Q4 2020 Thermo Fisher Scientific Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher scientific 2024th quarter Conference call. At this time, all participants are in a listen only mode.

For the speaker's presentation, there will be a question and answer session to ask a question at that time. Please press star one on your telephone keypad. If you require any further assistance. Please press star zero. Please be advised that today's conference is being recorded I would like to introduce our moderator for the call today, Mr. Kenneth After sterno.

Vice President of Investor Relations. Mr. Episternal, you may begin.

Good morning, and thank you for joining us on the call with me today is Marc Casper, Our chairman, President and Chief Executive Officer, and Stephen Williamson Senior Vice President and Chief Financial Officer. Please.

Please note this call is being webcast live and will be archived on the investors section of our website at Thermo Fisher Dot com under the heading Webcasts and presentations until February 12 2021.

A copy of the press release of our fourth quarter 2020 earnings is available and the investors 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 1095.

Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed and the company's most recent annual report on form 10-K, and subsequent quarterly reports on form 10-Q, which are on file with the SEC and also available and we invest.

For section of our website under the heading SEC filings.

While we may elect to update forward looking statements at some point and the future and we specifically disclaim any obligation to do so even if our estimates change and therefore, you should not rely on these forward looking statements as representing our views as of any date subsequent to today.

Also during the call, we'll be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP a.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available and the press release of our fourth quarter 2020 earnings and also and the investors section of our website under the heading financial information so with that I'll now turn the call over to Mark.

Thanks, Ken Good morning, everyone. Thank you for joining us today for 'twenty, and 'twenty fourth quarter call and a wrap up of whats been a truly exceptional year for thermo Fisher scientific I hope that you and your families are staying healthy as we all work to get beyond the pandemic.

Before I cover many of the highlights from the quarter and the year I want to share some news about our Investor relations team.

This will be Ken's last earnings call as he plans to retire at the end of March you've all come to know can very well over the years he's been leading the IR function since 2005, and his concluding a remarkable 25 year career at Thermo Fisher Kenneth.

And that's been the voice of our company to the street and he excels in that role and.

He and convey used his extensive knowledge of our company our markets and our opportunities and a way that is informative and engaging in fact, you voted Ken the best IR professional and our industry multiple times over the year.

And I couldn't agree more he's been a terrific partner to me and Stephen Ken. Thank you for a truly stellar contribution for Thermo Fisher.

Looking ahead, we're very fortunate to have wrapped the harder here to take the reins and March perhaps been a part of the Thermo Fisher Investor Relations team for five years and many of you knew him during his time and Wall Street and most recently a bank of America and analysts supporting dark Brown.

I know wrap and the team will carry forward Ken's legacy of excellence and Investor Relations. Please join me and congratulating wrap on his new role and and wishing Ken all the best and his well deserved retirement.

So moving on to our results for 'twenty, and 'twenty and unprecedented year by any measure I am pleased to report that we delivered the strongest year and our company's history. This speaks to the incredible work of our 80000 colleagues around the world.

Through their tireless efforts, we led the industry and supporting our customers globally, enabling the societal response to the pandemic.

We delivered outstanding results by working with speed and scale to meet our customers' evolving needs and this included generating $6 $6 billion of COVID-19 response revenue and quickly returning the base business to growth after the disruption seen across the globe earlier in 2020.

The strength of our response activities allowed us to significantly accelerate investments and our company to create an even brighter future with a focus on talent R&D and new capabilities and capacity.

We also generated significant free cash flow during 'twenty and 'twenty and we're good stewards of capital, creating shareholder value through share buybacks and dividends and building a strong M&A pipeline and reducing our net debt.

I'll share some of the many highlights from the quarter and the year later in my remarks, but first I'll cover the financials at a high level.

Starting with the quarter.

Our revenue grew 54% and Q4 year over year to $10.55 billion and.

Adjusted operating income increased 107% to $351 billion and our adjusted operating margin expanded 840 basis points and Q4 to 33, 3% finally, adjusted EPS increased 100% to $7.09 per share and the quarter.

Turning to our results for the full year, we grew revenue by 26% for 30 $222 billion and 2020 <unk>.

Adjusted operating income increased 60% to $9.56 billion.

We expanded our adjusted operating margin by 630 basis points to 29, 7%.

And we delivered a 58% increase and adjusted EPS for $19 55 per share.

Both our fourth quarter and full year financial performance were truly exceptional on all metrics and demonstrated the strength of our growth strategy and our ability to move with speed and scale and responding to rapidly evolving customer needs.

Let me now turn to our end markets and give you some color on our performance for the quarter and the year.

Starting with pharma and biotech we had outstanding performance again, and this end market delivering approximately 25% growth during Q4.

We saw very robust growth across all businesses, serving these customers, particularly bio production farmer services Biosciences, and our research and safety market channel.

Our Q4 results capped off capped off an excellent year of growth and the mid teens and our strong performance is being driven by our leading role and supporting our customers across a wide range of exciting therapeutic areas, including our significant role and supporting COVID-19 vaccines and therapies.

And academic and government, we grew and the high single digits and the quarter as customers across the globe ramped up activity. We saw good growth across a range of our businesses, particularly chromatography and mass spectrometry, and our research and safety market channel.

Similarly, and industrial and applied and the team's strong execution helped US return this and market to growth and Q4, we grew and the low single digits tour and the quarter and it was good to see our electron microscopy business returned to growth.

Given the significant impact of the pandemic on customer activity earlier in 'twenty and 'twenty, both the academic and government and the industrial and applied end markets declined and the mid single digit growth for the full year.

