Thermo Fisher Scientific's CEO Presents at The 30th Annual JPMorgan Chase Healthcare Conference (Transcript)

| About: Thermo Fisher (TMO)

Thermo Fisher Scientific Inc. (NYSE:TMO)

January 10, 2012 11:00 am ET


Marc N. Casper - Chief Executive Officer, President, Director, Member of Strategy & Finance Committee and Member of Science & Technology Committee


Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Okay. Good morning. We're going to go ahead and get started. I'm Tycho Peterson, from the science tools and diagnostics team. It's my pleasure this morning to introduce our next company, Thermo Fisher. For those of you interested in the breakout, it will be across the hall in the Georgian Room. So, let me turn it over to Marc Casper to tell you a little bit more about the Thermo story.

Marc N. Casper

Well, good morning, Tycho. Thank you for the welcome. With me here today is Ken Apicerno, our Vice President of Investor Relations.

I'm really excited to kick off the year from our investor side of things here out in San Francisco. What we'll do is give you a quick overview of the company, a recap of how we did against the goals without getting into the financials for 2011 and then talk about our goals for 2012.

Let me start with our Safe Harbor statement and the use of non-GAAP financials. When you -- as you look at the numbers, feel free to go to the investor section of our website, for the reconciliations or our various SEC filings.

Thermo Fisher Scientific. So let me just give a brief orientation for those of you that aren't as familiar with the company. Although, I do see a lot of familiar faces here in the room.

So we're the leading provider of analytical instruments, equipment, reagents, software, services, consumables for research, analysis, discovery and specialty diagnostics. Basically, if you walk into any laboratory in the world, you will see a huge range of capabilities from Thermo Fisher Scientific.

We have a truly unique scale in our industry as the industry leader with $12 billion in revenue and an unparalleled commercial reach, so we can really touch our 350,000 customers anywhere in the world and provide them with outstanding service and a world-class team.

In terms of our unmatched depth of capability, not only do have size, but we have an amazing suite of technologies, that makes a huge difference on our customers and then a little later in the presentation, I'll give you a sense for just 3 of the new products that we launched in recent history.

We have a deep applications expertise. We understand what our customers are using the products for, and what they're going to need to use them for in the future and that allows us to really make a difference in driving value for our customers.

And we're known by our broad base of customers as a productivity provider. So as the world has its twists and turns, we are well positioned to help our customers navigate their own productivity challenges that they face, and we have an incredible track record of doing that.

We have 2 well-known leading brands and today will be at least our investor debut of our third. Thermo Scientific is our technology brand, 50 years plus in the making, an incredible reputation of bringing out high-impact technologies. Fisher Scientific is our channel brand, and I'll talk more in a few moments about Unity Lab Services, but that's our services brand. This is a great growth opportunity for Thermo Fisher Scientific and we'll talk about why we're so excited about Unity Lab Services.

Ultimately, the company enables our customers to make the world healthier, cleaner and safer. And that mission allows us to just attract the very best people out there from the best colleges, grad schools, from industries around the world to join our company and really make a difference in creating value.

When you look at our revenue profile, really, we benefit from our unmatched reach. In terms of our diverse end markets, industrial and applied is our largest. We'll soon probably represent in the 30th percent range of our mix, and the other 3 market segments we serve are each about the same size, healthcare and diagnostics, pharma and biotech, and academic and government. We have a complete portfolio with 2/3 of our revenue being recurring in nature, 53% consumables, 14% services, and 1/3 of our business is capital equipment in terms of instruments, equipment and software.

Geographically, the mix of the company has changed a lot over the years. I'm going to highlight that in our review of 2011 in a few moments. But today, Asia-Pacific and other emerging markets represent 18% of our company's revenue, that's up from about 8% at the time of the creation of the company 5 years ago. So a huge emphasis on building out our presence and scale in the fastest growing markets around the world.

