Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 4th Quarter 2010 Earnings Conference Call. I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin the call.
Good morning and thank you
for joining us. On the call with me today is Mark Casper, our President and Chief Executive Officer Pete Woolver, Senior Vice President and Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our website, thermofisher the press release the Q4 2020 earnings and future expectations is available on 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 our expectations, plans and prospects constitute forward looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
The call. 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 the company's Form 10 Q for the quarter ended October 2, 2010 under the caption Risk Factors, which is on file with the Securities and Exchange the financial information and available in the Investors section of our website under the heading SEC filings. While we may elect to update forward looking statements at some the Q1 of 2019. We specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward looking the call.
Good morning, ladies and gentlemen, and welcome to the call. Also during the call, we'll be referring to certain financial measures not prepared in accordance with generally the Company's Form 10,000,000,000 non GAAP financial measures to the most directly comparable GAAP measures the call today. Thank you, Mark. Thank you, Mark. Thank you, Mark.
Thank you, Mark. Good morning, ladies and gentlemen, and welcome to results. So with that, I'll now turn the call over to Mark.
Thanks, Ken. Good morning, everyone, and thank you for joining us for our recap of the the to our shareholders back in May at our analyst meeting, all in support of our primary goal to accelerate EPS growth. As you saw in our press release, we delivered record EPS in 20.10 exceeding the high end of our annual guidance by 0 point our Investor Relations and Company
plans while continuing to make the strategic investments
in technology development and emerging markets that we believe to deploy capital gives us a competitive advantage and reinforces our position as the industry leader. We expect to continue our trend of delivering excellent EPS growth as you can see in our 2011 guidance, which I'll cover later in my remarks. Before I discuss our performance for the full year in more detail, let me touch on the highlights of the 4th quarter. We reported record adjusted EPS in the quarter with a 10% increase to $1 per share. We generated good adjusted operating margin expansion coming in at 40 basis points improvement to 18.4%.
I'm also pleased to report that we had strong double the mid digit growth in Q4 in China and India. In fact, in the quarter, China became our 3rd largest country in terms of revenue the Q1 of 2019. Turning to the year in a bit more detail, adjusted earnings per Air grew 17% to a record $3.57 versus $3.05 in 2,000 and Dine. As I did last quarter, I'd like to focus on the 3 key drivers of our 20 10 EPS performance. To So first, let me cover the top line revenue growth.
Revenues for the year grew 7% to
to $10,100,000,000 a year ago.
In our Analytical Technologies segment, our Scientific and Process Instruments businesses benefited the Q1 of 2019, particularly from strength in applied markets and the global industrial recovery. Our new products in molecular spectroscopy and handheld instruments Really hit the mark with rapid adoption by our customers for QAQC testing and security screening applications. I'll talk in a few moments about how the new food safety bill in the U. S. And increased awareness globally should create further growth opportunities for us as the call.
As a result of the need for better testing. Sales of our clinical diagnostic products within the segment remained strong throughout the year, including our biomarker test kits, which came with the Brahms acquisition. In our Lab Products and Services segment, we had solid contributions from our expectations from both our equipment and consumables businesses in 2010, highlighted by some key wins from major university customers. Our accounts, which continue to grow faster than the company average. We have demonstrated this level of performance at these accounts since the our merger 4 years ago.
Our approach here actually applies to a much broader set of customers. So going forward, we'll talk more about our the company's prepared remarks. Our second EPS growth driver is operational excellence and that continues to give us the advantage of fully leveraging our revenue growth to deliver excellent bottom line results. Our teams were determined to achieve their goals in 2010 and their solid execution of our operating plans made it possible. I'm extremely proud of their the accomplishments and let me give you a few highlights.
First, we increased the use of PPI and PPI lean tools to improve our processes and productivity and strengthen our global competitive position. 2nd, continuing to rationalize our global footprint by completing a number of facility consolidations during the year, 8 of which were factories. Last, carefully targeting our spending to investments that will create the most value for our customers. We increased our total R and D investment in 20.10 by over $40,000,000 or 20 basis points year over year to strengthen our leadership position in innovation. Our previous investments led to a number of successful Thermo Scientific the product launches in 2010, including our TSQ Quantum XLS Triple Quad Instrument for environmental and food safety Analysis.
Our new benchtop GP1 and 3 liter centrifuge platform for greatly improved laboratory productivity, which Which has done extremely well in helping us gain share. And we also introduced new consumables and bio reagents for our biotech customers doing cell based Research. Turning to emerging markets, I've already highlighted our strong results in Asia Pacific during the quarter the year. We continue to invest to expand in this important growth market. Our new China Technology Center, which we opened the segments in the region continue to grow as China's economic focus evolves from infrastructure to environment to consumer safety to life sciences research.
To the Q1. In 2011, we expect to build our presence in other emerging global markets as well, such as in South America. We plan to expand our commercial operations in Brazil, for example, which is now the 8th largest economy in the world. Even with these significant investments in R and D and global expansion. We achieved a 12% increase in adjusted operating income year over year for 80 basis points of adjusted operating margin expansion.
