賽默飛世爾科技 (TMO) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Thermo Fisher Scientific 2014 fourth-quarter and full-year earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(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, 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 & Presentations until February 27, 2015.

A copy of the press release of our 2014 fourth-quarter and full-year earnings is available on our website under the heading, Financial Results.

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

Various remarks when we 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 September 27, 2014, under the caption, Risk Factors, which is on file with the Securities and Exchange Commission, and also available on the Investor section of our website under the heading SEC Filings.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change.

Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

Also during this call, we'll be referring to certain financial measures not prepared in accordance with Generally Excepted Accounting Principles, or GAAP, including adjusted EPS, adjusted operating income and adjusted operating margin, which exclude restructuring costs, amortization of acquisition, related intangible assets and certain other items.

The definitions of and the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the earnings press release and also in the Investor section of our website under the heading, Financial Information.

So, before we get started, one other item.

As I mentioned in prior quarters, please note that the commentary that we provide today regarding the Company's Q4 and full-year 2014 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.

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

Ken, thank you.

Good morning everyone.

Thanks for joining us on the call today.

As you saw in our press release, we finished the year with an outstanding fourth quarter, delivering excellent growth on both top and bottom line.

In an environment that still has its challenges, we focused intently on our customers, identified opportunities, and executed very well to deliver strong growth.

At the same time, we continue to make excellent progress with the integration of Life Technologies and are attracting -- tracking ahead of our initial goals as we approach the one-year anniversary of the close.

Our excellent performance in Q4 topped off what was a great year for us financially, operationally, and strategically.

This positions the Company well for a strong year head and a very bright future over the longer term.

We have a lot of ground to cover this morning so let me get right to our financial performance in the quarter and what we saw in our key end markets.

Then I'll cover some of the highlights of the quarter and the year, give you an update on capital deployment and wrap up with our guidance for 2015.

So, starting with the quarter.

Our revenues in Q4 grew 30% year over year; our adjusted operating income increased 48%.

We expanded our adjusted operating margin by 280 basis points to 22.8%.

Our strong top line growth and operational discipline led to adjusted EPS of $1.99, which is a 39% increase over Q4 of 2013.

Thanks to the determination of our team, we ended the year on a very strong note.

Looking at our Q4 performance in the context of our key end markets, I'm pleased to say that we saw strength across the board and we executed well to capitalize on year-end opportunities.

First, let me start with Industrial and Applied.

We had another quarter of mid-single-digit growth.

Our Research and Safety Channel, Chromatography and Life Sciences Mass Spec businesses performed particularly well.

We saw some year-end spending with our Industrial and Applied customers in Europe and we were able to capitalize on that.

In Diagnostics and Healthcare, we performed well again this quarter, with growth remaining in the mid-single digits.

We saw strong demand for immunodiagnostics products, as we have all year.

Our Transplant Diagnostics business and Healthcare channel also performed very well in Q4.

As you may recall last quarter, we talked about our involvement in supporting customers who are working to contain ebola.

We did see some benefit to our Q4 revenue from this activity.

Our customers turn to us for help with some of the most difficult challenges and this was another good example.

Turning to Pharma and Biotech, this end market was particularly strong in Q4, coming in with high digit growth.

We continue to effectively leverage the strength of our value proposition to help these customers accelerate innovation and drive out costs and we also captured opportunities from some year-end spending.

Last, I'm pleased to report that our performance in Academic and Government was also especially strong in the quarter, growing in the high single digits.

More specifically, we saw strong sales of our analytical instruments to several government agencies in the US, especially in our Life Sciences and Mass Spec business.

In addition, a number of our businesses took advantage of increased academic and government spending in Europe at the end of the year.

So in summary, we performed very well across all of our end markets for a strong finish to 2014.

That's a good lead into our discussion of the full year.

My assessment of the year was pretty simple.

We achieved or exceeded all of our goals, whether you measure us by our financial performance, execution of our growth strategy, our integration of milestones, or our balance sheet.

It's a pretty good report card and let me walk you through each of these achievements in a little more detail.

