Thermo Fisher Scientific Inc (TMO) — Q3 2017 Earnings Call Transcript

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 & Presentations, until November 3, 2017. A copy of the press release of our third quarter 2017 earnings and future expectations is available in the Investors 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 July 1, 2017 under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also available in the Investors 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 2017 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. Thanks for joining us today for our Q3 call. I am pleased to report that Q3 was another excellent quarter for Thermo Fisher Scientific. We achieved strong growth on both the top and bottom lines thanks to sharp execution by our team. We had several developments in the quarter that strengthened our leadership and innovation in emerging markets. We significantly enhanced our customer value proposition by adding new capabilities through the acquisition of Patheon, which we completed earlier than expected. With an excellent nine months behind us, we're well positioned to achieve our growth goals for the year. Let me start with a quick overview of our Q3 financial highlights. First, we delivered another quarter of strong adjusted EPS performance, achieving a 14% increase to $2.31 per share. Our revenue in Q3 also grew 14% year over year. Our adjusted operating income increased 13%. Before I turn to our end markets, I want to acknowledge the tremendous effort of our teams. The natural disasters during the past couple of months have been unprecedented, and our teams have managed through them very effectively. I've been inspired by how our colleagues across the company have stepped in to offer support in many different ways, both from a humanitarian and an operational perspective. The most significant impact for us was in Puerto Rico. About 700 colleagues and their families are located on the island, and we were relieved to learn that they were all safe. Even with tough challenges at home, it was humbling to see colleagues return to work focused on meeting customer requirements. It reinforced our culture of intensity and involvement, which is the foundation for our work every day but truly stands out in times like these. Our legacy Patheon site in Manati, Puerto Rico, is the only one still experiencing disruption, but we're making steady progress in getting the facility back to full operation. Now let me provide some insight into our Q3 performance relative to our key end markets. Starting with pharma and biotech, we grew in the mid-single digits in Q3. Our chromatography, mass spectrometry, and biosciences businesses performed well. We also saw strong growth in our research and safety market channel. Our value proposition for these customers remains a competitive advantage for us, and we continue to strengthen our leading position. Diagnostics and healthcare grew in the low single digits, in line with what we've been seeing all year, with good growth in our transplant and immunodiagnostic businesses. In academic and government, we reported mid-single-digit growth, driven by strong performance in Europe and China. Lastly, in industrial and applied, we continued to benefit from increasing global demand and grew in the mid-single digits. We saw particular strength across our analytical instrument businesses in Asia-Pacific. We also continue to make excellent progress in setting Thermo Fisher up for an even stronger future. As you know, our growth strategy includes developing high-impact innovative new products, leveraging our scale in Asia-Pacific and emerging markets, and delivering a unique value proposition to our customers. I emphasize these each quarter to illustrate our commitment to a consistent and well-defined strategy that continues to strengthen our competitive position. Let’s get into our Q3 highlights, starting with innovation. We launched four new Thermo Scientific products at the Microscopy & Microanalysis meeting in early August to reinforce our leadership in electron microscopy. For material science applications, we introduced two new scanning electron microscopes, the Quattro and the Talos F200i, to assist scientists in advancing nanomaterials research. For life sciences applications, we launched the Krios G3i and Glacios Cryo-EM systems to streamline the analysis of proteins and other biomolecular structures. Our goal is to make Cryo-EM accessible to a broader range of scientists while raising performance and workflow standards. In early October, we were pleased to learn that the three scientists who won the Nobel Prize in chemistry utilize our Cryo-EM systems. Their work allows scientists to routinely produce high-resolution 3D images of protein structures, leading to a better understanding of biological functions and new therapies. We gained these groundbreaking capabilities through our acquisition of FEI, part of our analytical instruments offering. We recently surpassed the one-year anniversary of this transaction, and the teams are doing a great job with integration. The