賽默飛世爾科技 (TMO) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2018 Third Quarter Conference Call.

(Operator Instructions) Thank you.

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

Mr. Apicerno, you may begin the call.

Good morning, and thank you for joining us.

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

Please note this call is being webcast live and will be archived on the Investors section of our website, thermofisher.com, under the heading Webcasts & Presentations until November 9, 2018.

A copy of the press release of our third quarter 2018 earnings and future expectations is available in the Investors section of our website under the heading Financial Results.

So before we begin, let me briefly cover our safe harbor statement.

Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the company's quarterly report on Form 10-Q for the quarter ended June 30, 2018, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and is also available on 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 the call, we'll be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third quarter 2018 earnings and future expectations and also in the Investors section of our website under the heading Financial Information.

So with that, I'll now turn the call over to Marc

Thank you, Ken.

Good morning, everyone.

Thank you for joining us today for our Q3 call.

And Ken, happy birthday.

I'm very pleased to report that we continued our strong growth momentum and delivered another excellent quarter in Q3.

Our team executed very well in a strong market environment and continued to capture opportunities to drive growth.

Our outstanding performance underscores the impact of our proven growth strategy.

We're clearly delivering a differentiated experience for our customers and that's driving meaningful share gain across our businesses.

We have a lot of highlights to cover this quarter, and I'll start with an overview of our financial results.

As you saw in our press release this morning, our adjusted EPS grew 13% to $2.62 per share in Q3.

Our revenue in the quarter increased 16% year-over-year to $5.92 billion.

Adjusted operating income increased 12% to $1.31 billion and our adjusted operating margin in Q3 was 22.1%.

The combination of great execution by our team and strong market conditions led to outstanding results again this quarter.

Our performance puts us in great position to deliver a fantastic 2018.

Now let me give you a little color on our performance by end market.

All of our end markets were strong in Q3.

We took advantage of the favorable conditions and effectively leveraged our customer value proposition to drive growth.

In pharma and biotech, we delivered high teens growth in the quarter and continued to see strength in all of our businesses serving this end market.

As you know, we're uniquely positioned to enable success for our pharma and biotech customers and that results in significant share gain for Thermo Fisher.

Turning to diagnostics and health care.

We grew in the mid-single digits in the quarter and saw strong growth -- strong demand in this end market.

In academic and government, we grew in the mid-single digits.

It was great to see a continuation of the positive funding dynamics in the U.S. during the quarter.

And finally, in industrial and applied, we delivered high single-digit growth in Q3, led by strong performance across our Analytical Instruments businesses.

A quick comment on our overall performance from a geographic lens.

We continued to see good conditions in our end markets globally and this was highlighted by another very strong quarter in China where we delivered more than 20% growth.

So it was another great quarter.

We executed very well to capitalize on the strong market conditions across-the-board.

As I mentioned at the beginning of my remarks, our results point to our proven growth strategy and our ability to execute consistently over a long period of time.

We've been building on our leadership position by making significant investments in R&D, leveraging our scale in high-growth regions and providing increasing value for our customers.

I'm going to cover a few of the highlights in the quarter that reinforces the success of our strategy.

As you know, one of the elements of our growth strategy is our ongoing commitment to developing high-impact, innovative, new products.

I've highlighted quite a few so far this year and Q3 is another great example of how we develop products that make a huge difference for our customers.

We had a number of launches across our businesses in the quarter, but I'll single out a few of the new instruments that we've introduced.

First, at the meeting of the American Association of Clinical Chemistry in late July, we launched the Phadia 200, which recently received the CE mark for sale in Europe.

This is a fully automated benchtop system that can perform up to 700 different ImmunoCAP and EliA tests to diagnose allergies and autoimmune diseases.

Phadia 200 is perfect for smaller diagnostic labs and its flexible menu of tests minimizes the need to send samples offsite.

This helps clinical labs retain control of their samples and improve operational efficiency.

At the Microscopy & Microanalysis conference in August, we launched a number of new products that expand our leading electron microscopy portfolio to enable discoveries for both academic and industrial customers.

One of the highlights was our new Thermo Scientific Phenom Pharos desktop scanning electron microscope.

This is a first-of-its-kind instrument that features advanced detectors to generate high-resolution images in a benchtop model.

It's easy to operate and allows researchers to capture an image in less than 25 seconds.

The Phenom Pharos makes advance microscopy technology accessible to a much broader customer base for a range of materials science applications.

In our biosciences business, we introduced a new digital microscope for cell imaging during the quarter, the Invitrogen EVOS M5000 system, which is designed to provide biologists with a simplified process for cell imaging that produces publication-quality images in minutes.

I was thrilled to participate in the unveiling of this new product when I visited our site in Bothell, Washington.

Last, in mass spectrometry, we introduced the Thermo Scientific ISQ EM single quad, which raises the standard of performance for productivity in high-volume LC-MS labs.

This new system has the power to detect and quantify small and large molecules for a range of applications from drug development to manufacturing and quality control.

Another element of our growth strategy is the advantage we gain by leveraging our scale in emerging and high-growth markets.

We had strong performance in these regions again in Q3 with China leading the way.

We're very pleased that our efforts to expand our presence in these markets have produced strong results for some time.

But what's even more exciting is that we see many untapped opportunities for future growth.

Take China, for example.

As I mentioned earlier, we had another outstanding quarter there with strong demand across all of our end markets, but especially from our life sciences customers.

As you know, we've been doing business in China for many years supporting national priorities like better health care, a cleaner environment and safer food.

When I think about how the market has evolved, a few years ago, there was limited life science research activity in China.

Today, it's a growing contributor to our results and we're benefiting from the precision medicine and cryo-EM centers that we've established there, which are giving our customers exposure to our leading life sciences technologies.

I'm looking forward to spending time with our China team next week to participate in the ribbon cutting of our new commercial office in Beijing and I also plan on meeting with a number of our life sciences customers who are eager to learn how we can help them advance their work.

Now I'll turn to the last element of our growth strategy, which is our unique customer value proposition.

As a reminder, we leverage our value proposition to help our customers accelerate innovation and enhance productivity.

This has allowed us to establish scale relationships that give us differential access to our customers.

And of course, we continue to strengthen our value proposition to build on these relationships and gain share.

As an example, the acquisition of Patheon a little over a year ago has further differentiated our value proposition for pharma and biotech customers.

We've created a strong pharma services capability by combining Patheon's drug formulation, development and manufacturing services with our clinical trials logistics.

With our full suite of services, our customers can better leverage our deep expertise while optimizing their capital investments.

We're continuing to invest to further strengthen our pharma services business and began construction in Q3 to expand our manufacturing site in St.

Louis.

We produce biologic therapies for the treatment of various cancers and inflammatory disorders there.

Once completed at the end of 2019, St.

Louis will be the largest outsourced single-use biologics site in North America.

To enhance our bioproduction offering, we announced during Q3 that we signed an agreement to acquire BD's Advanced Bioprocessing business, which provides media supplements that are highly complementary to our cell culture media.

Adding these products will allow us to help customers maximize yield and reduce variability in the production of biologic drugs.

So we continued our strong momentum in each element of our growth strategy in Q3 to become a stronger partner for our customers and widen our lead versus the competition.

Before turning to our guidance, I'll give you a quick update on our capital deployment strategy.

We've made great progress on all fronts.

We've significantly delevered, and Stephen will give you those details.

In addition, we're on track to deploy a total of $2.2 billion this year.

This includes $1.5 billion of M&A.

We've closed the IntegenX acquisition and look forward to completing the acquisitions of Advanced Bioprocessing and Gatan.

We also continue to have a very active deal pipeline.

We will also return $775 million of capital, which is a combination of $275 million of dividends and $500 million of stock buybacks.

Let me take a moment to give you a quick update on the integration of Patheon now that we've passed the 1-year anniversary of the acquisition.

The integration continues to go very smoothly, the business is performing well and our results are running ahead of our original expectations.

We're very pleased with the progress we're making in driving revenue synergies, so let me give you a couple of examples.

First, we had some nice quick wins in our clinical trials business by providing these services to our legacy Patheon customers.

Second, legacy Patheon is benefiting from access to a broader customer base, which bodes very well for the future.

We have a number of revenue synergy opportunities as a result of the combination, and we're excited about the growth outlook for our pharma services business.

So we continue to successfully execute our capital deployment strategy to create value for our customers and shareholders.

Turning to our guidance.

As you saw in our press release, we're raising both our revenue and adjusted EPS guidance for the year.

The increase is based primarily on our strong operational performance, partially offset by a less favorable foreign exchange environment.

We're raising our revenue guidance to a new range of $23.99 billion to $24.09 billion for 2018, resulting in 15% growth over 2017.

In terms of adjusted EPS, we now expect to deliver between $11.00 and $11.06 per share.

This would lead to 16% to 17% growth over the strong adjusted EPS performance we delivered in 2017.

So to summarize our key takeaways from Q3.

We executed well to take advantage of the strong conditions across our end markets.

We're continuing to build on our leadership through our proven growth strategy.

We're deploying our capital to strengthen the company and create shareholder value.

And we're effectively delivering a differentiated customer experience to drive share gain.

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

Stephen?

Thanks, Marc, good morning, everyone.

I'll take you through an overview of our third quarter results for the total company, provide some color on our 4 business segments then conclude with our updated 2018 guidance.

Before I get into the details of our financial performance, I'll provide a high-level view of how the third quarter played out versus our expectations during our last earnings call in July.

As you saw in our press release, we had a very strong quarter with 10% organic growth and 13% adjusted EPS growth.

This was driven by great operational execution and continued strong market conditions.

We delivered $0.12 more adjusted earnings per share in Q3 than we'd assumed at the midpoint of our previous guidance.

This is driven by $0.10 stronger operational performance and $0.05 better below the line, driven by FX, lower interest cost and lower tax.

This is partially offset by $0.03 of increased reinvestment in the business.

So another excellent quarter.

Let me share you -- share some more details on Q3.

Starting with earnings per share.

This quarter, we grew adjusted EPS by 13% to $2.62 and GAAP EPS was $1.75, up 31% from Q3 last year.

