賽默飛世爾科技 (TMO) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Thermo Fisher Scientific 2014 second- quarter earnings conference call.

(Operator Instructions)

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

Mr. Apicerno, you may begin the call.

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, our Senior Vice President and Chief Financial Officer.

Please note this call is being webcast live and will be archived on the Investor section of our website, thermofisher.com under the heading Webcasts and Presentations until August 22, 2014.

A copy of the press release of our 2014 second-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 March 29, 2014 under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also 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 this call, we'll be referring to certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our second-quarter 2014 earnings and future expectations, and also in the Investor section of our website under the heading Financial Information.

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

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

Ken, thanks.

Good morning, everyone.

Thank you for joining us on today's Q2 call.

I'm very pleased to report that we had an excellent quarter with strong performance on both the top and bottom line.

Our teams executed very well, and we're seeing the results of our growth strategy.

We continue to build on our industry leadership with investments in technology innovation and global capabilities.

We have a lot of great news to cover this morning, but I'll start by reminding you that our primary financial objective is to consistently deliver strong adjusted EPS growth.

By that measure, we had an outstanding Q2.

Our strong revenue performance, our culture of constantly driving productivity and great execution on the Life Technologies integration extended our long track record of EPS growth.

With a solid first half behind us we are in an excellent position to deliver on our growth goals for the year.

Let me turn to our Q2 financial results, then discuss our performance in the context of our end markets and geographies, I'll hit some of the business highlights and then wrap up with our guidance.

I want to remind you that Q2 is the first, full quarter including Life Technologies, which is reported in our life sciences solutions segment.

As you saw in our press release, our total revenue for the quarter grew 33% year-over-year.

Adjusted operating income was $924 million in the quarter.

We expanded our adjusted operating margin by 210 basis points to 21.4%.

As I said, we had very strong performance on the bottom line, delivering adjusted EPS of $1.72, which was a 30% increase over last year.

I'm really pleased with how our teams executed in the quarter, leveraging our PPI business system to translate our strong revenue performance into outstanding earnings growth.

It was an excellent quarter overall and contributed to a first half that played out better than we expected.

Let me take a couple of minutes to give you my perspective on our performance in the context of our four key end markets.

I'll start by saying that our growth outlook for the full year has improved slightly.

That's because our performance in pharma and biotech in the first half of the year was a bit stronger than we expected.

Aside from that, in aggregate, we didn't see any significant changes in our other end markets that would alter our view for the balance of the year.

Starting with pharma and biotech, as I mentioned, the end market continues to be a terrific story.

Our teams are performing very well.

They are doing a great job of delivering our customer value proposition, and this resulted in another quarter of high single-digit growth.

We saw strength in the quarter in pharma and biotech across our analytical instruments, lab equipment and consumables, and our biopharma services business also continues to perform very well.

In the academic and government end market we saw improvement in Q2 with growth in the low single digits.

We said last quarter that we saw thought funds would begin to flow in the US under the new appropriations, and that seems to be playing out.

Stronger results in North America during the quarter were offset partially by weakness in China, which I'll discuss in a minute.

In industrial and applied, we delivered low single-digit growth again this quarter and haven't really seen any meaningful changes here since the beginning of the year.

Last, in diagnostics and healthcare, we performed very well, growing in the mid-single digits in Q2.

Strength in the US drove our results here and sales of our immunodiagnostics and transplant diagnostic products remain strong.

A great Q2 offset a slower Q1, resulting in a first half that was generally in line with our original expectations in this end market.

To sum up our performance overall, stronger results in pharma and biotech led to a first half that played out a bit better than we expected.

As a result, we've slightly increased our growth outlook for the full year.

Before I move on to the business highlights, let me make a few brief remarks about our results in key geographies.

First, we performed very well in North America in Q2.

As I mentioned in the context of our end markets, it's especially nice to see some renewed strength in the US.

We also had a very good quarter in Europe with strength in our biopharma services, analytical instruments and immunodiagnostics businesses.

As you saw in the press release, we're expanding our centers of excellence in Lithuania and Germany to support growth in our molecular biology and mass spectrometry products.

In China, while we had good growth in Q1, revenue performance in Q2 was flat and this was driven by a slower release of government funds.

That said, we remain confident in our growth prospects for China and recorded bookings growth in the high teens in Q2.

To sum up our performance geography as you know, China has historically delivered very strong growth.

In spite of the results we saw there in Q2, I'm pleased that were able to deliver strong revenue growth for the Company overall.

Let me shift now to highlight the great progress we're making to strengthen our leadership position so we can best serve our customers and gain market share.

As you know, we have a solid strategy for driving growth.

It's based on technology innovation, our unique customer value proposition, and our scale in APAC and emerging markets.

It was an excellent quarter in terms of innovation, so I'll focus my remarks there this morning.

We had a number of new products that demonstrate our ongoing commitment to technology innovation.

As you know, the American Society for Mass Spectrometry conference, or ASMS, is always an important forum for Thermo Fisher.

It's an opportunity to showcase our industry leadership, and we took full advantage of that again this year.

At the show we launched two significant new instruments, complementary software packages and new consumables that improve sample preparation.

I'll start with the Q Exactive HF, which was named ASMS product of the show by industry publication Industry Business Outlook.