business continues to perform exceptionally well, and we are on track to achieve our synergy targets. Another key launch in our Analytical Instruments business was our new line of Thermo Scientific air-quality monitors, the iQ Series. These instruments are designed to help global customers in the power industry and government agencies more effectively gather and manage critical air quality data. The iQ Series platform includes mobile applications for remote monitoring and control, as well as wireless connectivity and enhanced services. I want to mention that our new mass spectrometry systems launched at the ASMS in June, including the Q Exactive HF-X and our new Altis and Quantis triple-quads, have received exceptional feedback. Our innovative mass spec platforms resonate well with customers in both research and applied markets. Lastly, I'll highlight a significant development in our Life Science Solutions business. Our Dynabead technology played a crucial role in the first FDA-approved gene therapy, aimed at treating a specific form of leukemia in children and young adults. These magnetic beads can isolate, activate, and amplify T-cells that have been genetically programmed to target cancer cells in individual patients. This groundbreaking gene therapy innovation arose from our long-standing collaboration with Novartis. It's a prime example of our commitment to advancing precision medicine by partnering with leaders in industry, government, and academia. Moving to our second growth driver, Asia-Pacific and emerging markets, we continued our strong performance in the region in Q3. China led the way with high teens growth, alongside strong results in South Korea and India. In China, we strengthened our presence with the opening of our Precision Medicine Customer Experience Center in Guangzhou this quarter. The facility showcases our wide range of workflow solutions to advance research in genomics, proteomics, and metabolomics, serving as a hub for customer training, collaboration, and application development. This milestone reflects our strategic collaboration with the Guangzhou government. Earlier this year, we initiated another partnership with Mab-Venture Pharmaceutical to jointly establish a new center to expedite biopharmaceutical development. Guangzhou is at the forefront of healthcare innovation in China, exemplifying our in-China for-China strategy to introduce tailored capabilities for local customers. Our third growth driver is enhancing our customer value proposition, and we are investing significantly to fortify our offering and competitive position. In late August, we closed the acquisition of Patheon, ahead of the projected timeline communicated when we announced the transaction in May. We welcomed 9,000 new colleagues to our team, and I enjoyed being at the Greenville, North Carolina site for the day-one event. I’ve visited several facilities, and the operations are impressive while the teams are energized to elevate the great business they’ve built as part of Thermo Fisher. We're just two months into the integration, but we are excited about the opportunities to be a stronger partner for our pharma and biotech customers. We expect to achieve total synergies of approximately $120 million by three years post-close, comprising about $90 million of cost synergies and around $30 million of adjusted operating income enhancement from revenue-related synergies. It's early in the integration phase, but we’re off to a strong start and look forward to updating you on our progress. This has been a busy year for capital deployment. Alongside stock buybacks, we have strengthened our strategic position with multiple acquisitions, the largest being Patheon this year. Regarding our short-term capital deployment priorities, we have two main focuses. First, with the Patheon acquisition concluded, we are prioritizing debt repayment. Second, how we financed the Patheon acquisition enables us to continue pursuing M&A opportunities. Our pipeline is active, and we are assessing new options to enhance shareholder value. I will now turn to our guidance for 2017. As reflected in our press release, we are raising both our revenue and adjusted EPS guidance for the full year. This reflects the addition of Patheon, our operational performance strength, and our commitment to benefiting from a favorable FX environment. Stephen will elaborate on the details, but at a high level, we're adjusting our revenue guidance to a range of $20.50 billion to $20.66 billion, resulting in 12% to 13% growth over 2016. For adjusted EPS, we are raising our guidance to a range of $9.29 to $9.38 for 2017, which also represents 12% to 13% year-over-year growth. Before I hand the call over to Stephen, let me summarize our key takeaways from Q3. We delivered another excellent quarter financially and operationally, completed our acquisition of Patheon, and the integration is off to a strong start. We made terrific progress in the past nine months and are on track to deliver another outstanding year. Now, I'll turn the call over to our CFO, Stephen Williamson.

