Thermo Fisher Scientific Inc

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2019 Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's call is being recorded. If you require any further assistance, please press star 0. I would like to introduce our moderator for the call, Mr. Kenneth Apacerno, Vice President, Investor Relations. Mr. Apacerno, please begin the call.

Good morning, and thank you for joining us. On the call with me today is Mark 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. It will be archived on the Investor section of our website, thermofisher.com, under the expectations until February 7, 2020. A copy of the press release of our Fourth Quarter 2019 Earnings and Future Expectations is available in the Investor section of our website under the heading Financial Results. Before we begin, let me briefly cover our Safe Harbor Statement. 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 these indicated on these forward-looking statements as a result of various important factors, including those discussed in the company's quarterly report on Form 10Q for the quarter ended September 28, 2019, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and is also available on the Investor section of our website under the heading 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 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 fourth quarter 2019 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 Mark.

Thank you, Ken. Good morning, everyone. Thank you for joining us today for our 2019-24 New Year End Call. I'm pleased to report that we finished the year strong and exceeded our goals for 2019. From a financial perspective, as you saw in our press release, we delivered excellent revenue and earnings growth. From a customer lens, we launched many exciting new products and added new capabilities to strengthen our unique value proposition. And for our shareholders, we continued to be good stewards of capital, making strategic acquisitions and returning capital to create significant value. All in all, it was an excellent year, and we positioned Thermo Fisher very well to begin this new decade as an even stronger company. I'll cover some of the highlights later in my remarks, but first I'll hit the financials from the quarter and the year at a high level. Starting with the quarter, our revenue increased 5% in Q4 year over year to $6.83 billion. Organic growth was also 5% in the quarter. Adjusted operating income increased 5% to $1.70 billion, and our adjusted operating margin expanded 10 basis points in Q4 to 24.9%. Finally, we achieved strong adjusted EPS growth in the quarter with a 9% increase to $3.55 per share. Turning to our results for the full year, we increased revenue by 5% to $25.54 billion in 2019. Organic revenue growth was 6% for the year. Adjusted operating income increased 6% to $5.97 billion. We expanded our adjusted operating margin by 30 basis points to 23.4%, and we delivered another excellent year of earnings performance in 2019 with an 11% increase in adjusted EPS to $12.35 per share. As you know, our strong performance is fueled by the power of our PPI business system. Our colleagues use it across the company to improve all aspects of how we work. This not only leads to strong earnings growth, but also helps us continuously make our company even better, and that creates a great experience for our customers and our 75,000 colleagues around the world. Let me now give you some color on our performance by end market for the quarter and the year. Starting with pharma and biotech, we had excellent performance again in this end market, delivering 10% growth during Q4. We saw broad-based strength across our businesses serving these customers. Our unique depth of capabilities gives us a clear competitive advantage, and we continue to strengthen our offering to gain share, which I'll cover later in my remarks. Our leading position in serving pharma and biotech customers led to double-digit growth in this end market for the year. In diagnostics and healthcare, we saw strong growth in our immunodiagnostics, clinical diagnostics, and healthcare market channel businesses in Q4, and we grew in this end market in the mid-single digits for both the quarter and the full year. Turning to industrial and applied, growth in this end market declined in the mid-single digits in Q4 compared with the double-digit growth we delivered in Q4 last year. This is predominantly driven by our electro-microscopy business, a dynamic consistent with what we saw in Q3. For the full year, industrial and applied grew in the low single digits. In academic and government, we grew in the low single digits during the quarter and for the full year. Finally, let me comment briefly on our performance from a geographic lens. In Q4, we grew in China in the low single digits. This was driven by very strong comparisons in the year-ago quarter, coupled with a slower release of funds for capital purchases by some of our customers. Our performance in North America and Europe was very strong, driving excellent revenue growth for the total company. That speaks to the strength of our portfolio and our global competitive position. To sum up our performance, market conditions continued to be good overall, and our teams executed well to achieve another excellent year. We continue to effectively leverage our unique customer value proposition to deliver very strong growth. That's a good transition to our growth strategy, and I'll use it as a framework to recap some of the highlights for the quarter and the year. We continue our strong momentum across all three elements of our strategy to put Therville Fisher in the best position to win with our customers and gain market share. Starting with the first pillar of our strategy, it was an exceptional year for high-impact innovation. We launched exciting new products every quarter and across all of our technology-focused businesses. I'll highlight just a few this morning. In analytical instruments, you'll recall it was a big year for us at ASMS with the introduction of our new generation of thermo-scientific orbitrap instruments. We strengthened our mass-spec leadership with the new Explorers 480 and Eclipse private systems, which significantly raised the bar in protein analysis. We're pleased to see very strong customer demand for these products. In our electron microscopy business, we launched our new generation cryo-C4 instrument for structural biology during the year. And in Q4, we introduced the MetriOS AX for industrial applications. This new system uses machine learning to automate the collection and measurement of critical data, ensuring quality and efficiency for our customers. In our specialty diagnostics segment, we added a number of new assets during the year, particularly in our immunodiagnostics business, where we continue to expand our menu of immunocat allergy tests. In transplant diagnostics, we extended our family of lab-screened reagents to Q4. Our new single-antigen X-Plex reagents greatly expand the number of HLA antibodies that lab directors can characterize to help identify the risk of organ rejection in transplant patients. Turning to our life-size solution segment, we launched a range of new products to strengthen our bioproduction, biosciences, and genetic sciences offering, highlighted by the new OnStudio 6 and 7 Pro real-time PCR systems. In Q4, we introduced the Q-GIT Flex fluorometer, which is designed to measure up to