First, looking at our financial performance.

Our revenues grew 29% for the full year.

Adjusted operating income grew 45% with adjusted operating margin expanding 240 basis points to nearly 22%.

Let me make a quick comment on the topic of margin expansion.

We benefited from the acquisition and from delivering the related synergies.

And we also continued to drive productivity through our PPI Business System, sourcing, low-cost region manufacturing, and footprint optimization efforts.

When you add it all up, we achieved significant margin expansion last year and, looking ahead, we still have a lot of runway.

Finally, our strong performance led to a year of outstanding adjusted EPS growth, with a 28% increase year-over-year.

So overall, we had a great year operationally and we achieved a strong year according to all of our key financial metrics, including those related to the Life Technologies acquisition.

Now, let's talk a little bit about executing our growth strategy and the terrific progress we've made there.

As you know, the three elements of our strategy are: developing innovative new products, expanding our presence in emerging markets, and leveraging our unique customer value proposition to gain market share.

Let me review some of the highlights from the year and a few from the quarter.

First, 2014, was another strong year of new product innovation.

We have the largest R&D budget by far in our industry and invest about $700 million annually.

That investment is resulting in key new product launches across our technology offerings in Analytical Instruments, Life Science Solutions and Specialty Diagnostics.

I don't have time to go into every product we've talked about during the year but just to do a quick recap, here are some of the standouts.

In Analytical Instruments, we strengthened our industry leadership across our Thermo Scientific Mass Spec and Chromatography offerings.

We launched the new Q Exactive HF, which was the latest generation in our Orbitrap family.

We also launched the Prelude and Endura MD systems for clinical use.

It was a pretty big year for Chromatography, with the launch of Chromeleon 7.2 software and the Vanquish UHPLC system.

In our Life Science Solutions business, we strengthened our Ion Torrent Next-Gen Sequencing offering with a number of new product launches.

Among the highlights was the Ion PGM Dx instrument for clinical use in the US and Europe.

We've also been very focused on delivering NGS-based panels for clinical oncology so cancer treatment can be more effectively targeted to the patient.

A good example from 2014 was the Oncomine Solid Tumor DNA kit we launched last year in Europe.

In October, we leveraged our capabilities and HLA expertise in our Genetic Sciences and Specialty Diagnostic businesses to launch the research-use only, NXType Kit.

This is a workflow for HLA tissue typing for transplant patients that we believe will play an important role in further improving tissue typing accuracy and transplant success rates.

We've heard great customer feedback, so this is a clear example of our businesses are working together to bring value to our customers.

Also in Specialty Diagnostics, we launched the PCT Direct for point-of-care testing to expand the market for our high-growth biomarker business.

So as you can see, 2014 was a very strong year for innovation.

We put our R&D dollars and expertise to work to deliver high impact products for customers working in research, applied markets and the clinic.

We have a great line-up ahead for 2015.

Turning to emerging markets, the second element of our growth strategy, the big topic in 2014 was China.

We continued to strengthen our industry-leading capabilities in China and delivered mid-single-digit growth in 2014 in a muted government funding environment.

While the Chinese government works through the process of implementing reforms, we will keep you posted as to when we see an inflection point indicating faster growth.

Thermo Fisher's capabilities are well-aligned with key government priorities, including food safety, a cleaner environment, and expansion of the healthcare system.

So we remain very bullish on the long-term prospects for strong growth in China.

In the meantime, we haven't been standing still.

We've been expanding our presence in other emerging markets like Southeast Asia, India, and Brazil, to gain additional momentum in these growth regions as well.

We also continue to optimize our footprint in the US and Europe.

You may recall that we expanded our Centers of Excellence in Lithuania and Germany earlier in 2014.

And in Q4, we had the grand opening for our new Center of Excellence for Specialty Diagnostics in Fremont, California.

I was there for the ribbon-cutting and I have to say that the facility is quite impressive and a real showcase for production of amino assays and diagnostic tests.

I think our strong performance in 2014 shows that we've done a great job leveraging our global footprint to meet the needs of our customers and capture growth opportunities.