Thanks, Marc, and good morning, everyone. I'll take you through an overview of our third quarter results for the total company, and then I'll provide some color on our four business segments and wrap up with an updated 2017 guidance. Before I get into the details, let me remind you that our results now reflect the addition of the Patheon acquisition, which we closed on August 29. Patheon's results are now part of the Laboratory Products and Services segment. So with that, let me start with a high-level view of how the third quarter performed versus our expectations at the time of the last earnings call. As you saw in our press release, we delivered a very strong quarter with 5% organic growth in Q3, which was above the midpoint of our previous guidance range and was driven by strong operational execution. We were also able to deliver $0.11 more adjusted earnings per share in Q3 than we had assumed in the midpoint of our previous guidance. This was driven by four factors of roughly equal magnitude: the pull-through on the incremental organic growth; a more favorable foreign exchange environment; the timing of our discrete tax planning actions; and the contributions from Patheon. Now let me give you more color on the quarter, starting with our total company financial performance. As you saw in our press release, we grew adjusted EPS in Q3 by 14% to $2.31. GAAP EPS was $1.34, up 13% from Q3 last year. On the top line, our reported revenue grew 14% year over year. The components of our Q3 reported revenue included 5% organic growth, 8% growth from acquisitions, and a 1% tailwind from foreign exchange. Looking at our growth by geography in Q3, Europe grew in the mid-single digits. North America grew in the low single digits. Asia-Pacific grew in the low double digits, including high teens growth in China. And finally, the rest of the world grew in the mid-single digits. Turning to our operational performance, Q3 adjusted operating income increased 13% and adjusted operating margin was 22.9%, which contracted 10 basis points from Q3 of last year. Patheon was 40 basis points dilutive to margins in the quarter and FX further diluted by 10 basis points. As a reminder, Patheon is a scale acquisition with gross margins and adjusted operating income margins lower than the company average. So as we incorporate the results of Patheon into our financials over the first 12 months, it will have a dilutive impact on year-over-year margin expansion. The rest of the business saw good margin expansion driven by our PPI Business System and volume leverage, partially offset by unfavorable business mix and strategic investments. Adjusted gross margin came in at 48.4% in Q3. This represents a contraction of 50 basis points from the prior year. The combination of Patheon and FX lowered gross margins by 100 basis points in the quarter. The rest of the business saw good gross margin expansion, driven by very strong contributions from our PPI Business System, partially offset by business mix. Adjusted SG&A in the quarter was 21.2% of revenue, which is 60 basis points favorable to Q3 2016. And R&D expense came in at 4.3% of revenue. R&D as a percent of our manufacturing revenue was 6.6%, up 50 basis points over Q3 2016. Looking at our results below the line, net interest expense was $132 million, up $29 million from Q3 2016, mainly as a result of our incremental debt related to the capital deployment actions this year. Adjusted other income and expense was a net income of $7 million within the quarter, which is $6 million favorable versus Q3 2016, driven primarily by non-operating FX gains. Our adjusted tax rate in Q3 was 11.8%, which is 130 basis points lower than last year, due to our tax planning activities and the impact of Patheon. The timing of discrete tax planning actions within Q3 and Q4 of 2017 is different versus our previous guidance. As a result, the Q3 tax rate is slightly lower than previously expected, and the Q4 tax rate will be slightly higher, with no net impact expected on the year due to the shift in timing. Average diluted shares were 399.6 million, up 2.2 million year over year, due to the completion of the recent equity offering and option dilution, partially offset by previous share buybacks. Turning to cash flow and the balance sheet, cash flow from continuing operations for the first nine months of the year was $2.15 billion, and free cash flow was $1.85 billion after deducting net capital expenditures of $290 million. Free cash flow is $85 million higher than the same period of last year and includes approximately $200 million of one-time cash payments related to the Patheon acquisition. We ended the quarter with $745 million in cash and investments. Similar to previous quarters, we paid $60 million of dividends in Q3. Our total debt at the end of Q3 was $22 billion, up $5.2 billion sequentially from Q2, as a result of the financing related to the Patheon acquisition. Our leverage ratio at the end of the quarter was 4.4 times total debt to adjusted EBITDA on a reported basis and 4.1 times on a pro forma basis, which is in line with our expectations. Wrapping up my comments on our total company performance, our trailing 12 months adjusted ROIC was 9.8%, flat versus the prior year. This represents approximately 100 basis points of operational improvement over Q3 2016, in line with our expectations. Now let me give you some color on the revenue and operational performance of our four business segments. Starting with the Life Sciences Solutions segment, reported revenue grew 5% and organic revenue increased 4% in Q3. Our Biosciences business delivered another strong quarter of growth. Q3 adjusted operating income in the segment increased 17%, and adjusted operating margin grew 320 basis points year over year to 32.8%. We saw very strong productivity, volume pull-through, and positive business mix, partially offset by strategic investments. In the Analytical Instruments segment, reported revenue increased 32% in Q3 and organic revenue growth was 11%. This segment includes our FEI electron microscopy product line, which is part of our materials science business. In the quarter, we had strong growth in our chromatography and mass spec and our materials science businesses. We also continued to see growth in our chemical analysis business. Q3 adjusted operating income in Analytical Instruments grew 35% and adjusted