Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2019 Fourth Quarter Conference Call. [Operator Instructions]. I would now like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, please begin the call.

Good morning and 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 Investors Section of our website thermofisher.com, under the heading Webcasts and Presentations until February 7, 2020. A copy of the press release of our fourth quarter 2019 earnings and future expectations is available in the Investors 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 the 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 September 28, 2019 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 fourth quarter 2019 earnings and future expectations and also in the Investors section of our website under the heading Financial Information. So with that, I'll now turn the call over to Marc.

Thank you, Ken. Good morning everyone. Thank you for joining us today for our 2019 Q4 and year end call. I'm pleased to report that we finished the year strong and exceeded our goals for 2019. From our financial perspective, as you saw in our press release, we delivered excellent revenue and earnings growth. From our 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. We've 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 expended 10 basis points in Q4 to 24.9%. Finally, we achieved strong adjusted EPS growth in the quarter with 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 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 store performance is fueled by the power of our PPI Business System. Our colleagues use it across the company to improve all aspects…

Thanks, Marc and good morning everyone. I'll begin with an overview of our fourth quarter and a 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 the financial performance, I thought it'd be helpful to provide a high-level view of how the fourth quarter played out versus our expectations 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 was $0.04 higher than the midpoint of our previous guidance, reflecting good volume pull-through along with incremental, favorable below-the-line FX. 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. You saw on our press release we grew adjusted EPS and Q4 by 9% to $3.55. For the full year adjusted EPS was $12.35 up 11% versus 2018. GAAP EPS in the quarter was $2.49 up 12% from Q4 last year, and 2019 full year GAAP EPS with $9.17 up 27% versus the prior year. On the top line, our Q4 recorded 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 divestitures 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…

Thanks Stephen. Operator, we're ready to open it up for Q&A.

Thank you. [Operator Instructions] And our first question today comes from the line of Tycho Peterson with JP Morgan. Your line is open.

Hey, good morning. Marc, I want to start with performance in the Analytical Instruments business. You had a difficult comp last quarter, but there's a notable quarter-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 slower release of funds. How much of it was that versus maybe FDI? It looks like FDI’s tracking a couple of hundred million dollars below with semis and Life Sciences lagging suit. Can you maybe talk to those two dynamics and if there's anything else that weighed down AI in the quarter?

Yes. 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, 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, electron microscopy 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 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 ketchup on the release of funds? And maybe just talk about some of the other gives and takes in China for the yearend. And is there an opportunity on Coronavirus for you guys on the positive side, is we think about the diagnostics business?

Yes. So let me cover China. From a China perspective, I always liked to keep things in the contact, right, which is we in we had a very strong year in China and 13% growth. And when I look back on the year, we really continue to strengthen our strategic position in the country. Feedback from our customers continues to be positive. We were expecting that we would have mid-single-digit growth in Q4, based on comparisons, which is in the Analytical Instruments business that I – as I just highlighted and we came in with low-single-digit growth in China versus the mid-single-digit expectations for the fourth quarter. And the driver that was really the slower release of capital or 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 play 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 – on very large capital equipment purchases to hold funds and so that's our take there and Coronaviruses isn't baked into our forecast one way or the other. Thanks, Tycho.

Okay, thank you.

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

Thank you. Good morning. I wanted to probe a little bit more on the industrial and applied end markets, so down mid-single digits in the quarter. Obviously, electron microscopy weighing on that. Just – I'm curious if you excluded that, what you're 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 does the guidance assume 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. And our guidance 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 up in 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 eased 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 in industrial and applied. The only thing that's changing is really the – is just how challenging the comparisons are. When you look at sort of the day-to-day run rate business in industrial and applied, there's always some pockets of strength. We saw some strength in applied markets QA/QC applications. You saw some strength, but the larger capital equipment purchases had a difficult comparison primarily in semiconductor and material science applications.

Great. Okay. And then just as a follow-up. I know Stephen mentioned, I think, all the businesses within AI had a tough comp, but was hoping you could just provide some more color on mass spec and chromatography, how you feel – did that grow? Or was that negative also in the quarter from the comp? And how do you feel about share gains versus the competitive environment?

