Q2 2021 Thermo Fisher Scientific Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Thermo Fisher scientific 2021 second quarter.
The conference call all lines have been placed on mute to prevent any background noise.
Speakers remarks, there will be a question and answer session.
Like to ask a question during this time simply press Star then the number 1 on your telephone keypad.
Good luck to withdraw your question first of the pound key.
Yeah.
I would like to introduce on.
The moderator for the call Mr. Raphael, It's the hottest Vice President Investor Relations. Mr. Johannes you may begin the call.
Good morning, and thank you for joining us on the call with me today.
Mark Casper, our chairman, President and Chief Executive Officer and Steve.
Stephen Williamson Senior Vice President.
Chief Financial Officer.
Please note this call is being webcast live and will be archived on the investors section of our website Thermo Fisher of Dot com under the heading news and events until August 13.2021.
A copy of the press release of our second quarter.
2021 earnings it's available in the investors section of our website under the heading financials.
So before we begin let me briefly cover our safe Harbor statement.
Various remarks that we may make up on the company's future expectations plans and prospects.
<unk> 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.
Prospects.
Including those discussed in the company's most recent annual report on form 10-K, and subsequent quarterly report on form 10-Q, which are on file with the FCC and available on the investors section of our website under the heading financials.
The SEC 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. Therefore, you should you should not rely on these forward looking statements as representing our views.
As of any date subsequent to today.
Also during this call we will.
We'll be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.
We cant filiation of these non-GAAP financial measures to the.
Most directly comparable GAAP measures is available on the press release of our second quarter 2021 earnings and also on the investors section of our website under the heading financials. So with that I'll now turn the call over to Mark.
Thanks, Ralph and good morning, everyone. Thank you for joining us today from.
And quarter call.
As you saw on our press release, we executed on our growth strategy to deliver another fantastic quarter and Q2 with.
With excellent growth on both the top and bottom line.
As I reflect on the first half of the year 3 things stand out to me first our team's exceptional execution.
Operating with speed of scale to deliver on our growth strategy and gained share second we're already seeing the benefit of the accelerated investments we initiated in 2020.
Third the power of our PPI business system, which enables our performance. These 3 factors position us exceptionally well.
<unk> to deliver a fantastic 2021 and provide terrific momentum as we enter 2022.
I'll cover each of these topics in more depth of my remarks, but first let me recap the financials.
Our revenue in Q2 grew 34% year over year to $9.2.7 billion.
Our adjusted operating income for the second quarter increased 44% to $2.69 billion.
And our adjusted operating margin expanded 200 basis points to 29% for the quarter.
Finally, we delivered another quarter of exceptional adjusted EPS performance, achieving a 44%.
To $5.60 per share.
Turning to our end markets, we continue to see excellent conditions driven by 3 factors.
The robust fundamentals on the life Sciences strong economic activity globally, and the role of our industry is playing in the pandemic response.
Our unique.
<unk> position.
The excellent execution by our team have allowed us to gain share and deliver another outstanding quarter.
Starting with pharma and biotech with outstanding performance with growth of over 30% driven by strong underlying market conditions, the benefit of our unique customer value.
<unk> proposition and our leading role in supporting our customers across a wide range of exciting therapeutic areas, including our significant role in COVID-19 vaccines and therapies.
We saw excellent growth across all businesses, serving these customers, including bio production pharma services.
<unk> Biosciences chromatography, and mass spectrometry and in our research and safety market channel.
We're clearly benefiting from our trusted partner status that we've earned over many years with these customers.
In academic and government, we grew 35% this quarter, we saw very strong growth across our businesses.
The supporting this customer base, especially in biosciences electron microscopy, and the research and safety market channel.
Turning to industrial and applied we grew approximately 30% during the quarter as the team continues to execute at a high level to capture opportunities in Q2, we had particularly strong growth.
In our electron microscopy in chromatography and mass spectrometry business.
Finally of diagnostics and healthcare, we grew on the high teens during the quarter and we're seeing customer demand customer demand in our base business approach pre pandemic levels on immuno diagnostics and transplant diagnostics businesses delivered outstanding.
Yeah.
Also in diagnostics and health care demand for COVID-19 testing related products grew to approximately $1.4 billion.
Let me wrap up the end market recap with a quick comment on our role in the pandemic response.
Since the beginning of the pandemic, we have played the largest role in the life.
The growth tools and diagnostics industry is supporting the societal response and delivering critical solutions for our customers and governments around the world.
In the second quarter, we generated a total of $1.9 billion.
Bringing our first half of COVID-19 response revenue to $4.7 billion.
1 of the benefits of our.
<unk> activity is the ability it gives us to accelerate investments and position the company for a phenomenal future use.
You know about the additions to capacity capabilities and new products that we're making and we are also continuing to invest in our colleagues.
Building on our investments last year, we are again.
Again, providing all nonexecutive colleagues with the special recognition payment of 2 weeks additional pay to reflect the incredible contributions to our success.
This is just 1 of the many measures we are taking to ensure we remain the employer of choice across the life Sciences industry.
Let me turn to the great progress we've made.
Made in.
In Q2 on our growth strategy, which is based on 3 pillars launching high impact innovative new products, leveraging our scale on the high growth and emerging markets and delivering our unique value proposition to our customers. Let me give you a few examples.
I'll start with innovation, we launched a number of new products across.
Businesses to further strengthen our industry leadership and enable our customers to accelerate scientific breakthroughs let.
