WALTHAM Oct 21, 2015 (Thomson StreetEvents) -- Edited Transcript of Thermo Fisher Scientific Inc earnings conference call or presentation Wednesday, October 21, 2015 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Kenneth Apicerno Thermo Fisher Scientific Inc - VP of IR * Marc Casper Thermo Fisher Scientific Inc - President & CEO * Stephen Williamson Thermo Fisher Scientific Inc - SVP & CFO ================================================================================ Conference Call Participants ================================================================================ * Tycho Peterson JPMorgan - Analyst * Derik de Bruin BofA Merrill Lynch - Analyst * Ross Muken Evercore ISI - Analyst * Jon Groberg UBS - Analyst * Jack Meehan Barclays Capital - Analyst * Doug Schenkel Cowen and Company - Analyst * Dan Arias Citibank - Analyst * Isaac Ro Goldman Sachs - Analyst * Steve Beuchaw Morgan Stanley - Analyst * Brandon Couillard Jefferies LLC - Analyst * Jeff Elliott Robert W. Baird & Company, Inc. - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the Thermo Fisher Scientific 2015 third-quarter conference call. (Operator Instructions) I would like to introduce our moderator for the call, Mr Kenneth Apicerno, Vice President Investor Relations. Mr Apicerno, you may begin the call. -------------------------------------------------------------------------------- Kenneth Apicerno, Thermo Fisher Scientific Inc - VP of IR [2] -------------------------------------------------------------------------------- Good morning. Thank you for joining us. On the call with me today is: Marc Casper, our 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 Investor section of our website, ThermoFischer.com under the heading, Webcasts and Presentations until November 6, 2015. A copy of the press release of our third-quarter 2015 earnings and future expectations is available in the Investor section of our website under the heading, Financial Results. So, before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the Company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors including those discussed in the Company's annual report and on Form 10-Q for the quarter ended June 27, 2015 under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also available on the Investor section of our website under the heading, SEC Filings. While we may elect to update future 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 to today. Also during this call, we'll be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third-quarter 2015 earnings and future expectations and also in the Investor section of our website under the heading, Financial Information. So with that, I'll now turn the call over to Marc. -------------------------------------------------------------------------------- Marc Casper, Thermo Fisher Scientific Inc - President & CEO [3] -------------------------------------------------------------------------------- Thanks, Ken. Good morning, everyone. Thank you for joining us today for our Q3 call. I am pleased to report that we delivered a solid quarter, with good growth on the top and bottom line. Q3 is another example of how we're successfully executing our growth strategy and increasing our depth of capabilities to gain market share. We had another great quarter for innovation, with important new product launches across our businesses. We're leveraging our scale in APAC and emerging markets as a key differentiator. We had another strong quarter in China. We also continue to make good progress in capturing revenue synergies using our expanded technology portfolio, our commercial capabilities and global reach to show our customers the power of our value proposition. With a strong nine months behind us, we're on track to achieve our growth goals for the year. Before I get into the business highlights for the quarter, let me start with a financial overview and some color commentary on our end markets. Then I'll conclude with our updated guidance outlook for the year. So in terms of the financials, our revenue in Q3 was $4.12 billion. Our adjusted operating income increased 2% to $934 million. We achieved adjusted operating margin of 22.6%, which represents 70 basis points of margin expansion. Finally, we extended our track record of consistently delivering strong adjusted EPS growth. We achieved $1.80 of adjusted EPS, which is a 5% increase over Q3 of last year. We drove good pull-through on our topline growth using our PPI business system to increase operating efficiencies and provide the highest quality products and services to our customers. Our solid results again this quarter demonstrate our ability to effectively manage the business despite the FX headwinds and achieve our growth goals. So starting with our performance by end market, we didn't see much change in Q3. In industrial and applied, our performance was similar to what we've seen all year, with low single-digit growth. Our core industrial