Yes. Jack, so in terms of Analytical Instruments, as a reminder, we have three business lines within our Analytical Instruments business our materials and structural analysis was below the segment average and chroma mass spec and 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 chroma mass spec and chemical analysis was above the segment average for the full year. I feel good about our shared performance in terms of how we performed during the course of the year. Thank you, Jack.

Thank you.

Our next question comes from the line of Derik De Bruin from Bank of America. Your line is open.

Hey, good morning.

Good morning, Derik.

Hey, Marc, can you talk a little bit about sort of the margin profile? I mean, you've done some deals recently, like the GSK deal, and the Brammer 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. And I mean – and this sort of bonds into a – of further capital deployment conversation in that when you sort of look at other assets you could potentially add, is there a lot more stuff like GSK and Brammer that you're looking to add that would be dilutive on this? I'm just trying to get a sense on the pacing of the margin because you're trying to balance this new growth opportunity with step of demands, higher capital investment and lower margins at this point in time?

Yes, Derik. Thanks for the question. So I will try to answer this way. When we – the first thing is about just M&A generally and how we think about M&A. 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 accretive to margins from an operating perspective from day one. And we've done ones that have been dilutive, right? What we look at is what are the return profiles and what can we do with the business and are we the right owner, right? 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 just to say, "Here's the core, everything we have before the acquisition and then whatever the effects are of the acquisitions going forward." When I look at the margin expansion, we laid out at the Analyst Day roughly 50 basis points of margin expansion 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 deployment assumptions on tax rate and so forth. And we've 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 basically 30 basis points of margin expansion relative to the 55 that we had explained at Analyst Day, a conscious choice, and Stephen laid out the details. Part of it was trading some 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 we made the decision because of the talent of our hourly workforce in the U.S. to reinvest additional funds in wage increases and to mitigate the increases in health care cost to that part of our population. And so we're taking a slower rate of margin 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 I just articulated.

And Derik, just one thing to clarify the comment about the divestiture – the acquisition and the divestiture impact our margins and on gross margin. That 50 basis points is much, much smaller impact than Q4 on the bottom line in terms of our adjusted operating income. It's kind of – the gross margin profile of the acquisitions and the divestitures is really what's caused the dynamic there.

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

Yes. So obviously, it will depend on the mix of actual revenues that comes in. But I think most of the margin expansion next year will be coming from leverage of SG&A, and roughly flat gross margins is probably a good selling point to think about for the year, those 30 basis points.

Okay. Good. I got another follow-up. So it's been a long time since we've – I've really thought about thinking about NGS and Thermo. I hadn't really thought about Ion Torrent. You closed 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 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 given your very large competitors' footprint there?

Yes. So Derik, thanks for the question. In terms of NGS, we have been very focused since 2014 on maximizing the impact of our NGS business. And we really have focused it on the oncology market. And you've seen, over the last 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 how you treat a patient, which is as opposed to sending out a sample and getting a result two to three weeks later with an answer, you can come into work the next day and have your sequence completed. And an oncologist then can make a decision based on the information. That's what Genexus is all about. In terms of extending to other markets, 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 – any idea – can you give us some idea on sort of what sort of volume LabCorp does in the sort of 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 roughly been six weeks of launch that they wanted to actually announce to the world their excitement about Genexus and using us to have that within their network. So I think that's a great opportunity. And the specifics, obviously, we're not going to get into, but it's a really nice win for both companies.

And if I can squeeze in one more from a client. One investor wants to know what Thermo's exposure is in the Chinese hospital settings since obviously that's – people are not going there. Just any idea on which how your business sort of breaks down in China on that regard in diagnostics?

Yes. If you think about the health care and diagnostics globally, it's 20% of our revenue. In China, it is actually less penetrated. So it's less than 20% of the Chinese revenue is going to be in the health care and diagnostics setting.

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

Hey, good morning everybody. Thanks for taking the question. 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.

Yes. So Doug, thanks. In terms of the release of funds, 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 they're Chinese state-owned enterprises, right? So a semiconductor fab that's owned by the Chinese government would be an example of an industrial and applied tech customer. 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've assumed 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 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 of really strong years? And then I guess, just to layer in one more element to the question, and I apologize if I've missed this in your prepared remarks, but could you just share what your assumptions for growth are in terms of what you built into 2020 revenue growth guidance by end market and geography? Thank you.

