Thermo Fisher Scientific Inc. (TMO) Earnings Call Transcript & Summary

Perfect. Good morning, everyone. This is Rachel Vatnsdal from the life science tools and diagnostics team here at JPMorgan. I'm joined on stage by Marc Casper, CEO of Thermo Fisher. So as we typically do, this is going to be a 40-minute session. First half will be roughly 20 minutes of presentation, followed by 20 minutes of Q&A. If you do have questions, feel free to either submit them via the portal or you can ping me directly. With that, Marc, I'll pass it off to you.

Rachel, thank you. Nice to see everybody here in San Francisco. Great to be back at the JPMorgan conference. So the time goes quickly. A year ago, I'm reflecting back on being in front of this group right here in this ballroom and thinking about the year ahead for 2023. And I think the industry, and certainly ourselves as well expected that our industry would see moderating growth in 2023 after several years of extraordinary growth in terms of the role that the pandemic had called upon our industry to play in Thermo Fisher specifically as well. The year wound up turning out to be more challenging even in the moderation of growth that we had reflected upon at that point in time. The pandemic unwind actually played out roughly as I think we expected and probably others expected. But the combination of more difficult macro environment and a resulting caution in customer spend as well as a deterioration in the Chinese economy affected the results, right? And before one declares a victory lap on a year, I think one puts it in the context that we navigated a very different environment than we were expecting to navigate. So I'll talk about our performance in that context. And I'm very proud of how the team operated last year and what we delivered. But of course, we didn't achieve the original financial goals that we set out to, and we look forward to getting back to that track record in 2024. So when I look at the safe harbor statement and the non-GAAP measures, they're up here on the screen, and you can find the reconciliation of any numbers to the relevant numbers in the Investors section of our website. So take note of that. So the key takeaways, right? When I think back now in 2023 with the environment explained, we actually delivered a strong year, differentiated performance rather -- relative to others in the industry. The team worked tirelessly. I'm very proud of our 125,000 colleagues for what they delivered. And as we like to say internally, they sprinted right through the tape in the fourth quarter, and I'm proud of that. When I think about how we're positioned for 2024, it will be a good year for us, right? We're excited about how well positioned we are. So one of the key takeaways is that. When I think about our company, we're an incredibly well-positioned industry leader. We serve very attractive end markets. I know that will be a discussion throughout, I'm sure, the days in the breakouts about all of the markets are attractive. The answer is resoundingly yes, and we'll talk about that. Our growth strategy has consistently driven meaningful share gain. You see that in our results. You've seen that over the years -- actually, over decades. And that strategy works and it positions us all for success going forward. We are aggressive and active deployers of capital. That strategy creates value for our shareholders and for all of our stakeholders because it strengthens the company's outlook for the long term as well. We have a deeply ingrained business system called PPI. Many of you are familiar with it. It enables outstanding execution at the company. And we do business the right way. We have a comprehensive ESG strategy that delivers competitive advantage for Thermo Fisher Scientific. And our financial track record, both historically and our future, is incredibly bright. We are a very well-positioned industry leader with an exceptionally bright future ahead of us. So always good to orient on the company as we continue to evolve and actively shape our company. Today, as the world leader in serving science, our customers know us for our leading brands: Thermo Scientific, Applied Biosystems, Invitrogen, Fisher Scientific, Unity Lab Services, Patheon, PPD. They are on the tip of the tongues of all of our customers in pharma and biotech, academic and government, health care and diagnostics, industrial and applied, there's an incredibly well-known set of capabilities. We have $43 billion in revenue, 125,000 colleagues in our manufacturing businesses. We invest about $1.4 billion in restructuring development. Our customers know us for our industry-leading scale, our unmatched depth of capabilities. And all of our stakeholders understand the sustainable value-creation approach that we've taken over a long period of time. Our business gets better every day because of our PPI Business System, and I'll talk more about that in a few moments. When you look at what rallies all of our colleagues to get up every day fired up for the day ahead, it's around our mission, which is our purpose. It's a pretty slide. The words sound good, but they're deeply ingrained and genuine. We enable our customers to make the world healthier, cleaner and safer. We're behind the scenes, enabling the breakthroughs in new medicines, diagnosing patients and helping doctors bring the right treatments to the child that's sitting in front of them in an appointment. We're helping our customers make sure that the environment is cleaner. We're helping in the efforts to decarbonize the world. And from a safer perspective, the food that we eat, the water that we drink and the air that we breathe are all safer because of the technologies that our customers employ from us. We serve a great set of end markets, and we have significant opportunities to enable our customer success. When you look at our revenue mix, about 60% of our revenue is serving pharmaceutical and biotech. And we're enabling our customers from a scientific idea, the very beginning of the research process, all the way through the delivery of a commercial medicine, right? And we play a role across that value chain. Our other 3 end markets are around 15% of our revenue each: diagnostics and health care, where we enable more cost-effective health care and we're powering precision medicine; academic and government, we're bringing out the scientific advances to fuel the development pipeline for the pharmaceutical and biotech