operating margin was 21.6%, up 40 basis points year over year. In the quarter, adjusted operating margin benefited from our PPI Business System, volume pull-through, and acquisitions, partially offset by strategic investments and foreign exchange. Turning to the Specialty Diagnostics segment, in Q3 revenue grew 6% and organic revenue growth was 4%. We saw good organic growth contributions from all of our businesses in the segment in Q3, with particularly strong growth in our immunodiagnostics and transplant diagnostics businesses. Adjusted operating income increased 2% in Q3 and adjusted operating margin was 25.9%, which represents a contraction of 90 basis points from Q3 of the prior year. Adjusted operating margin was positively affected by volume and productivity. However, this was more than offset by strategic investments and business mix. Finally in the Laboratory Products and Services segment, which now includes the Patheon acquisition, Q3 reported revenue increased 15%, and organic revenue growth was 3%. Our channel business once again delivered strong growth in the quarter. Adjusted operating income in this segment increased 1%, and adjusted operating margin was 12.6%, down 170 basis points from the prior year. Adjusted operating margin benefited from strong productivity and volume leverage. However, as expected, this was more than offset by the impact of unfavorable business mix driven by our clinical trials business and by strategic investments. As a reminder, the clinical trials business was affected by the discontinuation of a large Phase 3 clinical trial in late 2016, and the impact will sunset by the end of Q4. With that, I'll now move on to our full-year 2017 guidance. As you saw in our press release, we are raising the revenue and adjusted earnings per share guidance. Let me walk you through the details, starting with revenue. The midpoint of our revenue guidance is increasing $780 million to reflect $670 million from Patheon, an $80 million improvement in foreign exchange, and a $25 million increase in organic revenue as a result of our operating performance in Q3. The full-year organic growth outlook is therefore $25 million higher than our previous guidance, but it did not change the ramp for the full year, so we still expect 4% organic growth for 2017. On adjusted earnings per share, we're increasing the midpoint of our adjusted EPS guidance by $0.12. This includes a $0.05 impact from Patheon, $0.04 from improved operational performance, and $0.03 from a less adverse FX environment. Finally, with three quarters of strong operational performance behind us, we're narrowing our revenue guidance range to $160 million and narrowing our adjusted earnings per share range to $0.09. As Marc mentioned, Hurricane Maria caused widespread damage to Puerto Rico last month, and our thoughts and prayers are with the people affected. We have three operational sites on the island. The largest, the legacy Patheon site, is still offline. We're working with our customers to get that site back online as soon as possible. We currently estimate the impact of the site being offline to be approximately $0.05 of adjusted earnings per share, and that is factored into the guidance I just outlined. So despite this headwind, we're still able to increase guidance at the midpoint by $0.12, which indicates that we're executing very well. To sum up the guidance changes, the increased 2017 revenue guidance is now a range of $20.5 billion to $20.66 billion, which would represent 12% to 13% growth versus 2016. We expect acquisitions to contribute just under 9% to our reported revenue growth in 2017, and FX is expected to be a year-over-year headwind of $10 million, a negligible impact on growth. In terms of adjusted earnings per share, our increased 2017 guidance is now a range of $9.29 to $9.38, with a midpoint of $9.335. This represents growth of 12% to 13% versus 2016. We now expect a headwind from foreign exchange of $0.12 for the year. Excluding the impact of FX, this would represent adjusted earnings per share growth of 14% to 15%. A few other details behind the revised 2017 guidance; as I mentioned earlier, Patheon's margin profile is lower than the average for the company, so it will be dilutive to the overall operating margins for the first 12 months. Our revised guidance now assumes that we will deliver 20 basis points of adjusted operating margin expansion in 2017. Excluding Patheon, the revised guidance is 60 basis points expansion, which is slightly higher than our previous guidance. Net interest expense has increased $30 million from our previous guidance to $510 million as a result of the financing of the Patheon acquisition. We're forecasting our adjusted income tax rate to be 13% for the year, which is a 30 basis points reduction from our previous guidance due to the positive impact of the Patheon acquisition. We've completed $750 million of share buybacks this year, all in the first half. At this point, we do not expect any additional buybacks in 2017. We continue to assume we'll return approximately $240 million of capital to shareholders through dividends in 2017. Our guidance does not include any future acquisitions or divestitures, and full-year average diluted shares are now estimated to be 398 million, which is a 4 million increase from the previous guidance due to the completion of a recent equity offering. Q4 average diluted shares are estimated to be 404.5 million. We're assuming net capital expenditures to be approximately $500 million, no change from the previous guidance. With respect to free cash flow, as I mentioned earlier, we've incurred approximately $200 million of one-time cash payments related to the Patheon acquisition. This is being offset by improved operational cash flow, including a small benefit from the Patheon business. So we continue to expect to generate about $3.15 billion of free cash flow for 2017. As always, in interpreting our revenue and adjusted EPS guidance ranges, you should focus on the midpoint as the most likely view of how we see results playing out. So in summary, we delivered three strong quarters of operational performance, flowed through the benefit of a more favorable FX environment, and executed really well on our capital deployment strategy. All of this keeps us well on track to deliver an excellent 2017. With that, I'll turn the call back over to Ken.