businesses remain soft while those serving applied markets again performed well. We had good growth in our analytical instrument business serving environmental and food safety markets. We also had another strong quarter in our chromatography business. Turning to diagnostics and healthcare, our performance in this end market was pretty similar to what we had seen in the first half of the year, with growth in the low single-digits. The key contributors in Q3 were our clinical diagnostics business and our healthcare market channel, which continue to grow well. In academic and government, we grew again this quarter in the low single-digits. Conditions in this end market were also basically similar to what we experienced in Q2. Last, I'm pleased to say that we had another excellent quarter in pharma and biotech, which grew for us at just over 10%. We continue to capitalize on the strength of this end market overall and effectively leverage our unique value proposition, which really resonates with these customers. We had strong performance across our businesses that serve this end market and particularly in biosciences, bioproduction and biopharma services. Let me now highlight some of our accomplishments from Q3 in the context of our growth strategy. We continue to make great progress in all fronts, which positions us for another successful year. As you know, our growth strategy is centered around high impact technology innovation, leveraging our scale in Asia Pacific and emerging markets and developing our unique value -- and delivering our unique value proposition to best serve our customers and gain share. In terms of innovation, Thermo Fisher has by far the largest R&D budget in our industry at approximately $700 million annually. We continue to target those investments to create the most value for our customers. Let me hit some of the highlights from Q3. First in September, we introduced the new Ion S5 and Ion S5 XL next generation sequencing systems. This is a significant development that builds on our Ion Torrent platform. It makes targeted sequencing more accessible to customers working in academic, translational and clinical research labs. The key advantages of both systems are that they're cost effective and flexible, giving scientist the ability to sequence gene panels as well as small genomes, xenomes and transcriptomes on a single platform. We're also making great progress in developing new products that improve the speed and accuracy of test results in the clinical laboratory. At the annual meeting of the American Association of Clinical Chemistry, we launched a number of new Thermo scientific instruments and assays designed to help clinicians improve patient diagnosis and treatment. Let me mention a couple of them. We launched three new immunoassays that have been FDA cleared for detecting autoimmune diseases. These new EliA assays can help diagnose multiple conditions that could be precursors to kidney disease. We also introduced the Phadia 2500E instrument, which is now configured to run both our EliA autoimmunity and ImmunoCAP allergy test to significantly increase lab productivity. In our analytical instruments business, we introduced a new HPLC system, the Thermo Scientific Prelude LX-4 MD, which is listed with the FDA as a Class I medical device for general in vitro diagnostics use. The Prelude LX-4 significantly enhances sample throughput for high-volume clinical settings. Also worthy to note during the quarter, we obtained CE marks for our Prelude MD HPLC, Endura mass spec and related ClinQuan MD software, which were all previously introduced in the US. This designation gives clinical labs in Europe access to advanced technologies for analyzing patient samples using laboratory developed tests. Let me take a moment now to highlight an example that demonstrates our customers are recognizing the value we can create through our unique depth of capabilities and our repetition as a scientific thought leader. We've been collaborating with the Biotech Research and Innovation Center the University of Copenhagen to help researchers better understand how gene mutations can lead to cancer progression. Scientists there recently published two landmark studies in the scientific journal, Cell. Their work was based on results generated by our Orbitrap Fusion mass spec and our Ion Torrent next gen sequencing technologies. These studies offer insight into human cell biology that may eventually lead to more effective cancer treatments and better outcomes for patients. This is a great example of the new capabilities we're now able to deliver to our customers based on our successful integration of life technologies. Just to give you a quick update on where we are relative to our revenue synergy target, we continue to make great progress in Q3 building on the momentum we have had all year. With nine months behind us, we're at $50 million, which positions us to slightly exceed our revenue goal for the year. Turning to APAC and emerging markets, China seems to be on the top of everyone's mind. I've been getting a lot of questions about it. I am pleased to report that we had another strong quarter in China, which contributed to good growth for us in APAC overall. Our China strategy is clearly working. We delivered 15% growth in Q3. We continue to work with the government and our customers to meet their goals for improving healthcare, the environment and food safety. Back in August, I had the opportunity to visit some of these customers with our team in China. Their feedback reinforces why our technologies are well positioned there. Here are a couple observations from my trip. It is great to see our high-end instruments in customer labs there. Our Q Exactive HF and Orbitrap Fusion Lumos mass specs are being used for proteomics research. Our next generation sequencing technologies are helping to advance oncology research. We also supplied our gas and particulate monitors to ensure that air quality was safe after the widely publicized chemical warehouse explosion in Tianjin. I think this is an example that illustrates why the diversity of our technology portfolio is a key advantage in addressing China's needs. The investments we made in our China innovation center are also bearing fruit. We have a number of our products soon to be launched that have been designed specifically to meet the needs of the local market. So we have great momentum with our customers. Our team is executing well. We continue to feel good about our prospects for growth in China. In other emerging markets, we continued our strategy of expanding our presence to position us for growth. The most recent example is an investment we made in Brazil. We opened a new customer experience center in Sao Paulo to serve markets across Latin America. This center is a showcase for our analytical capabilities and allows us to partner with customers to help them achieve their goals by developing new methods using our technologies. We made this investment in Brazil despite the current economic challenges that this country is facing in the short term, because we believe it will position us for market share gains as the customer and funding environment improves. Before I move on to our guidance, I'll make a quick comment on capital deployment. Just after quarter end, we completed our acquisition of Alfa Aesar for approximately $400 million, to expand our offering of laboratory chemicals. This is a nice complementary bolt-on that gives our customers access to a much broader portfolio whether they're working in research or production. It is another great example of how we strengthen our strategic position by leveraging our scale and customer reach. In terms of capital deployment, we bought back $500 million of stock in January. We deployed $700 million to make two strategic bolt-on acquisitions. We continue to return capital to our shareholders through our quarterly dividend. So, we've deployed a total of $1.4 billion for the year to date in order to create value for our customers and our shareholders. Now, let me give you a quick update on our guidance for 2015. As you saw in our press release, we're raising both our revenue and adjusted EPS guidance. We now expect revenue for the year to be in the range of $16.81 billion to $16.91 billion. We are also raising our adjusted EPS guidance to a new range of $7.33 to $7.41. This equates to a 5% to 6% growth over our strong results in 2014. So in summary, it was a great quarter. We delivered solid financial performance. We made excellent progress in executing our growth strategy. We continued to make wise investments to create shareholder value. With that, I will turn the call over to our CFO, Stephen Williamson. Stephen? -------------------------------------------------------------------------------- Stephen Williamson, Thermo Fisher Scientific Inc - SVP & CFO [4] -------------------------------------------------------------------------------- Thanks, Marc. Good morning, everyone. As usual, I'm going to begin with an overview of our total Company financial performance, then provide some color on our four segments and conclude with our updated 2015 guidance. So starting with our overall financial performance for the third quarter. As you saw in our press release, we grew adjusted EPS by 5% to $1.80. GAAP EPS in Q3 was $1.18, up 1%. On the topline, we achieved organic revenue growth of 4% this quarter. Our reported revenue was down 1% year over year. Q3 reported revenue included a 6% headwind from foreign exchange and a neutral impact from acquisitions net of divestitures. I'm pleased to note that the components of the Q3 change in revenue do not sum due to rounding. Bookings were slightly less than revenue in the quarter but grew organically in all four segments. Looking at our growth by geography, both North America and Europe grew in the mid single-digits. Asia Pacific grew in the high single-digits, with China growing in the mid teens and rest of the world declined in the mid single-digits. Looking at our operational performance, Q3 adjusted operating income increased 2%. Adjusted operating margin was 22.6%, up 70 basis points from Q3 last year despite a 110 basis points of headwind from foreign exchange. At a high level, our adjusted operating margin expansion for the quarter was driven by continued strong contribution from our primary productivity levers: global sourcing; footprint optimization; and our PPI business system, as well as continued contribution from cost synergies. To add some color on our synergies, we realized $32 million of incremental cost synergies in Q3, in line with our full-year target of $130 million. Revenue synergies during the quarter were $25 million. As Marc mentioned, this puts us in a great position to slightly exceed our full-year 2015 target of $60 million of revenue synergies. We've been able to accelerate our actions and are on track to deliver the $150 million of revenue synergies in 2016. In Q3, we continue to make additional strategic growth investments, primarily to strengthen our core technology platforms and commercial capabilities. Moving onto the details of the P&L, total Company adjusted gross margin came in at 48.3% in Q3, down 80 basis points from the prior year. The decrease was driven primarily by foreign exchange and unfavorable business mix. Adjusted SG&A in Q3 was 21.5% of revenue, which is 140 basis points favorable to Q3 2014, driven primarily by foreign exchange, cost synergies and our productivity actions. Finally, R&D expense came in at 4.2% of revenue flat to Q3 last year. R&D as a percent of our manufacturing revenue in Q3 was 6.5%. Looking at our results below the line, net interest expense in Q3 was $93 million, down $13 million from Q3 last year, as a result of reducing our debt over the past 12 months. Adjusted other income for Q3 was $2 million, which is flat to Q3 last year. Our adjusted tax rate in the quarter was 14%, 80 basis points below last year, primarily as a result of realizing the benefits of our acquisition tax planning. Average diluted shares were $402 million in Q3, down $1.7 million year over year, primarily as a result of share buybacks we completed in Q1 and partially offset by option dilution. So turning to cash flow and the balance sheet, cash flow from continuing operations through Q3 was $1.6 billion. Free cash flow was $1.31 billion after deducting net capital expenditures of $286 million. We ended the quarter with $505 million in cash and investments, down $265 million sequentially from Q2, as we used surplus cash on the balance sheet as well as cash generated in the quarter to reduce debt. We returned $60 million of capital through dividends in the quarter. Just after the quarter end, we spent approximately $400 million on the acquisition of Alfa Aesar. Our total debt at the end of Q3 was $13.3 billion, down $700 million sequentially from Q2. Our leverage ratio at the end of the quarter was 3.2 times total debt to adjusted EBITDA. We still expect to achieve a leverage ratio of about 3 times by the end of 2015. Wrapping up my comments on the total Company performance, we continued to make progress on our ROIC. Our trailing 12-months adjusted ROIC in Q3 was 9.3%, up 20 basis points sequentially from Q2. So with that, I will now provide you with some color on the performance of our four business segments. As I highlighted for the total Company, foreign exchange continued to be a significant headwind to the topline for our segments and impacted their year-over-year revenue growth and adjusted operating margins to varying degrees. Starting with the life sciences solution segment, reported revenue increased 1% in Q3 and organic revenue grew 5%. In the quarter, we continued to see strong growth in our bioproduction and bioscience businesses. Q3 adjusted operating income in life science solutions increased 9%. Adjusted operating margin was 30.8%, up 220 basis points. In this segment, adjusted operating margin benefited from very strong productivity and incremental cost synergies along with some favorable product mix, partially offset by significantly unfavorable foreign exchange. In the analytical instrument segment, reported revenue decreased 1% in Q3. Organic revenue growth was 5%. In the quarter, we had strong growth in our chromatography and service businesses, which was partially offset by the continued weakness we've seen in some of our core industrial markets. Q3 adjusted operating income in analytical instruments increased 6%. Adjusted operating margin was 18.8%, up 130 basis points. In the segment, we delivered very strong productivity. We experienced favorable product mix, which is partially offset by unfavorable foreign exchange and strategic growth investments. Turning to the specialty diagnostics segment, in Q3, total revenue decreased 4%. Organic growth was 1%. This was driven by good growth in our clinical diagnostics and healthcare market channels businesses, partially offset by the expiration of an OEM contract within this segment. Adjusted operating income in the segment decreased 9% in Q3. Adjusted operating margin was 26.4%, down 120 basis points from the prior year. In this segment, unfavorable foreign exchange, product mix and strategic growth investments were partially offset by productivity initiatives. Finally, in the lab products and services segment, Q3 reported revenue increased 1%. Organic growth was 7%. This segment continues to benefit from our strong performance in the pharma and biotech end market, with our biopharma services business delivering very strong growth, along with good growth across the rest of our businesses in this segment. Adjusted operating income in the segment increased 1%. Adjusted operating margin was 15.2%, up 10 basis points from the prior year. Margin expansion in the quarter was driven by productivity improvements, partially offset by strategic growth investments. So with that, I would like to review the details of our full-year 2015 guidance. As you saw in our press release, we are increasing both the top and bottom line guidance, primarily as a result of somewhat better foreign exchange rates and the acquisition of Alfa Aesar, which as I mentioned, closed shortly after the quarter end. From a revenue standpoint, we're raising both the low and the high end of our guidance range and increasing the midpoint by $70 million. This leads to a new full-year 2015 revenue guidance range of $16.81 billion to $16.91 billion. Of the $70 million increase in the midpoint, approximately $40 million is due to the slightly improved foreign exchange environment and $30 million relates to the addition of Alfa Aesar. So we're still expecting organic revenue growth of about 4% for the full-year 2015, consistent with our previous guidance. Acquisitions net of divestitures now contribute a little over 1% to our reported revenue growth in 2015. Moving to our adjusted EPS guidance, we're raising the low end by $0.05 to a new range of $7.33 to $7.41. This range represents a year-over-year growth of 5% to 6%. The midpoint of the new ranges is $7.37, a $0.025 increase from our previous guidance. To bridge the $0.025, we're driving about $0.01 of improvement from the acquisition of Alfa Aesar, $0.01 from improved foreign exchange and about $0.005 from below the line items. Our current adjusted EPS guidance has a $0.69 or 10% negative impact from foreign exchange. If you look at our guidance on an FX neutral basis, adjusted EPS will be growing 15% to 16% representing very strong underlying operating performance. On the topline, foreign exchange is now lowering our revenue by just over $900 million or about 5%. So our reported revenue growth guidance would be 5% on an FX neutral basis. In terms of adjusted operating margin pull-through on the FX revenue headwind, we now expect the total impact of about $325 million, representing an average pull-through of 36% and 80 basis points of adjusted operating margin dilution. The change in foreign exchange compared to our previous guidance is an increase in revenue of about $40 million with a pull-through of approximately 15%. Consistent with past practice, our guidance assumes current foreign currency exchange rates. We haven't attempted to forecast future changes in rates. As I mentioned previously, the guidance now includes the acquisition of Alfa Aesar, but does not include any other future acquisitions or divestitures. Turning to our adjusted operating margin guidance, we expect 70 to 80 basis points of expansion year over year, which is unchanged from our previous guidance. On an FX neutral basis, our margin expansion would be a very strong 150 to 160 basis points, also unchanged from previous guidance. Moving below the line, we're expecting net interest expense to be about $385 million, slightly higher than our previous guidance. We're forecasting our adjusted income tax rate to be about 14%, consistent with our previous guidance. In terms of capital deployment, we're still assuming that this year we will return approximately $240 million of capital to shareholders through dividends, as well as $500 million through share buybacks, which we completed in January. Full-year average diluted shares are estimated to be $402 million, slightly lower than our previous guidance. We're expecting net capital expenditures to be in the range of $395 million to $410 million, down $40 million from our previous guidance. Finally, we're still expecting about $2.6 billion of free cash flow for full-year 2015, consistent with our previous guidance. As always in interpreting our revenue and adjusted EPS guidance ranges, you should focus on the midpoint as our most likely view of how we see things playing out. Results above or below the midpoint will depend on the relative strength of our markets, as well as foreign exchange rate fluctuations during the rest of the year. So in summary, we delivered another solid quarter in Q3, which positions us well to achieve our 2015 financial goals. With that, I'll turn the call back over to Ken. -------------------------------------------------------------------------------- Kenneth Apicerno, Thermo Fisher Scientific Inc - VP of IR [5] -------------------------------------------------------------------------------- Thanks, Stephen. Operator, we're ready to take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Tycho Peterson, JPMorgan. -------------------------------------------------------------------------------- Tycho Peterson, JPMorgan - Analyst [2] -------------------------------------------------------------------------------- First, wondering actually if you can call out Japan. I didn't hear that in the prepared comments. Obviously that has been a source of weakness for some of the other companies in this base. I know it was a little bit soft last quarter. So can you maybe just touch on dynamics there? -------------------------------------------------------------------------------- Marc Casper, Thermo Fisher Scientific Inc - President & CEO [3] -------------------------------------------------------------------------------- Sure, Tycho. Good morning. Asia-Pacific was strong for us in the quarter. We had great strength in China. Japan had grown but in a muted fashion, not materially different than we would have expected. There's clearly some government budgeting challenges, which means that the next quarter may be a little muted. But given the strength we have in China, it shouldn't be a significant factor for Thermo Fischer. -------------------------------------------------------------------------------- Tycho Peterson, JPMorgan - Analyst [4] -------------------------------------------------------------------------------- Okay. Then a question on visibility in some of the core end markets. If we look at what is going on in the industrial world, obviously the data points have not exactly been encouraging from some of the companies that have reported thus far, in particular, with oil and gas exposure. Can you maybe talk on your visibility into the industrial channel over the next couple quarters? Then similarly with pharma, you've obviously had great strength there over the past year. Maybe just talk about the sustainability of those trends? Obviously with the biotech funding window shutting, whether maybe there's some sensitivity around that? -------------------------------------------------------------------------------- Marc Casper, Thermo Fisher Scientific Inc - President & CEO [5] -------------------------------------------------------------------------------- Yes. So in terms of those end markets, Tycho, the core industrial business that we serve has been weak now for a protracted period of time. Our assumption is it's going to continue to be in that state. So we did not see a further deceleration. It's just been a -- it's been a soft end market. We've been able to power through that in terms of our driving results. So, that is what it is. Applied markets, however, are continuing to have good strength. Our environmental markets, food safety was strong. As I look forward to the next couple quarters, the applied markets are also benefit from a very nuanced thing, which is in the US, the Coal Miner Safety Act actually has a deadline in terms of when air monitoring has to be done. That goes into effect February 1. So we had a couple nice things going on, on the environmental side that helps us on the applied. We're making the assumption that, at least for the next couple of quarters if not longer, we're going to be in a muted industrial outlook. -------------------------------------------------------------------------------- Tycho Peterson, JPMorgan - Analyst [6] -------------------------------------------------------------------------------- Then in pharma? -------------------------------------------------------------------------------- Marc Casper, Thermo Fisher Scientific Inc - President & CEO [7] -------------------------------------------------------------------------------- Yes. In terms of pharma and biotech, I can talk about pharma and biotech forever. We're well-positioned there. The market is doing great. 10% growth in the market. Clearly, as we saw in the last few quarters, the market is a little better than what it has been, say, in the previous few years. That's primarily because drugs are getting through the FDA process and getting approved. So the customers are getting a return on their R&D investments and they're spending money. We are really well-positioned with this customer set. We have incredible access to the executives at all levels in these organizations. They understand our technologies and how we help drive both their productivity and innovation. You're seeing very strong momentum across our entire portfolio from bioproduction, based on a lot of what is going on in the biotech front. |