Let me highlight a few in chromatography and mass spectrometry, we launched the new thermo scientific or be trapped IQ ex <unk> mass spectrometer, which further extends the impact of our industry leading arbitrage.
Our platform to accelerate small molecule analysis of metabolites of other complex compounds.
In our electron microscopy business, we introduced the thermo scientific Helios 5 EXL wafer dual beam scanning electron microscope very important tool to help semiconductor customers more efficiently.
The truck production of new smaller and more complex microprocessors and memory devices.
In our Biosciences business, we launched several new products, including 2 instruments to advanced cell analysis. The in vitro, Jim Big Big foot spectrum order is a powerful self sort of tool based on the technology.
<unk>, we acquired from propel labs in Q1, and the in vitro attune <unk> flow Cytometer, which offers enhanced imaging capability to enable researchers and cell therapy developers to better understand cell biology.
Turning to the second pillar of our growth strategy, we continue to.
Leverage our scale to create an outstanding experience for customers and the high growth and emerging markets.
This has contributed to excellent growth and share gains we are delivering across Asia Pacific Let me cover a couple of the highlights.
In China, we delivered strong growth of just under 30% in the quarter. The team is ramping up our new.
New single use technology facility in Suzhou.
In India, we demonstrated speed at scale at our genetic sciences facility in Bangalore room, which shipped millions of COVID-19, PCR tests to support the country's response to the pandemic.
We also contributed $10 million of urgently.
Needed products and donations to help India bring the crisis under control.
Our performance across the region demonstrates that we've created a differentiated experience for our customers and the significant investments that we've made in these markets are fueling growth.
The third pillar of our growth strategy is our customer value.
Proposition and we continued to increase our capabilities and capacity to be an even better partner for our customers and help them achieve their goals.
Building on our significant investments last year in 2021, we're executing on over $2.5 billion in Capex to further expand our capacity and capabilities.
<unk>, it's exciting to see the continued progress of these investments for.
For example, during the quarter we.
We brought additional capacity online around the world to support customers' production of vaccines and therapies. These include sterile flow finish lines in Italy, and Greenville, North Carolina.
Expanding our single use technology capacity in our facilities in Logan, Utah, and adding to our Lithuanian site for the production of the central raw materials used in making mrna vaccines.
These investments are of value proposition demonstrate our commitment to our customers, which rely on us as in the central partner network.
Yeah.
During the quarter, we announced the number of collaborations with leading academic medical centers. The combination of our innovation and our unique customer value proposition position us to move science forward for.
For example were collaborating with the Mayo clinic to develop more precise and personalized diagnosis.
Work makes for blood based cancers, allergy and autoimmunity and therapeutic drug monitoring.
This work will leverage our insight and technology and clinical next gen sequencing immunology and clinical mass spectrometry.
In addition, we announced that we will build and operate in the state of the art cell therapy development manufacturing and collaboration.
Nasty Center at the University of California, San Francisco.
The advanced innovation and cell and gene therapy.
These partnerships will lead to new capabilities for our customers and ultimately.
Better outcomes for patients.
As always our PPI business system was a major factor in our success.
Library fast store in Q2.
This discipline and our mission driven culture helps us to find a better way every day. So we can continue to bring more innovative new solutions to our customers work more efficiently and effectively operate with speed of scale.
Create even greater value for all of our stakeholders.
Turning to capital deployment, we announced the acquisition of <unk> at the beginning of the quarter. This acquisition will establish thermo Fisher is the leader in the attractive and high growth clinical research services industry and <unk>.
Net highly complementary services for our fastest growing end market the.
The integration planning is going extremely well.
Very impressed with the World class talent I've met during the integration planning process.
We're looking forward to welcoming our PPD colleagues to thermo Fisher upon closing of the transaction.
Before turning to guidance, let me update you on our progress on our ESG initiatives.
As the World leader in serving science, we know.
The rule goes beyond the work, we do to enable our customers and the value we create for our shareholders and extends to our responsibility to make the world of better place.
To that end, we continue to advance our sustainability initiatives.
Yesterday, we announced our commitment to achieve carbon neutrality by 2000.
Of that already.
This builds on our existing goal to reduce greenhouse gas emissions across our operations by 2030, we're moving forward on this from by making our facilities more energy efficient increasing our use of renewable energy and reducing waste in our operations, while also innovating across our portfolio to enable.
The fifth tumors to meet their sustainability needs.
This is aligned with our commitment to doing business, the right way and to fulfilling our mission to enable our customers to make the world healthier cleaner and safer.
Now, let me turn to our guidance for 2021, driven by our very strong start to the first half of the year and our content.
<unk> comments on the full year outlook, we're raising both our revenue and earnings guidance for the full year, Stephen will outline the assumptions behind our guidance I'll cover the highlights we're raising our revenue guidance by $300 million to $35.9 billion.
Which represents 11% reported growth over 2020.
In.
<unk> adjusted EPS, we're raising our guidance by 10 to.
The $22.7.
Which will represent 13% growth over 2020 book.
Before I turn the call over to Stephen Let me summarize our key takeaways from Q2, our team is doing an outstanding job of executing our proven growth strategy to strengthen our competitive.
In terms of our.
Our PPI business system is enabling our ability to operate with speed at scale.
Our businesses are performing extremely well and gaining share.
All of this enabled us to deliver excellent first half results position us to deliver a fantastic 2021 and provides terrific momentum as we enter 2022.
Position finally, I'd like to thank my 80000 colleagues for their dedication to our company our customers and for once again delivering another excellent quarter.
And now I'll turn the call over to our CFO Stephen Williamson Stephen.
Thanks, Mark and good morning, everyone I'll begin with the high level summary of our Q2 performance.
We had another excellent quarter and grow our revenue of 34%, including 28% organic growth.
Mark mentioned, our growth strategy of enabling us to take share on top of strong market conditions as.
As a result in Q2, we were able to deliver 27% organic growth in the base business and continue our industry, leading response of the pandemic.
Generating $1.9 billion of.
Of COVID-19 response revenue in the quarter.
Our PPI business system enabled us to generate excellent pull through on the very strong topline growth.
And it's also enabling us to execute really well on a significant growth investments.
As a result of we grew our adjusted EPS in Q2 by 44%.
The $5.60.
On the Levered, $1.7 billion of free cash flow.
Overall, another excellent quarter.
Now let me provide some more color on the Q2 performance.
EPS in the quarter with $4.61 up 59% from Q2 last year.
On the top line on <unk>.
Q2 reported revenue growth, 34% year over year.
Bonus of about Q2 reported revenue increase included 28% organic growth, 2% from acquisitions and of tailwind of approximately 5% from foreign exchange.
As I mentioned in the base business organic growth of 27%.
Turning to our performance by geography during the call.
Quarter, North America grew 25% Europe, 35% Asia Pacific and China, Both grew just under 30% and rest of the world grew low double digits.
Think of our operational performance Q2, adjusted operating income increased 44% on adjusted operating margin of.
About 29% 200 basis points higher than Q2 last year.
In the quarter, our PPI business system enabled us to deliver very strong contributions from volume and productivity.
So have favorable business mix. This was partially offset by the ongoing strategic investments across our businesses to support our near.
On long term growth Inc.
<unk> and the investments in the quarter and over $100 million of supplementary cash bonuses for the nonexecutive colleagues a member of corn at a similar amount in Q1.
As of to recognize the extraordinary work that our colleagues continue to do for our customers communities and shareholders are on.
Ongoing investments.
Colleagues and the capacity and capabilities are ensuring the really bright future for the company.
Moving on to the diesel on the P&L total company adjusted gross margin in the quarter came in at 56% flat to Q2 of the prior year.
In the quarter, we delivered strong productivity and had positive business mix.
And this was offset by strategic investments.
Adjusted SG&A in the quarter was 17, 9% of revenue a decrease of 200 basis points versus Q2, 2020, reflecting strong volume leverage.
Total R&D expense of approximately $340 million.
Representing growth of 29%.
But the Q2.2020 and reflects the increased investments in high impact innovation to fuel future growth.
Okay net results below the line for the quarter on net interest expense was $111 million $17 million lower than Q2 last year, largely due to low of net debt.
Adjusted other.
<unk> expense was the net income in the quarter of $3 million.
$30 million lower than Q2, 2020, mainly due to changes in non operating FX.
Our adjusted tax rate in the quarter with 14%. This is 250 basis points versus the Q2 last year due to the increase in pre tax profit.
Income on average diluted shares from $396 million in Q2 about $2 million lower year over year, driven by share repurchases net of option dilution.
Turning to cash flow on the balance sheet, the cash flow performance enabled by our PPI business system with very strong in the first half of the year.
Year to date cash flow from continuing.
Operations was $4.2 billion.
Up 88% from the same period last year.
Year to date of free cash flow with $3 billion up 76% over the same period last year and that's after investing $1.2 billion of net.
The net capital expenditure.
This reflects the strong returns but jen.
And on the short term on the investments, we're making for the long term.
We returned over $100 million to shareholders through dividends in the quarter. This reflects the 18% dividend increase we announced in February.
We ended the Q2 was $7 billion in cash of $18.8 billion of total debt of.
The leverage.
<unk> ratio at the end of the quarter was 1.4 times gross debt to adjusted EBITDA.
And 0.9 times on a net debt basis.
In concluding my comments on our total company performance adjusted ROIC.
<unk> was 22, 5% up 10 percentage points from Q2 last year as we continued to generate exceptional returns.
The time.
Now provide some color on the performance of our 4 business segments.
Much of the last few quarters I'll start with some framing thoughts on the impact of the COVID-19 response on our segment results.
From a revenue standpoint as of the case in the last 3 quarters. The majority of the COVID-19 response revenue is recognized.
<unk> of life Science solutions with the remainder of recognized in the laboratory products and services and specialty diagnostics.
From a margin standpoint, the impact of COVID-19 different across the segments based on the scale of the response revenue on the <unk>.
<unk> levels of profitability on that revenue.
In addition, during the quarter we continued it.
T J investments across all of our businesses the.
The size of those investments does not necessarily align with the COVID-19 response revenue in each segment because that does skew some of the reported segment margins.
Moving on to the segment details starting with life Science solutions Q2 reported revenue in this segment increased.
37% and organic growth was 29% in the quarter, we delivered exceptionally strong growth in our biosciences and buy of production businesses.
Q2, adjusted operating income in life Sciences solutions increased 39% on adjusted operating margin was 48, 3%.
Up 9.
Basis points year over year.
In the quarter, we drove strong volume pull through and sort of positive business mix, which were partially offset by the strategic investments we.
We also had a tailwind on margins from FX in the segment in Q2.
In the analytical instruments segment reported revenue increased 41% in Q2.
2 on organic growth with 36% during the quarter, we saw excellent growth in all businesses within the segment.
Q2, adjusted operating income in analytical instruments increased 107% on adjusted operating margin was 18, 9% up 600 basis points year over year.
