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Marc N. Casper; Chief Officer; Thermo Fisher Scientific Inc.
Rafael Tejada; Vice President of RI; Thermo Fisher Scientific Inc.
Stephen Williamson; Senior Vice President and Chief Financial Officer; Thermo Fisher Scientific Inc.
Daniel Antonio Arias; MD & Senior Analyst; Stifel, Nicolas
Derik De Bruin; Director General of Stock Research; BofA Securities, Research Division
Douglas Anthony Schenkel; Research analyst; Wolfe Research, LLC
Jack Meehan; Couple; Nephron Research LLC
Academician Tejas Rajeev; Equity Analyst; Morgan Stanley, Research Division
Vijay Muniyapa Kumar; Senior Physician & Team Leader, Medical Devices & Supplies, and Life Sciences Tools & Diagnostics; Evercore ISI Institutional Equities, Research Division
Operator
Good morning, ladies and gentlemen, and welcome to the Q4 2023 Thermo Fisher Scientific Telephone Convention. My call is Bailey and I will be your moderator for today’s call. (Operator Instructions) Now I’d like to introduce you to our call moderator, Mr. Rafael Tejada, Vice President of Investor Relations. Mr. Tejada, you can start your call.
Rafael Tejada
Hello and thank you for joining us. I’m on the call today with Marc Casper, our chairman, president and CEO; and Stephen Williamson, senior vice president and chief financial officer. Please note that this call will be webcast live and archived in the Investors segment of our online page, thermofisher. com, under News, Events and Presentations until February 16, 2024. A copy of the press release Our fourth quarter and full year 2023 effects will be in the Investors segment of our online page in the Finance segment. So before we begin, let me briefly describe our Safe Harbor Statement. Various comments that we may make regarding the Company’s long-term expectations, plans and customers constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual Effects would possibly differ materially from those indicated through those forecasts. statements due to vital factors, adding those discussed in the Company’s most recent Annual Report on Form 10-K and upcoming Quarterly Reports on Form 10-Q, which are filed with the SEC and can be obtained at Investors from our online page. in Financial Filings with the SEC. Although we may choose to update forward-looking statements at some point in the long term, we particularly disclaim any legal responsibility to do so even if our estimates change. Therefore, you should not rely on such forward-looking statements as representing our prospects as of today. Also on this call, we will refer to certain financial measures that are not prepared in accordance with generally accepted accounting principles, or GAAP. A reconciliation of those non-GAAP monetary measures to the directly comparable maximum GAAP measures will be made in our fourth quarter and full year 2023 news release and will also be found in the Investors segment of our online page under the heading Data financial. With that said, I now give way to Marc.
Marc N. Casper
Thank you, Raf. Good morning, everyone, and thanks for joining us today for our fourth quarter call. As you saw in our press release, our fourth quarter results were ahead of the guidance we provided on our call in October and demonstrates strong execution. As I reflect on our performance for the full year, I’m very proud of our team as they operated with speed at scale to enable the success of our customers, while demonstrating incredibly strong operational discipline and commercial execution. In 2023, we delivered differentiated short-term performance while, at the same time, strengthening our long-term competitive position. I’ll get into more detail in my remarks later, but first, let me recap the financials. Starting with the quarter. Our revenue was $10.89 billion. Our adjusted operating income was $2.55 billion. We expanded our adjusted operating margin by 100 basis points to 23.4%. And we delivered another quarter of strong adjusted EPS performance, growing adjusted EPS 5% to $5.67 per share. Then in terms of our full year results, our revenue was $42.9 billion in 2023, adjusted operating income was $9.81 billion and adjusted EPS was $21.55 per share. Last year, we once again delivered meaningful share gain with our industry-leading products, services and expertise. We leveraged our PPI Business System to enable outstanding execution, including aggressively addressing our cost base to effectively navigate a challenging macroeconomic environment. At the same time, we strengthened our long-term competitive position with high-impact innovation, exciting and complementary acquisitions, additional investments in our capabilities and further strengthening our trusted partner status with our customers. Turning to our performance by end market. In the fourth quarter, underlying market conditions largely played out in line with our expectations. Our continued strong execution resulted in revenue performance that was slightly ahead of our expectations. Now let me provide you some color on our performance in the context of each of end markets, starting with pharma and biotech. As expected, growth declined in the high single digits for the quarter and approximately 1% for the full year. In 2023, vaccine and therapy runoff resulted in a 7-point headwind in this customer segment, which was effectively offset through share gains as a result of our trusted partner status. We’ve made strong progress in transitioning COVID-related capacity to other therapies, and that’s very exciting for the future. In academic and government, we grew in the mid-single digits for the quarter and in high single digits for the full year. In 2023, we delivered strong growth across a range of our businesses, including electron microscopy, chromatography and mass spectrometry as well as the research and safety market channel. In industrial and applied, we grew in the low single digits for both the quarter and for the full year. During the year, we delivered very strong growth in our electron microscopy business. And finally, in diagnostics and health care, in Q4, revenue declined in the high teens and was 30% lower for the full year. In 2023, we delivered good core business growth in this end market, highlighted by our immunodiagnostics, microbiology and transplant diagnostics businesses. I’ll now turn to an update on our growth strategy. As a reminder, our strategy consists of 3 pillars: high-impact innovation; our trusted partner status with customers; and our unparalleled commercial engine. Starting with