On the top line, our reported revenue grew 16% year-over-year.

The components of our Q3 reported revenue increase included 10% organic growth, 7% growth from acquisitions and a 1% headwind from foreign exchange.

Looking at growth by geography.

As Marc mentioned, our markets were strong across the globe in Q3.

North America and Europe both grew in the high single digits.

Asia Pacific grew in the low teens, including another quarter of very strong growth in China.

And rest of the world grew in the high single digits.

Turning to our operational performance.

Q3 adjusted operating income increased 12% and adjusted operating margin was 22.1%, down 80 basis points from Q3 of last year.

As expected, the impact of acquisitions and FX was approximately 90 basis points in the quarter.

So operationally, we increased margins 10 basis points.

We saw a very strong volume leverage and good contributions from our PPI Business System, but this was largely offset by business mix and strategic investments.

Regarding the investments, given the continued strong market conditions and a very strong top line growth, we're taking the opportunity to selectively increase investments in a few of our businesses to help maximize our long-term growth prospects.

We've been able to make these additional investments and deliver 12% year-over-year increase in adjusted operating income dollars.

So a very strong quarter.

Moving on to the details of the P&L.

Total company adjusted gross margin came in at 46.2% in Q3, down 220 basis points from the prior year.

Strong productivity was more than offset by the expected dilutive impact of our acquisitions and unfavorable business mix and strategic investments.

Adjusted SG&A in the quarter was 20.1% of revenue, which is down 120 basis points versus Q3 2017.

And total R&D expense came in at 4.1% of revenue, down 20 basis points versus Q3 last year.

Both of these were primarily due to the impact of acquisitions.

R&D as a percent of our manufacturing revenue was -- in Q3, was 6.8%, up 20 basis points from Q3 2017, reflecting the increase in strategic investments.

Looking at our results below the line.

Net interest expense was $121 million, down $11 million from Q3 last year driven primarily by improved interest income.

Adjusted other income and expense was a net income in the quarter of $14 million, which is slightly favorable versus Q3 2017 driven primarily by changes in nonoperating foreign exchange.

Our adjusted tax rate in the quarter was 11.5%, down 30 basis points versus last year, primarily due to the impact of U.S. tax reform.

The adjusted tax rate was lower than last quarter due to the timing of discrete tax planning items.

Q3 average diluted shares were 406 million, up 6 million year-over-year.

Turning to cash flow and the balance sheet.

Cash flow from continuing operations for the first 9 months of the year was $2.7 billion and free cash flow was $2.3 billion after deducting net capital expenditures of about $400 million.

We ended the quarter with $1.1 billion in cash and investments.

Early in Q4, we repurchased $250 million of our shares, bringing the total repurchases for 2018 to $500 million.

This is in line with our prior guidance.

We returned $70 million to shareholders through dividends in the quarter.

Our total debt at the end of Q3 was $18.8 billion, down $600 million sequentially from Q2.

Our leverage ratio at the end of the quarter was 3.1x total debt to adjusted EBITDA, down from 3.3x last quarter and down from 4.4x at this point last year.

This demonstrates the strength of our cash flow and our commitment to delever.

So wrapping up my comments on our total company performance.

Adjusted ROIC was 10.4%, up 10 basis points from last quarter and up 60 basis points from Q3 last year as we continue to generate very strong returns.

Now I'll provide some color on the performance of our 4 business segments, starting with Life Sciences Solutions.

Reported revenue in this segment increased 9% in Q3 and organic revenue growth was 10%.

In the quarter, we continued to see strong growth in this segment led by bioproduction, biosciences and clinical next-gen sequencing.

Q3 adjusted operating income in Life Science Solutions increased 9% and adjusted operating margin was 32.9%, up 20 basis points year-over-year.

In the quarter, we drove very strong volume pull-through and good productivity, which was partially offset by unfavorable business mix, strategic investments and the expected impact of acquisitions.

In the Analytical Instruments segment, reported revenue increased 12% in Q3 and organic revenue growth was also 12%.

In the quarter, we saw very good growth across all of our businesses in the segment.

Q3 adjusted operating income in Analytical Instruments grew 15% and adjusted operating margin was 22%, up 40 basis points year-over-year.

We saw very strong volume leverage in productivity, partially offset by strategic investments and unfavorable business mix.

Turning to the Specialty Diagnostics Segment.

In Q3, total revenue grew 6% and organic revenue growth was 7%.

Strong growth in this segment was led by our health care market channel and the transplant and clinical diagnostics businesses.

Adjusted operating income increased 2% in Q3 and adjusted operating margin was 25%, down 90 basis points from the prior year.

In the quarter, we saw good volume leverage from productivity.

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

Finally, in the Lab Products and Services segment, which includes the legacy Patheon business.

Q3 reported revenue increased 28%.

Organic revenue growth was 11%.

In the quarter, we saw strong growth across all businesses in the segment led by our clinical trials logistics business and our research and safety market channel.

Adjusted operating income in the segment increased 23% and adjusted operating margin was 12.1%, down 50 basis points from the prior year.

In the quarter, we saw good volume leverage and productivity.

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

I'll now move on to our updated full year 2018 guidance.

As you saw in our press release, we're raising both our revenue and adjusted earnings per share guidance.

Let me walk you through the details.

I'll start with revenue.

We're raising the midpoint of our revenue guidance by $275 million and tightening the range by $80 million.

The $275 million increase to the midpoint consists of 2 elements: a $315 million increase in our organic growth outlook for the year and $40 million less favorable FX.

The $315 million organic growth increase factors in the stronger Q3 performance and a $45 million organic increase for Q4.

So our guidance now assumes 7% organic growth for the full year.

Turning to adjusted earnings per share.

We've increased the midpoint of our adjusted EPS guidance by $0.08.

This reflects the following changes from the prior guidance: a $0.17 increase in operational performance, which is $0.12 in organic growth pull-through and $0.05 lower interest and tax; a $0.01 reduction due to less favorable FX; and a decision to make $0.08 in additional strategic investments to maximize our long-term growth prospects.

To sum this up, our 2018 revenue guidance is now a range of $23.99 billion to $24.09 billion, which would represent 15% growth versus 2017.

Acquisitions are expected to continue to contribute about 7% to our reported revenue growth in 2018 and FX is expected to be a benefit of 1%.

Our updated adjusted earnings per share guidance for 2018 is now a range of $11 to $11.06 with a midpoint of $11.03.

This represents growth of 16% to 17% versus 2017.

Now I'll provide a few other details behind the revised 2018 guidance.

We're assuming that foreign exchange will be about $170 million revenue tailwind for the year, approximately 1%.

The FX tailwind on adjusted EPS is assumed to be $0.13 or 1.4%.

There's been a slight change in the composition of tariffs, but we continue to expect that the 2018 growth impact for the company is $14 million.

And we're executing actions to fully offset the impact in 2018, so we continue to expect that tariffs will have no net impact this year.

We now expect adjusted operating margin expansion to be between 0 and 10 basis points for the year.

Operationally, we're increasing margins 50 to 60 basis points.

And as expected, the impact from acquisitions is approximately 50 basis points.

We expect net interest expense to be in the range of $525 million to $530 million.

It's a reduction of approximately $20 million from our previous guidance due to higher interest income and active management of our debt portfolio.

We're now assuming other income and expense to be net income of just over $20 million, a slight improvement to our prior guidance due to nonoperating FX benefits realized in Q3.

We expect an adjusted income tax rate of 11.9% for the year, a 10 basis point improvement from our prior guidance due to benefits from our tax planning.

Our guidance continues to assume $500 million of share buybacks in 2018.

As I mentioned earlier, all of these have now been executed.

We expect that the full year average diluted shares will be in the range of 405 million to 407 million, no change from previous guidance.

We continue to expect to return approximately $275 million of capital to shareholders through dividends.

Our guidance does not include any future acquisitions or divestitures.

We continue to assume that net capital expenditures will be approximately $700 million to $730 million.

And for free cash flow, we're expecting about $3.8 billion for the year, consistent with previous guidance.

So in summary, we delivered another excellent quarter in Q3 and we're in a great position to deliver a very successful year.

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

Thanks, Stephen.

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

(Operator Instructions) Your first question comes from the line of Tycho Peterson from JPMorgan.

Marc, want to start with the Analytical Instruments business.

Great organic growth.

The comp was even more difficult than it was last quarter.

Can you maybe parse out some of the components there?

How much of that was FEI versus other pieces?

Yes.

So as a reminder, Tycho, thanks for the question, we have 3 businesses in our Analytical Instruments business: materials and structural analysis, which is electron microscopy and spectroscopy; chromatography, mass spectrometry; and chemical analysis.

All 3 businesses had double-digit growth, very strong quarter.

It was great to see continued momentum in electron microscopy.

Orders were strong.

Chroma and mass spec really doing a great job.

And chemical analysis actually really had a terrific quarter.

So great strength across the businesses.

And then maybe just for the follow-up.

You're obviously putting up exceptional numbers.

The comps do start to get a little bit more difficult and obviously the macro outlook is a little bit shaky.

So as we think ahead to next year, I'm just wondering if you can talk qualitatively about what markets do you think could accelerate versus decelerate?

Do you think pharma, given that you've anniversary-ed Patheon and added BD biosciences, can actually accelerate?

And how do you think about China heading into next year as well?

The end markets are fantastic, Tycho.

And we see that across geographically.

We see it across the 4 end markets.

The company is executing very well.

I feel very proud of how our colleagues are working around the world.

And we are gaining share across a large number of businesses and that bodes well for an excellent 2019.

So we're super excited, and of course, we look forward to giving the guidance and all the details.

We'll do that in late January next year, but outlook is great.

Your next question comes from the line of Ross Muken from Evercore ISI.

Happy birthday, Ken.

Thank you, Ross.

So maybe let's start on the pharma channel.

Obviously, given what we've seen in terms of your results, it feels like pretty broad strength there as well as on the bioproduction side.

So give us a feel for kind of how you're thinking about sort of the sustainability of some of the trends there and where you feel like you're gaining share because I think it probably still benefits from actions made years ago as you kind of integrated into that customer base and obviously touched them in a unique way.

So just give us a feel for kind of the product segments and the duration in terms of some of that upside we're seeing.

Yes, Ross.

Another very strong quarter in pharma and biotech, and from a business perspective, bioproduction was very strong.

Chromatography and mass spectrometry, the research channel and our pharma services business, which includes both clinical trials and legacy Patheon, all had very good quarters.

And if I omitted any, it wasn't because they didn't have good quarters.

We saw excellent momentum across our portfolio.

The way I think about the end market is we have very scaled relationships with these customers, whether they're smaller companies or larger ones.

Commercially, we serve them in a different way.

We have great access to the decision-makers because of the scale of those relationships.

And every time we bring a new capability in, it allows us for yet another dialogue across the whole portfolio, not just what we add to it organically or inorganically, and that has driven great momentum in the business.

So the strategy that we outlined in 2006 in terms of how we were going to serve pharma and biotech, keeps getting better and better in terms of our performance and obviously the underlying end market is strong as well.

And maybe, Stephen, to talk about the margin side.

Obviously, we knew the pull-through this quarter wasn't going to be as good and next quarter obviously you're forecasting fantastic margin expansion.

Maybe can you just give us a little bit of the puts and takes because I've done just a bunch of questions, and I know there were some pieces, particularly around Patheon, that impacted this quarter and kind of reverse next quarter.

So any of the detail around that sort of sequential cadence would be helpful.

Yes.

So in terms of the margins, the current quarter, the business mix is really driven by the very high growth across the company.

All businesses grew well.

But just in terms of the relative growth and relative profitability of the parts created some of the mix dynamics.

So especially diagnostics, which had a great quarter for diagnostics, but was below -- significantly below the company average at the high end from the average profit margin so that put some mix pressure on the reported margins.

And then in the Lab Products and Services, we've got some relatively lower-profitability service lines, for example, the channel, which had exceptional growth and that also then created some reported mix pressure on the margins.

Overall, we grew adjusted operating income dollars 12%, which is really what counts at the end of the day, but because of what the noise in terms of the mix and how that came through.

As we think about Q4, we're looking at more -- a tighter range of organic growth across the businesses so there's less mix dynamic.

Also sequentially, Q3 to Q4, as you said, we've got the pharma services business to be significantly more profitable due to the nonrepeat of the impact of the hurricane that we had in Q3 last year, it's one of the largest pieces.

So that's the main drivers.

Your next question comes from the line of Jack Meehan from Barclays.

Marc, I was hoping you could elaborate on what you're seeing on the ground now in China related to trade and tariffs?

And given the strength of the quarter, was there anything that you think got pulled forward into the third quarter from the fourth quarter or beyond?

Yes.

So Jack, thanks for the question.

China was very strong and another better than 20% quarter.

It's better than 20% year-to-date.

Bookings, once again, grew faster than revenue.

Positive book-to-bill.

Reviewed with the team the performance and they feel very good about the outlook.

In terms of the pull forward, we're not seeing anything, nothing that we've noticed out of the ordinary in terms of customer buying behavior.

Looking forward, as I mentioned earlier, I'll be in China next week and seeing a number of customers, spending time with the team, government, things of that sort.

It's a great market and we are so incredibly well positioned to serve the various segments from food safety, to life sciences, to diagnostics.

It's just a great market.

It's served us well in the past and we look forward to a bright future there.

Great.

And similar to that, just was hoping you could elaborate on what expectations were built into the quarter.

You've had a great start to the year, about 8% year-to-date organic.

I think that implies about 3% to 4% isn't baked in for the fourth quarter.

So are you assuming anything or whether you need a budget flush?

I'm guessing, no, but if you can elaborate what's built in, that would be great.

Yes, Jack, thanks for that.

It's an important question.

Thank you.

So in terms of the outlook for Q4, what's implied in our guidance is that we increased our Q4 outlook by about a point, as Stephen mentioned, organically.

So when I think about what's assumed, obviously, we're a few weeks into the quarter so we have good visibility into how things are shaping up.

And the assumption on year-end money is the exact same assumption that we used all year and it's our normal convention, which is that we will see normal year-end spend relative to the very strong year-end spend we saw last year.

And if we see a strong year-end spend or a budget flush beyond sort of the normal, then this will truly be yet another just spectacular quarter.

And either way, we're going to have a fantastic year and setting ourselves up for a great '19.

So we won't know the budget flush numbers until a couple of weeks left in the year, so it's one of those things where normal is the right way to think about how you do guidance.

And if it's better, great; and if it's not, then we're well positioned to achieve our numbers.

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

It's Mike Ryskin on for Derik.

I have a couple of quick questions.

You highlighted a few times share gains across the business, meaningful share gains.

Can you add a little bit of color where you're seeing some of the biggest strengths?

I mean, obviously, it looks like a lot of it is in pharma.

But a little more color on specific product segments or geographies or customer types?

Yes, Mike, thanks for the question.

In terms of share gain, we're growing faster than the rate of growth in China, that's one of the geographic lines.

I would say we're also growing probably faster than the rate of growth in North America as well.

From an end market perspective, we're growing faster from a pharma and biotech than others.

And from a product perspective, it's fairly broad based, but it's nice to see continued really strong growth in chromatography and mass spectrometry.

That's done very nicely.

Our biosciences business is something I featured in our last quarter's call, continues to have good momentum.

So that's another area.

And bioproduction, looking at what's been reported in terms of results from the couple companies that reported so far, we grew faster than those that have reported.

So those would be examples.

And then about the investments you talked about making.

Again, where are they coming in?

The investments you talked about in this quarter and then going forward, is there any particular area you're emphasizing?

And along that line, the Phadia product you launched in Europe, how does that fit into the market and can you talk a little bit about how that's positioned?

Sure.

I'll talk about the new instrument and Stephen will talk about the investments.

So we launched -- we have a very strong allergy and autoimmune franchise globally.

And we refreshed one of the key products, which is the lower end in terms of volume, instrument platform for smaller labs to be able to run their full menu of allergy and autoimmunity tests on that new updated platform.

Why that's relevant is, in many markets, the economics of keeping the tests in-house are better than the economics of sending the samples out.

So by having the ability to serve that smaller customer set with a very up-to-date instrument, it allows them to improve their economics.

So we're very excited about that new product launch.

And our allergy and autoimmune business continues to perform very well.

Stephen, do you want to talk about investments?

Yes, so in terms of the investments, given the strong market conditions and our strong top line growth, we're taking the opportunity to selectively increase investments in a few of the businesses to help maximize long-term growth prospects.

So the additional investments are really in 4 businesses, biosciences, chroma and mass spec, electron microscopy and pharma services, where we're on great growth trajectory and believe, by selective additional growth investments, we can continue that business momentum.

So the investments are really mainly to accelerate R&D, commercial effectiveness programs and scale our production capacity.

Your next question comes from Doug Schenkel with Cowen.

Over the years, we've heard you talk a lot about your value proposition in biopharma and how successful you've been there.

It looks like you're gaining share across all end markets.

So I'm curious if you'd be willing to provide an update on how you're progressing with your efforts to essentially apply that biopharma playbook -- biopharma value proposition playbook to other end markets.

Essentially, how are those efforts progressing?

Yes.

So Doug, thanks for the question.

So the value proposition has done very well in more than just pharma and biotech, but it's obviously done exceptionally well there.

It's done very well in serving the reference lab accounts around the world from a diagnostics and health care perspective where they're very focused on productivity.

That's been a big driver.

Your big industrial companies also are big adopters of the methodology, the chemical, petrochemical, those types of customers also so that's in customer lines.

But interestingly enough, when you think about those other segments, our geographic strategy of leveraging our scale in Asia Pacific and the high-growth regions, that really has served those 3 end markets incredibly well because we just provide an amazing experience in terms of service and support because of our scale to those markets and that's allowed us to drive very strong growth beyond just pharma and biotech.

Okay.

And going back to, I guess, kind of an earlier question, just building off of an earlier question.

You're on track to deliver organic growth well above your 3-year targets this year.

You've talked over the last few calls about what the key drivers have been.

I'm curious, one, what's been most surprising?

And then looking ahead, how should we think about your 3-year growth targets in the context of a strong 2018?

Do you think your -- is it fair after 4 really strong quarters we're on a trailing basis, organic growth has been about 8% to conclude that the core growth rate of the business has improved?

Yes.

I mean, we're performing very well.

The end markets are good, right?

And we're executing well and our customers really value what we do for them and that's driven good share gain.

So as you parse through the end markets, we're clearly growing faster than others and that's good performance.

When I think about the 3-year outlook, we're going to finish this year stronger than what we assumed in the May analyst meeting.

So our jumping off point is going to be great.

And the fundamentals of our industry are fantastic, right?

So we're excited about the long-term prospects that we outlined in May and we're very well positioned to deliver those results and continue to create significant shareholder value.

If I think about how this year has unfolded and -- am I surprised?

No, I'm not surprised.

The team has done a really good job.

I think the amount of dialogue that we've been able to generate post the acquisition of Patheon has been very good for us, for the whole business, it really has just reenergized excitement in the pharma and biotech end market, which has been doing really well.

So I think that's been really good.

And I would say that the North American market is doing better than what we've seen for a number of years, right?

And I can't tell you whether that's tax reform or what the underlying driver is, but fundamentally, our North American business is growing at a rate that's better than what we've seen and that's really -- is terrific.

So we feel good about how the year is shaping up, we feel good about our outlook and we're super excited about the midterm outlook as well, as well as long term.

Your next question comes from Steve Beuchaw with Morgan Stanley.

I'll ask one for Marc and one for Stephen.

One for Marc is I wonder if you could zoom out a little bit on the Patheon business and the environment around Patheon.

Clearly, the synergies, the commercial synergies, from the call point to strengths between Patheon, CTS and the rest of your businesses are driving some accelerated interest in synergy there, but do you think that what you and maybe some others are delivering in terms of scale for a contract manufacturing is driving a structural change to the way that your partners think about the appeal of that type of service?

I think that there's been a change to the structural growth rate of that segment of the market.

And then my question for Stephen actually jumps off on some earlier comments around -- on Patheon and it's more about growth in margins into 2019.

I think -- if we think about 2018, we didn't have a benefit for the full year from Patheon because it wasn't in the organic build fully.

We did have a margin impact.

Can you talk at all prospectively about what you see for the impact at top line and margins given the announced acquisitions, some of which are closing soon and Patheon, which, of course, becomes a part of the organic going forward?

And I'll apologize here for the very long-winded question.

So Steve, in terms of the growth rate for pharma services or -- it's an attractive market.

It's got good growth prospects.

We're performing well.

The business is actually growing faster than what we assumed in the deal model, and the outlook looks good.

I believe that a company like Thermo Fisher, given its trusted relationships that we've built over a very long time, will have a huge impact on changing the dynamic in the industry.

The dialogue is certainly very positive, but it hasn't happened yet in terms of changing the structural dynamics of the industry at this point.

It's more in the early phases of enthusiasm and exploratory conversations.

It's good to see that the revenue synergies actually have materialized faster, right?

And remember that it's a very long-cycle business, so what we have is not only what showed up in the P&L, but we have visibility to what the longer-term growth is and it looks good because the customer feedback is positive.

So we'll continue to execute to really drive good growth and good profitability into the business, and Stephen will talk a little bit about margins.

Yes.

So Stephen, in terms of the margins, actually Ross' question earlier about the sequential change, Q3 to Q4, I highlighted in 2018 the nonrepeat of that, the impact of the hurricane.

The other piece for 2018 and the sequential part in our margins is that for the first 9 months, we've been basically bringing in Patheon's financials into the company, incorporating them into the overall company.

That's put a pressure on margins, about 90 basis points in the quarter.

So we're through the anniversary date now, so you don't get that impact going forward.

It's just natural margin expansion from that business and the impact of synergies plus the benefit of the hurricane.

So Q4 would be strong margin expansion.

As the outlook for 2019, we think about the strong growth in that business, both from a market standpoint plus the additional -- actually the share again that we're taking in terms of setting up and the synergies, that strong growth will print at a good margin coming into that business to expand -- basically to expand the margins of the pharma services group.

So you'll see that come in the overall margin expansion of the company in 2019 and beyond.

Your next question comes from Dan Arias with Citigroup.

Marc, on academic demand, obviously the segments that are exposed there are doing well.

So I'm just curious about the extent to which you feel like the businesses are actually benefiting from the funding improvement in the U.S. versus your share gains and some really good execution.

Do you feel like at the end of the day, organic growth is higher because the NIH budget is up?

Yes, absolutely, Dan.

The environment is good.

It's nice to see how NIH has been funded.

It's been -- I think, it's been 20 years or so since NIH had its budget locked up in advance of the fiscal year.

It's been a very -- it's a very long time.

So having clarity going into the first 9 months of 2019 on a budget increase is really excellent.

And obviously, we're excited about the cryo-electron microscopy program that got $130 million of allocation earlier in the year on a multiyear basis.

So that bodes well for us as well.

So the market conditions are good in North America.

It's flowing through our business and we feel good about that.

And then we continue to see a good outlook for academic and government around the world.

Okay.

And then maybe just following up with one on the Analytical segment, specific to FEI, has the semiconductor portion of that business seen any impact at all from the ups and downs in the macro picture?

And I know there's a skew towards R&D there and obviously things look good overall.

So I'm just curious if you've been seeing any fluctuations on that side of the business.

Thanks.

Materials and structural analysis had a very good quarter.

Electron microscopy, a portion of that business had a very good quarter.

And the materials science applications, which includes semiconductor and all of the other things from batteries to all of the research -- basic materials science research did very well.

We had good growth in the pieces of it.

So it's broad-based strength and we feel well positioned to serve the semiconductor market.

And also because China, in particular, is building up a large infrastructure to support their own semiconductor needs, that bodes well for some period of time ahead.

Your next question comes from Patrick Donnelly with Goldman Sachs.

Maybe Marc, just on the macro front.

Given some mixed industrials earnings this week lower your PMIs this morning, can you just talk through how you're feeling on the more macro-sensitive areas like chemical core industrial markets?

Any trends you're seeing there recently to make you feel kind of constructive going forward?

Yes, Patrick.

Thank you for the question.

Chemical analysis is probably the -- our [interim] business, that probably has the best sort of what's going on purely from a macro GDP perspective.

Very, very strong Q3 and good bookings growth.

Won some nice mining orders, which we'll ship in the future.

I always like to look at mining because it gives you a sense of sort of what the longer-term outlook is and when you see growth there, that typically is positive.

So the signs that we see are good, right?

And it was nice to deliver high single-digit growth in the industrial and applied markets.

So we pay attention to all of the other macro trends, but in our business, things continue to look very good.

That's helpful color.

And then maybe just on the tariff initiatives to minimize that impact.

Can you just provide a little more color what guys are doing there and then also the confidence level that we're not going to see any impact in 2019 for you guys?

Yes, it's a good question.

So we provided like super granular detail on tariffs and we'll probably stop at some point because the point of doing that is this category of products is not the focus of what the tariffs are in China, in particular, because the Chinese government needs these products to advance their initiatives, right?

So many of these categories aren't tariffed and it's not been a huge economic impact.

And what we've done is we have increased pricing in certain places.

We are making adjustments to our supply chain, that takes a little longer obviously, but we're comfortable in our ability to fully offset that impact in 2018 and then make the structural changes that we need to make, if any, to position ourselves for great success going forward.

Your next question comes from Steve Willoughby with Cleveland Research.

Two questions for you.

First, Stephen, you made some comments regarding some incremental investment spending.

It looks like maybe $0.03 worth in the third quarter and maybe another $0.05 in the fourth quarter.

I was just wondering, is that something that continues into or through 2019 in a similar type of run rate?

Just wondering how sustainable, and then just one quick follow-up as well.

Yes, so in total, it's $0.08.

It's roughly $15 million in Q3 and $20 million in Q4.

So we're going to be investing in these businesses appropriately given the top line environment and the long-term outlook.

So it'll be some continuation going forward, but that's matched with good growth prospects for the businesses.

Got you.

And then could you just remind us, in the fourth quarter last year, how much of an impact there was to your SG&A from the onetime bonuses you guys paid out regarding -- related to tax reform?

Yes, approximately $30 million.

$30 million.

Your next question comes from Brandon Couillard with Jefferies.

A bit of a follow-up to the last macro question.

Marc, yesterday, had 2 competitors sort of raised a yellow flag around some end markets in Europe.

Just curious what you're seeing from a macro perspective there, especially around pharma and more cyclical industrial areas?

Yes, we had high single-digit growth in Europe.

Business is performing well.

I was in Europe towards the end of the quarter, met with customers, met with our teams.

They feel good about the environment.

I'm heading back in November and business performed well.

Fair enough.

And then last one would be -- would love to hear some of your comments on the Advanced Bioprocessing business acquisition, kind of what you see as the growth trajectory of that asset and how synergistic you see it with the rest of the Thermo bioprocessing portfolio and perhaps the size of the customer base would be useful.

So yes, we'll get into more of the details when we close the transaction.

It's about $100 million business.

Very complementary to our offering in bioproduction.

As a reminder, we're the market leader in single-use technologies and in the cell culture media.

The supplements, which is what this business is, that we're acquiring used in conjunction with media allows customers to get better yields and reduce variability in the production process.

So it's very positive.

It's one of those things where if it's -- it's 1 plus 1 equals more than 2 because you are able to leverage the customer relationships where each company has strength.

You're able to optimize offerings.

You're able to leverage the expertise of both commercial teams and those relationships.

So we're really excited about it and it'll be a nice accretive transaction to the business.

Your next question comes from Daniel Brennan with UBS.

So a couple of questions.

First, going back to biopharma, I'm just wondering, Marc, could you provide a little more color in terms of the share gains that you're seeing?

How much of this is from, namely, you're seeing new customers as you kind of synergize across all the different buckets of products you have versus maybe using a little bit of price that you can now leverage across a broader set of products or simply did the customers really appreciate the ability to bundle and just kind of have logistically a lot of your great products in one bag.

Just trying to look for a little more color on that.

Yes, Dan.

Thanks for the question.

Effectively, every biotech and pharmaceutical customer around the world has some relationship with Thermo Fisher Scientific today, but what we're seeing is that the multiproduct line and service line relationships, we're just getting larger and larger relationships with customers who are just working with us and more and more service lines because our businesses are doing a good job of creating value for them and therefore they want to work with us more closely.

And because of the scale of our company, the depth of our offering and the ability to really have very, very meaningful relationships in terms of impact with those customers, they want to spend more time with us and that creates new opportunities.

So that's how I think about it and we're seeing great momentum across the customer base from that perspective.

Okay.

And then maybe just a quick follow-up.

Could I ask just on M&A just kind of what looks most interesting to you today, Marc, from an M&A perspective?

And in terms of more volatile macro, does that help or hurt your ability to do deals possibly?

It could swing either way, just wondering.

Yes, the pipeline is quite busy.

So I feel good about it.

And I think the short-term ups and downs of the macro probably don't have a very significant effect on the M&A environment.

So it's our job to apply our strict criteria and identify the right opportunities that are going to strengthen the company and create shareholder value.

And I feel good about the one transaction we've closed, the 2 that we're in a late stage of finalizing and the many interesting ones we're looking at.

So we're well positioned.

Interestingly enough, what's nice as we go into the year is we delevered from over 4.4x leverage a year ago to 3.1x leverage.

So as we enter '19, we have a lot of firepower and we'll be able to capitalize on that on the right opportunities.

So it's a very exciting time from a capital deployment perspective.

Thanks, Dan.

So let me wrap up the call.

Yes, with 3 strong quarters behind us, we're in a great position to achieve a very successful 2018.

As always, thank you for your ongoing support of Thermo Fisher Scientific, and we look forward to updating you on our fourth quarter call.

Thanks, everyone.

This concludes today's conference call.

You may now disconnect.