Thermo Fisher Scientific CEO Discusses Q1 2014 Results - Earnings Call Transcript

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Thermo Fisher Scientific (NYSE:TMO) Q1 2014 Results Earnings Conference Call April 23, 2014 8:30 AM ET


Kenneth Apicerno - Vice President of Investor Relations

Marc Casper - Chief Executive Officer, President

Peter Wilver - Chief Financial Officer


Jon Groberg - Macquarie Capital

Ross Muken - ISI Group

Tycho Peterson - JPMorgan

Derik de Bruin - Bank of America Merrill Lynch

Doug Schenkel - Cowen & Company

Steve Willoughby - Cleveland Research

Tim Evans - Wells Fargo Securities

Isaac Ro - Goldman Sachs

Paul Knight - Janney Capital

Jeff Elliott - Robert W. Baird

Brandon Couillard - Jefferies


Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2014 first quarter earnings conference call. [Operator Instructions] 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 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 this call is being webcast live and will be archived on the Investors section of our website,, under the heading Webcasts & Presentations, until May 16, 2014. A copy of the press release of our 2014 first quarter earnings and future expectations is also 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 and 10-K for the year ended December 31, 2013, under the caption, Risk Factors, which is on file with the Securities and Exchange Commission and also available in the Investors section of our website under the heading SEC Filings.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

Also during the call, we'll be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first quarter 2013 earnings and future expectations and also in the Investors section of our website under the heading Financial Information.

Before we get started, one other item to note is that the commentary we provide on today’s call regarding the company’s revenue growth by end market and geography is on an end market basis only, and therefore does not include the performance of Life Technologies.

So with that, I'll now turn the call over to Marc.

Marc Casper

Thank you, Ken, and good morning everyone. Thank you for joining us today for our Q1 call. I’m pleased to report that we achieved a number of significant milestones in the first three months of the year, and our performance positions us well to meet our goals for 2014.

First, as you all know, we closed on the acquisition of Life Technologies in early February. I’ve spent quite a bit of time since then travelling to our new sites in the U.S. and Europe to do business reviews, hold town halls with our new colleagues, and visit our customers.

I continue to be impressed by the caliber of people I meet, the innovative technologies being developed, and the passion the team has for using science to make a real difference in the world. It’s also very clear to me that the life science solutions team shares our commitment to unrivaled industry leadership, and that’s an important common denominator.

On the topic of integration, I’m very pleased to report that our teams are implementing their plans and executing extremely well. We had a number of months to plan the integration so the team would be able to hit the ground running immediately after the close. As you know, we have a great track record of integrating acquisitions and achieving the synergies that we signed up for. We’ve targeted $85 million of synergies in 2014 from the Life Technologies transaction and have no doubt that we’ll accomplish that goal.

In late March, we completed the sale of the delayed divestitures that we previously announced to GE, and we received over $1 billion for our cell culture sera and media, gene modulation, and magnetic beads businesses. We were pleased to be able to complete the transaction expeditiously. The proceeds provide us with more cash to pay down our debt, and we still expect to achieve our target leverage during the third quarter of 2015, as we said on our Q4 call.

Last, but very important, our teams remain intensely focused on our customers and they executed very well to deliver solid financial results in Q1. We leveraged our top line growth and focused on controlling costs to once again continue our long trend of delivering outstanding adjusted EPS performance.

I’ll now cover the financial highlights, give some commentary on end markets, hit some of the business achievements, and end with our guidance. As you saw in our press release, our results in Q1 include Life Technologies since early February and exclude the divestitures as of late March.

That said, our total revenue for the quarter grew 22% year over year. Adjusted operating income was $830 million in the quarter, and we expanded our adjusted operating margin by 200 basis points to 21.3%. The addition of Life Technologies businesses and our solid operational execution resulted in adjusted EPS performance of $1.53 per share. This was a 12% increase over 2013, and sets us up to deliver another year of consistently strong adjusted EPS growth.

As you know, we use our PPI business system to continuously drive margin expansion and significant productivity across our global operations. In a market where we’re still seeing some muted growth in certain customer segments, this is a key competitive advantage.

One quick anecdote on this topic. Our laboratory equipment center of excellence in Ashville, North Carolina was recently recognized as one of the best plants in the U.S. by Industry Week magazine. I visited the plant in March to congratulate the team for the great work they’ve done to achieve this distinction.

This was actually the second time one of our factories has won this award. Both plants have aggressively implemented the PPI business system across our operations and both are great examples of the impact that PPI can have.

Our PPI business system is already being implemented at our new sites within life science solutions and we’ll begin to see the results, which we’ll highlight for you at our analyst meeting next month.

Now, let me give you my perspective on our performance in the context of our four key end markets. I’ll start by saying that in aggregate, our outlook for the year hasn’t changed. So, beginning with academic and government, this end market started off in Q1 a little softer than what we had experienced over the past year or so, most likely due to some of our U.S. customers working fewer days.

Overall, we said last quarter that these customers would probably begin spending money under the new appropriations at around midyear. Our view on that hasn’t changed, and we believe this end market will improve in the second half as the funds begin to flow.

Turning to diagnostics and healthcare, our performance her was relatively flat overall, reflecting the lower healthcare utilization in the U.S. that’s been widely publicized. On the other hand, we had very good growth in our transplant diagnostics and immunodiagnostics businesses. As the year plays out and utilization increases, we expect growth for the full year to be in line with the company average.

