Thermo Fisher Scientific Inc

Good morning, ladies and gentlemen, and welcome to the Thermal Fisher Scientific 2020 Third Quarter Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the conference over to your moderator today, Mr. Kenneth Apicerno, Vice President, Investor Relations, Mr. Apicerno, you may begin your call.

Good morning, and thank you for joining us. On the call with me today is Mark 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, thermofisher.com, under the heading Webcasts and Presentations, until November 6, 2020. A copy of the press release of our third quarter 2020 earnings 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 these forward-looking statements as a result of various important factors, including those discussed in the company's quarterly report on Form 10-Q for the quarter ended June 27, 2020, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and is also available in 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 third quarter 2020 earnings 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 Marks.

Thanks, Ken, and good morning, everyone. Thank you for joining us today for our 2020 third quarter call. As you saw in our press release, we delivered exceptional performance again in Q3 as we continue to build on the significant progress we made last quarter. I continue to be humbled by the incredible efforts of our team as they answer the call to help our customers and society manage through this unprecedented time. Not only did they expand our leading role in supporting the global COVID-19 response, but they also effectively managed through this environment to return our base business to growth. The work we're doing today is clearly having a profound impact on the world. And for that, we can be very proud. But it's important to note that our efforts are also strengthening Thermo Fisher for the future and making us a more valuable partner for our customers. I see many positive trends from this period that will increase our contributions to healthcare. A few examples that I referenced during our recent analyst meeting are worth repeating. We're seeing much greater collaboration among industry and governments globally. Funding for research, diagnostics, and development of therapies and vaccines will increase to prepare for future health threats. We'll see more focus on supply chain security and the building of national stockpiles as well. And all of this has put a significant spotlight on the need for a stronger commitment to improving healthcare systems globally. We're already seeing the impact of these trends on our business, and I'll give you a number of examples later in my remarks. But first, I'll review our financial performance and give you some color on what we're seeing in our end markets. From a financial perspective in Q3, we continue to work with speed at scale to support our customers, generating approximately $2 billion of COVID-19-related revenue in the quarter. At the same time, our teams did excellent work to grow our base business. This led to exceptional performance across all of our key financial metrics. Our reported revenue increased 36% in Q3 year-over-year to $8.52 billion. Adjusted operating income grew 97% to $2.80 billion. Our adjusted operating margin increased to 32.9%. And we grew our adjusted EPS by 91% to $5.63 per share in the quarter. We're continuing to manage the company appropriately in a very fluid environment, exercising the cost discipline that you'd expect from us while investing significantly in new products, services, and capabilities that will create value over the longer term. Turning to our end markets, our performance was a combination of our significant pandemic response and the return to growth in our base business. Starting with pharma and biotech, the largest of our four end markets. We delivered an excellent Q3, growing 20%. We've performed very well in this end market for many years, and we further accelerated our growth by helping these customers to ramp up development of COVID-19 therapies and vaccines. The combination of strong market fundamentals and pandemic-related activities led to strength across all of the businesses serving this end market. particularly bioproduction, pharma services, biosciences, and our research and safety market channel. In academic and government, we grew in the low single digits in Q3. We captured opportunities as more of these customers returned to work and their research activities increased. Turning to industrial and applied, while we declined in the low single digits during the quarter, we saw a meaningful sequential improvement from Q2. Last, in diagnostics and healthcare, we had an incredible quarter, delivering 130% growth. While we continue to see the impact of a lower level of routine doctor visits and related testing, demand did improve from Q2 levels, and our COVID-related testing revenue grew significantly during the quarter. We saw the benefits of these dynamics across our life science solutions and specialty diagnostics businesses. As you know, our involvement here includes providing both proprietary COVID-19 diagnostic test kits, as well as reagents used for laboratory-developed tests, along with sample collection products and instrumentation. So in summary, our teams put forth an amazing effort in Q3, not only increasing our response to the pandemic, but also returning our base business to growth. The combination resulted in performance that positions us to deliver our best year yet. Turning to our business highlights for the quarter, as you know, we continue to increase our capabilities so we can be the best partner for our customers and strengthen our competitive position. In Q3, we work with speed at scale to address the critical needs brought on by the pandemic, while making great progress in executing our growth strategy across our businesses. Let me cover a few of the highlights. In terms of our pandemic response, we continue to expand our role as a trusted partner for industry and governments around the world. It's important to note that while this has clearly driven exceptional growth for us so far this year, much of what we're putting in place now will create sustainable value longer term. First, as you know, we have the leading position in providing COVID-19 diagnostic test kits, given our gold standard PCR-based tests, and our industry-leading install base of instruments. And we continue to expand our presence by bringing new solutions to the market that help the medical community ramp up testing capacity and enable society's return to work and school. In September, we launched a new highly automated solution called Amplitude that helps laboratories quickly scale up to meet testing volumes. This platform is based on our TacPath combo kit and the Quant Studio 7 PCR instruments, and has the highest sample throughput in