賽默飛世爾科技 (TMO) 2013 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2013 third-quarter earnings conference call.

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

Later, we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions)

As a reminder, today's call is being recorded.

I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President Investor Relations.

Mr. Apicerno, you may begin the call.

Thank you.

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 November 22, 2013.

A copy of the press release of our 2013 third-quarter earnings 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 quarterly report on form 10-Q for the quarter ended June 29, 2013 under the caption Risk Factors, which is on file with the Securities and Exchange Commission and available in 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 the call today, 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 2013 earnings and future expectations and also in the investor section of our website under the heading Financial Information.

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

Thanks Ken.

Good morning everyone.

Thanks for joining us today for our third-quarter earnings call.

I'm pleased to report that we executed well to deliver strong bottom-line performance again this quarter, continuing the excellent growth momentum we have had all year.

In the challenging market environment, we delivered 2% organic growth, which keeps us on track to achieve our full-year guidance.

Our bottom line results are a testament to our operational discipline and our ability to deliver strong earnings growth.

With three quarters of the year behind us, I am confident that we will achieve the growth goals we laid out for 2013.

With that, let's move into the highlights from the quarter starting with the financials.

Our revenue and adjusted EPS were both third-quarter records.

Reported revenue grew 3%, and adjusted EPS rose 9%.

Turning to operating income, our adjusted operating income grew 8%, and adjusted operating margin was a particular bright spot with 70 basis points of expansion.

Pete will go through the details behind our strong operating performance in the quarter, but as you know, we are always driving productivity across our businesses.

We use our PPI business system to improve our processes so we can deliver the best products and services to our customers as efficiently as possible.

This strengthens our competitive position and strengthens our bottom line.

Let me take a moment now to talk about our performance with the current market environment as the backdrop.

At a macro level, we have generally seen a continuation of the market conditions we've experienced all year.

I will give you some color on the performance by our four key end markets.

Starting with academic and government, because it is probably top of mind, this end market was somewhat softer in Q3 given the environment in the US.

As a result, we were down here in the low single digits.

Our customers continue to feel the effects of sequestration along with the added uncertainty leading up to the budget standoff late in the quarter.

Of course, the deal reached last week ensures that sequestration will be with us for the balance of the year.

That said, we benefited from certain academic and government markets outside of the US.

The best example is a significant order for analytical instruments that was shipped to the Japanese National Police Agency for use in forensic toxicology and drugs of abuse screening.

This was a result of a relationship we built with this agency since we first supplied them with mass spectrometers back in 2008.

Turning to industrial and applied markets, they pretty much played out as we expected, and we reported low single digit growth here against an easy comp in Q3 last year.

Getting into the details, core industrial markets remain weak overall as they have been through the first half of the year.

Our businesses serving these customers continue to face a challenging environment.

And we still have an inflection point -- we still haven't seen an inflection point.

However, we continue to see strength in some applied markets, particularly in China, which was an offset to the core industrial softness.

Turning to healthcare and diagnostics, we didn't see any significant change here during the quarter, and our growth remains in the low single digits in Q3.

We saw a carryover of the softness we experienced in Q2 as a result of lower healthcare utilization in the US, and our anatomical pathology business continues to be affected by lower US reimbursement rates.

The bright spots here was the performance of our transplant diagnostics business, formally One Lambda.

Although it was not included in our organic growth until mid-September, it stretched over a year now since we acquired the business, which provides antibody and molecular tests to improve outcomes for transplant patients.

It has been a very nice addition to our specialty diagnostics portfolio.

In the first year of ownership, transplant diagnostics delivered high single digit revenue growth.

Finally in our pharma and biotech end markets, we continue to perform very well, growing in the high single digits.

Our ongoing momentum here is a clear sign that our value proposition is resonating with these customers, and we're continuing to gain share.

To sum it all up, the overall market environment has been consistent with what we have seen all year long.

We continue to look at this as an opportunity to leverage our scale and unique depth of capabilities to help our customers manage through and achieve their own success.

Before I move on to our growth drivers and the business highlights for the quarter, let me give you a quick update on our pending acquisition of Life Technologies.

First, as you probably know, Life Technologies' shareholders voted to approve the transaction in late August.

In addition to that important milestone, the integration planning teams are right on schedule, and day one planning is nearly complete.

We continue to work through the regulatory process, and Pete will give you an update on our financing activities.

Now that we're getting into the more detailed planning, we continue to feel very good about the synergy targets we originally laid out.

The teams from both companies are excited about the value this combination will create for our customers, our employees and our shareholders.

As we stated when we first announced the transaction, we continue to expect an early 2014 close.

Now I will turn to some of the business highlights for the quarter in line with the elements of our growth strategy, specifically around technology innovation and our presence in emerging markets.

It has been a terrific year for us in terms of innovation, and you know about our major Thermo Scientific product launches in the first half of the year at both Pittcon and the American Society of Mass Spectrometry.