Finally, and diagnostics and healthcare, we had another incredible quarter delivering more than 200% growth. Our COVID-19 testing revenue continued to accelerate in the quarter as customer demand for our sample preparation PCR solutions and viral transport media remain very robust for the full year diagnostics.

And health care grew by more than 100% driven by our leading role in supporting COVID-19 testing around the world.

Our outstanding performance was the result of having the right technologies and the ability to rapidly scale up manufacturing, which was enabled by our PPI business system.

As I think back to this call a year ago, and how quickly conditions evolve during the year I'm humbled by the incredible impact our team had and navigating the environment, while supporting so many aspects of the pandemic response as a reminder for early in the year, our cryo electron microscopes, we used a restart.

For us to create the first three D image of the virus, we were a critical supplier of P. P and leveraging our strong channel relationships to secure these products and supplies for scarce. We enabled COVID-19 testing and an unprecedented level, creating a market leading molecular diagnostics business and just a few months.

To support hundreds of millions of PCR tests around the world and as you know, we built trusted relationships with our pharma and biotech industry over many years and have provided them with the right set of products and services as a result, these customers engage with us on a significant number of projects.

To help develop and produce vaccines and therapies.

And 2020, this led to $500 million and COVID-19 vaccine and therapy revenue and we expect that to increase to $1 billion and 'twenty 'twenty one.

Our comprehensive response to the pandemic demonstrates the unique capabilities of Thermo Fisher scientific.

Now, let me turn to our business update framed by our growth strategy and highlight just a few of our many achievements as a reminder, there are three pillars to our growth strategy first we're committed to high impact innovation second we leverage our scale and the high growth and emerging markets and third we deliver a unique value proposition to our customers.

Starting with the first pillar it was an extraordinary year of high impact innovation and response to the pandemic, we established worldwide leadership and COVID-19 testing, we quickly developed and gained regulatory approval to launch the attack path COVID-19 combo kit and March providing gold standard PCR based tests for our customers at a scale Orange tree is net.

Ever seen before.

We also significantly expanded our portfolio of COVID-19 related products, including our ample could amplitude solution for high throughput PCR based testing and our Tac check PCR tests for asymptomatic health surveillance.

In addition, we launched a number of highly innovative products across our base business to strengthen our leading positions and analytical instruments Biosciences and bio production for example, and mass spectrometry, we extended our industry, leading Ob trap franchise with two new generation explorer smashed potometer and.

Our electron microscopy business, we launched two selectric imaging filters for our cryo electron microscopes and and Q4, we introduced the tundra cryo electron microscope and these are just some of the examples of how we're continuing to expand the benefits of this groundbreaking technology and democratize to choose.

The second pillar of our growth strategy is leveraging our scale and the high growth and emerging markets our actions and the region are a great example of how our ongoing investments and a differentiated customer experience. We've created sets us up to further capitalize on the significant growth opportunities there.

And China, we further accelerated from our strong Q3 results growing 30% and Q4 two.

To continue to strengthen our presence in China and support the local biotech industry. During the year, we localize the manufacturing of single use bio production technologies, and our center of excellence and Suzhou.

And in the quarter, we announced the formation of a joint venture to establish a biological drug development and manufacturing facility and Hangzhou.

Last time, when and touch on the third pillar of our strategy our unique customer value proposition.

And during 'twenty 'twenty, one our relationships with customers and governments around the world have never been stronger let me give you some examples.

And when the pandemic hit we were uniquely positioned to help our pharma and biotech customers develop and eventually produce COVID-19 vaccine related third related therapies and vaccines because of the trusted relationships, we built over many years.

And we moved quickly and invested significantly and our infrastructure scaling up to support the volumes needed as well as adding capabilities for new modalities such as mrna.

The broad and fast response help deepen our already strong customer relationships and this positions us incredibly well to help them with their near term COVID-19 needs as well as the longer term needs for future vaccines and therapies for other diseases.

And through our extensive work and molecular diagnostics clinical labs now have an even greater appreciation of our leading offering and specialty diagnostics, we've dramatically increased our PCR and sample preparation instrument installed base and our customers have seen how strong a partner we are and addressing their needs.

Bringing this all together, we execute our proven growth strategy using our PPI business system that enables our teams to operate with speed and scale and was a key differentiator and our success last year.

P. P is our operational discipline and enables us to translate the topline growth into strong growth and earnings and free cash flow.

We enter 'twenty and 'twenty with excellent long term growth prospects as a company the way we executed for our customers throughout the year further unlocked our growth potential which will benefit us in 'twenty and 'twenty, one and beyond let me give you some color on the increased investments we were able to make because of our strong performance.

And innovation, we ramped up our R&D investment by approximately 20% to $1 2 billion.

And emerging markets, we expanded our localized capacity and capabilities to further advance our leadership.

And to enhance our unique customer value proposition, we invested significant capex and our high growth bio production pharma services, and biosciences businesses as well as and commercial capabilities to further differentiate the customer experience.

And total last year, we invested an additional $1 billion to accelerate our long term growth roughly half and capex and half and P&L investments. These actions combined with the substantial investments plan for 'twenty 'twenty, one will position our company for a very bright future.

Turning now to capital deployment.

We have a strong track record of creating value for our shareholders and we continue to execute our strategy and 2020 during the year. We returned a total of $1 $8 billion and capital to our shareholders through share buybacks and a growing dividend as you know we announced several strategic bolt on acquisitions and our pharma services business, we entered into a strategic.

<unk> partnership with CSL to expand our biologics capacity for this rapidly growing market we.

We acquired Phyton ex to enhance our flow cytometry offering for cell analysis. Shortly after year and we acquired the European viral vector manufacturing business from Novus shop and.

And we signed an agreement to acquire Mesa biotech to enhance our PCR based diagnostics and in gold standard technology in a rapid point of care testing format.