eight samples simultaneously and with highly accurate and reproducible results. To cap off an excellent year in Q4, we launched the GeneXus system to extend our ion-torrent next-generation sequencing platform. This fully automated system is a real game changer, delivering results in a single day and requiring minimal amounts of sample for analysis. We've continued to make great progress with our oncology-focused NGS strategy, and GeneXus is a significant milestone in our goal to ultimately bring NGS to local hospital settings. I'm proud of the passion our teams have for innovation, and that makes a real difference for our customers. This has always been a key element of our culture. So clearly, another fantastic year in that regard, and we look forward to continuing our momentum in 2020. Turning to the second pillar of our growth strategy, leveraging our scale on high growth and emerging markets, we had strong performance across these key regions in 2019, and that included another great year in China with 13% growth. Looking forward, the government priorities in China are aligned with the technologies we provide to meet customer demands for biologic drugs, a cleaner environment, and safer food supplies. And we continue to build on our industry-leading scale to help them solve these challenges. You'll recall that we highlighted many new developments during the year, including the expansion of our clinical trials operations in China to meet growing demands. During the quarter, we opened a new Pharma and BioNTech Customer Solutions Center in Shanghai. The center showcases our expertise in critical analytical processes and specialized workflows to help our customers accelerate the development of novel therapeutics. I came away from my visit to China in Q4 with incredible excitement for how rapidly the biotechnology market is expanding there, and how well positioned we are to support that growth. To sum it up, Donald Fisher has a distinct advantage in China, and that we've created by leveraging our unique industry-leading scale, and that allows us to deliver an exceptional experience for our customers there. This is a strategy that plays out across our high-growth and emerging markets around the world. As you heard during the year, we also continue to build on our capabilities in South Korea, India, and Singapore to help our customers advance their work in life sciences, biopharma, and food safety applications. The third pillar of our growth strategy is our customer value proposition, and we continue to enhance it to help our customers meet their goals for innovation and productivity. We've been talking a lot about our offering for pharma and biotech because it's a great example of how we're bringing together our existing capabilities and adding new ones to be the strongest partner for these customers. We have a proven formula for serving these customers, and it resonates from large pharma to small and emerging biotech. We can support them from the discovery of a molecule all the way to making it a commercial medicine. And we do this through a combination of continuing to strengthen our product offering by introducing relevant new technologies, leveraging our scale and the extensive customer access we have through our research and safety market channel, and continuing to expand our CDMO service capabilities, which also drives revenue synergies across our portfolio. This is a formula that's working very well, and in 2019 we once again delivered double digit growth with our pharma and biotech customers. It's been over two years since we acquired Patheon, and we've successfully completed the integration. We were able to turn a business that was growing in the mid-single digits into a high single digit grower with a bright outlook. We've already covered a lot of our pharma services development during the year, but at a high level our approach has been a combination of organic investments and strategic investments that have been a huge default on acquisitions. Organically, we've continued to expand our global network to meet customer demand, including our capacity for biologics production and sterile fill finish services. We've also acquired new capabilities to strengthen our position. We added the new API manufacturing facility in Ireland that we acquired from GSK, and we significantly increased our capabilities in the high growth gene therapy market with the acquisition of our pharma bio. In early December, I attended the grand opening of our new viral vector facility in Lexington, Massachusetts. Our team there is super excited about the opportunities we now have to help our customers bring innovative new therapies to patients with rare diseases. The integration of random bio has gone extremely well. Business performance is strong, and I'm really excited about its potential. So, excellent momentum in serving our pharma and biotech customers. It's clear that our value proposition is a key competitive advantage for us when we continue to gain share. Turning now to capital deployment, as you know, we have a great track record here in creating value for our shareholders by being good stewards of capital, and we continue to successfully execute our strategy in 2019. First, we deployed $1.8 billion on strategic calls on acquisitions. Second, we continue to return capital to our shareholders for a total of $1.8 billion in share buybacks and dividends. Last, you'll recall that we announced in Q3 that we refinanced $5.6 billion of our debt, and that will generate $80 million in savings annually for us. So, it was a great year from a capital deployment and balance sheet perspective as well. Let me cover one last highlight from the year before I turn to our guidance, and that relates to our commitment to environmental, social, and governance priorities. We've always been a company that's focused on doing business the right way, and that's embodied in our mission, which is to enable our customers to make the world healthier, cleaner, and safer. We not only bring our mission to life every day, but we also have robust programs that connect our customers, colleagues, and communities so we can make a direct impact. This happens in a number of ways, including through our STEM education and environmental sustainability initiatives. Still, much more to be done here, but I'm proud of the work our teams are doing to raise our ESG profile and continue to make our company even better. Stephen Moulalla and the assumptions that factor into our revenue and earnings guidance will let me quickly cover the highlights. In terms of our revenue guidance, we expect to deliver between $26.61 and $27.01 billion in 2020, which would result in reported revenue growth of 4-6%. We're initiating adjusted EPS guidance for 2020 in the range of $13.49 to $13.67. This would lead to -11% growth year over year. Before I hand the call over to Stephen, I'll leave you with my key takeaways for the year. We've consistently achieved excellent revenue and earnings growth, and extended our track record with another year of strong performance in 2019. We're delivering an exceptional experience for our customers by continuing to enhance our unique value proposition and using our PPI business system to make our company even stronger. And we've continued to create significant value for our customers and our shareholders, which puts us in a very strong position as we begin the decade. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen? Thanks,

