Q4 2022 Thermo Fisher Scientific Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the family Fisher Scientific 2022 fourth quarter conference call.
My name is breaker and I will be your body specialist money these days cool.
This time, all participants are in a listen only mode.
A brief question answer session.
We will follow the formal presentation.
You would like to ask a question. Please press star one when you were touching keypads.
If you change your mind anytime press Saatchi and felt right to assistance at any point, it's all day right.
Keith.
I would like to introduce our moderator for the call Mr.
Rafael Shahada, Vice President Investor Relations Mr. Todd you may begin your call.
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 note this call is being webcast live and will be archived on the investors section of our website Thermo Fisher Dot com under the heading news at FX until February 17 2023.
Copy of the press release of our fourth quarter and full year 2022 earnings is available in the investors section of our website under the heading financials.
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 doses.
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 available in the investors section of our website under the heading financials 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 not rely on these forward looking statements as representing our views as of any date subsequent.
Today.
Also during this call we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.
Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our fourth quarter and full year 2020 to earnings and also in the investors section of our website under the heading financials. So with that I'll now turn the call over to Mark.
Thank you Rob good morning, everyone and thanks for joining us today for our fourth quarter call and a ramp up of a truly exceptional year for thermo Fisher scientific.
We delivered another quarter of outstanding results in Q4, and as I reflect on the year three things stand out to me.
Proven growth strategy continues to drive significant Cherokee.
Our differentiated customer value proposition is further elevating our trusted partner status with our customers and this in combination with the power of our PPI business system drove outstanding financial performance for the quarter and full year exceeding our ambitious goals.
Our ability to deliver these results in a year that included global supply chain disruptions Award in Ukraine, COVID-19, Lockdowns in China, and inflationary headwinds wouldn't be possible without the incredible dedication of our team around the world.
I'm very grateful for our team's great execution, and effectively navigating dynamic times and enabling the success of our company and our customers. Thanks.
Thanks to our colleagues our company delivered a spectacular 2022 and I couldnt be more excited for 2023 I'll get into more of the details in my remarks later, but first let me recap the financials.
During the quarter, our revenue grew 7% to 11 $45 billion. Our adjusted operating income was $2 $5 $6 billion and we delivered another quarter of strong adjusted EPS performance, achieving $5 40 per share.
Turning to our results for the full year, we grew revenue by 15% to $44 $92 billion in.
In 2020 to adjust.
Adjusted operating income was $10 99 billion.
Adjusted EPS of $23 and <unk> 24 per share.
Let me turn to our end markets, we continue to deliver excellent and differentiated performance in Q4.
This was driven by a continuation of good market conditions and outstanding execution from our global team, resulting in meaningful share gains.
Let me now give you some color for the quarter of the year.
Starting with our largest end market pharma and biotech we continued to deliver impressive performance with growth in the low teens for the quarter and mid teens for the full year, our differentiated customer value proposition is further elevating our trusted partner status with our pharma and biotech customers throughout.
Throughout the year, we had broad based strength across our businesses serving this end market highlighted by our bio production pharma services chromatography, and mass spectrometry businesses as well as the research and safety market channel.
In academic and government we grew in the mid single digits for both the quarter and for the full year.
We delivered strong growth across a range of our businesses, including biosciences electron microscopy chromatography and mass spectrometry as well as in the research and safety market channel.
In industrial and applied we grew in the low teens for the quarter and mid teens for the full year during the year, we delivered strong growth in our electron microscopy in chromatography and mass spectrometry businesses.
And finally in diagnostics and healthcare in Q4 revenue was approximately 40% lower than the prior year quarter, and 25% lower than full year 2021.
The team delivered good core business growth during the year led by our microbiology and transplant diagnostic businesses as well as our healthcare market channel.
I'll now turn to our growth strategy, which is deliberate delivering differentiated performance and so I think I saw pretty even brighter future.
As a reminder, our strategy consists of three pillars developing high impact innovative new products, leveraging our scale in high growth and emerging markets and delivering our unique value proposition to our customers.
Starting with the first pillar it was another terrific year of high effect innovation as we launched outstanding new products across our businesses that strengthen our industry leadership by enabling our customers to break new ground in their important work.
In chromatography and mass spectrometry, our innovations are accelerating our customers' research and unlocking deeper analytical insights and.
In 2022, we extended our industry, leading thermo scientific <unk> portfolio.
Largely orbit drop of San <unk> mass spectrometer to advanced proteomics, Metabolomics and cancer biomarker research.
We also launched the Thermo scientific trade 600 series gas chromatograph to advanced analytical testing for food environmental and industrial and pharmaceutical applications.
And electron microscopy, the new Thermo scientific <unk> crowd Oems was launched during the fourth quarter.
It will help our customers accelerate structure based drug discovery for debilitating disorders, such as Alzheimer's, Parkinson's and Huntington diseases, as well as research for cancer and gene mutations.
We also continue to build our genetic sciences capabilities to help our customers understand diagnose and treat disease during the fourth quarter, our CCAR CTX HLA sequencing system was granted marketing authorization by the U S. FDA for use as a companion diagnostic with a T cell receptor therapy for adults with <unk>.