During the quarter.
We drove very strong volume pull through and productivity, which more than offset the strategic investments that we're making across the segments.
Turning to the specialty diagnostics in Q2 reported revenue in the segment increased 25% on organic growth was 21%.
During Q2, we delivered exceptionally strong growth in the immuno.
Unit diagnostics and transplant diagnostics businesses.
Adjusted operating income increased 15% in the quarter and adjusted operating margin was 19, 9% down 170 basis points from the prior year.
In Q2 of the positive volume leverage and favorable business mix were more than offset by the continued strategic investments.
<unk> in this segment.
Finally on the priority products and services segment Q2 reported revenue increased 29% organic growth was 23% in.
In the quarter, we saw excellent growth in all of our businesses in this segment.
Adjusted operating income in the segment increased 59% and <unk>.
The operating margin was 12, 4%, which is 230 basis points higher than the prior year.
In the quarter, we delivered positive volume leverage and favorable business mix. This was partially offset by strategic investments.
With that now let me turn on to our updated 2021 guidance.
As Mark mentioned, we're raising both our revenue and adjusted EPS guidance, reflecting the strength of our Q2 performance along with a stronger outlook for the base business in the second half of the year.
In terms of revenue, we're raising our full year guidance by $300 million to $35.9 billion.
And increasing our full year organic.
To 9%.
The increase in revenue guidance is driven by 3 factors.
An increase in the base business organic growth outlook for the full year from 8% to 12%.
An updated assumption of $6.7 billion of COVID-19 response.
<unk> revenue for 2021.
On a slightly more favorable FX tailwind than previously assumed.
Let me give you additional details on each of these factors.
Starting with the base business Hamer, increasing the outlook by $850 million.
Collecting a great Q2 performance on a stronger.
<unk> growth up for growth in the second half of the year.
This increases our 2021 on full year organic growth outlook for the base business by 400 basis points to 12%.
Our end markets of very strong and we're executing very well on our growth strategy and increased strategic investments to drive excellent performance.
Moving on to COVID-19 response revenue.
Our role in supporting Covid, 19, vaccines and therapies continues to increase and we now expect $1.8 billion of related revenue in 2021 up $300 million from the prior guide approximately half of that $1.8 billion.
Was recognized in the first half.
Half of the year.
Given the strength of both the base business.
Growth and our vaccine and therapy response, we've taken the opportunity in this revised guidance to significantly derisk the outlook for testing with.
We've lowered the full year testing related response revenue by $900 million.
From the prior guide.
We're now assuming it'll be $4.9 billion for 2021 of which $3.8 billion was delivered in the first half of the year.
Leaving just over $1 billion to go in the second half.
The continued to be a wide range of outcomes for testing in the second half of the year, there are scenarios, where the pandemic could increase.
<unk> intensity driving a higher need for testing should that be the case, we'd be well positioned to support customer needs from a flow of those benefits of that through our P&L, but for now we thought it was prudent to take the opportunity to derisk the outlook.
The third and final element of the revenue guidance raise as FX rates continue.
To fluctuate they were favorable to those from from our prior guidance from most of Q2, and then moderated significantly.
The net of best results from increase in our FX revenue tailwind for the year is now assumed to be 525 million.
Up $50 million.
The prior guidance.
Taking accounts.
On the different margin profiles of the revenue changes I've just outlined we're increasing our annual adjusted EPS guidance by 10 to $22.7.
Which would result in 13% growth over 2020.
With the revenue mix assumed in the guide we now estimate the the adjusted operating margin for the full year.
Would be approximately 29, 7% in line with 2020.
The other elements of our guidance remain the same as the prior guidance, let me remind you of some of those assumptions.
We've not included any operational benefits in 2021 from the acquisition of PPD, when we get more clarity on the actual close.
Dave will provide an estimate of any potential impact in 2021.
We expect net interest expense in 2021 to be approximately $510 million.
As a reminder of included within that number is $40 million or <unk> 10 of adjusted EPS as a placeholder for pre financing for the PPD transaction.
Action.
We expect the adjusted income tax rate to be 14% in 2021.
We're assuming net capital expenditures of approximately 2.5% to $2.7 billion.
And free cash flow of approximately $7 billion in 2021.
Our guidance still includes $3.8 billion of capital.
The deployment, which is $2 billion of share buybacks, which were completed in Q$1.1 $4 billion per completed M&A.
And $400 million of capital returned to shareholders through dividends.
We estimate the full year average diluted share count will be 397 million shares.
Finally.
Finally, I want to touch on phasing of revenue dollars on adjusted EPS for the remainder of the year.
When I think about the split of the second half P&L between Q3 and Q4, we're assuming that the results will be slightly weighted to Q4.
As you think about the split remember the placeholder for PPD.
Financing is all in Q4.
To conclude we delivered another excellent quarter and we're on a great position to achieve our 2021 goals as we move into the second half of the year with that I'll turn the call back over to Ray.
Thank you Stephen operating operator, we're ready to take questions.
No worries.
Hello, everyone in the queue and opportunity to address the Thermo Fisher management team. Please limit your time on the call to 1 question and only 1.5 of that.
Do you have additional questions. Please return to the queue.
The other question at this time, please press star 1 on your Touchtone phone.
The first question comes from the line of Vijay Kumar with.
Okay.
Hey, guys. Congrats on a solid from this morning, Mark 1 on on the guidance here. So.
The overall revenues were increased by 300 million for the year, but you know your Covid response revenues were lower by 600 and the implied.
