賽默飛世爾科技 (TMO) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific third-quarter 2011 earnings conference call.

My name is Tahisha and I will be your operator for today.

At this time, all participants are in listen-only mode.

Later, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would like to introduce our moderator for the call, Mr.

Kenneth Apicerno, Vice President, Investor Relations.

Mr.

Apicerno, you may begin your call.

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, ThermoFisher.com, under the heading Webcasts and Presentations until November 18, 2011.

A copy of the press release of our third-quarter 2011 earnings and future expectations is available on our website under the heading Financial Results.

So before we begin, let me briefly cover our Safe Harbor statement.

Various remarks that we may make about the Company's future 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 Form 10-Q for the quarter ended July 2, 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 will 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 third-quarter 2011 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.

Thanks, Ken.

Good morning, everyone and thank you for joining us on our earnings call for the third quarter of 2011.

Let me start by saying that we had another quarter of excellent earnings growth with a 23% increase in adjusted EPS over 2010.

We reported double-digit adjusted EPS performance every quarter this year and our teams did an outstanding job in executing their operating plans to deliver on our goals again this quarter.

As I have been saying for the past couple of years, Thermo Fisher is committed not only to delivering strong growth in adjusted EPS, but to do so consistently.

Our results in Q3 clearly continued that trend.

In fact, on a year-to-date basis, adjusted EPS is up 19%.

Our three drivers of adjusted EPS growth haven't changed.

They are, one, top-line growth through new product innovation, expansion in emerging markets and our efforts to leverage our unmatched commercial reach to gain share; two, our focus on operational excellence through PPI and PPI Lean, as well as low-cost region sourcing and manufacturing; and three, our ability to effectively deploy our capital to create shareholder value.

All of this added up to a third-quarter record of $1.07 in adjusted EPS.

Before I cover our EPS drivers in more detail, let me point out that we also delivered excellent adjusted operating margin expansion in the quarter with an increase of 120 basis points to 18.4% over the same quarter last year.

This margin improvement was a significant contributor to our strong EPS performance in Q3.

So turning to the top line, the first key contributor to our EPS growth.

We achieved a 13% increase in revenues for the quarter to $2.97 billion.

Let me give you some color on what we are seeing in our businesses.

Starting with our businesses serving the industrial sector, we performed well across our portfolio with strong revenue and bookings consistent with what we have been seeing all year.

Our process instruments for materials and mineral applications performed very well in Q3.

We also had another strong quarter for our handheld analyzers, continuing the great momentum we have had here for quite some time.

Across our Specialty Diagnostics businesses serving the healthcare industry, growth was driven by our various share gain initiatives.

We saw strong demand again this quarter for our clinical diagnostic products driven by sales of our biomarker tests to detect sepsis and our test kits for drugs of abuse.

We were also pleased to see good growth in the quarter in our microbiology business, as well as our healthcare customer channel.

Our new immunodiagnostics business, formerly Phadia, is off to a great start as well with growth in excess of 10%.

I will give you an integration update in a few moments.

Moving on to pharma and biotech, we had a number of highlights in the quarter.

As we have seen throughout the year, both our biopharma services and our bioprocess production businesses once again had a strong quarter.

Our pharma and biotech customers are collaborating much more closely with us to drive productivity by leveraging our industry-leading services capability, which I will talk about more later in the call.

I am also pleased to note that our HPLC business, which was dramatically strengthened through the Dionex acquisition, is clearly gaining share with strong double-digit revenue growth.

The one notable headwind that we had to manage through in the third quarter was the academic and government market segment.

As Pete and I mentioned in the September investor conferences that we attended, we began to see a softening in demand from these customers in the US and Europe late in the quarter.

We have implemented a number of cost-reduction initiatives to mitigate the effect on our bottom-line results.

And we are continuing to drive additional actions in Q4.

We have also put in place very targeted share gain action plans to maximize our performance in this segment given our capabilities to help our customers meet their own productivity goals.

Let me make a quick comment on our top-line growth from a geographic perspective.

Our progress in leveraging our industry leadership in emerging markets is clearly paying off.

We again performed very well in our Asia-Pacific countries, including China and India, both growing at above 20% in the quarter.

I just got back from China a couple of weeks ago where I met with a number of our customers who showed great enthusiasm about working closely with us.

In fact, we are collaborating with our customers in the biopharma, environmental and healthcare markets to develop comprehensive product and services solutions tailored to meet their specific needs.

I was very impressed by the excellent progress our teams there are making with these initiatives.

Turning to new products, we had a steady stream of new launches in the quarter.

Let me give you some of the innovation highlights under our Thermo Scientific brand.

First, our Specialty Diagnostics business launched two chemistry analyzers.

One is called Indiko, a fully automated compact chemistry analyzer that recently received clearance from the US Food and Drug Administration for routine clinical chemistry applications.

The Indiko analyzer supports our specialty assays business where we have leadership positions in drugs-of-abuse testing and therapeutic drug monitoring.

This was part of our strong, new product lineup at AACC, the leading conference for clinical laboratory professionals and clinical researchers.

Our other new chemistry analyzer, the Gallery Plus, was launched specifically for food, beverage and water analysis.

The Gallery Plus is ideal for high-volume labs because customers can simultaneously analyze several parameters from a single sample.

Turning to our lab equipment business, we introduced a whole new platform in our ultralow temperature freezer line.

This platform provides sample storage and protection in a variety of capacities while setting new standards for energy efficiency and space utilization for any lab looking to improve productivity.

Given our industry-leading position in lab equipment, this is a significant platform launch for us.

Finally, in analytical instruments, during our second-quarter earnings call, we highlighted that we launched several significant new mass spectrometer products at ASMS in Q2.