<unk> melanoma. This is a really nice example of how our specialty diagnostics business is benefiting from our capabilities in life Sciences solutions.
In addition, we expanded our PCR test menu to leverage our incredibly large installed base of instruments and launched the true Mark infectious disease research panels for rapid detection of research of infectious disease pathogens.
To wrap up the innovation highlights we added to our cell gene therapy offerings. Most recently launching the kimco Cts dining select magnetic separation system. Our solutions are helping customers advanced their cell and gene therapy programs. So another spectacular year of innovation and we have an exciting pipeline of launches in 2010.
Three and beyond.
The second pillar of our growth strategy is leveraging our scale in high growth and emerging markets to create a differentiated experience for our customers. We continue to strengthen our capabilities serving these markets during the year and I'll highlight a recent example.
In the quarter, we opened a new cgmp biologics is sterile manufacturing facility in Hangzhou, China, which provides integrated clinical and commercial drug substance and drug product capabilities to help customers in China, and the Asia Pacific region deliver patient therapies more quickly.
Turning to the third pillar of our growth strategy, we continue to enhance our customer value proposition by strengthening our capabilities. We've been executing on the significant investments we've made over the past couple of years and throughout 2022, we brought new capacity and capabilities online for pharma services by our production and clinical research services.
Most recently during the fourth quarter, we opened a new state of the art Bioanalytical lab, and Richmond, Virginia to support our clinical research business and the increasing demand for our laboratory services to accelerate drug development.
As always our PPI business system enabled our success during the year. It is helping us to drive meaningful share gain maximize the return on our investments meet our customers' needs and successfully navigate the dynamic environment, including effectively addressing inflation and global supply chain challenges PPA.
Engages and empowers all of our colleagues to find a better way every day and enables outstanding execution.
We continue to successfully execute our capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. In 2022, we successfully integrated PPD, our clinical research business for the full year PPD delivered core organic growth in the high teens generating over $7 billion in revenue.
And contributing over $2 to our adjusted earnings per share the combination of a great store share performance and excellent progress on our synergy realization is delivering very strong returns for our shareholders that is well ahead of the deal model.
From a customer lens. The acquisition has further elevated our trusted partner status as customers are realizing significant value in partnering with our team to advance scientific idea to an approved medicine.
In 2022, we also returned $3 $5 billion of capital to our shareholders through stock buybacks and dividends and on the first business day of 2023, we completed the acquisition of the binding site, a leading specialty diagnostics company. The binding side is an exciting addition, and highly complementary to our specialty diagnostics business.
Together, we'll be able to advance the diagnosis and management of patients afflicted with multiple myeloma and immune disorders.
Reflecting on our progress of our ESG priorities in 2022, we further advance our environmental and philanthropic efforts, while also continuing to strengthen our company culture.
During the year, we continued to advance our environmental sustainability roadmap.
Reducing our carbon emissions and finalizing significant power purchasing agreements to accelerate our transition towards a 100% renewable energy.
Looking forward. We've also increased our 2030 greenhouse gas emissions reduction target to achieve a 50% reduction in this decade.
Through our foundation for Science, we continue to advance our philanthropic efforts and support of students across the globe during the year with our stem education programs. This included announcement in the quarter for the Thermo Fisher scientific Junior innovators challenge the Premier Municipal Middle School stem competition in the U S.
Without the year Thermo Fisher scientific was recognized for its industry leadership and inclusive culture. This includes earning 100% score on the human rights campaign 2022, corporate quality index for LGBTQ equality for the seventh consecutive year.
As well as inclusion unfortunate list of the world's most admired companies in the quarter. We were recognized by Forbes magazine as one of the world's top female friendly companies and one of America's best employers for veterans.
As I reflect on the year I'm very proud of what our team accomplished in 2022 was a special year for Thermo Fisher and I am excited about 2023 and beyond.
Stephen will outline the assumptions that factor into our revenue and earnings guidance, but let me quickly cover the highlights were initiated 2023 revenue guidance of $45 3 billion.
And adjusted EPS guidance of $23 70 per share.
This very strong financial outlook reflects a continuation of our track record of delivering excellent financial performance and sustainable value creation for all of our stakeholders.
So to summarize our key takeaways for 2022.
Our proven growth strategy continues to drive significant share gain.
Our differentiated customer value proposition is further elevating our trusted partner status.
And this in combination with the power of our PPI business system drove outstanding financial performance for the quarter and full year exceeding our ambitious goals, while navigating a very dynamic macro environment.
And we enter 2023 with strong momentum and we're incredibly well positioned beyond 2020 with that I'll now hand, the call over to our CFO Stephen Williamson Stephen.
Thanks, Mark and good morning, everyone. As you saw in our press release in Q4, we delivered an outstanding quarter capping off another excellent year.
For the quarter and the full year, we delivered 14% core organic revenue growth. This differentiated level of performance demonstrates the power of our growth strategy and the trusted partner status that we've earned with our customers.
In addition in Q4, we generated $370 million of COVID-19 testing revenue $3 1 billion for the full year.
Taking a step back and thinking about the topline performance for the year I'm really proud of what the team delivered we offset $4 $2 billion less testing revenue, which was a headwind of over 10% and still delivered slightly positive organic growth for the whole of the year, that's a great accomplishment.
Complishments.
And using the power of the PPI business system, we were able to translate the top line strength to excellent adjusted EPS and cash flow Rico.
In Q4, we delivered 23 more adjusted EPS in that prior guide ending the year at $23 24.
<unk> delivered $6 $94 billion of free cash flow, all while continuing to invest in the business to enable an even brighter future.
So 2022 was another excellent year.
Let me now provide you with some details on our performance.
With the annual results as I mentioned, we delivered $5 40 of adjusted EPS in Q4 in 'twenty three 'twenty.
<unk> 24 for the full year GAAP EPS in the quarter was $4 one.
And $17 63 for the full year on.
On the top line as I mentioned in Q4, we delivered 14% core organic revenue growth of $370 million of testing revenue.
Reported revenue grew 7% year over year.
Elements of our Q4 reported revenue increase included 3% lower organic revenue, a 14% contribution from acquisitions and a headwind of 4% from foreign exchange.
Yes.
Full year core organic revenue growth was 14% and we delivered $3 $1 billion in testing revenue.
For the full year 2022 reported revenue increased 15%. This includes slightly positive organic growth and 18% contribution from acquisitions and a 3% headwind from foreign exchange.
Turning to our organic revenue performance by geography, the organic growth rates by region are skewed by the COVID-19 testing revenue in 2022 in the prior year in Q4, North America grew in the low single digits Europe declined in the low teens Asia Pacific in the mid single digits with China declining in the mid single digit.
<unk>.
And the rest of the world declined high single digits.
For the full year North America grew in the low single digits Europe declined high single digits Asia Pacific grew at high single digits, including China, which also grew high single digits for the year and the rest of the world declined high single digits.
On a core organic growth basis, all regions had strong growth in 2022.
With respect to our operational performance adjusted operating income in the quarter decreased 19% and adjusted operating margin was 22, 4% 710 basis points lower than Q4 last year.
For the full year adjusted operating income decreased 9% adjusted operating margin was 24, 5%, which is 650 basis points lower than 2021.
For both the fourth quarter and full year, we achieved strong price realization to effectively address.
Inflation, while also delivering strong productivity this was more than offset by lower testing volumes continued strategic investments and the expected impact of incorporating PPD into our financials.
For 2022 full year adjusted operating margin was 40 basis points lower than assumed in the prior guidance. Two thirds of this was due to business and currency mix and a third due to onetime costs related to the runoff of testing revenue.
Total company adjusted gross margin in the quarter came in at 41, 4% 910 basis points lower than Q4 last year.
For the full year adjusted gross margin was 43, 5% down 810 basis points versus the prior year.
Both the fourth quarter and the full year the change in gross margin was due to the same drivers as those of our adjusted operating margin.
Moving on to the details of the P&L adjusted SG&A in the quarter was 15, 6% of revenue an improvement of 170 basis points versus Q4 2021.
For the full year adjusted SG&A was 15, 8% of revenue an improvement of 130 basis points compared to 2021.
Total R&D expense was $390 million in Q4.
For the full year R&D expense was $1 5 billion, representing 5% growth over the prior year, reflecting our ongoing investment in high impact innovation.
R&D as a percent of our manufacturing revenue was 7% in Q4, six 4% for the full year.
Looking at our results below the line for the quarter, our net interest expense was $119 million.
Which is $31 million favorable to Q4 of last year.
Net interest expense for the full year was $454 million.
A decrease of $39 million from.
From 2021.
Adjusted other income and expense was a net expense in the quarter of $10 million compared to net income of $7 million in Q4 2021, the year over year variance is primarily due to changes in non operating FX.
For the full year adjusted other income and expense with a net income of $14 million.
Which is $24 million lower than the prior year.
Our adjusted tax rate in the quarter was 12, 8%, which is a 100 basis points lower than Q4 last year, reflecting the results of our tax planning activities.
For the full year, the adjusted tax rate was 13% or 160 basis points lower than 2021.
We repurchased $1 billion of shares in Q4, bringing our total repurchases for 2022% to $3 billion.
Average diluted shares were $393 million in Q4, approximately $4 million lower year over year, driven by share repurchases net of option dilution.
Turning to cash flow on the balance sheet full year cash flow from continuing operations was $9 one 5 billion.
Free cash flow for the year was $6 $94 billion.
After investing $2 2 billion of net capital expenditures.
We returned $118 million to shareholders through dividends in the quarter and $455 million for the full year.
We ended the quarter with eight $5 billion in cash at $34 5 billion of total debt our leverage ratio at the end of the quarter was two nine times gross debt to adjusted EBITDA and two two times on a net debt basis.
Clearly my comments on total company performance adjusted ROIC was 13, 5%, reflecting the strong returns on investment that we're generating across the company.
Now I'll provide some color on the performance of our four business segments, Let me start with a couple of framing comments.
The scale and margin profile of our COVID-19 testing revenue varies by segment.
And the testing revenue was significantly higher than the prior year.
Skew some of the reported segment margins were executing strong pricing realization across all segments to address higher inflation.
Referring to the acquired PPD business at that clinical research business that resides in laboratory products and Biopharma services segment. The anniversary date of the acquisition with December eight.
Moving on to the segment details starting with life Sciences solutions Q4 reported revenue in this segment declined 27% and organic revenue was 24% lower than the prior year quarter. In Q4, we delivered very strong growth in our bio production business. This was more than offset by the moderation in testing revenue in the segment versus the.
Prior year quarter.
For the full year reported revenue in this segment declined 13% and organic revenue declined 12%.
Q4, adjusted operating income in life Science solutions decreased 48% and adjusted operating margin was 34, 1% down 14 percentage points versus the prior year quarter and.
In Q4, we haven't we had unfavorable volume mix due to the significantly higher testing revenue in the prior year quarter.
For the full year adjusted operating income decreased 29% adjusted operating margin was 41, 2% a decrease of 880 basis points versus 2021.
In the analytical instruments segment reported revenue increased 9% in Q4 and organic growth was 14%.
The strong growth in the segment. This quarter was led by electron microscopy chromatography and mass spectrometry businesses.
For the full year reported revenue in this segment increased 9% and organic revenue increased 14%.
Q4, adjusted operating income in this segment increased 25% and adjusted operating margin was 25, 4% up 330 basis points year over year.
In the quarter, we delivered strong volume pull through and productivity. This was partially offset by strategic investments.
For the full year adjusted operating income increased 26% and adjusted operating margin was 22, 8% upstream within 10 basis points versus 2021.
Turning to our specialty diagnostics.
<unk> in Q4 reported revenue declined 23% and organic revenue was 20% lower than the prior year quarter.
In Q4, we continued to see strong underlying growth in the core led by our healthcare market channel and our transplant diagnostics and microbiology businesses.
This was offset by lower COVID-19 testing revenue versus the year ago quarter.
For the full year reported revenue in the segment decreased 16% and organic revenue was 13% lower than 2021.
Q4, adjusted operating income decreased 30% in the quarter adjusted operating margin was 18, 6% down 190 basis points versus Q4 2021.
During the quarter, we delivered strong productivity, which more than offset by the impact of lower testing volume.
For the full year adjusted operating income decreased 20% and adjusted operating margin was 21, 5% down 110 basis points versus 2021.
Finally in laboratory products and Biopharma services segment, Q4 reported revenue increased 42% organic growth was 11% and the impact of acquisition was 35%.
During Q4 organic revenue growth in this segment was led by the pharma services business.
PPD IDE clinical research business continued to perform very well during the quarter and delivered over 20% core organic revenue growth and contributed $1 $9 billion of revenue to this segment.
For the full year reported revenue in the segment increased 51% and organic revenue increased 10%.
Q4, adjusted operating income in the segment increased 73% and adjusted operating margin was 14, 1%, which is 260 basis points higher than Q4 2021.
In the quarter, we drove favorable business mix and delivered strong productivity and volume pull through that was partially offset by strategic investments.
For the full year adjusted operating income increased 56%.
Operating margin was 12, 8% up 40 basis points versus 2021.
Let me now turn to our 2023 guidance as.
As Mark outlined we're starting the year with a very strong financial outlook, consisting of revenue guidance of $45 3 billion.
And adjusted EPS guidance of $23 70.
It provides some details of the underlying assumptions starting with revenue.
<unk> guidance for 2023 assumes 7% core organic revenue growth $400 million in testing revenue $250 million of revenue from acquisitions, and a tailwind of $100 million from FX is.
<unk> to return to more normal market growth conditions in 2023 in the range of four 6%.
Within our core revenue, we expect $500 million.
<unk> as a therapy revenue in 2023.
Thats, just $1 2 billion less in 2022, a 3% impact on core organic growth.
Even with this headwind we are expecting to deliver 7% core organic revenue growth in 2023, demonstrating the strength of our initial outlook the agility with which we are managing the business and the ongoing benefits of our growth strategy.
Turning to profitability in 2023, we're assuming an adjusted operating margin of 23, 9% to 60 basis points lower in 2022, driven by two elements at 40 basis points of core margin expansion.
And 100 basis point headwind from the runoff of testing revenue.
The year over year margin change is consistent with the comments I made on the last earnings call were not described how to model the margin impact of the different elements of the year over year change in revenue.
In 2023 with a pandemic related testing revenue behind us I thought this would be a good opportunity to take a step back and take a multiyear view on a meaningful margin expansion progression.
And starting in 2019 pre pandemic, excluding the impact of PPD. We're on track to expand operating margins 60 basis points a year on average through 2023 or 250 basis point improvement over the four year period.
Progress on margin expansion.
Turning to adjusted EPS, we expect to deliver $23 70 in 2023. This is a 2% year over year increase consisting of a 10% headwind from testing more than offset by a 12% increase driven by the core business.
We're actively managing the whole P&L to effectively deal with material runoff and testing in vaccines and therapies revenue and still grow our adjusted earnings per share for the year. This shows the strength of our growth strategy and the power of our PPI business system.
Moving onto some more detailed assumptions behind the guide the cost the FX in 2023, we're assuming that the year over year tailwind of approximately $100 million of revenue.
One, 2% and <unk> to adjusted EPS also 2%.
We're assuming that the binding site acquisition will contribute approximately $250 million to our reported revenue growth and seven to adjusted EPS in 2023.
Below the line, we expect net interest expense in 2023 to be approximately $480 million, that's approximately $25 million higher than 2022 and includes the funding for the banking site acquisition.
We assume that the adjusted income tax rate will be 11% in 2023. The improvement from 2022 is driven by a tax planning initiatives.
We're expecting net capital expenditures will be approximately $2 billion in 2023 and free cash flow is assumed to be $6 $9 billion for the year.
In terms of capital deployment, our guidance assumes $3 billion of share buybacks, which were already completed in January we.
We estimate the full year average diluted share count.
388 million shares.
We're assuming that we return approximately $540 million of capital to shareholders this year through dividends and.
And as is our normal convention, our guidance does not assume any future acquisitions or divestitures.
And finally I wanted to touch on quarterly phasing for the year Rep.
Revenue adjusted operating margin and adjusted EPS are all expected to ramp up as we go through the year. This is due to several factors core.
Core organic revenue growth is expected to increase as we go through the year largely due to the comps related to vaccines and therapies as well as the expected phasing of economic activity in China.
The impact of the runoff in testing revenue is most pronounced in Q1 and the benefits of the offsetting cost actions are spread over the year.
From a foreign exchange standpoint, while a slight tailwind for the year as a whole in Q1 FX is expected to be a year over year headwind of approximately $200 million of revenue and $80 million of adjusted operating income.
Below the line net interest expense is expected to decrease during the year as we generate free cash flow.
Interest on that cash build.
Putting all this together the Q1, we expect core organic revenue growth to be in the mid single digits adjusted operating margin to be slightly lower than Q4, 2022, and adjusted EPS to be just over 20% of the full year total.
So to wrap up we had an excellent 2022, and we're really well positioned to continue to deliver differentiated performance for all our stakeholders in 2023 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 Ralph.
Thank you Stephen operator, we're ready for the Q&A portion of the call.
Okay.
In order to allow everyone an opportunity to address to suddenly. Thank you management team. Please limit your time to one question only.
One follow up.
If you have additional questions. Please return to the queue.
To ask a question. Please press star one on your telephone keypad.
The first question, we have from the phone lines comes from.
Jack Meehan.
Further research your line is now open.
Thank you good morning.
I wanted to start with the clinical research PPD performance, So high teens for the year, that's well above what we're seeing from the peer group. So a three parter for you Mark.
What was your book to Bill in 2022.
Two how are the revenue synergies tracking and then three can you talk about what sort of growth you're assuming for this business in 2023.
Sure So Jack Thanks for the question.
Our clinical research group has performed incredibly well.
Great first year as part of the company.
Exceeding our own high level of ambition for the business integration has gone smoothly customers really see the obvious fit with the company and it really has driven very strong momentum and our colleagues are very excited about the combination so as I think about the different elements of our performance.
The book to Bill.
It was very positive authorizations were very strong.
In the quarter and the year. So we enter the year with very with very strong momentum in terms of.
The backlog that we have in the business and the authorizations.
The revenue synergies the way I would think about it is in two phases.
Because of the long cycle nature from a win to revenue.
We have one extremely substantial revenue synergies.
That will show up in the.
Financials in 2023 and beyond we had a small amount of revenue that came in.
The numbers last year, but we're talking in the hundreds of millions of dollars of wins.
We've achieved from an authorization standpoint, so extremely positive.
In terms of our thoughts about 2023.
ROE above the company's average of 7% growth that we outlined during the course, so a nice contributor to their success.
It's been a seamless integration for the team very predictable from that.
Excellent.
And then wanted to ask about the Covid vaccines and therapeutics.
Assuming $500 million for the year.
My question is simple just how quarter or your core sales would you ever consider changing this definition just confidence in the handoffs as it pertains to bio processing in 2023.
Yeah, So Jack thanks.
For the question.
When I think about the $500 million and.
When I look at that.
That number is primarily related to our pharma services activity, it's around actually producing the active pharmaceutical ingredients for the therapies. It's for the sterile fill finish primarily.
For the vaccines and some of the therapies so.
We have pretty good visibility to that number.
So I feel good about that.
We decided back I.
I guess, a year and a half ago or whenever the exact timeframe. We did the the definition of core was.
We invested in capacity and if you think about our sterile fill finish line as an example can be used for a COVID-19 vaccine and it can also be used for pretty much any other biologic in and even some of the small molecules right and therefore, our view was we would transition that capacity overtime and we have been in <unk>.
Well the other aspect of core is that if you think about how strong our growth was last year well above our own ambition given the 12% we had laid out at the end of the third quarter, we've already transitioned.
A meaningful amount of that revenue in terms of other activities. So we didn't.
Contemplated at all about changing the definition of what successes, we think 7% is the right number for us in the quarter as the right definition for us.
We will provide transparency during the year about the different components as we always do so.
Just kind of understand how we're getting there, but I feel great about the outlook and I'm very proud of what the team delivered last year.
Sure.
Thank you.
Thank you.
We have the next question.
From Patrick Donnelly with Citi. Your line is now open.
Hey, good morning, guys. Thank you for taking the question.
Mark maybe one on the analytical instruments business, 14% growth for the year, because obviously pretty impressive you guys and Steve elevated growth or a good stretch here.
Stepped down a little bit against the easier comps I just wanted to get more color I guess on what youre seeing on the demand side. How you are seeing order trends in bookings there visibility into 2023 I know you've had this elevated backlog we talked a lot about it seems like some peers are expecting kind of a normalization of moderation in the second half as we work our way through the year. So wanted to get your perspective, what you're seeing there.
Yes actually thanks for the question so when I think about the analytical instruments business.
Really strong year excellent execution.
There is nothing different in Q4 than in Q3 so.
I wouldn't read anything into that.
When I look at what's driving it.
Last year you saw good market conditions funding was clearly strong I don't know if that was a little bit of pent up demand from 2020.
But the funding was clearly available.
It very well with our innovation, we stayed committed to innovation throughout the early phase of the pandemic.
Making sure we had robust pipelines you saw that in the stream of launches in our chromatography and mass spectrometry and electron microscopy businesses. Those products have been well adopted we're clearly growing very well and as you know we've also built out a very strong presence and enabling the next generation of semiconductors.
Battery applications. The most advanced aspects of materials sciences, a different market position than really anybody else has in the industry.
And that's driving great growth right you can see it in our electron microscopy numbers I'm very proud of how the teams executed. So that's kind of a context of why the elevated growth. So as I think about bookings demand very strong throughout the year.
So we have good visibility to the first half that's when those most of those orders will ship.
We would expect that the analytical instruments business will be a really nice contributor to our growth for the year.
And I think it's reasonable to assume that the growth normalized is more in the second half as.
As an assumption is not that I see something different or something happening in the market conditions, but our visibility is typically six months. So at the end of the first quarter, we'll have good visibility into the third quarter and we will keep you posted I think for modeling purpose I think normalization in the second half is a good assumption.
Okay. That's helpful.
And then maybe one for Steven on the margins.
Gross margin seem to Rebase I would love just your perspective on what those look like in 'twenty three first off and then maybe just the additional areas of leverage kind of down the P&L coming out of Covid you mentioned, maybe some elevated strategic investments in 'twenty. Two obviously, we saw some things like onetime bonuses that had been a pretty clear, but it would be.
Helpful. If you could just talk through the moving pieces what areas of additional leverage you do have coming out in 'twenty, two because again the mix, obviously as Lps becomes bigger.
<unk> should be lower but you guys are putting up pretty good numbers. So just trying to figure out that they've got a little bit of the moving pieces in areas of leverage you have what do you think about that $23 nine for 'twenty three.
Yeah. So Patrick thanks for the questions first when I think about the margin profile going forward that 7% to 9% core organic growth driving 40% to 50 basis points is the right way to think about our company and.
The margin opportunity that you've got a little bit of that I would assume a little bit of price benefit.
Good volume leverage that comes with that and still investing in the business to maintain that top line growth and then a continuation of using PPI is it kind of de complex the company, but I think that that margin profile still holds in terms of going from the 23, 9% going forward post 2023, I think about the levers that we have.
As you saw in this past year, we had.
A slightly different mix of higher growth.
Certain parts of our business.
Slightly and margins are slightly different in Q4 than we had in the prior guide, but the revenue was significantly higher than what really matters is operating income dollars that were driving and that that's incredibly strong in.
The margin profile the mix then.
Into 2023.
And then that forward that kind of 7% to nine driving that.
50 is a good way to model the company.
And then just gross margins were 23.
I don't really want to give guidance for every single element of the P&L.
To manage the complex company, but similar margin profile to where we are right now is probably a good starting point, but.
It really depends on the mix.
The changes in currency and our job is to manage the whole thing and deliver great results.
Thanks very helpful. Thank you guys.
Thank you.
Our next question comes from.
Rachel.
Zhang of JP Morgan. Please go ahead, when you're ready.
Okay. Thanks, operator, and so first up just on China, China declined mid single digits during Q and you flagged that some of that roll off.
So talk about how China is part of the reason that that core grant core growth is going to ramp throughout the year. So can you just walk us through what are you embedding for China growth for <unk> and then for total 2023, and then can you also just spend a minute talking about the underlying demand trends for China, and how you're planning for the reopening.
Rachel Thanks for the question.
So.
If I step at the highest level with China historically has been our fastest growing end market.
We have a very strong position.
Our enabling technologies are important to life sciences, and food safety in the biologics industry in China et cetera.
Good demand drivers long term long historical perspective.
When I think about last year team delivered high single digit.
Both through the year.
When I think about the fourth quarter.
You had very very significant disruptions from the end of the Covid zero corporate policies. So you went from this period, where I think we.
Had no problem navigating through the challenges of the lockdown policies, but when you have 50 60, 70% of colleagues with colder, but thats honestly.
Highly disruptive.
So so you saw the first half of the quarter was strong in the second half of the quarter was weak our assumption for this year is that zero COVID-19.
Opening up the economy leads to a weaker first quarter.
A strong rebound in the balance of the year, China will grow our expectations in our guidance a little bit faster for the full year, then our core growth. So that's <unk>.
So it's hard to think about so a really strong end market, including the disruption from Q1 of these it teams actually I'm very impressed with how they dealt with all of the complexities and keeping our colleagues safe.
A challenging period of time.
Great and then maybe just kind of digging deeper in context of your question around margin you did 22, 4% adjusted op and <unk> guided to a step down on the operating margin line during <unk>, but then hitting that $23 nine ish for the year for 2023. So can you just kind of.
Hey, Josh through the math, there on margins and how that gives you confidence in the back half of the year to be able to round out at just shy of 24%.
Yes, so its duration. Thanks for the question so when I think about the margin progression through the year.
Q1, we got very significant roll up in highly profitable testing revenue and the cost actions against that and to enable a 40% pull through for the year.
It's a combination of cost actions and then the non repeat of the.
Certain onetime things that were doing on compensation in the prior year those things spread over the whole year. So you get a little bit of benefit in Q1 to offset part of that profitability, but more of that offset really coming in the following three quarters left three of the largest piece to it.
FX is a headwind to margins in Q1 sets a slight a slight aspect to it and then that the phasing of the China activity is another aspect of that kind of lower level of activity in Q1, and then ramping up to a higher level of revenue in Q4.
Helpful. And then just squeezing one more in here on industrial and applied we grew low teens in <unk>. So can you just give me give us a little bit more granularity on that performance during the quarter. If there was any pockets of strength or softness relative to your expectations and then how are you thinking about that industrial applied market for 2023.
And the macro backdrop.
So we're going from there.
Great. Thanks.
Yes, so industrial cloud was very strong in the quarter.
Low teens growth in the quarter.
Really strong demand and shipments for.
Our chromatography mass spectrometry and electron microscopy business.
So we didn't see any concerns our assumption for the year is going to grow at about.
The average rate of growth for us.
Full year so that's.
So what we're assuming in the guidance.
Great. Thank you.
Thanks, Rick.
Thank you.
We now have.
Derik de Bruin.
Bank of America. Please go ahead.
Hello, and good morning.
So marni.
Even not to not to pick on the margin point, but I do want us to clarify something.
Looking at the 40 to 50 basis points of expansion. So, let's say you do a 100.
Next couple of years at your Analyst day in May you talked about.
6% ish.
Adjusted operating margin, excluding the impact of capital deployment our.
I mean can you sort of just walk us through sort of like how you're thinking about the 2025.
Outlook that you provided and sort of like general thoughts around that.
Thanks.
Go ahead.
I think about margin profile, it's in combination with revenue dollar so.
Revenue dollars are materially higher than.
Incorporated into my long term model and the combination of that plus plus the margin gets you through very strong operating income dollars and that's what's driving EPS.
We're well positioned with a long term model.
Okay.
Just wanted to clarify that as well and then just one quick follow up.
I assume there is some residual COVID-19 business and your PPD.
You talked about core growth being 20% what is the headwind in the PCB business from leftover Covid going from 23 to 22 23.
Yes, there is some activity.
Studies that will.
Roll off over multiple years in terms of required follow on studies and activity there.
The team is as those studies.
Come off they just have moved to other areas of <unk>.
Therapeutic range. So absolutely has been done quite seamlessly and as you know with the business scale and the way. It is having a large capable team is a great way to be able to be ready to serve the next set of customer work so pretty straightforward.
Okay. So if I can.
If I can squeeze one more in capex sort of outlook as.
As we go from 23 <unk> been adding a lot of facility can you talk about what you are thinking about 'twenty three 'twenty four.
So 'twenty Stephen said, it's just a couple of billion dollars and we will continue to.
We will kind of go down to a glide path back to that 353 to three 5% overtime, so nothing's changed in that assumption.
Great.
Thank you thanks Derek.
Yes.
Thank you.
Next question comes from Dan Brennan of Cowen.
Your line is now ladies and gentlemen.
Great. Thank you.
Maybe mark to kick it off just I'm all in on our guests can get them.
Struggling company again that would be like a struggling company getting you as a CEO would be a great deal I think so so the founding my questions here.
Maybe the first one just obviously theres a lot of concerns in the industry broadly on the near term drag on revenue growth for biologic drug products.
Given the inventory depletion that's ongoing in the industry, you've been pretty confident that for various reasons. Some of it was really not seeing this.
It would be interesting to get an update on <unk>.
Kind of.
Just on your thinking there and kind of what you're assuming in your outlook for 7% growth for your business both on the consumable side and on the PGM services side.
Yes so.
In terms of Footfall Hope springs eternal until the first half.
In terms of the bio production business.
What I would say is a few points.
Every single player has reported that a couple of them have so we have a sense of how the industry did and what others have said.
When I think about last year.
Bio production business, just crushed it cookies right just phenomenal performance well above the rate of growth of our pharma and biotech customers.
Three years in a row, a really very strong growth.
Very proud of how the team has executed.
When I think about 2023.
Against tougher comparisons, obviously that growth will normalize a bit and I would expect that based on some of the COVID-19 comparisons of the first half of 2020 to that.
You will see.
More normalization in the first half stronger in the second half is the powder, but it's a good business with incredibly bright prospects. So.
From that perspective, I feel good about how the team's managing it well.
<unk> 23, a contributor in the long term is can be fantastic.
Pharma services business has had a very good year very strong growth.
As part of its capacity online very effectively and winning a lot of new business, we still have activity.
This year, that's that's meaningful and vaccine therapies for Covid.
And then as those.
Wind down at some point in time, it's function of what what the longer term visibility for that that capacity just gets repurposed all those things. So we do that in an orderly fashion and we think about it.
Strong year on some really nice meaningful wins.
Throughout 2022.
That's up to pharma services business with Goodyear and the share swap.
Got it and then maybe just as a follow up obviously your business mix is.
A lot less cyclical today than it was back in the prior down so I'm just wondering implicit in the 700 Rachel asked a question on industrial business, but just to what extent does your guide bake in some cushion.
For potential slowdown that could unfold given weaker macro.
Yes, so we assumed.
As normal market conditions, and the way I would characterize last year was above normal market condition, so normal and my definition of market grows 4% to 6%.
For very very long time, so that's what we're assuming for this year.
If it's materially different than that meaning that if the market conditions look anything like they look last year, we're going to grow well above the core guidance. If the market conditions are meaningfully worse than what's assumed in normal market conditions.
And we're going to go lower than that.
For core organic that we outlined so nothings nothing dramatic about that will be super transparent in all of our vessels will understand that the world is totally different than what it looks like on February one.
What we know is that we're going to manage incredibly well so whatever the world throws at US we'll come out with great short term performance and a much stronger industry leader for the long term.
That's super Cool about Thermo Fisher, because it's our job to manage the dynamics and do a great and do a great job for our investors. So I'm excited for what the world holds in.
In 2023 and beyond.
Great. Thank you.
Thank you Dan.
We now have Vijay Kumar with Evercore ISI. Please.
Please go ahead when you're ready.
Hey, guys congrats on a really strong.
<unk> finished the year and thanks for taking my question had two parts, maybe I'll ask them both upfront.
The first part for you on when I look at the guidance in base organic excluding vaccine I think the business did.
The businesses, assuming perhaps low double digit organic here in.
Fiscal 'twenty, three and that's coming off of perhaps a mid teens comp.
One is that math correct the base business, excluding vaccine at double digits and what is it is yes.
I'm thinking biopharma has to grow at least mid teens.
<unk> percent to 10%.
It seems pretty strong do those numbers makes sense.
Steven.
Second part for you on margins here, what are you assuming for decremental margins on Covid and margins and FX.
And did I hear you correctly on that Q1 is starting at 22%.
I just wanted to make sure I heard the numbers right.
Sure so in terms of the.
The guidance and the 7% core.
We did not do.
A lot of machinations about excluding this or that I think from the math the way Youre doing it is that if you excluded the vaccines and therapies it would imply that the growth.
Nine or 10% somewhere in that range is about what the what the growth would be.
On that measure of which we're not using that particular measure.
Therefore, it can't sort of speculate onshore while award of all of the dynamics is much better to say relative to our 7%.
Grow our pharma and biotech we expect to grow above that right in terms of its contribution to the 7%.
We would assume that the industrial and apply would go around.
Around the 7% core and the other two markets alone.
That's how you should think about the different banks.
Yes, Vijay in terms of the pull through on the lower testing revenue for outlined on the last call.
Approximately 40% in aggregate for the whole year, but that doesn't help.
The same in every single quarter, but the offsetting cost actions against the very significant profitability pull through which is higher than that on a contribution margin basis.
That's spread across each of the quarters, but the revenue drop it's largely just in Q1. So that's why you have the margin profile that I outlined for Q1 in.
The indication I gave for Q1 margin profile at this point is slightly below what has the margin in Q4. So that's the largest driver of that or is that a large truck for a profitable testing and then the offset on the cost to get it to the 40% pull through spread throughout the year.
Thanks Vijay.
Operator, we have time for one more question.
Thank you.
Our final question comes from the line of.
Ken.
Stifel. Please go ahead when you're ready.
Hey, good morning, guys. Thanks for getting me in here Mark maybe just one on bioprocess bio production.
Wanted to ask whether youre seeing any differences in purchasing patterns in the way the inventories.
Just appear as though theyre being manage when you look at <unk> versus the Biopharma as themselves. There has been some conversation around just timelines that looked like they might materialize.
On Destocking. So curious if you can just sort of help us with what may be taking place given where you sit here.
Yes, the answer is sort of a.
Along the line with Tim Burns question really.
Not much to add right, which is.
Phenomenal 2022, we created a really.
Challenging and exciting comparisons we get paid to create those.
Comparisons.
I would expect that would show up in <unk>.
Normalized growth in the first half and we will be stronger than that in the second half I think there is much color between different customer types are that it will.
Provide much more insight on it.
Okay. Thanks, so much.
Well, so let me wrap it up here.
Thanks to everyone for participating in the call.
With another strong year behind us we're in a great position to achieve another excellent year in 2023 and as always thank you for your support of Thermo Fisher scientific and we look forward to updating you during the course of the year as it progresses. Thanks, everyone.
Okay.
Thank you for joining that does conclude today's call. Please have a lovely day and you may now disconnect your lines.
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