Mark on basis, it's up.
$50 million.
From Houston.
That's the big number and that's all coming here.
It seems to be in the back half.
I'm curious what is I guess, the what's the N versus the prior.
You know assumptions.
Which segments of coming in better you know.
Clearly with the analytical type of coming better and I'm curious if it has any implications for fiscal 'twenty 2.
Yes, so vijay thanks for the question as I look at the base business outlook.
The real.
Really incredibly strong.
Strong Q2 the performance.
The performance of the 27% base business organic growth.
The business is really firing on all cylinders and orders were very strong the informal dialogue you have with customers is very bullish about the market conditions.
And also from importantly, our role in supporting them and that gave us confidence the 12%.
Organic growth for our base business activities as appropriate.
Guidance for the full year, so we feel really good about that.
And youre seeing the benefits of the.
Innovation in our growth strategy investments that we started in the second half of last year.
Seeing those things start to.
Come into the new products that we launched the collaborations new capabilities. This is really a super exciting time and.
We're excited about it in terms of what the the fundamental outlook is for.
<unk>.
Understood.
The 1 for Stephen.
Moving on on the margins here I think he called out.
On the 1 time or maybe 2 weeks at the extra per.
What would the impact and is that expected to continue on in the second half and the thank you mentioned $1 billion of.
Of the baseband in back half and I think the commentary used with the DFS. So I'm curious do you have any tenders of orders that gives visibility into those numbers.
Yes, so Steve I wanted to do the margin and then I'll talk about the testing yeah think about the mix of change in our guidance. It brought on the margin profile from the full year down to the 20.
The 9.7% of its down about 15 basis points from what are the assumed in my prior guidance that kind of thing.
The consideration of the different mix of the contribution margins on the revenue changes.
In terms of the response.
Revenue in the on the testing side of the equation.
We took the strategy.
G around de risking the how.
Look.
We had a strong quarter actually at $1.4 billion of testing.
So from a reasonably good about that and we actually have a number of orders for the second half and felt that.
Given how much dialogue there is around testing just generally and so much.
We just felt that take.
Taking that off the table it felt like the right thing to do.
And we're well positioned as you know given our relationships and capacity if the.
You know things like the Delta variant continue to drive more demand for testing and then obviously, we're going to be higher than the number we assumed in the in the guidance.
Your next question comes.
Your next question comes from the line of Ducks income with Cowen.
Yeah.
Hey, Doug.
Oh, Hey, guys can you can you hear me per.
Yes, Okay, sorry about that had some technical difficulties.
Actually.
I guess.
The question as we think about 20 of 22.
I know you're not going to guide on this call and the.
Yeah, I'm going to apologize for doing Roger.
Yeah.
But I mean at some level. So maybe just cuts of the chase is it reasonable to take you know the 3 year revenue.
Canoe and EPS targets from your 2019 analyst day at the mid to high end.
Layering some lingering COVID-19 relief revenue at the top and bottom line and then add in whatever we're gonna model for PPD, you know in and basically take those 3 components and you know out of them up and use that as kind of of construct for thinking about 'twenty.
But is there is there any reason to just not kind of boil it down to that to that contract at this point.
So many of you terrific.
Terrific news.
Which is moving to hold an analyst day on September 17th.
And we're going to we're going to give our.
On some early thoughts about 2022.
That's going to help with some of the ways to think about modeling and not 1 of them call official guidance for the year, but at least some scenarios to help that and then give the 3 year outlook going forward. So we thought on analyst day would be the best way because we think it's of great question.
I would say as you think about between now and whenever it is 7.
On weeks from now on.
As for 2022.
The performance of the base business is Super cool right, 12% organic growth were.
We're gonna be entering the year with very strong order book.
With very strong momentum and more and more of those investments that we've made and are making.
US for great momentum in 2022.
We're going to play a meaningful role in what customers need on the response rate as the 2022 seems like a long way off on I'd say, obviously vaccines and therapies are going to continue to be super relevant in.
There'll be testing of the question is on what level.
And we will try to do some scenarios to help with that but nobody knows what the the demand is going to be for testing next year, and so there'll be a range of outcomes on that but I'm excited on the PPD.
Sure.
Obviously, you'd add wherever you know assumptions for for next year or 2 the numbers from a capital deployment perspective.
So 2022 is going to be another great year for the company.
Okay, alright, thanks for that Mark and then I guess as my follow ups, maybe I'll just throw the the 2 quick ones out there the.
The first is.
As you know as well as anybody there's a ton of labs globally that built out new infrastructure.
<unk> share for COVID-19 testing using thermo products.
What are you seeing at these sites now so sort of testing volumes they are slowing but still robust what I'm what I'm curious about is as.
As we move into the towards the fall are you seeing these labs move more into 4 in 1 testing.
And then.
I get the beyond that is there any move towards the broader infectious disease testing at the sites because I think that would help us as we think about the durability of what what's occurred in that category and then the other 1 I just wanted to sneak in even.
The COVID-19 revenue.
It's clearly been a boon to operating margin.
That said underlying margin seems to be tracking quite nicely.
Maybe I should be able to do this math real quick, but I, but I haven't I'm. Just wondering if you take COVID-19 revenue contributions out of your 2021 targets, where do you believe 2021 operating margin would come out. Thank you.
So.
And that sort of those.
Those are those of would be good.
2 or 3 hour long conversations, but I'll take a shot at it and Stephen certainly feel free to.
To add.
When I think about the Covid testing.
The demand and what do we see.
But what I would say is.
We obviously the built we've had and have built during the pandemic a huge installed base around the world right. It's for us.
On the activities, we do across all of the countries is the huge driver of our activity.
And so.
A lot of what we read about is what's going on in the U S and the U S. Testing demand is is definitely less at this moment, although obviously.
<unk> is starting to increase but the there's quite a bit of demand.
Around the world and certain customers of preparing for a.
The respiratory panel for the winter.
Seeing isn't in and obviously, we will have to add in.
Moving to support our customers whatever the level of demand that they need.
In terms of margins I'll make it sort of what's the philosophy and then Stephen if you want a handful of free which is we're not thinking about its base business versus Covid, we're thinking of it how do we manage the company.
Winter Sealy.
Of the profitability of the company on the investment grade 4.
Going forward I think 1 of the things that.
If you kind of do very simple math and I'll do it from an EPS perspective, right. We raised our based on the very strong outlook for the year on the very strong first half we raised our EPS by.
<unk> <unk> from the guidance, we chose to invest another 25 on our colleagues throughout the $100 million.
The Q2 additional payment.
As a investment in the future of right. So we made the conscious decision obviously margins are very strong and we will manage that appropriately it really highlights the power of our PPI business system.
Yes.
The focus on the how do we maximize the top line opportunity invest appropriately for the future of at a pace of getting kind of getting.
The right returns of that investment.
And then kind of.
Flow through the income since the last day, we're trying to manage to a margin expansion number then appropriately manage the P&L.
Best of appropriately for the future.
Thanks, Doug.
The next question comes from the line of Jack Meehan with Nephron research.
Good morning, Jeff Good morning.
Mark was hoping you could give us your latest thinking on capital allocation within the year.
I'd go back of between 19 analyst.
Day, you talked about 29 billion of deployment through 2020 to do I think there's a view on the market that it could be a lot higher than that because of the Covid response sales. So my question is.
What's your latest view on ability to close deals is the multiples seem to be moving higher and if not why not do more buybacks.
You've only done $3.5 billion since the beginning of 2020.
Yeah. So Jack Thanks for the question you're on in terms of capital deployment.
First of all of it.
On an active year right between the <unk>.
The update on PPD at the minute, but it's been an act of the year, we obviously announce Peter.
P. P D. We've done a number of.
Smaller bolt on transactions. So we've been active our pipeline is quite busy right. We're looking at things.
Disciplined and because of our industry is so large and fragmented.
We see ample opportunities.
To continue to build on our M&A strategy and execute against that and.
So from that perspective things are good.
From a return of capital perspective.
We felt the $2 billion that we did in terms of buybacks and the increase from the dividend.
Like the right return given the M&A commitments, we've made the PPD and we certainly revisit our return of capital.
The mix with our board periodically and we will continue to do so but right now we continue to have M&A is the primary focus.
PPD.
Spend a moment there because it's.
The large commitment of capital.
I've been Super impressed.
With the team.
If the come to get to meet a number of the team because of the end of question planning, it's gone very smoothly.
Colleagues of very excited to become part of the company as you see from some of the other companies in the CRM field that are reporting the end markets are super good on the industry is doing well as PPD.
As a leader is very well positioned.
So it's going to be of really good growth.
Asset from.
The pathway to the closure of the transaction.
We've gotten most of the direct investment the foreign investment.
Approvals dominoes sort of got a little bit left between.
There, but thats pretty much done.
We're working our way through the various antitrust filings around the world. We're collaborating with the FTC on the second request and we're looking forward to closing the transaction.
By the end of the year. So that's a quick recap on capital deployment and then Jack just on 1 thing to add but I think back of 2019 the.
The outlook on I think that the use of cash in the ROI.
Significantly significantly higher investments in Capex range.
<unk> identified some great opportunities to invest organically and we're putting the putting cash to work and getting great returns and in a really short period of time as well. So that's another element I think about how the company has evolved over that period of time.
Yeah definitely hear you on that.
Just as a follow up either for mark or for Stephen Theres been a lot of discussion around inflation across the market. So I was curious to get your view.
The ability to toggle pricing as a lever in the channel just how that is going and then any thoughts around the supply chain of you had any.
The issues.
Yeah, I think when you look at the world its unwinding from the recessionary impacts of the pandemic and as a result, you've got Kinks on supply chain.
And clearly inflationary pressures in multiple different places.
How large that impact is on how long it.
The last 4 is still to be proven out kind of we're operating on the basis that will be with us for some time.
I'll keep you out of business system enables us to effectively navigate events like this and run our operations efficiently.
The scale to partner with suppliers.
And then maximize opportunities as you mentioned.
Around pricing for certain products to help protect our margins. It's not just on the challenge for the across across the portfolio. That's the kind of the scale benefit of using our pricing discipline across the company and we've navigated through this dynamic really well on the through the first half of the year on.
The expected to continue to do so going forward.
Your next question.
On comes from the line of Tycho Peterson with JP Morgan.
Hey, good morning, Mark I'm wondering if you could talk a little bit more about the recovery in analytical instruments. I know you said it was widespread but you did call out of electron microscopy of couple of times. So can you maybe just talk to that dynamic you know how much of that do you think there's pent up demand as you know how much of thats part of the semi cycle.
I'm just curious for some more color there.
Good morning thinks of the questions Yeah, our analytical instruments.
<unk> performed extremely well.
<unk> grew over 35% in the quarter and all 3 businesses really performed very well.