The Q Exactive HF is an LC-MS system that builds on our highly successful Q Exactive platform by incorporating an ultra-high-field Orbitrap mass analyzer.

It dramatically increases performance for research customers who continue to push for greater analytical speed and sensitivity to accelerate the results.

The Q Exactive HF is especially suited to life sciences applications such as protein identification and reinforces our leadership in proteomics.

Application specific software is critical to extending the use of mass spec and creating new market opportunities for us.

We made significant inroads with biopharma customers by launching PepFinder 1.0 for biotherapeutic protein characterization.

We also launched Proteome Discoverer 2.0, which provides a wide range of bioinformatics tools and customizable workflows to accelerate protein research.

Let me give you a quick example of the significant milestone recently achieved by our customers at Mass General Hospital in Harvard Medical School, because it illustrates the profound impact our Thermo Scientific technologies are having on protein research.

Using our most advanced mass spectrometry instruments along with our customized reagents, scientists there were able to carry out comprehensive proteome analyses of 32 breast cancer cell lines in just six days.

This would have taken up to 10 times longer without the integrated combination of the technologies we provided.

According to the researchers, this is the first time that proteome analysis was performed on a scale previously reserved for genomics.

Their achievement marks a huge step forward in the scientific community and complements the sequencing of the human genome in 2001.

For customers working in applied markets we expanded our successful TSQ 8000 triple quad offering by launching the TSQ 8000 EVO at ASMS.

The system incorporates the new EVO cell technology to significantly increase productivity for customers analyzing food, environmental, pharmaceutical and forensic samples for complex compounds.

It's a great example of us focusing on creating new opportunities in applied markets by giving our customers more sophisticated tools for non-targeted analysis.

I also want to mention that our GlobalFiler PCR Amplification Kit received approval from the FBI for use in forensics.

FBI labs will use GlobalFiler to generate DNA profiles of suspects for a national database that will be instrumental in helping solve crimes.

Before I turn to our guidance, let me give you a brief update on the Life Technologies integration.

Our teams are making very good progress executing their plans, and we are now tracking ahead of our original synergy target for the year.

We now expect it to achieve $100 million in synergies in 2014, up from the $85 million in synergies we originally anticipated.

We're pleased to report that we're achieving the first $100 million at a faster pace, and we remain confident in our overall synergy target for year three, which we increased from $300 million to $350 million at our analyst meeting back in May.

Turning now to our annual guidance, as you saw in our press release, we revised our revenue guidance and are raising our adjusted EPS guidance.

This is based on our solid operating performance in the first half of the year and the increased synergies from the Life Technologies integration.

The new guidance also reflects the estimated impact of the divestiture of our Cole-Parmer business, which we now announced last week.

We signed an agreement to sell the specialty channel for $480 million and expect to complete the transaction in Q3.

In terms of our guidance at this point in the year, we now expect our revenues for 2014 to be in the range of $16.86 billion to $16.98 billion for 29% to 30% revenue growth year-over-year as we previously announced.

We're raising our adjusted EPS guidance to a new range of $6.85 to $6.97, which now results in 26% to 29% growth over 2013.

Before I turn the call over to Pete, let me leave you with a few takeaways.

First, it was an excellent quarter for us financially across the board, with strong performance in revenues, margins, adjusted EPS and cash flow.

It's been a very strong year so far on the innovation front and we look forward to more significant new product launches to come in the second half.

The Life Technologies integration is going very well and we increased our 2014 synergies expectations.

At this point in the year, we're on track to deliver a strong 2014.

With that, I'll now hand the call over to Pete Wilver, our CFO.

Pete?

Thanks, Marc.

Good morning, everyone.

As you can see from our results, we had a strong second quarter and delivered a solid first half.

Let me begin with an overview of our Q2 financial performance for the total Company, then provide some color on our four segments and conclude with our updated 2014 guidance.

As a reminder, at the total Company level, we're reporting organic revenue growth using our standard methodology.

That means we'll exclude the results of Life Technologies until we reach the one-year anniversary date of the acquisition.

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

Starting with our overall financial performance, we delivered strong earnings growth resulting in a 30% increase in adjusted EPS to $1.72.

GAAP EPS was $0.69 in Q2 down 9% from $0.76 in the prior year primarily as a result of higher non cash cost of sales charges related to the acquisition accounting.

Looking at the top line, we delivered 5% organic revenue growth this quarter and total revenue increased 33% year-over-year.

Q2 reported revenue includes 27 points of growth from acquisitions net of divestitures and a 1% positive impact from foreign exchange.

We once again strengthened our backlog in the quarter with bookings exceeding revenue by 1%.

By geography, both North America and Europe grew in the mid-single digits.

As Marc mentioned, China was flat year-over-year resulting in Asia-Pacific growth in the low single digits.

Our China bookings performance in the quarter was much stronger than revenue and was up in the high teens.

As a result, we're confident that revenue growth in China will be much stronger in the second half resulting in high single-digit growth for the full year.

Rest of world declined in the low single digits.

Looking at our operational performance, Q2 adjusted operating income increased 48%, and adjusted operating margin was 21.4%, up 210 basis points from Q2 last year.