the first pillar. It was another terrific year of high-impact innovation. Throughout the year, we launched outstanding new products across our businesses that strengthen our industry leadership by enabling our customers to advance their important work. In chromatography and mass spectrometry, the yield was highlighted by the launch of the groundbreaking Thermo Scientific Orbitrap Astral Mass Spectrometer, which is helping our customers uncover proteins that were previously undetectable. The scientific breakthrough is enabling customers to advance precision medicine, including the identification of new clinical biomarkers. In the 6 months since launch, the scientific community’s adoption of the product has exceeded our high expectations, and the momentum is continuing to build as we enter 2024. In electron microscopy, we launched the Thermo Scientific Metrios 6 STEM, a fully automated system that enables our customers to rapidly obtain large-volume, high-quality data from increasingly complex semiconductors to advance development. In Specialty Diagnostics, we launched the first FDA-cleared assays for the risk assessment and clinical management of preeclampsia. This first-of-a-kind diagnostic has received significant attention and adoption as it has significantly raised the standard of care for pregnant women, helping physicians to better manage care by predicting who is most at risk for this condition. In Life Sciences Solution, we introduced the Gibco CTS Detachable Dynabeads, our next-generation Dynabeads platform, to accelerate manufacturing of life-changing cell therapies. We continued this great innovation momentum in the fourth quarter. In electron microscopy, we launched the Thermo Scientific Meridian EX System for precise defect localization in advanced logic semiconductors. And in Laboratory Products, we launched the Thermo Scientific Aquanex Ultrapure Water Purification System for reliable water purity and operational enhancement in laboratories. So another spectacular year of innovation and an exciting pipeline for the future. In 2023, we also continued to strengthen our industry-leading commercial engine and the trusted partner status we have earned with our customers. This included the opening of a state-of-the-art customer center of excellence in Milan to showcase our industry-leading product services and expertise. And during the fourth quarter, we further strengthened our position in advanced materials by opening our Customer Experience Center for battery manufacturing in Seoul to accelerate the development of next generation of environmentally friendly energy solutions. We also made significant advancements in the partnerships and collaborations with our customers throughout the year. Building on our longstanding relationship with Boehringer Ingelheim, a great example in the fourth quarter was an exciting opportunity to develop a genomic testing-based companion diagnostic for non-small cell lung cancer patients in Japan and the United States, where lung cancer is a leading cause of cancer death. Now let me turn to our PPI Business System and our mission-driven culture, which continue to enable successful execution during the year. PPI engages and empowers all of our colleagues to find a better way every day. It’s helping us to drive share gain, improve quality, productivity and customer allegiance. I’m proud of the way our team leveraged PPI to step up in an agile way to navigate the dynamic environment last year, driving higher commercial intensity, actively managing our cost base and optimizing sourcing. We’re also leveraging generative AI as part of our PPI Business System toolkit to increase productivity, further optimize our commercial effectiveness and improve the customer experience. A quick wrap — recap on capital deployment last year. We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. In terms of M&A, we completed our acquisition of The Binding Site, our protein diagnostics business, which enhances our Specialty Diagnostics offering by advancing the diagnosis and management of patients with multiple myeloma and other immune disorders. The integration has gone smoothly, and the business is performing extremely well and tracking ahead of the deal model. As we look to the future of the protein diagnostics business, our launch of EXENT instrument solution represents a significant breakthrough given its enhanced sensitivity, specificity and ease of use when compared to conventional methods. This is a great complement to our Freelite assays and their strong interest from the medical community due to the positive impact on diagnosing multiple myeloma patients. In the third quarter, we added CorEvitas, a leading provider of regulatory-grade, real-world evidence for approved medicines and therapies. CorEvitas is now integrated into our clinical research business, and customers are seeing the benefit of these additional capabilities. The business is off to a great start and performing very well. During the fourth quarter, we announced our intent to acquire Olink, a provider of advanced proteomic solutions that help researchers to gain an understanding of disease at the protein level rapidly and efficiently. As a reminder, Olink’s technology complements our leading mass spectrometry and life science platforms, and we’re uniquely positioned to rapidly bring this technology to customers. The transaction is on track to be completed by mid-2024, subject to customary closing additions, including regulatory approvals. In 2023, we also returned $3.5 billion of capital to shareholders through stock buybacks and dividends. Let me now give you a brief update on our corporate social responsibility initiatives. As a mission-driven company, we help to make the world a better place by enabling the important work of our customers. We also have a positive impact by supporting our communities and being a good steward of our planet, and I’m proud of the actions we took in 2023 in this regard. Building on our — the environmental sustainability initiatives, we continue to accelerate our transition to renewable energy with on-site solar projects and power purchase agreements around the world. This progress will help us achieve our recently established target of utilizing 80% renewable electricity globally by 2030. To advance global health equity in the fourth quarter, we announced a partnership with Project HOPE to improve the well-being and treatment outcomes for young people living with HIV in Nigeria, the country with the second largest HIV epidemic worldwide. Throughout the year, Thermo Fisher Scientific was once again recognized for our industry leadership and inclusive culture, where colleagues can have a mission-driven career. To list just a few of the recognitions, we were once again included on Fortune’s list of the World’s Most Admired Companies as well as Fortune’s inaugural list of Most Innovative Companies. Newsweek named us as one of America’s Most Responsible Companies. Forbes included us on its list of the World’s Top Companies for Women and named us as one of the Best Employers for Veterans. As I reflect on the year, I’m very proud of what our team accomplished. Thanks to our incredible colleagues, we successfully navigated the environment, continues to build a bright future for our company. I’m very excited about 2024 and beyond. So let me now turn to guidance. Stephen will outline the assumptions that factor into our 2024 revenue and earnings guidance, but let me quickly cover the highlights. We’re initiating a 2024 revenue guidance range of $42.1 billion to $43.3 billion and an adjusted EPS range — guidance range of $20.95 to $22 per share. This outlook reflects a continuation of us demonstrating incredibly strong commercial execution and operational discipline and enabling the success of our customers. I’ve had the opportunity to connect with many of our customers in January to understand what’s on their minds. Based on our longstanding relationships, we have terrific access to the senior executive teams of our customers. From these conversations, it’s clear to me that our customers value our partnership and see us as essential to enabling their success. They are enthusiastic for the future because of the progress in pipelines to treat disease, and there’s also great enthusiasm with material science customers for the important advances made in those fields. All of this will create strong long-term demand for our capabilities as we enable customer scientific breakthroughs, and we continue to be incredibly well positioned to enable our customers to make the world healthier, cleaner and safer. So to summarize our key takeaways for 2023. Our proven growth strategy continues to drive significant share gain. We continue to elevate our trusted partner status and deepen the relationship with many customers last year. And this, in combination with the power of our PPI Business System, deliver differentiated performance for the quarter and the full year, helping us to effectively navigate a challenging macroeconomic environment. We’re well positioned in 2024 to once again deliver differentiated short-term performance and further strengthen our long-term competitive position. With that, I’ll now turn the call over to our CFO, Stephen Williamson. Stephen?
Stephen Williamson
Thanks, Marc, and good morning, everyone. As you saw in our press release, we executed really well in Q4. Market conditions played out largely as we’d expected in the quarter. And through great execution, we delivered 1% more core organic revenue growth than our prior guide. In terms of adjusted EPS, we beat our prior guide by $0.05, and that included offsetting $0.08 of additional FX headwind through really strong operational execution in the quarter. We also capped off the year with very strong free cash flow, delivering $7 billion in 2023. Throughout the year, we navigated the changing macro environment very effectively. Our proven growth strategy and PPI Business System enabled us to deliver a differentiated experience for our customers and differentiated financial results for our shareholders, all while continuing to invest in the business and advance our strategic position as the world leader in serving science. Let me now provide you some additional details on our performance, beginning with our earnings results. We delivered $5.67 of adjusted EPS in Q4 and $21.55 for the full year. GAAP EPS in the quarter was $4.20 and $15.45 for the full year. On the top line, reported revenue was 5% lower year-over-year in Q4. The components of our Q4 reported revenue change included 7% lower organic revenue, a 1% contribution from acquisitions and a tailwind of 1% from foreign exchange. Q4 core organic revenue decreased 4%. For the full year 2023, reported and organic revenue decreased 5%, and core organic revenue growth for the year was 1%. In 2023, we delivered $1.73 billion of pandemic-related revenue, $330 million of testing and $1.4 billion of vaccines and therapies revenue. Turning to our organic revenue performance by geography. The organic growth rates by region are skewed by the pandemic-related revenue in the quarter — in the current year and prior year. In Q4, North America declined low double digits. Europe declined low single digits. Asia Pacific grew low single digits, with China declining in the mid-single digits. For the full year, North America declined high single digits. Europe declined low single digits. And Asia Pacific declined low single digits, with China declining high single digit. With respect to our operational performance, we delivered $2.55 billion of adjusted operating income in the quarter. And adjusted operating margin was 23.4%, 100 basis points higher than Q4 last year. In the quarter, we continued to deliver exceptionally strong productivity and achieved good price realization. This was partially offset by lower pandemic-related revenue, strategic investments and FX. The strength of our productivity reflects the impact of our PPI Business System. It’s enabling us to manage our cost base appropriately given the macro conditions. For the full year, adjusted operating income decreased 11%, and adjusted operating margin was 22.9%, in line with our prior guide. Total company adjusted gross margin in the quarter came in at 41.5%, 10 basis points higher than Q4 last year. The change in gross margin was due to the same drivers as those of our adjusted operating margin. For the full year, adjusted gross margin was 41.2%. Moving on to the details of the P&L. Adjusted SG&A in the quarter was 15.1% of revenue, an improvement of 50 basis points over Q4 last year. For the full year, adjusted SG&A was 15.2% of revenue, an improvement of 60 basis points compared to 2022. Total R&D expense was $328 million in Q4. For the full year, R&D expense was $1.35 billion, reflecting our ongoing investments in high-impact innovation. R&D as a percent of our manufacturing revenue was 6.8% in 2023. Looking at our results below the line. Our Q4 net interest expense was $81 million, which is $38 million lower than Q4 2022. Net interest