Our 3rd key contributor to EPS growth, effective capital deployment continues to provide us with multiple avenues for creating shareholder value. In 2010, we deployed a total of $1,600,000,000 on share buybacks and complementary acquisitions. 1,000,000 shares. In the Q4 alone, we spent $350,000,000 to repurchase almost 7,000,000 of our shares. The call.
At the end of the year, we had $488,000,000 remaining under our existing buyback authorization. We also deployed $600,000,000 to complete 11 acquisitions in 20 Trinity Technologies and expanded our presence in attractive markets. As you know, in December, we announced our agreement to acquire DIONICS for $2,100,000,000 It's been over a month since we talked about it, so let me remind you of our rationale for this exciting transaction. DIONICS is a leading provider of chromatography systems with a very strong track record of technology innovation. By combining their chromatography capabilities.
With our existing chromatography offering, we will create an industry leading chromatography portfolio for our customers. Of course, this will benefit our leading position in mass spectrometry as well and vice versa.
To the company.
The technology combination alone creates a compelling value proposition. What makes it even more so is that it strengthens our presence in highly attractive markets. We to the Q1 of 2019. We continue to benefit from Dynex' extensive customer base in applied markets such as environmental, food safety and other industrial the sectors. And with more than 35% of their revenues in Asia Pacific and other emerging geographies, Dynex fits perfectly with our strategy of expansion in these high growth regions.
I just visited Sunnyvale a couple of weeks ago to meet with the Dyllanix employees and management. There's certainly a lot of excitement and enthusiasm about becoming part of Thermo Fisher. I'm pleased to report that the integration planning is well underway. To As you know, we cleared U. S.
Antitrust in early January. In Europe, we're seeking to transfer jurisdiction to the European Commission Rather than having to file for regulatory approvals in multiple countries, the timeline in Europe will likely take the closing into early Q2. So we're focused on accelerating our long term growth and strengthening our industry leadership by deploying our cash flow and by putting our balance sheet to work. I'd like to now highlight a key growth theme within the company as I did in Q3. The driving our revenue growth, leveraging our unique depth of capabilities across the company and fulfilling our mission, which to our customers to make the world healthier, cleaner and safer.
Last quarter,
the call. I talked about
moving advanced technologies from the lab to the line and to the field. Today, I want to highlight our opportunities in Food Safety Testing. In light of the new legislation that we passed a month ago in the U. S, this This is good news for Thermo Fisher because it will increase the need for testing in an already attractive food safety market, not only in the U. S.
But worldwide. The Food Safety Modernization Act is a step forward in restoring public confidence in the integrity of our food supply. The company's question. Potentially, it replaces doubt and uncertainty with accountability and testing protocols to ensure that our food whether domestic or the reported is safe. The immediate impact is twofold.
First, it authorizes the Food and Drug Administration to increase monitoring and auditing processes, Excess Records of Food for Doses and Recall Tainted Products. 2nd, it enables the FDA to establish procedures to protect our food supplies tariffs and reduce the likelihood of intentional tampering. So what does this mean for us? It means that we can strengthen our position in this growing market by helping our customers comply with the new rules. Thousands of U.
S.-based food production plants registered with the FDA will be required to our prepared remarks. We to avoid recalls that hurt their profitability and put their brands at risk. Our analytical instruments business to the new law, mainly our leading mass spec systems and our chromatography offerings, which will be significantly enhanced by the acquisition of DIONX. More specifically, our TurboFlow Technologies enable food testing labs to improve productivity to simultaneously. We have also developed non targeted screening methods using our Exactive high resolution bench top mass spectrometer.
This system brings the power of mass analysis to a price point that enables efficiency and routine analysis. In And new laboratory standards for accreditation will require more robust quality systems, which will present opportunities for our leading LIMS software platform. Tracing the origin of food from the farm to the table will produce enormous amounts of data. An automated system for data storage and retrieval will become to the standard rather than the exception in many existing labs and production facilities. Finally, new microbiology the FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's
FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's FDA's
FDA's FDA's FDA's FDA's FDA's. The full year of 2020.
The percentages of the U.
S. Food supply being imported, there will no doubt be a carryover benefit in other global markets such as Europe, Japan and China. To As you know, we opened our food safety response center in Germany in April 2010 and we'll continue to use this new resource to develop testing methods in response Food Crises Around the World. This is a great example of the growth opportunity that we can capitalize on as a result of our leadership position from a a technology perspective as well as our market presence around the world. Before I wrap up, let me summarize our annual guidance for 2011, which you the Q and A session.
Pete will go into more details during his remarks, including the key assumptions we're factoring in, but I'll review them at a high level. We expect to achieve a range of $4 to $4.10 in adjusted EPS for 2011. This This would be 12% to 15% growth over our excellent results in 2010. I want to point out that this does not yet include the anticipated accretion from our acquisition of Dionex. We expect to achieve 20 11 revenues for the full year in the range of $7,330,000,000 to $11,450,000,000 This will lead to 5% to 6% revenue growth over 2010.