The last point I want to make about our growth strategy is that our customer value proposition continues to get stronger as more customers in a range of industries relies on us to help them meet their growth objectives.

We've been leveraging our value proposition in BioPharma with great success, as you know.

We also have some nice wins with industrial customers who are seeing the benefit of our depth of capabilities.

One of the biggest highlights here in 2014 was the addition of Life Technologies.

It further strengthened our ability to help our customers drive innovation and productivity and really positions us well to continue to gain share with our Biotech Pharma and Industrial customers.

That's a good segue to the integration; clearly, a major achievement for us in 2014.

Our overriding goal of the acquisition of Life Technologies is to combine our capabilities in a way that serves our customers best to drive growth.

We are off to a great start.

As you know, in this phase of the integration, we've been focused on delivering the cost synergies, planning the revenue synergies, and making sure that we set the business up for accelerated growth.

In terms of the cost synergies, we achieved $115 million in cost synergies last year.

As we mentioned previously, that was faster than we originally outlined and we're well on track to deliver the $300 million of cost synergies in year three.

Turning to the revenue synergies, we've been developing detailed plans since the close to realize the benefits of our combined capabilities.

We are now implementing those plans and are starting to deliver revenue synergies this year.

We're very confident in achieving our goal of $150 million in revenue synergies in year three, which is 2016.

Our team has done a lot of work here and it's exciting to see the plans start to materialize.

For example, in early January of this year, we introduced about 14,000 SKUs from the former Life Technologies organization into our research channel in North America.

Our sales reps are being trained to represent the expanded portfolio and the team is excited about the opportunities.

Although it's early days, our customers have been responding very favorably.

The final word I want to leave you with on the integration is that the Life Science Solutions business grew about 1% faster in 2014 than it had in the past few years.

This is another indicator that the integration is off to a great start.

Onto the last major achievement of the year.

In terms of our balance sheet, 2014 was all about repaying debt.

We generated strong cash flow and paid down $3.8 billion of debt in 2014 related to the acquisition of Life Technologies.

That got us to a leverage ratio of about 3.6 times by year end.

Given the pace of delevering and the confidence in our cash flows, we started deploying capital immediately in 2015.

In fact, we bought back $500 million of our stock in the first few weeks of the year.

We have many opportunities ahead to create shareholder value through our proven strategy of effectively deploying capital.

Let me now turn to our guidance for 2015.

Pete will cover the details and outline all of the assumptions for our revenue and earnings guidance.

But I'd like to make a couple of comments.

Our 2015 guidance reflects a number of factors.

First, it takes into account our very strong underlying operating performance.

It also includes the revenue synergies we expect to achieve as well as the continuation and a ramp-up of cost synergies.

It factors in contributions below the line from share repurchases we just completed and tax planning initiatives we are implementing.

As you are well aware, we're also operating in a very challenging FX environment.

So when you sum it all up, we're initiating revenue guidance in the range of $16.80 billion to $17.0 billion in 2015, which is about flat with the last year and includes a 4.5% headwind from foreign currency.

On the bottom line, our adjusted EPS assumes an 8 percentage point headwind from currency so we are guiding to adjusted EPS of $7.22 to $7.40.

This would result in 4% to 6% growth over our strong EPS performance in 2014.

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

First, our team worked with amazing intensity on all fronts throughout 2014.

Their efforts led to a very strong year and that puts us in an excellent position going into 2015.

Second, in terms of our guidance for 2015, the unfavorable FX is masking our strong underlying operating performance in the short term.

We'll see how rates play out as the year unfolds and update our guidance accordingly.

If rates deteriorate further, we will determine how much we can offset.

If they improve, we'll add the benefit to our revenue and earnings.

So in summary, we will continue to execute well, deliver growth, and set Thermo Fisher up for a very successful future.

With that, I would now like to turn the call over to Pete Wilver, our CFO.

Pete?

Thanks Marc.

Good morning, everyone.

As usual, I'll begin with an overview of our Q4 and full-year 2014 financial performance for the total Company then provide some color on our four segments and conclude with a detailed review of our 2015 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 in early February of this year.

