter over quarter deceleration here.
Anything you could talk too in terms of pacing getting can come up late in the quarter, you talked about the China flow or at least one how much of it was that versus maybe FDI it looks like.
Taking a couple hundred million dollars below.
I can you maybe talk to those two dynamics and if there was anything else that weighed down AI in the quarter.
Yes, Tyco. Thanks for the question in terms of the analytical instruments as you said, we had 12% growth.
Prior year. So our expectations were that we were going to have that as a headwind in our performance is little bit below the expectations that we had really happened.
Late in the quarter in China with a slower release of bonds from specific customers on high end capital equipment in that market.
When we think about.
Comparisons.
Oh election, Mccroskey business as you said has a very strong.
Second half an 18 is actually very strong going into the first quarter of 19.
So we would have challenging comparisons there in the played out pretty much as we expected.
And then I guess for the follow up on China can you maybe just talk about the gives and takes obviously you're not factoring any kind of virus impact are you expecting a catch up on the release of funds.
Maybe just talk about some of the other gives and takes in China for the year end is there an opportunity on krona virus for you guys.
Uh huh.
Yes so.
Let me, let me cover China.
From a China perspective.
I always like to keep things in the contact chart, which is.
Very strong year in China, and 13% growth and when I look back on the year.
Really continued to strengthen our strategic position in the in the country.
You got from our customers continues to be positive.
We were expecting.
We would have mid single digit growth in Q4 based on the comparisons.
Lunch business that I.
So just highlighted and we came in with low single digit growth in China versus the mid single digit expectations for the fourth quarter.
And the driver that was really the slower release capital for high end capital equipment Interestingly enough.
When you look at the remainder of the business, which is obviously the majority of the business various service businesses and all of our consumable businesses actually played out exactly as we saw in the previous three quarters very strong growth across the rest of the portfolio. So seems like a government made some decisions on very large capital equipment purchases to whole funds and.
So that's sort of take their and grown the viruses isn't baked into our into our forecast one way or the.
Thanks, Okay. Thank you.
Our next question comes from the line of Jack Meehans from Barclays. Your line is open.
Thank you good morning.
Wanted to prove a little bit more on the industrial applied end markets are down mid single digits in the quarter.
Obviously electron microscopy weighing on that just I'm curious if you excluded that what you're seeing in terms of the macro was that also weaker year over year and.
Yeah.
Excluding some of the capital seasonality you're talking about there what does the guidance assume for that as of end market for 2020.
So Jack as I look to 20 for the year last year, we grew low single digits in industrial and applied and our guidance has the same.
No single digit assumption for the year and you'll see the flip in terms of phasing, where again, a very strong year of industrial and applied at the first half of 2019, and therefore, we have more challenging comparisons as we start this year than the comparisons ease substantially as the year goes on so it's a little bit softer began and then accelerating growth as the year.
Oh plays out and really what assuming exactly the same market conditions happening industry orders. The only thing thats changing annually, though is just how challenging the comparisons are.
When you look at sort of the day to day run rate business in industrial imply there's always some pockets of strength, we saw some freight markets.
We see two eight you see applications yourself right, but with the larger capital equipment purchases had a difficult comparison, primarily and semiconductor material science applications.
Great. Okay, and then just as a follow up I know even mentioned thank all the businesses within a I had a tough comp but was hoping you could just provide some more color on mass spec and chromatography. How you feel you know did that grow where was that negative also in the quarter from the comp and how do you feel about share gains versus the competitive environment.
Jack So in terms of analytical instruments as a reminder, we have three business lines within our analytical instruments business for materials and structural analysis business, which nordstrom across the PNG troughs compete or chrome aspect business. Our chemical analysis, all three businesses declined in the quarter because all three had very strong.
Comparisons.
Our chromatography and mass spectrometry business performed the strongest up to three businesses and when you look at it for the full year, the electrum across will be or materials, a structural analysis.
Below the segment average and from aspect in chemical analysis was above the segment versus.
I feel good about our share performance in terms of how we performed during the course.
Thank you Gerry thank you.
Our next question comes from the line of Derek You Brown from Bank of America. Your line is open.
Hey, good morning.
Sure.
Hey, Mark can you talk a little bit about some of them. The the margin profile I mean, you've done some deals recently like the GSK deal and the Brommer deal that have been putting some pressure on margins and I guess I'm just trying to get a sense on the go forward basis on what the margin opportunity will be in I mean and and into sort of bell.
Funds into a.
Further capital deployment Ics.
Conversation in that when you sort of look at other other apps that you could potentially add is there a lot more stuff like GSK and brommer.
That you're looking to add that would be dilutive on business I was trying to get some sense on the pacing the margins as you're trying to balance as new growth opportunity with stuff the demand higher capital investment and lower margins at this point in time.
Yes, there are actually question. So saw chart frame it this way.
So when we first thing is about just M&A general and how we think about M&A, we actually don't focus on what the starting margin is meeting as you know over the many years, we've done M&A that was accretive to margins from a form of operating perspective in day, one and we've done ones that have been dilutive right. What we look at.
It is what are the return profiles of what can we do with a business over the right on her answer so you'll have things that sometimes short term or headwinds or tailwinds and when we give our guidance, we always try to carve that out to explain it not just say here's the core everything we had before the acquisition and and then whatever the effects on the acquisitions going forward.
When I look at.
Margin expansion, we laid out at the analyst day, roughly 50 basis points of margin expansion.
On average over the three year model.
As you what was assumed in the in the base view and long with that.
We had assumptions on capital deployment assumptions on tax rate and so forth.
And we made some interesting decisions right. What we want to do is always deliver excellent adjusted EPS growth and manage the business in the best possible way.
When I look at the end market outlook I feel very good about that growth prospects and because we had very good.
Community to refinance our balance sheet during the course of Q3 and because our team was able to identify additional tax planning opportunities.
Very strong EPS growth set up for 2020, we made a conscious decision to actually reinvest some of those savings still delivering cdps growth will come out with a.
Basically 30 basis points of margin expansion relative to the 55 that we had explained at analyst day conscious choice and Steven laid out the details.
Part of it was trading some short term margins in our PCT franchise for a decade long extension of the relationships, which is a great economic deal for the company in the second was we made a decision because of the talent over hourly workforce in the us to reinvest additional funds in wage increases and submitted.
The increases in healthcare cost to that part of our population and so we're taking a slower rate of margin expansion. This year and then I would expect that margins will be brought back where the model was in 2021 and beyond EPS No no factor one way or the other just based on the other things at the start.
And Doug just wanting to clarify that the the comment about.
Joe with the acquisition divestiture impact on margins is on gross margin 60 basis points.
Much much smaller impact in Q4 on the on the bottom line since or adjusted operating income is that kind of in the gross margin profile of the acquisitions in the divestiture.
It was equipment.
Eat into how should we think about that gross margin target for 2020 since the threed seems to be all of the place on a quarterly basis.
Yes, it would depend on the mix of retro revenue that comes in but I think most of them out and expense next year will be coming from leverage best DNA in roughly flat gross margins is probably a good things when thinking about the.
Okay.
Good I got to another follow up.
So yes it is.
It's been a long time since we've I've really thought about thinking about ngs thermo I Hadnt really thought about ion torrent as you closed the life deal and so you've been investing more and doing more of that is I guess can you sort of talk about where you're going for and would you be interested in getting more into the research phase three clinical space in bars them assets out there that are.
That are being kicked to the sideline from the through curious in terms of what's your general plan isn't that market through like how you see that competitive dynamic shaking out.
Given given given your very large competitors footprint there.
Yes so.
Thanks for the question in terms of Ngs.
We have been very focused since 2014.
On maximizing the impact.
Of our Ngs business, and we really a focus it.
On the oncology market.
And you've seen over the last five years or so.
A steady stream of product launches that really have a benefit for clinical researchers and ultimately patients and our technology uses less DNA sample to get a read relative to the alternatives on the market and the ease of use is outstanding.
The generics platform, which we launched.
After November .
As being very well received in the market with incredible customer interest because you can change the way you think about.
How you treat patients which is as opposed to.
Sending out a sample and getting a result, two to three weeks later with an answer you can come into work. The next day and heavier sequence completed and an oncologist and make a decision based on information. That's what you next is all about.
In terms of.
Extent extending into other markets our focus right now is really on oncology and.
Some other applications within where our Ngs platform is outstanding and that's where we kept our focus [noise].
And you signed an agreement with Labcorps in that market I'm. Just wondering could you any idea can you give us some ideas or what sort of volume lap or does that sort of the ngs space.
On the lack of course, obviously huge number of ngs tests across their network.
And I thought it was super exciting that.
Roughly in six weeks of launch that they wanted to actually announced in the world their excitement about the nexus and using us so to have that within their networks I think thats, great great opportunity and you know the specifics, obviously, we're not going to get into but but it's a really nice win for both companies.
If I can squeeze in one more from a client one investor wants to know what their mode exposure is in the Chinese hospital settings is obviously that people are not going there just any idea on which on how your business of the breaks down in China in that regard in diagnostic.