Martin. Good morning, everyone. I'll begin with an overview of our fourth quarter and our full year results for the total company, then I'll provide some color on our four segments and conclude with a detailed review of our initial 2020 guidance. Before I get into the details of our financial performance, I thought it would be helpful to provide a high-level view of how the fourth quarter played out versus our expectations at the time of our last earnings call. As you saw in our press release, we had a strong finish to the year and delivered results ahead of our prior guidance on both the top and bottom line. We delivered 5% organic growth and adjusted EPS that was 4 cents higher than the midpoint of our previous guidance, reflecting good volume pull-through along with incremental favorable call-over line effects. Our strong performance in Q4 enabled us to deliver 6% organic growth for the full year 2019 and 11% growth in adjusted earnings per share. So excellent financial results in 2019. Now let me give you some more color on our performance. Starting with the earnings results. As you saw in our press release, we grew adjusted EPS in Q4 by 9% to $3.55. For the full year, adjusted EPS was $12.75 of 11% versus 2018. Gap EPS in the quarter was $2.49, up 12% from Q4 last year, and 2019's full year gap EPS was $9.17, up 27% versus the prior year. On the top line, our Q4 reported revenue grew 5% year over year in Q4. The components of our Q4 reported revenue increase included 5% organic growth, approximately 1% growth from the net of acquisitions and debestitures, and a foreign exchange headwind of approximately 1%. For the full year 2019, reported revenue increased 5% year over year. This includes a 6% contribution from organic growth, a 1% positive impact from the net of acquisitions and debestitures, and a 2% headwind from foreign exchange. Turning to our growth by geography during the quarter, North America grew in the mid-single digits, Europe grew in the high-single digits, Asia-Pacific grew in the low-single digits, including China which also grew in the low-single digits, and the rest of the world grew in the mid-single digits. For the full year, North America grew in the mid-single digits, Europe and Asia-Pacific both grew in the high-single digits, and the rest of the world grew in the mid-single digits. Turning to our operational performance, Q4 adjusted operating income increased 5%, and adjusted operating margin was 24.9%, up 10 basis points from Q4 of last year. We saw strong productivity from our PPI business system and good volume leverage. This was partially offset by strategic investments, business mix, and the impact of acquisitions and the debestiture of our anthropophatology business. Q4 margin expansion was 30 basis points lower than we'd assumed in the last guidance, half of that was driven by FX, and the other half by incremental investments to fuel future growth. For the full year, adjusted operating income increased 6%, and adjusted operating margin was 23.4%, which is 30 basis points higher than 2018. We had strong productivity and volume pull-through, which was partially offset by strategic investments, business mix, and the impact of acquisitions and debestiture. For the full year, FX was ahead of 2% on revenue, 10 basis points on adjusted operating margins, and 2% on adjusted earnings per share. As a reminder, our debestiture of the anatomical pathology business at the end of Q2 was 9 cents dilutive in 2019, and a -over-year headwind of approximately $120 million on revenue, $50 million on adjusted operating income, and 10 basis points on adjusted operating margins. Moving on to the details of the P&L, total company adjusted gross margin in the quarter came in at 46.3%, down 60 basis points from Q4 of the prior year. 50 basis points of this was the impact of acquisitions and the debestiture. For the full year, adjusted gross margin was 46.4%, down 30 basis points from 2018. For both the quarter and full year, strong productivity and volume pull-through were more than offset by business mix, strategic investments, and the impact of acquisitions and the debestiture. Adjusted SG&A in the quarter was .6% of revenue, an improvement of 70 basis points, versus Q4 2018. Total R&D expense came in at .8% of revenue, 10 basis points lower than Q4 last year. For the full year, adjusted SG&A was 19.1%, an improvement of 60 basis points compared to the full year 2018. R&D expense was .9% of sales, 10 basis points lower than the prior year. R&D as a percent of our manufacturing revenue for the full year was 7.1%. Looking at our results below the line for the quarter, our net interest expense was $97 million, down $30 million from Q4 last year. Net interest expense for the full year was $450 million, a decrease of $80 million from 2018. The reduction in net interest expense was driven by debt reduction and our refinancing actions. Adjusted other income and expense was a net income in the quarter of $16 million, higher than Q4 2018, primarily due to changes in not operating foreign exchange. Our adjusted tax rates in the quarter was 11.7%, down 50 basis points versus Q4 last year. Our full year adjusted tax rate was 11% in line with previous guidance, with 90 basis points lower than the full year 2018, primarily reflecting the beneficial impact of US tax reform and our continued tax planning initiatives. As I mentioned on the Q3 call, we repurchased $750 million of our shares in early Q4, bringing the total repurchases for 2019 to $1.5 billion. Average diluted shares were $402 million in Q4 and $403 million for the full year, both in line with that prior guidance. Turning to cash flow on the balance sheet, for the full year cash flow from continuing operations was $5 billion and three cash flow was $4.1 billion after deducting net capital expenditures of approximately $900 million. During 2019 we also continued to return significant capital to shareholders, with $1.5 billion to share buybacks, $300 million in dividends. And as Mark mentioned, we successfully deployed $1.8 billion in capital through strategic acquisitions. We ended the year with approximately $2.4 billion in cash and $17.8 billion in total debt. Our total debt was up to $700 million from the end of Q3, driven by the completion of our debt refinancing activities which began in the prior quarter. Our leverage ratio at the end of the year was 2.7 times growth debt to adjusted EBITDA in line with our expectations. Wrapping up my comments on our total company performance, adjusted ROIC was 11.8%, up 20 basis points from last quarter, and up 90 basis points from Q4 last year, which we continue to generate very strong returns. Now I'll provide you with some color on the performance of our four business segments for the quarter and the full year. Starting with life science solutions. In Q4, reported revenue in the segment increased 8% and organic revenue growth was 9%. In the quarter we continue to see strong growth in the segment led by bioproduction, biosciences, and genetic sciences businesses. For the full year, reported revenue increased 9% and organic revenue growth was 10%. Q4 adjusted operating income in life science solutions increased 11% and adjusted operating margin was .5% up 70 basis points year over year. In the quarter we drew a very strong productivity and volume pull through which was partially offset by business mix and strategic investments. For the full year 2019, adjusted operating income increased 13% and adjusted