The chemical analysis, chromo mass spec and mature.
Central analysis, where our electron microscopy business.
When I think about the dynamics here on new products Theyre very exciting I mentioned, a few of them this quarter as they did last so so the investments we've been making in R&D. There are really paying off in the end markets are good right and you see that.
Electronic.
I was just trying to be both in the adoption of.
The tools for life Sciences applications. So the cryo electron microscopy, but you also see that across the materials science applications, including semiconductor in the obviously from everything you read.
Around what's going on in.
Chip supply and invest.
The cross there at both.
Well for the electron microscopy business.
Sure.
Okay.
And then from the follow up on that you've got 2 quick ones on on Covid. I think you made a prudent move to take testing data just curious your latest thoughts on the durability on the vaccine and therapy side of what Youre hearing from us.
<unk>, obviously, you know a lot of focus on things true now and then on margins I know a lot of people are focused on 2022 operating margins you did take up R&D by 20% last year. So maybe another way to ask the question is how much of the.
Opex do you think we'll carry through or do you think you'll be set of R&D, a little bit to drive the leverage thanks.
<unk> Tyco.
I'll cover the I mean come on.
The margin question I think that no 1 of the.
Elevated investments are getting great returns, so we're going to manage the company appropriately spend appropriately and how can it have fueled really.
The strong base of business of organic growth going forward and should those returns of at the right places were going.
Obviously, the amount of spend on them as the as the pandemic response on why isn't it appropriately deal with the variable cost that goes with that.
On the P&L appropriately on them before giving more details can be better.
Better positioned to do that around.
Around 2022.
So take on in terms of the role that we're playing.
And supporting the vaccines and therapies for Covid.
It's quite significant and it's.
<unk> cuts across both our pharma services capabilities.
For the active.
The active ingredients of the drug substance as well as on the sterile flow finish.
Playing these 4 of the vaccines and we play obviously very substantial role as the technology provider.
Of our biosciences business with things like Enzo enzymes nuclear tides as well as in our single use technologies of so called from aegis 1 of very large role.
We expect that to be about 1.
The activity 8 this year.
And demand is very robust range. So for the industry, it's mostly about capacity coming on line to support the demand and so so we look at our.
The momentum going into 2022, we would expect that the vaccine and therapy demand.
Ability to be very strong given the likely demand for the response of the pandemic and as our capacity of homes more and more on line of positions us very well to meet the strong backlog of orders that we've been able to generate because we have the right solutions for our customers.
Your next question.
Demand is from the line of Dan areas of Stifel.
Yeah.
Good morning, guys. Thanks for the question Mark on the new plasmid production side out in Carlsbad I think you just opened up there.
So when do you expect to be fully scaled up and going is there anything you can say about the extent to which capacity is kind of already been book there just given that it sounds.
Question pretty supply constrained area, and then I think you're supporting mrna vaccine work out there and I'm just curious whether you're starting to talk to customers about projects, maybe down the road with them on the mrna vaccines that are not related to COVID-19.
1 of the open questions here is where are we headed.
With the mrna now that we have some proof of concept.
So it's been a great question so.
The different things that are that are going up going on most of the mrna more broadly first right. So you know.
There has been a huge increase in investments in the.
The biotech and pharmaceutical industry.
Given the success that mrna has had on the Covid vaccine. So that investment is both in next generation vaccines.
The combination vaccines as well as just in the class for other diseases.
Altogether so.
And yes, we're in.
The numerous dialogues and supporting those activities across our capabilities. So that's that's a wonderful tailwind.
4 of our largest segment of the pharma biotech in terms of customer so that looks very strong 1 of the things that we have seen is that.
In the plasmid DNA.
Okay.
There has been.
The.
Shortage of capacity for some period of time.
Been addressing that.
Making significant organic investments and we have been able to.
Secure.
Meaningful orders.
Orders for our new facility in Carlsbad I had the opportunity of visiting the facility in June.
Awesome.
Super excited and it's open.
We just cut the ribbon cutting in early July and will be producing product in the not just in future there.
Building momentum on that and Thats great.
And the customer base once the choice and we're giving them, we're giving them choice and we're excited about that.
Okay, I appreciate that and maybe.
Maybe just Stephen just thinking about some of the other parts of bio production on <unk> is the out of I think the outlook last time for was for 150.
The.
And contributions from Novus is that still the current outlook.
I felt like that was conservative last quarter, just given that you had you had done almost half of that or if not a little bit more than half of that in <unk> alone. So just wanted to check the Q&A from additional orders on the.
Covid response from.
The slightly.
The higher at another about another $30 million to $40 million higher for the net included in that increasing guidance from the response revenue.
Your next question comes from the line of Derik de Bruin with Bank of America.
Hi, good morning, good morning.
So a couple of questions.
Millions, yes on the first 1 can.
Can you talk a little bit about the China market, obviously, it wasn't going to be as strong.
In the second quarter of it wasn't the first quarter of the growth just given that kind of trying to start to recover in the second quarter, but it was a little bit lower than I would've thought can you sort of talk about the dynamics of the Chinese market.
Yes, China is performing.
Hum.
When I think about the.
The growth in the quarter of just under 30% we've had 40% growth in the first half.
Spent time with the team.
Activities of returned.
It's pretty much normal the 14.5 year plan is.
Very well implemented.
And that has tailwind for our industry and Thermo Fisher is well positioned to capitalize on so so I feel good about China in terms of our outlook.
It's off to a good start to.
So the first half of the year.