We ended 'twenty, one 'twenty 'twenty, one with a very strong balance sheet active and inactive deal pipeline and as always we'll continue to apply our disciplined approach to opportunities and continue to be good stewards of our capital.

Before I turn to guidance 'twenty, and 'twenty or 'twenty 'twenty was also a significant year of progress in terms of our environmental social and governance priorities.

We've always been a company that's focused on having a positive impact on the world. That's the true embodiment of our mission, which is to enable our customers to make the world healthier cleaner and safer I'll highlight a couple of initiatives that are having a big social impact.

One is that we launched and significantly funded the Thermo Fisher Foundation for science, and expanding our stem education programs to benefit underserved communities.

And the others that we establish that just project a collaboration with historically black colleges and universities, where we've invested in a COVID-19 testing program, allowing students and faculty to safely return to campus I'm proud of these and the many steps our teams are taking to make a difference and our communities around the world take.

Taking a step back and reflecting on the year as a whole by all measures we delivered an outstanding year.

Now looking ahead to 2021.

Stephen will outline the assumptions that factor into our revenue and earnings guidance, but let me quickly cover the highlights in terms of our revenue guidance, we expect to deliver $35 $1 billion, and 2021, which would result and reported revenue growth of 9%.

We're initiating adjusted EPS guidance of $21.62 per share for the full year, that's 11% growth year over year and a continuation of our outstanding track record.

Before I hand, the call over to Stephen I'll leave you with my key takeaways for the year.

The success of our growth strategy clearly sets us apart as the unrivaled leader and our industry 'twenty and 'twenty truly demonstrated the power of who and what we are and as a company.

And your unique time of need we stepped up for our customers, enabling their important contributions to society and helping them navigate the recessionary impact of the pandemic. As a result, we were able to gain significant market share and solidify thermo Fisher as their partner of choice at the same time, we stayed focus on driving strong returns from <unk>.

<unk> investments and made additional investments to accelerate our future growth.

While I'm very proud of our accomplishments during the past year as I look ahead, and I couldn't be more excited about our opportunities and 'twenty 'twenty, one and beyond with that I'll now hand, the call over to our CFO Stephen Williamson Stephen.

Thanks, Mark and good morning, everyone I'll begin with a high level summary of our Q4 performance and full year results for the total company and then I'll provide some color on our for segments and conclude with comments around our initial 2021 guidance as you saw in our press release, we achieved an exceptional quarter and grew organically, 51% and Q4. This resulted in.

Full year organic growth of 25%.

Similar to previous quarters, I'll break down the organic growth into two elements. The first is the performance of the base business and the second is the scale of the COVID-19 response revenue.

And Q4 at the base business grew 5% organically another quarter of sequential improvement for the full year. The base business was essentially flat as a result of slower economic activity earlier in the year due to the pandemic, partially upset by great commercial execution.

Our COVID-19 response revenue also increased significantly and the fourth quarter to $3 $2 billion, bringing the full year impact for our customers to $6 $6 billion.

This was largely driven by testing related products and instruments, but it's also worth noting that we generated $500 million of revenue and 2020 from support for COVID-19 related vaccines and therapies.

Once again, our PPI business system enabled excellent pull through and we delivered 100% growth and adjusted earnings per share and Q4 and 58% for the full year.

Our PPI business system also enabled us to generate extremely strong cash flow free cash flow for the year was $6 $8 billion up 67% versus the prior year.

Overall exceptional financial results and 2020.

And I provide you with some more details and half performance starting with our Q4 earnings results and as I mentioned, we grew EPS adjusted EPS by 100% to $7 nine for the full year adjusted EPS was $19 and 55.

Up 58% compared to last year.

GAAP EPS in the quarter was $6.24 up a 151% from Q4 last year and 2020 full year GAAP EPS was $15 96 up 74% versus prior year.

On the top line, our Q4 reported revenue grew 54% year over year. The components of our Q4 reported revenue increase included 51% organic growth and a 3% benefit from foreign exchange.

For the full year 2020, and reported revenue increased 26%. This includes a 25% contribution from organic growth and a 1% tailwind and foreign exchange.

Turning to our growth by geography during the quarter all regions delivered very strong growth North America grew just over 65% Europe grew approximately 50% Asia Pacific grew approximately 20%, including China, which grew 30% and rest of the world grew approximately 50%.

For the full year North America grew just over 30% Europe grew over 25% Asia Pacific grew 5% and rest of the world grew approximately 45%.

And then to our operational performance.

Q4, adjusted operating income increased 107% and adjusted operating margin was 33, 3% 840 basis points higher than Q4 last year.

For the full year adjusted operating income increased 60% and adjusted operating margin was 29, 7%, which is 630 basis points higher than 2019.

In the quarter and for the full year, our PPI business system enabled us to drive exceptional volume leverage and we also had favorable business mix. This was partially offset by strategic investments across all of our businesses to support our near and long term growth.

Moving on to the details of the P&L total company adjusted gross margin and the quarter came in at 53, 9% up 760 basis points from Q4 of the prior year for.

For the full year adjusted gross margin was 51, 2% up 480 basis points versus prior year for both.

The fourth quarter and the full year the increase in gross margin was due to the same drivers as those for our adjusted operating margin.

Adjusted SG&A in the quarter was 17% of revenue a decrease of 60 basis points versus Q4 2019 due to the strong volume leverage for the full year. Adjusted SG&A was 17, 9% of revenue and improvement of 120 basis points compared to 2019.

Total R&D expense was $376 million for Q4, and $1 $2 billion for the full year, representing growth of 44% and 18%, respectively, reflecting our increased investment and high impact innovation.