operating margin was .7% and increased to 130 basis points over 2018. In the eligible instrument segment, reported revenue decreased by 3% in Q4 and organic revenue declined 2%. In this segment, all businesses had very strong year over year comps given that 12% organic growth would be delivered in Q4 2018, particularly in our electron microscopy business. In addition, the slower release of funds for capital purchases in China impacted Q4 growth for the business in this segment. For the full year, reported revenue in this segment increased 1% and organic growth was 3%. Q4 adjusted operating income in analytical instruments decreased 5% and adjusted operating margin was 26% down 60 basis points year over year. In the quarter we saw very strong productivity which was more than offset by business mix, strategic investments and volume. For the full year, adjusted operating income was 1%, 30 basis points higher than the prior year. Coming to the specialty diagnostics segment, as a reminder, this is a segment that previously included the anatomical pathology business which we divested at the end of Q2. In Q4, total revenue declined 1% and organic revenue growth was 7%. We saw strong growth in this segment led by immunodiagnostics and clinical diagnostics businesses with continued strong growth in our healthcare market channel. For the full year, reported revenue was flat and organic growth was 5%. Adjusted operating income decreased 5% in Q4 and adjusted operating margin was 23.7%, down 80 basis points in the prior year due to the impact of the debasiture. In the quarter we saw strong productivity involving leverage which was more than offset by strategic investments and the impact of the debasiture and business mix. For the full year 2019, adjusted operating income was 5% and operating margin was 25% contracting 60 basis points year over year with the debasiture representing 30 basis points. Finally, in the pharma products and services segment Q4 reported revenue increased 9% and organic revenue growth was 7%. In the quarter we saw strong growth across all of our businesses within the segment led by the pharma services business and the research and safety market channel. The revenue grew 6%. Adjusted operating income in the segment for Q4 increased 15% and adjusted operating margin was .8% which was higher than the prior year by 70 basis points. In the quarter we saw very strong productivity volume leverage, contributions from acquisitions and favorable business mix. This was partly offset by strategic investments. For the full year adjusted operating margin was .5% and the balance was .8% in the last 2018. With that I would like to review the details of our initial 2020 guidance. As Mark mentioned earlier, we are initiating a 2020 adjusted EPS guidance range of $13.49 to $13.67 which would result in 9% to 11% growth over 2019. In terms of revenue, our guidance range is $26.61 billion to $27.01 billion which would result in revenue of $4.00 to $6.00 percent over 2019. Our initial guidance for 2020 assumes 5% organic revenue growth for the year. With regards to FX, in 2020 we are assuming that it is a -over-year headwind of approximately $100 million of revenue or .4% and 6 cents of adjusted EPS or .5% largely in Q1 and to a lesser extent in Q2. We expect 6 cents of dilutions from the sale of the anatomical pathology business which reflects revenue and operating income headwinds of $105 million and $30 million respectively. We are assuming that the acquisitions we completed in 2019 will contribute approximately $160 million to our reported revenue growth in 2020. Turning to adjusted operating margin, we made the decision to reinvest $40 million of last year's debt refinancing back into the business. This reinvestment impacts 2020 adjusted operating margins by 15 basis points. In addition, we expect to have about 10 basis points of margin impact in 2020 from our decision to renew key commercial contracts for our PCT test business, which is part of our specialty diagnostic segment. In exchange for some royalty rate concessions, we successfully negotiated long-term contract extensions with most of our PCT commercial partners. For 2020, this creates a headwind and adjusted operating income that in return extends the revenue stream for this highly successful tech franchise for many years to come. Factoring in the impact of these two decisions and the benefits of strong volume, hold true on the organic growth and continued strong productivity from our PPI business system, we expect to expand adjusted operating margins by 30 basis points in 2020, and we expect net interest expense in 2020 to be approximately $340 million. This is $110 million lower than 2019 and reflects the debt refinancing activity we completed this past year and the lower average debt level. We're assuming adjusted other net income will be about $60 million. We expect the adjusted income tax rate to be .5% in 2020. This is driven by the continued realization of benefits associated with US tax reform. We're assuming net capital expenditures in the range of $1 billion to $1.1 billion. This represents an increased investment of approximately $150 million over 2019 driven by capacity and capability expansions in our pharma services and bioproduction businesses. Free cash flow is expected to be approximately $4.5 billion in 2020. This is primarily driven by our expected strong earnings growth. In terms of capital deployment, our guidance includes a total of $1.5 billion of share buybacks in 2020, which we assume will be completed throughout the year. We're also assuming that we'll return approximately $350 million of capital to shareholders this year through dividends. We estimate that the full year average diluted share count will be between 400 and 401 million shares. Our guidance does not assume any future acquisitions or divestitures. It's also worth noting that our guidance does not include any potential impacts from the coronavirus outbreak. It is too early to gauge the impacts. We're fully focused on doing everything we can to help our customers and our colleagues address the situation. And finally, one to the test on quarterly phasing for the year, and there are several factors to consider. We have one less day in Q1 and two extra days in Q4 this year. From an organic growth standpoint, we expect Q1 to be a couple of points lower than the full year due to the day's impact and the prior year comps, particularly in the analytical instruments segment. And we expect Q4 to be higher than the full year for the same reasons. From an adjusted operating income margin standpoint, we expect Q1 to be 40 basis points lower than the previous year's. This is driven by the phasing of organic revenue and the timing of investments in our 2019 acquisitions. Acquisitions and divestitures are approximately 60 basis points diluted in Q1, accreted for the rest of the year, so net neutral for the year as a whole. Due to the phasing of revenue and margins, in the year we expect adjusted EPS in Q1 to be just over 21% for the full year and Q2 and Q3 are expected to be about equal. So at a high level to start the year, our guidance assumes 5% organic revenue growth and 9% to 11% adjusted EPS growth, a continuation of excellent financial performance track record. As always, we'll strive to deliver the best possible results and I look forward to updating you on our progress as we go through the year. With that, I'll give the call back over to Ken. Thanks, Stephen. Operator,