I am pleased to report that there has been a lot of interest in and adoption of our new Q Exactive hybrid mass spectrometer.

Let me turn to our second key EPS growth driver -- operational excellence.

You know our strong track record around productivity, which continues to give us the ability to leverage our top-line growth for strong bottom-line results.

We have a number of levers we can pull to protect the bottom line.

Given the revenue headwinds that we saw in academic and government markets late in the third quarter, we have increased our activities here.

Let me cover three of the productivity levers that I consider to be most important.

First, PPI and PPI Lean.

As you know, practical process improvement is ingrained in our Company culture.

At this point in the year, we have generated more than $60 million of productivity savings and we continue to ramp up our PPI project activity to streamline our processes and better serve our customers.

Second, low-cost region manufacturing.

We typically save 20% to 30% by manufacturing in low-cost regions, primarily China, Mexico and Eastern Europe.

To remind you, only about 10% of our manufacturing revenue comes from these regions, so we still have plenty of opportunity here.

And third, facility rationalization.

We continue to focus on improving our revenue per facility and constantly reevaluate our global footprint to improve our cost structure and strengthen our global competitive position.

So still a lot of opportunity for productivity gains in all of these areas.

Our ability to translate top-line growth into strong bottom-line results has always been a key strength of our Company.

When market conditions become a bit more challenging, our productivity levers are a particular advantage for us.

Moving on to our third key driver of EPS growth, we continue to create value for our shareholders through effective capital deployment.

First, a quick update on Dionex.

The integration is continuing to progress very well.

The business delivered good growth and profitability and as I mentioned earlier, we are especially pleased with the early momentum we are seeing in our HPLC share gain initiatives.

The cost and revenue synergies are right on track with our plan and we benefited from tax efficiencies as well.

The most recent highlight of course is the acquisition of Phadia with our new allergy and autoimmunity diagnostic testing business, which we completed that in late August.

We have been talking a lot about Phadia since we first announced the deal back in May, so I am not going to go into the details again today.

But I do want to mention here that the integration is going very smoothly and the business is continuing to deliver strong growth.

So it is off to a great start.

I did participate in our day one integration activities in Sweden and Germany and there was tremendous excitement about the potential that this combination has to offer our customers.

We will be able to provide them with innovative new tests based on Phadia's robust R&D pipeline and we can continue to use our strong presence in Asia-Pacific to bring these tests to customers in emerging markets while leveraging our healthcare customer channel in the US as well.

I want to welcome our new colleagues to Thermo Fisher and we are looking forward to working together to strengthen our presence in these high-growth markets.

As you saw in our announcement a couple weeks ago, following the close of Phadia, we established a third reporting segment for our Specialty Diagnostics business.

This took effect in Q3.

Pete will go into the details, but I want to make the point here that we have made this change to give our investors greater visibility in all three of our major businesses.

This new reporting structure highlights our Specialty Diagnostics capabilities, which now total more than $2 billion in revenue, as well as our high-growth Analytical Technologies and market- leading Laboratory Products and Services business.

Clearly, it has been a productive year so far for M&A, but I also want to highlight that we continue to deploy our capital to buy back our stock.

In the third quarter, we spent $225 million to repurchase 4 million shares.

For the first nine months of this year, we spent nearly $1 billion to repurchase 17.4 million of our shares.

So we continue to be focused on generating strong returns by effectively deploying our cash flow and balance sheet to create value both through M&A and share buybacks.

Switching gears, I will now highlight a key growth theme, as I have done every quarter, to illustrate how we really leverage our unique depth of capabilities for the benefit of our customers.

As you know, pharmaceutical companies continue to look for ways to reduce their cost structure and increase productivity.

While outsourcing has become a standard practice in some industries, it is going a step further in the pharmaceutical industry.

You have heard me talk about our relationship with Eli Lilly and the extent to which we support their clinical trials operations with materials manufacturing, packaging and labeling at their technology center in Indianapolis.

What you may not be aware of is the fact that we have an even broader managed services model that we are rolling out to pharmaceutical customers large and small.

Our value proposition here is that we can offer a range of expertise and support to reduce their time and cost of lab operation so they can focus on the science, innovation and commercialization of new drugs.

This managed services model incorporates our vast experience in designing and maintaining scientific labs for a variety of organizations.

We have developed a list of nearly 50 standard operating procedures that when implemented ensure that a lab is operating as efficiently as possible.

In fact, our managed services capabilities and the opportunity associated with it is not limited to the pharmaceutical industry.

We recently signed an agreement with a major industrial company to develop a comprehensive, chemical sample management program at a new R&D site being built in the Southwest.

Our long-term goal is to build sustainable relationships with key customers and bring added value to their business through innovative products, world-class service and support.

Before I hand the call over to Pete, let me give you an update on our annual guidance for 2011.

As you saw in our press release, we are revising our revenue and adjusted EPS guidance to reflect our market outlook at this point in the year, including less favorable foreign exchange rates.

The change in guidance is driven primarily by our assumption that the softer academic and government market environment that we saw in the US and Europe late in the third quarter will continue throughout Q4.

In the US, customer funding is impacted because the government is still operating under a continuing resolution authority and European governments are still sorting out their budgetary responses to the fiscal situation there.

As I mentioned earlier, we are taking swift cost actions to offset these pressures on our top line to protect our bottom-line earnings growth.

With this backdrop, we are revising our adjusted EPS guidance to a new range of $4.11 to $4.17 for the full year in 2011.

This would result in 19% to 21% growth over our strong 2010 results.

We are also revising our annual revenue guidance and now expect to achieve a range of $11.62 billion to $11.70 billion for 10% to 11% revenue growth over 2010.