We have 3 complementaries, reporting segments. When you look at them, starting with our Specialty Diagnostics segment, represents about 20% of our total revenue. We have an incredible portfolio of Specialty Diagnostics that improves patient care.

We have a very specific strategy about picking segments to participate in diagnostics where there are high barriers to entry, very high customer loyalty and ultimately superior margins. And that has allowed us to really hand pick a very exciting portfolio and puts us in a very enviable position of having good growth and really good profitability and cash flows coming out of our diagnostic business. We think it's actually quite a unique set of capabilities.

Analytical technology is probably the company -- what the company is best-known for. Our leadership position and instrumentation, our strong position in bioscience reagents represents 30% of the total revenue. We have the technologies that solve the world's complex challenges that are out there. Whether it's measuring, emissions in air, making sure that the water that we drink is safe and clean or just finding the next drug or technology to use day in and day out to solve the world's most complex challenges.

Half of our business is really focused on driving productivity for our customers in the laboratory. We have 3 parts of that portfolio. We have our leading channel, which allows us to reach customers in the way that no other company can. We have our Lab Products Group. So basically, when you walk in the laboratory and you see those refrigerators, freezers, centrifuges, safety cabinets, glassware, plasticware, we make it all. We have by far the highest market position in that market share, in that category.

And then our outsourcing business or our Biopharma Services business are all driving productivity for our customers. We use our scale and depth to create value across all 3 of our businesses. They're all related. They're selling to the same customers and ultimately, it gives us the opportunity to do unique things for our customers and grow our market share.

When you look historically, the company has an excellent financial track record. This is from the time of the creation of the company's current form. But if you go back 10 years, you'd see similar type, type growth. In this case, 5% growth including managing through the recession of 2009, and more than tripling it on the bottom line at 17% CAGR in terms of EPS growth from 2006 to 2010.

This is the slide exactly as presented, 1 year ago, almost to the day, at JP Morgan. So, what did we say that we were going to do last year? We said we were committed to driving earnings growth and we reinforced that over the past year. We reinforced that at our analyst meeting in May, and we said we'd drive that through 3 things: revenue growth; expanding our margins; and effectively deploying capital.

What I want to do in the next section of the presentation is actually just go through the highlights of 2011 and how did we do against those goals, and I'll give you the details and I'll do wrap it up with a scorecard and then we'll go look forward.

So revenue growth. Given that we're -- not yet reported our results, we used our guidance that we provided at the end of October for representing how we see 2011 playing out with 10% to 11% revenue growth for the year. So strong revenue growth momentum, obviously, faster than the growth that we had experienced in the 5 years prior.

Looking at the drivers of that, I picked 3 impact products that we launched last year. One from each segment to give you a sense that there are great opportunities across our portfolio to use innovation, to gain share and grow our market.

Starting with Q Exactive, our flagship launch. Launched towards the end of the 2011. What this instrument is, is a mass spectrometer. It allows Thermo Fisher to enter the Q-TOF market, a market that we have not historically participated in.

And this Quanformation instrument really in a single run will identify, quantify and confirm what is in that sample in one analysis. Fantastic uptake we're seeing with the Q Exactive. We think this is yet another revolutionary product. It is taking a quadrupole on the front end to an Orbitrap. So it's not something that anybody else can copy because of our intellectual property and it really is something we're very, very excited about.

In fact, the Exactive technology was selected by the Olympic committee in London to be used for the drug screening applications for athletes. A very significant win because historically, the Triple Quads were used in that particular application and it was nice to see Thermo Fisher getting 100% share of the drug doping analysis going on in London. Typically, we would have more than a 50%, 60% market share, and getting 100% was a nice validation of the technology.

Moving to Specialty Diagnostics. We have a strong position in immunoassays, and one example is in the area of drugs of abuse. We were able to get 6 new cleared, FDA-cleared assays, for oral fluids for drugs of abuse. And obviously, oral fluids are much easier to administer and much less likely to be adultered than the alternative. So if any of you have done pre-employment screening or anything of that sort, it's much easy to have saliva than the other methods for drugs abuse testing. Anyway, a little bit of -- we're excited about the products.