However, for the Life Sciences solutions segment, 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 of that segment.

So, starting with our overall financial performance in the fourth quarter, we grew adjusted EPS by 39% to $1.99.

For the full year, adjusted EPS was $6.96, up 28% from 2013.

GAAP EPS was $1.49 in Q4, up 62% from $0.92 in the prior-year's quarter and $4.71 for the full-year 2014, up 35% from 2013.

As you saw in our press release this morning, starting with the top line, we delivered 6% organic revenue growth this quarter and our reported revenue increased 30% year-over-year.

Q4 reported revenue includes 26% growth from acquisitions net of divestitures and a 3% headwind from foreign exchange.

Please note that the components of the Q4 change in revenue do not sum due to rounding.

For the full year, total revenue increased 29% year over year and organic revenue was 4%, slightly above the high end of our most recent guidance as a result of our very strong results in Q4.

Full-year reported revenue includes 25% growth from acquisitions net of divestitures and a slightly negative impact from FX.

We strengthened our backlog in the quarter, with bookings 2% higher than revenue.

Looking at growth by geography, in the quarter North America grew in the high single digits and Europe grew in the mid-single digits.

Asia-Pacific grew low single digits, with China growing mid-single digits.

Rest of the world grew in the low single digits.

For the full year, North America and Europe grew in the mid-single digits, Asia Pacific and China grew at the same rate as Q4, and rest of world was essentially flat.

Looking at our operational performance, Q4 adjusted operating income increased 48% and adjusted operating margin was 22.8%, up 280 basis points from Q4 last year.

For the full year, adjusted operating income increased 45% and adjusted operating margin was 21.9%, up 240 basis points from 2013.

Our adjusted operating margin expansion for the quarter and the full-year revenue from the Life Technologies acquisition and achieving the related synergies.

That said, we also continue to see strong contribution from our primary productivity levers: global sourcing, footprint optimization, and our PPI Business System.

We realized $13 million in benefit from our restructuring actions in Q4 and $49 million for the full-year.

We realized $42 million of synergy benefits in Q4 and a $115 million for the full year.

We took advantage of our strong performance in Q4 to make additional strategic investments, primarily to straighten core technology platforms and commercial capabilities and accelerate growth.

Moving onto the details of the P&L, total Company adjusted gross margin came in at 49% in Q4, up 470 basis points from the prior year.

This is primarily due to the addition of Life Technologies along with solid productivity across our businesses.

For the full year, adjusted gross margin was 48.8%, up 460 basis points from 2013.

Adjusted SG&A in Q4 was 22.1% of revenue, which is 80 basis points unfavorable to 2013.

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

For the full year, adjusted SG&A was 22.9% 130 basis points unfavorable to 2013.

Finally, R&D expense came in at 4.1% of revenue for both the quarter and full year, 110 basis points above last year.

This increase reflects the impact of the relatively higher level of R&D investment in the Life Sciences Solutions segment.

R&D, as a percent of our manufacturing revenue for full year 2014, was 6.4%.

Looking at our results below the line, net interest expense in Q4 was $107 million, up $45 million from last year.

The increase was driven by interest on the debt we raised to fund the Life Technologies acquisition as well as the debt issuance we completed this past November to refinance maturities through the first half of 2015.

Net interest expense for the full year was $432 million, an increase of $198 million from 2013.

Adjusted other income for Q4 was $9 million -- $10 million higher than Q4 2013 and for the full-year, it was $13 million, $9 million higher than last year, both driven primarily by non-operating foreign exchange gains.

Our adjusted tax rate in the quarter was 13.2%, 270 basis points below last year, primarily as a result of acquisition tax planning and the US R&D tax credit, which was approved in Q4.

Given the late approval of the R&D credit, we recognized the entire full-year benefit in the fourth quarter.

Our year-to-date rate was 14.5%, lower than our full-year guidance of 15% as a result of the R&D tax credit.

In terms of returning capital, we continue to pay our dividend and paid out $60 million in the quarter and $235 million for the year.