expense for the full year was $495 million, an increase of $41 million year-over-year. Adjusted other income and expense was a net expense in the quarter of $19 million, $9 million higher than Q4 2022. This is primarily due to changes in nonoperating FX. For the full year, adjusted other income and expense was a net expense of $16 million compared to a net income of $14 million in 2022. Our adjusted tax rate in the quarter and for the full year was 10%. This was 280 basis points lower than Q4 last year and 300 basis points lower for the full year, reflecting the results of our tax planning activities. Average diluted shares were 388 million in Q4, approximately 5 million lower year-over-year, driven by share repurchases net of options. And shortly after the year-end in January 2024, we repurchased $3 billion of shares. Turning to cash flow and the balance sheet. Full year cash flow from operations was $8.4 billion. And as I mentioned earlier, free cash flow was $7 billion after investing $1.4 billion of net capital expenditures. We returned $136 million of capital to shareholders through dividends in Q4 and $523 million for the full year. During the year, we invested $3.7 billion on completed acquisitions and committed $3.1 billion to the acquisition of Olink, which we expect to close by mid-2024. We ended the quarter with $8.1 billion in cash and $34.9 billion of total debt. Our leverage ratio at the end of the quarter was 3.2x gross debt to adjusted EBITDA and 2.5x on a net debt basis. Concluding my comments on our total company performance. Adjusted ROIC was 12%, reflecting the strong return on investment that we’re generating across the company. I’ll now provide some color on the performance of our 4 business segments. Let me start with a couple of framing comments. The scale and margin profile of our pandemic-related revenue varies by segment, and that revenue was higher in the prior year, so that does skew some of the reported segment growth rates and margins. In 2023, we continue to execute strong pricing realization across all segments to address inflation. Moving on to the segment details, starting with Life Sciences Solutions. Q4 reported revenue in this segment declined 19%, and organic revenue was 20% lower than the prior year quarter. This was driven by the runoff of our pandemic-related revenue in the segment as well as lower levels of activity in our bioproduction business versus the year ago quarter. For the full year, reported and organic revenue was 26% lower than 2022. Q4 adjusted operating income for Life Science Solutions decreased 14%, and adjusted operating margin was 36.2%, up 210 basis points versus the prior year quarter. During the quarter, we delivered exceptionally strong productivity, which was partially offset by unfavorable volume pull-through. The team has done an excellent job of appropriately managing the cost base and dealing with the unwind of the pandemic. For the full year, adjusted operating income declined 39%, and adjusted operating margin was 34.3%. In the Analytical Instruments segment, reported revenue increased 8% in Q4, and organic growth was also 8%. The strong growth in the segment this quarter was led by the electron microscopy business. For the full year, both reported and organic revenue were 10% higher than 2022. In this segment, Q4 adjusted operating income increased 23%, and adjusted operating margin was 28.8%, up 340 basis points year-over-year. In the quarter, we delivered strong productivity and volume pull-through, which is partially offset by FX and strategic investments. For the full year, adjusted operating income increased 27%, and adjusted operating margin was 26.3%, an increase of 350 basis points versus the prior year.Turning to Specialty Diagnostics. In Q4, reported revenue declined 1%, and organic revenue was 7% lower than the prior year quarter. In Q4, we continue to see strong underlying growth in the core led by transplant diagnostics, microbiology and immunodiagnostics businesses. This was offset by lower pandemic-related revenue versus the year ago quarter. For the full year, reported revenue declined 8%, and organic revenue was down 13%. Q4 adjusted operating income for Specialty Diagnostics increased 27% in the quarter, and adjusted operating margin was 23.9%, which is 530 basis points higher than Q4 of 2022. In Q4, we delivered strong productivity and favorable business mix, which was partially offset by the lower — the impact of lower COVID-19 testing volume and strategic investments. For the full year, adjusted operating income was 10% higher than 2022, and adjusted operating margin was 25.5%, an increase of 400 basis points versus 2022. Finally, in the Laboratory Products and Biopharma Services segment, Q4 reported revenue decreased 4% and organic revenue was 5% lower than the prior year quarter. This was driven by the runoff of vaccines and therapies revenue and the phasing of revenue in our Pharma Services business within 2023, as had been expected. For the full year, both reported and organic revenue were 2% higher than 2022. In this segment, Q4 adjusted operating income declined 4%, and adjusted operating margin was 14%, which is 10 basis points lower than Q4 2022. In the quarter, we delivered strong productivity, which is more than offset by unfavorable volume mix. For the full year, adjusted operating income was 17% higher than the prior year, and adjusted operating margin was 14.6%, an increase of 180 basis points versus 2022. Let me now turn to guidance. And as Marc outlined, we’re initiating a 2024 revenue guidance range of $42.1 billion to $43.3 billion and adjusted EPS guidance range of $20.95 to $22. Our guidance assumes core organic revenue growth in the range of minus 1% to positive 1% for 2024. Our view on the expected market conditions in 2024 has not changed significantly from our initial framing for the year shared on the last earnings call. We’re assuming that the market declines in the low single digits this year. Our growth strategy and PPI Business System execution will enable us to continue to take share once again this year. Our current estimate of pandemic-related revenue in 2024 is just under $100 million of testing revenue and $300 million to $400 million of vaccines and therapies related revenue. In total, this represents a year-over-year headwind of $1.3 billion to $1.4 billion or 3% of revenue. M&A is expected to increase revenue by $175 million year-over-year, the combination of 6 months of Olink revenue and the inorganic portion of CorEvitas revenue in 2024. At current rates, we expect FX to be neutral year-over-year to both revenue and adjusted EPS. From a phasing standpoint, FX is expected to be a slight headwind in Q1 and an offsetting tailwind in the second half. Turning to margins. Our 2024 guidance range assumes adjusted operating income margins between 22.3% and 22.8%. We continue to aggressively manage our cost base, and that’s reflected in this margin outlook. In terms of the range for the margins, that’s driven by the revenue range that I provided. We’ll continue to use the PPI Business System to not only manage costs very carefully, but also continue to make the right long-term investments to enable us to further advance our industry leadership. Strong underlying productivity and cost controls, including the carryover benefit from the cost actions put in place last year, are expected to largely offset the runoff in the remaining pandemic-related revenue inflation and a normalization of incentive compensation across the company to appropriately invest in our colleagues. Below the line, we expect approximately $430 million of net interest expense in 2024 and expect adjusted other income and expense to net close to 0. We assume that adjusted income tax rate will be 10.5% in 2024. And below the tax line, you should factor in $20 million of profit elimination related to minority interests. We’re expecting between $1.3 billion and $1.5 billion of net capital expenditures in 2024, and we’re assuming free cash flow is in the range of $6.5 billion and $7 billion for the year. In terms of capital deployment, our guidance assumes $3 billion of share buybacks, which, as I mentioned earlier, were already completed in January. And we estimate the full year average diluted share count will be approximately 383 million shares. We’re assuming that we’ll return approximately $600 million of capital to shareholders this year through dividends, and we’re assuming that we close the acquisition of Olink by midyear. And finally, I wanted to touch on quarterly phasing for the year as there are a few things to consider. First, in terms of organic revenue growth, we expect Q1 to be better sequentially than Q4 ’23 by 1 to 2 points and then improve each quarter during the year. Implied in that is core organic revenue growth in Q1 similar to Q4 ’23. And core organic revenue growth is also expected to improve each quarter during the year, leading to moderate growth in the second half of the year. From a margin standpoint, we expect Q1 to be just under 21% and increase each quarter throughout the year from that level. And we expect Q1 adjusted earnings per share to be approximately 22% of the full year. So in conclusion, we navigated the challenging environment in 2023 very successfully. We stepped up for our customers and delivered differentiated financial performance for our shareholders. We continue to manage the company with agility, and we’re really well positioned for the year ahead. I look forward to updating you on our progress as we go through the year. With that, I’ll turn the call back over to Raf.
Rafael Tejada
Thank you Stéphane. Operator, we are in a position to make the consultation and answer part of the call.
Operator
(Operator Instructions) Our first query comes from the lineage of Jack Meehan of Nephron Research.
Jack Meehan
Marc, if you look at the business, if you look at the company, I think the question is whether it’s starting to see some recovery. Could you talk to us about the sectors that you think could grow more or less above the market and what that might mean in terms of earnings and profits?
Marc N. Casper
Yes. So Jack, when I think about last year, and you’ve heard us say delivering differentiated short-term performance, strengthen the company for the long term kind of simultaneously, we had the opportunity to look at, obviously, for the first 9 months of how others have done, and we looked at those companies that preannounced or reported so far. And we had a really strong year in terms of delivering above-market growth, which means share gain, right? And that share gain actually was broad-based in terms of the performance. You look at things like Analytical Instruments, very strong; clinical research, pharma services. These businesses did well. And by the absence of some, I’m not implying anything in the others. This is a very strong year relative to a challenged set of market conditions. As I think to the future, we’re well positioned in those businesses to continue our share gain momentum. We made an assumption for this year, which is pretty much the same as what we said back in late October, is that we’re assuming that for the full year, it’s going to be pretty similar to 2023 and a mirror image, meaning that we start to lap comps as the year unfolds and we wind up with the market being down slightly in the low single digits and us performing better than that level. So I’m excited about what the year unfolds and our position to deliver differentiated performance. And we’re certainly going to capitalize on any improvements in the market and hold ourselves to a very high standard of what good looks like.
Jack Meehan
And are there any express corporations that I can talk about?So, as an example in the script, I think he talked about the ability to transition, new therapies. So, in a prospective recovery, what can you tell us about how you expect a slow recovery?Evolution for Patheon and some – and for the bioprocessing sector?
Marc N. Casper
Yes. So when I think about the year, we basically use a range of outcomes for each of our businesses in terms of how they perform. I believe that the second half of the year based on lapping the comps as well as we’re expecting that the market conditions improve slightly as the year unfolds, and that helps with demand for the industry and for us is how I would think about the business in aggregate is the way that we manage the company. So thank you, Jack.
Operator
The following query comes from the Dan Arias lineage of Stifel.
Daniel Antonio Arias
Marc, obviously, a lot of discussion on destocking across the industry. Can you just maybe add some color to where you think you are with that process? And maybe draw a distinction for us between the inventory work down that’s taking place on the bioprocess side specifically versus more routine consumables. If you split it that way, are the drawdowns kind of happening at a similar pace and ending in a similar time? Or do you think we should sort of keep those 2 buckets separately or think of them differently?
Marc N. Casper
Yeah. So Dan, I guess, let me start with sort of biomanufacturing, which I think is the essence of the question, and then maybe go up a level. In terms of biomanufacturing, this is an incredibly attractive long-term market. Historically, this is an incredibly smart market. A fairly taboo call these days is rarely very important; In terms of biomanufacturing, it has caused a lot of volatility over the course of 2023 in the industry. For us, some data, right? This represents just under 10% of our revenue and we have the most productive bioprocessing products with an incredible global footprint. We maintain leadership positions in mobile culture media, single-use technologies and in an increasingly vital purification business as we expand our market share there. When I think about the fourth quarter, we saw a sequential increase in orders in the fourth quarter compared to the third quarter. But underlying activity remains subdued in the market. Therefore, we have not noticed any inflection. We didn’t expect it and we didn’t see it in the last quarter. We believe that the scenario will normalize throughout the year. And as I said at an investor convention earlier this year, no one will be rewarded for announcing when this change will occur. This will develop throughout the year and the long-term fundamentals are very strong. When I think about our overall business heading into the year, I think what’s very exciting is the trusted spouse cachet that we’ve earned among our consumers for many, many years. We are in the room with the decision makers. We perceive what they are thinking. We are incredibly well positioned. And if I think about the medium-term outlook for clinical research, pharmaceutical services, biomanufacturing and our distribution business, we are incredibly well positioned, right, in the sense that we are helping our consumers bring advancements to their projects. We help them navigate any environment. So I hope this is useful to you. And then maybe the last comment I would make is that one of the classes that I learned from the many, many visitor interactions that I have had during the first month of the year is on biotech networkArray and what I mean by biotech, like I will do that. Call it, the small corporations, the corporations that define the capital market in the [biopharmaceutical] segment, were much more positive, right? They see green shoots. They love the M&A activity that has been slowing down late in the year, which is getting investors excited about startups and fundraising. And while it’s early and will take some time, this is actually the most positive I’ve noticed in the last five quarters in terms of the tone of your sentiment. And I think that bodes well for the years to come. THANK YOU.
Daniel Antonio Arias
It is ok. This is encouraging. Maybe just a continuation of the AI part, with an expansion still forged there. I’m curious if you still have a backlog of work in microscopy. And can you tell us a little bit about this year’s delivery times and order conversion?Should we assume that it is possible that those deadlines will be extended as the year progresses?Or do you think it can be solid compared to the current situation?
Marc N. Casper
Yes. So when I think about the performance of our Analytical Instruments business with double-digit growth for the full year, it’s awesome. Really, a tremendous year. It was across all 3 businesses. The backlog that we carried into the beginning of 2023, those things largely cleared in the first half of ’23. So we’re at — we’ve been at normal lead times, normal shipping times really for about 6 months now in terms of that already. So we’re kind of in a normal spot. And while there won’t be the repeat of the unwind of the pandemic impacts on the supply chain, the business is positioned for a good year. And there’s a high demand for the breakthrough technologies, whether it’s in electron microscopy, for semiconductor, material science, life sciences or the astral, right, in chroma and mass spec. It’s just incredible demand for those technologies. So we’re excited for the upcoming year and the future of that business.
Operator
The following query comes from Derik De Bruin of Bank of America.
Derik De Bruin
Marc, I’m a little curious. Last quarter, you were talking about a 1% base expansion when you were looking at your initial 2024 framework. If I listened to you correctly, it’s now about 1%. It doesn’t look like the fourth quarter will be much worse. So – so what – in a way, what has changed?Are you more conservative about the PDP and those companies?Are you more conservative only in complicated compositions?Am I a little curious as to what is now hidden in this more conservative perspective?
Marc N. Casper
Stephen, why not. . . ?
Stephen Williamson
Yes. It’s. . . let me give you a little bit of context on the advice, take a step back and then. . . and hopefully help you frame your question. So we provided an initial scope for 24 on our last call, we were given a review of how the fourth quarter is going, and we finalized our detailed elaboration plans with our companies. Through this process, our view of the market prospects has not particularly changed. The guidance is not particularly different from the initial framework we provided. It includes the newest view of currencies, both the rates and the expected distribution of profits and prices across the currency. This increased profit from our initial tables, but has no effect on constant revenue, reducing our margins by 20 base issues compared to these initial tables. And then from a consistent international point of view, I think the only notable detail that it has replaced in the last 3 months is a discrete detail of our Pharmaceutical Services business. We are transferring some of our sterile filling and finishing capacity from COVID vaccine support to GLP-1 support. We would have expected to receive an upfront payment in the first quarter of year 24. Now that the accounting is finalized, we expect to make profits based on production, which actually begins in year 25. So, that’s up to about $0 . 20 compared to the first quarter of 2024, which had some effect on the reported underlying growth. And then another observation about the forecast is that we thought it was more productive to offer a diversity, not a point estimate. So I think it is more useful for our investors. And the diversity of outcomes for the year, now diversity does not encapsulate each and every conceivable scenario for the year, however, it captures the most likely scenarios of how the year would unfold as we see it today. ‘today. And diversity is about $1. 2 billion in earnings and $1. 05 in adjusted earnings per share, which I think is about right given the length of the company. But I hope this is kind of the framework of the guide.
Derik De Bruin
It is ok. And a little bit more, how do we deserve to think about segment margins as we go along?I mean, I’m just looking, I mean, they’ve noticed some really smart advancements in the LSS, and that possibly seems like smart progress in their margins, an expansion of margins in all of them. But I’m just thinking about how we deserve to think about LPS and, given their position in the 14% margin diversity that we’re saying for the full year. Will it go backwards next year?I’m just looking to figure out where the margin is, given our expectations.
Stephen Williamson
In terms of the margin profile for, we ended the year precisely where we set out for the full year for our margin profile for the company. And I think some of the adjustments that occurred in the fourth quarter as opposed to the segments, I think not everyone has been given an intelligent understanding of the slow allocation of our profits to laboratories and biopharmaceutical services. So when I look at some of the pre-call notes, I think it’s a little bit different in terms of what – there are expectations for sure. But in line with our internal expectations, the fourth quarter went as planned. And then in terms of long-term margins, I think the margin profile that we have today doesn’t require a significant difference in the margin profile for the next one. year. And I think the landing point at the margins of the segment is probably a smart starting point to think about for next year.
Operator
The next question comes from Doug Schenkel of Wolfe Research.
Douglas Anthony Schenkel
So I need to start with a high-level query about LRP, and then my follow-up is really just an explanation about LPS. So in the LRP, Marc, you said Thermo is designed to grow 2 to 3 units larger than the peer organization over the long term. That said, you talked about a 7% to 9% expansion at last year’s Analyst Day. I’m sure the 2 or 3 problems haven’t changed. But, turning the calendar around, is it fair to say that the 7% to 9% expansion rate is perhaps a little high, even in a more normalized environment? I just need to give them the opportunity to adjust that as we change the calendar and look ahead. And in terms of revenue, it has done a fantastic job, as Array strengthening operations in a more difficult time. Never let a smart crisis go to waste. Your recommendation suggests to me, at least superficially, that I would possibly invest more in the short term. But as we think about getting back to normal, I’m wondering if you think we can also get a large incremental margin flow to the business as the business normalizes. Let me just leave it at that and then I’ll do a quick follow-up question on LPS in a second.
Marc N. Casper
Of course. So Doug, thanks for the question. Regarding the long-term forecast, it is true, we increased our forecast at the end of 2021. And what happens, at that time, we did not forget precisely that moment, but we were growing at 25%, right? ? ? We were experiencing ordinary biological expansion. And what we were looking to do was give our investors a very long-term view of what the market is and our position in the market, right? And in terms of our ability to gain percentage, I think there are 3 issues. . . 2, 3. I’m using 3 for simplicity. 3 things faster than the market. placeplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplaceplace and we’ve been doing so for a while. And we’ve been expanding our market share for a long time, for many, many years. And that’s why nothing has replaced there. In terms of market expansion, where the market was normal when we said it, we said our underlying market expansion would be four to 6%, and it was more like 3% to 5%. And the replacement is really fair because we’ve been more exposed to the pharmaceutical and biotech sectors as we’ve built our business functions there. When I look forward and think about what’s happening in the long-term drivers of our industry, I feel incredibly confident that this is a four to 6% expansion sector and that we are well positioned to grow, simplify, 3 numbers faster than that, i. e. 7 to 9%. So while I get a lot of questions, and clearly in an era where we’ve achieved 1% base expansion in 2023, that’s a long way from 7% to 9%. But our view of a low-single-digit market last year reflects at least a percentage gain component. And when I look at the long term, I remain very confident in the long-term suitability of the industry. I’ve had some very interesting conversations with investors and basically followed the following logic: If you are bullish on life sciences, pharmaceutical tools, diagnostics and services, you probably have 6% upside over the long term. And if you’re bearish on life sciences tools, diagnostics and pharmaceutical services, you’re probably looking at a four percent expansion in the sector. But you have to be incredibly bearish globally to achieve sub-4% long-term business expansion in our segment, because we are very much a GDP-plus type company in terms of the market we serve. So I hope that at least gives you an idea of what we think about it. And while I appreciate the offer to replace our appearance, I couldn’t be more confident in the long term of our industry and our competitive position. As for the main concept, I like you. If you see volumes developing at a normalized pace, you will see very strong money flowing into the margins. And part of what’s happening with margins for this year is that we’ve brought our colleagues’ incentive pay to normalized levels after a year below that number. So, just the math is that there is some headwind built into the less difficult numbers, nothing more than what we expected in October. But that’s one reason why the cumulative margin is rarely as large as you might expect.
Douglas Anthony Schenkel
It is ok. I’ll leave the consultation on LPS for another day. But I guess the other component of my secondary query, Marc, was clearly that we want to pay people, we want to reset things. In an era where Don’t Grow Up So Much, this is where Thermo has traditionally played on offense, while others have played on defense to some degree. So I’m wondering if you’re really looking to make an investment at the beginning of the year. which could, in the coming quarters, lead to an even larger-than-expected margin as the company returns to a more normalized era.
Stephen Williamson
Doug, I think the example I gave about the GLP-1 contract is that we’re basically setting up a facility for a customer. We get paid for doing this. We recognize those prices in production volumes, and in the meantime, we incur significant prices in 2024, which will create smart cumulative expansion in the future. This is a clever example. And we continue to invest in innovation across the company. And we haven’t diminished our preference for literally generating strong long-term expansion. So we’re managing our pricing appropriately, our profit environment, but we’re making sure that we’re putting the right measures in place. investments in position and to make sure that that earnings environment is maintained, and the outlook remains as smart as we are, as well as articulated.
Operator
The next question today comes from the line of Vijay Kumar from Evercore ISI.
Vijay Muniyapa Kumar
The first, Marc, when I look at the yearly forecast here, the core is flat halfway. But if we exclude vaccine-related obstacles, that’s about 3 points. He’s a pretty solid consultant. The three things that stood out were China, CRO business, and analytics technology. Can you remind us what China did, what PPD did in FY23?And does the consultant assume that those three elements, China, CRO, and analytics, are at 3%, about 3%, less than 3%?
Marc N. Casper
So Vijay, thanks for the question. So when I think about the functionality of our business, actually last year and actually when we look forward, last year, it’s impressive functionality in our clinical trials business. Really, the team did an incredibly smart job in terms of results. And I think in some tactics we probably underestimated the details, not the numbers, as much as what was actually happening because there were so many other things we were communicating. But if I think about the clinical studies, it’s been a little over 2 years since the acquisition, a phenomenal acquisition. Customers like that the company is running well and that colleagues are doing a wonderful job, right? And it was a wonderful success. During the pandemic, the company played the most vital role in supporting vaccine clinical trials and at the same time achieved the fastest underlying expansion, I’ll call it, excluding all effects of COVID. activity, I just crushed it. And that means that for this year we have a reduction, to which we have given transparency on a large part of the vaccine income, which is very smart. And we generated a very extensive comparison, which is great. Like us, it is a smart challenge in terms of proper functionality. Therefore, we expect the company’s expansion to be even more moderate this year, based solely on comparisons. But the future, which is approaching 25 years and more, is a very strong business, a long-term business with single-digit expansion and the synergies it generates. So I literally feel smart about it. And then a quick comment about China and that has nothing to do with the clinical studies, but rather the other component of your question. In China, the market situation has been difficult in 2023. The first quarter was very strong, with a lot of stimulus and all that smart stuff. But of course, it was China. We are not asking for a significant improvement in China this year. Instead, we make comparisons as the year progresses. Therefore, the headwind is a little less. We all know that at some point the Chinese government will create a recovery mechanism. Whether it’s directly, not accepted as true or whatever, we don’t know when it will happen. But over time market conditions will improve because the need for what we do is very high. So I’m sure the long-term scenario in China will be better than what we have now, and it will take some time to get there. Thanks, Vijay. Look for.
Vijay Muniyappa Kumar
Stephen, just one quick one for you. On Q1, I think operating margin is less likely under 21%. I think the EPS is around $4.70-ish. Is that just the outsized impact from incentive comp reset? Just want to understand the Q1 margin cadence.
Stephen Williamson
Yes. So when I think about the margin in Q1, that’s definitely an element when you look at it year-over-year and kind of sequentially as well. So when I think about it year-over-year, so there’s — obviously, we have a significant drag from the lower pandemic revenue and the reset of the incentive comp. That’s just under 200 basis points in total and then about 100 basis points contribution from the core business, despite the lower dollars of revenue. And the key driver there being the impact of the cost actions that we’ve taken over the past year. So to give you a way to frame the margin in Q1. And then, yes, the margin profile grows each quarter as the revenue dollars grow during the year in terms of the profile for the year ahead.
Operator
Our final question comes from Morgan Stanley’s Texas Savant lineage.
Rajeev Savant Shingles
Marc, just a continuation of your comment about China, more in terms of long-term opportunities. You’ve talked in the past about the fact that this is a vital market for you, growing, at the more sensible end of your life. prospects for the company. Recently, there has been a thaw in relations over the past month. I think you alluded to that as well and to a high-level government commitment. But not long ago, we heard about this law on BIOSECURE. Can you help us think about what this means for you?Perhaps this is an opportunity to be more ahead of the curve and gain a short-term market share in the sector, compared to the long-term threat of a possible backlash from China. , with respect to U. S. multinationals operating in this market. That would be a big help.
Marc N. Casper
Of course. So thanks for the question. Looking at China, a market that we’ve been in for 40 years, a set of features that we’ve built over a long period of time that have helped Chinese society, yes, and created jobs in the United States. Better food supply, fight against air pollution, generation of medicines for the local population, we enjoy a fair reputation. I have had the honor of serving as Chairman of the US-China Business Council for the past two years and interacting with both the US Administration and the Chinese Government. And while it’s clear to me that the short-term GDP environment is being questioned in China, the expectations for what our industry is doing and what Thermo Fisher is doing in the long term are good. This will be an expansion market forged, in fact, one of the fastest developing geographies in the long term. Regarding relations between countries, yes, I agree with your sentiment, there is a thaw. And in terms of future legislation, there are thousands of expenses that are drafted and not implemented. So until something matures in the process, it’s hard to really know if it will come to fruition and what the precise implications will be. And my quick read of what they’re doing in this specific one, it’s actually essentially an opportunity for the uninitiated. -Chinese corporations will have to have a more powerful position at the service of entities connected to the federal government. So that’s the essence of it all. And obviously, as a non-Chinese company, we would be well placed to help the US government. So thanks for this question. Let me temporarily summarize the call. So thank you all for joining our call today. We enter this year with strong momentum. We are in a great position to have a wonderful 2024. As always, thank you Thermo Fisher Scientific for your support and we look forward to keeping you updated as the year progresses. Thank you all.
Operator
This concludes today’s conference call. Thank you all for your participation. You may now disconnect.