VWR Corporation (NASDAQ:VWR)
Q4 2016 Earnings Conference Call
February 24, 2017 8:00 AM ET
John Sweeney - Vice President of Investor Relations
Manuel Brocke-Benz - President and Chief Executive Officer
Gregory Cowan - Senior Vice President and Chief Financial Officer
Eric Percher - Barclays Capital, Inc.
Juan Avendano - Bank of America Merrill Lynch
Doug Schenkel - Cowen & Co LLC.
Dan Leonard - Deutsche Bank Securities, Inc.
Isaac Ro - Goldman Sachs & Co.
Amanda Murphy - William Blair & Company, L.L.C.
Tycho Peterson - JPMorgan
Stephen Willoughby - Cleveland Research
Derik De Bruin - Bank of America Merrill Lynch
Good day, ladies and gentlemen, and welcome to the VWR Fourth Quarter and Full-Year 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.
I’d now like to turn the call over to Mr. John Sweeney, VP of Investor Relations. Sir, you may begin.
Thank you, Chelsea, and good morning, everyone. Welcome to VWR’s fourth quarter and full-year 2016 financial results earnings call. I’m John Sweeney, VP of Investor Relations, and joining me today are Manuel Brocke-Benz, President and CEO; and Greg Cowan, SVP and CFO.
Manuel will lead a discussion, providing overall comments on VWR’s financial and operational performance. Greg will then walk through the results of our operations and our financial outlook for the year. Manuel will then wrap up our prepared remarks with some closing comments. And there is a slide deck accompanying this call on our Investors website at investors.vwr.com. Following our prepared remarks, we’ll open up the lines for Q&A.
I’d like to note that we’ll be making some statements during the call that are forward-looking statements within the meaning of the Federal Securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, in those set forth in our SEC filings.
Actual results may differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update, whether as a result of new information, future events and developments or otherwise. This call will include a discussion of our non-GAAP measures and a reconciliation of these non-GAAP measures can be found at the back of the deck.
And now with that, I’ll turn the call over to our CEO, Manuel Brocke-Benz. Manuel?
Thanks, John, and good morning, everyone. As our results show 2016 was a strong year for VWR, delivering strong top and bottom line growth for the business. Organic revenue growth was 3.2% for the full-year which is still comfortably within our long-term organic revenue growth expectation of 3% to 4%. This was driven by tremendous first half performance in the Americas, up 5.7% in the first six months of the year and consistently solid organic growth throughout the year in EMEA-APAC which was up 3.4% on an organic basis in 2016.
2016 adjusted operating income margin was 9.5% flat to prior year. The flat operating income margin was a result of the steep strengthening of the dollar against the euro and other currencies and an increase in variable compensation, reflecting our desire to align our compensation programs more closely to the market.
During the year, we continue to de-lever our balance sheet reducing our net debt to adjusted EBITDA ratio from 4.1 times at the start to 3.8 times at the end of December 2016. And we continue to work down our interest, reducing net interest expense from $102.8 million in 2015 to $79.7 million in 2016.
Operating cash flow increased 18.3% to $266.2 million and we posted a 13.2% increase in our adjusted EPS to $1.72 in 2016. In addition, we made good progress in driving sales increases for private label and services which together grew in the 8% to 10% range for the year. So despite a relatively difficult currency environment, VWR posted solid financial results in 2016 and sets the table for continued growth in 2017 and beyond.
Moving now to our fourth quarter performance. Revenues increased 1.6% on a reported basis. As we mentioned on our last earnings conference call, our third quarter revenue trends continued into the fourth quarter. Additionally, as a result of the strengthening of the U.S. dollar, we incurred an incremental $10 million currency headwind compared to the expectations we gave on our last earnings call.
Fourth quarter organic revenue growth came in at 1% just slightly weaker than the third quarter run rate with an organic revenue decline of 0.9% in the Americas. The function of the difficult compared to the extra billing day in the prior year quarter somewhat offset by a solid organic revenue growth of 3.6% in EMEA-APAC.
Adjusted operating income that excludes amortization, restructuring and other items was $111.5 million in the fourth quarter up $2.4 million as compared to prior year. We have now lapped the interest benefit coming from our refinancing activity, so interest expense was relatively flat as compared to last year's fourth quarter.