Before I cover our Q3 highlights, let me take a moment to remind you of the profound impact our new products are having on our customers.

You'll recall that we launched three new mass spectrometry platforms at ASMS, the Orbitrap Fusion Tribrid for sciences applications, and the Endura and Quantiva triple quads which are geared more towards customers and applied markets.

We've had great customer uptake of these products, and we began shipping all three in the quarter.

Let me relay a brief anecdote shared by one of our early adopters of the Fusion system, Dr. Josh Coon from the University of Wisconsin.

In proteomic research, yeast has served as a common test organism for many years.

In the past, it had taken about four hours to analyze a single yeast proteome.

But with the Fusion Tribrid, Dr. Coon and his team were able to perform a complete analysis in one hour.

Dr. Coon described the Fusion's blazing spectral acquisition speed as truly unprecedented.

He said that the fourfold reduction in analysis time will transform the speed and number of proteomes that can be analyzed, opening up new avenues of research.

Dr. Coon also predicts that the comprehensive analysis of the human proteome in just a few hours is within reach using this exciting new platform.

I think this tells you why we label some of these new technologies as groundbreaking and why we have been investing to keep our innovation pipeline strong.

While we like to talk about mass spec innovation because of our leadership position, I want to emphasize that we innovate across our technology platforms.

In Q3, we launched a number of new Thermo Scientific products as we do just about every quarter.

At the American Association of Clinical Chemistry, we announced two of our products received FDA 510k clearance.

One was our tacrolimus immunoassay used in organ transplant monitoring, and the other was our MAS Omni Cardio control, which improves cardiac testing.

At the BioProcess International conference held last month, Thermo Fisher showcased new innovations that for the first time combined our bioscience and analytical instrument technologies for BioProcess applications.

We introduced several technologies that meet increasing customer demand for the development and production of biologics.

I'll just mention one of them.

We launched our first benchtop process mass spec for biologics research, the Prima BT gas analyzer.

Customers can now analyze complex gases that are a byproduct of the cell culture process so they can better understand cell growth and more quickly scale up production.

Last I want to highlight a new product in one of our portable instrument offerings.

At our analyst meeting last May, we talked about our microPHAZIR AG analyzer, which is used for testing in animal feed, which at the time was still in development.

We launched the product in Q3, opening a completely new market by helping feed manufacturers do on-site inspection to improve quality and reduce production costs.

I think my recap makes it clear that we have a strong innovation pipeline, and we have launched significant products across our businesses all year long.

Turning to Asia Pacific and emerging markets, our growing presence in these regions is creating value for our customers, and our teams there delivered other great quarter.

We continued our excellent growth momentum in China with 20% revenue growth in Q3.

I recently returned from a trip to China in September, and our teams are doing a great job leveraging our unique scale and depth of capabilities to gain market share.

The opportunities in China are perfectly aligned with our mission to enable our customers to make the world healthier, cleaner and safer.

Let me give you a couple of examples.

We won a significant order to supply laboratory equipment to the Chinese Center for Disease Control and Prevention.

Only locally manufactured products were considered for this project, and our new Suzhou manufacturing center was a key factor in this customer win.

In air quality monitoring, we continue to see a steady source of growth for us.

You may recall that we moved the headquarters of this business to China a few years back, and it has really helped us to gain greater access to this important growth market.

We expanded our presence in Asia Pacific during the quarter as well by opening a new production facility in Singapore to support increasing global demand for vaccines, therapeutic drugs and other biologics.

This added capacity will help ensure a safe and uninterrupted supply of materials for our biopharma customers, and it will also serve as a logistics hub for the efficient delivery of these critical supplies.

Turning to Brazil, we continued our strong momentum here as well, growing better than 20% in Q3.

We're strengthening our commercial presence in Brazil to support the country's rapid growth.

Turning now to our guidance, as you saw in our press release, with three strong quarters behind us, we are raising the low end of both our revenue and adjusted EPS guidance.

Pete will cover the details, but at a high level, we're bringing up the low end of our revenue guidance by $40 million and now expect to deliver between $12.87 billon and $12.95 billion in 2013.

This will result in 3% to 4% growth for the year.

We are also raising the low end of our adjusted EPS by $0.02 this quarter for growth of 7% to 9% over last year.

Before I turn the call over to Pete, let me leave you with the key points of the quarter.

First, we executed well to deliver another strong quarter of adjusted EPS growth.

Our scale and depth of capabilities are key competitive advantage, and we continue to build on our leadership positions.

The integration planning for Life Technologies is progressing well, and we look forward to the value this transaction will create.

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

Thanks Marc.

Good morning everyone.

As I have done in the past, I will start with an overview of our financial performance for the total company, provide some color on each of our three segments, briefly review the status of our financing activities related to the Life Technologies acquisition and then conclude with some color on our updated 2013 guidance.

As you saw in our press release and heard from Marc, we delivered a solid quarter resulting in a 9% increase in adjusted EPS to $1.30.