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

Hi, good morning.

Good morning, Derik.

So a couple of questions. So the 11% organic number in Analytical Instruments, what was the FEI contribution to that?

So, Derik, in terms of Analytical Instruments, we had very strong performance from our chromatography and mass spectrometry business. It's good to see chemical analysis also return to growth. FEI had strong double-digit growth in the quarter. Obviously, it was a partial quarter impact just given the anniversary, but obviously, electron microscopy also contributed to the strong growth.

And so staying on the Analytical Instruments side, and this is a question for both your industrial and your pharma customers, as we talk about increasing interest in tax reform in the U.S. and there's talking about immediate expensing of capital, are you seeing any potential hesitation in terms of people looking to spend in Q4? The question on the budget flushing, thinking about if people think tax reform is coming, would they push instrumentation spending off into next year?

If I think about what's happened in industrial and applied end markets, we saw real strength in Asia-Pacific. The U.S. has been pretty consistent. Customers really haven't talked much about sitting on the sidelines because of potential tax regulations. So I think the U.S. has not been strong with industrial. It's been slowly recovering. So I don't think we're expecting a big factor one way or the other from U.S. tax policy on demand.

Great, and I'll get back in the queue.

Thank you, Derik.

Thanks, Derik.

Hey, thanks, great quarter. Marc, I want to maybe follow up on that question on FEI. I'm curious how much of the growth is coming on the semi side versus Cryo-EM uptake. And then with the new systems, is this reflecting some strong early interest on the pharma side? It seems like the new platforms are geared toward drug development.

So, Tycho, thanks for the question. When I think about how the FEI business has performed, given that it's just past the one-year anniversary, it's a good time to reflect on what's happened. At the highest level, the business has benefited tremendously from our integration approach. Our PPI Business System has helped them expand capacity. Our business management system, part of PPI, ruthless prioritization on the most important things, has allowed both the materials sciences businesses and the life sciences businesses to significantly accelerate growth over anything the business has delivered over the last number of years, and the team has done a fabulous job of executing. When I think about the two end markets, materials sciences is in a strong part of the cycle. That's both industrial and semiconductor customers. Semiconductor has been very strong, but we've also seen a nice acceleration in our life sciences customers as well as strong bookings growth as well. So the businesses are performing well across all fronts. The new products are geared towards both the nanomaterial research on the materials science side. And on the life sciences side, we are getting some level of interest from biotech and pharma customers, although it's still a bit early, but the feedback has been positive. When you summarize the whole story on FEI, I think the way I would characterize it, performance has been so strong that relative to the underwriting case that we talked about when we announced the deal on the call a little over a year ago, we're going to meet our ROIC hurdle a full year earlier than what we articulated back then. So it's been a great acquisition, off to a great start, and we're going to fully capitalize on the opportunities ahead.

Thanks. And then a follow-up, I'm just curious on your comments on bioprocess. There's a fair amount of noise in that market now with biosimilars and some of the drug companies working down inventory at both the supplier and the manufacturer. You see both sides of it. I was just curious – your comments on the outlook for that market, I know it slowed a little bit last quarter. That was more timing on the supplier side, but I was curious how you see the outlook there.

So, Tycho, in terms of bioproduction, we had moderate growth, very similar to what we saw in Q2. We continue to see very strong early indicators that really showed up in the biosciences business for cell culture media and sera, as well as in the smaller biotech demand for our clinical trials activity. So the early indicators, leading indicators are very strong, and conditions were similar to what we saw in Q2 with moderate growth.

Okay, thank you.

Thanks, Tycho.

Good morning and thanks for the time here, everyone. First question is actually on the fourth quarter, the implied fourth quarter expectations. It would be really helpful if you could try to frame up for us, quantify for us what you think the bottom line impact in the fourth quarter would be from Patheon specifically and from any lingering impacts from the situation in Puerto Rico or the natural disasters, more specifically top/bottom line. Whatever you have on hand would be very, very helpful. Thank you.

So I'll do a little bit of it and then Stephen will give maybe a more comprehensive view. In terms of the fourth quarter, other than bringing our Manati, Puerto Rico site back online, we're not expecting really any impact from weather. So what you would see from that in the fourth quarter is embedded in our guidance of about a $0.05 headwind, probably a little bit we got at the end of the third quarter. But a $0.05 headwind in Manati based on just getting the operation back online. And, Stephen, you might want to discuss some puts and takes.

Yes, so just some additional color. So the $675 million of revenue for Patheon that we've added to guidance, $190 million of that was recognized in Q3. In terms of Q4 for the net accretion, including the impact of the Puerto Rico issue for that site, it's still $0.02 additional accretion in that $0.12 change that I gave you at the midpoint.

Okay, got it. I really appreciate that. And then, Marc, it's always really helpful to hear how you're thinking about a couple of things going forward. I think one is it's very helpful to hear how you think what the critical factors outside the company's control are with regard to where the trajectory of the business is within the 4-to-6 framework. And then maybe a subcategory of that framework is always the NIH, not necessarily budgets but more disbursements, and then I'll get back in queue. Thanks so much.