So let me summarize my remarks this morning with a few key points.

We had another quarter of excellent earnings growth with strong double-digit adjusted EPS performance and 120 basis points of margin expansion.

We delivered good growth at the top line despite pressure from academic and government markets.

We will continue to manage our cost base to reflect the current environment and we are committed to building on our strong momentum in new products and emerging markets.

Now I'll turn the call over to Pete Wilver.

Pete?

Thanks, Marc.

Good morning, everyone.

As you know, we completed the acquisition of Phadia in August.

Similar to our reporting of Dionex, given the significant size of this investment, we are providing visibility to the revenue growth performance of the combined companies by calculating organic growth on a pro forma basis as if Phadia were owned for the entire third quarter in both years.

As Marc mentioned, following the acquisition, we established a new reporting structure to provide visibility into our Company, highlighting our leading capabilities in all three segments -- Analytical Technologies, Specialty Diagnostics and Laboratory Products and Services.

This structure is also aligned with the way we manage these businesses to best serve our customers and capitalize on our growth opportunities.

So effective this quarter, I will be providing details on all three segments later in my comments.

We are pleased to report another quarter of strong adjusted earnings per share with 23% year-over-year growth to a third-quarter record of $1.07 compared to $0.87 last year.

GAAP earnings per share in Q3 was $0.69, up 5% from $0.66 in the prior year's quarter, including acquisition-related costs for Phadia.

Moving on to our top-line performance, reported revenue increased 13% year-over-year to a third-quarter record of $2.97 billion.

On a pro forma basis, as if both Dionex and Phadia were owned for the entire third quarter in both years, total revenue increased by 7% year-over-year and organic revenue growth was 3%.

In addition to the organic growth, Q3 pro forma revenue increased by 3% as a result of favorable foreign currency translation and another 1% from acquisitions other than Dionex and Phadia.

Bookings were essentially in line with revenue in the quarter.

Now let me cover our revenue performance by each of the three segments.

First, Analytical Technologies' Q3 revenue grew 22% on a reported basis.

On a pro forma basis, including Dionex, Analytical Technologies' revenue increased 9% year-over-year and organic revenue growth was 5%.

In the quarter, we continued to see strong growth in our instrument businesses serving industrial and applied markets.

Also, our biosciences business, particularly our bioprocess production products, continued to deliver strong year-over-year growth.

Growth in the segment was, however, affected by challenging conditions in academic and government markets in the US and Europe, as Marc referenced in his comments.

Turning to the Specialty Diagnostics segment, Q3 revenue grew 20% on a reported basis.

On a pro forma basis, and including Phadia, Specialty Diagnostics' revenue increased 11% year-over-year and organic revenue growth was 6%.

In this segment, we continued to see strong growth in clinical diagnostics, specifically our biomarkers business, and Phadia, now called immunodiagnostics, delivered better than 10% organic growth.

We also had mid-single digit growth in our channel business serving healthcare markets, which is also a part of this segment.

In the Laboratory Products and Services segment, Q3 revenues increased 5% on a reported basis and grew 1.5% organically.

This segment has the highest exposure and was most affected by academic and government markets although our biopharma services business continued to deliver strong growth.

By geography, we continued to see organic growth in the high teens in Asia-Pacific.

China and India again performed very well with both growing above 20%, as Marc mentioned.

North America and Europe both grew in the low single digits and rest of world declined in the mid-single digits versus a tough comparison of high 20%s growth in the prior year's quarter.

Turning to adjusted operating income, we had strong bottom-line results with Q3 adjusted operating income up 21% year-over-year to $547 million.

Adjusted operating margin was 18.4%, up 120 basis points from 17.2% in the year-ago quarter.

The year-over-year margin expansion was driven by pull-through on organic growth and strong contribution from our cost productivity actions.

And we continue to see nice accretion in the quarter from our recent acquisitions.

However, similar to last quarter, we continued to encounter inflationary pressure in some of our direct material costs, particularly oil-based raw materials like plastic resin, which we have partially offset with additional global sourcing initiatives.

We also began to implement incremental restructuring actions and discretionary cost controls this quarter in response to the more challenging market conditions.

These totaled about $30 million in annualized benefit over and above our normal productivity efforts driven through PPI and PPI Lean projects.

By segment, Q3 adjusted operating income in Analytical Technologies increased 36% year-over-year and adjusted operating margin was 19.5%, up 210 basis points versus last year.

In Specialty Diagnostics, Q3 adjusted operating income increased 27% year-over-year with adjusted operating margin at 24.4%, up 140 basis points from the year-ago quarter.

And in Laboratory Products and Services segment, Q3 adjusted operating income grew by 6% with adjusted operating margin at 13.5%, slightly above the year-ago quarter.

Moving on to the details of the P&L, total Company adjusted gross margin was 43.6% in Q3, up 190 basis points from the year-ago quarter.

The year-over-year margin expansion was driven by our productivity actions and global sourcing initiatives, which were partially offset by raw material inflation and some unfavorable productline mix.

Gross margin also benefited from the accretive impact of recent acquisitions.

Adjusted SG&A in Q3 was 22.3% of revenue, 50 basis points higher than 21.8% last year driven by the dilutive impact of our acquisitions.

Excluding acquisitions, we delivered good year-over-year margin expansion as we continue to tightly control discretionary costs and restructure our cost base.

R&D expense was 2.9% of revenue in Q3, up 20 basis points from last year as a result of our growth investments and our recent acquisitions.

Moving below the line, our Q3 net interest expense increased $27 million year-over-year to $43 million driven by higher interest expense as a result of issuing debt to fund the Dionex and Phadia acquisitions.