Our adjusted operating margin expansion for the quarter was driven primarily by the Life Technologies acquisition, which as you know has a higher overall margin rate compared to stand-alone Thermo Fisher.

However, we also continued to see strong contribution from our primary productivity levers, global sourcing, site consolidations and our PPI business system.

For the first time in quite a while, we saw expansion from FX compared to the dilution we've been experiencing for the past couple of years.

We realized $23 million of synergy benefits in Q2 and $40 million through the first half.

As Marc mentioned, we now expect to achieve $100 million of cost synergies for full-year 2014, up from the $85 million we previously communicated.

This is being driven primarily by accelerating corporate and functional cost reductions as well as modestly increased sourcing savings.

Our growth initiatives remain on track and we continue to make strategic investments primarily to strengthen our core technology platforms and commercial capabilities to continue our growth momentum.

Moving onto the details of the P&L, total Company adjusted gross margin came in at in at 49.0% in Q2 up 480 basis points from the prior year.

This was primarily due to the Life Technologies acquisition along with solid productivity across our businesses.

Adjusted SG&A in Q2 was 23.4% of revenue, 140 basis points unfavorable to the 2013 quarter.

Again, this was primarily a result of the acquisition and was partially offset by volume leverage and our productivity actions.

Finally, R&D expense came in at 4.3% of revenue for the quarter, 130 basis points above the prior year.

This reflects the relatively higher level of investment in R&D and the life sciences solutions segment.

R&D as a percent of our manufacturing revenue in Q2 was 6.6%.

Looking at our results below the line, net interest expense in Q2 was $113 million, up $56 million from last year driven primarily by the debt we raised to fund the Life Technologies acquisition.

Adjusted other income for Q2 was $1 million, about the same level as last year.

Our adjusted tax rate in the quarter was 14.3%, 130 basis points below last year primarily as a result of our acquisition tax planning.

Our year-to-date tax rate was 15.1% in line with our full-year outlook of 14.5% to 15.5%.

In terms of returning capital, we paid out $60 million in dividends to our shareholders in the quarter.

Average diluted shares were $403.1 million in Q2, up $39.6 million or 11% from last year primarily as a result of the shares we issued to partially fund the Life Technologies acquisition and to a much lesser degree, option dilution.

Turning to cash flow and the balance sheet, cash flow from continuing operations for the first half of the year was a very strong $992 million and free cash flow was $824 million after deducting $167 million of net capital expenditures.

This is up significantly from our prior-year free cash flow of $650 million primarily as a result of our increased operating earnings from the acquisition partially offset by higher acquisition related interest expense and cash payments tied to the acquisition and related divestitures, which I highlighted on last quarter's call.

We ended the quarter with $600 million in cash and investments, down $900 million sequentially from Q1 as we used surplus cash on the balance sheet as well as cash generated in the quarter to pay down short-term debt in Q2.

As a result, our total debt at the end of Q2 was $15.6 billion, down $1.8 billion from Q1.

Our leverage ratio at the end of the quarter was 4.6 times total debt to adjusted EBITDA, and we remain on track to achieve our target leverage ratio of 2.5 to 3 times in Q3 of 2015.

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

Our trailing 12 months adjusted ROIC in the second quarter of 2014 was 9.3%, down 20 basis points from Q1 as expected, driven by the addition of adding another quarter of the Life Technologies investment into the average invested capital base used in the calculation.

This was partially offset by higher returns generated in the rest of the business.

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

Starting with the life sciences solutions segment, in Q2, total revenue grew significantly to $1.10 billion from $181 million in the prior year primarily as a result of the Life Technologies acquisition net of divestitures.

On a pro forma basis, assuming Life Technologies was owned for the entire quarter in both periods, organic revenue grew 3%.

In the quarter, we continued to see strong growth in our bioproduction business as well as in cell biology and next-generation sequencing, which was partially offset by lower royalties.

Q2 adjusted operating income for life sciences solution also increased significantly primarily as a result of the acquisition with adjusted operating margin up 310 basis points to 27.1%.

In the analytical instrument segment, Q2 total revenue grew 4% and organic revenue grew 3%.

In the quarter, we had very strong growth in our life sciences mass spec and instrument services businesses, which was partially offset by the weakness in China that Marc mentioned.

Q2 adjusted operating income in analytical instrument increased 4% and adjusted operating margin was 16.4% down 10 basis points.

We delivered very strong productivity and saw positive contribution from FX that was more than offset by unfavorable business mix and strategic growth investments.

Turning to the specialty diagnostics segment, in Q2, total revenue grew 8% and organic growth was a very strong at 6%.

As Marc said, we saw better market conditions in the US versus the slow first quarter.

We continue to deliver strong growth in our transplant diagnostics and immunodiagnostics businesses and our healthcare market channel had a very strong quarter as well.

Adjusted operating income in the segment increased 9% in Q2, and adjusted operating margin was 27.6 %, up 30 basis points from the prior year.

In the segment, we had nice pull through on the organic growth and strong productivity, which funded strategic growth investments.

In the laboratory products and services segment, Q2 reported revenue grew 7% and organic revenue grew a robust 6%.

Our biopharma services business continued to deliver very strong growth and we saw broad-based strength across the rest of the business.

This segment benefited from our strong performance in the biopharma end market as well as the pickup in our US academic and government end market.