To Before I hand the call over to Pete, let me summarize my remarks this morning with a few key points. We successfully executed our plan to deliver a strong 20 10. We remain focused on accelerating our adjusted EPS growth. We are well positioned to deliver on our growth goals for 2011. Now, I'll turn the call over
to Pete Wilbur. Pete? Thanks, Mark. Good morning, everyone. As Mark said, we're pleased to report another quarter of strong adjusted earnings per share with 10% year over year growth to a 4th quarter record of $1 compared to $0.91 last year.
The call. For the full year, adjusted EPS was a record $3.57 up 17% from $3.05 last year. The call. GAAP EPS in Q4 was $0.75 up 15% from $0.65 in the prior year's quarter. And GAAP EPS for the full year was $2.53 up 26% from $2.01 last year.
Moving on to our top line performance. Q4 reported revenue decreased 2% year over year to 2.7 $8,000,000,000 In the quarter, we picked up a 2% benefit from acquisitions and foreign exchange was a negative 1%, to the Q4 results, resulting in a 3% decline organically. Excluding the flu, BioSight and calendar headwinds that we highlighted on our last quarter's call, to our Q4 organic growth was positive 3% consistent with our expectations. Full year reported CNY increased 7% year over year to $10,790,000,000 For the year, we added 2.5% from acquisitions and the full year. Moving on to the segments, in Analytical Technologies, Q4 revenues grew 4% the Q1 of 2019.
We saw strong growth in our Specialty Diagnostics businesses, including our biomarker business in the quarter. To our instruments businesses, especially those serving industrial and applied markets continued to deliver strong year over year growth. To the Q4. For the full year, Analytical Technologies grew 11% on a reported basis and 6% organically. Turning to the Laboratory Products and Services segment, Q4 revenues declined 6% on a reported basis and 5% organically.
In the quarter, we saw strong growth in our laboratory equipment, offset by a decline in consumables related to flu, BioSight and the calendar. By geography, in Q4, we saw high single digit organic growth in Asia Pacific with both China and India growing over 20%. North America and Europe saw mid single digit declines compared to the prior year and rest of the world grew in the low double digits from a relatively small base. For the full year, North America grew in the mid single digits, Europe in the low single digits, Asia Pac near 10% and the rest of the world in the
to the Q4 of 2018.
Turning to adjusted operating income, we had strong bottom line results with Q4 Q4 adjusted operating income of $511,000,000 up slightly compared to the prior year on lower revenue. Adjusted operating margin was 18.4%, up 40 basis points from 18% in the year ago quarter. The year over year margin expansion was driven strong cost productivity from our practical process improvement, global sourcing and restructuring initiatives. And we continue to see nice accretion in the quarter from our recent acquisitions. These gains were partially offset by the investments we're making in R and D and commercial resources to support growth,
the Q1 of 2019, primarily in Asia.
For the full year, adjusted operating margin increased to 17.8%, up 80 basis points year to the Q4 of fiscal year and at the high end of the guidance we gave at our analyst meeting back in May. This is a significant achievement given the level of investments we to this year to position the company for future growth. By segment, Q4 adjusted operating income in Analytical Technologies increased by 6 51.8% year over year. Adjusted operating margin was 22.2%, up 40 basis points versus 21.8% last year, driven the Q4 of fiscal 2019. Turning to our Laboratory Products and Services segment, Q4 adjusted operating income decreased by 5% year over year.
Adjusted operating margin was 14.2%, up 10 basis points from the year ago quarter With strong cost productivity more than offsetting growth investments and lower revenues. For the full year, Laboratory Products and Services adjusted operating margin increased 20 basis points to 13.9%. Moving on to the details of the P and L, total company the adjusted gross margin was 43.2 percent in Q4, up 170 basis points from the year ago quarter. To the Q4. For the full year, adjusted gross margin was 42.5%, up 140 basis points from 41.1% in the the prior year.
Adjusted SG and A in Q4 was 22 percent of revenue, up 90 basis points from the year ago to the call. For the full year, it was 22.1%, an increase of 40 basis points, primarily as a result of strategic growth investments acquisitions. R and D expense was 2.8% of revenue in Q4, up 40 basis points from last year. To the call. For the full year, it was 2.7%, an increase of 20 basis points or $40,000,000 reflecting our commitment to invest in technology to expand our new product pipeline for future growth.
Moving below the line, Our Q4 net interest expense decreased $10,000,000 year over year to $16,000,000 driven by lower interest expense as a result of our debt financing initiatives. Adjusted other income was a gain of $1,000,000 up $3,000,000 from last year. Our adjusted tax the Q1 of 2019.6%, down 40 basis points from last year and down 190 basis points from our previous guidance, primarily as a result of the U. S. R the Trinity Tax Credit being extended in December.
For the full year, our adjusted tax rate was 20.7 percent, 20 basis points from 2,009, primarily as a result of higher income at marginal rates. As Mark mentioned, we used 350,000,000 to cash to buy back 6,900,000 shares during the quarter. And for the full year, we spent slightly more than $1,000,000,000 on buybacks against our total the presentation of $1,500,000,000 So we have $488,000,000 left to spend on our current authorization. Average diluted shares were 3 $29,000,000 in the quarter, down $23,000,000 or 6% from last year, reflecting the benefit of our 2010 share buyback program as well as the redemption of 3 $25,000,000 of our convertible debt earlier in the year. For the full year, average diluted shares were 409,000,000 to down $13,000,000 or 3 percent from 2,009.