we're ready to open it up for Q&A.

You will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. In order to allow everyone in Q an opportunity to address the Thermo Fisher Management Team, please limit your time on the call to one question and only one follow-up. If you have additional questions, please return to the queue. Please stand by while we compile a Q&A roster. And our first question today comes from the line of Tycho Peterson from JPMorgan.

Hey, good morning. I want to start with performance in the analytical instruments business. You had a difficult comp last quarter, but there's notable -over-quarter deceleration here. Is there anything you could talk to in terms of pacing? Did anything come up late in the quarter? You talked about the China solar release of funds. How much of it was that versus maybe FDI? It looks like FDI is tracking a couple hundred million dollars below with Sennheiser and Life Sciences lagging. Is there anything else that weighed down AI in the quarter?

Yeah, Tycho, thanks for the question. In terms of the analytical instruments, as you said, we had 12% growth in the prior year. So our expectations were that we were going to have that as a headwind. And our performance was a little bit below the expectations that we had. It really happened late in the quarter in China with a slower release of funds from specific customers on high-end capital equipment in that market. When we think about the comparisons, our electromechanical business, as you said, has a very strong second half in 2018 and actually very strong going into the first quarter of 2019. So we knew we would have challenging comparisons there and that played out pretty much as we expected.

And then I guess for the follow-up on China, can you maybe just talk about the gives and takes? Obviously you're not factoring any coronavirus impact, but are you expecting a catch-up on the release of funds? And maybe just talk about some of the other gives and takes in China for the year? And is there an opportunity on coronavirus for you guys on the positive side, as we think about the diagnosis

business? Yeah, so let me cover China. From a China perspective, I always like to keep things in the contact chart, which is we had a very strong year in China with a very strong growth of 1.5 percent and 13 percent growth. And when I look back on the year, we really continued to train in our strategic position in the country. The impact on our customers continues to be positive. We were expecting that we would have mid-single digit growth in Q4 based on the comparisons, which is the analytical instruments business that I just highlighted. And we came in with low single digit growth and low single digit expectations for the fourth quarter. And the driver of that was really the slower release of capital for high-end capital equipment. Interestingly enough, when you look at the remainder of the business, which is obviously the majority of the business, the various service businesses and all of our consumer businesses actually played out exactly as we saw in the previous three quarters, very strong growth across the rest of the portfolio. So it seems like the government made some decisions to hold funds. And so that's our take there. And coronavirus isn't baked into our forecast one way or the other. Thanks, Snape.

Our next question comes from the line of Jack Nehan from Barclays. Your line is open.

Thank you. Good morning. I wanted to probe a little bit more on the industrial applied end market. So down mid-single digits in the quarter, obviously electron microscopy weighing on that. Just I'm curious if you excluded that, what you were seeing in terms of the macro, was that also weaker year over year and excluding some of the capital seasonality you're talking about there, what is the guidance assumed for that as an end market for 2020?