Adjusted operating income in laboratory products and services grew 8% for the quarter, and adjusted operating margin was 15.2%, up 20 basis points driven by strong productivity and volume pull through.

With that I'd like to review the details of our full-year 2014 guidance.

As you saw in our press release, we're updating our guidance for our strong performance in the first half and to reflect the divestiture of our Cole-Parmer business, which we announced last week.

On the top line, we're tightening the range by $40 million resulting in a midpoint that's unchanged.

This leads to a new full-year 2014 revenue guidance range of $16.86 billion to $16.98 billion, which represents year-over-year growth of 29% to 30% consistent with our previous guidance.

To bridge the pluses and minuses to the midpoint of our guidance, we added $80 million in volume, about $45 million which was organic and another $10 million as a result of more favorable FX rates on the Thermo Fisher standalone businesses.

These increases were fully offset by a $90 million decrease as a result of the Cole-Parmer divesture assuming a mid-Q3 close date.

On an organic basis, we're still expecting standalone organic growth for full-year 2014 of 3% to 4% consistent with our previous guidance, although we now expect to be somewhat higher in the range.

As I mentioned earlier, this measure of organic growth does not include the results of Life Technologies.

For the life sciences solutions segment, we still expect pro forma organic growth of 2% to 3% for the full-year 2014, also consistent with our previous guidance and slightly higher in the range.

In terms of FX, assuming recent rates, the year-over-year foreign currency impact on our revenue remains slightly positive at about 0.5%.

In terms of margin pull through on the FX revenue impact, we're expecting a slight improvement versus our previous guidance primarily as a result of our favorable Q2 results.

The Life Technologies acquisition net of divestitures is expected to contribute about 26 percentage points of our total revenue growth in 2014 unchanged from our previous guidance.

Consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates and our guidance does not include any future acquisitions or divestitures other than the Cole-Parmer divesture.

Moving to adjusted EPS, we're raising both the low and high end of the range in line with the change in revenue as well as increased contribution from acquisition synergies.

This leads to a new full-year 2014 adjusted EPS guidance range of $6.85 to $6.97, which now represents growth of 26% to 29% over our 2013 EPS of $5.42.

To bridge the $0.04 increase in the adjusted EPS from the midpoint of our previous guidance, the acquisition, including synergies, is up about $0.04 and performance in standalone Thermo Fisher added about $0.03.

These increases were partially offset by a decrease of $0.03 related to the pending Cole-Parmer divesture, again assuming a mid-Q3 close.

Turning to adjusted operating margin, we're increasing the low end and tightening the range by 10 basis points.

This results in a revised guidance of 21.8% to 22% of adjusted operating margin and 230 basis points to 250 basis points of expansion year-over-year.

As I mentioned earlier, we're also increasing the synergy benefits we expect to realize in 2014 to $100 million up $15 million from our previous guidance.

The increase in 2014 is driven by realizing some synergies a bit earlier than we had originally planned, and therefore does not change the $350 million of total expected synergies by year three that we outlined at our analyst meeting.

Moving below the line, we're expecting net interest expense to be in the range of $425 million to $435 million down slightly from our previous guidance as a result of paying down debt more quickly.

As I mentioned earlier, we're still expecting our adjusted income tax rate to be in the range of 14.5% to 15.5% consistent with our previous guidance.

In terms of capital deployment, we're still assuming that we'll return approximately $240 million of capital to shareholders this year through dividends.

We're also assuming that, in the second half, we'll use the bulk of our free cash flow and the net proceeds from the Cole-Parmer divestiture of approximately $340 million to pay down short-term debt.

Full-year average diluted shares are estimated to be in the range of $401 million to $404 million up about 10% from 2013 and down slightly from our previous guidance.

We're expecting net capital expenditures to be in the range of $460 million to $480 million, also down slightly from our previous guidance.

In terms of full-year 2014 free cash flow, we're maintaining our previous guidance of about $2.2 billion, and we expect that our year-end leverage will be slightly lower as a result of using the net proceeds from the Cole-Parmer divestiture to pay down debt.

However, we do have a headwind versus our previous guidance of over $150 million related to the Cole-Parmer divestiture as a result of lost earnings and the cash taxes we expect to pay on the taxable gain, so we'll need to perform very well in the second half to achieve this forecast.

One final note on guidance, we recognize that it's still challenging to model the model the newly combined Company, so I thought it would be helpful to give you some insight into what we're expecting for Q3.

In terms of revenue, we're expecting Q3 to represent about 25% of our full-year revenue guidance midpoint.

In terms of adjusted EPS, we're expecting Q3 to be in the range of $1.65 to $1.70.

As always, in interpreting our full-year revenue and adjusted EPS guidance ranges, you should focus on the midpoint as our most likely view of how we see the year playing out.

Results above or below the midpoint will depend on the relative strength of our markets during the balance of the year.

In summary, we delivered a very strong quarter, which positions us well to achieve our financial goals for the year.

With that, I'll turn it back over to Ken.

Thanks, Pete.

We're ready to open it up for Q&A.

(Operator Instructions)

Ross Muken, ISI Group.

Congratulations.

Thanks, Ross.

I wanted to start a little bit of reflection on the sequential shift in the business.

