Yahoo Finanza Thermo Fisher Scientific Inc. (NYSE:TMO) Q1 2024 Earnings Call Transcript
Thermo Fisher Scientific Inc. (NYSE:TMO) Q1 2024 Earnings Call Transcript April 24, 2024
Thermo Fisher Scientific Inc. beats earnings expectations. Reported EPS is $5.67, expectations were $4.7.
Operator: Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2024 First Quarter Conference Call. My name is Angela, and I'll be coordinating your call today. [Operator Instructions] I would like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President, Investor Relations. Mr. Tejada, you may begin the call.
Rafael Tejada: Good morning, and thank you for joining us. On the call with me today is Marc Casper, our Chairman, President and Chief Executive Officer, and Stephen Williamson, Senior Vice President and Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our website thermofisher.com, under the heading News, Events & Presentations until May 8, 2024. A copy of the press release of our first quarter 2024 earnings is available in the Investors section of our website under the heading Financials. 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 most recent annual report on Form 10-K, which is on file with the SEC and available in the Investors section of our website under the heading Financials, 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 will 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 first quarter 2024 earnings and also in the Investors section of our website under the heading Financials. So with that, I'll now turn the call over to Marc.
Marc Casper: Thank you, Raf. Good morning, everyone, and thanks for joining us today for our first quarter call. As you saw in our press release, we had a great start to the year. We delivered another quarter of strong financial performance. I'm proud of our team's ongoing focus on enabling the success of our customers while demonstrating incredibly strong commercial execution and operational discipline and our continued success is a result of our proven growth strategy and our PPI business system. So, let me first recap the financials. Our revenue in the quarter was $10.34 billion. Our adjusted operating income was $2.28 billion. We expanded our adjusted operating margin in Q1 to 22%, and we delivered another quarter of strong adjusted EPS performance, achieving a 2% increase year-over-year to $5.11 per share.
Our performance in the first quarter is allowing us to raise our guidance and sets us up to deliver differentiated performance in 2024. Turning to our performance by end-market. In the first quarter, underlying market conditions played out as we'd expected. Our team's excellent execution enabled us to deliver differentiated revenue performance that was ahead of our expectations. Now, let me provide you some additional context. Starting with pharma and biotech, we declined in the low single-digits for the quarter, which was a sequential improvement in performance over Q4 2023. In the first quarter, the vaccine and therapy revenue runoff resulted in a 3 point headwind for this customer segment and we also delivered strong growth in our clinical research business.
A quick reminder on academic and government and industrial and applied. A year ago, we had very strong shipments of analytical instruments as we worked down the backlog that was caused by pandemic-related supply-chain disruptions. As a result, in academic and government, we declined in the low-single digits during the quarter. We delivered strong growth in our electron microscopy business as well as in our research and safety market channel. In industrial and applied, we declined in the low single-digits for the quarter. We delivered strong growth in our electron microscopy business in this segment. Finally, in diagnostics and healthcare in Q1, we declined in the high single-digits. The reported growth in this end-market was impacted by the runoff of COVID-19 testing-related revenue.
During the quarter, core revenue growth was highlighted by our transplant diagnostics and immunodiagnostics businesses as well as our healthcare market channel. So wrapping up on our end-markets, underlying market conditions played out as we expected to start the year. As you recall, our assumption for 2024 is that we'll see a modest pickup in economic activity as the year progresses. During the quarter, it was good to see a couple of positive developments in our end-markets that support this view, including continued improvements in the biotech funding environment and the stimulus program announced by China. I'll now turn to an update on our growth strategy. As a reminder, our strategy consists of three pillars, high-impact innovation, our trusted partner status with customers and our unparalleled commercial engine.
Starting with the first pillar, high-impact innovation. We had an excellent start to the year, launching a number of new products across our businesses during the first-quarter. Let me first highlight a number of products in analytical instruments that demonstrate our continued market leadership. In our chromatography and mass spectrometry business, we launched the Thermo Scientific Dionex Inuvion Ion Chromatography system, which enables higher resolution, faster time-to-results and streamline workflows to more efficiently identify contaminants for environmental testing. In our chemical analysis business, we launched the Thermo Scientific LInspector Edge In-line metrology solution to enhance battery safety, performance and production. And we also launched the Thermo Scientific TruScan G3 Handheld Raman Analyzer, a next-generation handheld instrument for the rapid identification of chemical compounds used in drug production.
And then in Life Science Solutions, we launched the Axiom PangenomiX Array, a high-throughput microarray for use in human genomic studies across global populations, including disease risk and detection research as well as population scale disease research programs. So, another strong quarter of product launches. One of the highlights of our high-impact innovation during the quarter was being named as one of Fast Company Magazine's Most Innovative Companies. It's great external recognition for the impact that our team is driving for our customers. Moving to the second pillar of our strategy. We are in the trusted partner status over many years and it gives me the unique opportunity to connect with our customers' senior executive teams. Since the beginning of the year, I've had many meetings with our customers as they're turning to us more than ever.
This is to both reinforce our partnership as well as to help them navigate the opportunities and challenges that they face. These conversations are happening across our company at all levels of the organization. Our customers see our team as part of theirs and our culture of always finding a better way every day serves to reinforce our trusted partner status with our customers. We do not take lightly the trust our customers have in our company and we'll continue to partner closely with them to enable their innovation and productivity. The first example of this is in our clinical next-generation sequencing business. In the quarter, we announced a collaboration with Bayer to develop a next-generation sequencing-based companion diagnostic that will help identify patients who may benefit from Bayer's growing portfolio of precision cancer therapies.
The second example is our analytical instruments business. We are partnering with the North Carolina Collaboratory to support PFAS research capacity in the state as they help to identify and implement solutions to address PFAS contamination. This is the first network of its kind and they'll use several of our state-of-the-art instruments, including the Orbitrap Astral in their research. And finally, in our clinical research business, I'll share two examples of how our trusted partner status comes to life as our customers look for solutions to their unmet needs. We expanded our portfolio of GMP lab services to include qPCR-based biosafety testing capabilities for the detection of bacteria and other contaminants and medicines. This offering enables significantly faster results versus traditional testing method, allowing for quicker delivery of medicines to patients.
And we launched the CorEvitas syndicated clinical registry in generalized pustular psoriasis to address an unmet need for real-world evidence related to outcomes for patients with this rare disease. As you recall, CorEvitas became part of our company last year. The business is performing very well and making a difference for our customers and patients. All of these are great examples of our trusted partner status. Now, let me turn to our PPI business system, which enables outstanding execution during the quarter. PPI engages and empowers all of our colleagues to find a better way every day. You can see it in our strong profitability and cash flow that we delivered in the first quarter. Looking forward, our team is actively utilizing Generative AI as part of the PPI business system to increase efficiency and productivity as well as to continually improve the customer experience across the company.
To share a couple of examples of how we're applying AI, it's enabling us to accelerate software development timelines in our analytical instruments and Life Science Solutions businesses. We're also leveraging the combination of large language models with a vast and differentiated amount of data at our disposal. One benefit we're seeing is our ability to enhance the capability of our technical and customer service teams to more effectively serve our customers. Generative AI is another great example of how we continually strengthen the impact of the PPI business system. Let me now give you an update on our corporate social responsibility initiatives. As a mission-driven company, we help to make the world a better place by enabling the important work of our customers.
We also have a positive impact by supporting our communities, being a good steward of our planet and focusing on [education] (ph) and advancing global health equity. To that end, during the first quarter, we announced a collaboration with the South African Medical Research Council. Together, we'll establish a center of excellence and training program focused on molecular biology and life sciences. The facility will provide specialized education and support for professional development to scientists and laboratory professionals in Africa. I'm also pleased to share that Thermo Fisher achieved a perfect score on the Human Rights Campaign Foundation's Corporate Equality Index for the eighth year in a row. Let me now give you an update on capital deployment.
We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. During the quarter, we reached the one-year anniversary of the Binding Site acquisition, now our protein diagnostics business. Its financial performance is tracking ahead of the deal model with really strong growth. I recently had the chance to visit the headquarters of our protein diagnostics business and saw the great progress they're making, given the exciting new products that can positively impact patient care for multiple myeloma. Turning to our planned acquisition of Olink. We're working through the regulatory process and the transaction is on track to close by mid-2024. We look forward to welcoming our new colleagues to the company later this year.
And in terms of return of capital during the quarter, we repurchased $3 billion of shares and increased our dividend by 11%. As I reflect on the quarter, I'm very proud of what our team accomplished and grateful for their contributions to our success. In a nice recognition of both our team and track record, Thermo Fisher has once again been included on Fortune Magazine's list of Most Admired Companies. Let me now turn to our guidance. Given the stronger operational performance to start the year, we are raising our 2024 guidance. We now expect revenue to be in the range of $42.3 billion to $43.3 billion, and we expect adjusted EPS to be in the range of $21.14 to $22.02 per share. Stephen will take you through the details in his remarks. So, to summarize our key takeaways from the first quarter, we delivered another quarter of strong financial results, driven by our proven growth strategy and PPI Business System.
We continue to enable our customer success and this continually reinforces our trusted partner status. Our strong results in Q1 position us to deliver differentiated performance in 2024 as we continue to create value for all of our stakeholders and build an even brighter future for our company. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen?
Stephen Williamson: Thanks, Marc, and good morning, everyone. I'll take you through an overview of our first quarter results for the total company, then provide color on our four business segments and I'll conclude by providing our updated 2024 guidance. Before I get into the details of our financial performance, let me provide you with a high-level view on how the first quarter played out versus our expectations at the time of our last earnings call. In Q1, market conditions were as we'd expected. We had another quarter of excellent execution and this enabled us to deliver Q1 financials meaningfully ahead of what we'd assumed in our prior guidance. Core organic revenue was $150 million or 1.5% ahead. And adjusted EPS was $0.40 ahead.
To give you some color on that $0.40, $0.19 was from very strong profitability pull-through on the revenue beat, $0.12 was from phasing of spending within the year, $0.07 was from lower FX headwinds and $0.02 was from lower net interest expense. So, we're continuing to manage the business really well and are off to a great start to the year. Let me now provide you with some additional details on our performance, beginning with earnings per share. In the quarter, we grew adjusted EPS by 2% to $5.11. GAAP EPS in the quarter was $3.46, up 4% from Q1 last year. On the top line in Q1, reported revenue was 3% lower year-over-year. The components of our Q1 reported revenue change included 4% lower organic revenue and a slight contribution from acquisitions.
Q1 core organic revenue decreased 3%. And in the quarter, pandemic-related revenue was approximately $200 million, including $175 million of vaccines and therapies related revenue. Turning to our organic revenue performance by geography. In Q1, North America declined mid-single-digits, Europe declined low single-digits and Asia-Pacific and China declined in the low single-digits. With respect to our operational performance, the team used the PPI Business System to execute really well in the quarter, delivering $2.3 billion of adjusted operating income, which was 22% of revenue, 20 basis points higher than Q1 last year. Total company adjusted gross margin in the quarter came in at 41.8%, 150 basis points higher than Q1 last year. In the quarter, we continued to deliver very strong productivity, reflecting our continued focus on cost management as well as the carryover benefit from the cost actions put in place last year.
This enabled us to more than offset the impact of lower volumes while appropriately funding investments to further advance our industry leadership. Moving to the details of the P&L, adjusted SG&A in the quarter was 16.5% of revenue. Total R&D expense was $330 million in Q1, reflecting our ongoing investment in high-impact innovation. R&D as a percent of manufacturing revenue was 7.2% in the quarter. Looking at our results below the line, our Q1 net interest expense was $84 million, which is $70 million lower than Q1 2023 due to increased cash balances. Our adjusted tax rate in the quarter was 10.5% and average diluted shares were $384 million in Q1, approximately $4 million lower year-over-year, driven by share repurchases net of option dilution.
Turning to free cash flow and the balance sheet, we had a strong start to the year with cash flow generation. Q1 cash flow from operations was $1.3 billion and free cash flow for Q1 was $910 million after investing $340 million of net capital expenditures. We continued to return capital to shareholders in Q1 with an 11% increase in our dividend and the $3 billion of share buybacks which were completed in January. We ended the quarter with $7.25 billion in cash and short-term investments and $35.6 billion of total debt. Our leverage ratio at the end of the quarter was 3.3 times gross debt-to-adjusted EBITDA and 2.6 times on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 11.8%, reflecting the strong returns on investment that we've been generating across the company.
Now, I'll provide some color on the performance of our four business segments, starting with Life Sciences Solutions. Q1 reported revenue in this segment declined 13% and organic revenue was 12% lower than the prior year quarter. This is driven by moderation in pandemic-related revenue in the segment as well as lower levels of activity in our bioproduction business versus the year-ago quarter. Q1 adjusted operating income for Life Science Solutions increased 1% and adjusted operating margin was 36.8%, up 480 basis points versus the prior year quarter. During Q1, we delivered exceptionally strong productivity, which was partially offset by unfavorable volume pull-through. The team continues to do an excellent job to appropriately manage the cost base and deal with the unwind of the pandemic.
In the Analytical Instruments segment, reported revenue declined 2% and organic growth was 1% lower than the prior year quarter. We continue to deliver very strong growth in the electron microscopy business. And as a reminder, we had very strong comparisons in this segment in the quarter due to the high level of instrument shipments in Q1 last year as we worked down the backlog. In this segment, Q1 adjusted operating income decreased 5% and adjusted operating margin was 23.7%, 70 basis points lower year-over-year. In the quarter, we delivered strong productivity, which was more than offset by unfavorable volume mix and strategic investments. Turning to our Specialty Diagnostics. In Q1, reported revenue and organic revenue were flat versus the prior year quarter.
In Q1, we continued to see strong underlying growth in the core, led by our transplant diagnostics and immunodiagnostics businesses as well as in our healthcare market channel. Q1 adjusted operating income for Specialty Diagnostics increased 5% and adjusted operating margin was 26.5%, which is 120 basis points higher than Q1 2023. During the quarter, we delivered favorable business mix and good productivity, which was partially offset by strategic investments. And finally, in Laboratory Products and Biopharma Services segment, both reported revenue and organic growth decreased 1% in Q1 versus the prior year quarter. This was driven by the runoff of vaccines and therapies revenue. During the quarter, we delivered strong growth in our clinical research business.
Q1 adjusted operating income declined 6% and adjusted operating margin was 13%, which is 80 basis points lower than Q1 2023. In the quarter, we delivered strong productivity, which was more than offset by unfavorable volume mix and strategic investments. Turning now to guidance. As Marc outlined, given the strong start to the year, we're raising our 2024 full-year guidance. We now expect revenue to be in the range of $42.3 billion to $43.3 billion and adjusted EPS to be in the range of $21.14 to $22.02. At the midpoint, that reflects a core revenue increase of just under $100 million. We continue to assume core organic revenue growth will be in the range of minus 1% to positive 1% for 2024. We continue to assume that the market declines low single-digits this year.
Our growth strategy and PPI Business System execution will enable us to continue to take share once again. In terms of adjusted EPS, the increase in the guidance at the midpoint is just over $0.10. The majority of this is from the core revenue raise, but also $0.02 from assumed lower net interest expense versus our prior guidance. Our 2024 updated guidance range assumes an adjusted operating income margin between 22.4% and 22.8%, slightly improved from the prior guide. We continue to use the PPI Business System to enable excellent execution, manage costs appropriately and fund the right long-term investments to enable us to further advance our industry leadership. So, a great start to the year and increasing the guidance outlook. We remain well positioned to continue to deliver differentiated performance.
I thought it would be helpful to remind you of some of the key underlying assumptions behind the guide that remain unchanged from the previous guidance. In 2024, we're assuming just under $100 million of testing revenue and $300 million to $400 million of vaccines and therapies-related revenue. In total, this represents a year-over-year headwind of $1.3 billion to $1.4 billion or 3% of revenue. We assume that FX will be roughly neutral year-over-year to both revenue and adjusted EPS. Given recent FX rate changes, we're assuming that the $0.07 beat that we saw in Q1 is offset in the remainder of the year, leading to no change for the year as a whole for FX versus our prior guide. We expect the adjusted income tax rate will be 10.5% in 2024, and we're assuming between $1.3 billion and $1.5 billion of net capital expenditures and free cash flow in the range of $6.5 billion to $7 billion.
In terms of capital deployment, we're assuming $3 billion of share buybacks, which were completed in January. We expect to return approximately $600 million of capital to shareholders this year through dividends. We continue to assume that we'll close the Olink acquisition by mid-year. Full year average diluted share count is assumed to be approximately 383 million shares. And finally, I wanted to touch on quarterly phasing. In Q2, we expect revenue dollars to step up from the first quarter and organic growth will likely be 2 points better than Q1. And we expect Q2 adjusted EPS to be similar to Q1. This reflects the revised view of the phasing of spending within the year that I mentioned earlier. I think this view of Q2 is pretty close to what's currently baked into consensus right now.
So to conclude, we delivered on our commitments in Q1, and we're in a great position to deliver differentiated performance for all our stakeholders in 2024. With that, I'll turn the call-back over to Raf.
Rafael Tejada: Operator, we're ready for the Q&A portion of the call.
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