industry; and industrial and applied, facilitating research and advanced materials that really puts material science, clean energy and the semiconductor industry at the forefront. We have 4 business segments, and those segments are industry leaders in their own right. Starting with our Analytical Instruments, we have leading analytical technologies to enable scientific breakthroughs and solve the most so-called analytical challenges. Life Science Solutions is a portfolio of capabilities to serve the life sciences research, the bioproduction and clinical markets. Specialty Diagnostics, leadership in Specialty Diagnostics segment to cost-effectively improve patient care. And our largest segment, Laboratory Products and Biopharma Services, we're enabling the biopharma industry with our leading laboratory products clinical research development and manufacturing services, incredibly strong set of complementary capabilities across our company. The reason that we are able to navigate the variety of environments that we faced over the years is because of our PPI Business System. It's the culture and mindset of our colleagues that every colleague is engaged in the company's success, and we hold ourselves to a standard that we're going to be better today than we were yesterday and we're excited to make tomorrow better than we are today. And that just constant dissatisfaction with the status quo has allowed the company to execute its strategy and deliver spectacular performance over a long period of time. The benefits of our PPI Business System is seen in our quality, productivity and customer allegiance, where we have world-class products and services. We have incredibly strong operating processes that drive efficiency, and we're very focused on delivering customer success day in and day out. The results of a deeply ingrained business system is a competitive advantage, is the ability to successfully integrate acquisitions, make the acquired companies better than they were when we acquired them and deliver differentiated financial performance for our shareholders. When I think about the future, before I talk about our performance against goals and talk about our future goals, I think it is always helpful to think about how do we measure success, what is the standard that we're holding ourselves to, right? And the first is that we're going to operate with speed at scale to support our customers, right? We're going to bring our relevant capabilities, expertise, products and services to make a high impact on our customer success. We're going to hold ourselves to the standard of delivering differentiated short-term performance that we hold ourselves to the highest bar of what good looks like in a given year. And at the same point, continually enhancing our long-term competitive position, right? It's getting that right, which is you deliver great short-term results, and at the same point in time, you create a brighter and brighter future. And that's the standard that we manage the company to and have a great track record of. When I think about why the future is so bright is also around our end markets. They have strong growth, they have durable growth, right? We serve a GDP-plus industry, right? And you think about what drives our industry ultimately, it's really around the demographics of increasing health care needs around the world. Aging populations, more wealthy populations, those things drive the demand for health care, and we're the company that enables the industry to make that a reality. The scientific advances going on right now, the impact that it's having is unbelievable, right? Having sat through 1.5 days now of customer interactions, the enthusiasm in the pharmaceutical, the biotech industry, how AI is intersecting with the industry, it's spectacular about what's going on in the research side. And that means that ultimately funding will be strong to capitalize on those opportunities, and that really creates a bright future for our industry. And then on the material science side, we don't talk as much about it, there is great growth coming from semiconductors, advanced materials and the clean energy transition that our company empowers, right? So the end markets are strong in the long term, right? And I feel about that. And no matter what the environment is, we have a good track record of navigating that dynamic environment, right? And the reason for that is we're a trusted partner to our customers. Our customers tell us when the environment is tough. What do they need from us, right, how do we help them navigate it? They tell us when things are surf's up and everything is great and -- right, just be ready for the huge demand. So we get that view from our customers, and it's exciting in terms of the role that we play from there. Our business system drives continuous operational excellence, and we have a deep and experienced management team that has steered the company through many different environments. So I think we're very well positioned for a bright future. When I think now about our financial results, if you look back over the last 10 years, we've been able to deliver consistently teens growth in revenue, adjusted EPS, free cash flow. You can go back longer, the numbers will look similar. So we have an incredibly disciplined track record of creating value for our shareholders, and we're excited about our formula for success going forward. When I was here a year ago, this is the slide I presented for our goals for the year. And I always like to use this as a quick recap of how the year went qualitatively. And we look forward to reporting our financial results on the 31st of this month, and we'll talk about the quantitative aspects of our performance. So revenue, it's about executing our proven growth strategy to drive share gain, PPI Business System to navigate the environment, effectively execute our capital deployment strategy and progress our ESG priorities. So those are the goals that I set out. When I think about how we did, incredible year for product launches, right? One of the best that I can remember in my years at the company across the business. And this is just a very small snapshot of the products that we launched, whether it was in genetic analysis with digital PCR; whether it was a true breakthrough in mass spectrometry, where we're the industry leader with the Orbitrap Astral, which we think is the most significant launch in the last 15 years in the industry. The customer adoption has been incredibly significant. Whether it's something that you probably read about, right? We're a company that's kind of behind the scenes despite our scale. You probably read about our diagnostic assay for preeclampsia, the first cleared assay in the U.S. to help stratify patient risk for pregnant women, hugely relevant from an improving quality of life and safety of mothers and child in this case. And so this gives you the example of the kinds of innovations that we've launched, bioproduction, strong launches, helping semiconductor innovation as well as enabling gene therapies, to round out a very strong year of product launches last year. When I think about the second aspect of driving share gain is advancing our trusted part status. Just took some snapshots from some of the media that was out there in terms of the collaborations that were reported on and the roles that we play to enable our customer success and really broad-based across the industry in terms of making a huge difference to enable the biopharmaceutical industry. And the final aspect of our share gain strategy is around the unparalleled commercial engine that Thermo Fisher has. And some examples of the progress we made in '23 was around our new cell therapy, a GMP facility that we opened as a collaboration center that we work with both the academic community and the biotech community in cell therapies. We expanded our customer excellence centers in Europe with a state-of-the-art facility that was open. And we're leveraging AI further to optimize commercial effectiveness and improve the customer experience. And when I think about AI, there's sort of 2 aspects to it, right? There's how you run the company and then where do you create new value. And in adopting how we run the company, it's making a really significant difference in the early days, right? Some of the stuff we've implemented many, many years ago, but in terms of the generative AI, it really is making us better and it creates a great opportunity to just find new ways of doing our work more efficiently, and ultimately, creating new products and services for our customers. So very exciting in terms of the progress we made on the top line in 2023. When I think about the PPI Business System and as the environment turned more challenging in the first half of the year, we really ramped up our commercial intensity, and the team did an extraordinarily good job of going out and winning business. We actively managed our cost base. Versus our original guidance, we took $1 billion of cost out of our P&L, right? So we didn't sit passively whatsoever in terms of managing through a different environment, and I'm proud of how the team responded to that to set us up for success. And we manage price appropriately so that our customers feel good about how we help them and at the same point, manage through an inflationary environment. So made a real difference to our success last year. When I think about capital deployment, we closed $4 billion in acquisitions. The Binding Site and CorEvitas, great additions, performing incredibly well in their first year of ownership. We announced the acquisition -- a $3 billion acquisition of Olink and on track to close middle of this year there. We invested around $1.5 billion in CapEx to fuel our long-term growth and returns on investment and ultimately return $3.5 billion of capital to our shareholders during the year. So that free cash flow was actively put to work to create a brighter future for the company and for our shareholders. ESG was a strong year. Environmentally, we are well on our way to achieve 80% of our sites across the world will be powered by renewable energy. We signed commitments in Europe to get over half of our sites on renewable energy by 2025. We were able to also help our customers achieve their own objectives through launching new products that are more environmentally friendly. Socially, a strong year. We've been recognized repeatedly for our award-winning culture and a place where our colleagues can have a mission-oriented career. And we've been active in supporting our communities through STEM education, right? So we're good neighbors, if you will, as a company where we work around the world. From a governance perspective, we continue to see our ratings increase and recognized for our disclosures. And if you haven't glanced through our corporate social responsibility report, I think it's well worth a quick read about how we operate the company and the positive impact we're having on the world. And we report with transparency, and we get recognized for that as well. So when I think about 2023, I'm proud of how the team navigated the environment, worked tirelessly to deliver against our goals for the year, and most importantly, set the company up for a bright future, which turns us to our 2024 goals. And nothing here should be surprising, right? We're going to go out. We're going to execute our share gain strategy, our growth strategy and go win business from our customers so that we continue to deliver differentiated performance. From an operational excellence perspective, we're going to leverage our PPI Business System to deliver strong cash flow and earnings growth. We'll effectively execute our capital deployment strategy, closing and successfully integrating Olink this year and continuing to execute. We have an active pipeline. We'll continue to look at the right opportunities for the company to deploy capital and create shareholder value. And we'll continue to make progress on our environmental, social and governance priorities. So I'll end, before we go to the Q&A, with where I started, right? '23 was a year, it had its challenges. It took 365 days to deliver results that we were proud of, but I am proud of how the team executed during the course of the year, and we're well positioned to do so again in 2024. We're an incredibly well-positioned industry leader. We serve attractive end markets. We have a great growth strategy that's proven, that drives share gain, capital deployment strategy that creates significant value, powered by our PPI Business System and a comprehensive ESG strategy that creates competitive advantage. I'm excited about our financial track record, much more excited about our financial outlook. So the future is bright at Thermo Fisher Scientific, and I appreciate you filling the ballroom and standing through the session. And with this, I'll turn it back over to Rachel.

Perfect. Thank you, Marc. Yes, next year, we'll hopefully get a bigger room for you. So to kick it off here, it's been a volatile year, as you mentioned. Many of the markets that Thermo and peers participate in have been challenged. And one of the key questions that investors are really trying to understand is, is there something structurally broken in the industry that Thermo and your peers plan, especially given how low visibility it's been in recent quarters as well? So from your point of view, has anything changed in how you view those long-term prospects of the sector?

Yes. Rachel, I think it's a good question. I just don't think it's the right question, right, which is in a year where our industry -- or historically, our industry is incredibly predictable and probably skewed towards the upside generally. And then you have a year where -- a lack of visibility that occurred. I think -- let's talk about that, and then we'll talk about the future, right? So I don't think anybody predicted China, right, across the economy. In terms of Q1, things ramped up in the industry, ramped up for us, and then things fell off a cliff in terms of activity through the balance of the year. And I think the Chinese government and the Chinese, at least our colleagues, were as surprised as anybody about sort of how weak the environment was, right? And so that visibility, I'm not sure that there was something that anybody could have done differently. I think the combination of a pandemic unwind, which I think certainly, we understood and reflected in our financial outlook, combined with higher interest rates, a more muted funding environment in biotech, customers were just more cautious, right? They just didn't know what does inflation mean, and that seems to be easing. But the combination of less available capital for our customers, higher cost through inflation, customers just were more cautious during the year. And I don't think anybody really anticipated that. When I think about the future, right, what an unbelievable industry, right, in terms of what we do, right, and what are we enabling, right? If you think about the curative medicines that are progressing through the pipeline, the impact that it's having on lives, right, you see it through the obesity medicines that are coming, that have been launched. You see it through the continued focus on Alzheimer's, a devastating disease which hasn't been tackled yet, but there's huge efforts against that. The learnings from mRNA and where that can be applied, you can go through the -- list after list after list of items that just create optimism that there's going to be new medicines out there, and our industry and our company is going to benefit hugely from enabling that success. The discovery is going on, on the research side in terms of in academic has been great. If I think about just the enthusiasm around a product like the Orbitrap Astral, even in a more constrained environment, there was no problem getting funding, right? Customers spending over $1 million, short notice, just going out and getting the money because the product is so relevant to the discoveries that it enables. And I just believe that if you're bringing out relevant products, our customers will ultimately have the money to go out and buy them. So a combination of attractive set of opportunities in the pharmaceutical and biotech industry, great scientific breakthroughs, bodes well for the future. And I always think about our industry as GDP-plus, right? So we think about 4% to 6% market growth. You look back over the last 20 years, that's a good proxy for what it was. I can point to years that it was below and I can point to 2 or 3 years that we just lived through that, it was way above it. And -- but if I say over the long period of time that I've been in the industry, it's an industry that grows 4% to 6%.

All right. That's really helpful. Maybe just shifting over to 2024. So you provided an initial framework for the year that pointed towards roughly 1% core growth. So one of the key things that investors are looking at is trying to approach this from a bottoms-up analysis to get to that outlook for 2024. So I appreciate you'll give us more color during 4Q earnings. But in the meantime, can you just remind us of what are your assumptions embedded in that initial framework? Should we think of it as a floor for 2024? And then how do we think about the phasing throughout the year as well?

Yes. So if you go back to October, why did we do what we do, I think, is actually a helpful starting point, right? When you looked at the sell-side outlook for the industry, incredibly bullish on 2024, right? And what we believed in October is that we would deliver a good fourth quarter, that we would execute against what we said we were going to do. And then we would have this sort of fall flat on our face, which is the analysts are expecting this incredible growth in 2024, which is not reflecting the environment that we're in. So we actually said, "Let's give a high-level view of how to think about the upcoming year," right? And we didn't do the deep bottoms-up analysis. We didn't even finish the year yet, right? But we said the environment, market growth probably down 1% to 2%, we'll grow 3 points faster than the market. That's about a point of growth that's similar to what we guided to last year. With that and the cost actions that we took throughout the year, that would lead to a slight increase in EPS on those assumptions and that we would actually do real guidance as we finish the year and know where we were and set it up. And so I look forward to that in January. I don't think of it as anything other than getting our analyst community down to an appropriate level of consensus to start the year, and then we'll get into all the details bottoms-up to explain it. My expectation for the year, so hopefully helpful, is that it's a mirror image of what we had in 2023, meaning that the comparisons are much more challenging in the first half, much easier in the second half. So you're going to see -- you'll see growth pick up in the second half of the year just based on the comparisons. And we're also assuming, I would say, a slight pickup in -- a modest pickup in growth as well in terms of the market conditions as the year unfolds. So I'd say that's sort of the underlying assumptions behind our outlook. Hopefully, that's helpful.

Yes. No, that is. Maybe going over to the long-term framework. So you mentioned the 4% to 6% market growth. So you lifted that to 4% to 6% during your 2021 Analyst Day. Previously, your market growth assumptions before that were 3% to 5%. So can you walk us through the framework you use to develop your market growth assumptions? How much of that was really driven by the shift with Thermo Fisher's portfolio mix versus some type of underlying acceleration in market growth? And then do you still think that 4% to 6% is the right way to think about market growth going forward?

Yes. So when I think about market growth, the drivers in the assumptions has always been what is our mix of our business, right? So for many years, we had assumed 3% to 5%, this was a long time ago. At the time we acquired Life Technologies, we actually made it 3% to 4% because we had, had a mix shift at that point in time. And then as we expanded our presence in pharmaceutical and biotech, just looking at the mix, where it used to be about 1/3 of our business, and today it's about 60%, the 4% to 6% is really the product of the mix of our business. And so I feel very good about that. And so that's one, is really kind of the weighted average math of the company is how we got 4% to 6%. The share gain assumption that goes with that, right, I mean, historically, we would have said and the historically being, say, 2010 to maybe 2016, 2017, we'd say 1 to 2 points of share gain above market growth. And we've been consistently delivering now for a number of years, 2 to 3 or even more share gain. And we've said that holding ourselves accountable to about 3 points of growth faster than the industry is appropriate in terms of our strategy and our execution. And that's how we take the 4% to 6% and turn that into a long-term growth of 7% to 9%.

Got it. That's helpful. So maybe just as a follow-up on that 7% to 9%. Thermo was one of many companies in the sector that lifted LRPs over the last few years. So just given that recent volatility that we've seen in the market, is 7% to 9% still the right way to really think about Thermo going forward?

Yes. When I think about in normal market conditions, our ability to deliver 7% to 9% growth, I feel with extraordinarily high confidence in our ability to do that. We have a great track record, right, in terms of having delivered greater than 20% organic growth, high-teens organic growth during the pandemic. Our ability to -- in normal conditions, grow 7% to 9% is something that we'll do.

Perfect. Helpful. Then I kind of wanted to touch on this topic of cautious customer spend that we've been seeing throughout the sector. So the unwind of the pandemic and cautious customer spend has really caused a short-term impact for some of your businesses, particularly those serving pharma biotech customers. So can you walk us through at a high level for bioprocessing CDMO and the CRO businesses, what you're seeing there? And then how do you think about these businesses really contributing to that long-term growth profile of Thermo Fisher?