Looking at results below the line for the quarter and net interest expense was $134 million $37 million higher than Q4 last year, primarily due to a higher level of debt and.

Interest expense for the full year was $488 million and increase of $37 million from 2019.

Other income and expense was a net expense in the quarter for approximately $3 million $19 million lower than Q4, 2019, mainly due to changes in non operating FX.

For the full year adjusted other income and expense was a net income of $40 million, and which is $32 million lower than the prior year.

Our adjusted tax rate and the quarter was 16% up 430 basis points versus Q4 last year for the full year. The adjusted tax rate was 14, 3% or 320 basis points higher than 2019, the increase and the tax rate was due to the substantial increase and pre tax profit year over year coming in at.

Marginal tax rate.

Average diluted shares for 400 million and Q4 about 2 million lower year over year, driven by the net impact of option dilution and share repurchases for the full year. The average diluted shares were $399 million.

Turning to cash flow and the balance sheet cash flow was another great highlight for the year.

We significantly increased net capital expenditure to accelerate the execution of our growth strategy, while delivering a 67% increase and free cash flow.

Cash flow from continuing operations was $8 $3 billion net capital expenditures were $1 5 billion and free cash flow was $6 $8 billion.

During 2020, we returned approximately $1 $8 billion for capital to shareholders through stock buybacks and dividends and we ended Q4 with approximately $10 $3 billion and cash and $21 7 billion of total debt.

Our leverage ratio at the end of the quarter was two one times gross debt to adjusted EBITDA and one one times on a net debt basis.

And concluding my comments and our total company performance adjusted ROIC C was 17, 9% up 610 basis points from Q4 last year as we generated exceptional returns and 2020.

Now I'll provide some color on the performance and by four business segments and similar to last quarter I'll start with some framing thoughts on the impact that our COVID-19 response had on our segment results from a revenue standpoint. The majority of the COVID-19 response revenue is recognized and life science solutions and <unk>.

This is revenue from testing kits instruments sample preparation and reagents for lab developed tests recognized and the genetic sciences and biosciences businesses.

This segment also includes revenue from vaccine and therapy production supply is recognized and the bio production and biosciences businesses.

The specialty diagnostics segment includes revenue and the clinical diagnostics business from the molecular controls that go into testing kits and we also recognized revenue from viral transport medium and then microbiology business and for tests and PPE and the health care market channel.

Laboratory products and services segment includes revenue from vaccine and therapy services for.

From our pharma services business. This segment also includes revenue for PPE and the research and safety market channel as well as plastics used and testing workflows and cold storage equipment manufactured by our lab products businesses.

From a margin standpoint for the impact of the COVID-19 and different across the segments based on the scale of the response revenue and the different levels of profitability on that revenue. In addition, during the quarter. We continued to make strategic investments across all of our businesses. This included investments and our colleagues and Sampson incentive compensation and recognition.

And so long as commercial R&D and production capability investments and the size of those investments does not necessary to align with the COVID-19 response revenue in each segment and so that does skew some of the reported segment margins.

A lot of moving parts from a segment margin standpoint reflects the very active management of the company successfully navigating the current environment and position the company for an even brighter future.

Moving on to the segment details starting with life Science solutions, and Q4 reported revenue increased 138% and organic revenue growth was 134% in the quarter, we saw exceptionally strong growth and our genetic sciences business and Fiat Biosciences and by our production businesses for the full year reported and organic.

Revenue growth was 77% Q.

Q4, adjusted operating income and life Science solutions increased 236% and adjusted operating margin was 53, 1% up 16 percentage points year over year.

And the quarter, we drove very strong volume pull through and positive business mix and we continue to make strategic investments across all businesses and this segment. We also had a tailwind and margins from FX.

For the full year adjusted operating income increased 150% and adjusted operating margin was 52% and increase of 15 percentage points over 2019.

And the analytical instruments segment reported revenue increased 8% and Q4 and organic revenue growth was 5% and markets for chemical analysis remain muted, but this was more than offset by strong growth and both chromatography and mass spectrometry and the materials and structural analysis businesses.

We continue to see increased levels of customer activity and these businesses and drove strong commercial execution.

For the full year reported revenue and the segment declined 7% and organic revenue decreased 8%.

Q4, adjusted operating income and analytical instruments decreased 16% and adjusted operating margin was 22% down 580 basis points year over year.

And the quarter, we drove very strong productivity was more than offset by the strategic investments that I mentioned earlier.

He also had a headwind to margins from FX and this segment.

For the full year adjusted operating income decreased 37% and adjusted operating margin was 15, 8% a decline of 730 basis points versus prior year.

The specialty diagnostics segments, and Q4 reported revenue increased by 109% organic revenue growth was 107%.

COVID-19 response revenue with significant and the quarter, enabling us to deliver very strong growth and our microbiology health care market channel and clinical diagnostics businesses.

The level of routine diagnostics testing activity was higher in Q4 than Q3, but still remains below pre pandemic levels, particularly for our immuno diagnostics and transplant diagnostics businesses.

For the full year reported revenue was 44% higher than the prior year and organic revenue growth was 48% adjusted operating income increased 134% and the quarter and adjusted operating margin was 26, 4% up 270 basis points from the prior year.

And Q4, we drove very strong volume leverage, which is partially offset by negative business mix and strategic investments.

For the full year adjusted operating income increased 47% and adjusted operating margin was 25, 6% and improvement of 60 basis points versus prior year.

And finally, and the biopsy products and services segment Q4 reported revenue increased 28% organic revenue growth was 25% and the quarter, we saw strong growth and all of that businesses and this segment as the research and safety market Channel Laboratory products and pharma services for the full year reported revenue was 16% high.