We continue to maintain a strong balance sheet and deliver solid cash flow performance this full year free cash flow from continuing ops was $1,240,000,000 after deducting net capital expenditures of 255,000,000 higher revenues and higher capital expenditures, partially offset by higher earnings. We ended the quarter with 926,000,000 cash and investments, down $13,000,000 from Q3 as free cash flow in the quarter was offset by cash used for share buybacks and acquisitions closed during the quarter. Our total debt was $2,140,000,000 down slightly from Q3. With regard to working capital, we Good sequential improvement this quarter. Accounts receivable days outstanding days sales outstanding were 49 days, Down 3 days sequentially from the previous quarter and inventory days of supply were 67 days, also down 3 days from Q3.
To Moving on to our guidance for 2011. We're initiating adjusted EPS guidance to $4 to $4.10 which represents 12% to 15% growth over our 20.10 adjusted EPS of $3.57 In terms of revenue, we expect to achieve 2011 revenues in the range of $11,330,000,000 to 11,450,000,000 the Q1 of 2019 reported revenues of $10,790,000,000 This guidance includes about 0.75% growth from completed acquisitions and it excludes the pending acquisition of Dionix as as well as any other potential future acquisitions or divestitures. It also presumes present foreign currency exchange rates, which would have a favorable impact of about 0.75% on our revenue growth. Consistent with past practice, we haven't attempted to
our Investor Relations and Investor Relations and Investor Relations.
On an organic basis, the midpoint of our revenue guidance represents about 4% growth. To the Q1. Keep in mind that we still have about a percentage point of revenue headwind this year as a result of the BioSight and Japan stimulus revenues we Steve last year. Both of these occur in the first half of the year with the Japan stimulus only affecting Q1. So when you look at the year from a revenue growth perspective, Q1 has a tough comparison and we expect organic revenues to be essentially flat.
For the rest of the year. We should be in the mid single digit range with accelerating growth as the year progresses. To give you a little more detail on our earnings guidance, We're expecting adjusted operating margin expansion of 50 basis points to 80 basis points compared to 2010. Positive contributors to our margin expansion will be pull through on organic revenue growth at marginal rates, PPI and PPI lean as well as low cost region manufacturing, global the Q1
of 2019.
The full year benefit of our restructuring actions in 2010 as well as incremental actions in 2011 and and moderate price increases comparable to the environment we experienced in 2010. These benefits will be somewhat offset by salary increases and other inflation
to the Q and A.
And the full year impact or run rate of the investments we made in 2010 in a few key strategic areas to strengthen our depth of capabilities and drive future growth. In R and D, to accelerate long term growth, primarily in our mass spectrometry, specialty diagnostics and biosciences businesses to in selling and marketing primarily in emerging markets, but also to drive our new product launches and in information technology primarily related to e business. Moving below the line, we're expecting net interest expense to be about flat year over year. Our adjusted income to the tax rate is forecasted to be in the range of 21% to 22%, up slightly from 20.7% in 20 earnings release, primarily as a result of higher income at marginal rates. And full year average diluted shares are estimated to be in the range of $390,000,000 to 3 $95,000,000 down 4% to 5% from 2010, which assumes that we'll use the remaining $488,000,000 of our current share the transaction through its expiration on September 8, 2011.
Finally, we expect free cash flow to be in the range of $1,300,000,000 $1,400,000,000 after deducting net capital expenditures of $280,000,000 to $310,000,000 In interpreting our revenue and adjusted EPS guidance the range of ranges. As I've said in the past, you should focus on the midpoint as our most likely view of how we see 2011 playing out. Results above or below the midpoint will depend on the relative strength of our markets during the year. So in summary, 2010 was a great year for us, operationally the financials. We successfully delivered our plan and met or exceeded our targets for the year.
I believe we're well positioned to achieve our growth our shareholders in 2011, and I'm excited about our prospects for the long term. With that, I'll turn the call over to the operator for Q and A.
To the operator. Thank you. And our first question comes from the line of Chris the questions. The first question will come from the line of John Groberg, Macquarie.
To Hi, John. Hi, good
morning and thanks, Emily, for taking the questions. Mark, would you mind, to obviously, in this quarter, there's a lot of noise still with the fewer number of days and some things you've characterized I know you go into next year, Pete just outlined some of the headwinds. But if you just kind of step back and talk, I guess, about kind of end markets to And kind of compare them, how you're seeing them, I guess, today. You have the balanced end markets you discussed. I don't
know if you want
to talk about them from that perspective. And then, Maybe kind of your view as you enter into 2011, how you envision these markets performing in 2011 as well. Just give us a sense as to how you actually see the end markets currently to Despite a lot of these pluses and minuses that are coming into your specific results.
Sure. John, as you look at the end markets. Let me start with industrial, and that's clearly a great story. We're seeing the benefit of a gradually improving the market throughout the year. And we saw very strong growth in the quarter and for the full year.
Organic growth in Industrial is well above the company average. For us, we're to increased demand for more QAQC products broadly, particularly benefiting from nice new product launches that we've had in molecular spectroscopy and portable instrumentation to the next question to meet the needs of our customers in the industrial applications. Healthcare, which is where you're going to have the most noise in the numbers, if you normalize that for Flu and BioSight, the Q1. Growth was in line with the company average and we continue to do well with our healthcare customers. We're very pleased with how our clinical diagnostics business performing.
We're very excited about the performance of Brahms, which we closed in October of 2009. That business's outlook is very bright and It clearly is it was a very good acquisition for us. Obviously, the comps are going to get easier for us in 20 Covenant Healthcare, as we don't have the H1N1 comparison and Biocite will go away in the second half. Academic and Government. It's been pretty consistent throughout the year.
We've had some very good wins in lab equipment, as our customers are taking advantage of the very broad our range of capabilities we have there. So we've done some equipping out of large new laboratories at major universities. So that's been really positive. Probably the only The thing I would mention as a reminder is that in the academic and government segment in Q1 of 2010, we had $50,000,000 set of orders from Japan in terms of stimulus funds, which will make that a tough comparison. But other than that, we see economic and government to to to a sterile manufacturing environment that's good for our media and disposable plastics business in particular.
Okay, great. Thanks a million. And just one follow-up, I guess, on revenues again for next year, either Peter or Mark, but just to make certain, the acquisitions, the 3 quarters of a to Ascent. The ones I see primarily for next year are NovaWave, Prozion, Fermentis and Lone, You're not including Vionic and you think and all of those all in are going to be about 3 quarters of a percent. Is that what you said in terms of 2011?
The specific list is out on our website in our reconciliation package, but yes, that's the 3 quarters of percent is the past acquisitions and divestitures.
Okay. Thanks, Malin.
And the next question will come from the line of Ross Muken, Deutsche Bank.
To the call. Thanks, guys. So in terms of the operating margin line, it looks like you had some pretty good pull through in the quarter to Obviously the headwinds you had on the top line. I know Pete you gave some commentary as we head into next year. Where are the biggest sort of the puts and takes in terms of ability to get sort of leverage in line with what we've seen historically from the business in sort of the 50 to 100 basis points area.
Is it maybe some potential pressures on the raw material side. Is it the salary increases? Where do we have the biggest variability in terms of where we could be better or worse than that range.
Well, the biggest variability really comes from the top line. To the productivity initiatives that we drive, that is something that we're doing no matter what's going on in the economy. So we're driving that and that generates around 2% or 200 basis points of margin expansion year over year and that offsets to the inflation that we see and the investments that we're making. And then the rest really comes down to pull through on organic growth. Certainly, if we saw differences in the top line, the investments are at some level discretionary, obviously, so we could manage that.
But primarily, Productivity is offsetting inflation and investments.
Ross, we're in a good rhythm with the operating margin expansion. If you to this year. We increased margins by 80 basis points and still allowed us to significantly increase R to the Asian expansion. You look at next year's guidance range, we're at 50 to 80 basis points of margin expansion Dan. And we feel good about the momentum we have there.
Great. And in terms of the Dionys acquisition, where are we In terms of what your current sort of preference is in terms of how to finance that deal in terms of how you Given the favorable debt markets, how you're thinking about kind of the capital structure on a go forward basis?
Well, we haven't really changed our view on the financing. We said we would fund it with debt and that the interest cost would Something in the range of 3% to 3.5%. Those assumptions are still consistent. We most likely will prefund the acquisition to Just to make sure that we lock into the current favorable rates.
So just in terms of your comments on the interest expense and for the guidance. I mean that's prior that's not inclusive of the no potential financing event to occur at some point in the 1st part of the year.
No, it does include the assumption that we'll prefund the acquisition.
Okay. That's all I wanted clarification on. Thank you, guys. Yes.
The next question will come from the line of Dan Leonard, Leerink Swan.
Hi. Thank you. Just one question. I want to better understand your thinking on the top line forecast for 2011. So it looks like you're expecting even when you back out all of the temporary gymnastics from both 20102011 You're expecting some softening of the organic growth rate in 2011 from 2010 levels.
I guess, can you guide me through your thinking behind that expectation at the midpoint.
Yes. We don't think too much about gymnastics, Dan, but we're trying to make this as clear as possible. If you look at to 2010 and you just take out flu and BioSight, which is noise in the system, we grew 6% in terms of organic growth. When Look at 2011, the midpoint of our guidance when you take out the headwind is 5%. So there's a 1 point delta.
What's the 1 point delta? It's just comparisons, right? If you look at it, the 6% was versus a negative 3% and which was the 2 to Yes, we're effectively saying that we're going to grow at the same rate. So we're actually getting increasingly bullish in terms of what the end markets look like and what the world Worldholds.