In industrial and applied, we delivered mid-single digit growth as conditions here continue to improve. You may recall that last quarter we said we believed the industrial market had begun to stabilize. To provide you with a little more color from a product perspective, we’re pleased with our ongoing strength in chromatography, and we saw a nice pickup during the quarter in our portable analyzer business.

Last, in pharma and biotech, we delivered high single-digit growth in the quarter, driven by continued strength in our clinical trials logistics and mass spectrometry businesses. It’s clearly that our biopharma customers continue to recognize the benefits of our unique value proposition.

So, in summary, as I mentioned at the beginning of my commentary, in aggregate, our outlook for the full year is consistent with our original guidance. Let me now talk about the great progress we’re making strengthening our company to gain market share.

As you know, we have a solid strategy for increasing share gain with our customers to drive growth. It’s based on three core elements, technology innovation, our unique customer value proposition, and our scale in Asia Pacific and emerging markets.

We’ve followed this playbook for a number of years. It’s served us well, and the acquisition of Life Technologies further enhances all three elements of our strategy. My point today is that we’ll continue to execute this strategy to best serve our customers and strengthen our position as the unrivaled industry leader.

In that context, let me cover some of the business highlights from the quarter. First, we kicked off the year with a lot of new products that strengthened our position as the innovation leader in our industry. Starting with Pittcon, the leading analytical instruments show, our theme this year was around helping customers run their laboratory operations more efficiently, regardless of the industry they were in.

Our new[unintelligible] scientific products included instrument software, data management systems, and new additions from molecular spectroscopy and lab product offerings. To highlight two of the new launches, we released another update of our gold standard chromatography data system, Chromeleon 7.2.

This new version allows customers to control their mass spec instruments on a single data platform with gas, ion, and liquid chromatography instruments. We have good momentum in our chromatography and mass spec businesses and this industry leading software package is another step in further strengthening our competitive position.

I also want to mention a small but innovative new product, the Virtuoso system for vial identification. This system prints barcodes directly on even the smallest vials to provide a data trail that could prevent the loss of valuable samples. This is a growing problem, and you may have seen the news last week about thousands of vials containing the SARS virus that were lost in a prestigious European research lab.

At Analytica, we launched a number of new Thermo Scientific products that can help our laboratory and biotech customers improve productivity. Highlights included a new cell culture surface that better models cancer cell growth to accelerate research. We also introduced new systems for protecting individual samples during long term storage.

Separately, we launched the Life Technologies Quantifiler Trio and HP kits for more accurate forensic analysis of highly compromised samples. Q1 also marked the launch of Ion Chef, which is used to automatically prepare DNA samples before they’re loaded into the Ion Torrent gene sequencer.

The key advantages of this new product are that it saves time for researchers and also reduces variability during the process to improve results. We shipped a significant number of our units to our customer base in the quarter, and early feedback is very positive.

Let me now turn to our customer value proposition and give you an example from the quarter that shows how our increased [unintelligible] capabilities is a real differentiator for Thermo Fisher.

We highlighted our expanded offering in bioreduction and bioprocessing at a leading biopharma manufacturing trade show called [unintelligible]. For the first time, our Thermo Scientific and Life Technologies offerings were displayed side by side in the booth. We launched several new single use technologies at the show to strengthen our leading position with this product offering.

Customers could also see the embedded capabilities we now have in upstream cell culture applications, downstream [unintelligible], as well as analytics for detecting and quantifying impurities. This combination gives us a strong position with certain biopharma customers who are focused on bringing new biologics and vaccines to the market more quickly and cost effectively.

I’ll make a couple of quick comments on Asia Pacific and emerging markets before wrapping up with our guidance. Let me start with China, where we recorded low double-digit growth during the quarter. We continue to have excellent momentum serving healthcare, although this is still a relatively small segment in China today. Our performance here was led by strong demand for a range of products in our specialty diagnostics businesses.

As you know, we continue to increase our presence across high growth regions. We delivered good growth in India, driven by strong sales of our analytical instruments, and the addition of Life Technologies builds on our leading presence across Asia Pacific.

In Southeast Asia, for example, we plan to further leverage the manufacturing infrastructure that we now have in Singapore. I’m traveling to Asia shortly, and I look forward to visiting several of our sites and spending time with some of our key customers there.

So, I think this gives you a good sense of all the opportunities we have to drive growth and the great progress we’re making in the three elements of our strategy. Turning now to our annual guidance, as you saw in our press release, we’re raising both our revenue and adjusted EPS guidance for the year. The increase primarily reflects the timing of the Life Technologies acquisition and related divestitures. It also reflects a slight improvement in foreign exchange rates versus our assumption at the beginning of the year.

Pete will cover the details of our guidance in his remarks, but at a high level, we’re raising our revenue guidance for 2014 to a new range of $16.84 billion to $17.0 billion for 29% to 30% revenue growth year over year. We are also raising our adjusted EPS guidance to a new range of $6.80 to $6.95, which would result in 25% to 28% adjusted EPS growth over our strong performance in 2013.

Before I turn the call over to Pete, let me leave you with a few takeaways. First, we closed our acquisition of Life Technologies to further strengthen our strategic position. We had a very active quarter in terms of technology innovation, with many new product launches, and we continue to build on our scale to take advantage of the growth opportunities in Asia Pacific and emerging markets. We are clearly the unrivaled leader in our industry, and that puts us in an excellent position to continue to gain share.

With that, now to you, Pete.

Peter Wilver

Thanks, Marc. Good morning everyone. I’ll begin with an overview of our Q1 financial performance for the total company, then provide some color on each of our four segments and conclude with our updated 2014 guidance.

Before I get into the details of our results, as we stated in our press release, our financial results for the quarter include Life Technologies as of February 4 and exclude the related divestitures as of March 22.

As I mentioned last quarter, at the total company level, we’re reporting organic revenue growth using our standard methodology. That means we’ll exclude the results of Life Technologies until we reach the one-year anniversary date of the acquisition.

However, for the life sciences solutions segment, which consists primarily of the Life Technologies businesses and our remaining biosciences businesses, we’re providing organic revenue growth on a pro forma basis as if we had owned Life Technologies for all of 2013 and 2014. We’re doing this to give you insight into the growth performance of that segment.

So, starting with our overall financial performance, we delivered a solid quarter, resulting in a 12% increase in adjusted EPS to $1.53. GAAP EPS was $1.36 in Q1, up 46% from $0.93 in Q1 2013, primarily as a result of the gain on the divestitures.

Starting with the top line, Q1 total revenue increased 22% year over year and we delivered 2% organic growth. Q1 reported revenue includes 20% growth from acquisitions net of divestitures and an immaterial positive impact from foreign exchange.

We strengthened our backlog in the quarter with bookings exceeding revenue by 2%. By geography, North America declined organically in the low single digits, Europe grow in the mid-single digits, and Asia Pacific grew in the high single-digits, with China growing low double-digits. The rest of the world grew in the low single digits.

Looking at our operational performance, Q1 adjusted operating income increased 35% and adjusted operating margin was 21.3%, up 200 basis points from Q1 last year. Our adjusted operating margin expansion for the quarter was driven primarily by the addition of Life Technologies, which had a higher overall margin rate compared to standalone Thermo Fisher.

However, we also continued to see contribution from our primary productivity levers: global sourcing, site consolidations, and our PPI business system. In total, operating performance for standalone Thermo Fisher contributed about 30 basis points to adjusted operating margin expansion in the quarter.

We realized benefits from our restructuring actions of $13 million in Q1 and are on track to achieve about $45 million of benefit for the full year. We also realized synergy benefits of $17 million in Q1, in line with our guidance of $85 million for full year 2014.

In terms of supporting our growth initiatives, we continue to make strategic investments, primarily to strengthen our presence in emerging markets and continue our growth momentum in those regions.

Moving on to the details of the P&L, total company adjusted gross margin came in at 48.2% in Q1, up 420 basis points from the prior year. This was primarily due to the acquisition, along with solid productivity.

Adjusted SG&A in Q1 was 23.1% of revenue, 140 basis points unfavorable to the 2013 quarter, again primarily as a result of the acquisition, partially offset by volume leverage and our productivity actions.

Finally, R&D expense came in at 3.8% of revenue for the quarter, 70 basis points above the prior year. This reflects the relatively higher level of investment in R&D in the life sciences solution segment. R&D as a percentage of manufacturing revenue in Q1 was 6%.

Looking at our results below the line, net interest expense in Q1 was $106 million, up $49 million from last year, driven primarily by the debt we raised to fund the Life Technologies acquisition. Adjusted other income for Q1 was $3 million, about the same level as Q1 last year.

Our adjusted tax rate in the quarter was 16%, 430 basis points above last year. This was primarily as a result of higher than average credits in the prior year, related to foreign tax credits and the double R&D tax credit, which has not yet been approved for this year.

Although this quarter’s rate is slightly above our full year adjusted tax rate guidance of 14.5% to 15.5%, this was assumed in our previous guidance, as we only included a partial quarter of benefit from the acquisition tax synergies in Q1. So we’re maintaining our full year adjusted tax rate guidance and we expect that our adjusted tax rate will be below the Q1 rate for the balance of the year.

In terms of returning capital, we paid out $55 million in dividends to our shareholders in the quarter. Average diluted shares were 398.4 million in Q1, up 36.7 million, or 10% from last year, primarily as a result of the shares we issued to partially fund the Life Technologies acquisition and to a much lesser degree, option dilution.

Turning to cash flow and the balance sheet, there are a lot of moving pieces, primarily related to the acquisition and related divestitures. The headline numbers for Q1 are $102 million of cash flow from continuing operations and free cash flow of only $1 million after deducting $101 million of net capital expenditures. This compares to $236 million of free cash flow in the prior year.

In the quarter, we incurred $240 million of one-time payments related to the acquisition close that were netted against operating cash flow, including financing fees, transaction fees, and restructuring costs. In our acquisition model, these outflows were primarily included as upfront deal costs.

Cash flow from working capital in the quarter was reduced by about $50 million as a result of the close timing and related opening balance sheet amounts, and our tax payments were $115 million higher than the prior year, primarily because of the quarterly phasing of last year’s payments. This will even out through the rest of the year.

So, as I said, a lot of moving pieces this quarter. We ended the quarter with $1.52 billion in cash and investments, down $4.3 billion sequentially from Q4, as a result of funding the Life Technologies acquisition.

Our total debt at the end of Q1 was $17.4 billion, up $6.9 billion from Q4, as a result of drawing down our $5 billion term loan and issuing $500 million of commercial paper to fund the acquisition as well as assuming $2.3 billion of Life Technologies debt.

Our cash balance at the end of the quarter was about $1 billion higher than we need to maintain on an ongoing basis, because the divestiture proceeds were received very late in Q1. These proceeds were used to pay down debt early in Q2.