And then 2019 and organic revenue growth was 13%.

And Q4, adjusted operating income and the segment decreased 13% and adjusted operating margin was nine 4%, which is 440 basis points lower than the prior year in the quarter as strong productivity and volume leverage was more than offset by unfavorable business mix and strategic investments.

For the full year adjusted operating income declined 4% and adjusted operating margin was 10, 4% 210 basis points lower from the prior year.

With that I'll turn to our initial 2021 guidance.

We're starting the year with annual guidance of 7% organic growth and adjusted EPS of 21 point $21 62, which will result.

<unk> and 11% growth over 2020 for another year of very strong financial performance.

The dynamics around the pandemic continue to be fluid, but we thought it was important to give you. Our initial view of the full year along with the associated assumptions to help frame. How we are positioning the company for another successful year.

We've chosen to go with a point outlook rather than a range because there are a multitude of different potential customer demand outcomes for the year, especially around testing.

We remain incredibly well positioned to operate with speed and scale to uniquely serve our customers under any demand scenarios that actually plays out this year.

And at the same time, we will continue to invest aggressively for very exciting near and long term growth opportunities, while delivering exceptional financial performance for shareholders.

So just as we did in 'twenty and 'twenty and 'twenty 'twenty, one we will maximize the opportunity to drive short and long term value for all our stakeholders.

Let me now provide you with the assumptions behind our initial guidance.

In terms of revenue our guidance is $35 1 billion, which represents approximately 9% reported growth over 'twenty and 'twenty, including 7% organic growth.

And there are two key elements to the organic growth assumption for.

For the base business here, we're assuming 7% organic growth and 2021.

The second element is the COVID-19 response.

Here, we're starting the year with an assumption of $7 $1 billion of revenue for 'twenty and 'twenty one.

This reflects testing related revenue that's roughly the same as we delivered in 2020.

Plus approximately $1 billion and vaccine and therapy related revenue and 2021, which is double the level, we generated last year.

Let me give you some color on the phasing of the COVID-19 response revenue, we're assuming that vaccine and therapy revenue is fairly linear and 2021.

The testing related revenue is assumed to be very front end loaded with Q1 levels similar to Q4 2020.

Our guidance and assumes testing demand may begin to moderate in Q2 and potentially moderate further as the year progresses.

Should the pandemic be longer lasting and the need for testing maintained and the sizable upside to the $7 1 billion, particularly and the second half for the year for.

And we're really well positioned to support our customers should demand levels be higher than this initial guidance assumption.

Have more clarity on the actual second half demand levels later in the year.

With regards to FX, we're assuming a year over year tailwind of approximately $400 million of revenue and a 1.2% and 14th for adjusted EPS or 1%.

We're assuming that acquisitions will contribute approximately $125 million to our reported revenue growth in 'twenty and 'twenty one.

The initial guidance assumes an adjusted operating margin of 29, 8% 10 basis points higher than last year.

Our PPI business system will continue to drive strong volume pull through and productivity benefits will be partially offset by significant strategic investments, adding to those made in 2020 that mark outlined earlier.

Moving below the line and we expect net interest expense and 2021 to be approximately $470 million. This is $20 million lower than 2020 due to lower average net debt and includes the impact of the $2 $6 billion debt pay down debt we completed in January.

We're assuming adjusted other net income will be about $8 million lower by $32 million from 2020, mainly due to changes and non operating FX.

We expect the adjusted income tax rate to be 14% and 2021 the improvements from a 14, 3% prior year tax rate is primarily driven by the benefits of our tax planning initiatives.

We're assuming net capital expenditures of approximately $2 two to $2 $4 billion. The midpoint represents and increased investment of $800 million over 'twenty, and 'twenty driven by capacity and capability expansions and our pharma services by a production Biosciences and laboratory products businesses.

Free cash flow is expected to be approximately $7 billion and 2021, the increase over 'twenty and 'twenty is primarily driven by expected earnings growth, partially offset by the increase and capital expenditure investments.

Our guidance includes $2 $8 billion of capital deployment. This consists of $1 $5 billion of share buybacks, which we completed in January.

$880 million for the recently completed acquisition of <unk> European viral vector business.

And it assumes approximately $400 million of capital returned to shareholders this year through dividends and we.

We estimate that the full year average diluted share count will be approximately 398 million shares and at <unk>.

And this does not assume any future acquisitions or divestitures and so it does not include the acquisition of Mesa biotech, which is expected to close later in Q1.

And finally I wanted to touch on quarterly phasing for the year is there are several factors to consider first note that we have three extra selling days in Q1 and for fewer days in Q4, and 2021, resulting in one less day for the full year.

And then as I mentioned earlier the COVID-19 response revenue included and the initial guidance is more significantly weighted to the first half of the year.

And as a reminder, the 'twenty and 'twenty comparisons are significantly easier and the first half of the year.

For a lot of dynamics impacting the top line growth for by quarter with very strong growth expected in the beginning of the year.

From an adjusted EPS standpoint, we're expecting approximately 54% at the year's total and the first half of the year and 46% and the second half, reflecting very strong operational execution throughout the year.

And then from a near term standpoint, taking into account all of these factors, we're expecting Q1 organic growth and operating margin.

And the profile of those to be similar to Q4, 'twenty and 'twenty.

So and a high level, we're starting the year with guidance of 7% organic revenue growth and 11% adjusted EPS growth a continuation of our excellent long term financial performance track record as always will strive to live and for the best possible results and I look forward to updating you on our progress as we go through the year with that I'll turn the call back over to Ken.

Thanks, Stephen operator, we're ready to open it up for Q&A.

Okay. Thank you and I'll get you.

To allow everyone in the queue and opportunity each way trust with Thermo Fisher management team. Please limit your time on the call to one question and only one follow up if you have any additional questions. Please return to the queue yeah for.

Question comes from Tycho Peterson from J P. Morgan Your line is open.

Hey, good morning, I'll start off by wishing Ken all the best and being great to work with you over the years.

Mark your implied testing drop off and steeper than what we've heard from others like Hologic and I have and I'm curious if you could talk a little bit more about that dynamic in particular is that just a function of you know.

And then non automated PCR testing and maybe in a lower installed base for the amplitude and then I'm curious about nisha bio thoughts on net and Christina entering and increasingly quite a point of care market and are you planning to materially and scale. The antigen test and then how does that factor into the outlook. Thanks.

Tycho. Thanks for the question, Yeah, I am much more optimistic than the way you framed the question right. So if I think about.

Piece, your install base and the assumptions.

We have really strong line of sight to the first quarter reasonable line of sight for the second quarter and after that our customers. Just don't know right. So we made an assumption based that we're going to see incredibly strong demand and the first quarter.

And that it's going to drop off somewhat in Q2, and then we made a much more conservative assumption, but you know the way. The pandemic has played out and there are many scenarios, where I see testing demand being very robust for a long period of time the truth is.

This pandemic is going to be around and some form around the world and doctor is going to want to know whether or not a patient or a person has.

Corona Covid, alright, so I think you'll see as.

As the year plays out there scenarios well above the testing assumption amp.

Ample to demand has been extraordinarily robust our.

Our installed base is growing and that's been a nice adder to the growth that you saw in Q4 and a strong momentum we expect Macy's very exciting right. When you think about what we've learned.

Throughout the pandemic is the PCR testing is truly the gold standard and.

And the accuracy that you get is super relevant and Macy's technology gets you a result, and 30 minutes with PCR capability and it gives you that confidence and the accuracy and the way. We think about it is there are a number of applications that are very relevant to have that rapid thing farmers.

<unk> would be and obvious example, the sports leagues have been using this technology. So those would be examples of where it is and that obviously will be additive to our capabilities is not assumed in our guidance at this point. So thank you Tycho.

Thanks, and then one follow up for Stephen just on the margins you know understanding that 29, 8% operating margin guidance and you think about the gives and takes around.

The Covid Timberlands can you maybe just talk as we think about Covid and eventually wearing off how much you expect to retain and terms of some of the margin uplift you've seen over the past year.

And so when I think about the margin profile that's embedded in this guide.

As I mentioned Q1, similar to Q4, 'twenty and 'twenty and then the other three quarters, they're roughly the same in terms of margin profile. It's a combination of.

And from lost contribution from from the testing revenue drop off and and the timing of investments so could you and indication.

Thank you.

Thanks Tycho.

Your next question comes from Garik <unk> from Bank of America. Your line is open.

Hi, good morning, and all.

Extend my congratulations to Ken and rash.

Stephen I, just wanted to sort of follow up on.

And tyco's comment there I mean for most of it I.

I would say for it for the for a lot of the end of 2020 and what are the incoming calls from investors, where Oh My God Thermo has this huge COVID-19.

And it's going to create these really difficult comps, they're not gonna be able to grow earnings.

Obviously, that's not the case in 'twenty and 'twenty, one, but it's sort of flips. The question now over to 2022 and I realize it's too.

Too early and a certain extent too to really answer that question given all the uncertainty, but I mean all of my incoming questions. This morning from investors are.

The guide for 'twenty, one looks great.

And how do they think about 'twenty and 'twenty, two and I just I don't know.

Initial thoughts on how you can talk about that or if you took and talk about potential.

Potential for earnings growth and in 2022.

And so Derek I've been around the I've been around this one and while I've never been there for <unk>.

And next year's guidance on the opening one but it's a great question and it's one that is a very fair one as well so the way I think about it is the following.

For.

First and think about the way, we manage the company throughout 'twenty and 'twenty, right, which was drive very substantial.

Growth in our financial performance earnings cash flow, while dramatically accelerating and the reinvestment rate and the business right new opportunities will open during the course of the year because of the pandemic because of how we responded because of the relationships, we solidified and bill and we were able to put a $1 billion of.

For additional reinvestment and the business.

The normal increases that we have every year and we're stepping that up again in 'twenty and 'twenty, one and so what does that mean for the future. It means that the company is positioned to grow more rapidly.

And and that obviously will drive good earnings off of that increase kind of base business activity and much of the investments that we made that are supporting COVID-19 are going to be applied to other applications. So obviously vaccines and therapies. We expect will continue to be very relevant and 2022, but at some point there'll be less relevant and that.

Apache City that all converts over to non COVID-19 related activities on the molecular diagnostic side, the install base increase and sample prep and the installed increase in Q P. C. R creates the opportunity to build out and even larger molecular diagnostic business, we increased our installed base hugely during the course of.

The year and more importantly, we.

We satisfied customers and the reason that some of the others in this industry have relatively flat straight through the year results for Covid is because they couldn't get manufacturing capacity up right. We were able to do that and months others are talking about level loaded demand and that's because of the supply has been so constrained with others. So we're excited about our prospects and all.

Lee we will see what the economy is what the growth is all of those things and as it gets much closer to 2022, we'll figure it out, but but I'm extremely bullish about the long term prospects of the company.

Great. Thanks, Mark I know, it's a lot of this what have you done for me lately and sort of conversations but.

You already answered my molecular diagnostics question. So I just have one quick follow up.

And just to clarify the Capex step up in 'twenty, one 'twenty and 'twenty, one that we would expect those levels and sort of fall off in 2022 and beyond.

That's not that's not a new base level capex spending.

And would expect and Stephen and Joe We would expect it to start to.

Wind back down over time, obviously, if there are new opportunities that come up with them right and obviously support them and because we'll get good returns, but but effectively the step up in 'twenty and 'twenty and a further step up in 'twenty, one really support the opportunities materialize and a long term acceleration of growth.

Yeah, I think that's kind of a long long term modeling, it's really around about three to three and a half to center revenue is a good way to think about the profile of the company right now.

Perfect.

Got it thank you very much.

Sure.

And your next question will come from Jack Meehan from Nephron Research. Your line is open.

Thank you good morning and.

And that also congratulations Ken Congrats Ras.

Well deserved. Thank you so one debt dig into the guidance a little bit more so around the assumption for vaccine and therapeutic revenue fairly linear throughout the year.

So we're obviously seeing the vaccine manufacturers scaling capacity into 'twenty and 'twenty. One so could you just give a little bit more color around the framework behind the assumption or are there any takes that youre assuming throughout the year.

So I think one framing is we were at that run rate already in Q4, and so this is kind of have with CA and the year play out was a continuation of why we are so it's a very high level of support for that for for our customers.

And then could you just clarify the last part of your question about the take.

Yeah are there are there any projects that you think drop offs throughout the year.

Oh, Yeah, I mean, there's always we obviously has supported a lot of development.

Development work of which some of those therapies and vaccines will be unsuccessful. So those projects conclude and throwing buds embedded and that embedded and the number but obviously the demand for the successful ones increase so so.

That kind of run rate. We're at is not going to be the exact same products throughout the year it ebbs and flows.

Right and then wanted to turn to analytical instruments as you reflected over the last six months can you versus the first six months of 'twenty and 'twenty, how do you think could be purchasing demand.

Translated throughout the year could there have been some catch up and the second half and then.

And maybe looking forward how does what are your assumptions around that segment for 2021.

Yeah, so in terms of.

The demand profile, obviously, there was very substantial disruptions, both and customers' ability to order or even receive and instrument. During the first part of the year and and obviously all of the other challenges of the pandemic broad.

We saw activity start to pick up a day at a much.

Stronger level, particularly and materials and structural analysis, which is largely our electron microscopy business and our chrome and mass spec business. So Q4 was strong in those regards chemical analysis is still soft total bookings did improve so.

You know what I would expect is that.

And you'll see continued strengthening and this year and that analytical instruments would grow.

Above the company average and so I would think about it.

Thanks Mark.

Your next question will come from Doug Schenkel from Cowen Your line is open.

Alright, good morning, everybody. Thanks for taking my questions before I get into it and once again, Ken and best wishes on the next stage you deserve all the best and congrats to Ralph.

I've always enjoyed working with you both and look forward to.

Working with you both well at least RAF moving forward and here and about what what Ken's do and on the beach so for.

First thing first topic is again on guidance.

'twenty 'twenty, one guidance assumes a base business growth rate of 7%.

According to our math this implies a two year stacked growth rate of around 3.5%, which is well below your longer term growth rate target and also the Q for core growth rate.

How would you characterize the conservatism embedded into 'twenty and 'twenty, one guidance or is this kind of balancing.

Early in the year conservatism, which is typical for you with maybe just seeing some increased headwinds related to COVID-19 restrictions in certain parts of your business.

So when I think about the base business.

I feel good about the implied step up and growth that we saw from Q4 for the full year I going from roughly 5% growth and the fourth quarter to 7% growth and the base business for the full year.

And what's assumed in there are still there's some level of disruption based on the pandemic.

Visualize it.

Our specialty diagnostics business routine doctor visits are still well down right. So there's parts of the business, where you don't see that recovery for a while but we still feel confident and growing at a good rate and I see scenarios that are above the 7% right and so it's not as if.

And that's the only scenario that plays out so I don't know if it's I think it's an appropriate star and I don't know, if it's conservative or not but.

We measure ourselves at the end of the year do we do a great job and so we're going to look at how did everybody else and the industry report and we need to make sure that we're gaining market share and if the 7% reflects market share gains that we're gonna be satisfied and if if there's more opportunity to go faster than that and you're going to see is deliberate.

Okay. That's helpful. And then let me just pivot to China, China growth rebounded strongly in the fourth quarter actually.

We were looking back for our model over the years and I think this represents the highest growth rate for it.

At least the past decade and China.

On a quarterly basis, what drove the strength and China did you did you see some benefit of catch up and spending and then you made some comments in your prepared remarks, which prompted me to it.

I guess prompted some curiosity about how your large molecule investments and China.

Impacting growth and I guess, the last part of this would be whats embedded for China growth in 'twenty and 'twenty one thank you.

Yeah. So so China. It was good to see you know, obviously very disruptive first half of the year, 20% ish organic growth and Q3, and 30% organic growth and Q4. So a nice nice step up in Q4 was very strong there was definitely some catch up spend right I mean.

And obviously customers getting back to work and all of those things. So there was some of that and they are and that's pretty much impossible to quantify exactly what that is but bookings were stronger than revenue growth right. So so so we're excited about the growth prospects for China for this year right. So China should be one of our fabs.

And that's growing geographies in 2021, so that would be the expectation in terms of biologics and large molecule and we've talked about it a lot on these calls over the years the emergence of a local biotech industry for the Chinese market has become larger and larger over time.

<unk> done a good job serving that customer base I'm excited that we were able to localize our capacity for.

Single use technologies to support the local customer base and give them assurance of supply and at the same point, we're very excited about the partnership and the joint venture reforming.

And Hangzhou to actually produce.

Biologic drug substance and drug product, so, we're well positioned there and and biotech as a nice driver of our growth. We also saw a nice growth and other segments of academic and government was quite strong and the quarter as well. So hopefully it gives you a little bit of a flavor for what.