So, Jack, as I look to, for the year last year we grew low single digits in industrial and applied has the same low single digit assumption for the year. And you'll see the flip in terms of phasing, right? We had a very strong year of industrial and applied at the first half of 2019. And therefore we have more challenging comparisons as we start this year. And then the comparisons ease substantially as the year goes on. So it's a little bit softer to begin and then accelerating growth as the year plays out. And really what's assuming is really exactly the same market conditions happening industrial and applied. The only thing that's changing is really the, is just how challenging the comparisons are. You know, when you look at sort of the -to-day run rate business in industrial and applied, there's always some pockets of strength. You know, we saw some strength in applied markets. In QA, QC applications you saw some strength. But the larger capital equipment purchases

you

saw some strength also some weakness нет heat Diego's hood, business, our materials and structural analysis business, which is electron microscopy and spectroscopy, our chromium aspect business, and our chemical analysis. All three businesses declined in the quarter because all three had very strong comparisons. Our chromatography and mass spectrometry business performed the strongest of the three businesses. And when you look at it for the full year, the electron microscopy or materials and structural analysis was below the segment average and chromium aspect and chemical analysis was above the segment average for the full year. I think we have our shared performance in terms of how we performed during the course of the year. Thank you, Derek. Thank you.

Our next question comes from the line of Derek DeBrown from Bank of America. Your line is open.

Hey, good morning. Morning, Derek. Hey, Mark, can you talk a little bit about the margin profile? I mean, you've done some deals recently like the GSK deal and the Brahmre deal that have been putting some pressure on margins. And I guess I'm just trying to get a sense on the go-forward basis on what the margin opportunity will be in. I mean, and it sort of bends into a further capital deployment conversation in that, you know, other assets you could potentially add. Is there a lot more stuff like GSK and Brahmre that you're looking to add that would be diluted on this? I'm just trying to get some sense on the pace and the margins. You're trying to balance this new growth opportunity with stuff that demands higher capital investment and lower margins at this point in time.

Yeah, Derek, thanks for the question. So it's hard for me to explain. You know, when we – the first thing is about just M&A generally and how we think about We actually don't focus on what the starting margin is, meaning, as you know, over the many years we've done M&A that was accreted to margins from an operating perspective from day one and we've done ones that have been diluted, right? What we look at is what are the return profiles and what can we do with the business and I'll be the right owner. So you'll have things that sometimes short-term are headwinds, sometimes they're tailwinds. And when we give our guidance, we always try to carve that out to explain it, not to, you know, just say here's the core of everything we had before the acquisition and then wherever the effects are of the acquisitions going forward. When I look at the margin expansion, you know, we laid out at the analyst day, you know, roughly 50 basis points of margin expansion, you know, in the – on average over the three-year model is what was assumed in the base view. And along with that, we had assumptions on capital requirements, assumptions on tax rate and so forth. And we made some interesting decisions, right? What we want to do is always deliver excellent adjusted EPS growth and manage the business in the best possible way. When I look at the end market outlook, I feel very good about the growth prospects and because we had very good opportunity to refinance our balance sheet during the course of Q3 and because our team was able to identify additional tax planning opportunities, we have very strong EPS growth set up for 2020. And we made a conscious decision to actually reinvest some of those savings, still deliver the same EPS growth, but come out with a, you know, a basically 30 basis points of margin expansion relative to the 55 that we had explained at analyst day. Conscious choice and Stephen laid out the details, you know, part of it was trading short term margins in our PCT franchise for a decade long extension of the relationships, which is a great economic deal for the company. And the second was mid decision because of the talents of our hourly workforce in the US. So we invest additional funds in wage increases and to mitigate the increases in health care costs to that part of our population. And so we're taking a slower rate of market expansion this year. And then I would expect that margins would be right back where the model was in 2021 and beyond. EPS, no factor one way or the other just based on the other things that are articulated.

And Derek, just one thing to clarify, the comment about the best share of acquisitions, the best impact on margins is on gross margin at 60 basis points. Much, much smaller impact than Q4 on the bottom line, since we're just operating income. It's kind of the gross margin profile of the acquisitions and the divestiture is really what's causing the dynamics there.

And so how should we think about that gross margin target for 2020 since the street seems to be all over the place on a quarterly basis?

Yes, obviously it will depend on the mix of the actual revenue that comes in, but I think most of the margin expansion next year will be coming from leveraged best GNA and roughly the same. And so I think that's a good point to think about. Okay,

good. I got another follow up. So, you know, it's been a long time since, you know, I've really thought about thinking about NGS and Thermo. I hadn't really thought about Ion Torrance as you close the life deal. And so you've been investing more and doing more of that. I guess, can you sort of talk about where you're going for and would you be interested in getting more into the research space versus the clinical space? I mean, there are some assets out there that are, you know, that are being kicked to the sidelines. I'm just sort of curious in terms of what your general plan is in that market and sort of like how you see that competitive dynamic shaking out, you know, given, you know, given your very large competitors footprint there.

Yeah, so, Derek, thanks for the question. In terms of NGS, you know, we have been very focused since 2014 on maximizing the impact of our NGS business. And we really have focused it, you know, on the oncology market. And you've seen over the last, you know, five years or so a steady stream of product launches that really have a benefit for clinical researchers and ultimately patients. And our technology uses less DNA sample to get a read relative to the alternatives on the market. And the ease of use is outstanding. And the GeneXus platform, which we launched at AMP in November, is being very well received in the market with incredible customer interest. Because you can change the way you think about, you know, how you treat a patient, which is as opposed to, you know, sending out a sample and getting a result two to three weeks later with an answer. You can come in to work the next day and have your sequence completed. And an oncologist then can make a decision based on that information. That's what GeneXus is all about. In terms of, you know, extending into other markets, you know, our focus right now is really on oncology and some other applications within where our NGS platform is outstanding. And that's where we kept our focus.