GAAP EPS in Q3 was $0.86, also up 9% from $0.79 in Q3 last year.

Looking at the top line, Q3 total revenue increased 3% year-over-year, and we delivered 2% organic growth.

Q3 reported revenue includes 1% growth from acquisitions and a nominal negative impact from foreign exchange.

Although the revenue impact of FX in the quarter was minimal, similar to the past few quarters, the mix of currencies including the weakening of the Japanese yen drove a significant negative impact on earnings.

This resulted in about 40 basis points of adjusted operating margin dilution and $0.03 or 2% of adjusted EPS dilution year over year in the quarter.

In terms of orders, we returned to growth in our backlog with bookings slightly exceeding revenue in the quarter.

By geography, North America declined slightly, Europe grew in the low single digits, and consistent with previous quarters, Asia Pacific grew in the high single digits with China once again delivering very strong growth of 20%.

Rest of world grew over 20%, primarily driven by Latin America.

Looking at our operational performance, Q3 adjusted operating income was up 8%, and we delivered very strong adjusted operating margin of 19.4%, up of 70 basis points from the prior year.

Our adjusted operating margin expansion was driven by very strong contribution from our primary productivity levers, global sourcing, site consolidations and our PPI business system, and we also benefited from acquisition accretion.

These gains were partially offset by growth investments and foreign exchange.

The $85 million benefit from restructuring actions that we previously communicated for this year continues to provide some offset to the FX headwind.

In total, we realized about $20 million of benefit from these restructuring actions in Q3 and about $65 million year to date.

In terms of driving growth, we continue to make strategic investments, primarily in emerging markets to strengthen our global presence and to continue our strong growth momentum there.

Moving on to the details of the P&L, total company adjusted gross margin came in at 44% in Q3, flat to the prior year with accretion from acquisitions being offset by unfavorable foreign exchange.

Adjusted SG&A in Q3 was 21.6% of revenue, down 70 basis points from the 2012 quarter as a result of volume leverage and the previously mentioned productivity actions.

Finally, R&D expense came in at 3% of revenue, essentially flat with the prior year.

Below the line, net interest expense in Q3 was $57 million, $3 million above last year as a result of the debt we issued in mid Q3 2012 to fund the One Lambda acquisition.

Our adjusted tax rate in the quarter was 15.3%, consistent with our previous guidance and 160 basis points lower than last year as a result of acquisition tax synergies and our ongoing tax planning efforts.

In terms of returning capital, we paid out $54 million in dividends to our shareholders in the quarter, and as discussed in previous calls, we have suspended our share buyback program in light of our pending acquisition of Life Technologies, so there were no share buybacks in the quarter.

Average diluted shares were $367.3 million in Q3, up $1.9 million or 1% from last year, reflecting the accounting impact of the equity forward we entered into in the second quarter.

Our share count increased by 3.8 million shares from Q2, primarily as a result of the equity forward accounting and option dilution.

Turning to cash flow and the balance sheet, cash flow from continuing operations for the first 9 months of the year was $1.29 billion, and free cash flow was $1.11 billion after deducting net capital expenditures of $170 million.

Year-to-date free cash flow was down slightly from the prior year, primarily as a result of increased working capital investment along with financing fees and transaction costs related to Life Technologies.

We ended the quarter with $1.85 billion in cash and investments, up $480 million sequentially from Q2 driven by our strong free cash flow.

This build in our cash balance is tracking in line with our expectations related to the Life Technologies financing.

Our total debt at the end of Q3 was $7.11 billion, essentially flat with Q2.

Let me wrap up my comments on the total Company with a quick update on our return on invested capital performance.

Our trailing 12-month adjusted ROIC through the third quarter of 2013 was 9.8%, up 10 basis points from Q2, so we continue to make good progress on this important metric.

With that, now I'll walk you through the performance of our three business segments.

Starting with analytical technologies, in Q3, total revenue grew 1%, and organic revenue also increased 1%.

We had strong growth in our mass spec business again this quarter, and we're seeing great traction from the mass specs we launched at ASMS in June.

And we continue to benefit from great performance in China.

We also saw good growth in instrumentation for the applied markets.

This growth was partially offset by the softness we continue to see in our core industrial markets, which are most highly represented in this segment, as well as in some US government funded projects.

Adjusted operating income in analytical technologies decreased 3%, and adjusted operating margin was 18.1%, down 80 basis points.

During the quarter, we were negatively impacted by foreign exchange, product mix and strategic investments, which were partially offset by continued strong productivity.

Turning to the specialty diagnostic segment, in Q3 total revenue grew 7%, and organic growth was 1%.

In the quarter, we delivered good growth in our clinical diagnostics business, specifically in bio markers.

Although it did not impact our organic growth for the segment until late in the quarter, we saw very nice growth in our transplant diagnostic business which has consistently been performing above expectations.

However, as Marc mentioned, we continue to see some softness in this segment relating to healthcare utilization and reimbursement pressure.