Fourth quarter 2016 adjusted EPS was $0.45 down $0.02 compared to the prior year with a reduction in adjusted EPS driven by the year-over-year change in the quarterly tax rate. Operating cash flow in the fourth quarter 2016 was $80.1 million up 18.3% as compared to prior year.
Moving on to Slide 7. EMEA-APAC fourth quarter revenues increased 0.4% and were up 3.6% on an organic basis. Organic revenue trends improved after relatively weaker third quarter performance. Currency was 3.8% headwinds to EMEA-APAC revenues in the fourth quarter of 2016. This was particularly driven by the weaker British pound, which was down 18% as compared to the prior year quarter.
EMEA-APAC operating income was $27.4 million down as compared to $49.3 million in the year ago quarter. Operating income was significantly impacted by the fourth quarter restructuring. On an adjusted basis that is excluding the restructuring, other charges in amortization in both quarters, adjusted operating income declined by $2.6 million to $53.7 million.
The year-over-year weakening of the British pound and the Euro reduced fourth quarter 2016 operating income by approximately $2 million with year-over-year increase in variable compensation contributing an additional $1 million to adjusted operating income declined.
Encouragingly in EMEA-APAC, we saw growth in all customer segments in the fourth quarter of 2016. Sales to biopharma customers were up low single-digits with strong sales of private label offset by a more cautious purchasing behavior by large pharma customers.
Healthcare customers increased mid single-digits with strong growth in branded consumables and instruments. Education was up low single-digits, mainly driven by the timing of a large furniture project. Government increased low single-digits, benefiting this year from the timing of a customer installation.
Industrial revenues were up mid single-digits with strength in consumables sales. From a product perspective, consumables were up mid single-digits. Sales of chemicals increased low single-digits, while sale of equipment and instrumentation increased mid single-digits.
Moving on to the Americas segment on Slide 9, in the fourth quarter, the Americas had 2.5% revenue growth. Organic revenues declined by 0.9%, while acquisition contributed 3.3% to total revenue growth. The Americas negative organic growth was a function of a very difficult comp. If you recall organic revenue increased by 6.4% in the prior year fourth quarter. In addition 2016 fourth quarter had one less billing day making the comparison even more challenging.
Operating income was $40.7 million, up $2.3 million as compared to prior year. However, when you exclude amortization and other reconciling items, adjusted operating income increased $5 million or 9.5% and adjusted operating income margin increased 60 basis points to 8.6% in the fourth quarter of 2016.
In the Americas, we saw a low single-digit decline in biopharma with decent growth in chemicals and services and relatively weaker performance in equipment and instrumentation. Healthcare sales increased mid single-digits with solid growth in chemicals and instruments and strong sales to hospitals.
Education was up low single-digits with goals in universities and K-12 customers. Sales to government entities were up mid single-digits with growth in federal and state government accounts. Industrial was up low single-digits with growth and sales to microelectronic environmental offset by weakness in mining, agriculture and petroleum customers.
From a product perspective, net sales of consumables declined low single-digits, chemicals increased mid single-digits and equipment and instrumentation declined low single-digits in the quarter.
Okay. With that, I will now turn the call over to Greg to discuss financials and outlook. Greg?
Thanks Manuel and good morning everyone. I am on Slide 12 of the deck. Today we reported fourth quarter consolidated revenues of $1.13 billion, up 1.6% as compared to the prior year and up 1% on an organic basis. This performance was against a fairly difficult comparison as we grew consolidated organic revenue 5.6% in the fourth quarter of 2015. Currency was a 1.6% headwind to sales growth. Acquisitions added 2.2% of fourth quarter revenues.
Our gross margin was 27.8%, up 10 basis points year-over-year, driven by a stable pricing environment and favorable customer mix. Fourth quarter SG&A expenses were $246.2 million, up 11.8% as compared to prior year. However, SG&A included restructuring in earn-out costs, excluding these items in amortization in both the years, SG&A increased by $4.5 million or 2.3%. Operating income was $68.1 million excluding the restructuring, amortization and other items adjusted operating income was $111.5 million up $2.4 million as compared to prior year.
Moving on to items below operating income line, interest expense was $19.2 million relatively flat as compared to the prior year quarter. The tax rate used to calculate our fourth quarter EPS was 44% and for adjusted EPS was 36.5%. The tax rate used to calculate adjusted EPS for the full-year was 35.1%. Fourth quarter diluted earnings per share was $0.20 as compared to $0.41 in the prior year, and fourth quarter 2016 adjusted EPS was $0.45 down $0.02 as compared to $0.47 in the prior year quarter due to the lower tax rate in the prior period.
Operating cash flow came in above our expectations with 2016 operating cash flow of $266.2 million up $41.2 million or 18.3% as compared to 2015. We had a strong finish to the year with fourth quarter operating cash of $80.1 million up 18.3% as compared to the fourth quarter of 2015. Capital expenditures for 2016 were $59.9 million up $19 million versus 2015. The increase in capital expenditures was driven by the completion of our 226,000 square foot chemical manufacturing facility in Solon, Ohio. 2016 free cash flow or operating cash flow less capital expenditures was $206.3 million in 2016 versus $184.1 million in 2015.
Moving on to Slide 14. Our capital deployment strategy is focused on continuing to de-lever the balance sheet and investing in value-added acquisition opportunities. We finished the year with net leverage of 3.8 times in line with our expectations. In 2016, we acquired Therapak, PAW, JM Separations, Reliable and BioArra. These acquisitions continue to strengthen our business model and broaden our capabilities to supply value added services and high quality products to our customers.
We had acquisitions spending of approximately $143 million in 2016 higher than our normal level of investment driven by a strong pipeline of acquisition opportunities we are seeing in the market. In January, we acquired SEASTAR, so we are off to a good start in 2017. In 2017, we expect to grow our cash flows with earnings, so we anticipate cash flows from operations of about $285 million for the full-year. As we move through 2017, we will continue to execute on our capital deployment strategy. Over the coming few years, we expect to reduce our net leverage into the low 3’s. As we continue to lower our leverage ratios, we will be in a position to consider alternative capital allocation strategies.
Now I will discuss our 2017 guidance. For revenues we expect organic revenue growth of 2.5% to 3.5% with lower organic revenue growth in the first quarter due to a fairly difficult comparison in the Americas ramping up as we move through the balance of 2017. Acquisitions that have already been completed are expected to add 1% to our topline growth. As part of our restructuring, we are in the process of disposing of a loss making business accounting for about 0.5% of our revenues.
At current rates currency is expected to be about $79 million headwind or about 1.8% of our reported revenue for the year. This gets us to our 2017 reported revenue guidance range of $4.56 billion to $4.61 billion which translates into reported revenue growth of about 1% to 2% over 2016 and up 3% to 4% on a constant currency basis.
We continue to execute on our restructuring activities and completed $20 million of the $30 million to $35 million restructuring initiatives in the fourth quarter with another $10 million to $15 million of restructuring expenses coming in 2017. These restructuring initiatives will add approximately $10 million in total to 2017 operating income as we leverage ongoing investments in IT, our operational footprint and process improvement initiatives.
While our restructuring benefit will fall directly to the bottom line. This benefit will likely be more than offset by two factors and increase in stock-based and variable compensation expense and in addition transactional currency headwinds for EMEA Asia-Pac as the euro and particularly the UK pound remain lower than prior year. It will take a while before we can pass along the necessary pricing to offset this headwind.
Adding this all together we now anticipate 2017 adjusted operating income margins to expand moderately in 2017. 2017 interest expense is now expected to be approximately $81 million to $82 million roughly flat to prior year. On the income tax we expected non-GAAP tax rate of approximately 34.5% for the first quarter and full-year 2017. The deductibility of stock options for tax purposes guess us a very modest reduction in expected tax rate for 2017 given a relatively new equity incentive program.
For 2017, we expect 6% to 11% EPS growth excluding the impact of currency fluctuations. However, as a result of unfavorable currency movements, our current expectation is for 2017 adjusted EPS in the range of $1.79 to $1.87 which represents growth of 4% to 9% over 2016 adjusted EPS. But obviously higher growth when you exclude the anticipated $0.04 translation currency impact. In terms of quarterly progression we expect the first quarter to show relatively lower year-over-year organic growth and adjusted EPS growth. With the growth rates moving up as we move through the rest of the year.
Just a final comment on taxes, with the legislation backdrop remains but rather uncertain there are two main areas which could potentially impact VWR in 2017 or 2018. A border tax adjustment and the potential lowering of the U.S. corporate tax rate. Starting with the border tax adjustment we import and export significantly less than 5% of both our American COGS and sales, sourcing the vast majority of our U.S. products from domestic suppliers. Accordingly, we would now anticipate a significant impact from a border tax adjustment should one be implemented.
In terms of corporate tax rate in the United States we pay a federal U.S. rate of 35% and we now are in about 60% of our pretax income in the U.S., if the corporate tax rate was reduced to say 20% this change without approximately $0.25 to our adjusted EPS on an annualized basis.
I would now like to give a quick update on our recent acquisition activity. In January, we announced the acquisition of SEASTAR CHEMICALS a manufacturer of high purity reagents used in the Global Research Laboratory industries. SEASTAR is a leader in the manufacturing of ultra-pure acid and base products as well as Trace Metal Analysis.
SEASTAR is leading product offerings and their dedication the quality, safety and innovation make them a strong fit for VWR. The acquisition represents our most recent biochemical acquisition and fits nicely into our existing portfolio. Previous acquisitions include AMRESCO which provides a variety of biochemical products in addition to the manufacturing of diagnostic reagents.
United biochemical and national bio chemical which are pure biochemical manufacturing companies, purification technologies with its products in the high purity solvent space, BioArra is a supplier of serum-based products to biopharma customers and reliable and manufacturer of media components and excipients for biopharma customers. We have long been excited about the biochemical space and are continuing to invest and build-out our platform.
As all of these businesses were traditionally direct they create minimal conflict with our existing distribution focused supplier base. We welcome the SEASTAR employees into the VWR family and look forward to a successful future with them.
With that, I'll now turn over the call back to Manuel for his additional comments.
Thank you, Greg. I'm on Slide 18 of the deck. I would now like to give you some quick thoughts and how we see our customers developing in 2017. Sales to biopharma customers started 2016 with strong double-digit growth decelerating to more moderate growth rates toward the end of the year. I believe that biopharma customers are generally optimistic about the potential for speeding up the FDA approval process and perhaps a little cautious on the pricing environment. But overall, I have a positive, call it mid single-digit outlook for the year.
Industrial customers showed positive growth in both Americas and in EMEA-APAC in 2016. Customers continue to become more sophisticated and need to leverage VWR’s global capabilities and services. In addition, regulation is going to be even more of a factor, driving increases in certain sub-sectors like food, beverage and safety. We now expect low to mid single-digit growth for industrial customers in 2017.
We had a good year for government and the Americas in 2016 based on some of the programs we have put in place and I expect this trend to continue in 2017. In EMEA-APAC, we expect ongoing pressure in government funded segments, including healthcare and education customers. In the Americas, healthcare could see mid or even high single-digit growth in 2017.
I recently attended our Americas sales conference and our Global and European leadership conferences. And I have to say that I'm extremely encouraged by the high level of energy and enthusiasm that our associates have shown at these meetings. All of my conversations with suppliers, customers and our associates have confirmed that VWR has incredible capabilities that fully differentiate us in the marketplace.
VWR operates at the nexus of our industry joining together thousands of suppliers with over 100,000 customers around the world. Neither our suppliers nor our customers are especially concentrated. Our largest customers represent only 3% of sales and even our largest chemical supplier represents only 6% of our total cost of goods sold.
Suppliers value VWR, because we give them access to a global sales and support infrastructure, including deep relationships and ties to our customer base, specialized support and information to run their businesses. In short, we treat our suppliers like our customers in helping to grow their businesses.
Customers value VWR because we offer a broad array of products and services and we allow them to better manage their supply chain. They trust the security we give them, assistant with their regulatory compliance, visibility into their global purchasing with integrated EDI connectivity, reporting capabilities and inventory software management tools.
In addition, we offer our customers an increasing array of value-added services marketed under the VWRCATALYST brand, allowing them to continue to outsource non-core functions and instead focus on their own competitive imperatives. As we move forward, we will take the necessary steps to continue to enhance customer intimacy, leverage the relative strength of our supplier base and increase the use of our unique IT capabilities.
Our positioning in the industry coupled with the optimism that we are currently seeing from our customers, make it clear to me that 2017 will be a year, where VWR continues to strengthen our competitive position and become even more valuable to our global customers and supplier base.
To finish up VWR successful 2016 performance was the result of all the hard work and collaboration of our dedicated and talented team of VWR associates around the world. I would like to thank all of them as well as our loyal suppliers and customers for helping us deliver a strong year and I look forward to updating you on our progress as we move through 2017.
And with that, I would now like to open the call for questions. Operator?
[Operator Instructions] And our first question comes from the line of Eric Percher. Your line is now open.
Thank you. I have a question on maybe the visibility as you enter the year. I want to make sure I cut it right that your comment on organic growth was 2.5% to 3.5%. And my other question would be what does it feel - is there a number you can give us in comparison to the visibility you have as you enter 2017 relative to 2016 given that organic growth rate, given a bit of a change to the acquisition strategy or I should say increase in the acquisition strategy. Where do you feel you are at this moment?
Yes. This is Manuel. Thank you for the question. We feel pretty good about the start of the year here, and specifically in Europe we're growing very nicely in the first couple of months. Now we're almost half through the first quarter obviously at this point in time. So we're confident that we will be in the range that we have indicated between 2.5% and 3.5% in organic growth.
The phasing of the year and that's what we mentioned as well is it's a little bit backend loaded because we had a very difficult comparison in Q1 especially in the United States or in the Americas segment. And therefore, we expect higher growth rate in the Americas in the second half of the year, while Europe came out of the gates rather strong already.
Right. I guess one elementary that I’d want to ask about is the second half of the year, we knew there was a tough comp. You gave us some advance notice of that, but when I look at Q4, I felt a little bit further than I expected. From your point of view did it feel like a greater slowdown than was expected in the Americas? Or did it feel like you were on the same line and then how that leads us into 2017?
Yes. I mean there's always some special effects in any given quarter where specific customers tend to spend less or surprisingly spend less than then we had anticipated. But overall it didn't feel like we were deviating from what we were expecting. I mean we are very close to what we said on the third quarter earnings call. We saw the decline or the slowdown in Q3 and that continued into Q4, but again we're not too fussed about it. It's really more that compares into the last years quarters that causes this and we feel very confident that this will change again in the out quarters.
Thank you. And our next question comes from the line of Derik De Bruin with Bank of America. Your line is now open.
Hello, good morning. This is Juan Avendano on behalf of Derik De Bruin. Thank you for the question. My first question is going to be - I was wondering if you can recap the M&A contribution to overall FY17 revenue guidance? And also, if you could let us know whether recent acquisitions are actually delivering in line with your original expectations?
Sure. This is Greg Cowan. I'll handle that. Yes, we expect the run rates for deals that are wrapping around as well as our completed SEASTAR acquisition to provide about 1% revenue contribution in 2017 on the full-year, so call that somewhere between $40 million and $45 million.
In terms of performance on our acquisitions, the last three acquisitions we've done are obviously very recent, so they will take some time to develop their run rates as we work through integration and alike, but we are very pleased with the acquisitions that were conducted in 2016.
Earlier in the year, the performance has been very solid and I’d say collectively meeting the investment cases that we had. So we have some work to do with the three most recent ones, but the ones that were completed before then are performing quite well for us.
Good. Thank you. Then my second question is regarding the moderation of growth in Biopharma within the Americas. Besides the tougher prior year comps are there any other fundamental demand or competitive dynamics in play that you're seeing?
Actually not at all. We're in a rather stable environment also 2017 when it comes to pharma account, we feel very good about the account base that we have it was a few isolated pieces that we already eluded to on the Q3 call you know one major customer was going through a system change that slowed down their spending. So you know those are more technical issues rather than you know fundamental issues from a demand perspective. And I actually don't expect that to happen and that's why I mentioned earlier on here that we expect roughly mid single-digit growth pharma in 2017.
Got it. Thank you, and lastly with regards to private label and custom manufacturing growth. What was the magnitude of growth in 4Q on what's embedded in your expectation in fiscal year 2017 guidance when it comes to private label and custom manufacturing?
Yes, I mean again we have as a target the combination of custom manufacturing private label and service should grow anywhere between 8% and 10% and we're in that range and we expect that to continue.
Thank you. And our next question comes from the line of Doug Schenkel with Cowen & Company. Your line is now open.
Good morning and thank you for taking the questions. Maybe just a quick follow-up on one of those last questions, just to go back to Americas pharma growth one more time. I think we've largely covered this but just to make sure you called out what sounded to be a weaker demand pattern than normal especially in the Americas and at this point in earnings season.
I think it's fair to say that you know while the commentary was a bit more mixed on the pharma end market than we've seen in a few quarters it was generally more positive than most expected. So you guys definitely you know kind of came out on the more negative side? Is this just timing dynamics as you mentioned Manuel or is there anything that's worth talking about in a little more detail in terms of specific product categories where demand was maybe stronger or weaker than you characterize or any changes in account positioning anything like that?
No, no not really I mean like I said it's a rather stable environment what I would say in Q4 we saw less equipment instrumentation sales to pharma customers. I think that's where - there were some maybe budget cuts within specific accounts, but you know this is not a general statement that we can make I mean every single pharma account will make different decisions based on their development cycle or where they stand in the year. So I wouldn't read into that a general trend here.
Okay. Thank you for that and unrelated follow-up. You commented on your largest chemical customer accounting for 6% of COGS I think that's what you said…
Yes, supplier. So just doing some quick math is it right to assume that this account still accounts for around 10% of sales and a little bit more than that at EBITDA line.
No, no it's significantly less than that.
Significantly less than that. Okay, all right thank you for those details.
Thank you. And our next question comes from the line of Dan Leonard with Deutsche Bank. Your line is now open.
Thank you. First off a tax question, thank you for the color on how much benefit from lower rates. Philosophically would you anticipate the entirety of any benefit would fall to the bottom line or are there certain programs you would use the extra money to invest in?
Well, that's a fair question. I hope I get the opportunity to answer it tangibly at some point. So again this is a lot of assumptions and obviously we need these regulations to actually be passed and have an effective date, but it would be it would dramatically improve our cash flow as well as our earnings profile if in fact we had a 20% rate in the U.S. and if that were the only adjustment to pretax income we would certainly have more money to deploy toward growth in the business. In terms of potential M&A as well as continue with the leveraging of the Company.
Okay. And then my follow-up question. Can you walk us through the pacing at which you expect to recover some of the foreign currency headwind through pricing? I think you said it would take time, but any more color on that patient would be helpful.
Yes, I mean again there's the biggest culprit here was actually the British pound you know was Brexit and declining by almost 20% in mid-year last year and so you have to - first of all you cannot adjust your pricing right away to customers because they actually don't care whether you import stuff from let's say the Eurozone or the U.S. and therefore you have to get that into pricing over time and again I don't think it's realistic to have a 20% price increase in January 2017 to offset that impact. So this will take a couple of years where you kind of phases in and therefore we're a little bit cautious about the recovery of the margin hit that came out of that FX decline.
Is it makes sense?
It does. Thank you.
Thank you. And our next question comes from the line of Isaac Ro with Goldman Sachs. Your line is now open.
Hey, guys. Good morning, thanks. First question I’ll deal with free cash flow. It looks like CapEx came in a little bit higher for the year in 2016 than the original guidance, and you mentioned a manufacturing plant. Can you give us a sense about how CapEx looks for 2017, because I think you give us an operating cash flow number, but not a CapEx number to net that again? Thank you.
Yes, sure Isaac. This is Greg. Yes, we did accelerate a couple of projects as we saw very strong operating cash flows in the fourth quarter. We pulled a couple of projects ahead that were on the bubble between 2016 and 2017. So we drifted north of $55 million to about $60 million of CapEx this year. Our expectation is for a similar level of spending in 2017 with some emphasis on continuing improvements in our IT architecture and capabilities and the like, so pretty much steady state with CapEx in and around 1.2%, 1.3% of revenue.
Thanks. And then just a follow-up on the pharma end market, as is often the case, there's just a lot of interest in customer concentration for you guys, net of what's going on in a competitive environment. Could you guys give us a sense, I think you talked before about the diversification of your business on the topline, but how about just the concentration of profit contribution for pharma? Are there any customers that are just unfortunately high percentages of profit as opposed to revenue?
No, no. That's not the case. I mean we were talking about a very competitive environment to begin with. So I would even say that pharma as a second probably has a lower profitability than some of the other segment that we are serving.
Could you maybe put some framework in terms of like just concentration of profits? Is it in the low single-digits for your biggest pharma customers or maybe in less?
Yes, it's a low single-digits.
Thank you very much.
Thank you. And our next question comes from the line of Amanda Murphy with William Blair. Your line is now open.
Good morning. I have had a follow-up to you on Isaac’s question around the competitive dynamics. So maybe there's been a lot of discussion around the impact of various different consolidation efforts in the space. Can you maybe just [indiscernible] any change in terms of some of your competitors have to either the geographies?
So it's actually - we're in a very stable environment right now and we don't expect any major swings in 2017 in that space at all.
Okay. And then I had one question around academic, the academic market. So there's been some discussion and I think it's mostly in the U.S. around just timing of the disbursement and some of the agencies moving a bit more toward shorter time horizon. I'm not sure that is more of a capital equipment dynamic, if you've seen any impact from that at all on the business?
I mean we haven't seen major impact of any budget flashes in Q3 in academia, in North America. And like we always say in Europe the situation doesn't really improve in the government funded segments, which includes education. But again overall we were actually out of the gates pretty well in the U.S. this year in education and so we believe we were doing a good job to that market and also on the government side. We had very good growth almost double-digits last year and we continue to see a very positive trend here also into 2017.
Got it. Thanks so much.
Thank you. And our next question comes from the line of Tycho Peterson with JPMorgan. Your line is now open.
Hey, thanks. Manuel question on industrial and 22% of your business understand obviously more than - and some of the markets talked about like Madison Mining are still lagging, but can you maybe just talk to your views on your leverage to a recovery there. I know you're guiding for kind of low single-digit to mid single-digit growth, but maybe just talk about how you think about recoveries in the market?
Yes. Actually in Europe industrial is the leading segment and with very nice growth and also starting again in 2017, we are seeing double-digit growth in industrials. So I'm very happy with industrial development. In the U.S. as well I personally see the Industrial segment as one of the biggest growth opportunities for the Company because it's a very fragmented market and we're competing very often with smaller competitors. And we believe with all the investments we put into our infrastructure system capabilities this is where we should actually gain share.
And are you expecting a pickup in some of the markets that have lagged that you flag like Petrochemical and Madison Mining over the course of the year?
Yes. I mean again, it's hard to predict specific sub-segment, but because there are so many different sub-segments we will always find ways to grow our business in the ones that are actually growing. It's really aligning with those sub-segments and grows the most which will give us the biggest bang for the buck here.
And then I know you had a number of questions on kind of some of the year end dynamics and you had highlighted these at our conference as well. Are you able to comment on January trends and whether you saw a pick up relative to some of the budget flashes slowdown that you didn’t see at year end?
Well, again it’s still early in the year, but I would say we're better of the gates in Europe than we are in the Americas, but we also have a growth trajectory here in the Americas as well.
Okay. And then two quick ones for Greg. Greg you mentioned pursuing alternative capital deployment strategies, can you maybe just clarify what you mean there outside of M&A? And then other additional restructuring actions that are planned for 2017 or is it just kind of a carry through from - 2016?
Yes. So let me start with your second question. So with respect to restructuring, we recorded about $20 million of charges. Here in the fourth quarter, our program as we indicated is somewhere between $30 million and $35 million, so I would expect additional charges here in the first half of the year, generally speaking accounting for the vast majority of that program by this year.
From an operational perspective about two thirds of the program is really operationally related in terms of headcount and some modest facility consolidations and the like and the cash outflows associated with that program generally would be accomplished towards the tail end of this year. So broadly speaking, the vast majority of this will be in the books and fundamentally behind us as we work through the third quarter.
In terms of acquisition opportunities, capital allocation, we continue to see a very robust pipeline. What I'm really encouraged about is the quality of the pipeline that we have in terms of some of the platforms and even a couple of tuck-in sitting out there that look rather attractive to us as well. So as we continue to grow our cash flows, I think it's prudent to think about additional investments in high quality acquisition opportunities. So that remains primary capital allocation strategy for us, but we will continue to de-lever with residual cash flows as well. So we’ll maintain that balance.
Okay. Thank you.
Thank you. [Operator Instructions] And our next question comes from the line of Steve Willoughby with Cleveland Research. Your line is now open.
Good morning and thanks for taking my questions. Just a couple of quick things for you. I was wondering if you could provide any more color regarding what you're doing as part of the restructuring programs more specifically I guess. And then secondly, Greg that in your commentary on corporate tax reform and the $0.25 you suggested did that takes into account any impact from potentially not being able to deduct interest expense going forward? Thanks.
Sure. So with respect to the tax calculation, we haven't factored in an add back for interest expense. We don't know how that regulation would be rolled out and to what extent there maybe grandfathering et cetera, so that's just a pure calculation deviating from 35% to 20% on the pre-tax income of the U.S. business. I mean if I took a full add back for the interest expense just 100%. We would still have a very nice EPS accretion albeit probably about 50% of what I otherwise quoted.
Okay. Thank you for that. Is there any additional color or commentary regarding what you are doing with the restructuring program and what changes are being made?
Yes, sure. I mean we about every four years, you'll see in our history that we've implemented restructuring programs and these really reflect just ongoing continuous improvement in the business and the ability to step back for a moment and take advantage of some of the technology we put in place, some of the process improvement we've done and think about how we affectively consolidate and truly globalize this company.
And in doing that, there is a relatively moderate headcount reduction in a few small facilities that we have the ability to rationalize as we continue to do acquisitions. We looked at tuck in some of these operations into pre-existing businesses and some legacy facilities that just aren't as productive as they used to be.
So it's fundamentally just a little bit of bricks and mortar and moderate headcount reduction. But we're also investing in people as well. So on and that basis it's a relatively small reduction, but one that will produce estimated cost savings this year in and around $10 million and a payback less than two years. So it's a very valid program to have placed I would say.
Okay. Greg, if I can add one more question and the real quick just on your guidance regarding M&A contribution. Just so unclear, the deals you've done so far should add about a 100 basis points to revenue growth and then you mentioned something about a - some sort of divestiture or shutdown of the business, I'm not sure what the specifics were there that would be a 50 basis point offsets of the net impact is 50 basis positive contribution from net M&A, is that correct?
Okay. Thank you.
Thank you. And we have a follow-up question from the line of Derik De Bruin with Bank of America. Your line is now open.
Derik De Bruin
Hi. Thank you for the opportunity once again. My follow-up was also on the M&A and so regarding this business divestiture, in what segment does this correspond to and what was the rationale for divest in this business that will reduce revenues by about 50 basis points?
Yes, I mean the actual revenue reductions in the mid 30s. But having said that, it's within the broader EMEA Asia-Pac area, very geographically dispersed business and one that frankly I think is more readily managed for continuing growth by a little more local management presence.
So our view was that we're looking at our portfolio and to the extent that we haven't been fully successful and it's relatively non-strategic, we will take advantage of reduction opportunities from time-to-time and this would just be an example of effectively climbing back a little bit of the EPS from a loss making entity with that fundamentally should be doing better than it has.
Derik De Bruin
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Mr. John Sweeney for any closing remarks.
Well, thank you very much Chelsea and thank you everybody for joining us today. I just finished one quick thought on our modeling in terms of looking at the first quarter, what we told you that the Americas is showing an improving trend from the fourth quarter run rate in an organic perspective.
And that one thing to bear in mind is a very difficult comparison as we were up 7.6% in the prior year quarter in our GAAP basis, but overall pleased with that business. And then as you modeling out - the APAC section of the business. Bear in mind, that we've had a good start, but also bear in mind the timing of Easter this year, which actually falls into April as opposed to March of last year and that will impact the comparison as well.
With that, I would like to thank you for joining our call today and we look forward updating you as we move through the rest of the year. Thank you. Goodbye.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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