And you signed an agreement with LabCorp in that market. And I'm just wondering, could you give us some idea on sort of what sort of volume LabCorp does in the NGS space?

I mean, LabCorp obviously runs a huge number of NGS tests across their network. And I thought it was super exciting that, you know, roughly within six weeks of launch that they, you know, wanted to actually announce to the world their excitement about GeneXus and using us to, you know, have that within their network. So I think that's a great opportunity. And, you know, the specifics, you know, obviously we're not going to get into, but it's a really nice way for both companies.

And if I can squeeze in one more from a client. Investor wants to know what thermos exposure is in the Chinese hospital settings. And obviously that's, you know, people are not going there. Just any idea on how your business breaks down in China in that regard in diagnostics?

Yeah, you know, if you think about the healthcare and diagnostics globally, it's 20% of our revenue. But in China, it is actually less penetrated. So, you know, it's less than 20% of the Chinese revenue is going to be in the healthcare and diagnostics setting.

Thank

you.

Our next question comes from the line of Doug Schenkel from Cowen. Your line is open.

Hey, good morning, everybody. Thanks for taking the questions. I'd like to start by going back to the slower than expected release of budget funding for capital equipment investment in China. Could you just provide a little more detail on which end markets have you recaptured that revenue in Q1 already? Or do you have visibility on recapturing that revenue soon? And how are you treating this dynamic in guidance? So let me pause there and then we can go to the second topic.

Yeah, so thanks. You know, in terms of the release of funds, you know, 100% driven in government-controlled type entities. So we saw it in certain academic and government customers and in certain parts of the industrial market where there are Chinese state-owned enterprises, right? So, you know, a semiconductor fab is owned by the Chinese government would be an example of an industrial and applied type customer. You know, in terms of the timing or assumption is that that will work its way through during the course of the year, but we didn't assume that it would be immediately in the first quarter is the way I would think about it. In our guidance, what we would assume for China is low double-digit growth is what we assumed in our full-year guidance for China.

Okay. Thank you for that. And it's a good segue to the second thing I wanted to unpack a little bit more, which is indeed guidance. So your first, your initial organic revenue growth target of 5% for the year is on the lower end of your long-term 5% to 7% target that you outlined at the analyst's day over the summer. Given seemingly strong end-market conditions and a lot of the momentum you've had for a little while now, is this just beginning of the year conservatism or is this just kind of what you'd expect in terms of a trend towards normalizing towards the mean after a couple really strong years? And then I guess just to layer in one more element to the question, and I apologize if I've mis-listened your prepared remarks, but could you just share what your assumptions for growth are in terms of what you've built into 2020 revenue growth guidance by end-market and geography? Thank you.

So, you know, first of all, thanks for the question on guidance. You know, I'm super excited about 2020. I mean, that is, if you want to take away the takeaway. So let me put them in context. The last three years, 17, 18, and 19, have been very strong in our end markets and very strong performance of Thermal Fisher relative to those end markets as well. 2020, we expect to be exactly the same thing. Another year of good end markets and share gain performance with a company. So we're expecting growth to be in line with the long-term model or consistent with the 5 to 7 percent organic growth. We're initiating with five because the way we think about the world is every year there's some level of risk and every quarter that those risks don't materialize for our industry. They get retired and it gives you the opportunity to raise guidance as you go through the year. As a reminder, we started out with 5 percent guidance in 19. We always were aspiring to deliver the best possible results. I feel great about the six that we delivered and our posture here is the same. We're starting out with, you know, in the range that we said we would do with the goal as the year unfolds to be able to continue to move higher and higher in that 5 to 7 percent range. So hopefully that gives you a sense and then a little bit of commentary on some of the details on the growth around that. You know, you're going to have farm and biotech, you know, with high single digit growth. If you're going to see mid-single digit growth in the healthcare and diagnostics, low single digit and academic government industrial applied end markets, we'll give you the drivers of where our growth is going to come

from. Great. Thanks again.

You're welcome.

Our next question comes from the line of Vijay Kumar from Evercore ISI. Your line is open.

Hey, guys. Thanks for taking my question. Just on the Q1 commentary and the guidance here, I think I heard you say a couple of hundred basis points below the year. I'm just curious, was there any days in fact or I'm not sure, you know, what drives the Q1 below trend?

Yeah, Vijay. So one last selling day in Q1. That's a number of point of headwinds from that and then it's really the comps from the analytical instruments and particularly electron microscopy that's really the driver of the piece to it.

Gotcha. Then Mark, one big picture question for you. Looking at the cash flow assumptions here, 4.5 billion free cash, you know, you have 2 plus existing with the share repos just 1.5. You know, that's a significant amount of cash for Thermo. It's been an unusual year for Thermo from a cap deployment perspective. You know, any thoughts on sort of how the M&A fund is looking, shaping up to be and thoughts on the cash burden on the balance sheet?

