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Executives

Kenneth J. Apicerno - Vice President of Investor Relations and Treasurer

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

Peter M. Wilver - Chief Financial Officer and Senior Vice President

Analysts

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

Doug Schenkel - Cowen and Company, LLC, Research Division

Amit Bhalla - Citigroup Inc, Research Division

Travis Steed - Macquarie Research

Peter Lawson - Mizuho Securities USA Inc., Research Division

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Daniel Brennan - Morgan Stanley, Research Division

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

Vamil Divan - Crédit Suisse AG, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Daniel Arias - UBS Investment Bank, Research Division

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

Steve Willoughby - Cleveland Research Company

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

Daniel L. Leonard - Leerink Swann LLC, Research Division

David Ferreiro - Oppenheimer & Co. Inc., Research Division

Derek De Vries - BofA Merrill Lynch, Research Division

Thermo Fisher Scientific (TMO) Q1 2012 Earnings Call April 25, 2012 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2012 First Quarter 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.

Kenneth J. Apicerno

Good morning, and thank you for joining us. On the call with me today is Marc Casper, our President and Chief Executive Officer; and Pete Wilver, Senior Vice President and Chief Financial Officer.

Please note that this call is being webcast live and will be archived on the Investors section of our website, thermofisher.com, under the heading Webcasts and Presentations until May 18, 2012. A copy of the press release of our 2012 first quarter 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 expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's annual report on Form 10-K for the year ended December 31, 2011, under the caption Risk Factors, which is on file with the Securities and Exchange Commission 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 point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

Also, during this call, we'll be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first quarter 2012 earnings and future expectations and also in the Investors section of our website under the heading Financial Information. So with that, I'll now turn the call over to Marc.

Marc N. Casper

Thank you, Ken, and good morning, everyone. Thank you for joining our call today. We had an excellent first quarter. It's always nice to report a strong start to the year, and I'm pleased to say that we continued our trend of consistently delivering double-digit growth in adjusted EPS. Our teams executed well. Our growth drivers continue to gain traction, and the cost-reduction programs we put in place delivered according to our plans. All of this added up to quarterly performance that was somewhat better than our expectations. I'll begin this morning's call by covering the financial highlights, giving you a little color on how we performed relative to our key end markets and then getting into a bit more detail on some of our growth drivers, namely product innovation and emerging markets.

As I mentioned, we had strong double-digit adjusted EPS growth with a 27% increase over 2011. We also delivered strong revenue growth with a 14% increase in the quarter. Our adjusted operating income rose 20%, and we increased our adjusted operating margin by 90 basis points. We continued our momentum of strong financial performance into 2012, and that positioned us well to meet our goals for the year overall.

Let me turn to our end markets and give you a high-level overview of what we saw in Q1. First, academic and government. While these markets were down low-single digits in the quarter, they were slightly better than what we saw in the fourth quarter of 2011. We had moderate growth in Laboratory Consumables and Bioscience reagents, which tells us that scientists and researchers continue to do their important work. The capital equipment side of their spend, however, continues to be constrained as our customers are choosing to delay their larger purchases.

Conditions in health care and diagnostics were similar to what we've seen over the last several quarters with one exception. This quarter, we experienced weak demand from our seasonal flu and allergy products. As you probably know, it was a light flu season this year, and we also saw the impact of unusually low pollen levels on our seasonal allergy product sold in Japan. Sales of our clinical diagnostic products remain strong, as they have for quite a few quarters now, driven by continued demand for our innovative biomarker tests such as our PCT marker for diagnosing sepsis.

Turning to industrial and applied markets. We saw continued strength across our portfolio with solid performance in our businesses serving these end markets. A couple examples were strong sales of our molecular spectroscopy instruments for quality control laboratories, as well as robust demand for our Process Instruments from mining and minerals customers.

Last in pharmaceutical and biotech, we continue to grow rapidly and gain share with these customers. We had another excellent quarter in our BioProcess Production business with strong sales of sera, media and single-use disposable production systems.

Our Biopharma Services business, where we are the largest outsourcing partner for clinical trial logistics, continues to grow in the double digits. Given that some of our largest customers are in the biopharma space, I spent quite a bit of time with them. I recently met with the ahead of R&D in one large pharma company and the head of manufacturing in another. The feedback on the impact that we're having on their business is extremely positive, and we continue to jointly identify opportunities for further collaboration. We believe that our scale and depth of capabilities position Thermo Fisher with Biopharma customers better than any other company in our industry. We're committed to building on these relationships.

One area that we're very excited about is our companion diagnostics program. This is in the early stages, but we've leveraged our strong relationships to get in front of the right decision makers in pharma R&D organizations. And we believe that we're uniquely positioned to build up a meaningful companion diagnostics business. Our goal is to be the key partner for the pharma industry by developing and marketing the diagnostic kits they need to support their new product launches.

Let me now turn to our new products. Given some of the unique relationships we have with our customers, we gained great insight into their emerging needs. And that really helps to guide our product development strategy. We also vet our R&D priorities with our Scientific Advisory Board, which includes representatives from some of the world's premier centers of health, science and academia.

Before I get into the new product highlights from the last few months, let me just mention here that sales of our Q Exactive mass spec, which we introduced last year at ASMS, continues to be very strong. Our customers are clearly seeing the benefit of this high-performance instrument with great uptake in a number of applications, including from those doing protein and peptide analysis to identify disease markers, as well as for small molecule identification and quantitation in metabolomic studies and for those doing food safety testing.