And what happened in China, and with the strong outlook looks like.

Perfect. Thank you.

Thank you Doug.

Your next question comes from Vijay Kumar from Evercore. Your line is open.

Hey, guys. Thanks for taking my question and congrats to Ken and math Mark.

Mark maybe a big picture question for you.

Uh huh.

Is there a view that the base business should be accelerating or perhaps has gotten stronger emerging from the pandemic.

You know some of the feedback we've been getting us a higher installed base and a <unk>.

Biopharma.

Excellent ratings for perhaps some thoughts on what that base I know DLR P. Pre pandemic was five to seven.

Is that largely itself that Matt changing because the businesses emerge stronger from the pandemic.

Yeah. So vijay thanks for the question and and now you've heard us talk about really starting in the <unk>.

In the Q3 call and the analyst meeting in September about how we're thinking about the longer term right and which is which goes back to the guiding principle that we have through the pandemic, which is make the decisions investments and run the company to set ourselves up for a brighter future, we created new opportunities and new opportunities will create interest in the market.

As well because of the pandemic and when I think about that will position the company to exit the pandemic phase is a faster growing company than what we grew and the exact numbers, we'll figure out over time, but.

And the way I think about it is you know are.

The percent of our business and pharma and biotech continues to increase that's our fastest growing and market. So that's a market driven weighted average type growth.

Our value proposition and the increased investments in our innovation you know the investments, we're making and emerging markets. Those things will all help us drive very strong growth going forward. So I'm very bullish about the long term prospects for accelerated share gain and.

And so the long term.

That's helpful and one perhaps enough free cash flows the guidance 7 billion and that sort of flattish to up slightly year on year.

If I just look at your cap deployment.

And our assumptions for the year.

It's about and are close to 2 billion ish considering.

You know you guys have kindle and plus on the balance sheet, plus the seven you're generating and I don't think thermo as ever.

And two consecutive years of Campbell and plus our cash.

Cash lying on the balance sheet and I'm curious why you know for.

Cash, perhaps you know what.

Why is it seven.

And he went up items and any thoughts on cap deployment.

So Vijay let me just clarify on that on the free cash flow and I think that includes a very significant increase in capex. So if you think about cash from operations, that's 13% growth year over year, which I think is incredibly strong and appropriately strong and then we're choosing to deploy a large chunk of that towards these great opportunities in terms of capex. So that kind of gets you to.

For the $7 billion of free cash flow and then mark in terms of capacity.

We have had substantial capacity even when the company is more levered and we've talked about that when we gave our three year models always have you know these numbers at all and secondly, large and we can deploy $30 billion wherever the numbers, where historically back in 18 and 19, when we would talk about them and when I think about where we are today, we have a lot of firepower and you're seeing us be active right now with bolt on.

We have a very busy pipeline and we're going to be good stewards of capital and this was gonna be disciplined we will do the right things will pass and the things that we don't think are the right.

It was good to get some return of capital already completed this year with a 1 billion and a half of buyback so no we.

We don't look at the calendar and say and any particular year you have to do extra y, but I would expect us to be able to deploy that capital over time and be a nice editor adder to the strong financials that youre seeing and the initial guidance.

Okay.

Thanks and efficient.

Operating we have time for one more.

And your final question for today than Wolfcamp B from Dan Brennan from UBS. Your line is open.

Great. Thank you and thanks for taking the question Ken obviously, it's been great working with you and best of luck same thing with lab look forward and going forward and Mark a quick plug things are looking up for jets here, So and wanted to ask a first question on vaccines and therapeutics I know you've addressed a few comments here. Thus far I think on the last call. You discussed is billion dollar revenue cumulatively looking at.

For Q 'twenty, one and 'twenty, two and I noted Derek's question you addressed the outlook and some color on 'twenty two I'm just wondering if you can help us think through.

What kind of the durability, obviously, there's a lot of moving pieces, but you know there's $1 billion you're guidance for 'twenty one.

Presumably there's going to be.

Any decent and tell that this vaccine opportunity anywhere any way to help us think through that opportunity and how it breaks down between your tools business and pay down.

So Dan and thanks for the question and you know that.

The jets.

The best of years.

But at least.

We were focused on and a lot of things a thermo Fisher, so I didnt suffer the pain too much. So when I think about vaccines and therapies as you know kind of our philosophy, which is you know articulate the numbers and the outlook on what you can see.

And don't create a lot of hyper and things. So when we started out some months ago, we talked about $1 billion opportunity and total right that was contracted revenue that we saw obviously as the pandemic continued as our position continued as we won more and more parts of the business.

Even what we committed to if it all went to zero at the end of this upcoming year it would be a billion and a half because we did a half billion last year, a 1 billion this year and based on what we see with the pandemic and what our customers are telling us we would expect demand for COVID-19 therapies and vaccines to be very substantial and 'twenty, two and unlikely to have some level of revenue going into 'twenty, three and maybe even.

Longer so so it's going to be a large contribution.

Based on the strength of our bio production business and our pharma services capabilities. So thank you for the question. Let me wrap here with a few things first as all of our analysts expressed and on behalf of all 80000 colleagues, Ken. Thank you for and a job incredibly well done and wishing you the.

Happiest of retirements.

And it's been awesome.

From a company perspective, we delivered.

And exceptional year and and we're even more excited about the opportunities ahead of US. We're looking forward to updating you during the course of 'twenty 'twenty, one and as always.

Thank you for your ongoing support and Thermo Fisher scientific thanks, everyone.

Thank you everyone for joining us today. This will conclude today's conference call you may now disconnect.

And.

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