Adjusted operating income in the segment increased 20% in Q3 with adjusted operating margin at 26.8%.

This was up 270 basis points from the prior year, primarily as a result of productivity savings, acquisition accretion and favorable mix.

In the laboratory products and services segment, both reported and organic revenue grew 4%.

Our clinical trials logistics business continued to deliver strong growth, and our channel business had good growth as well.

Weakened conditions in the US academic and government end market as a result of sequestration and the uncertainties surrounding the government shutdown continued to be a headwind in this segment.

Adjusted operating income in laboratory products and services grew 7%, and adjusted operating margin was 14.9%, up 50 basis points, driven by strong productivity.

Before I move on to 2013 guidance, I want to provide you with a brief update on the status of the Life Technologies financing.

As I mentioned on our Q2 call, we secured $7.5 billion of permanent financing consisting of a $5 billion term loan facility and $2.5 billion from a forward sale of equity, both of which we plan to draw down closer to the close.

For the remainder of the financing, there is no material change from what I reported on our Q2 call.

We still expect that the remainder of the financing in addition to cash on hand will consist of $3.5 billion to $4 billion in debt, which will likely be in the form of bonds, and up to $750 million of equity or equity linked securities.

We will continue to update you as we finalize these arrangements.

In terms of the average interest rate on the new debt, we still expect to meet our previously communicated range of 3.25% to 3.5%.

With that, I'd like to review the details of our updated 2013 guidance.

Please note that as I mentioned on our earlier calls, our 2013 earnings guidance does not include the acquisition of Life Technologies or the impact of the related transaction and financing cost.

As you saw in our press release, we are raising the low end of our reported revenue guidance by $40 million, reflecting our solid performance for the first three quarters of the year.

This results in a revised revenue guidance range of $12.87 billion to $12.95, which represents reported growth of 3% to 4% compared to our 2012 revenues of $12.51 billion, consistent with our previous guidance.

In terms of organic revenue growth, we are expecting to be in the range of 2% to 2.5% for the full year.

Completed acquisitions are expected to contribute about 1.5% to our reported revenue growth, no change from our previous guidance.

We now expect foreign exchange to have a negative impact on our top line of about 60 basis points which has improved slightly since our previous guidance.

The bottom line impact from FX on the full year continues to be significant and is expected to result in 30 basis points of adjusted operating margin dilution and $0.11 or 2% of adjusted EPS dilution year over year.

In terms of our adjusted EPS guidance, we're raising the low end by $0.02, reflecting our solid operating performance in the first nine months of the year and consistent with the increase in our revenue range.

This results in our new adjusted EPS guidance range of $5.31 to $5.39 or 7% to 9% growth over 2012, up $0.01 at the midpoint of versus our previous guidance.

Consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates, and our guidance doesn't include any future acquisitions or divestitures.

Turning to adjusted operating margin, we're raising the low end of our range by 10 basis points and now expect expansion of 40 to 50 basis points.

Moving below the line, there are no changes from our previous guidance for net interest expense, tax rate, capital expenditures, free cash flow, or return of capital.

We're still expecting net interest expense to be up $15 million versus last year and that our adjusted income tax rate will be about 14.5%.

We expect capital expenditures to be in the range of $300 million to $315 million and free cash flow to be in the range of $1.7 billion to $1.8 billion.

We're still assuming that we'll return a total of about $310 million of capital to shareholders, composed of the $90 million in share buybacks that we completed in Q1 and about $220 million of dividends for the full year.

Finally, full year average diluted shares are now estimated to be in the range of 365 million to 366 million shares, up 1 million shares at the low end from our previous guidance as a result of option and equity forward dilution related to our higher stock price.

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

Results above or below the midpoint would depend on the relative strength of our markets during the year as well as the economic factors we've discussed.

In summary, we once again managed through the macro environment, executed well and delivered strong adjusted EPS.

With three quarters of the year behind us, I believe that we are well positioned to meet our full year goals.

With that, I will turn the call back to Ken.

Thanks Pete.

Shannon, we are ready to take questions.

(Operator Instructions)

Ross Muken, ISI Group.

Maybe Marc, just digging a little bit on the markets, particularly on the analytical tech business, how would you characterize the pacing of orders or pacing of revenues in the quarter in some of the more short cycle businesses.

And in some of the areas where you had to weakness, did things get incrementally better at any point?

Did they stay relatively stable?

I'm just kind to get a sense for the jump off point relative to what we have seen in the macro, which is maybe a modest improvement in some of the subsectors.

Ross, thank you for the question.

Let me focus on the analytical technologies, which is where you focused the question.

Within that, we have our largest exposure to core industrial businesses or markets, and for us, that is most dependent upon things like commodity materials.

We didn't see any change through the quarter in terms of the pattern, so continues to be soft market.

It has been soft all year.

That is the industrial portion of that business.

When you look within that same segment, we also have our mass spectrometry and chromatography business is.

Our mass spectrometry business had an outstanding quarter, and our liquid chromatography business was very strong as well.

There is a lot of details within our portfolio, but we didn't see a lot of change month to month.

It was more industrial was very soft areas, but areas where you would expect Thermo Fisher to gain shares, things like life science, mass spec and HPLC, that continues to be consistent.

May be just from a competitive perspective, it is always tough to tease out relative growth rates among the peers because the businesses differ so much.

But I found interesting on my last Asia trip was a lot of your competitors were saying how much harder to is to compete against Thermo today than 12 months, 24, 36 months ago.

Where do you feel like you are seeing the most success as the integrated strategy, and where is the channel having the most impact?

I'm just curious across the business, seems like the momentum has increased.

Where do you feel like we are actually seeing it in the numbers, although obviously it is tough to tease out in the totals?

China has been growing consistently in the 20% range for us for quite a number of quarters.

We have a very integrated strategy, so because of our scale, we believe that we are able to put the best people on board which allows us to execute in a way a harder strategy.

But that strategy has manufacturing facilities that are geared toward the local markets.

And that is why I picked out the Chinese CDC, which in this particular order they wanted just local manufactured products.

And the reality is, we were able to do that, a big order.

Our customers want some degree of tailoring of our global products to meet their specific needs, is which is why our China technology center exists.

Environmentally, you get off the airplane in China, and you know that there is air quality issues.

You do not -- literally you can see it when you are landing, which is why our business is globally headquartered there for air monitoring.

When you look at it, we have a broad range of strength in the market, and are using our scale to create a really positive customer experience.

Our executive team spends an enormous amount of time in China.

I was there in September, I'm going back next week.

The rest of my direct reports do the same thing because the government is very important to decision-making, and building our strong relationships is an advantage, and scale matters.

Little companies just do not have the same access as an industry leader has, and we try to take that to the next level every time.

Jon Groberg, Macquarie.

Congratulations on another really remarkable quarter from an adjusted EPS and margin standpoint.

Marc, I want to focus on that for a second.

If I look back over the last -- looking at this year more on an annual basis, and I know we are only three quarters through, but if you look back on 2011, 2012, 2013, you have the 2.5% to 3.5% organic growth.

But if I look at this year, you are doing 40 to 50 bps of operating margin expansion.

That is not including the medical device tax, which probably gives you another 20 bps, the unfavorable FX that Pete mentioned.

I'm just curious if that is the realm of growth that we are in over the next year or two, still not 2.5% to 3.5%.

Is that still feasible, which you are doing there?

Do you feel like you are really starving your organization some, and I'm just trying to think about the levers that you feel like you still have to pull if the macro doesn't really improve that much.

Jon, that is a great question.

We have a very strong operating system at the company, the PPI business system.

Our 39,000 colleagues are constantly trying to make the Company better every day and more efficient.

As we went into this period of a muted recovery coming out of the recession, our team has done a very good job of streamlining the organization, eliminating waste so that we can fund R&D and our significant expansion in emerging markets.

We're not starving the organization in terms of a bright future.

In fact I spent most of my comments today actually on new product launches, and I had to cut them short otherwise we would have run out of time for Q&A.

We are spending for a bright future, and we feel like we are taking out the appropriate cost to deliver very strong returns for our shareholders.

Looking forward, if we continue in this muted growth environment, we believe the ability to drive good bottom line performance is clearly something that we have the skill to do and the ability to do.

And as we get into our guidance process for 2014, early in the year, we will articulate our plans.

But we have lived through periods of rapid growth, we have lived through a couple of recessions, and we have lived through a period of muted growth, and pretty consistent through that is we've been very focused on driving bottom line improvement.

A follow up to that, just a point of clarification, as you mentioned with Life, you're getting closer to -- day one planning in place, getting closer to potentially closing that acquisition.

You going to talk to investors?

I'm trying to think about, do we think about the core Thermo business still getting the margin expansion that you would get otherwise and then layering on top of that what you expect from Life?

Yes, at a simplistic level, yes.

But we will do, when we give out to -- when we close out the transaction, give out the guidance, we will bridge the details enough so everyone can understand what we are doing.

But our base business without Life continues to have generally good earnings growth, and then obviously you are going to get the positive synergies and accretions from that acquisition as well on top of that.

Daniel Brennan, Morgan Stanley.

Marc, I wanted to dig a little more on China, maybe get some color there in your China business.

Can you give us a sense of how the different segments did within China, specifically on the more industrial side of your business?

Have you seen any change either better or for worse?

Core industrial continues to be soft in China.

That is going to affect the analytical technologies segment the most.

There are certainly bright spots on the applied markets in China, particularly air quality continues to be the strong in that market.

Healthcare continues to be a good growth driver as well, so specialty diagnostics will benefit from that.

Mass spec had a very strong quarter in China as well, so that gives you a little bit of a flavor.

Headwinds continue in industrial, the rest of the business performing solidly.

Maybe on the LPS side, which you had pretty strong growth this quarter, you highlighted the clinical trial logistics business.

Can you break it down how the channel business versus the clinical trial business, and on the channel side, is this share gains or are you growing inline with the market right now?

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

We had very strong momentum in our clinical trials logistics business.

I would say that our share in our channel, we business probably grew share slightly in the quarter, and not growing hugely different from the rate of the market, but probably a little bit faster than the market.

Derek De Bruin, Bank of America.

I don't know if you're going to answer this, but I'm going to ask it anyway.

Obviously there has been a lot of FX moves since you guys first announced the Life transaction and some of the accretion expectations for that transaction.

Are you in a point where you can update what are expectations are for that just given how the currency is moving all over the place?

Certainly, there's a lot of things that have changed since April 15 on the Life acquisition, pluses and minuses.

We're not going to answer one piece of that equation, so we will give you updated guidance once we close the transaction.

Speaking of the US academic markets and some of the uncertainty there, what is your working assumption for that customer segment as we look into Q4, look into 2014.

Are you expecting that segment of the market to be flattish?

I'm curious what your current planning is.

Let me limit it to what we saw and a little bit on Q4.

We will deal with all of '14 holistically through our guidance process.

Longer term, as you take it out a few years , don't think we -- our view on academic and government continues to be the same, which is going to be a low single digit growth market for us in the long term.

Not so different than we talked about at the analyst meeting.

I don't think there was a big change even with all the stuff going on in Washington.

When I look at the performance in academic and government, year to date we're down low single digits, so basically -- and our view for the fourth quarter is fairly similar to that environment.

Basically we're not assuming a particularly material effect from the government shutdown.

Obviously a little bit of a headwind, but we also know that sequestration is certainly with us for the rest of the year.

So that means any optimism that sequestration will go away this year, that fades from customers' viewpoints.

Similar to Q3 is how we are thinking about it.

Tycho Peterson, JPMorgan.

First one on pharma and some of the trends, obviously you guys have had really good momentum there.

Can you maybe talk about the sustainability of those trends?

And the deals seem to be getting a bit bigger at the same time.

We see the market news about cutting R&D.

So maybe talk on your view on the Pharma business for the next quarter or two.

If we look back over the past few years, we have been growing well above the company average here.

We are clearly gaining share.

Our customers are benefiting from the productivity that we deliver for them, and we feel like our value proposition is very well suited to help customers navigate a tough environment.

We never like any of our customers to be struggling, but what I can tell you is we are on the phone the minute those issues happen.

And we're there coming out with new ways of helping them navigate those environments.

Our clinical trials logistics business has obviously done very well for quite some time, and the reason for that is we are just substantially lower cost than the in-house capability.

And our quality performance metrics are truly outstanding.

So customers are getting comparable or better quality at a lower cost.

And as customers have tightened their belts, they have been driving more and more business to us.

And we have been cross selling across the portfolio as well.

Our view is that it is our job to help our customers be successful, and we will continue to focus on navigating that environment going forward.

A follow up on mass spec, you spent a lot of time talking about the new products.

Can you talk about the degree to which those new products are seeing uptake in the clinical segments?

I think that was one of the themes out of ASMS was mass spec moving more into the clinical side.

And can you also talk on competitive dynamics to the extent you are taking share both in mass spec and LC with the Dionex addition?

Clinical research is growing in importance for us.

It is still early in terms of the adoption for us, but we are seeing some of it in clinical research.

The new products have done very well.

We started shipping the products in the quarter, the uptake has been very strong.

One of the things I am very passionate about is the Q Exactive which that we launched a few years back, just had a fabulous quarter.

So we launched another high-end system, but we did not lose any momentum in the Q Exactive.

I wasn't expecting to lose any momentum because serves a different market, but it is nice to see the facts play out that way in terms of performance.

HPLC was very strong for us, so I feel good about how our team is executing around the world.

Doug Schenkel, Cowen and Company.

One thing I am having a hard time reconciling is better than expected LPS growth in the quarter and the negative commentary on the academic government end market in the US.

I say this because in the past you pointed out that LPS for segment you thought would get most impacted by US government weakness, and I believe that is what was at least previously embedded in guidance.

The question is, has there been a notable source or are there notable sources of upside within LPS outside academic and government that have exceeded your expectations?

And is the offset that academic government weakness has been more pronounced in either AT or maybe even specialty diagnostics than you expected?

Great question.

When you look at the academic and government performance, you see the pressures in AT and LPS.

But the consumable mix is the vast majority in LPS, so it is more muted the effect than the capital equipment effect that you would see in AT.

You see some pressures Doug, in the lab products and services, but you see a lot of our pressure on more of the routine capital equipment which is in the other segment.

That is part of it.

The other thing is because Pharma is over representative, which is a good thing, in Lab Products and Services, that has really been a very strong driver of that because you have a clinical trials logistics business there, a channel business, consumables- things that are very Pharma and biotech focused, we have a disproportionate weighting in that segment.

I think those factors would say why does the performance consist of a very strong Lab Products and Services.

That's helpful.

SG&A spend was a bit lower than I think some of us expected.

This is probably largely because of mix and some progress you are making on the PPI side.

That said, I am wondering if some of this is also a function of planning for the closure of the Life deal.

You guys have been executing well to plan this year, but I think it is also fair to say that Life's performance has been a bit disappointing relative to expectations.

Point here is some of the SG&A pullback related to what has been going on in Life as you move towards a closure of detail.

In terms of the SG&A, we certainly are still continuing to make investments in the business.

The leverage we are getting in SG&A year-over-year is really about the restructuring activities that we are doing and PPI activities that drive cost out of the system, so they're really not any materially impact related to planning for Life.

Obviously there is a very small piece of our company that is really directly overlapping with Life in terms of the cost base.

That is not anything that is impacting the numbers.

If I could sneak in one more, you guys continue to do really well in APAC and rest of world as you are recognizing strong underlying demand in these markets.

Across most end markets in these geographies, it does appear like you are out-performing many of your peers.

I am wondering how much of your outperformance in these geographies versus your competitors is attributable to you having a better reach than your competitors in your opinion?

And are there opportunities you are actively looking at where you can repeat what you did with China environmental?

And more generally, are you thinking it might make sense given really what have become long-standing trends in these geographies it to accelerate relocation resources to areas in Latin America or certain areas of APAC.

A few things, as I mentioned, the China CDC order in lab equipment.

We moved one of our business units, actually a large one, the headquarters to China about a year ago.

Basically to position this business for the very strong funding environment that is likely to continue for many years in China.

We are always looking at our portfolio around the world and trying to optimize its position to grow.

I think the combination with Life Technologies actually gives us some interesting opportunities where the markets and some other countries might have been just a little subscale for us to really want to put the infrastructure in place to build a very superior experience for our customers, but the combined entity is worth doing.

I think when you get down to the South Korea's of the world, parts of southeast Asia, we're going to be able to replicate the very strong capabilities we have in China in some of these markets.

Not at the same level of cost or investment but just because we have enough skill that we are going to get a quick enough return to do it.

I actually think the combination will position us for better growth over time.

Isaac Ro, Goldman Sachs.

I wanted to start with a bigger picture on gaining wallet share across two of your specific end markets, one being academic and pharma the second being Pharma.

The reason I ask is you are probably looking at a period of retractive slow downs in funding in academia company, there has been obviously some continued cuts in the pharma side.

Thematically as you look at the combined portfolio you have and the competitor advantage you have with the channel.

Are there a couple of new initiatives you can specifically point to where you think you can use the franchise to gain wallet share in the slow environment?

Isaac, obviously we've been doing this with pharmaceutical customers for quite some time, and we will continue to do that.

We think that that type of requirement of productivity from our customers is always a good opportunity.

And the fact that we have a stronger offering in production chemicals now, and when we close Life Technologies an even stronger offering in some of the Life science research reagents would give us more opportunities to go to those customers and bring new value and help them navigate the environment.

On the academic and government side or academic side, decision-making is a little bit different, but the economic needs are the same.

You're dealing more at the lab level than the enterprise level.

I had the chance to meet with a number of academic customers this week actually here in Boston because of ASHG is here, and they love the Thermo Fisher value proposition, how we can help them navigate with a tough environment for them.

It is more of the micro level, but if we can help them save money so they can continue to do important research they are doing, then it is a great opportunity.

Just a tactical question, you guys called out in your prepared comments a couple of times the strength in the transplant diagnostics business.

So wondering if we should expect that kind of same thing to continue through the balance of this year?

How do you feel about the process over the next 12 months given that you have the asset under your control for the full 12 months, do think you can spur the growth from there?

Trying to gauge expectation for that specific business.

As you look, we had assumed mid single digit growth when we announced the acquisition.

It has been growing in the high single digits.

We think the business has good momentum, it will start to show up in our organic growth.

Not a huge business, but it is a nice business that integration has gone incredibly smoothly, the team has done a great job.

We are going to maximize the top line performance that we can get out of that.

And then certainly it is embedded in our guidance as we set that up for 2014.

Paul Knight, Janney Capital Markets.

When you look at the analytical instruments business, did we go into a double dip or what happened in 3Q, the industrial market?

Did it delay or what do you think the color is there?

Industrial, I do not think it changed much.

Basically we just haven't seen an upswing.

When you get into all the details basically, it is the core industrial, the commodity material market continues to be very soft.

That is where we have our largest mix of that part of the business.

Applied markets, clearly there are some nice pockets of strength, so I don't really see a big change in the third quarter, Paul.

That is what?

Spectrometry, gas chromatography, those kinds of things?

Yeah.

You have your chemical analysis instruments, your process instruments, molecular spectroscopy, those type of instruments will be most affected.

Portable instruments would be another one that would be affected by the economic downturn.

Marc, the PMI readings have been very strong at least until we don't know what this month is, but PMI has been good.

If PMI drives better sales, what do you think the lag factor is?

Should it show up this quarter, or should it show up next quarter, what is your experience?

Usually two quarters lag is typically what we see in our business, so we are definitely paying attention to that.

This is positive news, but it has not sustained yet in terms of orders momentum at this point.

Last, were you surprised by Pharma and biotech in the quarter?

No, it has been incredibly consistent with high single digit growth now for quite a number of quarters, so the team has done a good job of executing.

Dan Arias, UBS.

Marc, maybe on the industrial markets how do feel that were those customers are broadly in their product cycles?

Do you feel like if you removed macro factors from the purchasing you're sort of left with a decent course in that segment that is maybe due for a tech upgrade?

What I would say is that our product portfolio ourselves internally is very strong.

We have been watching a number of new products, so as customers release funds, we think we are well-positioned to capture market share.

I think basically customers are being cautious right now and only get to a period of a little bit more optimism in the customer base.

I think we're very well positioned to see an acceleration of growth.

Maybe one on diagnostics, what are your thoughts at this point on penetrating the US physician base with the Phadia products that you sell well in Europe?

Do you feel like over the near term and the midterm, there is the ability to convert a portion of that market that is currently doing crit testing sort of an antiquated way of going about things?

I would say that we are expecting to see us building momentum and driving penetration in the US for our allergy products.

We do a lot of end doctor visits to explain the technology and do education, and as that education become stronger and stronger, we think that we are well-positioned to have good growth.

Amid Bhalla, Citigroup.

Question on the lab products services, the revenue side has been quite strong, but what struck me was the operating margin of the business at 14.9%.

I flipped back last two years or so, and this is probably the highest it has been.

You said the productivity is the reason for the op margin expansion.

I was wondering if you can go into some detail about how much headway you still have on op margin expansion in that business?

When you say headway, you mean headroom?

Yes.

Obviously in the laboratory products and services segment, it is a little more challenging to get margin expansion just because of the mix, self manufactured versus source products.

This is a really strong performance for that quarter, but we still have room to expand margins.

I would say on an annual basis if we are thinking 50 to 100 basis points at the company level, you are probably in the 20 to 40 basis point range here in this segment is what you could expect as long as we get mid single digit organic growth.

Second in analytical technologies, I was wondering if you could give some color on bioprocess production in the quarter?

We had good growth in bioprocess production in the quarter.

Not as strong as the first half, but the pipeline looks incredibly strong, so I would say that it is growing well above the company average, and I do feel like we are well-positioned.

Anything, Marc, that drove the less than strong performance there versus the first half, any more color you can give?

It was actually strong performance, but we have been growing double digits for a while, and this was more in the mid to high single digits.

I do not think it is anything much to it.

I look at the pipeline, and it looks like the next few quarters look strong.

Jeff Elliott, Robert W. Baird.

I was wondering if you could give some more color on Brazil.

You said it grew over 20% in that market, can you talk about what is driving the growth and how sustainable it is?

We have had a few good quarters now in a row in Brazil.

Our diagnostic business in particular is driving good growth in that market.

So there has been some changes in the reimbursement and regulatory environment that have put some pressures on the business over the past year or so, and that has clearly subsided.

That has been probably the biggest driver.

On the clinical trials logistics business, can you talk about what is driving the growth there?

How much of that is the shift towards outsourcing versus you added additional services, and can you update us on the competitive landscape in the market?

It is really about the outsourcing trend which is driving it.

What customers are doing is most of the Bio Pharma customers use us in some fashion, but it is the question of how penetrated we are.

For the most part we have lots of opportunity to increase our share of wallet if you will.

It is less about new services than it is about going from being surplus capacity to being a portion of capacity to being the sole-source provider of that capacity.

And we are seeing more and more customers move towards using us as the sole or primary provider.

And that is a great opportunity, and we think we have got lots and lots of legs in that strategy in terms of driving growth.

Shannon, we have time for just one more.

Steve Willoughby, Cleveland Research.

Two things for you.

One, I was wondering if you could comment on how you are thinking about the three different business units and their growth in the fourth quarter as compared to the growth this past quarter.

And then secondly, do you have any early read on what the flu season is looking like and any thoughts on the impact to the company from that?

In terms of the three segments, I would say that the fourth quarter were be pretty similar to what we saw in the first nine months of the year.

Pete, do want to comment quickly on flu?

In terms of flu, we definitely have a tough comparison in Q4.

We had very strong flu season in 2012, and basically what is assumed in our guidance right now is that we have an average flu season.

We do not have any good insight yet on the strength of the season.

Let me wrap it up.

As we look sitting here in October, we have three strong quarters behind us, and we are on track to achieve our growth goals for the year.

Life Technologies integration planning is progressing very well.

I am really confident that we will be in an excellent position going into 2014, and I'm looking forward to updating you early in the year.

Thanks again for your time this morning and certainly for your support of Thermo Fisher Scientific.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

Have a wonderful day.