Thanks for the question. So the company is performing extremely well. When I think about the quarter, 5% organic growth. When I think about the end markets, we saw improved performance and really strong execution, both academic and government and industrial, applied, very, very positive. When I think about the outlook for Q4, basically we've raised our outlook for organic growth based on the Q3 performance. We've maintained for the fourth quarter the same level of organic growth that we assumed back in July. The reason we did that is there's always a range of outcomes on what year-end spend is, and we're obviously going to drive to the highest possible number. In the fourth quarter, the things we look at is where do the FX rates finally settle at, and ultimately what's the level of year-end spend. As you look back over many years past, we'll do a good job of capitalizing on all the market opportunities out there and creating some new ones as well.

Thanks so much.

You're welcome.

Thanks, Steve.

Hey, good morning.

Good morning, Doug.

You increased full-year organic growth revenue expectations by $25 million. This is about the magnitude of the Q3 beat. It seems like you have stronger than expected FEI momentum. AI grew I think around 6% the last six months with no signs of slowing momentum. And Specialty Diagnostics growth is actually improving to levels that we haven't seen in a little while, just to name a few observations. Your guidance doesn't seem to reflect a continuation of improving momentum. Could you just speak to why that might be? And then I guess relatedly, is some of this weather, and would you be willing to quantify specifically what you believe the impact of weather was in the third quarter?

So, Doug, in terms of the fourth quarter, a couple points, the first of which is we were very comfortable banking everything we delivered versus our expectations organically in Q3 and then subsequently raising the guidance. We chose to keep the Q4 number the same as it is because, as you know, it's the one with the widest level of variation based on year-end spend, and we've assumed year-end spend to be exactly the same level as last year. We believe the range of outcomes has the possibility for better performance. When you go through the numbers, we have a more challenging comparison in our electron microscopy business in the fourth quarter. It will still be above the company average and we're very confident of that, but the contribution might be a little bit smaller in Q4 than what we saw in Q3.

And the... The weather impact.

Weather here just in terms of customer demand in Q3 was probably about 0.5 point of impact.

Okay. And the expectation is some of that lingers into Q4.

Not a material amount.

Okay, and just one more follow-up. I know Tycho asked the earlier question on bioproduction. I apologize if I missed it in his answer, but when do you expect that to pick up a little bit more with the bioproduction revenue trend? And specifically on destocking, which is what we've heard from a few of your peers, have you seen any impact from destocking in that part of your business?

Probably from our company perspective, it's better to give the pharma and biotech as an end market. And when I look at that, obviously, solid mid-single-digit growth in the quarter, real strength in the research applications. Bioproduction had moderate growth. It was a little bit slower, but still a good contributor. We saw some of our customers managing their inventory. Really, with the advent of biosimilars becoming more important, I think customers are just managing inventory in a more prudent fashion. The pipeline of new molecules is quite promising, and it will take some time to ramp up. So we're very, very bullish on the long-term prospects of bioproduction. We're very bullish on our competitive position across pharma and biotech, and it continues to be a great end market for us.

Okay, thank you for all that. Have a good day.

Thanks, Doug.

Hi, good morning, guys. Thanks, maybe just two on FEI. Stephen, on the top line, I'm just curious how much of the organic growth that you're seeing is actually falling through versus being reinvested. And then along those lines, we're coming into year-one accretion that's more like $0.40 than $0.30. And so is that right? I'm just wondering maybe if you have a view on year-two accretion or synergies given where the performance is.

Sorry, can you just clarify the first question? I didn't get it, sorry.

I'm just trying to understand how much within that business you're actually letting through to the bottom line. And then on accretion, for the year-one target that you had of $0.30, we're looking at more like $0.40. I'm just looking to see if that was right.

Yes, so we're appropriately investing in that business for the long term. You see that, the results of that in the new products that have been introduced this quarter. But we're also printing very good EPS from the high growth that we're seeing this year. As you look at the first 12 months of this acquisition, as you said, we outlined $0.30 back at the beginning of the deal, and I think the actual number was $0.43, so very strong contribution from the acquisitions. A significant amount of that was basically the base business revenue being higher. The synergies are running a little bit ahead. Probably about $0.01 – about $0.02 of that beat was synergy-related. The rest was really from the base revenue.

Okay. And then Marc had highlighted the new products that you've launched there recently. So I guess as we think about the gross margins for the AI business, I'm just curious whether you think that segment can benefit from an improving profile there. Prior to the deal, those guys had emphasized better gross margins on the newer instruments that were being launched. So I'm just curious if you think that's something that's meaningful at all going forward.

Yes, I think you'll continue to see gross margins expand, and certainly in the electron microscopy business just given the mix over time. The life sciences business a number of years ago was a lower-margin business for legacy FEI. Through our PPI Business System as well as our commitment to innovation, those products are increasing their margins. The materials science applications are, of course, still higher margins. They're a more fully established set of products. So mix matters within the business, but in the underlying pieces, margins are expanding in both.

Just one other factor, the life sciences side of the businesses, the service stream for that is really ramping up. And that's slightly – that delays from the ramp-up in the instrument placements. So that will also help gross margins as we go out the next couple of years.

Super. Okay, thank you.

Hi, thanks. Good morning.

Good morning, Jack.

I have two biopharma questions. So I wanted to start with Patheon. So now that you've owned the acquisition for about two months, just talk about conviction in the revenue synergies long-term trajectory there. And near term, if I think about the implied fourth quarter from Stephen's guidance, I think it's down a little bit year over year, maybe just how you think that turns going into 2018.

In terms of the fourth quarter guidance, we're actually quite bullish on what the outlook is for the business. The end markets actually look good. So it is obviously – roughly around the 4% range would be what's implied based on the July guidance. As we've talked, there's obviously a range of outcomes, with a good year-end finish could drive that higher. That's the way to think about it.

But one additional factor is, Jack, is that we have deferred revenue accounting adjustments at the beginning of the transaction, and it's fairly sizable for this deal. It's about $20 million of impact on revenue and profitability in Q4 for the Patheon transaction.

So we feel good about Q4. From that perspective, everything looks strong and solid. So I don't think there's much there. In terms of going into 2018, looking at the end markets, we'll obviously give the more holistic view for the year when we get on to the January call. But based on what's going on in Washington, we're expecting a budget to get into place with NIH growth towards the end of this year, which would set up as a positive for next year. Obviously, in industrial and applied, at the beginning of this year, we were talking about a recovery, and obviously we're seeing good growth there. Pharma and biotech has been solid throughout the year. So at least as we see the world right now, we're entering 2018 with a lot of really good things going on. So I feel good about how the team is executing.

Great, that makes sense. And then I just wanted to nitpick the trends in Lab Products and Services a little bit, sequentially 3% growth, but a little bit softer. I think your overlapped the clinical trial logistics in the fourth quarter, but maybe just talk about the trends there and what we should think about comp-wise in 4Q.

So sequentially, really the impact is weather. It was fairly concentrated in that segment, so it was about a percentage of growth for the segment. That's really the sequential change. The clinical trial, we will sunset that by the end of Q4. There's still some run-over revenue that we are lapping in Q4. We'd probably be done with that by the end of the year.

Thanks, Stephen.

Thanks.

Thanks, maybe one for Marc. Just on Patheon, I know it's early, but how are things compared to your expectations when it comes to utilization levels at the facilities? It feels like cost synergies are going to be driven more by improved efficiency there rather than facility consolidation. So I just wanted to hear your general thoughts now that you've had a chance to see them from the inside.

Patrick, great question. So I've had a chance to visit a number of the sites and meet with all the general managers of each of the sites and all the quality leaders. It's a really strong team. There's plenty of capacity to be leveraged, right? So what's exciting about the Patheon business is that it really is about driving operational efficiency and then leveraging our commercial reach to further fill up the plants. So incremental volumes really do flow through at an attractive rate. So driving the top line here is going to be a key driver, and our PPI Business System is going to help drive further benefits within the plants. Some of the cost synergies, obviously, are duplicative corporate costs and things of that sort. So you get those right away, and that flows quickly. As we continue to drive volume growth, you'll see it flow through at an attractive rate. It's early days, but very, very encouraging, and we're looking forward to really leveraging our commercial infrastructure because the customer feedback has been great about the combination. So we're very bullish. It's early, but very bullish at this point.

Okay. And then on industrial, I know in past quarters you talked about core industrial orders trending up a little bit in the U.S. and showing signs of life, and the hope was revenue would follow suit in the back half. Could you just talk about an update on the market there and how you feel?

Yes, so mid-single-digit growth in industrial; another quarter of growth in our chemical analysis business, really strong Analytical Instruments performance across Chrome, mass spec, electron microscopy, environmental instruments, so good demand there. Asia-Pacific was very strong. The U.S. is growing but it's growing moderately. So that obviously still hasn't fully benefited from the recovery, but we're definitely seeing real strength in Asia. So pretty encouraging in terms of where industrial and applied is. The applied markets continue to be very positive. Certainly, we saw that in our environmental instruments, and we just launched a new air monitor and that makes a difference for that marketplace as well. It's really a much better part of the cycle than we've been reporting over the last couple of years.

Thank you.

You're welcome.

Hi, Marc. Can you talk about NIH, what you're seeing there? And then the second question I have is Europe has been better. Why do you think Europe is better?

So, Paul, thanks for the question. In terms of academic and government, it was really good to see mid-single-digit growth globally. That's a very strong quarter. North America was consistent with the last few quarters with modest growth, and we're expecting an NIH budget to show an increase of $1 billion to $2 billion ultimately, and that should continue momentum into 2018 as well. Generally, conditions here in the U.S. are stable and growing modestly. Europe was very good, right? We saw that across a variety of our instrument offerings. In particular, Germany was releasing funds, which was good, but we saw broad-based demand from a number of countries. So I think getting back to a more stable, growing European economy, you're seeing governments invest in academic and research, and that was a real positive in the quarter. It was great to translate it into our whole business, which grew mid-single digits in Europe. So it's very encouraging.

And then lastly, FEI, obviously a good quarter. How do you view that business in terms of predictability? It still has semiconductor exposure. Is there backlog, is there orders? What's your visibility on FEI going forward?

So orders grew strongly in the quarter. We have a very strong backlog and good visibility for the business. The life sciences business, you can think of it as a rapidly growing business, and therefore it's not really subject to the economic cycles as much. The materials science business does have a cyclical nature to it. It's in a really very positive part of the cycle. As we read, certainly for the next quarter, that's very strong. The next year's comparison will be more challenging just given how strong the growth was this year, but we're very positive on the outlook for the electron microscopy business.

Thank you.

You're welcome.

Good morning and thanks for taking my question. Most of them have been asked already. Just one question for you, Marc, on your AI business on LC and mass spec. I'm just wondering if you could provide a little bit more color on what you see going on there as it relates to the strength you're seeing. Is it your new products? Is it underlying market growth? Is it potential share gains in some of those markets? Just any more color there would be helpful.

When I look at the chrome and mass spec growth that we've delivered for a number of quarters relative to what we can see from the external market, we've been gaining share, meaning we're growing faster than the others that are reporting the numbers. As you recall, when you look at the growth, up until the last quarter or two, the chemical analysis business, which is not a mass spec business, had been declining. So when you looked at the segment, it looked like moderate growth, but underlying that was strong mass spectrometry growth. The reasons for that I think are twofold. One of the things is, as you advance technologies, it opens up new desire for the leading researchers to buy the products. We continue to innovate, and therefore the funding cycle actually follows that innovation. As long as the industry is bringing out relevant new products, these best researchers get the money. The funding environment has been good. ASMS was a great conference for us this year back in June, and it's rare that I highlight the quarter after product launches how well received they are, but our two triple-quads and our new Q Exactive really are off to a fantastic start. It's a good market and really solid execution for share gain has been what's driving that.

Okay, thanks very much.

Thanks, Steve.

Hi, guys. Thanks for the questions.

Good morning.

I was just thinking into the Analytical Instruments growth a little bit more. I'm wondering if you could walk it through by either end market or geography. I'm just trying to get a better sense of what was unique in this quarter to get to that 11% number.

I think probably it's more the macro of chemical analysis growing versus being a headwind because they had been shrinking for several years. It's been a couple quarters of growth. So that really makes a big difference. Even though it's moderate growth, it really does matter because chrome and mass spec have done well. We got some benefit from electron microscopy which had a very strong quarter. So that combination really was the big driver. In terms of geography, the one area I would call out as being just very strong was Asia-Pacific. It was very good across all segments for our Analytical Instruments markets.

Just as a reminder, the electron microscopy is currently showing up in industrial and applied and academic and government, where the concentration of revenue is.

Okay, great. That's helpful. And then just quickly on companion diagnostics, you have a number of FDA approvals under your belt and now starting to get some reimbursement. How big of a business do you think that could be in 2018?

When I think about the programs in companion diagnostics, we are getting our lab partners up and running on our Oncomine Target DX companion diagnostic. LabCorp was up and running; more will get online. So that business will build throughout the fourth quarter and into 2018. As you know, the entire next-gen sequencing business is less than 2% of our total revenue. So it's not a huge business, but certainly the oncology portion is encouraging in terms of the actions going there.

Great, thank you.

Thanks.

Operator, we're going to take just one more.

Thanks, my questions have been answered.

Great, Derik, thanks. So let me wrap it up. First of all, when I think about where we are at this point in the year, we're really in a great position to finish the year strongly, and I look forward to reporting a successful 2017 in January. Of course, thank you for your support of Thermo Fisher Scientific. Thanks, everyone. Have a good day.