Let me wrap up my comments on the total company with a quick update on our performance in terms of return on invested capital. Our trailing 12 months adjusted ROIC in the first quarter of 2014 was 9.5%, down 60 basis points from Q4, as a result of the Life Technologies acquisition. As we normally do, we’ll give you a longer term view of ROIC at our analyst meeting on May 20.

So, with that, now I’ll walk you through the performance of our four business segments. Starting with the new life sciences solution segment, in Q1, total revenue grew significantly to $836 million from $173 million in the prior year, primarily as a result of the Life Technologies acquisition net of divestitures. On a pro forma basis, assuming Life Technologies was owned for the entire quarter in both the current and prior years, organic revenue grew 1%.

In the quarter, we saw good growth in our bioprocess production business and in next gen sequencing, partially offset by a tough comparison in licensing revenues. Q1 adjusted operating income for life sciences solutions also increased significantly, primarily as a result of the acquisition, with adjusted operating margin of 550 basis points to 29.3%.

Because of the timing of the acquisition close, life sciences solutions Q1 reported results include only February and March, which historically have higher margin than January, as a result of the phasing of revenue versus expenses throughout the quarter. As a result, we expect adjusted operating margin in the segment to be about 250 to 300 basis points lower in Q2 compared to Q1, but this should increase throughout the year as revenue and synergies increase.

In the analytical instruments segment, in Q1 total revenue and organic revenue both grew 4%. In the quarter, we had very strong growth in our life sciences mass spec and chromatography businesses, which benefited from good performance in Europe and Asia Pac.

Q1 adjusted operating income in analytical instruments increased 9%, and adjusted operating margin was 17%, up 70 basis points. The margin expansion was driven by strong pull through on top line growth and good contribution from productivity actions, partially offset by strategic growth investments and unfavorable foreign exchange.

Turning to the specialty diagnostics segment, in Q1 total revenue grew 1% and organic growth was modestly positive. In the quarter, we continued to deliver good growth in our transplant diagnostics business and our immunodiagnostics business grew in the mid-single digits. As Marc noted earlier, we believe this was more than offset by weak healthcare utilization in the U.S.

Adjusted operating income in the segment declined 1% in Q1, and adjusted operating margin was 27.2%, down 50 basis points from the prior year. In the segment, we delivered good productivity, but this was more than offset by strategic growth investments and some unfavorable mix.

In the laboratory products and services segment, both reported revenue and organic revenue grew 2% in Q1. Our clinical trials logistics business continued to deliver very strong growth, but softness in the U.S. academic and government end market, as Marc mentioned, continued to be a headwind in this segment.

Adjusted operating income in laboratory products and services grew 1% for the quarter, and adjusted operating margin was 14.7%, down 10 basis points as good productivity was more than offset by strategic growth investments and unfavorable foreign exchange.

So with that, I’d like to review the details of our full year 2014 guidance. As you saw in our press release, on the top line, we’re raising both the low and high end of our reported revenue range, primarily as a result of the acquisition and divestiture timing as well as more favorable foreign exchange. This leads to a new full year 2014 revenue guidance range of $16.84 billion to $17.0 billion, which represents growth of 29% to 30% compared to our reported revenue of $13.1 billion in 2013.

To bridge the $190 million revenue increase from the midpoint of our previous guidance, we picked up $120 million related to the acquisition, primarily as a result of an early close date than our previous assumption, $45 million as a result of more favorable FX rates on Thermo Fisher standalone, and $25 million as a result of the divestitures closing later than our previous assumption.

On an organic basis, we’re still guiding to standalone organic growth for full year 2014 of 3% to 4%, consistent with our previous guidance. As I mentioned earlier, this measure of organic growth does not include the results of Life Technologies. For the life sciences solution segment, we still expect 2% to 3% pro forma organic growth for full year 2014, also consistent with our previous guidance.

In terms of FX, assuming recent rates, the year over year foreign currency impact on our revenue will now be slightly positive. However, we’re still expecting a slightly unfavorable margin impact resulting from the mix of currencies, with the stronger euro and British pound offsetting the weaker Japanese yen, which pulls through at a much higher rate.

The Life Technologies acquisition, net of related divestitures, is expected to contribute about 26 percentage points of our total revenue growth in 2014, and consistent with past practice, we haven’t attempted to forecast future foreign currency exchange rates and our guidance does not include any future acquisitions or divestitures.

Moving to adjusted EPS, we’re also raising both the low and high end of the range, in line with the change in our revenue guidance. This results in new full year 2014 adjusted EPS guidance range of $6.80 to $6.95, which represents growth of 25% to 28% over our 2013 adjusted EPS of $5.42.

To bridge the roughly $0.08 increase in adjusted EPS from the midpoint of our previous guidance, we added about $0.10 from the acquisition net of divestitures and about $0.02 from more favorable FX, which was partially offset by increased investments and some segment mix.

Turning to adjusted operating margin, we’re maintaining our previous guidance for the full year of 220 basis points to 250 basis points of expansion. We continue to expect solid contribution from our productivity actions and about $85 million of synergy benefit in 2014 from the Life Technologies acquisition.

Moving below the line, we’re expecting net interest expense to be in the range of $430 million to $440 million, up $10 million from our previous guidance. This is driven by the timing of the acquisition and divestiture close dates. Q2 interest expense will increase by about $10 million from Q1, as a result of having a full quarter of outstanding debt and then it will decrease throughout the year as we use our cash flow to pay down debt.

As I mentioned earlier, we’re still forecasting our adjusted income tax rate to be in the range of 14.5% to 15.5%, consistent with our previous guidance, and we’re still assuming that we’ll return approximately $240 million of capital to shareholders, all in the form of dividends, and that in addition to the proceeds of the divestitures, we’ll use the bulk of our free cash flow to pay down short term debt.

Full year average diluted shares are estimated to be in the range of 402 million to 405 million, up 10% to 11% from 2013, and similar to interest expense, our share count will increase by about 4 million shares in Q2 compared to Q1, as a result of having the acquisition related shares outstanding for the full quarter.

We’re still expecting net capital expenditures to be in the range of 470 million to 490 million, and in terms of free cash flow, nothing has changed in our assumptions as to our year-end cash balance or the speed at which we expect to pay down our outstanding debt. However, solely as a result of the reporting of acquisition and divestiture related cash flows, we now expect reported full year free cash flow to be about $2.2 billion, which is below our previous guidance of $2.55 billion to $2.65 billion.

One final note on guidance, we don’t normally provide detail other than annual guidance, but similar to last quarter, there are a lot of moving parts related to the acquisition and divestitures in our Q1 results, so I thought it would be helpful to give you some insight into what we’re expecting for Q2.

In terms of revenue, we’re expecting Q2 to represent about 25% of our full year revenue guidance, and in terms of adjusted EPS, we’re expecting Q2 as a percentage of our full year guidance to represent a couple points less than the comparable revenue percentage as a result of the acquisition synergies and revenue building throughout the year.

As always, in interpreting our full year revenue and adjusted EPS guidance ranges, you should focus on the midpoint as our most likely view of how we see the year playing out. Results above or below the midpoint will depend on the relative strength of our markets during the year.

In summary, we completed a number of significant milestones this quarter, while delivering solid operational results, which positions us well to achieve our financial goals for the year. With that, I’ll turn the call back over to Ken.

Kenneth Apicerno

Thanks, Pete. Operator, we’re ready to open it up for Q&A.

Question-and-Answer Session


[Operator instructions.] Our first question comes from Jon Groberg of Macquarie.

Jon Groberg - Macquarie Capital

I guess the first question is, North America now is going to be a slightly larger part of your revenues given life and obviously still a bit weaker. You talked about government and academic, healthcare utilization, but could you maybe give us a little bit more detail by segment what you’re seeing in North America and maybe how you see that playing out throughout the remainder of the year?

Marc Casper

In terms of North America, in aggregate, things were fairly similar to what we’ve seen over the last year or two, with two exceptions. Healthcare utilization is typically at your peak in Q4, and at your trough, or lowest level of utilization, in Q1. So that’s a pattern that started in 2013 and continues to be even a little bit more dramatic as you get to 2014. So you have that dynamic, and we expect that that improves as the year unfolds.

From an academic and government perspective, the appropriations is a positive, and as we said on our original call in February, we expect funds to flow from the appropriations to happen in the second half of the year, which is kind of customary in terms of how that works. Clearly, as we’ve talked to a number of our customers, they worked fewer days in the early part of the year, and that had some effect on our industry in terms of consumable demand, and that should obviously be just a one-time factor that will not repeat as the year goes on.

Jon Groberg - Macquarie Capital

And what were some of the implied markets, or some of the more industrial markets in North America?

Marc Casper

From a North America perspective, no really big changes. Industrial and applied continues to strengthen, and pharma and biotech continues to be an area of strength for the company. So those are clearly positives.

Jon Groberg - Macquarie Capital

You mentioned Interphex, and obviously I was there and looking at the opportunities with your bag business and [Gibco]. And obviously, the more you dig into this, it looks like there’s a lot of opportunity from a revenue synergy standpoint. I know it’s not something you’ve talked about as much in the investment community, because it’s harder to get credit for it, but maybe now that you’ve met with people, you’re travelling around, you’re examining opportunities, you’re going over to Asia, I’m just curious, from a revenue synergy opportunity, how are you thinking about the acquisition with Life relative to maybe where you were six months or so ago?

Marc Casper

From our perspective, we’re very excited about the logic of the combination and the revenue synergies that we’re going to capture over time. In fact, that will be one of the themes that we cover at our analyst day. Mark Stevens will walk through some of the things that we’re working towards. Not going to have a big impact in 2014. We’ve assumed that there won’t be any revenue synergies this year, although I assume we’ll deliver something in the later half that’s small. But they really ramp up in ’15 and beyond.

In the area of the one that you actually saw yourself, in Interphex, we didn’t assume a lot of revenue synergies, because we’re doing a divestiture and so forth, but it’s a great combination of having the single use technologies from our Thermo Scientific brand being combined with the Life Technologies position in the media sera as well as the downstream analytics.

So that combination should actually be quite powerful, and over time should put us in the position to gain significant share in that market segment. Other areas of revenue synergy, clearly our ecommerce capabilities are strengthened by the combination, great strength in Asia Pacific and emerging markets, and good opportunities to leverage our complementary channel strength, both our Fisher Scientific channel as well as the strength that Life Technologies brings to the company. So, lots of opportunities for the company to capture revenue synergies.


Our next question comes from Ross Muken with ISI Group.

Ross Muken - ISI Group

I guess on the core growth number for the quarter, how did it sort of pace relative to your expectations as the quarter went on and relative to your view coming in? And how do we put in context the book-to-bill, which is not a metric we look at for you guys that often, as it’s usually around one, but it was sort of particularly robust this quarter. How do we put all of that in context?

Marc Casper

When we looked at our original growth outlook for the year in our guidance call at the beginning of the year, we looked at 3% to 4% organic growth for Thermo Fisher and 2% to 3% for the life sciences solutions segment. The Q1 performance, nothing has changed in terms of our expectation for the full year. We’re very confident in our ability to achieve both of those milestones.

When I look at the first quarter, and the question around phasing, January and February were softer than normal. March was a strengthening and obviously bookings also were much better than revenue, and that’s really driven by just the timing, as customers got back to work later in the quarter. We had good bookings momentum, which gives us confidence as we continue through the year to achieve our organic growth goals.

Ross Muken - ISI Group

I guess just relative to growth in China, we had run at 20% for a long time. It came down to kind of mid upper teens, and now we’re kind of in the low double-digits. As you think about that geography going forward, obviously the PMIs haven’t been great. It seems like the healthcare piece is quite healthy, the industrial is a lot more mixed. Any sort of pacing there or change there in terms of how you’re thinking about that as a growth contributor, maybe on a near versus longer term basis?

Marc Casper

You know, I’m actually heading off to China next week. My view is a couple of things. One, we continue to have a very strong position. We delivered good growth, albeit a little bit slower than we have delivered over the last couple of years. Healthcare is very strong, and that’s been a continuing trend. And I agree, kind of industrial is a bit mixed. I’ll spend more time with the team. Basically, nothing has changed with the long term outlook in terms of our view on China. We still believe it’s going to be in the range of mid-teens as the year progresses.

Ross Muken - ISI Group

And one quick one for Pete. Did you call out the actually dollar contribution in the quarter? I know you gave us a net number. Are you going to be providing that so we can kind of back in?

Peter Wilver

What I said is the operating performance of Thermo Fisher standalone was about 30 basis points of margin expansion in the quarter. So that’s really the number to look at.

Ross Muken - ISI Group

I’m sorry, on a revenue basis. The revenue dollars.

Peter Wilver

Off the top of my head, I don’t know the number. I believe it’s in my script.


Our next question comes from Tycho Peterson of JPMorgan.

Tycho Peterson - JPMorgan

First question, just on the pharma channel. It’s obviously been a busy week in M&A world for pharma and healthcare in general. Could you maybe just talk about your view on the trajectory? I know you previously guided for a deceleration in the pharma business, but what’s your latest thinking as we think about all the potential M&A here?

Marc Casper

The first thing is another very strong quarter of performance in our biopharma customer set. A little bit stronger than the full year guidance that we gave in February, so the team executed well. Obviously a lot of corporate repositioning announced over the last 24 or 48 hours, with our customer set. And I think as companies look for synergies, we typically gain share. They have targets, we have incredibly strong relationships with the executive team, and we bring them ideas on how they can get higher impact for their dollars of spend. And in fact, two of the CEOs that were involved in those repositionings, and I already communicated about some opportunities, so we have very strong real time relationships with these customers.

Tycho Peterson - JPMorgan

And then as we think about the integration initiatives, obviously you’ve highlighted PPI for your own business, can you just talk maybe about how easy it is to port over that process to the life business and other kind of big next steps? I guess you’ll get into a lot of this at the analyst day, but how do we think about applying PPI to the underlying life business?

Marc Casper

Even though we’ve only owned the business for a couple of months, the reality is they’re already starting to use our business processes, so in terms of how we operate our business. And we already have our PPI methodology being implemented. And we’ll highlight some of the impacts of that, but that’s something that we start right at the beginning, and start with the training, start with the impact, and it’s part of the synergies that we deliver, and it’s part of the ongoing productivity that we’ll be able to drive for that business and certainly improve our customer experience, which positions us to accelerate growth and gain share.

Tycho Peterson - JPMorgan

Pete, can you quantify the weather impact? It’s a tricky thing, I’m sure, but I’m just wondering if you’ve got a number you can throw out.

Peter Wilver

Yeah, it’s obviously not an exact science, but when we look at the weather impact, as well as the impact of seasonal products, both flu and pollen were down versus the prior year, it’s about a 1 percentage point impact on the quarter.


Our next question comes from Derik de Bruin from Bank of America Merrill Lynch.

Derik de Bruin - Bank of America Merrill Lynch

I’m getting some questions from people on the second quarter guidance, the trajectory there. I assume the midpoint of that is a little bit lower than the Street number for the EPS number, if you sort of use your math. I assume that’s just all related to the timing of synergies and when things are coming through. Could you talk about your plans in terms of how you’re looking at synergies and what the different phases are with that?

Marc Casper

Just one thing to keep in mind, in terms of Q2, we always have a seasonal impact in Q2, because that’s when we do salary increases. So that has an impact on the bottom line, and that’s true for Life Technologies as well. So that could be one of the differences.

In terms of the synergies, we obviously realize $17 million in Q1 already. Those were the duplicative public company costs that we were able to eliminate, pretty much on day one. And then as we go through the year, we’re continuing to eliminate duplicative corporate costs, for corporate functions, and we’re beginning to integrate the biosciences business, the businesses, legacy Thermo Fisher, that were combined into Life Technologies to create Life Sciences Solutions. So those will build throughout the year.

Derik de Bruin - Bank of America Merrill Lynch

Has there been anything that sort of stuck out in Life in terms of when you got under the hood and looked for potential revenue surprises in the sense of more opportunity to develop new products, more potential downstream synergies in terms of revenue potential for the company, new product investments? I’m just curious in terms of how you’re thinking about the business now that you’ve got your hands on it.

Marc Casper

As we’ve thought over the last couple of months, part of the activity is for myself and other members of the team just to get visibility to our new colleagues, visit customers jointly and really look at the opportunities.

And one of the things that, to me, has been a real highlight is I spent quite a bit of time meeting with some of our new scientists - not new to the company, but new to Thermo Fisher - and they’re working on great technologies. So we’re bringing a really complementary suite of technologies and we’re already brainstorming long term on what are the new solutions that we can bring out from combining the two companies’ suites of technology capabilities. So long term, I’m very excited about what both companies bring.

From a customer perspective, feedback is incredibly positive. They see great synergy between the company, and the positions us the opportunity to gain share. So no surprises, but it’s been very positive and the business is performing as we expected, so we’re off to a good start.


Our next question comes from Doug Schenkel with Cowen & Company.

Doug Schenkel - Cowen & Company

Is there anything you could share regarding the changes in allocation of investment at Life Technologies product pipeline or commercial infrastructure you have implemented or are implementing since the deal closed?

Marc Casper

From my perspective, what we do from an innovation perspective is make sure that we’re maximizing the impact of our investment. Innovation is a core part of our strategy, and that’s part of the reason we’re meeting with our scientific leaders and scientists, just to really get an understanding of what’s in the pipeline. It’s business as usual right now, which is teams are working on great things, and they’re doing a great job, and that’s what they’re focused on. And then certainly we’re looking for what are the new opportunities that the combined company has going as we get later into the year and into 2015. So it’s a very exciting time from a scientific and innovation perspective.

Doug Schenkel - Cowen & Company

With One Lambda and Life under Thermo, can you just talk about the development efforts of sequence based HLA typing? This is a rapidly growing market and a lot of your biggest competitors announced earlier this year that they will be making a push into this market. So how are you thinking about competitive dynamics and the HLA sequencing market size?

Marc Casper

In terms of our transplant diagnostics business, it’s doing really well. It’s been a great acquisition, growing well above what the acquisition model assumed in 2012, so I feel great about that. We have integrated the HLA capabilities from a sequencing perspective, that Life Technologies brought to Thermo Fisher, into that business already. So that’s a combined offering that we’re working on, and we feel good about our prospects in that area.


Our next question comes from Steve Willoughby with Cleveland Research.

Steve Willoughby - Cleveland Research

I was wondering if you could provide a little more color as it relates to the growth rates within the life science solutions segment, specifically if you strip out the standalone or existing Thermo business, what did that grow versus what did the Life Technologies business grow? And then my second thing was just on the analytical instruments business. I heard you said that mass spec and chromatography both saw strong growth. I was just wondering if you could talk about the remaining pace of that business and what the trends are with those products.

Marc Casper

In terms of the analytical instruments business, what else is in there is a lot of our industrial chemical analysis businesses. So you obviously have great strength in chrom and mass spec, you still have some weakness in the later cycle, longer lead time products. So that would be what you see there. I was encouraged in the quarter by the strengthening in our portable instruments business. That’s kind of the shorter cycle industrial business, so that saw a nice pickup in the quarter. So there’s some signs of a continued economic recovery in the industrial markets.

From the life sciences solutions perspective, we’re already integrating that business, so we’re thinking about that as one unified business as we put our biosciences business in there. The growth rates were pretty similar between what would have been legacy Thermo Fisher products and what was the Life Technologies products. So they both grew around the same rate, in aggregate. So that’s the view on the splits there.


Our next question comes from Tim Evans from Wells Fargo Securities.

Tim Evans - Wells Fargo Securities

Just to follow up there on the question from Steve, in the life science solutions business, could you maybe give us a little bit more commentary around the clinical end markets that that business serves, particularly in molecular diagnostics products or the products going into that market?

Marc Casper

Maybe give a little bit more color in aggregate on the life sciences solutions segment, just to frame it, and I’ll cover clinical as well in that. So when I look at the performance of the business and the outlook, first of all, we feel confident about the 2% to 3% growth organically this year.

Within life science solutions, you really have three main businesses: bioproduction, which is our fastest growing portion of the portfolio; biosciences, which is our market leading position in our high tech bioscience reagents; and you have genetic sciences, which is made up of our QPCR franchise; our applied markets, such as human identification. You have animal and food testing as well. You have our next gen sequencing business, as well as our Sanger sequencing franchise.

Within the next gen sequencing businesses, you actually have a nice clinical presence as well, as there’s adoption of both those technologies there. And we continue to have good momentum in that part of our portfolio.

In terms of highlights, as I thought about it for the quarter, what I would say is I was very encouraged to see that QPCR had a good quarter in terms of growth. We have really nice momentum in next gen sequencing. So I think that’s a really nice complement to how the life science solutions team has started off the year.

Tim Evans - Wells Fargo Securities

Given those dynamics, though, and the 1% growth, the headwind from the licensing and maybe some other pieces of the business, that must have been fairly significant.

Marc Casper

Yeah, so headwinds, the OEM licensing royalties were all headwinds versus what was a strong Q1 of 2013. We saw some headwinds in portions of our Sanger sequencing business as we’ll. So those would be the headwinds that we would have seen in Q1.


Our next question comes from Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs

Pete, just wondering if you could put a little color on the pricing environment this quarter and your expectations for the year in the context of your core growth guidance?

Peter Wilver

In the quarter we did realize positive price, but it was between zero and 50 basis points, so pretty much consistent with what we’ve seen for the last every quarter in the prior year, so slightly positive. That’s basically what we’re assuming for the full year, around 25 basis points.

Isaac Ro - Goldman Sachs

And then a follow up to the earlier question on pharma, the M&A activity there. If we were to compare the share gains that you typically get in these types of opportunities, against the overarching cuts that you typically see in the combined R&D budgets for those accounts, is it fair to say the net effect of those two forces is typically a positive for your business in those accounts?

Marc Casper

As we’ve said in years past, typically you get a little bit of a dampener as companies are figuring out exactly what they’re going to be doing. But we typically then gain share, because we’re part of their synergy program and they typically move spend to us as part of that process, and it nets out to be, over time, a positive for Thermo Fisher.


Our next question comes from Paul Knight from Janney Capital.

Paul Knight - Janney Capital

Marc, you had mentioned the handheld market, and that kind of a leading indicator for these applied markets improving. Have you been surprised how slow it’s taken the industrial market to improve?

Marc Casper

I’m not surprised. We’re in this new normal of more slow recovery, economically globally. And so we’re seeing the improvements now in our shorter cycle business and that’s good news. And then at least we have stabilization in the longer lead time businesses. So we didn’t come out of the last recession with a big springback in terms of growth, but it’s something that we assumed, and we’re managing through, which is why the use of PPI and managing our costs effectively positions the company so well. We’ve been able to deliver great earnings growth in a muted top line environment, and we feel like we’re very well-positioned to capitalize on the opportunities that are out there.

Paul Knight - Janney Capital

And specifically, the [unintelligible] analyzer, probably in the metals mining market, you’re seeing, I guess, stability there?

Marc Casper

Yeah, we’re seeing growth again in our handhelds, which is a good leading indicator for us.

Paul Knight - Janney Capital

And then you [cite], in mass spectrometry, I think that must be what, stable pharma and biotechnology capital going into that market?

Marc Casper

Those two are good drivers, plus really great products. Our products are just being adopted, so from our perspective, we have a really exciting pipeline of demand for what we launched at ASMS last year, and we’re looking forward to ASMS coming up again later in the spring, and a new suite of products as well.


Our next question comes from Jeff Elliott with Robert W. Baird.

Jeff Elliott - Robert W. Baird

I guess just a followon to Paul’s question. Can you give a little more color on where you’re seeing the growth in MS and chromatography, and perhaps an update on the competitive environment?

Marc Casper

Orbitrap Fusion Tribrid is doing great. High end research, academic, biopharma, extremely strong adoption. So that’s been a very positive driver. From a chromatography perspective, applied markets, industrial markets, have been good for chromatography. We have strength in liquid chromatography, we have strength in [IM] chromatography in the quarter, and feel like we’re well-positioned there. So those are two businesses that had very good growth in the quarter.

Jeff Elliott - Robert W. Baird

And a follow up on China. Can you give a little more color on some of the growth rates you’re seeing in other areas there, like some of the more applied areas, environment and whatnot?

Marc Casper

I would say industrial and applied, not dramatic changes from what we’ve seen over the last few quarters. We saw a little bit of a slowness in the release of funds from government customers in China, and that happens from time to time. That seemed to be a factor that played out a little bit in the quarter.


Our final question comes from Brandon Couillard from Jefferies.

Brandon Couillard - Jefferies

Pete, on the free cash flow revision, could you elaborate on the moving parts that are contemplated in the new outlook relative to the prior view?

Peter Wilver

As I said, nothing has really changed in the operational side of our free cash flow guidance. But as I said, there’s lots of moving pieces, just in the way that acquisitions and divestitures are reported. As I said, in Q1, we had about $240 million of payments related to the acquisition that hit free cash flow, $50 million of working capital impact.

And then just to give another example that we’ll experience later in the year, the gross proceeds of the divestitures are excluded from free cash flow, but in fact the tax payments that we’ll make are actually included in free cash flow. So in that case, nothing’s changed in our assumption that we’re going to get somewhere around $800 million net from the divestitures, but reported cash flow will take a hit of over $200 million as a result of that.

So the change is in the range of $400 million. Again, nothing operational. It doesn’t change our year-end cash balance forecast or how fast we think we’re going to pay down debt. It’s just simply the moving pieces of how the acquisition and divestitures are reported.

Brandon Couillard - Jefferies

And then Marc, you spoke to the government and academic markets in the U.S., but curious what your view would be for that end market in the European and Asian geographies.

Marc Casper

Generally, Europe, in its entirety, continues to be consistent. We had mid-single digit growth in the quarter, continuing to benefit from stability. And that’s been a positive. There’s been some exciting R&D initiatives that are government funded that bode well for long term European demand. So I feel good about that. I don’t think we mentioned this as much, but we had good position and good strength in Japan in the quarter. There’s some initiatives around a tax increase that went into effect April 1 that encouraged customers to spend some money. So that’s off to a good start as well. So that’s a quick view on academic and government around the world.

Let me wrap it up with just a couple of quick comments. As I think back on the quarter, we made significant progress in Q1. I think we delivered solid results and positioned ourselves well to deliver another strong year. Thanks for the support of Thermo Fisher Scientific and certainly we look forward to updating you next quarter. Thanks, everyone.

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