the industry. We're seeing strong demand for this innovative solution, and we've already completed installation at several customer sites. We also recently introduced two new thermoscientific antibody tests. Our OmniPath ELISA test received emergency use authorization from FDA for the qualitative detection of total antibodies, And our new ALEA test is now available to run on our Fadia 250 instrument so customers can tap into the extensive installed base worldwide. Both tests can be used in the U.S. as well as Europe and other countries accepting the CE mark. As I reflect on the long term, we're now recognized by our customers as a scale player in infectious disease testing. We've significantly increased our installed base of sample preparation and PCR instruments over the last nine months. and that will create new opportunities for us going forward. Another example of sustainable value is that we continue to ramp up production of supplies that are essential to the testing process, such as liquid handling plastics and the specialized viral transport media used in sample collection. We highlighted the opening of our new viral transport media facility in Kansas last quarter. And in Q3, we announced plans to further expand our global capacity by building a new facility in Scotland to support the European market. We're also significantly expanding capacity for our lab plastics to meet surging demand, which will put us in a great position long-term as well. An important point that I want to make here is that our PPI business system is a key advantage in our ability to scale our operations quickly and cost-effectively to meet our customers' needs and drive growth. One more example of sustainable value creation is our support of new therapies and vaccines. We're significantly adding capacity across our biosciences, bioproduction, and pharma services businesses. creating an infrastructure that will position us incredibly well for the future. In our biosciences business, we're significantly investing in our global capacity to increase the manufacturing of enzymes and nucleotides used in vaccines. In pharma services, last week we announced our partnership with the Economic Development Board of Singapore to expand our sterile fill finish capacity by building our first facility there. Once operational in 2022, the facility will include the only high-speed filling line for live viruses in Singapore and help meet the demand across the Asia-Pacific region. This is another great example of how we're working with governments to help them respond effectively to health emergencies in the future. In addition to government-funded projects, including our BARDA project to increase capacity in the U.S., that we highlighted last quarter, we've committed more than $700 million in CapEx to add global capacity to meet COVID-related demand. In summary, all of this work is clearly essential to helping our customers navigate the pandemic, and it's also giving us new capabilities and capacity that will be repurposed to meet future demand for vaccines and therapies. While our COVID-19 response contributed significantly to our performance, We're also continuing to make great progress in executing our growth strategy across the business. I'll give you just a few highlights on the quarter. In terms of innovation, we launched a number of significant new products in Q3. Let me pick a couple to highlight, one from our electron microscopy business and one from bioproduction. Our new thermoscientific Selectris imaging filters are breakthrough advances in cryo-EM for structural biology applications. These new filters allow scientists to view protein structures in unprecedented detail and in less time than what was previously possible. This will not only accelerate research, but also accelerate the adoption of cryo-EM. And another new product is our thermoscientific porous oligo resin, which is used to purify and isolate mRNA for the development of vaccines and therapies. As mRNA production accelerates, the needs for a highly scalable purification technology will be critical. In emerging markets, our leading scale continues to be an advantage for us, and we're expanding our presence to meet customer demand. During the quarter, we celebrated the grand opening of a new factory in Suzhou, China for our single-use bioproduction technologies. As you know, we already have a well-established lab products operation in Suzhou, And this expansion is our first bioproduction facility in the Asia-Pacific region, which will help meet increasing demand there for biologics. Our teams in China have effectively managed through the pandemic while positioning the business for growth. And we were pleased to deliver 18% growth in China in Q3. The last point I want to highlight around the progress we're making across our business is tied to our unique customer value proposition. Our customers recognize that we've stepped up in a major way to help them navigate the challenging environment, and that's creating new opportunities to build on our already strong relationships. This is very evident in pharma and biotech, as you know, and now increasingly so with healthcare and diagnostic customers as well. During these times, the advantages of our leading scale and depth of capabilities have never been more evident, and this will lead to share gain opportunities longer term. Before I turn to our guidance, I'll make a quick comment on capital deployment. As you know, our capital deployment strategy is a combination of returning capital through buybacks and dividends and strategic M&A. In terms of our view on M&A, we continue to have an active deal pipeline, we have a very strong balance sheet, and as always, we'll apply our disciplined approach to opportunities that meet our criteria for creating shareholder value. Turning to our guidance. There's obviously been a tremendous effort in supporting the COVID-19 response this year, and we've also executed well to grow our base business. This combination led to extraordinary growth and performance in Q3, and we expect that to continue in Q4. With that context, we expect to grow full-year 2020 revenue by 20% to approximately $30.5 billion, and we expect to grow our full-year 2020 adjusted EPS to by 48% to $18.27 per share. Stephen will give you more of the details, but clearly, we're on track to achieve a truly spectacular year. Before I turn the call over to Stephen, let me leave you with a couple takeaways. We continue to expand our leading role in responding to the pandemic, and we're having a profound impact on society. We're executing very well to capture new opportunities, gain market share, and drive growth across our businesses. Our efforts this year are significantly strengthening our company and positioning us very well for the long term. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen?