賽默飛世爾科技 (TMO) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2017 Fourth Quarter Conference Call.

(Operator Instructions)

I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations.

Mr. Apicerno, you may begin your call.

Good morning, and thank you for joining us.

On the call with me today is Marc Casper, our President and Chief Executive Officer; and Stephen Williamson, Senior Vice President and Chief Financial Officer.

Please note, this call is being webcast live and will be archived on the Investors section of our website, thermofisher.com, under the heading Webcasts and Presentations until February 16, 2018.

A copy of the press release of our fourth quarter 2017 earnings and future expectations is available on 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 September 30, 2017, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and then 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 on the press release of our fourth 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 2017 Q4 call.

As you saw in our press release, we delivered an outstanding year.

We achieved strong growth in revenues and earnings, we executed well to take advantage of good conditions across our end markets and we became a stronger partner for our customers by successfully executing our growth strategy and completing strategic M&A.

The excellent progress we made in 2017 has significantly strengthened our leadership position and sets us up very well for the year ahead.

We have a lot to cover this morning, so I'll hit just some of the highlights from the quarter and the year.

Let me begin with our financial performance starting with the quarter.

We delivered very strong adjusted earnings per share growth in Q4 with a 16% increase to $2.79 per share.

Our revenue in the quarter increased 22% year-over-year to $6.05 billion.

Adjusted operating income increased 18% to $1.45 billion and our adjusted operating margin in Q4 was 24%.

Turning to our results for the full year.

We extended our long track record of consistently delivering strong earnings performance in 2017 with a 15% increase in adjusted earnings per share to $9.49 per share.

We increased revenues by 14% for the full year to $20.92 billion.

Adjusted operating income increased 15% to $4.86 billion with adjusted operating margin of 23.2%.

So it was a great year.

Our team did an excellent job of driving our growth initiatives forward and successfully completing and integrating new acquisitions.

As a result of their efforts, we're in a stronger position to serve our customers, provide opportunities for our colleagues and create value for our shareholders.

Turning to our performance by end market.

Conditions were strong, and we executed very well to take advantage of our growth opportunities.

I'll give you some specific commentary on the quarter and a little additional color on our results for the year.

Starting with pharma and biotech.

We delivered strong growth in Q4 across all of our businesses that serve these customers, including good contributions from our bioproduction and clinical trials businesses.

These resulted in 10% growth for the quarter in this end market.

We continue to capitalize on the underlying strength of pharma and biotech and the deep relationships we've built over time to deliver our unique value proposition for these customers.

Our leading position in this end market led to high single-digit growth for the year.

In academic and government, we grew in the high single digits during the quarter.

Geographically, we performed well across our key regions.

And from a product perspective, we saw a strong demand for our mass spectrometry and electron microscopy systems.

For the full year, we delivered mid-single-digit growth in this end market.

In diagnostics and health care, we were pleased to deliver a very good quarter with high single-digit growth.

Our performance in this end market was driven primarily by strength in our seasonal businesses as well as good demand for our biomarker tests.

For the full year, our growth here was in the low single digits.

Last, in industrial and applied, we achieved mid-single-digit growth for the quarter and the year.

In Q4, we saw strength across our various businesses serving this customer base.

In particular, it was great to see continued good growth in our chemical analysis business.

So to summarize our performance, good market conditions across the board and great execution of our teams led to strong growth for the year.

Now let me shift gears to talk about our accomplishments in the context of our growth strategy, which is based on our ability to continuously develop high-impact innovative new products, leverage our scale in emerging markets and deliver a unique value proposition to our customers.

I'm pleased with the excellent progress we made in 2017 in all 3 elements of our strategy.

Starting with innovation.

This is one of our core values as a company, and we invested about $900 million on R&D in 2017.

We had a number of milestones during the year across all of our key technology platforms and I'm going to cover some of the highlights.

First, in mass spectrometry, we continue to build on the long-term success of our Orbitrap platform by launching the Thermo Scientific Q Exactive HF-X system for life sciences research.

We also expanded our offering for applied markets with new triple-stage quadruple instruments.

Turning to electron microscopy.

It's been a little over the -- over a year since we acquired FEI, and we launched a number of new products since then.

Among the highlights for materials science applications, we expanded our Thermo Scientific Helios G4 DualBeam platform.

And for structural biology, new systems such as our Thermo Scientific Krios G3i are helping us to increase our presence in that fast-growing market.

You may recall that the winners of the 2017 Nobel Prize in Chemistry achieved breakthrough developments in structural biology using our Cryo-EM technologies.

This is a terrific business that we continue to make even stronger through our leading presence in pharma and biotech.

In Specialty Diagnostics, we launched a number of new assays during the year.

This included receiving FDA clearance to expand the use of our BRAHMS PCT test as a biomarker for bacterial infection, helping doctors to make better decisions regarding the use of antibiotics.

We had a number of highlights in our genetic analysis business as well, and the most significant was our new Applied Biosystems SeqStudio instrument for Sanger Sequencing.

This cloud-enabled system was designed for simplicity and affordability to serve customers working in low to mid-throughput laboratories.

Especially exciting were 2 new cancer treatment breakthroughs that in 2017 that were enabled through our innovations.

One was the first FDA-approved companion diagnostic for non-small cell lung cancer using our NGS-based Oncomine Dx Target Test.

Another was the first FDA-approved CAR-T immunotherapy for treating a specific form of childhood leukemia, which used our Dynabead technology.

These are both examples of our significant contributions towards advancing precision medicine, which will continue to be a priority for us going forward.

Turning to the second element of our growth strategy.

We continue to leverage our scale to drive growth in emerging markets.

As of year-end, these high-growth regions represent 21% of our total revenue.

China, India and South Korea all delivered strong growth.

China grew in the high teens once again in 2017 and remains a key growth market for us, constituting about 10% of our total revenue today.

We continue to fuel the long-term growth in China through targeted investments.

And during the year, we opened 2 new customer demo centers that showcased our leadership in electron microscopy and precision medicine.

These new capabilities are helping us to capitalize on the priorities outlined in China's Five-Year Plan.

We've also invested significantly in our digital capabilities and are pleased that our e-commerce revenues in China grew 50% in 2017.

In addition to China, we've continued to increase our scale and depth of capabilities across emerging markets from India to the Middle East to Southeast Asia.

Turning to our customer value proposition, which is the third element of our growth strategy.

We invested significantly to enhance our offering through a number of strategic acquisitions during the year.

In Q4, we completed 2 small bolt-on acquisitions that expand our air quality monitoring and scanning electron microscopy platforms.

As you know, the most significant transaction from 2017 was our acquisition of Patheon, a leading provider of contract development and manufacturing services for pharma and biotech customers.

These capabilities are a perfect complement to our leading clinical trials logistics services and allows -- allowed us to create a $3 billion pharma services business.

We've owned Patheon for about 5 months.

The integration is proceeding well, and we're on track to achieve our cost and revenue synergy targets for year 1. I recently met with our sales team in this business to help them kick off the year.

They're super excited about the opportunities they have as part of Thermo Fisher.

And I believe their enthusiasm is a reflection of what they're hearing directly from our pharma and biotech customers.

I'd also like to update you on the Patheon site in Puerto Rico that was impacted by the damage to the island's power infrastructure after the hurricane.

Our teams there really stepped up and I couldn't be more proud of the way they responded, making sure all of their colleagues were safe and getting the facility back online to help our customers deliver critical medicines to patients.

The site began shipping in late Q4 and was fully operational as we enter 2018.

Turning to capital deployment.

2017 was another very active year for us.

All told, we deployed $7.8 billion on M&A to expand our customer offering and strengthen the strategic position of Thermo Fisher.

Looking forward, we continue to have a very active M&A pipeline.

We're focused on paying down debt, and we're committed to driving higher returns for the investments we've made.

We also returned $1 billion of capital to our shareholders in 2017 through stock buybacks and dividends.

As we said in the past, we intend to grow our dividend over time.

And this morning, we announced that we increased our dividend by 13%.

Returning capital remains an important part of our overall capital deployment strategy.

Before I wrap up, let me make a quick comment on the other announcement we made this morning.

As you know, the new tax law is a real positive for Thermo Fisher and will further lower our tax rate.

We've decided to reinvest some of the benefit in our colleagues, customers and communities.

In 2017, we invested $34 million of the tax benefit by paying a onetime bonus to all of our nonexecutive colleagues around the world as a way to thank them for their commitment to our success.

In 2018, we'll invest [$16] million to accelerate breakthrough R&D programs and also to increase the impact of our STEM education and sustainability activities.

We're pleased to take advantage of this unique opportunity to complement our ongoing investments in Thermo Fisher's future growth.

So to summarize, our strong Q4 really capped off a great year.

Our teams executed very well to deliver strong revenue and earnings growth.

We strengthened our leadership by advancing our growth strategy and continuing to gain share.

We also continue to successfully execute our M&A strategy to create significant value for our customers and our shareholders.

Looking ahead, as you'd expect, we're planning to extend our long track record of consistent strong financial performance in 2018.

Stephen will outline the assumptions that factor into our revenue and earnings guidance, but let me quickly hit the highlights.

In terms of our revenue, we expect to deliver from $23.42 billion to $23.72 billion in 2018, which would result in 12% to 13% growth over 2017.

We're initiating adjusted EPS guidance for 2018 in the range of $10.68 to $10.88 per share.

This would lead to 13% to 15% growth over the strong adjusted EPS performance we delivered this past year.

Our excellent results in 2017 really sets us up for another successful year ahead.

With that, I'll turn the call over to our CFO, Stephen Williamson.

Stephen?

Thanks, Marc, and good morning, everyone.

I'll take you through our fourth quarter and full year results for the total company.

Then I'll provide some color on our 4 segments and conclude with a detailed review of our 2018 guidance.

Before I get into the details of our financial performance, I thought it would be helpful to provide a high-level view of how the fourth quarter played out versus our expectations at the time of our last earnings call.

As you saw in our press release, we had a strong finish to the year and delivered 8% organic growth in Q4.

This was driven by good market conditions and great operational execution.

From an earnings standpoint, we delivered adjusted earnings per share that was $0.15 higher than the midpoint of our previous guidance.

This was driven by pull-through on our organic growth, and more favorable FX environments and good performance from the Patheon acquisition, partially offset by the $34 million onetime bonus for our nonexecutive colleagues across the company that Marc highlighted.

So for the year, as a whole, we delivered 5% organic growth, 15% growth in adjusted earnings per share and $3.5 billion of free cash flow.

So overall, excellent financial results in 2017.

So now let me give you more color on our performance.

Starting with adjusted earnings per share, as you saw in our press release, we grew adjusted EPS in Q4 by 16% to $2.79.

For the full year, adjusted EPS was $9.49, up 15% versus 2016.

As you know, U.S. tax reform legislation was enacted during the quarter, and as we expected, it will have a positive impact on the company.

I'll cover the 2018 impact in detail in the guidance section of my comments later on.

The impact of the legislation on Q4 2017 was a onetime GAAP-only charge of $204 million.

This represents the transition tax on deemed repatriated earnings of foreign subsidiaries, partially offset by the remeasurement impact of U.S. deferred tax balances at the new lower corporate tax rates.

As a result, GAAP EPS in the quarter was $1.30, down 18% from Q4 last year and for the full year 2017 was $5.59, up 10% versus 2016.

On the top line, in Q4, our reported revenue increased 22% year-over-year.

The components of our Q4 revenue included 8% organic growth and 11% impact of acquisitions and a 3% tailwind from foreign exchange.

For the full year 2017, reported revenue increased 14% year-over-year.

The 2017 reported revenue includes 5% organic growth, a 9% impact from acquisitions and an immaterial impact from foreign exchange.

Looking at growth by geography in Q4, North America grew in the high single digits, Europe grew mid-single digits, Asia Pacific grew in the low teens with another strong contribution from China, which grew in the high teens and the rest of the world grew in the low teens.

For the full year, all geographies grew in the mid-single digits, except for Asia Pacific, which grew 10%.

Turning to our operational performance.

Q4 adjusted operating income increased 18% and adjusted operating margin was 24%, down 80 basis points from Q4 of last year.

As a reminder, Patheon is a scale acquisition with gross margins and operating income margins lower than our company average and was just over 80 basis points dilutive to total adjusted operating margins in the quarter.

The addition of Patheon will continue to be dilutive to our adjusted operating margins over the first 12 months of ownership.

The onetime bonus payment to our nonexecutive colleagues was a cost in Q4 2017 and was dilutive to adjusted operating margins by 70 basis points in the quarter.

So our underlying operational performance was strong in the quarter at 70 basis points of expansion driven by very good volume pull-through and productivity, partially offset by strategic investments and unfavorable business mix.

For the full year, adjusted operating income increased 15% and adjusted operating margin was 23.2%, up 10 basis points from 2016, in line with our expectations.

Moving on to the details of the P&L.

Total company adjusted gross margin came in at 47% in the quarter, down 240 basis points from the prior year.

For the full year, adjusted gross margin was 48.2%, down 60 basis points from 2016.

For both the quarter and the full year, gross margin contraction was driven by the dilutive impact of acquisitions and unfavorable business mix.

This is partially offset by strong productivity.

Adjusted SG&A in the quarter was 19.2% of revenue, which is down 110 basis points versus Q4 2016.

And R&D expense came in at 3.9% of revenue, down 40 basis points versus Q4 last year.

For the full year, adjusted SG&A was 20.7%, down 90 basis points compared to full year 2016.

And R&D expense was 4.2% of sales, up 10 basis points compared to the prior year.

And R&D as a percent of our manufacturing revenue for the year was 6.6%.

Looking at our results below the line.

The net interest expense in Q4 was $146 million, which is $29 million higher than Q4 last year, mainly as a result of the incremental debt related to our capital deployment activities this year.

Net interest expense for the full year was $511 million, an increase of $90 million from 2016.

Adjusted other income and expense was a net expense in the quarter of $3 million, which is $14 million unfavorable versus Q4 2016, driven primarily by changes in nonoperating FX.

Our adjusted tax rate was 13.3% in the quarter, right in line with our prior guidance.

This is 130 basis points lower than Q4 2016 due to the timing of discrete tax planning items as well as the impact of Patheon.

Our full year adjusted tax rate was 13%, which is 80 basis points lower than full year 2016.

Q4 average diluted shares were 405 million, slightly higher than our previous guidance of 404.5 million due to slightly higher option dilution.

For the full year, average diluted shares were 398 million, up 0.5 million from 2016.

For the full year, FX was a year-over-year tailwind of $70 million on revenue, an immaterial impact on adjusted operating income.

Other income had an $11 million FX headwind for the full year resulting in a $0.02 headwind on adjusted EPS from FX in 2017.

Turning to cash flow and the balance sheet.

For the full year, cash flow from continuing operations was $4 billion and free cash flow was $3.5 billion after deducting net capital expenditures of approximately $500 million.

This is $665 million higher than 2016 and ahead of our previous guidance, primarily due to strong operational performance and effective working capital management.

During 2017, we continue returning capital to shareholders with $750 million of share buybacks and $240 million in dividends.

As Marc mentioned, we successfully deployed capital to strengthen our customer value proposition through strategic acquisitions, including Patheon as well as a number of smaller bolt-on acquisitions.

All told, our total capital deployment in 2017 was approximately $8.8 billion.

We ended the quarter with approximately $1.3 billion in cash, just slightly higher than normal as we were preparing to pay down a $450 million senior note in the first week in January.

We finished the year with total debt of $21 billion, down $1 billion from the end of Q3, driven by debt paydown during the quarter.

Our leverage ratio at the end of the year was 4x total debt to adjusted EBITDA on a reported basis, which is down from 4.4x at the end of Q3 and in line with our expectations.

So wrapping up my comments on our total company performance, we continue to drive strong ROIC performance in 2017.

Adjusted ROIC at the end of 2017 was 10%.

This is up 10 basis points compared to the prior year, demonstrating the strength of our underlying businesses, offsetting the impact of the significant capital added from our acquisition activity in 2017.

So with that, I'll now provide you some color on the performance of our 4 business segments.

Starting with Life Sciences Solutions Segment.

Reported revenue increased 11% and adjusted -- and organic revenue growth was 8% in Q4.

We saw strong growth across the segment, particularly in our bioproduction and biosciences businesses.

For the full year, reported revenue increased 8% and organic revenue growth was 6%.

Q4 adjusted operating income in Life Sciences Solutions increased 20% and adjusted operating margin was 35.6%, which is 270 basis points higher than Q4 2016.

Adjusted operating margin expansion was driven by strong productivity as well as volume pull-through and foreign exchange.

This is partially offset by strategic investments.

For the full year 2017, adjusted operating margin was 33.1%, an increase of 310 basis points over 2016.

In the Analytical Instruments Segment, reported revenue increased 16% and organic revenue growth was 11% in Q4.

In the quarter, we benefited from strong growth contributions across all of our businesses within this segment.

For the full year, reported revenue in the segment increased 31% and organic growth was 9%.

Q4 adjusted operating income in Analytical Instruments increased 16% and adjusted operating margin was flat year-over-year at 24.5%.

In the quarter, we saw very strong productivity and volume pull-through.

This is offset by the impact of strategic investments, foreign exchange and unfavorable business mix.

For the full year 2017, adjusted operating income increased 38% and adjusted operating margin was 21.3%, 100 basis points higher than 2016.

Turning to the Specialty Diagnostics Segment.

In Q4, reported revenue increased 10% and organic revenue growth was 7%.

In the quarter, we had strong growth in seasonal products and good performance in our clinical and transplant diagnostics businesses.

For the full year, we grew both reported and organic revenue 4%.

Adjusted operating income grew 6% in Q4 compared to 2016, and adjusted operating margin was 26.5%, down 70 basis points from the prior year.

Adjusted operating margin within the quarter benefited from positive contributions of our PPI Business System and volume pull-through.

However, this is more than offset by unfavorable business mix and strategic investments.

For the full year 2017, adjusted operating income increased 2%.

And adjusted operating margin was 26.7%, down 50 basis points from 2016.

And finally, I'll cover the Laboratory Products and Services Segment, which, as a reminder, includes the Patheon acquisition.

In this segment, Q4 reported revenue increased 43% and organic revenue growth was 9%.

Our channel business once again delivered strong organic growth for the quarter.

And it was good to see that all businesses in this segment growing well, including the clinical trials logistics business.

For the full year, reported revenue increased 16% and organic growth was 5%.

In Q4, adjusted operating income in the segment increased 28%.

And adjusted operating margin was 12.5%, down 150 basis points from the prior year.

Adjusted operating margin benefited from strong volume pull-through and the accretive impact on the segment from acquisitions.

This is more than offset by unfavorable business mix and strategic investments.

For the full year 2017, adjusted operating income increased 4%.

And adjusted operating margin was 12.9%, down 150 basis points compared to the prior year.

With that, I'd like to review the details of our 2018 guidance.

As Marc mentioned, we're initiating a 2018 adjusted EPS guidance range of $10.68 to $10.88, which is a 13% to 15% growth over 2017.

In terms of revenue, our guidance range is $23.42 billion to $23.72 billion, which is growth of 12% to 13% over 2017.

And for 2018, we're expecting to deliver between 4% and 5% organic revenue growth.

Let me now cover the key assumptions that we factored into our guidance.

We're assuming that foreign exchange is a $300 million revenue tailwind for 2018, which should represent a positive impact of just over 1%.

This reflects the average of rates over the past 2 months.

We've seen that this pull through at approximately 20%, given our current mix of currencies, the addition of Patheon and potential transactional FX.

This translates to an EPS tailwind from FX of $0.13 or just over 1%.

We expect acquisitions completed in 2017 will contribute 7% to our reported revenue growth in 2018.

From adjusted operating margin standpoint, as I mentioned earlier, Patheon's margin profile is lower than the average of the company, so it will be dilutive to the overall operating margins until the anniversary date in late August.

The impact of this in 2018 is 50 basis points of dilution.

Despite this headwind, we're still expecting to deliver 20 to 30 basis points of expansion year-over-year in 2018, reflecting strong operational performance.

Moving below the line.

We expect net interest expense to be in the range of $550 million to $555 million, about $40 million higher than 2017, primarily as a result of the debt we took on for acquisitions in 2017 and assumed rate increases in 2018.

For guidance purposes, I've assumed that the fed increases rates 25 basis points per quarter in 2018.

We're assuming other income and expense will be an immaterial net expense in 2018.

As I mentioned earlier, we -- as expected, the impact of U.S. tax reform is a positive for the company.

As a result, in 2018, we're assuming an adjusted income tax rate of 12%.

This compares to 13% for 2017.

The detailed regulations supporting the new tax law are still being finalized by the U.S. Treasury.

But based on where we anticipate the final wording to land and factoring in our tax planning activities, we expect no cash impacts from the transition tax charge that we incurred in Q4 2017.

And in addition, for 2018, we expect cash taxes to be slightly lower than the adjusted P&L tax cost.

We're assuming net capital expenditures to be approximately $700 million to $730 million for the year.

The increase over 2017 is due to the timing of projects and the full year impact of Patheon.

We anticipate receiving approximately $30 million of customer funding towards this CapEx.

Free cash flow is expected to be approximately $3.8 billion in 2018.

The increase over 2017 is mainly due to higher earnings.

And in terms of capital deployment, we're assuming that we'll return approximately $275 million of capital to shareholders this year through dividends, reflecting the increase in dividend we announced earlier today.

Our guidance also assumes a total of $500 million of share buybacks in 2018, which, we assume, will be completed during the second half of the year.

We estimate that the full year average diluted shares will be in the range of 405 million to 407 million, up approximately 8 million from the average in 2017, primarily due to the equity offering last year.

Our guidance assumes that we'll continue to use excess cash to reduce debt and, as always, does not assume any future acquisitions or divestitures.

And finally, I wanted to touch on quarterly phasing for the year.

In terms of organic revenue growth, we're expecting Q2 and Q3 to be slightly higher than the average for the year.

This phasing is driven by the timing of holidays in the first half of the year and strong comps in Q4.

In terms of adjusted EPS, we're expecting the same phasing as 2017 when you look at each quarter as a percentage of the total year.

And as always, in interpreting our revenue and adjusted EPS guidance ranges, you should focus on the midpoint as the most likely view on how we see the year playing out.

So in summary, we delivered excellent financial results in 2017 and look forward to doing the same in 2018.

With that, I'll turn the call back over to Ken.

Thanks, Stephen.

Operator, we're ready to open it up for questions.

(Operator Instructions) Our first question comes from Tycho Peterson from JPMorgan.

Marc, wanted to start off with biopharma.

Obviously, great growth there at 10%.

Just wondering if you can provide a little bit more color, any budget flush dynamic.

Can you comment on January trend?

And then as we think about bioprocess, any commentary there?

We've seen some good results out from your peers, so we've gotten through kind of the inventory destock noise that we heard earlier last year?

Tycho, thanks for the question.

Yes, we had a very good year in pharmaceutical and biotech with high single-digit growth for the year and the fourth quarter is -- was 10%.

So when I think about the fourth quarter, we really had strong quarter across the board.

Biosciences, Analytical Instruments, our research channel, all did very well.

Bioproduction was very strong.

Clinical trials business, logistics business also grew.

So really very positive.

The way I see it the customers really understand the value we bring and we continue to gain share there.

From a bioproduction standpoint, it's a good year for bioproduction.

It grew above the company average.

And as you know, we're very bullish about the mid- and long-term prospects for that business.

It's got great tailwinds from a macro perspective.

And we like the way we finished the year with a quarter of very strong growth.

And then for the follow-up, the Lab Products and Services had a big step-up sequentially here.

Can you maybe just comment on and what drove that?

And I think you called out academic being up high single digits.

Just curious as to what the driver there was.

The Lab Products and Services, really a very strong performance across all of the businesses.

Our channel business had a very good end to the year.

And sequentially, really one of the big drivers was our clinical trials logistics businesses returned to nice growth, right?

We -- as we had mentioned 1 year plus ago, we were going to have a difficult first 3 quarters just based on a large study cancellation late in 2016.

So once we anniversary that, you saw that business, which has great tailwinds, return to nice growth.

So that's probably the biggest sequential change in that business.

Okay.

And then can you just comment on the academic high-single-digit growth?

Yes.

So academic and government was very strong in the quarter.

We saw good growth across all of the key geographies.

And we saw really good growth in our Analytical Instruments, particularly mass spectrometry and electron microscopy in that segment.

Thank you, Tycho.

Your next question comes from Ross Muken from Evercore ISI.

And I appreciate the whole organization welcoming back with such a good quarter.

So Marc, obviously, the macro backdrop is pretty good.

And the end markets you serve are quite healthy, but it still feels like last 12, 24 months, incrementally, your business is sort of doing better than peers.

And it feels like, whether it's mix or share or new technologies, you guys have been kind of gaining momentum on the top line.

And so how when you think about sort of the more recent performance are you kind of teasing out how much of this is sort of the macro and some of the markets or some of the acquisitions versus some of the hard work the organization is doing to really claw out sort of better results on the organic line?

So Ross, thanks for the question.

And obviously, the end markets are good, right?

And the biggest change really in '17 was that industrial and applied turned back to mid-single-digit growth.

So that helps the industry.

And obviously, we benefited from it.

But we are performing much stronger over the last couple of years, as you highlighted based on the success of the growth strategy.

And when I think about last year, we delivered 5% organic growth and we would have delivered 5% organic growth even if you took out the contribution from FEI in the organic growth.

So we had a really strong year across the business and it was really good execution.

Our channel business had another really good year.

When you look at our Analytical Instruments business, strength across the portfolio.

And it was good year on spend, right?

So all of those factors contributed to a very strong 2017.

And it's another step-up in performance in terms of our strategy.

That's helpful.

And maybe just on China.

I mean, a lot of the tension being focused there.

You guys had another fantastic year.

In terms of sort of differentiating between both the industrial and biopharma side there, how are you seeing sort of trends?

And how are you thinking about comps in that region as kind of we enter next year?

And what's kind of the assumption baked into the '18 guide?

Yes.

We continue to expect that China is going to be our fastest-growing major geography within the company.

Our book-to-bill was above 1 in China.

And momentum is strong.

There's a tremendous amount of interest in the diagnostics area, expanding health care and the applied markets, food safety, environmental protection.

We're obviously benefiting a little bit from the industrial recovery as well, but it's more really the alignment with the Five-Year Plan that's driving the strong growth.

And while we obviously will have a challenging comparison in 2018 in China, the team is off to a good start.

Your next question comes from Derik De Bruin from Bank of America Merrill Lynch.

So just one cleanup question and one other one.

So on Q4, can you sort of break out, and you can do this is an aggregate, it doesn't have to be individual, but sort of like what you thought the contributions were from the flu season being stronger, hurricane catch-up, any sort of budget flushes?

I'm basically just trying to figure it out, so I can model Q4 '18 better.

Yes.

So I guess the way I'd characterize the quarter, no real hurricane catch-up.

We didn't see a significant impact in Q3.

And it might be a small amount, but really nothing that's really in the noise.

The seasonal products were very strong, so that's probably about 0.5 percentage point on the quarter.

And then it's really about year-over-year spending at the end of the year by our customers.

It was slightly weaker last year.

We saw a good strength this year.

So that's maybe in total a couple of points.

Okay.

Great.

That's really helpful.

And just -- I can't believe I'm going to actually ask you a DNA sequencing question, but I am going to.

You've made a lot of news.

You've made -- there's been a lot of news on your sequencing business in '17.

And I'm just wondering it's been a while since we sort of had an update on the overall size of that business and sort of like how the business has been growing.

Can you just provide us that since there's been that?

And then I want to ask what sort of drove the decision to sort of do the relationship with Illumina for the AmpliSeq product?

Yes, Derik.

In terms of next-gen sequencing, represents just under 2% of our revenue kind of order of magnitude.

It's a business that is growing reasonably well.

We've had a lot of good product launches during the course of 2017.

And at the very beginning of this year, we announced a new line of sequencers, 2 new Oncomine panels, 1 focused on immuno-oncology, which is obviously very important and one focused on liquid biopsy.

The early feedback from customers on all of the new products is very positive.

We also launched new chemistry for our sequencers.

In terms of Illumina, obviously, they have a very large installed base of instruments.

And our amplification chemistry is very well regarded, and we made the decision to supply them with those chemistries, so that they can market it on their installed base.

And we felt like that's a good growth opportunity.

And given the fact that we continue to launch new products, we were comfortable with that combination of moves.

Your next question comes from Doug Schenkel from Cowen and Company.

So you closed out 2017 with your net debt to EBITDA ratio below 4x.

As currently built, we see that getting close to 3x by the end of this year.

Is it fair to say that you're open for business for the right acquisition based on where your balance sheet is today?

And if so, I guess, a multiparter here, how should we think about your capacity?

How do we think about the application of your typical ROI criteria in the current high-valuation environment?

And how does certainty on the tax law impact the M&A environment?

So Doug, thanks for the questions.

Yes, we're open for business.

And it's been here a long time, we've never been closed.

But we have a very active pipeline.

And part of the reason the way we financed the Patheon acquisition was we issued some level -- a modest level of equity as part of that, so that we will never take ourselves out of the market at this point in time because the Patheon integration really is only one narrow part of the company.

So we felt like we had the management bandwidth to pursue good opportunities, and so we're in that mode.

We really have a substantial amount of capacity, so I don't feel constrained financially in terms of deal size from that perspective.

In terms of ROI, on transactions, as you've heard me say in the past, when valuations are higher, we always have used the criteria that we don't do bad transactions, meaning, that we really focus on the downside scenario of a transaction and ensure that we're going to drive good returns, even if something doesn't work out, right?

So it does inform the kinds of transactions that we do and -- in this type of market.

And if you look at it, we avoided speculative transactions.

We bought really great businesses.

FEI is a good example where it's a business that we spent years looking at and thinking about and understanding the business and bought it out of part of the cycle where it was growing around 3%.

We were able to grow it in the first year of ownership in the strong double digits, right?

And that's kind of the nose we have for M&A.

So we'll buy things that we feel we understand the downside scenario with and are going to make good returns for our shareholders on our ROI under all the different scenarios that are possible.

Okay.

And I just want to go back to 2 topics that came up earlier in the Q&A session, but I don't think were addressed completely clearly.

First, just to be clear, based on what you're seeing, thus far, in 2018, are you confident that there was no meaningful pull-forward of revenue into Q4 at the expense of Q1?

And on the question of bioproduction destocking, the dynamic that was out there across the industry earlier in 2017, are you confident that, that's largely abated?

Yes.

So I've never heard someone say that [and answer the] question, so it's a first.

So Doug, I guess, the year's off to a good start, consistent with our guidance.

When I look at how bookings were for last year, they were above 1. So we entered the year with a good backlog.

And there's nothing unusual about how the year started that would indicate some sort of customer pull-forward of something that was meaningful, right?

So I think that's the view.

In terms of bioproduction, it's a business we've been in for a very, very long time.

We really don't spend a lot of intellectual energy around quarter-to-quarter movements there because customers pull forward and push out orders all the time.

What I would say is that the pipeline is strong.

The business had a very good year and the customer activity is really positive.

So we feel good about the outlook for that business for '18 and feel like the end was a good sign.

But we don't get too hung up on is the quarter strong or weak, as business is lumpy.

And that's why I said the midterm and long term look really excellent for it.

Your next question comes from Jack Meehan from Barclays.

I want to start with Patheon.

Could you give us an update on the outsourcing discussions there with customers since the acquisition, just traction on revenue synergies?

And then has the dialogue changed at all since the beginning of the year with tax reform?

Yes.

So Jack, thank you for the question.

In terms of our pharma services business or Patheon, the customer feedback has been incredibly positive.

And we're having meaningful dialogue with a number of customers.

This is a business that doesn't turn quickly in terms of -- there's a long process of getting products, tech transfer and things of that sort.

But nonetheless, the early feedback is very good and the revenue synergy work.

We already have achieved some revenue synergies between our clinical trials logistics business and our new pharma services capabilities.

So those are happening and they will ramp up over time.

We have really interesting work going on with our bioproduction business and the biologics portion of that business as well.

So we're very bullish about the revenue growth outlook in the midterm for that business.

On the tax side of the equation, I think, really, the pharmaceutical customers have to think through how does the tax law change their manufacturing strategy because a lot of their older strategies were about putting plans in low tax jurisdictions, of which some of the advantages to those are no longer as compelling.

And therefore, it's possible that opens up new opportunities over time.

So that's something that we will continue to explore with our customers.

Great.

That's helpful.

And just -- if we might take a step back.

You have a long-term organic growth target of 4% to 6%.

You ended 2017 with a lot of momentum.

And portfolio is moving in the faster-growing areas with FEI and Patheon.

Just how would you frame the guidance of 4% to 5% in that context?

And what are some of the puts and takes as you sit here today?

Yes.

So as we thought about the outlook for the year, we felt good about the 4% to 5% initial guidance for organic growth.

And the way we think about it is as the year unfolds, obviously, we adjust the guidance.

We felt like we like the way the end markets are.

We like the way the year ended.

We obviously feel good about our orders as well.

The things that we will pay attention to later in the years, we're going to have a challenging fourth quarter comparison because of the strong year-end.

So we're assuming in the guidance a normal year-end spend as opposed to the very strong year-end spend.

So that's one we're not going to know obviously until the fourth quarter, but that would be one of the factors.

And then obviously, if GDP growth continues to accelerate, which it appears to be accelerating around the world, that obviously could be a tailwind as well.

And you could flip it the other way on the -- what would be things that will be headwinds would be if it goes in the opposite direction.

Your next question comes from Steve Beuchaw from Morgan Stanley.

First question is with regard to the Analytical Instruments business.

You saw a nice pickup there recently.

It would be helpful if you could sort of talk through what you saw second half of the year on a retrospective.

How much of this is improvement in the end markets?

And how much of it is new product flow?

And then for 2018, any color you can give us on how you're thinking about modeling the business would be really helpful, not only with regard to the sustainability of some of those drivers, but because we're including FEI in the organic component, which can be a pretty significant benefit to the organic profile of that business.

So in terms of looking back and then I'll talk looking forward, looking back in the second half, we obviously had good new products across the portfolio, right?

So that's a contributor.

Mass spectrometry, big beneficiary, electron microscopy as well.

The other thing in the second half is our chemical analysis business, particularly our handheld portable instrument, which kind of represents short-cycle industrial recovery was very good.

So it was very broad-based in terms of the growth in the instruments business throughout the year and in the second half.

As I think about 2018 in FEI and how to think about it, FEI had very strong growth.

Our electron microscopy business had very strong growth in 2017.

That makes for a challenging comparison this year.

We anticipate that the business will be a contributor to our growth and grow above the company average during the course of this year.

So it's how we would think about it based on a spectacular 2017.

We see momentum continuing into 2018, but obviously at a -- not as big of a contributor because of the comparison.

Real helpful.

And then just a couple of housekeeping items.

One is I wonder if you could speak at all to what fourth quarter underlying growth was and -- at Patheon, how the impact of some of the Puerto Rico challenges impacted that.

And do we capture some of that back in the first quarter potentially?

And then, Stephen, could you give us any sense for what the working capital outlook is year-on-year embedded in the guidance assumption for free cash flow?

Yes.

In terms of Puerto Rico, we don't believe that we'll see a pickup in Q1.

It's at normal rates, but the customers effectively had -- the big products [they had to] source, so likely bought the product from other -- another source.

But at that point, we may see a little bit of uptick during the course of the year.

But I wouldn't think that's a particularly big factor.

Underlying growth for the Patheon business for '17, if you -- obviously, not in our numbers, but mid-single-digit year-over-year growth for that business.

So a solid growth year.

And obviously, they obviously had the Manatí headwind, so I feel good about the performance there.

And Stephen, do you want to comment?

Yes.

In terms of working capital assumptions for 2018 is essentially kind of a normal year of need for working capital to grow the business organically at the 4% to 5% level.

So not expecting a significant difference in the norm there.

Your next question comes from Patrick Donnelly from Goldman Sachs.

Maybe just following up on Jack's question about the long-term organic growth rate of 4% to 6%.

I mean, in the past, you've always talked about one end market has been a headwind preventing you from getting towards that upper end.

But in the current setup, I know, Marc, you noted a few weeks ago, the end markets are as healthy as they've been.

I mean, do you view 2018 as the best shot you can recall at getting towards that 6% number, assuming the current macro backdrop holds up and you have a full year of FEI contribution?

So Patrick, thanks for the question.

Every year, we're always working to maximize the performance of the company and strengthen the strategic position.

And as we go into the year, we feel good about the outlook.

And historically, we've generally been around 4% as our opening view on organic growth.

And this year, obviously, we did 4% to 5%, so it reflects the momentum.

And we'll drive to the best possible performance.

Patheon is not a big contributor to our organic growth this year.

It doesn't flow in until the final 4 months of the year.

So while it will contribute, it's not going to contribute meaningfully to organic growth this year.

So we're going to deliver 4 really strong quarters and we'll see ultimately where that winds up in terms of organic growth.

Okay.

And then obviously, your LPS results speak for themselves to a degree, but would appreciate if you could just maybe provide some color on the Amazon threat to your business.

It seems like that's gotten a little more airtime this past quarter, in spite of their presence not being particularly new.

So have you seen any change in the market from them?

Are you expecting anything different?

Would appreciate your thoughts.

Yes.

Patrick, thanks for your question.

In Amazon, we take it extraordinarily seriously, right?

And we've taken it extraordinarily seriously over the last 5 years, as they thought about and tried different things in this market, and they have largely been unsuccessful.

And there are reasons for that.

And I think a lot of the reasons for that is just that we're relentlessly focused on doing a great job for our customers.

And many of you have heard me say, "We are the Amazon of scientific supplies, right?" We do a great job of aggregating a complex set of categories, providing a very cost-effective way for our customers to drive productivity, world-class logistics, on-site personnel handling very technically difficult products, hazardous goods, refrigeration.

We have great supplier relationships.

And at the end of the day, we built an amazing web capability to make it very easy for our customers to transact with us.

So we'll take it very seriously.

We haven't seen momentum from Amazon.

And we've had great performance in our channel business the last couple of years and ended on a strong note.

So we'll continue to pay attention to it, but feel good about our competitive position.

Your next question comes from Dan Arias from Citigroup.

Marc, just following up on academic.

What's your assumption for NIH funding this year?

Obviously, some good legislation out there, but it kind of also feels like we could live in continuing resolution land for a while.

So just wondering whether your base case, so to speak, has U.S. funding going up in fiscal '18.

Yes.

So Dan, great question.

In terms of the outlook for academic and government for the year, we're assuming in our guidance low- to mid-single-digit growth.

We're assuming that we will get a budget at some point in the year and that in that would be a modest level of growth.

And that's why you have the range for the segment of between low and mid-single digits, just depends on when a budget gets passed.

I did have a chance to meet with the NIH leadership recently, and they're operating under a stable environment and expect, over time, when a budget gets passed, it should get better.

The other -- if I think about the other end markets, diagnostics and health care, we're also assuming low- to mid-single-digit growth for this year.

Pharma and biotech, we're assuming mid- to high single digit.

In industrial, we're assuming mid-single-digit.

Kind of gives you a holistic view of the year.

Yes, that's great.

And then maybe just one for Stephen.

Stephen, what is necessary for LPS margins to be up in '18?

It looks like you'll be -- you will be up against a favorable comp, obviously, but just wondering more fundamentally what the key factors are to getting back to the midteens.

So I think the individual businesses are doing well.

It's really been around business mix that's been driving the change.

This year has been a principal driver.

You're going to see actually benefit from margins from Patheon through the anniversary date for the LPS side of the equation.

So I think just the underlying the businesses are actually doing well.

So let me wrap up the call with a couple of quick comments, the first of which is I'd like to thank Seth Hoogasian, our General Counsel, who's been our General Counsel for more than 20 years, retiring at the end of the quarter.

He's been the silent right hand of the management teams over a long period of time.

And we wish him a happy retirement and thank him for his service to the company.

And then for the reflection on the year, obviously, 2017 was an excellent year and has put us in a great position to achieve our growth goals for the year.

And as always, thank you for the ongoing support of Thermo Fisher Scientific.

And I look forward to interacting with you during the course of the year.

Thanks, everyone.

This concludes today's conference call.

You may now disconnect.