Average diluted shares were $404.1 million in Q4, up $33 million or 9% from last year primarily as a result of the shares we issued to fund, to partially fund the Life Technologies acquisition and to a much lesser extent, option dilution.

For the full year, average diluted shares were 402.3 million, up 36 million from 2013.

Turning to cash flow and the balance sheet.

Cash flow from continuing operations for the year was $2.62 billion and free cash flow was $2.25 billion, after deducting $378 million of net capital expenditures.

This is $50 million above our full-year guidance as a result of very strong cash flow performance in Q4.

It's also up significantly from our prior-year cash flow, primarily as a result of increased operating earnings from the acquisition as well as the standalone business.

This increase was partially offset by acquisition-related interest expense and cash payments tied to the acquisition and related divestitures.

We ended the quarter with $1.35 billion in cash and investments, up $800 million sequentially from Q3.

This increase was driven by free cash flow in the quarter and the November debt issuance I mentioned earlier partially offset by incremental pay down of our term loan.

Our total debt at the end of Q4 was $14.6 billion, up $100 million from Q3 and our leverage ratio at the end of the quarter was 3.6 times total debt to adjusted EBITDA.

As Marc mentioned, we spent $500 million in the first few weeks of January on share buybacks.

Given our 2015 financial guidance and then we resumed capital deployment early in the year.

We now expect to achieve our target leverage ratio of 2.5 to 3 times by the end of 2015.

So let me wrap up my comments on the total Company with my usual update on our performance in terms of return on invested capital.

Our trailing 12-months adjusted ROIC in Q4 2014 was 9.5%, up 20 basis points from Q3.

This shows that we're delivering increased returns across the business which are offsetting the short-term dilution of adding another quarter of the Life Technologies investment into the average invested capital base.

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

Starting with the Life Sciences Solutions segment, in Q4, total revenue grew to $1.19 billion from $192 million in the prior-year, primarily as a result of the Life Technologies acquisition net of the divestitures.

On a pro forma basis, assuming Life Technologies was owned in both periods, organic revenue grew 7%.

In the quarter, we saw strong growth in our bio production, QPCR, cell biology, and next generation sequencing businesses.

Overall, we benefited from year-end spending by our Pharma and Biotech customers as well as government customers in the US and Europe.

For the year, reported revenue grew to $4.2 billion with pro forma organic growth, up slightly above 3.5%, Driven by a strong performance in the fourth quarter.

Q4 adjusted operating income for Life Sciences solutions increased significantly, primarily as a result of the acquisition and achieving the related synergies, with adjusted operating margin up 660 basis points to 30.8%.

For all of 2014, adjusted operating margin was 29%, 520 basis points higher than the prior year.

In the analytical instrument segment, reported revenue grew 2% in Q4 and organic revenue grew 5%.

We had strong growth in our Life Sciences Mass Spec, Chromatography and Services businesses in the quarter.

For the year, reported revenue growth was 3% and organic growth was 4%.

Q4 adjusted operating income in Analytical Instruments stayed flat to the prior year and adjusted operating margin was 20.2%, down 30 basis points.

In the segment, we delivered very strong productivity that was more than offset by strategic growth investments, along with unfavorable foreign exchange and business mix.

For all of 2014, adjusted operating income increased 4% and adjusted operating margin was 17.9%, 20 basis points higher than 2013.

Turning to the Specialty Diagnostics segment, in Q4, total revenue grew 4% and organic growth was very strong again at 7%.

We continue to deliver strong growth across much of the portfolio.

As Marc mentioned, our Immunodiagnostics business had a very strong quarter and growth in our Transplant Diagnostics and Biomarkers businesses were robust as well.

Our Healthcare channel also had a strong finish to the year, in part, driven by sales of seasonal products.

For the full year, both reported and organic revenue grew 5%.

Adjusted operating income in the segment increased 6% in Q4 and adjusted operating margin was 27.1%, up 70 basis points from the prior year.

In this segment, we had strong pull-through on the organic growth, strong productivity and a positive benefit from FX, partially offset by strategic growth investments.