Obviously, this quarter turned out a lot better than last quarter in, I'm sure, your mind as well as investors.

As you look at the key changes sequentially and how the business performed, what it means for what actually happened Q1, could you walk through the two or three key things we should focus on?

It seems like China is probably one of them, of what changed sequentially?

Is it seem more like 1Q is really now a weather phenomenon versus anything performance-wise in the business?

Ross, thanks for the question.

The first way I would think about it is we look at a half in total and say if you look at the half, we feel like we're right on track from our original expectations, in terms of end markets, actually slightly better.

Obviously, we've been raising our earnings outlook consistently throughout the year since our original guidance in January.

We feel things are playing out well.

From Q1, obviously, there were some headwinds that made it for a softer quarter.

I thought generally the Company performed well, but obviously between weather and some other things, we had a little lower organic growth than the target for the full year.

Obviously, when we look at Q2, we're ahead; in a very strong quarter it averages out okay.

When you think about it sequentially, between the two quarters, healthcare and diagnostics was much stronger in the quarter and we were able to maintain excellent momentum in pharma and biotech.

Those are the two things, sequentially, worth noting when you think about it from the end-market perspective.

It was nice to see, actually, academic and government growing again, still low single digits, but that was good.

From a geographic perspective, when you think about when healthcare and diagnostics is doing well, and certainly with some growth in academic and government, the US performed much better, so that's the positive.

The challenge was China in terms of flat growth in the quarter.

When I look at that, especially given that China's been a significant growth driver for the Company, for us to deliver 5% organic over the flat China says how well the Company is performing.

Within China, we still feel good about the outlook.

Obviously, high-teens bookings growth is encouraging and should lead to a stronger second half in China than what we had in the first half.

If I could dig a little bit deeper on China?

I think you were over there not too long ago.

If you think about the different moving parts, whether it's the performance of the multinationals, given some of the corruption crackdown, or it's the government drawing to control the pacing of spend in certain regions, or the pocketbook of some of the different outer regions.

As you think about the disconnect between res and bookings and you think about the pacing and what's likely to be the next thing to focus on there, how do you see those various moving parts, basically, translating back into superior growth to what we've seen in the last quarter or two?

Sure.

When you look at the quarter, clearly, the release of government funds was very muted relative to quite a period of time.

An example of what's causing that would be very well publicized changes in how the food safety administration is being organized.

It's an important buyer of analytical instruments in particular is going through a reorganization.

That's an example that clearly slowed things down.

The team, as they were seeing those changes, actually focused where funds were more loose, if you will.

That's why the bookings growth is so strong.

Basically, they put their focus on other parts of the market segment, which is exactly what I would expect the commercial team to do.

That gives us confidence that the second half would have stronger growth than the first half.

I'm heading off to China in a few weeks time.

It's a very important market for the Company, and we have a great position there.

The changes that we're feeling right now, I don't have any long-term effect on the business.

We're very confident about not only the second half but also the long-term prospects here is how I would think about it, Ross.

Great.

Thanks.

Marc, Jets playoffs, no playoffs?

Playoffs, of course.

I'm always bullish.

Thanks.

Jon Groberg, Macquarie.

Congratulations on a very solid quarter.

Marc, if you think about -- you talked about the different end markets and geographies, but I've heard it from a few people, a few others recently, this idea that given all the investment in genomics that you're starting to see potentially equal types of investments on the genomics or the proteomics side for mass spec.

My question is just as you look out there, what opportunities do you see?

These incremental spend in R&D, these investments in R&D and in SG&A, where are you making those?

What do you expect to the growth drivers to be over the next 6 to 12 months?

John, thanks for the question.

Let's start with proteomics first, which is our mass spec business is doing great.

We have excellent momentum in terms of the actual results in the first half of the year, results in the second quarter, bookings outlook.

I went to ASMS.

I saw a few of you there.

Fabulous conference for Thermo Fisher.

That's obviously the expectation we set every year, but it's nice to actually deliver on it year in and year out.

We are dominating that field and doing a great job.

When you have organizations like Harvard Medical School and Mass General using the instrumentation to do totally new types of research, that's opening up more high-end opportunities, which is great.

But we're also seeing strength in some of the more applications driven opportunities as well, your environmental food safety, routine pharmaceutical work, and that's why we have some new applied instruments, as well.

There's clearly lots of interest in on the genomics side as well.

We had a good quarter in terms of growth in our next-gen sequencing business, so I feel good about that opportunity.

Things that we're focusing on, obviously, is innovation, big emphasis on next-gen, big emphasis on life sciences mass spec.

Chromatography, we're very excited about.

Asia-Pacific very important to us.

Our value proposition, that's what's going to drive our growth for the foreseeable future.

Okay.

If I could just follow up on thinking about the portfolio a little bit?

Can you maybe talk about your rationale for divesting Cole-Parmer?

It seems to be third-party distributor like some of your other channels.

Are there other things that you're looking at there from the divestiture standpoint that you can share?

Thanks.

John, two good questions there.

First, in terms of we have other divestitures in the queue, the answer's no, nothing planned and certainly nothing material either.

In terms of why the divestiture of Cole-Parmer, that's one business that actually I don't think we've ever talked about in the many years.

It's a niche specialty channel.

