Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2018 Third Quarter Conference Call. All lines are mostly on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to introduce our moderator for the call, Mr.
Kenneth Acacerno, Vice President, Investor Relations. Mr. Acacerno, you may begin the call.
Good morning, and thank you for joining us. On the call with me today is Mark 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, dermalfisher.com under the heading Webcasts and Presentations until November 9, 2018. Copy of press release of our Q3 2018 earnings and future expectations is available on the Investors section of our website under the heading Financial Results. So before we begin, let me briefly cover our Safe Harbor statement.
Various remarks that we may make about the company's future expectations, plans and prospects constitute forward looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in the company's quarterly report on Form 10 Q for the quarter ended June 30, 2018, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and is also available in the Investors section of our website under the heading SEC Filings. While we may elect to update forward looking statements at some point in the future, we specifically disclaim any obligation to do so Even if our estimates change, therefore, you should not rely on these forward looking statements as representing our views as of any date subsequent to today. Also during 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 Q3 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 Mark. 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 Standing 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 2% to $2.62 per share in Q3. Our revenue in the quarter increased 16% year over year to $5,920,000,000 Adjusted operating income increased 12% to $1,310,000,000 and our adjusted operating margin in Q3 was 22.1%. The combination of great 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 Healthcare. 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 continue 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 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 and 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 from 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 Fadia 200, which recently received the CE mark for sale in Europe.
This is a fully automated bench top system that can perform up to 700 different ImmunoCAP and ELLIA tests to diagnose allergies and autoimmune diseases. Fadia-two hundred is perfect for smaller diagnostic labs and its flexible menu of tests minimizes the need to send samples off-site. This helps clinical labs retain control of the samples and improve operational efficiency. At the Microscopy and Microanalysis Conference in August, we launched a number of new products that expand our leading electron microscopy portfolio to enable discoveries to both academic and industrial customers. One of the highlights was our new Thermal 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 advanced microscopy technology accessible to a much broader customer base for a range of material science applications. In our Biosciences business, we introduced a new digital microscope For cell imaging during the quarter, the Invitrogen EVOS N5000 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 Boffel, Washington.
Last, domestic spectrometry, we introduced the Thermal 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 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 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 PayPayon a little over a year ago has further differentiated our value proposition for pharma and biotech customers. We 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 medium. Adding these products will allow us to help customers maximize yields and reduce variability in the production of biologic drugs.
So we continue 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 made great progress on all fronts. We've significantly delivered, and Stephen will give you those details. In addition, We're on track to deploy a total of $2,200,000,000 this year.
This includes $1,500,000,000 of M and A. We've closed the Inogenix acquisition and look forward to completing the acquisitions of Advanced Bioprocessing from Gatan. We also continue to have a very active deal pipeline. We will also return $775,000,000 of capital, which is a combination of $275,000,000 of dividends $500,000,000 of stock buybacks.
Let me take a moment to give you
a quick update on the integration of ATHEON 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. 2nd, legacy Patheon is benefiting from access to our 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 to $24,090,000,000 for 2018, resulting in 15% growth over 2017. In terms of adjusted EPS, we now expect to deliver between $11 $11.06 per share. This will lead to 60% 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, Mark, and good morning, everyone. I'll take you through an overview of our 3rd quarter results 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 Q3 played out versus our expectations during our last earnings call in July. If you saw in our press release, we had a very strong quarter with 10% organic growth and 13% adjusted EPS growth. It 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 was driven by $0.10 stronger operational performance and $0.05 better below the line driven by FX, lower interest cost and lower tax. This was partially offset by $0.03 of increased reinvestment in the business. So another excellent quarter. Let me share some more details on Q3.
Starting with earnings per share. This quarter, we grew adjusted EPS by 13% $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 Mark 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 very strong volume leverage 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 and L.