For the full year, adjusted operating income increased 6% and adjusted operating margin was 27.4%, up 30 basis points from 2013.

In the Laboratory Products and Services segment Q4, reported revenue grew 2% and organic revenue grew 8%.

Our Research and Safety channel showed particular strength benefiting from continued improvement in US academic and government markets and year-end spending by our BioPharma and Industrial customers.

For the full year, reported revenue grew 3% and organic revenue grew 5%.

Adjusted operating income in Laboratory Products and Services was flat for the quarter and adjusted operating margin was 14.5%, down 40 basis points driven by unfavorable business mix and the Cole-Parmer divestiture, partially offset by solid productivity and favorable price.

For the full year 2014, adjusted operating income increased 2% and adjusted operating margin was 14.9%, down 110 -- excuse me, down 10 basis points from the prior-year.

So with that, I'd like to review the details of our 2015 guidance.

As Marc mentioned, we're initiating a 2015 adjusted EPS guidance range of $7.22 to $7.40.

This represents growth of 4% to 6% over our 2014 EPS of $6.96.

In terms of revenue, our guidance range is $16.80 billion to $17.00 billion, which is about flat with our reported revenue of $16.89 billion in 2014.

As Marc mentioned, we're seeing an unprecedented negative impact on both the top and bottom lines as a result of the recent strengthening of the US dollar versus our major foreign currencies.

As always, we're focused on our reported numbers but I thought I'd give you a bit more color on FX to give you some perspective on how it's impacting our guidance.

Foreign currency is reducing our adjusted EPS growth by $0.58, or 8%.

So if you were to look at our 2015 guidance on an FX neutral basis, adjusted EPS would be growing 12% to 14%, which represents very strong underlying operating performance.

On the top line, FX is lowering our revenue by about 4.5%, so our FX neutral reported growth guidance would be 4% to 5%.

Moving onto the details of our guidance, acquisitions net of divestitures are expected to contribute about 50 basis points to our reported revenue growth in 2015.

On an organic basis, our revenue range assumes an organic growth midpoint of about 4%, which includes Life Technologies after February 3, the one-year anniversary of the close date.

The midpoint of our 2015 organic revenue growth guidance is essentially the same as our 2014 organic growth when calculated on a pro forma basis including Life Technologies.

We're not expecting any significant changes in our growth assumptions by end market compared to 2014.

That being said, there is a slight mix shift by end market as a result of including Life Sciences Solutions in our 2015 organic growth calculation from February onward.

As a result, we're expecting slightly slower growth in Pharma and Biotech in the mid-to high single digits and slightly stronger growth in Academic and Government although still in the low single digits.

We expect growth in Diagnostics and Healthcare as well as Industrial and Applied to be consistent with 2014 at around the Company average.

For the Life Sciences Solutions segment, we expect pro forma organic growth of 3% to 4% for 2015.

Compared to 2014, growth in this segment will benefit from revenue synergies but will face a more difficult growth comparison and some dilution from the divestitures.

Consistent with past practice, our guidance assumes currency -- foreign currency exchange rates and we haven't attempted to forecast future changes in rates.

Our guidance also does not include any future acquisitions or divestitures.

Turning to adjusted operating margin, we're expecting around 50 to 70 basis points of expansion year over year.

In terms of pull-through on the FX revenue headwind, we're expecting a substantial unfavorable impact on the bottom line, totaling $275 million or about 37% average margin and 70 basis points of adjusted operating margin dilution.

This is being driven primarily by the weakening of the euro and Japanese yen.

With the addition of Life Technologies, the euro now pulls through to our adjusted operating income at a little more than 35% and the Yen is consistent with prior years, at 60% pull through.

So if you were to look at our 2015 guidance on an FX neutral basis, our margin expansion would be very strong at 120 to 140 basis points.

We are aggressively managing our cost base and driving top line actions to offset as much of that FX headwind as possible without damaging our future growth prospects.

We're also managing the FX impact with below the line actions, such as share buybacks, further optimizing our debt structure and initiating additional tax deploying strategies.