It was purchased by Fisher Scientific when the Company was purely a channel business.

We ran it separately from the other channels because there was less opportunity to sell our Thermo Scientific self-manufactured products through the channel, and we felt like it was appropriate timeframe to sell that particular business because of the, really, separate from our channel business, separate from our self-manufacturing business and thought that selling it made the most sense.

We're going to use the proceeds, as Pete, said to repay debt more quickly.

Great.

Thanks.

Congratulations again.

Derik de Bruin, Bank of America Merrill Lynch.

Marc, I'm a little bit surprised.

I'm pleasantly surprised by the 6% growth in the LTS business, which haven't seen numbers like that for a while.

Can you give us a little bit more color on the segments?

What by products, biopharma and then the research and specialty market channels grew?

I know you don't usually give that color of detail, I just wondered qualitative on this, I'm curious in terms of where the strength was?

Very strong quarter.

Biopharma services business is great business.

It's been doing great for a long period of time, continues to do well.

That's no change in the trend.

Pharmaceutical companies continue to outsource that activity to us.

We're the low-cost provider, the high-quality provider, so it's a terrific business.

Our channel business had a good quarter.

Our lab consumables business had a good quarter.

Our lab equipment business had a good quarter, so each of the components of lab products and services did well.

I'll have one follow up.

I've had some questions lately from people asking about alternative lab channels, things in the catalog business, particularly like Amazon, some of these things.

Have you seen any impact at all from some of these other venues trying to muscle in on the catalog business?

No, we haven't seen any impact.

We obviously take all competitors very seriously, and I think Alan Malus did a really nice job at the analyst meeting articulating how we're leveraging the added strength in our e-business approach that Life Technologies brought to the Company to make it an even better channel to market.

We take all competition seriously, but we haven't seen any effect, Derik.

Great.

Thank you very much.

I'll get back in queue.

Tycho Peterson, JPMorgan.

Given the momentum coming out of the quarter, I'm wondering if you could talk a little bit about some of the expectations in the back half of the year, in particular on pharma?

You talked about the momentum in biopharma services.

Previously you talked about a little bit of an anticipated slowdown in that business, so can you talk about what's baked in the guidance for pharma?

Also, can you quantify what you're expecting in China in the back half of the year?

I think you talked about a rebound to double digits previously, so.

Yes.

Tycho, starting with the back half of the year for pharma and biotech, our comparisons get more challenging, so we're assuming mid-single-digit growth in the back half of the year.

That would lead, in aggregate, for the full year for pharma and biotech, for us to be mid to high single-digit growth.

If you recall back to our January guidance, we assumed mid single-digit growth, so a little bit better outlook for that segment or that customer set in total.

In terms of China, we're assuming high single-digit growth for the full year.

We had mid single-digit growth in the first half of the year, so that's implying a stronger second half of the year based on the strong bookings performance we just delivered.

Okay.

On your comments earlier on proteomics, post ASMS you announced the Vanquish UHPLC system.

Can you talk a little bit about your strategy on the chromatography side, and are you making a bigger push here in particular around UHPLC?

Tycho, in terms of after the quarter closed we launched our next-generation UHPLC, and I'll save the detailed victory lap for our October remarks, but I'll give you a little bit of a highlight.

We acquired Dionex a few years ago.

That business has done well for us.

We took the R&D teams from legacy Dionex and Thermo Fisher and really have brought out a fabulous new UHPLC, which we launched around July 15.

We think it's a very meaningful launch product launch and is going after a large market where we have a presence, but we're not the industry leader.

We are targeted at gaining some market share there.

Okay.

Last one, you talked about potentially looking at some bolt-ons before 3Q 2015 when you can start to more fully utilize capital deployment.

Just any thoughts on the tuck-in environment right now?

There's certainly some things out there, but nothing significant.

There's some M&A activity level.

You've seen some things announced in the marketplace.

We did a small food and animal health deal last quarter, very small.

It's not super active right now, is the way I'd characterize it.

Again, as I've said in the past, if something looked exciting and compelling and created shareholder value, we would consider it.

Okay.

Thank you.

Doug Schenkel, Cowen and Company.

Actually, maybe building off of that last question, you had previously talked about getting down 2.5, 3 times debt to EBITDA by Q3.

You reiterated that this morning.

When you look at the Cole-Parmer divestiture synergies tracking ahead of plan and looking at this quarter, where you had a really strong cash flow performance and paid down debt at a pretty good clip, it does seem, at least mathematically, increasingly possible that you get closer to 3 times than the first half, maybe in the even in the first quarter with a couple other more strong quarters.

Would you agree, and if so at what point would you declare that you can actually confidently do a little bit better than previous guidance?

I'll take that one.

When you look at the forecast, certainly adding $340 million of proceeds net from the Cole-Parmer divestiture gets us earlier in Q3, but it doesn't necessarily pull us into the first half.

Seasonally, first quarter cash flow is generally weak.

Obviously, it was very weak this year but we don't expect that next year.

When you look at first half versus second half, free cash flow doesn't necessarily flow pro rata.

I would say we're down to early in Q3 at this point, but we're not into the first quarter or anything like that.

Obviously, we're driving our cash flow hard.

We're focused on debt repayment.

This Company is focused on creating shareholder value.

If we can get there sooner, we will.

Just as we model it out right now, we think Q3 is a reasonable assumption.

Okay.

All very helpful.

If I can just ask another China question?

If we think back to Q1 earnings season, you really only had about two or three companies across the group talk about challenges in China related to the delayed release of government funds.

Thermo wasn't one of them, as I remember that.

We were not.

Then over the course of the quarter, if anything I got the sense that you downplayed this dynamic and it seems like maybe something at the end of the quarter just didn't come in the way that you expected.

I just want to get your take on that, really specifically, when did you start to see this slowdown?

How broad is it across the different segments?

You did reference the high-teens bookings in China and clearly your guidance, as you've talked about it, assumes that these bookings come through in the second half as you talk about high single-digit growth for the year.

If anything it seems like you didn't bump up Q3 guidance, at least relative to how the Street's been modeling things.

It's not necessarily clear that you assume that to come through in some bolus in Q3, it may be more Q4 than Q3.

Is that the case?

Really the questions are, when did you see a slowdown?

How broadly is this impacting you buy segment in China?

Do you have a lot of visibility on the when this comes through in the second half?

Thank you.

That's a good question, so a lot to it.

I guess the way I would say it is, very straightforward, some of the bookings that we got in Q2 ship in Q3, some ship in Q4.

It's not as if you get everything it goes to all the next quarter.

Some of them are longer lead time items, so there's a balance between the two quarters.

The strong bookings growth helps the second half of the year.

It doesn't particularly favor Q3 versus Q4.

When you think about the view on the quarter, we didn't really talk much, to my recollection, about China other than on the earnings call and then [cyad] at the analyst meeting.

You talked, really, just about the long term, right?

You talked about the five-year outlook for China.

I don't recall talking much about it in the quarter one way or the other.

We didn't see, in the second and third months, obviously, we had the first two weeks of benefit, which seemed okay when we started the quarter, when we did our call.

After that, it wasn't particularly strong throughout the quarter.

It wasn't as if we had something happen at the end of the quarter per se, it just - government was slow in releasing funds.

It was food safety, the biggest driver, but there's been a skittishness on government spending or release of funds fairly broad based across the economy.

I think that's actually been extraordinarily well publicized in terms of some of the things going on there.

Okay.

Thank you.

Isaac Ro, Goldman Sachs.

Marc, could you maybe talk a little bit about Europe?

That's probably one reason it hasn't gotten a lot of attention here.

Just curious about the performance you saw and maybe the outlook for the back half of the year?

Europe had a very strong quarter.

Feel good about the performance.

Broad based, biopharma services did well.

Our instruments businesses did well.

There's excitement around the horizon, 2020 funding.

It's actually things are continuing to improve, so that's good.

For the full year, we are expecting growth to be in the range of the Company average and slightly better than our original assumptions.

If you think about it geographically, Isaac, the US and Europe, outlook for the full year is slightly better than our original thoughts, and obviously China a little bit weaker.

The net of it from a geographic view is obviously still a little stronger in aggregate.

Great.

Just a follow up on the guidance assumptions, if we look at the guidance you gave us for 3Q revenue, it does imply a pretty solid fourth quarter growth rate again this year.

Can you give us a little bit of color as to what gives you confidence that you can do what looks like to me to be something like 4% organic on a 6% comp?

It's actually pretty balanced in terms of the stack comp, so there's deceleration assumed in Q4 organic growth from Q3.

Got it.

The deceleration sequentially?

Sequentially from Q3 to Q4, yes.

Okay.

That's fair enough.

Thanks a bunch.

Paul Knight, Janney Capital Markets.

Marc, some customers have been saying the Ion PGM assays, there's some new develop -- more products they are seeing.

Are you accelerating new product with the Ion PGM or is it the same pace in the past?

Paul, thanks for the question.

In terms of next-gen sequencing, there's a lot of buzz around the PGM these days because there is work in the clinical trials area for oncology using the platform for matching patients to the right drug for various cancer types.

That's a lot of buzz.

When I was at American Society of Clinical Oncology in June, that was clearly a lot of -- actually that was the most important buzz in that particular conference around anything in next-gen sequencing because that's really where the clinical application is.

Yes, there is products being developed and launched and a lot of good feedback on that product line.

Then the service business does seem to have been slower than other parts of Thermo Fisher.

Any color there?

Pete will hit that a little bit.

Yes, we actually had pretty strong growth in services, certainly in the quarter.

As I mentioned in analytical instruments, we had one of the first times we've actually called out our service business in that segment, so we had very strong growth there.

It was actually on the strong side.

Analytical did had of a good quarter versus the last four or five, six.

Is this the economic cycle we're seeing in analytical or academic?

Do you have any thoughts there, Pete or Marc?

Yes.

When you look at the growth in the quarter, really, the China government release of funds is most felt in our instrument business because we have very, very strong position there.

It's a high percentage of that business's total revenue mix.

While the growth was pretty good, it was a little bit less than the full-year target, really just driven by what's going on in China.

The enterprise services business, which is also part of that segment, did very well.

That's, obviously, encouraging.

As a question was asked earlier, we just launched a new UHPLC product line after the quarter end, which also will help us in the second half.

Okay.

Thank you very much.

Dan Arias, Citi.

If I could just go back to China funding one more time?

On the environmental monitoring business, can you just make a quick comment on where we are in terms of tapping into the money that's being devoted to air quality?

I think we're coming up on a year since the government announced the big investment in that area.

With the idea of going where the funds are flowing, how open has the spigot been there and just knowing that that's been one of your stronger applications?

We're focusing on tier three and tier four cities now and installing the air monitoring network in the country, so it's well into implementation.

We did, two years ago, tier one.

Last year, tier two cities and now we're into the broad market.

EPM, the environmental process business, grew in the quarter, so that was encouraging.

I would say that, amazingly, how time flies, soon we'll be getting into the servicing aspect of those instruments and the recurring stream of revenue, which will be exciting as well.

Got it.

Okay.

Maybe just a hypothetical on op expenses in the context, Marc, of your comment on proteomics and genomics.

If the stronger top line did allow you to invest a little bit more in incremental R&D, which of the businesses do you think you'd be more apt to allocate to?

Right now, we did invest a little bit of additional funds, based on our strong performance, and are allocating some additional funds for the second half of the year.

We want to make sure that in our life sciences solutions segment that we have very good growth prospects for the mid to long term.

The 3% growth that we set as our target, was actually a step up from where the business was performing.

I'm very pleased with the 3% in the quarter, but we're making some investments to shore up that area of the business.

Then of course, in other parts of the Company like chrom and mass spec we're making investments to capitalize on those opportunities, as well.

Got it.

Appreciate it.

Jeff Elliott, Robert W. Baird.

Marc, can you give a little more color on what you're seeing in the rest of world area?

In terms of rest of world, a softer quarter.

It's a very, very lumpy business because there are very substantial tenders primarily in the mining sector, interestingly enough, is very big in parts of South America that drive that.

A little bit of a softer quarter, but we expect it to be, for the full year, in the mid to high single-digit growth range.

Brazil was soft in the quarter, but generally, we feel like the outlook is good for the full year.

Got it.

Pete, looking at the life sciences business, could you care to guess what the pro forma op margin performance would have been had you owned that business both years?

To be honest with you, we haven't calculated that number.

Obviously, a significant portion of the year-over-year increase is a result of just adding the number in.

As I said, we picked up, in the quarter, $23 million of acquisition synergies, which is actions that we've taken as a business.

The life sciences solutions segment does productivity and sourcing and restructuring and all those things just the same way as the rest of the business does.

They're driving productivity in addition to just the addition of the Life Technologies numbers.

Got it.

Okay.

Thank you.

Tim Evans, Wells Fargo.

Just wanted to dig into the biopharma services business a little bit.

Do you have any thoughts on what the penetration rate in this service area would be?

Just trying to get a sense for what inning we might be in of this pretty substantial growth phase for that business?

The business, it's hard to define the exact penetration rate because the customer base is actually expanding the definition of what we're doing with them, which is interesting.

Part of it is, we continue to add service lines, but we've had customers say, you do this so well, we'd like you to do syringe work with us, where we might have been doing other types of outsourcing work.

The market keeps expanding, but when we just did our strategic plan review, which is a five-year outlook for that business, the growth prospects look fabulous.

I don't know what my baseball analogy is, but we're using football as we're almost at training camp time, it's probably end of the first quarter with three quarters to go.

Okay.

Thank you.

We have time for just one more question.

Steve Willoughby, Cleveland Research.

Just wondering if you could clarify a couple of things for me as it relates to the guidance?

Just looking through things it looks like your interest expense for the year has come down a little bit, your share count's come down a little bit, FX is a little bit better than expected.

You mentioned that there is a $0.04 benefit from acquisitions relative to what you were thinking before.

I understand the Cole-Parmer divestiture impact, but I'm just wondering, with only raising the high end of the guidance by $0.02, is there a little bit of extra conservatism built into the guidance now?

No, I would say there's less conservatism built in than there was before.

When you look at it, we're raising the midpoint by $0.04.

Then, we have $0.03 from the Cole-Parmer divestiture, so that's $0.07.

If you look at the actual versus consensus in Q2, about $0.02 of that was tax rate, which doesn't affect the full year.

So, you get pretty close to the $0.10 beat being added in to the full year.

That reflects our good performance in Q2 and are basically carrying through that performance into the full year.

Okay.

Then, just the final thing is on China, what gives you the confidence or what could prevent the business in China not being delayed for another quarter or for another six months?

Do you have confidence that that business the starts to come back here in the third quarter?

The team is very experienced with a great track record.

In the quarter that we had, we didn't have cancellations or anything of that sort, so usually when bookings happen, they ship.

From that perspective, we have high confidence that the business is going to perform.

It is a centrally controlled economy, so if the government wants to do something different anything's possible, but that would be a Thermo Fisher specific thing.

That would be a major macroeconomic factor, which no one is predicting, so I would say we feel good about the outlook in China, Steve.

Okay.

Thanks.

Let me wrap it up.

We had a very strong Q2.

It puts us right on track at the halfway point of the year and it positions us to achieve a very strong 2014.

As always, thanks for your support of Thermo Fisher.

We look forward to update of updating you on our progress next quarter.

Thank for and thank you for joining.

This concludes today's conference call.

You may now disconnect.