This was partially offset by higher year-over-year interest income due to larger average cash balances and slightly higher interest rates on foreign cash.

Adjusted other income was a $2 million loss versus $1.8 million income in the prior year primarily as a result of some favorable items in the prior year.

Our adjusted tax rate in the quarter was 18.5%, down 110 basis points from last year as a result of our tax-planning initiatives, including tax synergies related to the Dionex and Phadia acquisitions.

And during the quarter, we deployed $225 million of our cash to buy back 4 million shares of our stock, which left $250 million remaining at the quarter-end under our current $750 million authorization that expires in February 2012.

Average diluted shares were 383 million in the quarter, down 22 million, or 5% from last year, reflecting the benefit of our 2010 and 2011 share buyback programs, as well as redemption of our convertible debt.

Turning to the balance sheet, we continue to maintain a strong balance sheet and deliver solid cash flow performance.

Year-to-date cash flow from continuing operations was $1.04 billion and free cash flow was $862 million after deducting net capital expenditures of $179 million.

Year-to-date free cash flow was flat year-over-year primarily as a result of higher operating income and improved working capital performance offset by higher interest payments and the timing of cash taxes.

We ended the quarter with $900 million in cash and investments, down $0.5 billion from Q2 primarily as a result of closing Phadia.

Our total debt was $7.1 billion, up $3.1 billion from Q2 as a result of issuing $2.1 billion of senior notes and $1 billion of commercial paper to fund the Phadia acquisition.

And now moving on to our guidance for 2011, as Marc mentioned, since we last provided guidance in August following the Phadia acquisition, our academic and government markets have become more challenging and foreign currency exchange rates are less favorable.

As a result, we are lowering the midpoint of our 2011 guidance range by $180 million to a new range of $11.62 billion to $11.70 billion.

This range represents growth of 10% to 11% over our 2010 reported revenue of $10.57 billion.

In terms of pro forma revenue growth, including Dionex and Phadia, the midpoint of our reported revenue guidance represents about 6% growth.

This translates to midpoint organic growth for the year of about 3%, excluding favorable foreign currency of 2% and completed acquisitions other than Dionex and Phadia of 1%.

As I mentioned last quarter, the Biosite and Japan stimulus headwinds we experienced in the first half have a negative impact of about 1% on our full-year 2011 organic growth.

Moving to our earnings guidance, primarily as a result of our revised revenue outlook, we are slightly lowering the midpoint of our adjusted EPS guidance by $0.06 to a new range of $4.11 to $4.17, which still represents very strong growth of 19% to 21% over our 2010 adjusted EPS of $3.46.

This guidance includes our completed acquisitions and it does not include any other future acquisitions or divestitures.

In interpreting our revenue and adjusted EPS guidance ranges, as I've said in the past, you should focus on the midpoint as our most likely view of how we see 2011 playing out.

Results above or below the midpoint will depend on the relative strength of our markets in the fourth quarter.

In terms of some color on below-the-line items, our full-year adjusted income tax rate is now expected to be 19% to 19.5%, slightly lower than last year and our previous guidance, primarily as a result of incremental tax synergies related to Dionex and Phadia.

And our full-year average diluted shares are estimated to be in the range of 383 million to 387 million, down slightly from our previous range.

This estimate assumes that we use the remaining $250 million of our current share buyback authorization through its expiration in February 2012.

To bridge the $0.06 change from the midpoint of our previous guidance to our current guidance, we lost about $0.12 as a result of lower revenue offset by incremental cost actions of $0.03 and the net improvement in below-the-line items, including our adjusted tax rate and a lower share count, of another $0.03.

As I mentioned earlier, we have already begun executing incremental restructuring actions and strict discretionary cost controls, which helped us deliver strong financial results and year-over-year margin expansion this quarter.

We are also implementing additional cost actions in the fourth quarter to further align our cost structure with our current outlook.

Finally, we continue to reap the benefits of our investments in new products and services, as well as our industry-leading presence in Asia-Pac and other emerging markets, all of which position us well for future growth.

With that, I will turn the call over to the operator for Q&A.

(Operator Instructions).

Ross Muken, Deutsche Bank.

On the outlook, so I think, Pete, you mentioned there was a $0.12 delta on revenue and you are offsetting some of it with cost.

That seems like a pretty big delta given we only had half the year to go.

So I guess in terms of when you started to see some of the shift in demand on the revenue line and sort of the magnitude, I guess what was sort of most surprising to you in terms of trend?

And then in sort of the inference for organic growth for Q4, it seems like you are implying something in the very low single digit range despite an easier comp and I guess the assumption there is you saw some weakness in Q3 and then things you are expecting to kind of continue or worsen into Q4.

Is that a correct characterization or not?

So there is a lot embedded there, Ross.

Let me try to break it down into the pieces.

Thanks for the question.

In terms of what we saw from a timing perspective, we really saw academic and government weaken later in Q3.

And order of magnitude, we saw mid-single digit decline for academic and government in the third quarter, which the prior part, first two quarters, even through July and parts of August, you are looking at low single digit growth.

So a very large swing in actually what happened in Q3.

So that is the magnitude of that.

In terms of organic growth outlook for the fourth quarter, it is 2% to 3% is what we are looking at for the fourth quarter at this point.

So it has really been looking at academic and government and given the sharp falloff late in the quarter, we have assumed that that is going to continue.

And as I mentioned in the opening comments, there is not a lot of -- there is not a huge catalyst for change, if you will, at least in my mind in the fourth quarter because the US is still going through the continuing resolution authority right now and that is going to put a dampener in the short term on the academic and government markets.

And Europe, as we see in the headlines every day, is still going through its fiscal response to the problems that is happening in southern Europe.

So very short-term catalysts we are not assuming they are going to change a lot and hence, we are reflecting that in our outlook.

Okay.

And I guess in terms of going back to the Analyst Day and the early color you gave on 2012, we are obviously in a little bit of a different jump-off point.

A few things have happened.

But as you think about sort of your core end markets going into next year versus what your expectation had been when you first gave some color, obviously government/academic seems to be a delta for the worse.

Are there any other markets where you feel like either performance is better or worse than what you had expected when you originally gave that color?

Yes, let me comment, Ross, on what we are seeing broadly in the markets in some more detail.

At a high level, our markets in Q3 were very similar to what we have seen the last few quarters with the obvious exception of academic and government.

So I am not going to delve into that because we just talked about it.

But in industrial and applied markets, third quarter was very strong for us, both in revenues and in bookings across the broad base of our businesses.

We are obviously following the external factors quite closely and we are monitoring the market, but the third quarter was strong for us.

So if you are thinking back to May and we are sitting here in October, industrial very similar.

In terms of biopharma, for us, Ross, that grew a little bit better than the Company average.

The two businesses that we have been highlighting all year continue to perform strongly and we are benefiting from the fact that we help our customers drive their own productivity, which is why we have done well in the segment.

So I would say that pharma biotech hasn't changed a lot for us as this year has unfolded.

In healthcare and diagnostics, that has been pretty consistent demand as well.

Growth in Special Diagnostics for us was driven both by market growth, as well as our share gain initiatives.

So if I think about the whole year, three of our four customer segments representing roughly 75% of our business, pretty consistent and one segment under very significant pressure relative to what we had seen in May.

So that is our view on where we are with the end markets.

Great, I will go back into the queue.

Thanks.

Quintin Lai, Robert W.

Baird.

Hi, good morning.

So as we look at the implied guidance, it looks like $1.13, $1.19 for EPS.

That would still be about 18% to kind of 20% some EPS growth year-over-year for that quarter.

So Marc, given what you're seeing in the academic, let's say that 2012's continuation of the trends that you are seeing now given maybe let's say a low single digit organic environment, given all the other things you have got with acquisitions and all that, is it still okay to say that you still think that double-digit EPS growth is achievable as we look out into 2012?

So a few things.

As you were mentioning on our Q4 outlook, what is implied in the outlook or in the guidance is 19% to 24% EPS growth for the quarter.

So another strong double-digit growth for us.

And assuming, as I mentioned to Ross, 2% to 3% organic revenue growth is what is implied in that.

So we are clearly getting a lot of leverage from the top line into the bottom line.

In terms of our outlook in guidance for 2012, we are going to do that like we have done in years past, specifically in the beginning of the year.

We typically do it in the February timeframe, so we will go through the process of finishing our own internal operating plans and setting out the EPS objectives.

But clearly, as you look at 2012, we bought a lot of shares back; that is favorable.

We have been active on the M&A front both with Phadia and Dionex.

Those businesses are both performing very well, right on track with our integration plans and those three actions in and of itself will be strong contributors to earnings growth as will our strong track record of driving margin expansion.

So while the specifics we will outline in February as we have done in every other year past, I feel very confident that we are going to have very strong financial performance in 2012.

And then one of the other areas of concern is what is the future outlook for China and since you have just come back, what are you hearing from your customers, from the government in terms of kind of the near and mid-term growth outlooks there?

Yes, it is a question that I get asked a lot from our investors, owners.

I spent a fair amount of time -- I think I saw in the range of 30 plus customers when I was in China and those customers are excited about doing business with us.

Some of them are small customers that want to do a lot more, some are big customers that also are excited about expanding their relationship.

Our teams are performing extremely well.

We had growth well over 20%.

The outlook for strong revenue growth looks positive.

So it is harder for us to comment broadly on China, but I can comment specifically on what our business's outlook is and that looks very encouraging and our team is executing very well.

Jon Wood, Jefferies.

Thanks a lot.

Good morning.

Marc, so -- and probably this is for Pete too.

So if you roll up all the restructuring you have kind of done in the first half of '11 and then what you have discussed in 3Q and 4Q, taking all of that, rolling it up, what kind of net benefit does that suggest to 2012 in terms of operating profit?

Well, in terms of the total amount of benefit from the actions that we have taken so far, including the $30 million that I referenced that we have initiated since the beginning of Q3, is about $70 million on an annualized basis.

Obviously, we are getting some of that this year and we will get some incremental next year.

So it is probably a little less than half this year and then we get all of it next year or almost all of it next year.

So it is another $30 million to $35 million incremental benefit.

Okay and one quick follow-up.

Thanks for that.

The free cash outlook, could you update us on that?

It looks like your conversion ratio is a bit below the 90% you have kind of talked about historically.

Has something structurally changed in terms of Phadia or Dionex?

And just kind of give us a rule of thumb on how to think about the free cash conversion in 2012.

Thank you.

I don't think the model has changed, so the assumption of 90% is good.

Year-to-date we have had a little bit of an impact because of timing of cash tax payments.

I mean, we basically almost paid the full bill through three quarters, so we will get a little bit of benefit in the fourth quarter.

I would say that the cash flow outlook right now on a free cash basis for 2011 probably brackets around $1.3 billion, maybe slightly above that.

Great, thank you.

Doug Schenkel, Cowen and Company.

Good morning.

Thanks for taking the questions, guys.

I just want to run through a little math here.

Total academic government as a percentage of sales is what, about 20% after the mergers, is that right?

No, it's still close to 23%, 24%.

Okay, so low 20%s.

So if we assume that whole group is down mid-single digits in Q4 along the lines of what you described happening in Q3 that is about $30 million or about one point of growth year-over-year.

You guys lowered guidance by -- I think it is $180 million at the midpoint and your response to one of Ross's questions, you made it seem as though other areas are holding up pretty well.

Can you just explain what I am missing here, including maybe breaking down how much of this change is foreign exchange, how much of it is coming up short of your internal expectations for Q3 and how much of it is Q4?

So the split of the $180 million, if we look at it at the midpoint, it is about one-third FX and about two-thirds organic.

So that is the 1% organic change from our previous guidance to where we are today.

I think the only problem with your math is that you are starting with zero versus starting with -- we were assuming some level of growth in academic and government.

So the delta is a little bit bigger.

As Marc said, we have been clipping along at about -- low single digits to the low end of mid-single digits and we saw a mid-single digit decline in Q3.

So we are expecting a comparable growth profile in Q4 versus obviously an expectation that we would have some growth.

So if you kind of ballpark, assume about a 7 point delta between what we had been seeing and what we saw in Q3 between low growth versus mid-single digit decline.

Okay.

All right, that's helpful.

So I know the intent of this new cut of the revenue model is to provide a greater degree of clarity for investors.

But at this point -- again, maybe I am just a little slow -- but for me, it is a little hard to see what is really going on with underlying Analytical Technologies and Specialty Diagnostic growth given a new divisional structure and the fact that you are blending Dionex and Phadia into what you are calling adjusted organic growth.

For instance, in Specialty Diagnostics, it is hard to see what you did with Phadia, it is hard to see what is embedded in Q4 and I would say more importantly, it is hard to figure out what is going on with the underlying business.

Can you just talk a little bit -- I mean obviously it would be great if you would break these out and I think it would be helpful for us and even helpful for you guys.

But to the extent you are not going to do that, can you provide us a little more guidance on how the underlying businesses, meaning not Dionex, not Phadia, are holding up to make sure that those are holding to plan?

Yes, Doug, good questions.

So when we acquired Dionex and Phadia, we did the pro forma because effectively we wanted to give as much visibility to the underlying performance year-over-year.

I think what is important to understand in Q3, whether you use the pro forma math or you didn't use the pro forma math, organic growth would have been 3% either way.

So it would not have changed the organic growth number from the 3% number for the quarter.

So that is at the Company level and Pete, anything you want to comment on the segments at all?

No, in terms of the segments, for Specialty Diagnostics, it is probably about a percentage point or so accretive in the quarter.

And then in terms of Analytical Technologies, Dionex is less than a half a percentage point accretive.

Okay.

And remember, in Analytical Technologies with Dionex, we do have product substitution issues there, which makes that number very hard to figure out.

We haven't gone to the trouble to try to figure out what if someone had purchased a Dionex HPLC versus a Thermo Scientific one.

So we just haven't gone through that process to try to determine that.

Okay.

Thanks for taking the questions.

Isaac Ro, Goldman Sachs.

Good morning, guys.

Thanks for taking the question.

If I just look at 2012 and refer back to the Analyst Day in May, is it fair to say you guys still expect call it 5% organic growth and 13% to 15% on the EPS line off of the new 2012 guidance range?

You mean off of the 2011 guidance range?

I'm sorry.

Yes, using the new 2011 guidance as a base, is it fair to still look at the framework for 2012 that you offered in May as the right way for next year to shape up?

Yes, we are going to do our guidance update for 2012 and give our guidance for the year in February.

So that is the timeframe there.

And then as I had mentioned earlier, three of our four markets are similar outlook, one of which is less similar.

We haven't finished our own operating plans to determine the right level of growth and margin expansion and EPS assumptions until we go through that process.

Fair enough.

Okay, and then, Pete, I think I might have missed if you guys updated the tax rate guidance.

You guys are obviously trending a little bit below the previous range you would have expected.

Wondering if you had an update there.

Yes, the update is that we are expecting 19% to 19.5% for the full year.

Okay, great.

Thanks a bunch.

Amit Bhalla, Citi.

Hi, good morning.

I wanted to ask you if you could talk a little bit about the demand for some of your short versus your longer cycle capital products.

Orders were more in line with revenue this quarter.

So maybe you could talk geographically and maybe product line between those short and long cycle products.

Yes, so when you look at the industrial and applied markets where you are really looking at GDP growth and outlook as a key driver, we saw very good demand in terms of bookings for both short cycle products like handhelds and long cycle products like materials and minerals process instrumentation.

So that was sort of my -- when I was describing the markets, that is why I picked those two.

They are very representative of short cycle, looked good.

Long lead time, later cycle stuff looked good as well.

So very good quarter for industrial and applied throughout what we have seen in 2011 so far.

And can you talk geographically?

Are there any differences along the same lines?

We have a very strong presence in Asia-Pacific with our industrials and that has been a key beneficiary.

So Asia-Pacific is going to be the fastest-growing region like it is for the Company, but not any particular nuances that are really materially different in Europe and the US and the Company as a whole.

And just a quick question on Phadia.

Now that Phadia is in your hands, in the US market, do you have any different view of blood-based testing versus skin-prick testing and how that conversion -- how quick that conversion could take place in the US market?

Thanks.

I think the assumptions that we talked about at the time of the acquisition of a slow but steady conversion of skin prick to blood-based, nothing has changed in our assumptions there.

So we see our immunodiagnostics business, which was formerly Phadia, being a very fast-growing business, high single digit, low double-digit type growth business, really driven by partially the conversion of skin-prick testing, but also the increase in asthma and allergy incidents and new products from autoimmune disease and revenue synergies that we will get.

So we think it is a business with very bright prospects.

Okay, thanks.

Peter Lawson, Mizuho Securities.

Marc, there seems to be a greater focus in your prepared commentary around share gains in the past and where those gains are coming from, it seems HPLC, but what other areas are there and what are you doing to drive that share gain?

Yes, so when you look at our commercial reach, it is unparalleled in the industry.

It is something that we talk about periodically.

We probably haven't talked about it as much in the last couple quarters, but when you look at the various product categories, clearly we gain share in chromatography, which we mentioned in the prepared remarks, but also our healthcare market channel had a very good quarter in the US in terms of performance.

Our diagnostics businesses broadly did well.

Our clinical diagnostics business performed very well in a share gain perspective and when I look at our performance in certain regions, including a country like China or India, I think -- I feel very confident that we had above-market growth through our initiatives there.

Then just on the longer term for margin expansion, is there a lot of upside for that Lab Product business or do you think that is more of kind of a cash cow for you guys?

In terms of margin expansion, you are going to see more margin expansion in Analytical Technologies and Specialty Diagnostics because, within our Lab Products business, we have our channels business which margin expansion is going to continue, but at a slower rate simply because we don't manufacture all the products and biopharma services as well where it is more of a people-intensive business.

But our Lab Products portion of that where we make equipment and consumables has really very good margin expansion prospects.

And then just finally, Peter, I missed your color on backlog, bookings versus revenue.

So I said basically bookings were in line with revenues in the quarter.

Great, thanks so much.

Jon Groberg, Macquarie.

Hi, thanks for taking the question.

So can you just, Marc or Pete, can you just remind us what the growth rate in China and India has been year-to-date and what was it in 2010?

In terms of growth rate for China and India, both are greater than 20% for the year-to-date numbers.

And I don't have it memorized what we did last year, but it was strong, it was our fastest-growing geographies.

Stronger this year than it was last year.

Yes, the rate has accelerated this year.

I guess the reason for the question is for a number -- I guess as you think about -- I know you are not giving 2012 guidance right, but these regions have been a strong driver of growth and when you were over there, Marc, to some of the other questions that have been asked earlier, I mean is your expectation that what you are seeing and what you're doing internally is able to sustain these types of growth or would you expect some deceleration from the levels that you are currently at as you think about those geographies in particular?

The way I would characterize that -- if you look at our internal plans, so assuming market is exactly the same as it is today in those regions, I believe that we can sustain these types of growth.

So if the markets get better, we'd have higher aspirations.

If the markets get worse, then you may see those growth rates come down.

But if the market conditions were exactly as they were today, there is a very good pipeline of initiatives to drive and sustain the types of growth rates you have seen.

Okay.

And then on the academic and government, if you could just clarify or maybe delineate between instruments and consumables in terms of what you saw halfway through the quarter and your outlook thinking about those two different segments.

Thanks.

The pressure we are seeing is clearly more on the equipment and instrumentation side.

I mean it is broad-based, but it is definitely more heavily weighted toward instruments and equipment and capital purchase decisions.

Okay, thanks.

Paul Knight, CLSA.

Hi, Marc.

In the past, I know Fisher has -- before it was even owned by Thermo -- had a lot of cyclicality in lab equipment, lab hoods, things tied to capacity expansion.

Is that the weakest part of what you see in the business right now?

Yes, I would say, in terms of, as Pete was just talking about, lab equipment, workstations, those types of products clearly are being impacted by weak academic and government funding and how that really shows up at the detailed level, the number of large tenders, big projects is a lot less.

So you are still getting the small replacement business, but the large projects, we saw a real slowdown in the third quarter.

Is the math correct that emerging markets are still showing one of your best growth rates of the year?

Yes, emerging markets growing very quickly and as Pete mentioned, we had very strong growth across Asia-Pacific, much, much faster than the Company average.

So we are seeing excellent momentum in our emerging markets.

Is your China expansion ahead or right on schedule for what?

Second half next year in Suzhou?

We are due to come online in the second half, which is what we were expecting in terms of it.

We just broke ground.

So depending on how fast the construction goes, it will happen sometime in the second half.

And then lastly, what happens after Suzhou?

It is it a new plant a year?

Is it a new plant every couple of years?

How do you grow the business there?

So when we look at the growth, the manufacturing footprint is part of it, but also it is commercial expansion.

So we are not constrained by how fast we put up new factories.

I think you'll see us continue to build out our presence in Asia-Pacific from a manufacturing perspective, both to take advantage of the costs, but also to be closer to the customers and deal with import duties and those types of things.

So I don't think it is a factory a year, but we have been on a trend for every couple years expanding our capacity in the region.

Okay, thank you.

Derik De Bruin, Bank of America.

Hi, good morning.

So I have kind of a multiparter here, so bear with me.

So basically since the middle of 2010 in the LPS business, we have had to deal with a number of one-offs and changes with flu and Biosite and the growth in this business has been choppy, to say the least and now we have more choppiness in terms of the academic funding.

I realize that this is workstations and the furniture and a lot of that stuff that the Fisher guys had -- that is in that Fisher business, which is unpredictable.

But I am worried that over the trend over the last few quarters, we have seen not particularly robust performance out of this business and I am just wondering does this business go back to a point where it's consistently and I stress the term consistently delivering kind of a 3% to 4% organic revenue growth range?

So it's a good question.

When I look at the Lab Products and Services business, I think we have good prospects there.

Is it to have more exposure to academic and government right now and is that a headwind?

Sure.

But I have been associated with big chunks of this business for a decade and when I look at it, I think that we have the industry-leading channel.

We will benefit from expansion in emerging markets where we have a smaller mix as a percent of the total.

So if you think about it, Asia-Pacific is much less of the total of that business in aggregate.

So therefore, it doesn't yet enjoy the full impact that the other parts of the business has.

So we are expanding that.

And if I look at our biopharma services business, I see great opportunities to help our pharmaceutical customers.

So I do think you will see that business return to a better growth prospect on a going-forward basis.

So I guess with that in mind then, can you help us break out what did biopharma services do and do in the quarter?

Just one thing I am trying to get to the underlying growth problem and where the hiccup is in the demand for it.

Because, as I said, if you are telling me that it is all equipment, it is all this and it is not the core consumables that are really being impacted, that is one thing.

But I am worried that we are starting to see weakness in the overall underlying demand for the core consumables.

So at a high level when you go into it, the primary driver of the weakness in the Lab Products and Services business is the equipment and the capital side for both our channels business and for our lab equipment business.

That is the primary driver of the weakness that we saw.

Okay, thanks.

Nandita Koshal, Barclays Capital.

Thank you.

Good morning, gentlemen.

I guess my first question would be around academic and if you could give us a little bit more color around which specific product areas.

I know you mentioned (technical difficulty) instruments versus consumables and instruments naturally being weaker.

But which specific product areas might have seen a little bit more of an impact?

And then looking forward, do we think about the continuing resolution and some sort of finality on the '12 budget as a catalyst or is this really more a super committee process overhang, which maybe continues for a few more months?

How are you thinking about an inflection in that market or some sort of rate change?

Yes, I think the way we thought about it is, for Q4, we are assuming conditions that we saw in Q3 continuing.

The reason for that is it is hard to say which is the continuing resolution, which is the super committee, but I think lack of clarity of budgets is the driver in the US as opposed to the specific budget.

And once that gets a little bit more clarity, I think customers will have more confidence to spend on bigger ticket items.

And as Pete said, if you go through the various mixes of products, it is really around instrumentation equipment was more affected in the academic and government than the consumables portion.

Was it also areas like mass spec for instance where we have seen some of the other players come out with a little bit more positive commentary because it could be an academic or outside, but could there be some sort of competitive dynamic there in that business?

When you look at the types of instruments that we make and they are sold to academic and government, that ranges from spectroscopy instruments, that ranges to mass spectrometers, it is our chromatography instruments, it is our lab equipment, it is our lab workstations.

That is the range of products that you might see in those customers.

Do I think it is a competitive dynamic?

No, I think it is a market-based dynamic is what we are facing.

That's helpful, Marc.

And I guess if you could clarify, why do you think you guys saw a little bit of a lagged impact?

Some of the other companies in the space even started seeing the effect in Q2.

Is there some sort of explanation or was this random?

What we said in Q2, the effect that we saw was -- we were expecting a bit of a pickup in Q2.

We didn't see it, but we didn't see the decline.

So I can't -- it is hard to comment on anybody else because you have to look at what did you say and expect versus what happened.

What I can say is that we saw not a pickup in Q2 that we were expecting; that is what we articulated in July.

And then we were expecting at that lower rate of growth to continue and we actually saw it go from that low growth to mid-single digit shrink.

So it is hard for me to comment on anybody else's because I don't know what their expectations were.

Operator, we have time for just one more question.

Tycho Peterson, JPMorgan.

Thanks for taking the question.

I actually want to follow up on that last question because I think it is an important point.

I mean most of your peers, or a great number of peers were pretty cautious around the second quarter talking about the academic softness.

And you seem to be a little bit more confident.

Obviously, with Phadia closing, you bumped numbers up.

So can you just talk to your visibility in the academic channel because you seem to have gotten caught flat-footed in kind of mid-September and what steps can you take to try to kind of buck the trend there going forward?

Yes, so I think when you look at the outlook for the year, basically what we said at the beginning of the year in terms of organic growth for the business and margin expansion, we have stayed consistent with that throughout the year.

And if you recall back to the very beginning of the year, what we had assumed was the headwinds that we saw in the first half of Biosite and the Japan stimulus wouldn't happen in the second half, so you have easier comparisons and you would see a little bit of a pickup in the second half because of that.

If you look at the various changes to guidance, we didn't change guidance throughout the year on those factors.

So margin expansion and organic outlook stayed consistent with what we said at the beginning of the year.

We raised guidance because of foreign exchange, tax rate and the very positive acquisitions that we did.

As we articulated in the previous call in July, what we really saw, Tycho, was we had expected a little bit of an improvement in academic and government; it didn't happen.

And we have been in this business a long time and we really haven't seen a mid-single digit decline quarter in academic/government before.

So that happened and we responded aggressively on managing costs.

We have a number of share gain initiatives I feel really good about that position us well for the future and like always, we try to provide as much clarity in the process as we possibly can.

And then can you talk to the cost-control initiatives you announced, $15 million to $17 million?

Does that impact R&D sales and any color by division?

I think it is very focused on site consolidations; it is focused on selective restructuring actions in the affected parts of the business as well; and then obviously, as Pete said, some very tight cost controls that we have in place.

So those businesses that are feeling more pressure, we have taken more aggressive actions.

But like everything, I think good cost management is part of managing a business effectively and all of our businesses are being disciplined on the cost side and are working to drive very strong bottom-line performance.

So thank you for the question.

Thank you.

So let me just wrap it up.

Thanks for joining us.

When I think about where we are, we have a very good track record, a proven track record of delivering strong adjusted EPS growth.

We demonstrated that again this quarter with 23% growth in earnings.

We remain very focused on executing on our plans to achieve our goals for the year.

So thanks for your continued support of Thermo Fisher Scientific and I look forward to updating you on our progress early in the new year.

Thanks, everyone.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.