Okay. I just wanted to clarify that. And I guess if I could ask one follow-up, Mark. You mentioned that you're broadening your approach you've taken with your top accounts to more accounts. The accounts.
What does that mean?
Yes. What that means is we have over the last 4 years consistently grown with our large accounts faster than the company average. We've learned a lot about how to do standardization programs, how to utilize our very deep set of capabilities. We're going to be using those capabilities for a broader set of customers going forward. We've experimented with a number of things over the years.
And as I talk about performance in 2011, We're talking more broadly, not just about top customers, but how are we doing in the marketplaces and gaining market share.
Okay. Thank you. Sure.
The next question will come from the line of Amit Bala, Citi.
Hi. This is Valerie Dixon actually in for Amit. Good morning. Good morning.
I was wondering if you could dive
a little deeper into your pharma end markets. Have you seen any consistency? You said that you're working with the FDA to some sort of testing guidelines. What do you expect in terms of implementation of the food safety bill on the timeline for you guys to finalize some of your discussions with the FDA and perhaps when Do you expect to see some revenue contribution from your handheld instruments and other instruments that would serve that market?
To When you look at the implementation guidelines that are in effect, it's typically about an 18 month window that food producers have to be getting to the Q1. So that means that you likely see some benefit late this year and into 2012 in terms of timeframe for when you would to see an incremental opportunity from food safety beyond the strong momentum that exists in those markets today.
Thanks. And just one quick follow-up, if I can. In the North America region, what would you expect to have to happen to return this region to growth?
Thanks. To So in
terms of North America, obviously, the business grew during the course of the year, and we're seeing It's a recovering economy. In a particular quarter, you're going to have flu and BioCyte or North American. That's 100% where that happens. So the comparison makes North America have the headwind, but that's not anything I'd read into. North America is doing fine.
Thanks.
To the next question comes from the line of Marshall Thuris, Morgan Stanley.
To Hi, Marshall. Hi, good morning. Thanks for taking the question. So first one, just for Pete on gross margin in 2011, kind of how much to improvements should we be looking for next year and maybe some of the major drivers there to And beyond the top line that could make things a
little bit better or a little bit worse.
Well, in terms of gross margin, if you look at the midpoint to the Q1 of 2019. I gave 50 basis points to 80 basis points as the margin expansion for EBITDA. So the midpoint is around 65 or so basis to the way that splits out is about 100 basis points of gross margin expansion. So comparable to what we to the Q1 of 2019. And then probably about 20 basis points of dilution in SG and A.
Again, I mentioned the run rate of the expenditures that we put in place in 2010 at about 15 basis points in R and D. So that's how it splits out to the 3 categories. The key Key drivers in gross margin expansion, as I mentioned, are really PPI, PPI lean, low cost region manufacturing, global sourcing, low cost region sourcing and restructuring, all the things that we normally do to drive our productivity. So a lot of those benefits fall into the gross margin Tivity. So a lot of those benefits fall into the gross margin category.
Okay, great. Thanks. And then Just one other one from me. I know you referred to kind of the organic growth picture improving over the year. So given kind of where you stand today to A and looking at what you're seeing on the industrial end markets and obviously some of the other major geographies, where would you expect to be exiting the year.
Would that be kind of over the second half? Should we be thinking more on par sort of in the 6% range with 2010? Thanks. To
You're talking about the quarterly phasing of organic growth?
Exactly. So if things are getting better over the year, kind of where should we expect to be finishing or where should we It's great to be by the second half.
Yes, I would say the second half would be in the higher end of the mid single digits to the lower end of high single digits.
Okay, perfect. Thanks guys.
And the next question will come from the line of Paul Knight, CLSA.
Hey, Mark, you ever wish
you were on gene sequencing instrumentation?
Only in the sense of the weather is better in Florida where the conference is than it is in the Northeast, but no, from a real answer to the question. I'm very comfortable with our portfolio. Clearly, gene sequencing, there's a lot of activity going on, but it's a pretty crowded field and it's one that to we benefit by being a supplier to most of those companies. We supply reagents, we supply technology, to the Q and A. And we're happy with our position.
When you see all the genomes that will be done this year, what's your Read through. Does it is it significant enough on the products you provide that it adds to growth? And I guess this activity continues in the years ahead.
Yes. I mean, we get a little bit of a benefit from the expansion of sequencing. To I mean, from the way we participate in that market.
And then last, did you
talk about geographies and growth?
We did. And Pete, if you want to rehash it, we can go through the
Are you talking about forward look or backward look? Just a quarter, Pete. Yes. In In terms of the quarter, it's Asia Pac in the high single digits and then North America and Europe in mid single digit declines because of the calendar and flu and BioSight as Mark mentioned. For the full year, which is probably a better way to look at it, North America in In the mid single digits, Europe in the low single digits and Asia Pac around 10%.
Okay. Thanks.
To the next question will come from the line of Tycho Peterson, JPMorgan.
Good morning, Taycan.
Hey, good morning. Just want to follow-up on some of your comments earlier on pharma. The news out of Pfizer yesterday wasn't so positive on R and D, talking about $1,000,000,000 to $2,000,000,000 in cost cuts. Can you just talk a little bit about what your dialogue is like with pharma now? And do you have to kind of step up your initiatives here.
In the past, you had also talked about a more strategic deal with Lilly. So are you seeing interest also in kind of longer term more strategic deals from Palma as they look to consolidate the channel.
Yes. I mean, obviously, when a customer segment is going to change. One can view it as negative or positive. For us, it's positive. We are so much larger than anybody else with these customers.
We have better access. We have more capabilities. Our depth of capability here is incredible. So we help our customers meet those challenges. To And as companies are going through those changes, we're working with them to meet their goals.
And we have a number of examples where we have active dialogue about helping them meet meaningful productivity goals. And for us, we're very well equipped to help them do that, and that's a share gain opportunity for us that we're focused on capitalizing on.
Okay. And then as we think about your broader portfolio, obviously, there's been some discussion about Athena and Lancaster Labs. Can you just talk either on that potential divestiture specifically or how you
look at opportunities to trim the portfolio? Sure. In terms of Athena and Lancaster, we really don't comment on speculation in the press. So I'm going to leave that one aside, and that's just consistent with all of our policies on speculation. To in terms of more divestitures and how we think about it, we periodically review the portfolio to make sure that we have the best portfolio and that we're creating shareholder value by owning the various things that we own.
And every once in a while, we'll sell something that's small where we think it's to owned by somebody else. But we're very we have a good management process with our businesses.
Okay. And then Just last one on capital deployment. Post Dionix, can you talk about potentially your willingness to do another deal? What kind of ROIC targets you'd be looking at and how you could look to lever up, if needed beyond closing the Dynex deal? Thank you.
Yes. Thanks, Tycho. So in In terms of the capital deployment strategy, it's going to continue to be a blend of return on capital through buybacks as well as to acquisitions provided they meet our criteria, which is strengthening the strategic position of the company, enhancing our offering from a customer to And clearly creating shareholder value so that we have ROICs well above our cost of capital in that metric. Ionix, as I've mentioned in the past, really just is part of one division within one of our groups. So, from a management to the bandwidth perspective.
We have plenty of bandwidth if the right acquisitions were available that met our criteria. So if we see ones that we feel good about. We'll do them and if there's ones that we don't see a pipeline at that point in the year, we won't. And Obviously, 2010 was a really good year in terms of M and A. There's lots of good activity and we'll continue to look for the right opportunities.
Thank you.
And the next question will come from the line of Doug Schenkel, Cowen and Company.
Doug. Hi, this is Brigham Hyde in for Doug. Thanks for taking the questions. Just quickly on pricing in the quarter, just asking how Things are trending both in instruments and consumables and any market commentary is helpful. And then similarly looking to 2011, to What your expectations are?
Yes. So pricing in the 4th quarter was pretty similar to the Q3. Consumable stronger the instruments a little bit more competitive. For the full year, for the company, we had just under 1% price. For 2011.
We're looking and anticipating very similar market conditions to 2010.
Okay, great. And you guys talked a little bit earlier to this year about opening an office in Brazil and ROW had a nice growth this quarter. When we think of emerging markets outside of China. Maybe just some commentary on expectations there and is that going to become, I guess, a bigger part of the business going forward?
Yes. Yes. When you look at where we're focused, we've been building out our Asian presence pretty dramatically and that's China India, our first China is our biggest priority, then India, a number of the other Asian countries, Korea, Singapore, Malaysia to our 3 examples where we've been building our presence. In terms of outside of that, probably Brazil is the only other one That's significant in terms of opportunity. The economy is obviously very strong.
There's a big focus on alternative energy sources. When you're doing alternative energy production. Typically, you're a large consumer of instrumentation, which is good for us. So there's not a long list of other countries you'll see us talking to in terms of emerging markets, but I think Brazil at this point merits inclusion with that group.
Great. Thanks for the questions.
The next question will come from the line of John Wood, Jefferies and Company.
Hey, thanks a lot. Pete, could you to quantify the flu and BioSight impacts,
you separate them for the 4th quarter?
To Yes, flu was about negative $20,000,000 and BioSight about negative $35,000,000 when you offset it against
Yes, that's a net number, dollars 35,000,000
Yes, net $35,000,000 So a total of about $55,000,000 of headwind.
To Okay. And then the calendar was between 4% and 5%. Is that right?
It's around 4%. It's difficult to get that exact number, but it's about 4%.
Okay. And then the next one is, if you look at 2011 and you net out Japan, so I know that's 50,000,000 to Is there a net effect from stimulus on the business in 2011 versus 2010 when you Takeout Japan, the effects of Japan.
Yes, it's still a little bit additional decline above the $50,000,000 of Japan. The reason we're calling out Japan is because it's $50,000,000 in 1 quarter. So it's a pretty significant impact. Overall, stimulus is down to more than the $50,000,000 but we're assuming that we'll make that up with other orders.
Got it. Thanks a lot.
To the operator. And the next question will come from the line of Isaac Ro, Goldman Sachs.
Hi, good morning. Thanks for taking the question. Mark, could you maybe address sort of your general outlook on hospital based trends in 2011 when we kind of normalize for the flu and the BioSight? And specifically, are you seeing any notable Changes in underlying patient volumes in the parts of your business that have exposure there. And would you as we look into 2011,
So when you look at the healthcare customers, which is primarily our clinical diagnostics business. Once you normalize for flu and the BioSight transition, we see that It's a mid single digit growing business. We didn't see any significant effect from patient volume on the downside. So if that happened for other companies, I think it's going to be a big factor one way or another for us in 2011. We're looking at pretty stable trends in our healthcare Western Base.
Great. And then maybe just secondly on the outlook for China. Is there any reason to think that there'd be tough comps in that region this year and the environmental testing business. Just given the Shanghai World Expo last year and some of the strength you've seen there last couple of years, any reason to think that might change?
When we looked at our detailed plan for China, we feel good about the outlook for 20 So obviously, you get some big orders in different parts of the business, but there's a good pipeline of other big orders going forward. So I feel like that's it will be okay in terms of outlook there.
All right. Thanks very much.
And the next question will come from the line of Quentin Lai, Robert W. Baird.
Hi, good morning. A lot of my questions have been answered. Just a couple of quick more current event questions. To any impact from recent snowstorms in terms of shipping days to watch out for? And then to some more broad line industrial companies have talked about, are they seeing any The impact in inflation and cost of goods.
And are you seeing anything on your side? Historically, I remember it hasn't been a big Factor, but I just figured I'd ask just to see what you're seeing given the chatter that we've heard throughout this earnings season.
To Thanks, Quentin. So first on inflation, we're not seeing a big impact in our ability to offset any inflationary to our shareholders. Our track record is good here. So we feel comfortable with the inflationary environment from a cost management perspective. From a to From a snowstorm perspective, that's obviously not a positive.
At this point, we're not seeing it being significant. It's Obviously, it'd be an unusual 1st 4 weeks of the year if you live in the Northeast as certainly kids are spending a lot of time at home and that some help, but it's very early in the quarter. So I'm not worried about it at this point.
All right. Thanks. Congrats on the quarter.
Thanks.
And the next question will come from the line of Derik De Bruin, UBS.
To Hi, Derek. Hi, good morning. So just
to clarify, so you're to On the interest expense line, so if I understood your discussion with Ross, you're taking the hit on the interest expense by prefunding the Dynex deal and to That's the delta for basically it being flat year over year, correct?
That's correct.
Okay. Yes.
They haven't offset okay, so it's not being offset with okay, Okay, that makes sense. That's the biggest difference in my model is that.
It's just the timing. You can't wait till the last second to close. You have to have the So you have a you're going to be out in front of it a little bit, Tarek.
Okay. And I guess the When you kind of look at some of the potential synergy opportunities for particularly to with Dionys. I mean, could you talk a little bit about where they might have a benefit in terms of being more exposed I mean, although Thermo has a big catalog, I mean, you're still not as well penetrated in some places as you could be. Could you just talk about what do you get from them from their exploit and their distribution
to
the
The Environmental Lab is going to have an ion chromatograph. And 30% of Environmental Labs are going to have a thermo scientific ICP. To so there's 65% of those labs that and by the way, every environmental lab has an ICP. So there is just some natural You've got a new customer set that you're going to be able to call on and over time show our exquisite technology to those customers. So that's a very the obvious example.
On the flip side, where Dionysus is going to benefit is obviously, we have huge penetration into all of the HPLC customer. They have great technology in HPLC and we'll be able to leverage that presence to help expand their HPLC business.
Great. And just one final question because I don't to my knowledge, no one asked the ubiquitous NIH question, but what's your outlook on what's going on in Washington right now?
So NIH seems to be relatively protected. We're not obviously expecting a robust funding environment, but not big changes in 2011 to Versus 10 is how we're seeing it.
Great. Thank you.
We have time for just one more question.
And next question will come from the line of Peter Lawson, Mizuho Securities.
Hi, Peter.
Hi. Peter, I may have missed this. Your outlook on gross margins, What was it for 2011? And was there any one time effect in 4Q?
The outlook for gross margins was about 100 basis points of margin expansion. And there's not really any one time effects in Q4 in gross margin.
And then regarding the new markets, are there any new products we should be thinking about for say food safety or China or India?
In terms of product launches, I mean, we're very excited about the ASMS conference in the middle of the year from Aspectrometry. We expect it to be another great year for us. We're always launching new products all the time. So across the broad product portfolio. You're not going to go a month without something exciting, but I think ASMS will be a really great year for us in terms of product launches.
Thank you. Thanks for taking the questions.
So let me just make a quick closing comment. First, thanks Thanks for joining us. 2010 was a great year financially and operationally, and our performance positions us well to achieve our goals for 2011. To our industry leadership coupled with our unique combination of growth investments, operational excellence and a strong balance sheet gives us many opportunities for creating shareholder value. Thanks again for joining us today, and I look forward to updating you on our progress in subsequent calls.
The call.
Ladies and gentlemen, thank you again for your participation. This does conclude.