Total company adjusted gross margin came in at 46.2% in Q3, down 2 20 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 and A in the quarter was 20.1 percent of revenue, which is down 120 basis points versus Q3 2017, And total R and D expense came in at 4.1 percent of revenue, down 20 basis points versus Q3 last year. Both of these are primarily due to the impact of acquisitions. R and 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 $121,000,000 down $11,000,000 from Q3 last year, driven primarily by improved interest income. Adjusted other income and expense was a net income in the quarter of $14,000,000 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 Turning to cash flow and the balance sheet. Cash flow from continuing operations for the 1st 9 months of the year was $2,700,000,000 And free cash flow was $2,300,000,000 after deducting net capital expenditures of about $400,000,000 We ended the quarter with $1,100,000,000 in
cash and
investments. Early in Q4, we repurchased $250,000,000 of our shares, bringing the total repurchases for 2018 to $500,000,000 This is in line with our prior guidance. We returned $70,000,000 to shareholders through dividends in the quarter. Our total debt at the end of Q3 was $18,800,000,000 down $600,000,000 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. Now 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 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 is 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 forty basis points year over year. We saw very strong volume leverage and 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 Healthcare 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 and 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 trial logistics business and our research 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 $275,000,000 and tightened the range by $80,000,000 The $275,000,000 increase to the midpoint consists of 2 elements: a $315,000,000 increase in our organic growth outlook for the year and $40,000,000 less favorable FX. The $315,000,000 organic growth increase It factors in the stronger Q3 performance and a $45,000,000 organic increase for Q4. So 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 $23,990,000,000 to $24,090,000,000 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 the 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 $170,000,000 Revenue tailwind for the year, approximately 1%. The FX tailwind on adjusted EPS is assumed to be $0.13 or 1.4 percent. It's been a slight change in the composition of tariffs, but we continue to expect that the 2018 growth impact for the company is $14,000,000 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 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 $525,000,000 to $530,000,000 through reduction of approximately $20,000,000 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 $20,000,000 a slight improvement to our prior guidance due to non operating 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 $500,000,000 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 405,000,000 to 407,000,000, No change from previous guidance. We continue to expect to return approximately $275,000,000 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 $700,000,000 to $730,000,000 And for free cash flow, we're expecting about $3,800,000,000 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 and A.
Certainly. In order to allow everyone In the queue and opportunities to address the Thermo Fisher management team, please limit your time on the call to one question and only one follow-up. If you have any additional questions, please return to the queue. Your first question comes from the line of Tycho Peterson from JPMorgan. Please go ahead.
Your line is open.
Hey, thanks. Congrats on the quarter. Mark, I 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 FDI versus other pieces?
Yes. So as a reminder, CECL, thanks for the question. We have 3 businesses in our analytical instruments business, materials and structural analysis, which is electron microscopy and spectroscopy, chromatography and mass spectrometry and chemical analysis. All three businesses had double digit growth, very strong quarter. It was great to see continued momentum in electron microscopy.
Orders were strong. ChromaMES 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 outlooks a little bit shaky. So as we think ahead to next year, I'm just wondering if you can talk qualitatively about what market You think could accelerate versus decelerate? Do you think pharma, given that you've anniversaried Patheon and added BD Biosciences, can I get to actually accelerate?
And How do you think about China heading into next year as well?
The end market is 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.
Okay. Thank you.
Your next question comes from the line of Ross Muken from Evercore ISI. Please go ahead. Your line is open.
Good morning, guys, and happy birthday, Ken.
Thank you, Ross.
I'm sad I didn't get the birthday invite for 30th, but maybe next time. So maybe Don't hold you, Brad. So maybe let's start on the pharma channel. Obviously, given what we've 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's probably Yes, 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 The key that we outlined in 2006 in terms of how we serve pharma
and biotech keeps getting better
and better in terms of our And obviously, the underlying impact is strong as well.
And maybe, Steven, just on 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. Eddie, can
you just give us a little bit of
the puts and takes? I've gotten a bunch of questions. I know there were some pieces, particularly around Patheon That impacted this quarter and kind of reversed next quarter. So any of the detail around that sort of sequential cadence would be helpful.
Yes. So in terms of margins, in the current quarter, the business mix is really driven by the very high growth across The company, all businesses grew well, but it's because of the relative growth and relative profitability that the part Created some of the mix dynamics. So PESI Diagnostics, which had a great quarter for diagnostics, was below significantly below the company average, at The average profit margins for that was some mixed pressure on the reported margins. And then on the lab price and services, we've got some Relatively lower profitability that was lined, for example, the channel, which had exceptional growth, And that also then created some of the quarter's mix pressure in the margins. Overall, we grew adjusted operating income dollars 12%, But in terms of what the noise, in terms of the mix, how that came through, looking back to Q4, Looking at more 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 We're significantly more profitable due to the non repeat of the impact of the hurricane that we had in Q3 last year on the life of pieces to it. So that's The main driver.
Great. Thanks.
Your next question comes from the line of Jack Meade from Barclays. Please go ahead. Your line is open.