So first of all, thanks for the question on guidance. I'm super excited about 2020. I mean, that is if you're going to take away the takeaway. So let me put them in context. The last three years, 2017, 2018 and 2019, have been very strong in our end markets and very strong performance of Thermo 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 for the company. So we're expecting growth to be in line with the long-term model or consistent with that 5% to 7% organic growth. We're initiating with 5% 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% guidance in 2019. We always were aspiring to deliver the best possible results. I feel great about the 6% that we delivered, and our posture here is the same. We're starting out within 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% 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're going to have pharma and biotech with high single-digit growth. You're going to see mid-single-digit growth in the health care and diagnostics, low single digit in academic, government and industrial applied end markets would – will 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 on the guidance here. Think I heard you say couple of hundred basis points below the year. I'm just curious on was there any days impact or I'm not sure what drives that Q1 below trend?

Yes, Vijay. So the one less selling day in Q1, that's just under 1 point of headwind from that. And then it's really the comps from the Analytical Instruments business, particularly electron microscopy. Those will be the driver – yes, the piece to it.

Got it. Then Marc, one big picture question for you. Looking at the cash flow assumptions here, $4.5 billion free cash. You have $2 billion plus existing, but the share repo is just $1.5 billion. That's a significant amount of cash for Thermo. It's been an unusual year for Thermo from a cap deployment perspective. Any thoughts on sort of how the M&A funnel is looking – shaping up to be and thoughts on the cash burn on the balance sheet?

Yes. So Vijay, thanks for the question. So from a capital deployment perspective, looking back and then looking forward, last year played out well from my perspective, which was we set out the very beginning of the year the goal of finishing the strengthening of the balance sheet from the very active period we had before that. So we did some refinancing. We returned $1.8 billion of capital to our shareholders through buybacks and dividends. We deployed $1.8 billion in terms of M&A. And as we – and we generated the cash flow. So as I look to 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 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 is basically $1.5 billion in buybacks, about $350 million in dividends, which means that what's not on our EPS numbers is just additional deployment of capital, whether it's return or buybacks – 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 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, Marc.

You’re welcome.

Our next question comes from the line of Stephen Beuchaw from Wolfe 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 4Q and year-end, how you saw hardware purchasing dynamics in pharma, specifically relative to the last two, three years. And then prospectively, for pharma in 2020, how do you imagine the hardware component of the pharma growth outlook looks like, whether it's in research it's in research settings or in bioprocess? And then I have one 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. For the year, we had double-digit growth. And when I look at the performance, it was really across the entire portfolio. We saw strength in bioproduction, biosciences, pharma services, analytical instruments in the research and safety market channel. If I left something out, it's not deliberately, and it's due to the sense of 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 we're starting out with a high single-digit growth guidance for pharma and biotech as 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 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 would think about it. Nothing particular on capital, I don't really track year-end spend by subsegment so much. I think about year-end spends that are 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 year-end money but others, kind of business as usual, and that kind of averages out in the long run. As a reminder, the previous two years were very strong year-end spends. And from recollection, I think 2016 was a below-average year in spend. And so it varies, but it took – 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, it's safe to say we can hold up double-digit growth in bioprocess, just as a follow-up to that prior. And then I wonder if you could speak to how things played out over the course of 2019 and how you're thinking 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.

Yes. So I'll take biologics and then Stephen will cover the pricing. On bioprocess, we had very strong growth. A couple of companies have reported prior to us, and we continue to perform a little north of the levels that others have performed there.

Yes. And pricing played out as we had expected in the year, so a good year for pricing, over 1% of price overall offsetting, in fact, the tariffs. So that was really the goal there. And going forward, I generally project kind of just – like between 0.5% and 1% price as we think about the company's performance in 2020.

Thank you.

Operator, we have time for just one quick one.

Okay. Our final question will come from the line of Dan Arias from Stifel. 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. Just on the Brammer margins, we expect it to be just under the company average for the full year 2020. So we'd be getting it up to the decent level at the end of the year. So think about going into 2020, that's right at that pace.

Okay. And then, may be Marc, 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?

Yes. We had – if – 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, 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 deliver really another excellent year. But 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 of Thermo Fisher Scientific, and look forward to seeing you soon.

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