Yeah, so Vijay, thanks for the question. So from a capital deployment perspective, looking back and then looking forward, you know, last year played out from my perspective, which was, you know, we set out at the very beginning of the year the goal of, you know, finishing the strengthening of the balance sheet from the very active period we had before that. So we did some de-levering, some refinancing. We returned a billion-eight of capital to our shareholders. We bought back some dividends. We deployed a billion-eight in terms of M&A. And we generated good cash flow. So as I looked at this year, we obviously have a very strong balance sheet. We have a significant amount of capacity. We continue to have a very active M&A pipeline. And, you know, as you know, we operate in a very fragmented industry, so plenty of things that we look at. And we'll only pursue things that we feel are aligned with our strategy and create shareholder value. Our return assumption, you know, is basically, you know, a billion and a half dollars in buybacks, about $350 million in dividends, which means that what's not in our EPS numbers is, you know, additional deployment of capital, whether it's return or buybacks, a return or M&A, or a combination of the two beyond that. And that's the convention that we've always used, which is as the year unfolds, we'll see what the best opportunity is for our shareholders. And we'll deploy it most likely in some way. And then we'll update you on the impacts to our EPS guidance based on whatever decisions we make as the year unfolds.

Thanks for clarifying, Mark.

You're

welcome. Our next question comes from the line of Steve Bishaw from Wolf Research. Your line is open.

Hi. Good morning. And thanks for the time here. First, I wanted to drill in just a bit on broader biopharma, and maybe a two-parter. I wonder if you could give us a sense for around the four Q&U year end, how you saw hardware purchasing dynamics in pharma specifically relative to the last two, three years, and then prospectively for pharma in 20, how do you imagine the hardware component of the pharma growth outlook looks like, you know, whether it's in research settings or a bioprocess? And then I want a much simpler follow-up.

So, Steve, thanks for the question. When I think about the pharma and biotech performance, really a fantastic year for the company, continuing the trend of many fantastic years. You know, for the year we had double-digit growth. And when I look at the performance, you know, it was really across the entire portfolio. We saw strength in bioproduction, biosciences, pharma services, analytical instruments, and the research and safety market channel. If I left something out, it's not deliberately. I mean, Steve, you sense a broad-based strength across the portfolio. We had a good quarter and a good year in capital equipment to the biotech and pharmaceutical spending. So no change in trajectory there. And, you know, we're starting out with high single-digit growth. Guidance for pharma and biotech is the initial starting point. So we're expecting strong performance. And if you go back over the last few years, we had historically started out with, you know, mid-single to high single-digit growth. And we feel comfortable starting out with high single-digit growth based on the momentum we have in the portfolio. So that's how I think about it. Nothing particular on capital. I don't really track year-end spend by segment so much. I think about year-end spend kind of more across the portfolio. And we saw last year playing out in line with our guidance that we had all year, which was a normal year-end spend, with some customers having very strong, you know, year-end money, but others kind of business as usual. And that kind of averaged out to normal. And as a reminder, the previous two years were very strong year-end spends. And from recollection, I think it was 16 was a low average year-end spend. So it varies, but it played out last year in line with our guidance.

Okay. Much appreciated. And then just a couple of fine points. Within the broader pharma outlook, you know, it's safe to say we can hold up double-digit growth and buy a process just as a follow-up to that prior. And then I wonder if you could speak to, you know, how things played out over the course of 2019 and I think in about 2020 as it relates to at the corporate level, price increases year on year. And then going into the year, given some of the broader trade dynamics, there was an initiative to look at accelerated pricing, how did that play out, and are we back to normal in 2020? Thanks again.

Yeah, so it's both the biologics and then Stephen will cover the pricing. On our process, we had very strong growth. A couple of companies have reported prior to us and we continue to perform, you know, a little north of the levels that others have performed at.

Yeah, and pricing played out as we expected in the year. So a good year for pricing over 1% of price overall, offsetting in fact a tariff, so that was really the goal there. And going forward, I generally project kind of, you know, just between half percent and 1% price as we think about the company performance in 2020. Thank

you.

Great.

Operator, we have time for just one quick one.

Okay, our final question will come from the line of Dan Arias from Stiefel. Your line is open.

Good morning. Thanks, guys. Stephen, on Brammer, just to follow up on the margins there, can you just touch on the impact of that business on overall margins over time? I think that goes from dilutive to accretive at some point, but I was just hoping you could confirm that, but then also just clarify the timing around that if that is true.

Yes, this one, the Brammer margins, we expect it to be just under the company average for the full year 2020. So we're beginning up to a decent level at the end of the year. So we're thinking about going into 2021 at that pace.

Okay, and then maybe, Mark, it's I'm sure a little hard to do, but just given how meaningful it seems like it's been for you guys, are you able to quantify what you think share gains have meant for growth over the last year or so?

Yeah, you know, we had, you know, we had 6% organic growth for the year. We obviously don't have the benefit of everybody reporting, but that's a very solid performance. And when we compare the pieces relative to others, you know, we expect that our share gain will be better than the 1% in terms of growth, and we'll have good clarity on that in the next week or two. So another strong year. So, Dan, thanks for the question. Let me wrap it up here. So first, thank you. We're pleased to do it really another excellent year. We're much more excited about what the opportunities that sit ahead of us. And we look forward to updating you on the course, over the course of 2020. So thanks for your support. They're official scientific and we'll approach the same thing.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating.