賽默飛世爾科技 (TMO) 2012 Q1 法說會逐字稿

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

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

Kenneth Apicerno, Vice President Investor Relations.

Mr.

Apicerno, you may begin the call.

Good morning, and thank you for joining us.

On the call with me today is Marc Casper, our President and Chief Executive Officer, and Pete Wilver, Senior Vice President and Chief Financial Officer.

Please note that this call is being webcast live and will be archived on the Investor section of our website, www.thermofisher.com, under the heading Webcasts and Presentations until May 18, 2012.

A copy of the press release of our 2012 first-quarter and future expectations is available on our website under the heading Financial Results.

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

Various remarks that we may make about the Company's future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including those discussed in the Company's annual report on form 10-K for the year ended December 31, 2011, under the caption Risk Factors, which is on file with the Securities and Exchange Commission, and available on the Investor 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 first quarter 2012 earnings and future expectations, and also in the Investor section of our website under the heading Financial Information.

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

Thank you, Ken, and good morning, everyone.

Thank you for joining our call today.

We had an excellent first quarter.

It's always nice to report a strong start to the year.

I'm pleased to say that we continued our trend of consistently delivering double-digit growth and adjusted EPS.

Our teams executed well, our growth drivers continued to gain traction, and the cost-reduction programs we put in place delivered according to our plans.

All of this added up to quarterly performance that was somewhat better than our expectations.

I'll begin this morning's call by covering the financial highlights, giving you a little color on how we performed relative to our key end markets, and then getting into a bit more detail on some of our growth drivers, namely product innovation and emerging markets.

As I mentioned, we had strong double-digit adjusted EPS growth, with a 27% increase over 2011.

We also delivered strong revenue growth, with a 14% increase in the quarter.

Our adjusted operating income rose 20%, and we increased our adjusted operating margin by 90 basis points.

We continued our momentum of strong financial performance into 2012, and that positions us well to meet our goals for the year overall.

Let me turn to our end markets, and give you a high-level overview of what we saw in Q1.

First, academic and government.

While these markets were down low single digits in the quarter, they were slightly better than what we saw in the fourth quarter of 2011.

We had moderate growth in laboratory consumables and bioscience re-agents, which tells us that scientists and researchers continue to do their important work.

The capital equipment side of their spend, however, continues to be constrained as our customers are choosing to delay their larger purchases.

Conditions in health care and diagnostics were similar to what we've seen over the last several quarters, with one exception.

This quarter, we experienced weak demand from our seasonal flu and allergy products.

As you probably know, it was a light flu season this year, and we also saw the impact of unusually low pollen levels on our seasonal allergy products sold in Japan.

Sales of our clinical diagnostic products remained strong, as they have for quite a few quarters now, driven by continued demand for our innovative biomarker tests, such as our PCT marker for diagnosing sepsis.

Turning to industrial and applied markets, we saw continued strength across our portfolio, with solid performance in our businesses serving these end markets.

A couple examples were strong sales of our molecular spectroscopy instruments for quality control laboratories, as well as robust demand for our process instruments for mining and minerals customers.

Last, in pharmaceutical and biotech, we continue to grow rapidly and gain share with these customers.

We had another excellent quarter in our bio-process production business, with strong sales of Sera, media, and single-use disposable production systems.

Our BioPharma services business, where we are the largest outsourcing partner for clinical trials logistics, continues to grow in the double digits.

Given that some of our largest customers are in the biopharma space, I spent quite a bit of time with them.

I recently met with the head of R&D in one large pharma company and the head of manufacturing in another.

The feedback on the impact that we're having on their business is extremely positive, and we continue to jointly identify opportunities for further collaboration.

We believe that our scale and depth of capabilities positions Thermo Fisher with biopharma customers better than any other company in our industry.

We're committed to building on these relationships.

One area that we're very excited about is our companion diagnostics program.

This is in the early stages, but we have leveraged our strong relationships to get in front of the right decision-makers in pharma R&D organizations.

We believe that we are uniquely positioned to build out a meaningful companion diagnostics business.

Our goal is to be the key partner for the pharma industry by developing and marketing the diagnostic kits they need to support their new product launches.

Let me now turn to our new products.

Given some of the unique relationships we have with our customers, we gain great insight into their emerging needs, and that really helps to guide our product development strategy.

We also vet our R&D priorities with our Scientific Advisory Board, which includes representatives from some of the world's premier centers of health, science, and academia.

Before I get into the new product highlights from the last few months, let me just mention here that sales of our Q Exactive Mass Spec, which we introduced last year at ASMS, continues be very strong.

Our customers are clearly seeing the benefit of this high-performance instrument, with great uptake in a number of applications, including from those doing protein and peptide analysis to identify disease markers, as well as for small-molecule identification and quantitation in metabolomic studies, and those doing food safety testing.

In terms of the new product launches, we have a great lineup so far this year.

Based on the early feedback, I believe 2012 will be a banner year, considering the range of new technologies introduced, and the success they will have with a broad base of customers.

We showcased many of these new capabilities at Pittcon in the US in Q1, and at Analytica in Germany just last week.

This includes a long list of innovative, new ThermoScientific products across our analytical technology segment that addresses the need of customers in all of our key end markets.

Let me take a few minutes to cover some of the highlights.

At Pittcon, we debuted our new ion chromatography platform, the ICS 4000, which is the world's first integrated capillary high-pressure IC system.

It's ideal for high-volume environmental and industrial laboratories that demand rapid analysis without compromising performance.

The powerful combination of Thermo Scientific and Dionex is already paying dividends for our gas chromatography customers, as well.

Our introduction of the new Trace 1300 is an excellent example.

This compact, versatile GC system, which can be used for QAQC and routine environmental, chemical, and food safety analysis, runs on the gold standard Chromeleon chromatography data system.

The Trace 1300 brings new capabilities and productivity to a product category that hasn't seen any significant technology developments for years.

Continuing our legacy of innovation in mass spectrometry, we launched the new iCAP Q, an ultra-compact, highly sensitive ICP mass spec that cuts analysis time by 50% compared with the current ICPMS it replaces.

The iCAP Q is ideal for clinical research, environmental, food safety, and semiconductor applications that cover both routine and complex elemental analyses.

Demand has been incredibly robust.

We have already booked and shipped a significant number of instruments.

With our depth of capabilities, we're in a unique position to leverage our technology platforms to create entirely new growth markets.

Our new TruNarc analyzer, for example, literally puts raman spectroscopy in the hands of law enforcement for the rapid identification of suspected narcotics.

TruNarc is already gaining real interest here in the US, and in China as well.

Finally, we introduced new products that improved routine work flows for life science researchers.

One example is the PikoReal quantitative PCR system, which is an affordable, high-performance, benchtop instrument that's integrated with our bioscience re-agents and consumables for the molecular biology workflow.

We're clearly in a strong new product development cycle, and we'll be launching a number of additional products through the remainder of the year.

I look forward to covering our new innovations on future calls, as well as updating you on the results of our launches from the past few months.

I'll now make some quick comments on emerging markets, another key growth driver for us.

I recently got back from a trip to China, and I'm pleased to see that our continued investment in the region is really paying off.

China came in at 20% revenue growth in the first quarter, with continued strong demand from customers in multiple end markets.

When I'm in China, I often spend much of my time visiting customers in Shanghai and Beijing, which is also where our main offices and production facilities are located.

This particular trip, I traveled to western and central China to meet with customers and government officials in those regions to better understand their needs and how we can translate them into new growth drivers for Thermo Fisher.

You may recall that we opened a new commercial center in Chengdu in central China, last year.

We also opened a commercial center in Shenyang, and during my recent trip announced the opening of a new office in Wuhan.

We're also on track to open our new Suzhou factory in Q3, where we will manufacture lab consumables for our life science customers in the region.

It's clear that there are huge opportunities across the country.

I'm confident that our capabilities are perfectly aligned with China's growing needs in diagnostic medicine, vaccine production, and environmental monitoring, as outlined in its five-year plan.

We're also intensifying our focus on other high-growth markets like South Korea, where we recently opened a new application and customer demo center, as well as in Brazil and Russia, where we're expanding our commercial presence.

Our strategy in these markets is to replicate the successful formula we've implemented in countries like China and India.

We continue to make investments to drive growth, and it's great to see that they're creating value for our customers and strengthening our Company overall.

I've never been more excited about the excellent opportunities we have through our ongoing commitment to high-impact innovation and expansion in global markets that have high rates of growth.

We also continue to create significant value for our shareholders, as well, by effectively deploying our capital.

Our stock is a very attractive investment, and we re-purchased $300 million of our shares during the quarter.

As you know, we also initiated the first quarterly cash dividend in our Company's history, which was just paid in mid-April.

The decision by our Board to incorporate a dividend into our capital deployment strategy is based on our strong financial performance, our track record of strong cash-flow generation, and our excellent opportunities for growth.

Turning to guidance, Pete will cover the details in his comments, but given the better-than-anticipated FX rates and our strong Q1 results, we're raising both our revenue and adjusted EPS estimates for 2012.

We're raising our annual revenue guidance to a new range of $12.27 billion to $12.43 billion for 5% to 6% revenue growth year over year.

This translates to adjusted EPS of $4.71 to $4.83, which will result in 13% to 16% adjusted EPS growth over 2011.

Before I turn the call over to Pete, let me summarize the key take-aways from the quarter.

We are pleased with our strong performance and start to 2012, with good top-line results and excellent adjusted EPS growth.

Our growth initiatives are on track, with excellent new products and great progress in emerging markets.

With our continued focus on driving growth while prudently managing our costs in line with market conditions, I'm confident that we'll continue our momentum and achieve our goals for the year.

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

Pete?

Thanks, Marc.

Good morning everyone.

I'm going to start with an overview of the total Company's financial performance, and then I'll provide some color on each of our three segments before moving on to our updated guidance.

As Marc stated, we had another quarter of double-digit growth in adjusted EPS, with 27% growth to a first-quarter record of $1.17.

GAAP EPS in Q1 was $0.75, up 17%.

Starting with the top line, total revenue increased 14% year-over-year.

On a pro forma basis, as if Dionex and Phadia were owned in the prior-year, both reported and organic revenues increased by 4%.

Pro forma revenue included 1% growth from acquisitions other than Dionex and Phadia, which was offset by a 1% headwind in foreign currency translation.

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

By geography, North America grew in the low single digits, Europe grew in the mid-single digits, and Asia-Pacific in the high single digits, with China coming in strong again at 20% growth, as Marc mentioned.

Rest of world, which is less than 5% of our revenue, declined in the low single digits versus a tough comparison due to several large project orders in Q1 last year.

Turning to adjusted operating income, we had strong bottom-line results, with Q1 adjusted operating income up 20%.

Adjusted operating margin was 18.5%, up 90 basis points, with margin expansion driven by strong contribution from our productivity and cost actions, solid accretion from Dionex and Phadia, and good pull-through on our organic growth.

We did experience some unfavorable mix in the quarter as a result of weakness in specialty diagnostics seasonal products related to allergy and flu, which have higher-than- average margins.

Similar to last quarter, inflation on oil-based raw materials like plastic resin continues to be a slight headwind, but we continue to push hard on sourcing actions to offset these pressures.

We are executing as planned on the incremental restructuring actions that we initiated last year, and realized about $12 million in benefit in the quarter.

Moving on to details of the P&L, as I've stated previously, the Dionex and Phadia acquisitions both have higher-than-average gross margins, as well as higher-than-average SG&A and R&D expense.

Until they anniversary, you'll see their impact on our year-over-year margins.

Total Company adjusted gross margin was 44.3% in Q1, up 180 basis points from the prior year.

Gross margin benefited from the impact of acquisitions, our standard productivity actions, and the increase in site consolidation efforts, but mix was somewhat unfavorable.

Adjusted SG&A in Q1 was 22.9% of revenue, up 70 basis points.

Excluding the impact of acquisitions, we delivered meaningful SG&A leverage, as we tightly controlled discretionary cost and restructured our cost base, while continuing to fund our growth investments.

Last, R&D expense was 3%, up 20 basis points as a result of acquisitions.

Below the line, net interest expense increased $29 million year-over-year to $51 million, driven by higher interest expense as a result of the debt we issued last year to fund acquisitions.

Our adjusted tax rate in the quarter was 17.5%, down 300 basis points from last year, primarily as a result of tax synergies we're recognizing from acquisitions, as well as the benefit of our ongoing tax planning initiatives.

We bought back shares pretty aggressively in Q1, and deployed another $300 million of cash to buy back 6 million shares of our stock at an average price of $50.

Average diluted shares were $370 million in the quarter, down $25 million, or 6%, reflecting the benefit of our 2011 and 2012 share buy-back programs, as well as redemption of our remaining convertible debt in the first half of last year.

Turning to cash flow and the balance sheet, we continued to generate solid cash flow this quarter.

Cash flow from continuing operations was $393 million, and free cash flow was $328 million, after deducting net capital expenditures of $65 million in the quarter.

Free cash flow was up 25% year-over-year, primarily as a result of higher income and lower cash taxes.

We ended the quarter with about $800 million in cash and investments, down $225 million from Q4.

Our total debt at the end of Q1 was $6.7 billion, down $350 million from Q4, as a result of paying down some of our outstanding commercial paper.

Now, let me give you some color on this quarter's performance by each of our three segments.

Starting with Analytical Technologies, total revenue grew 21%.

On a pro forma basis, assuming Dionex was owned in the prior year, Analytical Technologies' total revenue increased 6%, and organic revenue growth was 7%.

We continue to see strong growth, both in instruments sold to biopharma, industrial, and applied markets, as well as in our businesses serving bio-process production.

Adjusted operating income in Analytical Technologies increased 35%, and adjusted operating margin was 18.4%, up 190 basis points.

This was the result of pull-through on strong organic growth, contribution from our productivity actions, and good accretion from our acquisitions.

Turning to the specialty diagnostics segment, total revenue grew 27%.

On a pro forma basis, assuming Phadia was owned in the prior year, total revenue and organic revenue both grew 1%.

We continue to see strong growth in clinical diagnostics, particularly in our biomarkers business; however, as I mentioned earlier, this segment experienced soft demand for seasonal products, due to a very weak pollen season in Japan, and the weaker-than-average global flu season.

Adjusted operating income increased 31%, with adjusted operating margin at 25.5%, up 90 basis points.

In the Laboratory Products and Services segment, total revenue and organic revenue both increased by 4%.

In the quarter, we had strong growth in laboratory consumables, and our BioPharma services business continued to deliver strong results.

Similar to last quarter, this segment was affected by the challenging conditions in our academic and government markets, primarily in routine laboratory equipment, including laboratory workstations.

Adjusted operating income grew 1%, with adjusted operating margin coming in at 13.4%.

This was 40 basis points below the year-ago quarter, but up 20 basis points sequentially from Q4.

We continue to generate strong productivity gains in this segment, but this was more than offset by unfavorable mix, and operational performance in our laboratory work stations business.

Now moving on to our guidance.

As you saw in our press release, we are increasing the high-end of our 2012 revenue guidance by $80 million, as a result of more favorable FX rates, and we're increasing the low end of our guidance by an additional $40 million as a result of our strong performance in Q1.

This leads to a new revenue guidance range of $12.27 billion to $12.43 billion, which represents reported growth of 5% to 6%.

On a pro forma basis, as if Dionex and Phadia were owned for all of the prior year, the mid-point of our organic growth guidance remains at about 3%, but is slightly higher than our previous guidance.

Although rates have improved somewhat, this guidance still assumes an unfavorable year-over-year FX impact of about $325 million in revenue, which results in a 3% headwind on adjusted EPS.

We are also assuming that completed acquisitions, other than Dionex and Phadia, will contribute a little less than 0.5% to our expected growth in 2012.

As usual, we haven't attempted to forecast future FX rates, and our guidance does not include any future acquisitions or divestitures.

In terms of full-year 2012 adjusted EPS guidance, we are also raising the high-end and tightening the range.

This is driven by the higher revenue, which is partially offset by a slightly higher share count as a result of a higher stock price.

Our revised adjusted EPS guidance range is $4.71 to $4.83, which represents 13% to 16% growth over 2011.

The bridge from the mid-point of our previous guidance to our current guidance is a $0.05 increase from incremental revenue, offset by about $0.025 dilution from share count.

In terms of adjusted operating margin, we're still expecting expansion of 70 to 90 basis points for the year.

Below the line, we're still expecting our net interest expense to be up to $55 million to $60 million year-over-year, and our adjusted income tax rate to be in the range of 17% to 18%.

We're estimating full-year average diluted share count to be in the range of $367 million to $372 million, down 3% to 5% from last year, but up slightly from our previous range due to a higher share price.

This estimate assumes that we'll use the remaining $350 million of our current share buy-back authorization through its expiration in mid-November of this year.

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

In interpreting the guidance ranges, as I've said in the past, you should focus on the mid-point as our most likely view of how we see 2012 playing out.

Results above or below the mid-point will depend on the relative strength of our markets during the year.

With that, let me say I'm pleased to start off the year with a strong quarter that positions us very well for solid growth in 2012.

Thanks, Pete.

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

(Operator Instructions)

Quintin Lai, Robert W.

Baird.

Good morning.

Congratulations on a nice start.

Thank you, Quintin.

First question, relative to yesterday, we heard some others talk about big pharma, with maybe a CapEx hold-back at the start of the year.

Marc, did you see any of that in your business?

From a pharmaceutical and biotech perspective, very strong performance for Thermo Fisher in the quarter.

Personally, I think it reflects our customers understand the value proposition that we have, and the depth of our capabilities, Quentin.

I think we are very unique in how we work with these customers.

We saw great strength across our portfolio, including our biopharm services outsourcing businesses, our bio-process production business, as well as nice growth in our instruments business.

Did that pacing keep up through the quarter, Marc?

Yes.

The quarter was strong with our pharmaceutical and biotech customers, throughout Q1.

Great.

The integration and looks like things, especially with you and Dionex are going really well.

Where do you think you're seeing the biggest potential?

Is it taking the new products that Dionex would've done on their own and sending it through the Thermo Fisher channels, or is it also selling the -- cross-selling between the two customer bases, some of the legacy Thermo Fisher and Dionex products?

I'm excited about -- obviously we were excited when we did the acquisition, I'm much more excited today, because a year -- we're almost a year into it, we're about two weeks or so away from that, and integration has gone flawlessly.

We're well ahead of our synergy targets.

We have integrated the business and the teams are working great together.

When you look at where the opportunities are, they go across a huge range of areas.

Some of them is the obvious one -- the cross-selling, right?

Each company has great commercial reach, and we're helping the legacy Dionex business scale up and reach customers that they couldn't in the past.

We're aggressively leveraging the strength that Dionex had in environmental customers to sell a lot more of our ICPs and other environmental products.

Our connect rate between mass specs and liquid chromatographs are continuing to increase substantially, which means we're basically taking what would've been legacy competition LCs and now keeping the profitability in house.

In the product development cycle, as well.

We are a number three player in gas chromatography.

There's a very large number one player, in terms of market share.

It's been a very boring category in terms of innovation, and we took the incredible Dionex software, with very unique innovations in our hardware platform, and are aggressively going after the gas chromatography market., I think it's going well.

It's going well in a number of fronts.

I feel like we're just getting started.

(Operator Instructions)

Doug Schenkel, Cowen and Company

Good morning.

Thanks for taking the questions.

Pete, based on your prepared remarks about guidance, where I believe you said you increased the low end of the full-year revenue guidance range by $40 million due to the Q1 beat, if it's right to conclude that means you beat your internal expectations by $40 million in the quarter, could you just talk about some areas where you did a little bit better than internal planned?

In terms of full-year guidance, it sounds like all you did is just adjusted for the Q1 beat and the changes in FX.

Given that it does seem like a little bit better than internal plan in Q1, could you just talk about the thinking, or the reasoning behind not being a little bit more aggressive with the guidance?

I'll start, Doug, and thanks for the question.

In terms of guidance, as you know, we always focus on the mid-point.

As the year unfolds, we make adjustments where we think it makes sense.

Having the change in FX rates, we basically took that and flowed it through both the top end of the guidance and the bottom end, that was the $80 million.

Because Q1 was a good quarter, above our expectations, the lowest end of the scenario in our original guidance seemed less likely, and hence we lowered that -- excuse me, hence we raised that after the first quarter.

That was the 40 million of operational performance.

Just given a good quarter behind you, it's just less likely that you're going to have that low end view.

In terms of -- it's a little bit early in the year to change the high end operationally, because we've still got three quarters ahead of us, and there's still obviously some uncertainty in the end market.

That's how we thought about it.

If you want to say the next level is what went well, relative to our expectations, we saw a slight improvement in academic and government end markets.

It was still down low single digits, but it was actually a little bit better than Q4.

That was an improvement that we noted, and it was nice to see continued strength in industrial and biopharma customers across the business.

Okay.

One real quick clarifying follow-up.

Unlike some of your competitors, I believe you did not have an extra day in the quarter.

I know that was something that's come up this morning as just people have asked me what the impact was.

I don't think you guys had an extra day, could you just confirm that?

That's true.

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

Okay, thanks a lot.

Amit Bhalla, Citi.

Hi, good morning.

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

India grew for us low single digits for the Company, a little bit slower than some of the recent quarters, but, we did grow.

We had good momentum in our instruments business in the quarter.

Okay.

My follow-up on the academic government end market, down low single digits.

Can you give us a little bit more color on how labs are approaching 2012, and how they're thinking about the potential for budget cuts in 2013?

I think, as we see, and we talked to lots of customers -- basically, researchers are working, right?

Consumables, bio-science re-agents, you're doing experiments.

Demand has been reasonable for those products.

Capital equipment has been muted, as customers are making sure that they have money to pay salaries and other things in an uncertain environment that happens later in the year.

We continue to see softer demand, particularly for more routine types of capital equipment.

Our lab equipment, lower-end instruments, lab work stations, saw pressures.

We continue to do great, of course, with our mass spec business across a number of customers.

Thank you very much.

John Groberg, Macquarie.

This is Travis Steed on for John.

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

Certainly, we raised the guidance for FX by about $75 million from where we were before.

If you look at today's spot rates, that would say that it should probably be a little bit higher, so I'd say we are being still a little bit conservative against spot rates.

Of course, if we see a 1.25 Euro, I think us and everyone else are going to have to take our guidance down.

It takes into account some minor movements, but nothing -- we would never try to -- be so conservative as to predict something like that.

Sure.

As a follow-up, a lot of people are talking about companion diagnostics.

What products are you planning on using to use to partner with pharma, on companion diagnostics?

In terms of our companion diagnostics portfolio, we have the largest number of detection technologies of any company, ranging from what would have historically been life science tools like mass spectrometry, all the way to an incredible array of immuno assays clinical chemistry products.

Our Phadia acquisition brought great new capabilities in terms of our great strength in the autoimmunity and allergy area, so we'll pull those businesses together into a unique offering, where our customers can tell us the challenge that they're trying to find from a pharmaceutical perspective, and we can identify the right technology to help them tackle those needs.

Given our commercial reach, once those products make it to market, we obviously have the ability to then market those diagnostic products to laboratories.

We're excited.

We've always had some presence in companion diagnostics, but the combination of Phadia with Thermo Fisher gives us a really nice momentum as we focus on that area.

Thank you.

Peter Lawson, Mizuho Securities.

Marc, just around the potential weakness for academia as we roll through the year, what can you do with -- to work with US academia to kind of stop the freeze in spend?

We, along with other industry participants, are active in Washington.

We talk to Congress about the importance of US competitiveness and NIH spending.

We try to do the right thing for the country, which is to protect one of the core strength of the US, which is our biopharmaceutical medical device industries.

We're an active participant in trying to do that.

I know that both sides of the aisle, if you will, are very supportive of NIH spending.

It's just a question of whether a budget enhancement can happen at a macro level.

If it does, NIH will do okay, if it doesn't, there will obviously be challenges.

Is there anything at the customer level you can do?

Yes.

Our value proposition is very helpful.

If you think about it, over the last five years, we've gained a lot of share with biopharma customers by leveraging our unique offering, which is driving productivity.

Those tools and learnings that we've had from that customer set are just as applicable to academic labs.

We're able to help them stretch their dollars, buy the right products, leverage our scale and depth of capabilities to drive share gains.

From that viewpoint, I feel like we're going to be very well-positioned to do well in that end market, even if the spending is more muted.

Thank you so much.

Jon Wood Jefferies.

Thank you, good morning.

Either Mark or Pete, going back to your comments on uses of cash, I think you guys have talked about getting the leverage ratio down probably another 50 basis points or so going into 2013 from where it is today.

Can you just kind of update us on how you see the M&A landscape, your appetite for incremental M&A vis a vis that kind of leverage goal?

It seems like you've got another $400 million or $500 million of debt pay-down to go this year.

Is that the right way to think about it, or the right level to model?

Jon, from my perspective, we will continue to evaluate M&A opportunities against our well-understood criteria.

We look at acquisitions as strengthening the Company strategically, significantly improve the value proposition from a customer perspective, and of course, create shareholder value.

We continue to evaluate acquisitions, and for those that meet that criteria and we feel good about, we'd obviously pursue.

Those that don't, we pass on.

We've been able to improve our debt-to-EBITDA ratios on a combination of repaying debt, but also we're growing our earnings nicely.

We'll continue to focus on some level of debt reduction as we go through the year, and we'll evaluate M&A.

We don't commit to a specific number on the M&A side, because we don't know whether there's going to be transactions that we like or not.

Okay, thank you.

Daniel Brennan, Morgan Stanley.

Thank you for taking the call.

For the specialty diagnostics division, can you just quantify how much the weakness in the global flu and the weak results in Japan impact the results this quarter?

Also, could you comment specifically on Phadia's performance, and how this compared with expectations?

In terms of the flu and allergy, so seasonal-related project -- products, it was about 50 basis points for the full Company, and about 2 percentage points for the segment.

In terms of Phadia, actually, I think the business is performing well.

If you look at US allergy, which is a key growth driver for us, very strong double-digit growth.

If you look at the autoimmunity business, very strong growth.

Japan, a real headwind, but that's seasonal.

Effectively, we always plan for a normal season, sometimes it's better, sometimes it's normal, sometimes it's worse.

Not a big concern, one way or the other.

Thank you for that.

How do we think about, just kind of going forward.

What do you think a good normalized run rate is for the specialty diagnostics division that we should be using?

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

Great, thank you.

Tycho Peterson JPMorgan.

I just wanted to follow up on an earlier question on guidance that Doug had asked and if we go back, last year, obviously you had raised twice question and then had the issues in the third quarter.

As we think about your philosophy around guidance, is there a chance you are baking a little bit more cushion here throughout this year, in light of the macro backdrop?

I don't want to be reminded too much of last year, Tycho, but I would say that we learned, from every day we come to work, our job is to learn.

I don't actually think it's more cushion or less cushion, I think that we're just -- we try to get smarter every day and every year.

I feel reasonable about our guidance.

We think about what could go wrong in the world, and what could go right, and what is in our control, and what's outside of our control.

We put our best view of guidance together.

We feel comfortable with raising our guidance at the end of Q1, based on our outlook.

Okay.

Going back to the biopharma issue, and I know you've had a couple questions on this already, we did get very different messages from one of your peers yesterday.

Can you just comment on whether there's a delay in the release of the pharma budgets?

Obviously, your numbers were good and didn't reflect that.

As you talk to pharma companies, can you just talk about their release of budgets in kind of the March and April time frame?

We didn't have any biopharma issues, so from my perspective, we're executing great in the biopharma segment.

None of our commercial teams have mentioned once about delays in budgets or those things.

I don't know.

I visit most of the top pharmaceutical customers personally.

I speak to the CEOs, as I mentioned on the call, heads of R&D, heads of manufacturing, we understand their challenges and what they're working through.

Maybe we're just gaining share, I don't know.

But it's performed well now quarter-after quarter for a very long time.

Last one.

We've had a number of people asking about the Amazon news this week.

It looks like they're distributing some of your products with the Amazon supply business.

Can you just talk about that dynamic and how you view the channel business on a go-forward basis?

Yes, channel business is doing well.

In terms of Amazon, we don't see anything material going on there.

Okay, but they are distributing your products, so you have an agreement with them?

They're listing a few of our products.

We have several hundred thousand SKUs and I think there are 500 or so on Amazon that are all very low volume, so from that perspective, it's pretty -- it's truly insignificant.

Okay.

Thank you.

Vamil Divan, Credit Suisse.

One thing, I know you talked about Dionex and Phadia improving your gross margins.

Can you give any sort of sense, just as we're modeling here, can you pull that out a little?

Just looking at the legacy Thermo business, how the gross margins would've been for the quarter?

Honestly, I don't have that number in front of me.

When you look at Dionex, that business is fully integrated into an existing division.

Phadia is separate, still.

We don't have -- I know qualitatively that's the case, but I don't have the specific numbers, and we don't, honestly, track it.

We're measuring our chromatography and mass spec division as a business now, and not as two different pieces.

I know it's favorable, but I don't have the exact number.

Okay.

One other question, different topic.

On the companion diagnostics pulling up on the earlier question, I know there are other, obviously other companies focused on this space, also.

I think one of the questions we all have is kind of what sort of financial impact can that have?

My question to you, given how large your sales base is, what type of impact do you think it could have in terms of growth, and when could we see, maybe see that sort of impact, in terms of the timing?

From my perspective, every quarter, I picked a growth vignette that I want to highlight to show all of the great things we have going on in the Company.

Sometimes I pick countries, sometimes I pick product ranges.

When you have such a dominant industry leader, it's hard, sometimes, to understand all the good activities going on.

In this particular quarter, I wanted to focus on companion diagnostics, because it highlights convergence of life science tools and diagnostics and how we play.

It also shows the impact of a new acquisition on the Company.

It's already showing up in our results.

Is it going to be a meaningful number?

It could take a long time, right?

Because drugs have to make it through the pipeline, you've got to fund R&D jointly with pharmaceutical companies.

We're generating revenue.

We've got a lot of good activity, we're improving our reputation.

I think we're well-positioned to win in that space.

Thank you.

Isaac Ro, Goldman Sachs.

Good morning.

Thank you for taking the question.

To start in the mass spec and pharma services side -- first off, do you guys think you're gaining market share in mass spec?

Secondly in pharma services, maybe if you could comment a little bit on how fragmented you think that opportunity is, and maybe the sustainability of the double-digit growth you're seeing there?

In terms of mass spec, yes, I do believe that we're gaining share.

The Q Exactive is a fantastic product, and it's doing very well.

I picked three very different applications in terms of where it's gaining share -- large molecule, small molecule, and applied.

This isn't just a one-trick pony.

I feel like it's a revolutionary product.

We marketed it that way both to the investor community, but more importantly, to the customer community back middle of last year.

Nine months later, it's nice, and no surprise that it's doing exactly what we said it was going to do.

Yes, I feel good about mass spec.

In terms of biopharma services business, we have good momentum there.

It's primarily about how fast do customers move from in-house capabilities to outsourcing.

We've had great momentum for a lot of quarters.

You won't have that every single quarter, but I think the fundamental trends of pharmaceutical companies outsourcing more to lower-cost, higher-quality producers is a trend that will be with us for a very long time, and we're uniquely positioned as the industry leader in that offering.

Great, and then maybe second for modeling purposes, if I can a question on Phadia.

I appreciate the comments you made on the seasonality you've seen year-to-date for the allergy/flu trend.

I was also just wondering if you see opportunities in the back half for major contract wins, or expansion of your existing relationships in that business, that could maybe help offset the typical seasonality you see in that business?

I think the business is executing well.

In terms of will we offset the Japan numbers -- I don't know whether we will or won't.

The team feels very focused on trying to do that.

If we do, that's great, but reality is, it had no impact in our overall performance, right?

It was a headwind, it was dollars of headwinds that we would like not to have had, but we powered right through it as a Company.

We delivered above -- growth rates above our own internal expectations and certainly above what the external view was.

It's not an excuse.

We talked about it purely as a clarifying comment.

Got it.

Thanks a bunch.

Dan Arias, UBS.

Marc, just a question on the industrial segment.

It looks like demand there is still strong.

Obviously, the macro picture is mixed.

What is the tone amongst customers when you speak to them about spending at this point, and generally speaking, we're you get the sense that they are in terms of their new product cycles?

In terms of industrial and applied markets, as you mentioned and we did as well, it was a good quarter.

We saw strong demand, broadly, across our business serving those markets.

As I mentioned, molecular spectroscopy was good, process instruments were good, hand-held instruments were good, mass spec for those applications were strong, so very solid in terms of Q1.

Customer feedback is good, as we said on our last call.

Comps get a little tougher for us as the year unfolds.

That's something that we had in our original view on guidance, and that's a fact, but at least from a customer perspective, it looks pretty good.

Okay, thanks.

Can you just update us on facility rationalizations.

Do you think that the level of closures this year could be in that low 20s range that you've seen in the past, and maybe what portion of margin improvement this year might come from those efforts?

As I said last quarter, when I gave a lot more detail on our full-year guidance, we're expecting about $50 million of benefit, year-over-year from site closures.

We initiated more than 20 last year.

The number that will actually physically close this year, I don't have off the top of my head, my guess is it's between 15 and 20.

Thanks.

Sung Ji Nam, Cantor Fitzgerald.

Hi, thanks for taking the question.

Marc, I think you mentioned pretty solid growth in Europe in the quarter.

Could you maybe give us more color around what you saw by, I guess, the different end markets, like industrial versus pharma, et cetera, and also the outlook there for the remainder of the year?

In terms of Europe, the performance in Q1 was actually pretty similar to what we saw in the fourth quarter in terms of the end markets.

Geographically, northern Europe stronger than southern Europe.

That's not a surprise.

We saw good strength and industrial customers across the continent period, from that perspective as well.

Okay, and just a quick follow-up, going back to Phadia.

Just a clarification, there.

The allergy business, you did not have any other allergy business before Phadia acquisition?

That is correct.

From the seasonality perspective, should we anticipate this to have a similar lumpiness, if you will, that you might normally see in the flu business, going forward?

Is that fair to assume that?

When you look at the allergy business, basically, the majority of the business is your normal allergy work, with some seasonal allergies, really pollen-related, around the world.

The seasonal portion of the allergy business, is a Q1, Q2 phenomenon.

Typically, Japan is more of a Q1.

Europe and the US is typically more of a Q2.

It really just moves the incremental growth one way or the other.

The base underlying business, the trends are very positive, as allergy demand continues to be strong.

Great, thank you.

Steve Willoughby, Cleveland Research.

Good morning.

Just wondering, regarding the lab products and services side, you did 4% organic growth this quarter.

I believe you're going against your most difficult two-year comp in the first quarter.

I was just wondering where you think -- what you're thinking about organic growth over the remainder of the year in that business.

As Marc said earlier about specialty diagnostics, we don't really like to get into giving guidance, in terms of growth by segment, but, we're happy with a 4% growth in the first quarter.

We're expecting to continue to grow for the rest of the year, probably low single digits.

Okay, just a quick follow-up.

Do you still expect 70 to 90 basis points of operating margin improvement this year?

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

Thanks very much.

Paul Knight, CLSA

You had mentioned in the past that in a normal economic time and governments in a funding environment, you might be able to reach 5%-ish on organic.

Do you think that's higher now, if we do ever get back to a normalized period?

I think everyone on this call has heard me say a number of times that Thermo Fisher is a solidly mid-single-digit organic growth Company.

I feel very confident about that because of our unique value proposition, our scale and depth of capabilities, our great and expanding presence in emerging markets, and our incredible track record of innovation and a bright outlook for new products.

Our job is to manage to those mid-single-digit targets in various market conditions.

It's not always possible every single quarter especially if the world is difficult.

I'm pleased with how we did in Q1 from a revenue perspective.

Obviously, if we get more tail winds in a particular customer segment, it means that we're going to grow more, and we would be thrilled when that happens.

I know part of your China strategy has been to expand manufacturing, with Suzhou happening this year.

Does it stop there, or does it just continue?

Our perspective on manufacturing, the focus has actually shifted a little bit over the years.

A lot of what we're doing in the region is actually for the local customer base now.

These are big facilities, but they're really fueling demand locally, which is good.

It means you have better supply chain, lower-cost, less duties, all of those things that actually make your economics better.

Suzhou factory will be serving lab products broadly.

It's a big facility with lots of room for expansion.

We don't have any plans for another factory after that.

The next move, as the growth continues, would be to expand that facility.

That would be the next phase of growth.

Okay, thanks.

Daniel Leonard, Leerink Swann.

Just a couple questions on guidance assumptions.

Number one, can you remind us, for the lab products and services business, are you expecting the operating margin to be flat, up, or down in 2012, and what the drivers would be behind that?

Again, I don't want to get into specific guidance.

It should be -- I said last quarter we were expecting margins to stabilize, that's happening.

We were down 40 basis points, but we're up sequentially.

For the full year, I think flat margin it probably as good an assumption as any.

Okay, thanks.

My follow-up, in terms of the academic and government markets being down low single digits, are you assuming, in your guidance, that remains down low single digits for the entirety of the year, or would you expect there is some flattening on an easier comp in the back half of the year?

From a view -- and when we do our plan we don't measure every end market by every quarter -- we usually do it by business.

We know that comparisons get easier as the year unfolds in academic and government., but we also know that customer uncertainty is likely to increase a little bit until the budget is resolved, which if it's going to get resolved, is likely to happen late fourth quarter.

We're assuming that for the full year it's going to be down low single digits.

We're not making dramatic changes quarter-by-quarter on how that's going to play out.

Okay, thank you.

Operator, we're going to take just one more.

David Ferreiro, Oppenheimer.

Thanks for sneaking me in.

Just a quick question for Pete.

I think you've mentioned this in the prepared remarks, but I wonder if you could reiterate that -- just general pricing trends in the quarter, what you saw, and then maybe an update on the outlook for the year?

Thanks.

I didn't mention it in my comments, but we basically saw pricing similar to what we've been seeing for the last number of quarters, somewhere between 50 and 100 basis points, and our expectation is that's going to continue for the rest of the year.

Still, more favorable pricing on consumables, as opposed to equipment.

Thank you very much.

We actually still have time for just one more.

Derik De Bruin, Bank of America.

Hi Ken, thanks.

I thought you forgot about me for a moment.

Talking a little bit more about the competitive landscape, two questions.

Marc, you've spent a lot of time and effort building out these Chinese facilities, and trying to build that out as a consumables market and doing it like that.

Can you talk a little bit broadly about how your initial steps have been there?

I guess, how big is that?

When we think about the laboratory consumables market in China and the APAC region.

How big is that?

Give us an idea of the magnitude of that relative to the North American markets?

That's the first question, and I'll follow that up with something.

The lab consumables opportunity is meaningful.

Today, we have roughly a $600 million business in China, probably 10% of that is lab consumables.

It could easily be triple that in terms of our opportunity over time.

It's obviously growing as well.

That's a good growth opportunity for us.

Okay, that's helpful.

Could you talk about your successes or just your experiences and attitudes -- you acquired some of the real-time PCR assays, I think that was Fermentas and some of those products there.

There's obviously going to be some changes in the market there as patents have come off.

Can you talk about your successes, are you making any in-roads in the market there?

What customers are trying your products using that?

A little bit more on that competitive landscape in that market?

Basically, we've launched a low-cost, high-performance instrument for qPCR.

It came through an acquisition complement, on the instrument side complemented, with the re-agents from Fermentas.

We're targeting the areas where we, as a Company, have tremendous strength.

Things like the food-testing market.

Those labs are going to be the early adopters.

We'll work our way across the customer base.

We'll be leveraging our channel to drive growth there.

It's early, and we're a small-share player with those technologies.

We didn't make a huge investment to get into that space, but we feel like we're well-positioned to grow well.

Thanks.

Thank you Derik.

Let me wrap up.

Let me add a couple thoughts.

First, we are pleased with our strong start to the year.

Second, our growth investments are clearly paying off, with a strong pipeline of new products, and accelerated expansion in emerging markets.

During the quarter, we continued our track record of delivering double-digit adjusted EPS growth.

That puts us in an excellent position to deliver on our goals for 2012.

Thank you for your support of Thermo Fisher Scientific.

I look forward to updating you next quarter.

Thanks everyone.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, and have a great day.