In terms of the new product launches, we have a great lineup so far this year. Based on the early feedback, I believe 2012 will be a banner year considering the range of new technologies introduced and the success they will have with a broad base of customers. We showcase many of these new capabilities at PITTCON in the U.S. in Q1 and at analytica in Germany just last week. This includes a long list of innovative, new Thermo Scientific products across our Analytical Technologies segment that addresses the need of customers in all of our key end markets.

Let me take a few minutes to cover some of the highlights. At PITTCON, we debuted our new ion chromatography platform, the ICS-4000, which is the world's first integrated capillary high-pressure IC system. It's ideal for high-volume environmental and industrial laboratories that demand rapid analysis without compromising performance.

The powerful combination of Thermo Scientific and Dionex is already paying dividends for our gas chromatography customers as well, and our introduction of the new TRACE 1300 is an excellent example. This compact, versatile GC system, which can be used for QA/QC and routine environmental, chemical and food safety analysis, runs on the gold standard Chromeleon Chromatography Data System. The TRACE 1300 brings new capabilities and productivity to a product category that hasn't seen any significant technology developments for years.

Continuing our legacy of innovation in mass spectrometry, we launched the new iCAP Q, an ultracompact, highly sensitive ICP mass spec that cuts analysis time by 50% compared with the current ICP-MS it replaces. The iCAP Q is ideal for clinical research, environmental, food safety and semiconductor applications that cover both routine and complex elemental analyses. Demand has been incredibly robust, and we've already booked and shipped a significant number of instruments.

With our depth of capabilities, we're in a unique position to leverage our technology platforms to create entirely new growth markets. Our new TruNarc analyzer, for example, literally puts Raman spectroscopy in the hands of law enforcement for the rapid identification of suspected narcotics. TruNarc is already gaining real interest here in the U.S. and in China as well.

Finally, we introduced new products that improve routine workflows for life science researchers. One example is the PikoReal quantitative PCR System, which is an affordable, high-performance benchtop instrument that's integrated with our Bioscience reagents and consumables for the molecular biology workflow.

We're clearly in a strong, new product development cycle, and we'll be launching a number of additional products for the remainder of the year. I look forward to covering our new innovations on future calls, as well as updating you on the results of our launches from the past few months.

I'll now make some quick comments on emerging markets, another key growth driver for us. I recently got back from a trip to China, and I'm pleased to see that our continued investment in the region is really paying off. China came in at 20% revenue growth in the first quarter with continued strong demand from customers in multiple end markets.

When I'm in China, I often spend much of my time visiting customers in Shanghai and Beijing, which is also where our main offices and production facilities are located. This particular trip, I traveled to Western and Central China to meet with customers and government officials in those regions to better understand their needs and how we can translate them into new growth drivers for Thermo Fisher.

You may recall that we opened a new commercial center in Chengdu in Central China last year. We also opened a commercial center in Shenyang, and during my recent trip, announced the opening of a new office in Wuhan. We're also on-track to open our new Xuzhou factory in Q3, where we'll manufacture lab consumables for our life science customers in the region. It's clear that there are huge opportunities across the country, and I'm confident that our capabilities are perfectly aligned with China's growing needs in diagnostic medicine that's seen [ph] production and environmental monitoring, as outlined in this 5-year plan.

We're also intensifying our focus in other high-growth markets like South Korea, where we recently opened a new application and customer demo center, as well as in Brazil and Russia, where we're expanding our commercial presence. Our strategy in these markets is to replicate the successful formula we have implemented in countries like China and India. We continue to make investments to drive growth, and it's great to see that they're creating value for our customers and strengthening our company overall. I've never been more excited about the excellent opportunities we have through our ongoing commitment to high impact innovation and expansion in global markets that have high rates of growth.

We also continue to create significant value for our shareholders as well by effectively deploying our capital. Our stock is a very attractive investment, and we repurchased $300 million of our shares during the quarter. As you know, we also initiated the first quarterly cash dividend in our company's history, which was just paid in mid-April. The decision by our board to incorporate a dividend into our capital deployment strategy is based on our strong financial performance, our track record of strong cash flow generation and our excellent opportunities for growth.

Turning to guidance. Pete will cover the details in his comments, but given the better-than-anticipated FX rates and our strong Q1 results, we're raising both our revenue and adjusted EPS estimates for 2012. We're raising our annual revenue guidance to a new range of $12.27 billion to $12.43 billion for 5% to 6% revenue growth year-over-year. This translates to adjusted EPS of $4.71 to $4.83, which will result in 13% to 16% adjusted EPS growth over 2011. Before I turn the call over to Pete, let me summarize the key takeaways from the quarter.

We're pleased with our strong performance and start to 2012 with good top line results and excellent adjusted EPS growth. Our growth initiatives are on track with excellent new products and great progress in emerging markets. And with our continued focus on driving growth while prudently managing our costs in line with market conditions, I'm confident that we'll continue our momentum and achieve our goals for the year. Now I'll turn the call over to Pete Wilver. Pete?

Peter M. Wilver

Thanks, Marc. Good morning, everyone. I'm going to start with an overview of the total company's financial performance, and then I'll provide some color on each of our 3 segments before moving on to our updated guidance.

As Marc stated, we had another quarter of double-digit growth and adjusted EPS, with 27% growth to our first quarter record of $1.17. GAAP EPS in Q1 was $0.75, up 17%.

Starting with the top line. Total revenue increased 14% year-over-year. On a pro forma basis, as if Dionex and Phadia were owned in the prior year, both reported and organic revenues increased by 4%. Pro forma revenue included 1% growth from acquisitions other than Dionex and Phadia, which was offset by a 1% headwind in foreign currency translation.

We also continued to strengthen backlog with bookings exceeding revenue by about 2% and all 3 segments contributing.

By geography, North America grew in the low-single digits. Europe grew in the mid-single digits, and Asia-Pacific in the high-single digits, but China coming in at strong again at 20% growth, as Marc mentioned. Rest of World, which is less than 5% of our revenue, declined in the low-single digits versus a tough comparison due to several large project orders in Q1 last year.

Turning to adjusted operating income. We had strong bottom line results with Q1 adjusted operating income up 20%. Adjusted operating margin was 18.5%, up 90 basis points with margin expansion driven by strong contribution from our productivity and cost actions, solid accretion from Dionex and Phadia and good pull-through on our organic growth. We did experience some unfavorable mix in the quarter as a result of weakness in specialty diagnostic seasonal products related to allergy and flu, which have higher-than-average margins. And similar to last quarter, inflation on oil-based raw materials like plastic resin continues to be a slight headwind, but we continue to push hard on sourcing actions to offset these pressures. We're executing as planned on the incremental restructuring actions that we initiated last year and realized about $12 million in benefit in the quarter.

Moving on to details of the P&L. As I stated previously, the Dionex and Phadia acquisitions both have higher-than-average gross margins, as well as higher-than-average SG&A and R&D expense. So until they anniversary, you'll see their impact on our year-over-year margins. Total company adjusted gross margin was 44.3% in Q1, up 180 basis points from the prior year. Gross margin benefited from the impact of acquisitions, our standard productivity actions and the increase in site consolidation efforts, but mix was somewhat unfavorable. Adjusted SG&A in Q1 was 22.9% of revenue, up 70 basis points. Excluding the impact of acquisitions, we delivered meaningful SG&A leverage as we tightly controlled discretionary costs and restructured our cost base while continuing to fund our growth investments. Last, R&D expense was 3%, up 20 basis points as a result of acquisitions.

Below the line, net interest expense increased $29 million year-over-year to $51 million driven by higher interest expense as a result of the debt we issued last year to fund acquisitions. Our adjusted tax rate in the quarter was 17.5%, down 300 basis points from last year, primarily as a result of tax synergies we're recognizing from acquisitions, as well as the benefit of our ongoing tax planning initiatives.

We bought back shares pretty aggressively in Q1 and deployed another $300 million of cash to buy back 6 million shares of our stock at an average price of $50. Average diluted shares were 370 million in the quarter, down 25 million or 6%, reflecting the benefit of our 2011 and 2012 share buyback programs, as well as redemption of our remaining convertible debt in the first half of last year.

Turning to cash flow and the balance sheet. We continued to generate solid cash flow this quarter. Cash flow from continuing operations was $393 million, and free cash flow was $328 million after deducting net capital expenditures of $65 million in the quarter. Free cash flow was up 25% year-over-year, primarily as a result of higher income and lower cash taxes. We ended the quarter with about $800 million in cash and investments, down $225 million from Q4. Our total debt at the end of Q1 was $6.7 billion, down $350 million from Q4 as a result of paying down some of our outstanding commercial paper.

Now let me give you some color on this quarter's performance by each of our 3 segments. Starting with Analytical Technologies, total revenue grew 21%. On a pro forma basis, assuming Dionex was owned in the prior year, Analytical Technologies' total revenue increased 6%, and organic revenue growth was 7%. We continued to see strong growth both in instruments sold to biopharma, industrial and applied markets, as well as in our businesses serving bioprocess production. Adjusted operating income in Analytical Technologies increased 35%, and adjusted operating margin was 18.4%, up 190 basis points. This was the result of pull-through on strong organic growth, contribution from our productivity actions and good accretion from our acquisitions.

Turning to the Specialty Diagnostics segment. Total revenue grew 27%. On a pro forma basis, assuming Phadia was owned in the prior year, total revenue and organic revenue both grew 1%. We continued to see strong growth in clinical diagnostics, particularly in our biomarkers business. However, as I mentioned earlier, this segment experienced soft demand for seasonal products due to a very weak pollen season in Japan and the weaker-than-average global flu season. Adjusted operating income increased 31% with adjusted operating margin at 25.5%, up 90 basis points.

In the Laboratory Products and Services segment, total revenue and organic revenue both increased by 4%. In the quarter, we had strong growth in Laboratory Consumables, and our Biopharma Services business continued to deliver strong results. Similar to the last quarter, this segment was affected by the challenging conditions in our academic and government markets, primarily in routine laboratory equipment, including laboratory workstations. Adjusted operating income grew 1% with adjusted operating margin coming in at 13.4%. This was 40 basis points below the year-ago quarter but up 20 basis points sequentially from Q4. We continued to generate strong productivity gains in this segment, but this was more than offset by unfavorable mix and operational performance in our laboratory workstation business.

Now moving on to our guidance. As you saw in our press release, we're increasing the high end of our 2012 revenue guidance by $80 million as a result of more favorable FX rates, and we're increasing the low end of our guidance by an additional $40 million as a result of our strong performance in Q1. This leads to a new revenue guidance range of $12.27 billion to $12.43 billion, which represents reported growth of 5% to 6%.

On a pro forma basis, as if Dionex and Phadia were owned for all of the prior year, the midpoint of our organic growth guidance remains at about 3% but is slightly higher than our previous guidance. Although rates have improved somewhat, this guidance still assumes an unfavorable year-over-year FX impact of about $325 million in revenue, which results in a 3% headwind on adjusted EPS.

We're also assuming that completed acquisitions other than Dionex and Phadia will contribute a little less than 0.05% to our expected growth in 2012. As usual, we haven't attempted to forecast future FX rates, and our guidance does not include any future acquisitions or divestitures.

In terms of full year 2012 adjusted EPS guidance, we're also raising the high end and tightening the range. This is driven by the higher revenue, which is partially offset by a slightly higher share count as a result of a higher stock price. Our revised adjusted EPS guidance range is $4.71 to $4.83, which represents 13% to 16% growth over 2011. So the bridge from the midpoint of our previous guidance to our current guidance is a $0.05 increase from the incremental revenue offset by about $0.025 dilution from share count.

In terms of adjusted operating margin, we're still expecting expansion of 70 to 90 basis points for the year. And below the line, we're still expecting our net interest expense to be up $55 million to $60 million year-over-year and our adjusted income tax rate to be in the range of 17% to 18%.

We're estimating full year average diluted share count to be in the range of $367 million to $372 million, down 3% to 5% from last year but up slightly from our previous range due to a higher share price. This estimate assumes that we'll use the remaining $350 million of our current share buyback authorization through its expiration in mid-November of this year.

And finally, we're assuming that we'll deploy $150 million towards dividends, and we expect capital expenditures to be in the range of $300 million to $325 million.

In interpreting our guidance ranges, as I said in the past, you should focus on the midpoint as our most likely view of how we see 2012 playing out. Results above or below the midpoint will depend on the relative strength of our markets during the year. So with that, let me say I'm pleased to start off the year with a strong quarter that positions us very well for solid growth in 2012.

Marc N. Casper

Thanks, Pete. Operator, we're ready to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Quintin Lai representing Robert W. Baird.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

So first question, relative to yesterday, we heard some others talk about big pharma with maybe a CapEx holdback at the start of the year. Marc, did you see any of that in your business?

Marc N. Casper

So from the pharmaceutical and biotech perspective, very strong performance of Thermo Fisher in the quarter. Personally, I think it reflects our customers understand the value proposition that we have and the depth of our capabilities, Quintin. I think we're very unique in how we work with these customers. We saw a great strength across our portfolio, including our Biopharma Services outsourcing business, our BioProcess Production business, as well as nice growth in our Instruments business.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

And did that pacing keep up kind of through the quarter, Marc?

Marc N. Casper

Yes. I mean, the quarter was strong and -- with our pharmaceutical and biotech customers throughout Q1.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

Great. And then the integration, and it looks like the things, especially with you and Dionex, are going really well. What do you think that you're seeing the biggest potential? Is it taking the new products that Dionex would have done on their own and sending it through the Thermo Fisher channels? Or is it also selling these -- the cross-selling between the 2 customer bases, some of the Legacy Thermo Fisher and Dionex products?

Marc N. Casper

I'm excited about -- obviously, we were excited when we did the acquisition. I'm much more excited today because a year -- we're almost a year into it, we're about 2 weeks or so away from that. And integration has gone flawlessly. We're well ahead of our synergy targets. We have integrated the business, and the teams are working great together. When you look at where the opportunities are, they go across a huge range of areas. Some of them is the obvious one, the cross-selling, right? Each company has great commercial reach, and we're helping the Legacy Dionex business scale up and reach customers that they couldn't in the past. We're aggressively leveraging the strength that Dionex had in environmental customers to sell a lot more of our ICPs and other environmental products. Our connect rate between mass specs and liquid chromatographs are continuing to increase substantially, which means we're basically taking what would have been Legacy competition LCs and now keeping the profitability in-house. And the product development cycle as well, we are a #3 player in gas chromatography. There's a very large #1 player in terms of market share. It's been a very boring category in terms of innovation, and we took the incredible Dionex software with very unique innovations in our hardware platform and are aggressively going after the gas chromatography market. So I think it's going well. It's going well on a number of fronts, and I feel we're just getting started.

Operator

[Operator Instructions] Your next question comes from the line of Doug Schenkel representing Cowen & Company.

Doug Schenkel - Cowen and Company, LLC, Research Division

Pete, based on your prepared remarks about guidance where I believe you said you increased the low end of the full year revenue guidance range by $40 million due to the Q1 beat, if it's right to conclude that, that means that you beat your internal expectations by $40 million in the quarter, could you just talk about some areas where you did a little bit better than internal plan? And then in terms of full year guidance, it sounds like all you did is just adjust for the Q1 beat and the changes in FX given that it does seem like you did a little bit better than internal plan in Q1. Could you just talk about the thinking or the reasoning behind not being a little bit more aggressive with the guidance?

Marc N. Casper

So I'll start, Doug. In terms of guidance, as you know, we always focus on the midpoint. And as the year unfolds, we make adjustments where we think it makes sense. Having the change in FX rates, we basically took that and flowed it through both the top end of the guidance and the bottom end. That was the $80 million. Because Q1 was a good quarter, above our expectations, the lowest end of the scenario in our original guidance seemed less likely, and hence, we lowered that -- excuse me, we raised that after the first quarter. That was the $40 million of operational performance. So just given a good quarter behind you, it's just less likely that you're going to have that low-end view. In terms of it's a little bit early in the year to change the high end operationally, because we still got 3 quarters ahead of us, and there's still, obviously, some uncertainty in the end market. So that's how we thought about it. If you want to say the next level is what went well relative to our expectations, yes, we saw a slight improvement in academic and government end markets. It was still down low-single digits, but it was actually a little bit better than Q4. So that was an improvement that we noted, and it was nice to see continued strength in industrial and biopharma customers across the business.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay. And one real quick clarifying follow-up. Unlike some of your competitors, I believe you did not have an extra day in the quarter. I know that was something that's come up this morning. It's just people have asked me what the impact was. I don't think you guys had an extra day. Can you just confirm that?

Peter M. Wilver

That's true. We're on a fiscal calendar, so adding a day in February doesn't matter.

Operator

Your next question comes from the line of Amit Bhalla representing Citi.

Amit Bhalla - Citigroup Inc, Research Division

I appreciate your comments on the pharma end market, Marc, but I was just hoping you could go into a little bit more detail on India specifically and the performance of the biopharma end market there?

Marc N. Casper

India grew for us low-single digits for the company, a little bit slower than some of the recent quarters, but we did grow. And we had good momentum in our Instruments business in the quarter.

Amit Bhalla - Citigroup Inc, Research Division

Okay. And my follow-up on the academic government end market down low-single digits, can you just give us a little bit more color on how labs are approaching 2012 and how they're thinking about the potential for budget cuts in 2013?

Marc N. Casper

So I think as we see, and we talk a lot to customers, basically researchers are working, right? So consumables, bioscience reagents, you're doing experiments, demand has been reasonable for those products. Capital equipment has been muted as customers are making sure that they have money to pay salaries and other things in an uncertain environment that happens later in the year. So we continue to see softer demand, particularly for more routine types of capital equipment. So our lab equipment, lower-end instruments, lab workstations saw pressures. We continue to do great, of course, with our mass spec business across a number of customers.

Operator

Your next question comes from the line of Jon Groberg representing Macquarie.

Travis Steed - Macquarie Research

This is Travis Steed on for Jon. Just to clarify, if currency moves more negative through the rest of the year, is that something that you're going to have to move guidance back down lower?

Peter M. Wilver

Certainly, we raised the guidance for FX by about $70 million -- $75 million from where we were before. If you look at today's spot rates, I would say that it should probably be a little bit higher, so I'd say we're being still a little bit conservative against spot rates. But of course, if we see a EUR 1.25 [ph], I think us and everybody else are going to have to take their guidance down. So it takes into account some minor movements, but nothing we would never try to be so conservative as to predict something like that.

Travis Steed - Macquarie Research

Sure. And just as a follow-up, a lot of people are talking about companion diagnostics. And what products are you planning on using to partner with pharma companion diagnostics?

Marc N. Casper

So in terms of our companion diagnostics portfolio, we have the largest number of detection technologies of any company ranging from what would have historically been life science tools like mass spectrometry all the way to an incredible array of immunoassays, clinical chemistry products. Our Phadia acquisition brought great new capabilities in terms of our great strength in the autoimmunity and allergy area. So we pulled those businesses together into a unique offering where our customers can tell us the challenge that they're trying to find from a pharmaceutical perspective, and we can identify the right technology to help them tackle those needs. Given our commercial reach, once those products make it to market, we obviously have the ability to then market those diagnostic products to laboratories. So we're excited. We've always had some presence in companion diagnostics, but the combination of Phadia with Thermo Fisher gives us a really nice momentum as we focus on that area.

Operator

Your next question comes from the line of Peter Lawson representing Mizuho Securities.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Marc, just around the potential weakness of academia as we roll through the year, what can you do with -- to work with U.S. academia that's going to stop the freeze in spend?

Marc N. Casper

So we, along with other industry participants, are active in Washington. We talk to Congress about the importance of U.S. competitiveness and NIH spending. And we try to do the right thing for the country, which is to protect one of the core strengths of the U.S., which is our biopharmaceutical and medical device industries. So we're an active participant in trying to do that. And I know that both sides of the aisle, if you will, are very supportive of NIH spending. It's just a question of whether a budget resolution can happen at a macro level. If it does, NIH will do okay. And if it doesn't, there'll obviously be challenges.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And is there anything at the customer level you can do?

Marc N. Casper

Yes. I mean, our value proposition is very helpful, right? If you think about it, over the last 5 years, we gained a lot of share with biopharma customers by leveraging our unique offering, which is driving productivity. Those tools and learnings that we've had from that customer set are just as applicable to academic labs. So we're able to help them stretch their dollars, buy the right products, leverage our scale and depth of capabilities to drive share gains. So from that viewpoint, I feel like we're going to be very well positioned to do well in that end market even if the spending is more muted.

Operator

The next question comes from the line of Jon Wood representing Jefferies.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Okay. So either Marc or Pete, just going back to your comments on uses of cash, I think you guys have talked about getting the leverage ratio down probably another 50 basis points or so going into '13 from where it is today. So can you just kind of update us on how you see the M&A landscape, your appetite for incremental M&A vis-à-vis that kind of leverage goal? It seems like you've got another $400 million or $500 million of debt paydown to go this year. Is that the right way to think about it or the right level to model?

Marc N. Casper

So Jon, from my perspective, we will continue to evaluate M&A opportunities against our well-understood criteria. So we look at acquisitions that strengthen the company strategically, significantly improve the value proposition from a customer perspective, and of course, create shareholder value. And we continue to evaluate acquisitions. And for those that meet that criteria and we feel good about, we'd obviously pursue. And those that don't, we pass on. We've been able to improve our debt-to-EBITDA ratios on a combination of repaying debt, but also, we're growing earnings nicely. And we'll continue to focus on some level of debt reduction as we go through the year, and we'll evaluate M&A. So it's -- we don't commit to a specific number on the M&A side because we don't know whether there's going to be transactions that we like or not.

Operator

Your next question comes from the line of Daniel Brennan representing Morgan Stanley.

Daniel Brennan - Morgan Stanley, Research Division

For the Specialty Diagnostics division, can you just quantify how much the weakness in the global flu and the weak results in Japan impact the results this quarter? And also, could you comment specifically on Phadia's performance and how it is compared with expectations?

Peter M. Wilver

So in terms of the flu and allergy, so seasonal-related projects -- products, it was about 50 basis points for the full company and about 2 percentage points for the segment.

Marc N. Casper

And in terms of Phadia, actually I think the business is performing well. If you look at U.S. allergy, which is a key growth driver for us, very strong double-digit growth. If you look at the autoimmunity business, very strong growth. Japan, a real headwind, but that's seasonal. So effectively, we always plan for a normal season. Sometimes it's better. Sometimes it's normal. Sometimes it's worse. So not a big concern one way or the other.

Daniel Brennan - Morgan Stanley, Research Division

So how do we think about just kind of going forward? And what do you think the good normalized run rate is for the Specialty Diagnostics that we should be thinking -- using?

Marc N. Casper

I would say that for that business, we don't talk a huge amount about guidance by segment. But you should think about growth in the 3% to 5% type range would be -- segment growth would be a reasonable assumption over long periods of time.

Operator

Your next question comes from the line of Tycho Peterson representing JPMorgan.

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

I just wanted to follow up on an earlier question on guidance that Doug had asked. And if we go back, last year, obviously, I think you had raised twice and had, had issues in the third quarter. As we think about kind of your philosophy around guidance, is there a chance you're baking in a little bit more cushion here throughout this year in light of the macro backdrop?

Marc N. Casper

I don't want to be reminded too much of last year, Tycho, but I would say that we learn from -- every day we come to work, our job is to learn, all right? So I don't actually think it's more cushion or less cushion. I think that we're just -- we try to get smarter every day and every year, and I feel reasonable about our guidance. We think about what could go wrong in the world and what could go right and what's in our control and what's outside of our control, and we put our best view of guidance together. So we felt comfortable with raising our guidance at the end of Q1 based on our outlook.

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

Okay. And then going back to the kind of the Biopharma issue, and I know you've had a couple of questions on this already, but we did get very different messages from one of your peers yesterday. Was -- can you just comment on whether there's a delay in the release of the pharma budgets? I mean, obviously, your numbers were good and didn't reflect that, but as you talk to pharma companies? Can you just talk about their release of budgets in kind of the March and April timeframe?

Marc N. Casper

Yes. We didn't have any Biopharma issues, so from my perspective, we're executing great in the Biopharma segment. So none of our commercial teams have mentioned once about delays in budgets or those things. So I don't know. I spent -- I visit most of the top pharmaceutical customers personally. Speak to the CEOs, as I mentioned in the call, heads of R&D, heads of manufacturing. We understand their challenges and what they're working through, and they're -- maybe we're just gaining share. I don't know, but it's performed well now quarter-after-quarter for a very long time.

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

Okay. And then last one, we hear a number of people asking about Amazon news this week, and it looks like they're distributing some of your products with the Amazon supply business. Can you just talk about that dynamic and how you view the channel business on a go-forward basis?

Marc N. Casper

The channel business is doing well. In terms of Amazon, we don't see anything material going on there.

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

Okay. But they are distributing your products, so you have an agreement with them or...

Marc N. Casper

They're listing a few of our products. We have several hundred thousand SKUs. And I think there are 500 or so on Amazon. They're all very low volumes. So from that perspective, it's pretty -- it's truly insignificant.

Operator

Your next question comes from the line of Vamil Divan representing Crédit Suisse.

Vamil Divan - Crédit Suisse AG, Research Division

Just so -- one thing I know you talked about Dionex and Phadia improving your gross margins. Can you give any sort of sense just as we're modeling here? Can you pull that out a little bit just if -- just looking at the Legacy Thermo business, how the margins, gross margins, would have been for the quarter?

Peter M. Wilver

So honestly, I don't have that number in front of me. I mean, when you look at Dionex, that business is fully integrated into an existing division. Phadia is separate still. But -- so we don't have -- I know qualitatively that's the case, but I don't have the specific numbers, and we don't honestly track it. We're measuring our chromatography and mass spec division as a business now, not as 2 different pieces. So I know it's favorable, but I don't have the exact number.

Vamil Divan - Crédit Suisse AG, Research Division

Okay. All right. And just one other question, different topic, on the companion diagnostics, following up on the earlier question. I know there's obviously other companies looking -- focused on this space also. I think one of the questions we all have is kind of what sort of financial impact can that have. And so I guess my question to you just given how large your sales base is, what type of impact do you think it could have in terms of growth? And I guess when would we maybe see that sort of impact in terms of the timing?

Marc N. Casper

Yes. From my perspective, every quarter, I pick a growth vignette, that I want to highlight to show all of the great things we have going on in the company. And sometimes I pick countries. Sometimes I pick product ranges because when you have such a dominant industry leader, it's hard sometimes to understand all the good activities going on. So in this particular quarter, I wanted to focus on companion diagnostics because it highlights -- convergence of life science tools and diagnostics and how we play. It also converges -- it also shows the impact of the new acquisition on the company. So it's really showing up in our results. Is it going to be a meaningful number? It'll take a long time, right, because drugs have to make it the pipeline, you've got to fund R&D jointly with pharmaceutical companies. But we're generating revenue. We've got a lot of good activity. We're improving our reputation. And I think we're well positioned to win in that space.

Operator

Your next question comes from the line of Isaac Ro representing Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

I just -- 2 to start on the mass spec and pharma services side. First off, do you guys think you're gaining market share in mass spec? And secondly, in pharma services, maybe if you could comment a little bit on how fragmented you think that opportunity is and maybe the sustainability of the double-digit growth you're seeing there?

Marc N. Casper

So in terms of mass spec, yes, I do believe that we're gaining share. The Q Exactive is a fantastic product, and it's doing very well. And I picked 3 very different applications in terms of where it's gaining share, and large molecule, small molecule and applied, right? So this isn't just a one-trick pony. So I feel like it's a revolutionary product. We market it that way, both to the investor community, but more importantly, to the customer community back middle of last year. And 9 months later, it's nice and no surprise that it's doing exactly what it said it was going to do. So yes, I feel good about mass spec. In terms of Biopharma Services business, we have good momentum there. It's primarily about how fast do customers move from in-house capabilities to outsourcing. So you're not -- we've had a good momentum for a lot of quarters. You won't have that every single quarter. But I think the fundamental trends of pharmaceutical companies outsourcing more to lower-cost, higher-quality producers is a trend that's going to be with us for a very long time, and we're uniquely positioned as the industry leader in that offering.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Great. And then maybe second, for modeling purposes, if I could ask a question on Phadia. I appreciate the comments you made on the seasonality you've seen year to date for the allergy and flu trend. But just also wondering if you see opportunities in the back half for major contract wins or expansion of your existing relationships in that business that can maybe help offset the typical seasonality you see in that business?

Marc N. Casper

No. I think the business is executing well. In terms of will we offset the Japan numbers. I don't know whether we will or won't -- the team feels very focused on trying to do that. And if we do, that's great. But the reality is it had no impact on our overall performance, right? It was a headwind. It was dollars of headwind that we would like not to have had, but we powered through it as a company, right? We delivered above -- growth rates above our own internal expectations and certainly above what the external view was. So it's not an excuse. We talked about it purely as a clarifying comment.

Operator

Your next question comes from the line of Dan Arias representing UBS.

Daniel Arias - UBS Investment Bank, Research Division

Marc, just a question on the industrial segment. It looks like demand there is still strong, but obviously, the macro picture is mixed. So I guess what is the tone amongst customers when you speak to them about spending at this point? And generally speaking, where do you get the sense that they are in terms of their new product cycles?

Marc N. Casper

So in terms of industrial and applied markets, as you mentioned, and we did well as -- it's a good quarter. We saw strong demand broadly across our businesses serving those markets. So as I mentioned, molecular spectroscopy was good. Process Instruments was good. Handheld instruments were good. Mass spec for those applications were strong. So very solid in terms of Q1. Customer feedback is good, as we said on our last call. Comps get a little tougher for us as the year unfolds. So that's something that we had in our original view on guidance, and that's a fact. But at least from a customer perspective, it looks pretty good.

Daniel Arias - UBS Investment Bank, Research Division

Okay. And can you just update us on facility rationalizations? Do you think that the level of closures this year could be in the low-20s range that you've seen in the past? And maybe what portion of margin improvement this year might come from those efforts?

Peter M. Wilver

So as I said last quarter when I gave a lot more detail on our full year guidance, we're expecting about $50 million of benefit year-over-year from site closures. We initiated more than 20 last year. The number that will actually physically close this year, I don't have off the top of my head. And my guess is that it's between 15 and 20.

Operator

Your next question comes from the line of Sung Ji Nam representing Cantor Fitzgerald.

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

So Marc, I think you mentioned pretty solid growth in Europe in the quarter. And could you maybe give us more color around what you saw by, I guess, the different end markets like industrial versus pharma, et cetera, and also kind of the outlook there for the remainder of the year?

Marc N. Casper

Yes. In terms of Europe, the performance in Q1 was actually pretty similar to what we saw in the fourth quarter in terms of the end markets. Geographically, Northern Europe stronger than Southern Europe. That's not a surprise. And we saw good strength in industrial customers across the continent from that perspective as well.

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

Okay. And just a quick follow-up, going back to Phadia, so just a clarification there, the allergy business, you did not have any other allergy business before Phadia acquisition?

Marc N. Casper

That's correct.

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

And from the seasonality perspective, should we anticipate kind of this to be -- have a similar, I guess, lumpiness, if you will, that you might normally see in the flu business going forward? Is that fair to assume that?

Marc N. Casper

So when you look at the allergy business, basically the majority of the business is your normal allergy work with some seasonal allergies, really pollen related, around the world. The seasonal portion of the allergy business is a Q1, Q2 phenomenon. Typically, Japan is more of a Q1. Europe and the U.S. is typically more of a Q2. So it really just moves the incremental growth one way or the other. The base underlying business, the trends are very positive as allergy demand continues to be strong.

Operator

Your next question comes from the line of Steve Willoughby representing Cleveland Research.

Steve Willoughby - Cleveland Research Company

Just wondering regarding the Lab Products and Services side, you did 4% organic growth this quarter. And I believe you're going against your most difficult comp, 2-year comp, in the first quarter. So I'm just wondering where you think -- and what you're thinking about organic growth over the remainder of the year in that business?

Peter M. Wilver

So as Marc said earlier about Specialty Diagnostics, we don't really like to get into giving guidance in terms of growth by segment. But we're happy with the 4% growth in the first quarter. We are expecting to continue to grow for the rest of the year probably low-single digits.

Steve Willoughby - Cleveland Research Company

Okay. And then just a quick follow-up, do you still expect 70 to 90 basis points of operating margin improvement this year?

Peter M. Wilver

Yes, yes, that's not changed from the previous guidance.

Operator

Your next question comes from the line of Paul Knight representing CLSA.

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

Marc, you had mentioned in the past, that in a normal economic time and governments send a [ph] funding act environment, you might be able to reach 5-ish percent on organic. Do you that's higher now if we do ever get back to a normalized period?

Marc N. Casper

I think everyone on this call has heard me say a number of times that Thermo Fisher is a solidly mid-single-digit organic growth company. I feel very confident about that because of our unique value proposition, our scale and depth of capabilities, our great and expanding presence in emerging markets and our incredible track record of innovation and a bright outlook for new products. So our job is to manage those mid-single-digit targets in various market conditions. It's not always possible every single quarter, especially if the world is difficult. But I'm pleased with how we did in Q1 from a revenue perspective. Obviously, if we get more tailwinds in a particular customer segment, it means that we're going to grow more, and we would be -- we'll be thrilled when that happens.

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

And then I know you're -- part of your China strategy has been to expand manufacturing with Xuzhou happening this year. Does it stop there? Or does it just continue?

Marc N. Casper

Our perspective on manufacturing, the focus has actually shifted a little bit over the years. A lot of what we're doing in the region is actually for the local customer base now. So these are big facilities. But they're really fueling demand locally, which is good because it means you have better supply chain, lower cost, less duties, all of those things that actually make your economics better. So Xuzhou factory will be serving Lab Products broadly. It's a big facility with lots of room for expansion. So we don't have any plans for another factory after that. I think the next move is, as the growth continues, would be to expand that facility. That would be the next phase of growth.

Operator

Your next question comes from the line of Daniel Leonard representing Leerink Swann.

Daniel L. Leonard - Leerink Swann LLC, Research Division

Just a couple of questions on guidance assumptions. Number one, can you remind us, for the Lab Products and Services business, are you expecting the operating margin to be flat, up or down in 2012? And what the drivers would be behind that?

Peter M. Wilver

So again, I don't want to get into specific guidance, but it should be -- I said last quarter, we're expecting margins to stabilize. That's happening. We were down 40 basis points, but we're up sequentially. So for the full year, I think flat margin is probably as good as an assumption as any.

Daniel L. Leonard - Leerink Swann LLC, Research Division

Okay. And then my follow-up in terms of the academic and government markets being down low-single digits, are you assuming in your guidance that, that remains down low-single digits for the entirety of the year? Or would you expect there's some flattening on an easier comp in the back half of the year?

Marc N. Casper

So from a view -- and when we do our planning we don't measure every end market by every quarter, and we usually do it by business. We know that comparisons get easier as the year unfolds in academic and government, but we also know that customer uncertainty is likely to increase a little bit until the budget is resolved, which -- if it's going to get resolved is likely to happen late fourth quarter. So we're assuming that, for the full year, it's going to be down low-single digits. We're not making dramatic changes quarter-by-quarter on how that's going to play out.

Operator

Your next question comes from the line of David Ferreiro representing Oppenheimer.

David Ferreiro - Oppenheimer & Co. Inc., Research Division

Just a quick question for Pete. I think you mentioned this in your prepared remarks. But I wonder if you can reiterate that, just general pricing trends in the quarter, and then maybe an update on the outlook for the year.

Peter M. Wilver

So I didn't mention that in my comments. But we basically saw pricing similar to what we've been seeing for the last number of quarters, somewhere between 50 and 100 basis points. And our expectation is that's going to continue for the rest of the year, still more favorable pricing on consumables as opposed to equipment.

Operator

We have a question from the line of Derek De Vries representing Bank of America.

Derek De Vries - BofA Merrill Lynch, Research Division

The -- so just talking a little bit more about the competitive landscape, so 2 questions. Marc, you spent a lot of time and effort building out your Chinese facilities, and you're trying to build that out as a consumables market and doing it like that. Can you talk a little broadly about how your initial steps have been there? And I guess how big is that, when we think about the laboratory consumables market in China, in the APAC Region, how big is that? And the just give us some idea of the magnitude of that relative to North America markets? That's the first question, and I'll follow that up with something.

Marc N. Casper

Yes. So the Lab Consumables opportunity is meaningful. Today, we have roughly a $600 million business in China. Probably 10% of that is Lab Consumables. And that could easily be triple that in terms of our opportunity over time. So -- and it's growing as well. So that's good growth opportunity for us.

Derek De Vries - BofA Merrill Lynch, Research Division

Okay. That's helpful. And could you talk about your successes and/or just your experiences now that you've acquired some of the realtime PCR assays. I think that was Fermentas, then -- and some of those products there. And there's obviously been some changes in the market there as patents have come off. Can you talk about your successes? Were -- are you making any inroads in the market there? What customers are trying your products, using that? Just a little bit more on that kind of competitive landscape in that market?

Marc N. Casper

Yes. Basically, we've launched a low-cost, high-performance instrument for qPCR. It came through an acquisition complement -- on the Instruments side complemented with other reagents from Fermentas. And we're targeting the areas where we, as a company, have tremendous strength, so things like the food testing market. Those labs are going to be the early adopters, and we'll work our way across the customer base. We'll be leveraging our channel to drive growth there. So it's early, and we're a small share player with those technologies. We didn't make a huge investment to get into that space, but we feel like we're well positioned to grow well.

So let me wrap up. Let me add a couple of thoughts. First, we're pleased with our strong start to the year. Second, our growth investments are clearly paying off with a strong pipeline of new products and accelerated expansion in emerging markets. During the quarter, we continued our track record of delivering double-digit adjusted EPS growth, and that puts us in an excellent position to deliver our goals for 2012.

So thank you for your support of Thermo Fisher Scientific. I look forward to updating you next quarter. Thanks, everyone.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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