Got it and I'm going to squeeze 2 in.
As being the first 1 is.
Can you talk a little bit about academic and government and what youre seeing in that market is that 35% growth is that new is that any of that do you think is tied to new funding, that's coming up and sort of pick up or is that just catch up spending and then another 1 a question I keep getting from people as I still think there's some concern over the.
I guess the impacted P. D D on the margin given it's more of a people business and our.
The razor and blade business just the of your general thoughts on the the margin opportunity M. D D D.
Yes.
Of our academic and government of very good quarter of 35% growth.
That's exciting.
Think about academic.
The government obviously it was 1 of those segments of the 4 end markets. We serve that was very effective last year right in 2020.
Because of the pandemic in the second quarter, that's really the place you saw at the most.
So what you're seeing now or is it largely activity has returned back to normal around.
Of them involved I mean might be different but actually the activity level is is pretty normal.
What I'm encouraged about is 2 things 1 is widespread in terms of the performance across our businesses in the Biosciences research and safety market channel that talks about activity is very high and the electron microscopy really excellent.
Or on the work sort of talks about sort of the big capital funding. There also was strong and then when you look going forward.
That really does.
Look good because there's so much positive talk around the world about.
The funding it.
Of the PPD Derrick the margin profile of that whole industry is significantly.
On the lower than the company average.
Knowing that eyes wide open going into this.
And the investment thesis on this asset is the margin expansion what gets what gets the mcmartin expansion from cost synergies, but it will be lower than the company average expansion year over year, but the.
The higher than average growth business and when you think about the growth in operating income dollars. It will be very very equivalent to the rest of the company. So.
Slightly different P&L profile of we're bringing into the company with the fact that as you as you're thinking about modeling the company going forward is the scale of business coming in at lower than the average margins, but that doesn't change the margin.
The 5 of the margin opportunity for the rest of the company and it doesn't change the great outlook that we think PPG has and we're excited about bringing into the company.
The next question comes from the line of Patrick Donnelly with Citi.
Great. Thanks for taking the questions guys.
Mark maybe you want on the specialty diagnostics business you know.
It came in a bit lower than we expected obviously, a big chunk of that is the COVID-19 testing piece, but can you just talk about the core business trends there what the recovery path looks like in the back half.
Yeah. So Patrick Thanks for the question so when I look at the specialty diagnostics business.
You know actually underlying.
Improving what's going on in the business actually is quite encouraging activity levels pretty much back to the pre pandemic levels you see it in really strong growth in.
Our immuno diagnostics business for allergy and autoimmunity, you see it in our transplant diagnostic business as those businesses were behind.
The year ago, and medical procedures were put on hold.
But you also saw good growth in microbiology solid.
As well as in the healthcare market channel. So it shows is encouraging.
In terms of.
The you do see some of the Covid response.
Revenue.
You there as well on.
That will have a more challenging comparison in the second half but.
But I feel good about the underlying outlook within specialty diagnostics.
Okay, greater we'd have time for 1 more question.
Patrick.
To follow that the Patrick followed Patrick.
Yeah, sorry, just a quick 1 on P. P. D. I know Mark you mentioned the second response from the FTC just a quick update there in terms of any surprises from what the discussion has been in the confidence level, there and getting that done. Thank you.
No no no surprise, there and we're just working through the process and.
The work Super collaboratively and I'll look.
Look forward to bringing 2 of close at the end of the year.
So operator, we'll take 1 more question.
Yeah. The last question will come from the line of Puneet.
SBB Leerink.
Yeah, Hi, Mark So you can take thanks for taking the question. So just a quick clarification from Mark accurately for the Stephen on the Covid related.
The number of points of been covered but then just in terms of the Mesa on acquisition.
I know you had highlighted the contribution there.
The closer to $200 million or so does that still remain there with that removed.
Part of the Derisking that you mentioned in the.
Then just more broadly speaking you mentioned the number of times or be trumps.
The platform.
Continues to grow this has been a decade plus the growth opportunity for the company just could you maybe just on a very high level.
The view of where that stands today on what would you expect that to grow over the next few years.
And if you could just given the areas of high growth areas of Biopharma.
Vermont proteomics, whereas the number too so I appreciate some thoughts there. Thanks so much.
Thanks, Puneet in terms of Mesa.
We're scaling up the manufacturing capacity.
We're working on sort.
The longer term as well for building out the menu is really exquisite technology. So we're very excited about it.
Yes, and the revenue assumptions are the remain the same as where they were last quarter or so from that perspective.
The very positive and when I look at the.
Of the arbitrage of off 1 of a phenomenal technology continues to draw on very good growth for analytical instruments business.
Per relevant for our customers and we're able to continually push the technology forward to bring out more and more relevant solutions.
The most recent launch really is focused on complex small molecule analysis, but you also plan on the technology being used in the multi attribute method multi.
Multi attribute method.
Shootout for biologics the terms of QA QC, which is.
A very large market opportunity, we're well positioned there so I feel great about.
The performance of the chroma mass spec business.
And even more excited about what the future holds there as well. So when you think you for the questions and I'll turn to just wrapping.
<unk> it up here.
We really had an excellent first half of the year, we're on track to deliver another outstanding year, and we are going to enter 2022 with great momentum that sets us up for a very bright future and we're looking forward to sharing more about our future during our virtual analyst day on September 17th and of course, then updating you on.
And.
October on our Q3.
Call as always thank you for your ongoing support of Thermo Fisher scientific thanks, everyone.
Okay.
[music].