Yes, if you think about.
Healthcare and diagnostics globally.
20% of our revenue, but in China is actually less penetrated so.
It's less than 20% of the Chinese revenue is going to be in health care undiagnosed et cetera.
Thank you.
Our next question comes from the line of Doug Schenkel from Cowen Your line is open.
Hey, good morning, everybody. Thanks for taking my questions.
I'd like to start by going back to the slower than expected release of budget funding for capital equipment investment in China.
Could you just provide a little more detail on on which end markets have you recapture that revenue in Q1 already or do you have visibility on recapturing that revenue soon and how are you treating this dynamic in guidance. So let me pause there and then we can go to the second topic.
Yes. Thanks.
In terms of.
The.
Release of funds.
100% driven in government controlled type entities. So we saw it in certain academic and government customers and in certain parts of the industrial market where their Chinese.
State owned enterprises right. So you always semiconductor fab is owned by the Chinese government will be an example of industrial appointed customer.
In terms of the timing our assumption is that that will work its way through during the course of the year, but we didn't assume.
That it would be immediately in the first quarters away I would think about it.
In our guidance, where we've assumed for China is.
Low double digit growth is what we assumed in our full year guidance for China.
Okay. Thank you for that and it's a good segue to the second thing I wanted to unpack a little bit more which is indeed guidance.
Your first your initial organic revenue growth target of 5% for the year is on the lower end of your long term, 5% to 7%.
Hi, good that you outlined at the analyst day over the summer.
Given seemingly strong on market conditions and a lot of the momentum you've had for little while now.
Is this just beginning of the year conservative conservatism or is this just kind of what you'd expect in terms of a trend towards normalizing towards the mean after a couple of really strong year.
And then I guess just to layer in one more element to that question.
And I apologize if I've missed lift in your prepared remarks, but could you just share where your assumptions for growth are in terms of what you built into 2020 revenue growth guidance by end market and geography. Thank you.
So.
First of all thanks for the question on guidance.
No.
Super excited about 22.
That is if you want to take away the takeaway. So let me put him in context. The last few years 17, 18, and 19 have been very strong.
In our end market and very strong performance formal fisher relative to those end markets as well.
2020, we expect to be exactly the same.
Another year of good end markets and share gain performance for the company. So we're expecting growth to be in line with the long term model are consistent with 5% to 7% organic growth.
We are initiating was five.
Because the way we think about the world is every year, there's some level of risk in every quarter that those risks don't materialize for our industry. They get retired and it gives you the opportunity to raise guidance as you go through the year.
As a reminder, we started out with 5% guidance and 19, we always were aspiring to deliver the best possible results I feel great about the six that we delivered and our posture here is the same are starting out with in the range. So we said we would do with the goal as the year unfolds, we'll be able to continue to move higher and higher in that 5% to 7%. So.
Hopefully that gives you a sense and then a little bit commentary on some of the details on the growth around that youre going to have pharma and biotech with high single digit growth you're going to see.
Single digit growth in the healthcare in diagnostics low single digit and academic government industrial applied and markets would give you the drivers of where our growth.
Great. Thanks again.
Our next question comes from the line of BJ Kumar from Evercore ISI. Your line is open.
Hey, guys. Thanks for taking my question.
Just.
On the Q1 commentary on the guidance here.
I think I heard you see a couple of hundred basis points below the or I'm just curious.
On a was there any basin pack or I'm not sure what what drives that that Q1 below trend.
Yes, so the one less selling days in Q1 assesses under a point headwind from that in many through the comps from the investments business, particularly electron microscopy. This movie the driver.
Gotcha, then that Mark that one not big picture question not view I'm looking at.
The capital assumptions here, four and a half fill in free cash.
You have two plus a existing.
But the share repos just wanted to have you know that's a significant amount of cash burn for thermo, it's been an unusual gear for thermo.
From a cap deployments perspective, any thoughts on sort of how the M&A funnel is looking looking looking.
Shaping up to be a and thoughts on the cash burn on the balance sheet.
Yes, let me answer the question so from a.
The capital deployment perspective, looking back and then looking forward.
Last year.
Well from my perspective, which was.
Be set out the very beginning the year the goal of.
Finishing the strengthening of the balance sheet from the very active pretty we had before that some de levering. Some refinancing we returned to bill you need capital to our shareholders through buybacks and dividends, we deployed a billion a in terms of M&A.
And as we generated cash flow so as I look to this year, we obviously have a very strong balance sheet.
A significant amount of capacity.
We continue to have a very active M&A pipeline.
And as you know we operate in a very fragmented industry. So plenty of things that we look at and we'll only pursue things that we feel are aligned with our strategy and create shareholder value.
Our return assumption.
So is basically a building a half dollars in buybacks, but $350 million and dividends, which means that what's not in our EPS numbers as additional deployment of capital whether its return to buybacks I return or M&A or combination of the two beyond that.
The convention that we've always use which is as the year unfolds, we'll see what the best opportunity is for our shareholders.
We will deploy it slightly in some way and then we'll update you on the impacts.
Our EPS guidance based on where decisions we make us.
Yes.
Thanks for clarifying Mark.
[noise] fuel.
Our next question comes from the line.
Steve Shaw from Wolfe Research your line is open.
Hi, good morning, and thanks for the time here.
First I wanted to drill in just a bit on broader biopharma and maybe a two parter I wonder if you could.
Give us a sense for around the Fourq you and you were at year end, how you saw hardware purchasing dynamics in pharma, specifically relative to the last two three years and.
And then prospectively.
For pharma in 20, how do you imagine the hardware component of the Afirma growth outlook looks like you know whether it's in research settings or by a process and then I wonder how much simpler follow up.
So Steve Thanks for the question.
When I think about.
The pharma and biotech performance really a.
Pass stickier for the company continuing the trend of many fantastic years.
For the year, we had double digit.
Growth.
And when I look at the performance you know it was really across the entire portfolio, we saw strength and Bioproduction bias Sciences pharma services analytical instruments and the restriction safety market channels are left something out it's not deliberately skew sensor broad based strength.
Across the portfolio.
We had a good quarter.
Good year in capital equipment into the biotech and pharmaceutical.
Spent spending so.
No change in trajectory there and you know, we're starting out with a high single digit growth.
Guidance for pharma biotech as the initial SARM points. So we're expecting strong performance and if you go back over the last few years, we had historically started out with mid single to high single digit growth and we feel comfortable starting our high single digit growth based on the momentum we have the portfolio. So that's how we're thinking about it nothing particular on cash.
Capital, we I don't really track year on spend by sub segments. So much I think about year and spend.
More across the portfolio and we saw last year playing out in line with our guidance that we had all year, which was a normal year and spend with some customers, having very strong you're in money, but but others kind of business as usual on that that kind of average out and wall and as a reminder.
The previous two years were very strong year end spends and recollection I think it was 16 was the was below average year and so that's what areas, but but it took that played out last year in line with a guidance.
Okay. Much appreciated and then just a couple of fine points within the broader form outlook. You know, it's safe to say, we can hold up double digit growth and bioprocess, just as a follow up to the prior.
And then I wonder if you could speak to.
How things played out over the course of 2019 and are you thinking about 2020 as it relates to the corporate level price increases year on year, no going into the year given some of the broader trade dynamics there was an initiative.
To look at accelerated pricing, how did that play out and are we back to normal in 2020. Thanks again.
Yes. So it's also the biologics and then Stephen will cover the pricing.
Bioprocess, we had very strong growth.
Couple of companies that reported prior to US we continue to perform a little north of the levels.
Others.
Yeah, and pricing played out as we expected in the year. So good pricing over 1% of price overall offsetting the impact of tariffs that would really the goal there and I'm going forward I generally project kind of it just looks like between hospice and bumps and prices, we think about the company.
20.
Thanks, Greg.
Operator, we have time for just one quick one.
Okay final question will come from the line again areas from Stifel. Your line is open.
Good morning, Thanks, guys Steven on Brammer, just a follow up on the margins. There can you just touch on the impact of that business on overall margins overtime I think that goes from dilutive to accretive at some point, but I was just hoping you confirm that.
But then also just clarify the timing around that if that is true.
Yes, its own the premier margins, we expected to be just under the company average for the full year 2020, there were getting up to the decent level. We ended the year thinking about going into 2021 at the right.
Okay, and then maybe mark it so I'm sure a little hard to do but just given how meaningful it seems like it's been for you guys are you able to quantify what do you think share gains of men for growth over the last year or so.
Yes.
We had.
We had 6% organic growth for the year, you, obviously don't have the benefit of everybody reporting, but that's a very solid performance and when we compare the pieces relative to others, we expected our share gain will be better than the 1%.
In terms of growth and.
Good clarity on that.
Weaker too so so another strong year. So Dan Thanks for the question, let me wrap it up here.
So first thank you.
We're pleased to deliver really another excellent year well, we're much more excited about what the opportunities that ahead of us and we look forward to updating you on the course over the course of 2020. So thanks for your support.
Scientific government purchases.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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