Anyway, moving onto the third segment, ultra-low temperature freezers in our Lab Products. We have a market-leading position, north of 50% market share in ULT freezers. We have done a number of acquisitions over the last 15 years to consolidate our position and effectively, we launched a revolutionary new platform that consolidated all of those historical legacy platforms, low cost, high low-cost region content, able to be made in multiple plants, closer to the customer to avoid shipping costs. You can imagine freezers are big and bulky. And if you're shipping them long distance, you run the risk of damage and just really thinking about economics to really drive, to drive superior value for our customers. So 3 different examples, all ones that we're quite excited about.

The second aspect of revenue growth is our position in emerging markets. It represents about 18% of our revenue is now in emerging markets and in Asia-Pacific. We are, by far the company with the largest footprint in our industry in those markets. We are really focused right now on developing technologies in the region for the region. So taking that expertise we have globally and making those minor adjustments to really be well positioned to gain share in emerging markets, whether it's getting the right regulations, whether it's just making those minor or major adjustments to make sure that we serve our customers the best we can.

The big 4 markets for us in terms of focus is China, India, Korea and Brazil. And if you take China as an example, in 2010 we grew about 15%. In 2011 through the first 9 months of the year, well over 20% growth. So the initiatives that we're driving is really allowing us to accelerate our position.

The third aspect of revenue is really about gaining share and leveraging our unique value proposition for our customers. We have a large number and an increasing number of strategic partnerships with our customers. And the reason that customers select Thermo Fisher is that we reduce their costs, we improve their productivity and we accelerate their innovation. And we do that through a number of levers. The first of which is our technology leadership. We simply have phenomenal products that make a difference to our customers.

The second is our industry-leading laboratory supplies channel. We basically, can get them the products that they need from a variety of companies to their door, when they need it at a very effective and efficient manner using our leading logistics capability, as well as our leading e-commerce platform.

Unity Lab Services, I mentioned that I was very excited about this at the beginning of my presentation. Basically, we have the largest install base out there of equipment and instrumentation of any company. We have a very large and capable service organization. We also have some high-value-added services like asset management and actually outsourcing work within the laboratory. We pulled that all together under a single umbrella, a single set of capabilities with a new brand called, Unity Lab Services to really go out and gain share, to pick up legacy service business that other companies, other OEMs and independent service organizations have focused on. Our offering is so compelling that we're confident that we'll able to leverage our position to just pick up market share and really do a great job for our customers. So we see this is a really nice growth driver not only 2012, but into the future. If you will, yet another leg to propel our top line growth.

And in our clinical trial services business where we manufacture, package, label, and handle the logistics from more experimental medicines than any company in the world, including the pharmaceutical companies. We have a unique position here in terms of outsourcing as a business with phenomenal momentum, as our customers are looking for productivity and they continue to put more and more work with Thermo Fisher. We believe we are very uniquely positioned to deliver value for our customers and that ultimately will allow us to gain share.

Going to the second aspect of our report card and that is margins. We are very focused on driving operational performance. If you look at our historical track record, we average about 70 basis points of margin expansion from 14.6% in 2006 to 17.5% at 2010. And our guidance for the year, last year is around 18% in terms of margins.

We have a number of levers that drive that margin expansion and we can continually pull those levers to drive margin expansion going forward. Whether it's pricing or volume leverage, whether it's PPI-Lean, our PPI business system, our global sourcing efforts, our low-cost region manufacturing, our facility rationalization, with the synergies that we get from acquisitions, we have a lot of levers and a phenomenal track record to drive margins.

When you look at some of the details for 2011, just picking a few of them, in terms of our PPI business system. We drove about $75 million in costs through the use of our continuous improvement methodologies across the company.

Global sourcing, we continue to migrate more of our sourcing activities to low-cost regions. We're constantly aggregating when we buy a new business, we're leveraging the contracts that we have. $70 million in sourcing savings that we're able to drive last year.

We have a large footprint of facilities around the world. Every time we shut down a manufacturing site from a fixed-cost basis, we typically take out $2 million to $3 million of costs, as well as get higher quality as we move to our center of excellence, better working capital and a number of other benefits.

Last year, we consolidated 12 facilities and we've improved our manufacturing productivity from a revenue per facility perspective over 35% over the last 5 years, so significant progress. And we're up to about $600 million of our manufactured goods now in low-cost region manufacturing. Continually moving production from higher cost location to lower cost location to drive the bottom line.

As we look to 2012, we're going to drive this even harder and I'll highlight that in a few moments. The third aspect of our goals for last year was how do we deploy our capital to create shareholder value? Two areas: one is our growth investments, the second is our return of capital. When you look at our growth investments focused on acquisitions using our disciplined acquisition strategy that you're all, I'm sure, very familiar with, in terms of strategically straightening the company, creating value for our customers and having acquisitions that clearly create shareholder value, as measured by return on invested capital. We have a proven track record of successful integrations. And the recent acquisitions Phadia and Dionex, to name 2 of them, really continue to improve the company's growth profile as well. And I'll get into both of those in couple of seconds.

From a return of capital standpoint, we returned $1 billion in 2010 and we returned $1.3 billion in 2011. And at the end of last year, we authorized $750 million of share buyback authorization as well.

We're using our strong cash flow to increase shareholder value, while maintaining our financial flexibility. Let me give you a quick update on Dionex. We closed Dionex in May of 2011. As a reminder, and the date on the top is a little bit old because we haven't yet reported our results. But in 2010, Dionex is a $420 million business, leading manufacturer of chromatography instruments, software, consumables and services, serving a very attractive set of markets in environmental, life sciences, industrial applications.

If you recall back to, when we announced the deal, about a $60 million synergy target in year 3, $40 million from cost, $20 million from the earnings from revenue, as well as greater tax efficiencies from leveraging our financial structure.

I wanted to give you a progress report. So this is really a first progress report that we've given on Dionex since the close of the acquisition. Cost synergies through the first 7 months, $10 million. So we are a little bit ahead of the $15 million first 12-month goal. So we feel good about the cost synergy performance.

Revenue synergies. $8 million in earnings in that same period of 7 months, well ahead of the rate that we talked about of $20 million of earnings in year 3. So we are getting significant momentum in mass spectrometry, HPLC and environmental markets by combining the capabilities of Dionex and Thermo Fisher Scientific.

And we expect, over that first 12-month period for our accretion, that we have for that 12-month period, to be about $0.02 ahead of what we talked about at the time of closing. So we feel very good about the progress on Dionex. Early days, no victory laps, but it's good to be running, running right on track, actually a little bit better.

Phadia is even newer in terms of the acquisition, we closed at the end of August. As a reminder, Phadia is a leading developer and manufacturer of specialty in vitro diagnostic products, world leader in allergy testing in a very rapidly growing position in autoimmune testing. Basically, a EUR 367 million euro business back in 2010.

When you look at the synergies that we outlined at a time of the announcement, $35 million in adjusted operating synergies, $10 million in 2012, as well as accelerating our adjusted EPS growth rate as well as our organic growth. Cost synergy is $15 million, revenue synergy is $20 million and significantly greater tax efficiencies from the combination of the businesses.

While it's very early days only about 4 months, we're on track to achieve our cost synergies. The plans have been put in place on the revenue side and we are already seeing significant incremental value being realized from better-than-expected tax synergies, as well as from lower financing costs even at the time the we had announced the financials. So financing was very positive, taxes very positive and we are expecting to exceed the acquisition synergies with the acquisition accretion here by a few cents, so even a little bit better than Dionex is our early read on Phadia.

So we feel very good about 2 of the larger deals that we did in 2011. So all of that work of revenue growth, expanding margins and effectively deploying our capital has led to the guidance that we talked about in October of 18% to 20% -- 18% to 21% earnings growth for last year.

So let's just do a recap. I'm very excited about our performance last year. I'm very proud of what our 39,000 employees have done. When I look at revenue growth, I actually give it a yellow not a green. Why do I do it because the macro economy got a lot more difficult as the year unfolded. We didn't see the tsunami coming, we didn't see Greece, we didn't see the U.S. credit default. We acted quickly. We did the adjustments that we needed to do. The underlying actions are good but at the growth rates we had through the first 9 months, we're all driving for higher performance. So I give it a yellow even though I think fundamentally, we did a lot of good actions. I feel very proud and very good about performance on margins as well as capital deployment. So 2011 will turn out to be a very good year against our bar of having excellent years and that's our goal to have an excellent year in 2012.

So let's talk about what we're doing to set ourselves up for 2012. First of all, before I get into the goals for 2012, I want to talk about cost management in the environment that we're seeing. So in the second half of 2011, especially as we saw weakness in academic and government spend in the U.S., we implemented a number of incremental cost actions to address the market conditions. We tightened up discretionary spend, we did some targeted reduction in force, as well as initiated incremental facility consolidations. That will have a $35 million impact on our bottom line this year. This is above and beyond all of the other levers that we talked about on the previous page. This is pure restructuring activity above and beyond the normal run rate that we do.

In our planning for the year, which we'll highlight in a lot more detail on February 1 when we report our results, we also have put $20 million more of actions in terms of cost reduction to affect this year in terms of what's in our operating plans. And we have developed very significant contingency plans, which we're not expecting to actually have to pull, but if something happened and there were some sort of unforeseen macro shock, we're ready to go and address that and we used our planning process at the end of 2011 to set ourselves up to manage through the downsides if they occur and be well positioned to seize on the upsides as they unfold. So this total program of about $55 million of impact in 2012, you can think about as $100 million cost reduction program from the benefits we already received in '11 through the benefits that we received that trail into '13.

Our goal should be very comfortable and familiar to you. We're consistent about what we’re trying to do. Revenue growth, build on the emerging market momentum, launch innovative new products, drive our shared gain initiatives and then 2 others, capitalize on the acquisition synergies that we signed up for and launch Unity Lab Services.

On margin expansion, again, should be comfortable. Aggressive focus on our PPI business system, continuing to shift to low-cost manufacturing footprint. We'll be implementing the incremental cost reductions I just highlighted as well as delivering the acquisition cost synergies that we signed up for. So 2 levers on the bottom there are also new. Capital deployment, we've got an exciting M&A pipeline. We'll continue to look for deals that meet our criteria and deploy capital when we think it's really viable for our shareholders and we'll continue to return capital as well to our shareholders.

And then finally, my last slide. In summary, I think we are very well positioned to seize opportunities, to create opportunities and to meet the challenges those that we see and those that we can't see yet. When you look at it, the company continuously strengthens our industry leadership. We've got a great track record in innovation. We have unparalleled customer reach and we have leading scale in emerging markets. We have a strong culture and discipline in driving productivity. We're accelerating our productivity actions for 2012 to meet any challenges that are out there in the market and we're executing our acquisition synergy roadmap. We have a great ability to adapt to a changing environment. We have a very seasoned management team. Our top executives average over 10 years of experience with the company and is a phenomenal team that has managed through recessions, managed through periods of rapid growth, and one that will help us navigate whatever we might face.

And I want to end with the following thought, which is ultimately, we're the essential partner in our industry in improving our customers' productivity and there's no place that I would rather be in this environment than helping our customers meet their challenges and making them successful.

Thanks for your interest in Thermo Fisher Scientific. I'm looking forward to a great 2012. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!