Thanks and good morning. Mark, I was hoping you could elaborate on what you're seeing on the ground now in China, retaining trade and tariffs. And Given the strength of the quarter, was there anything that you think pulled forward into the Q3 from the Q4 or beyond?
Yes. So Jack, thanks for the question. Look, 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 pull forward,
we're not seeing anything, Nothing
that we noticed out of you in terms of customer buying behavior. Looking forward, as I mentioned earlier, We're trying to sell next week and seeing a number of customers, spending time with the team, government, things of that sort. It's It's a great market, and we are still 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.
We look forward to a great future.
Great. Thank you. And similar to that, just hoping you could elaborate on what expectations were built in the quarter. You had a great Sorry to hear about 8% year to date organic. I think that implies about 3% to 4% isn't baked in for the Q4.
So Are you seeing anything related to budget flush? I'm guessing no, but if you could elaborate on what's built in, that would be great.
Hey, Jack. Thanks for that. That'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 1 point, as Stephen mentioned, organically.
So when I think about what's 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've used all year in a formal 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 A strong year end spend or a budget flush beyond sort of the normal, then this will truly be yet another just Spectacular quarter. Either way, we're going to have a fantastic year and setting ourselves up for a good 'nineteen. 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
Your next question comes from Derik De Bruin with Bank of America Merrill Lynch. Your line is open.
Thanks. It's Mike Ryskin on for Derek. 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 strength?
I mean, obviously, I think it looks like a lot of it's in pharma, but a little bit 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 a geographic lens. 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 Our last quarter's call continues to have great momentum, so that's another area. And bioproduction, Looking at what's been reported in terms of results from the couple of companies that reported so far, we grew faster than Those that have reported.
So those would be examples. Thanks. 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 Fadia 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 will 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 cloud form 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 Allogene, our allergy and autoimmune autoimmunity business continues to perform very well. Stephen, you want to talk about investments?
Yes. So in terms of the investments, given the strong market conditions and strong top 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, chromomasspec, electron microscopy and pharma services. Well, we're on great growth trajectory. I believe by selective additional growth investments, we can continue that business momentum.
And so the investments really mainly to accelerate R and D,
Your next question comes from Doug Schenkel with Cowen. Your line is open.
Hey, good morning guys. 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 biotech, but it's obviously not exceptional there. Yes. 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 Big driver. Your big industrial companies also are big adopters of the methodology, the chemical, petrochemical, those types of customers also. So That's a customer lens. But interestingly enough, when you think about those other segments, our geographic strategy of leveraging our scale And Asia Pacific in the high growth regions, that really has served those 3 end markets incredibly well because we just provided 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 I thank you for that, Mark. 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 I'm curious, one, what's been most surprising? And then looking ahead, how should we think about your full year growth targets in the Context of a strong 2018, do you think you're is it fair after 4 really strong quarters where 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 Good share gains. 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 are 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, it's been very good for us or for the whole business. It really is just reenergized Siteman in the pharma 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 long term.
Okay. Thank you very much.
You're welcome.
Your next question comes from Steve Bishaw with Morgan Stanley. Your line is open.
Hi, good morning and thanks for the time. I'll ask one for Mark and one for Steven. The one for Mark is, I wonder if you could Zoom out a little bit on the Patheon business and the environment around Patheon. Clearly, the synergy the commercial synergies and the call point 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 Product 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 at that segment of the market. And then my question for Stephen actually jumps off on some earlier comments about on Patheon and It's more about growth in margins into 2019. I think if you 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 of 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.
Thanks, guys.
So Steve, in terms of the growth rate for pharma services, It's an attractive market. It's got good growth prospects. We're performing well. The business is actually growing faster That will be 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 and L, 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 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 non repeat of the impact of the hurricane. The other piece for 2018 and the sequential part in our margins For the 1st 9 months, we've been basically bringing in Patheon's financials into the company, incorporating them into the Yes, well, company has 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 will 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 acts The share gain that we're taking in terms of setting up on the synergies, that strong growth will print at a good margin coming into that business to expand Basically, the expanded margins of Pharma Services Group. So you'll see that come in the overall margin expansion of the company in 2019 and beyond.
Great. Thanks so much. Thanks.
Your next question comes from Dan Arias with Citigroup. Your line is open.
Hey, good morning guys. Thanks. Mark, 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 just share gains and some really good execution. Do you feel like at the end of the day, organic growth is higher The NIH budget is up.
Yes, absolutely. 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 long time. So Having clarity going into the 1st 9 months of 2019 on a budget increase is really excellent.
And obviously, we're excited about the cryo electron microscopy program that got 130,000,000 of allocation earlier in the year, on a multiyear basis. So that bodes well for us as well. So market conditions are good in North America. It's flowing through our business, and we feel good about that. And then we'll continue to see a good outlook for academic and government around the world.
Okay. And then maybe just following up with 1 on the analytical segment specific to FEI. Is the semiconductor portion of that business Seeing any impact at all from the ups and downs in the macro picture? And I know there's a skew towards R and D there and obviously things look good overall. So I'm just
So materials and structural analysis had a very good quarter. Electron microscopy, a portion of that business, had a very good quarter. And the material science applications, which includes semiconductor And all of the other things from batteries to all of the basic material side 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 Yes.
And also because China, in particular, is building up a large infrastructure, to support their own semiconductor needs, that bodes well
Your next question comes from Patrick Donnelly with Goldman Sachs. Your line is open.
Great. Thanks for taking the question. Maybe, Mark, just on the macro front, given some mixed industrial earnings This week, lower European 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 that make you feel kind of constructive going forward?
Yes, Patrick, thank you for the question. Chemical analysis It's probably the our insurance 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 will ship in the future. I always like to look at mining because it gives you a sense of sort 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 you 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. So it's a good question. So we provided like super granular detail on tariffs and then 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 are in tariffs, and it's not been a huge economic impact. And what we've done I know is we have increased pricing in certain places.
We are making adjustments to our supply chain. It 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.
Great. Appreciate the color.
Your next question comes from Steve Willoughby with Cleveland Research. Your line is open.
Hi, Steve.
Hi, good morning. Two questions for you. First, Stephen, You made some comments regarding some incremental investment spending. It looks like maybe $0.03 worth in the Q3 and maybe another $0.05 in the 4th quarter. I was just wondering, is that something that continues into or through 2019 at 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 $15,000,000 in Q3 and $20,000,000 in Q4. So We're going to be investing in these businesses appropriately given the top line environment and the long term outlook. So So there'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 Q4 last How much of an impact there was to your SG and A from the onetime bonuses you guys paid out regarding related to tax reform?
Yes, it's approximately $30,000,000
Your
next question comes from Brandon Couillard with Jefferies.
Thanks. Good morning. A bit of
a follow-up to that last macro question, Mark. Yesterday, they had 2 competitors sort of raise a yellow flag around some end markets in Europe. Just curious what you're seeing from a macro perspective there, especially around the pharma and more cyclical industrial areas.
Yes. We had high single digit growth in Europe. Business is performing well. It was in Europe towards the end of the quarter With customers, with their teams, they feel good about the environment and we're heading back in November and Yes. Business performed well.
Fair enough. And then last one,
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 is with the rest of the Thermo Bioprocessing portfolio and perhaps the size of the customer base would be useful. Yes. So we'll get into more of the details when we close the transaction. So about $100,000,000 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, Using 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 it's 1 plus 1 equals more than 2 because you are able to leverage the customer relationships where each company has strength. They're able to optimize offerings. They're able to leverage the expertise of both commercial teams and those relationships. So we're really excited about it and it will be a nice accretive transaction to the business.
Great. Thank you.
Operator, we have time for one more.
Thank you. Your next question comes from Daniel Brennan with UBS. Your line is open.
Hey guys. Hey Mark. Thanks. So a couple of questions. First, going back to biopharma, just one remark.
Could you provide a little more color in terms of the share gains that you're seeing? How much of this is from mainly 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 Now, simply do the customers really appreciate the ability to bundle and just kind of have logistically a lot of your great products in one bag? Just kind of look for a little more color on that. Thanks.
Yes, 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 multi product 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 it's that's how I think about it, and we're seeing great momentum across the customer base from that
Okay. And then maybe just a quick follow-up. Could I ask just on M and A, just kind of what looks most interesting to you today, Mark, From a name perspective and does the more volatile macro, does that help or hurt your ability to do deals possibly? It could swing either way, just wondering. Thanks.
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 and 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 were in the late stage of finalizing And then the 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, that's a 3.1x leverage. So as we enter 'nineteen, We have a lot of firepower and we'll be able to capitalize on that on the right opportunity. So it's a very exciting time from a capital deployment perspective.
Great. Thank you. Thanks,
Dan. So let me wrap up the call. 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 Q4 call. Thanks, everyone.