In total, we expect our productivity drivers to yield about 260 basis points of adjusted operating margin expansion.

Similar to last year, we expect to deliver productivity from our PPI Business System, our global sourcing initiatives including low-cost region sourcing and manufacturing, our footprint optimization actions, and we're assuming about $115 million of incremental cost synergy benefit in 2015.

And that will realize about $60 million of revenue synergies with around $20 million of adjusted operating income benefit.

This puts us well on track to achieve our year three goal of $350 million of combined cost and revenue synergies.

These benefits will be somewhat offset by select strategic investments continuing drive growth, primarily in emerging markets and also to enhance our customer experience.

Moving below the line, we expect net interest expense to be in the range of $375 million to $385 million, about $50 million lower than 2014.

The decrease is primarily as a result of continuing to pay down our term loan along with settling our 2015 maturities, a portion of which will be financed with our November 2014 bond issuance.

We're expecting our adjusted income tax rate to be about 14%, down slightly from 14.5% in 2014.

In this projection, we're assuming that the R&D tax credit will be approved again in 2015 or that we'll do some incremental tax planning above our base assumptions to replace it.

In terms of capital deployment, we're assuming that we'll return approximately $240 million of capital to shareholders this year through dividends and $500 million through share buybacks, which, as I mentioned, we completed earlier this month.

This leaves about $400 million remaining on our current share buyback authorization.

Full-year average diluted shares are estimated to be in the range of $403 million to $404 million, up slightly from 2014.

And we're expecting net capital expenditures to be in the range of $435 million to $450 million.

Finally, in terms of full-year 2015 free cash flow, we're expecting about $2.6 billion, up $350 million compared to 2014.

As a final note on guidance, I thought it would be helpful to give you some insight into what we're expecting for Q1 2015 because Q1 last year included only a partial quarter of the Life Technologies acquisition and that resulted in higher than normal margin due to the timing of revenue and expenses throughout the quarter.

We're expecting Q1 2015 reported revenue growth of 1% to 3% and organic revenue growth of 2% 4%.

In terms of Q1 earnings, we're expecting adjusted EPS growth of 2% to 6% and adjusted operating margin expansion of about 15 basis points.

In addition, we expect our interest expense and tax rate to be higher in Q1 than the average for the year as a result of the phasing of paying down debt and implementing tax planning throughout the year.

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

Results above or below the midpoint will depend on the relative strength of our markets as well as FX fluctuations during the year.

In summary, we delivered a strong finish to the year which positions us well to achieve our financial goals for 2015.

With that, Ill turn the call back over to Ken.

Thanks Pete.

Melissa, we're ready to open it up for Q&A.

(Operator Instructions)

Derik De Bruin, Bank of America Merrill Lynch.

First question for a change.

Good morning.

So just one quick one.

And then just one other one.

So Pete, you're a day less in Q1 this year by your calendar; is that my correct calculation on that?

Yes, it's one less day in Q1 and then we pick up a day again in Q4.

Okay, just making sure that, that's there.

And on China, can you just -- a couple of your competitors made some noise about seeing at least a little bit of improvement or seeing some potential pick up.

What's embedded into your organic revenue growth guidance for China this year?

Thanks.

Sure.

Thanks for the question.

In terms of China, looking back at last year, mid-single digit growth in the quarter, mid-single digit growth for the full year, bookings growth was stronger at high single-digit so we booked a little bit of backlog.

From our perspective, we're assuming in the guidance that market conditions are going to be very similar in 2015 to 2014.

And obviously, when we hit an inflection point for accelerated growth and we'll obviously communicate it, but there's not a huge amount of transparency right now into when the government is going to step up spending.

Based on the fact that 2015 has an easier comparison versus what we've had last year, that should hopefully be a conservative assumption on China.

Great, thanks.

You're welcome.

Ross Muken, Evercore ISI.

Good morning, gentlemen.

So on the quarter in and of itself, and then you had a couple of other businesses had their best prints of the year from a growth perspective.

If you look under the hood and examine where the greatest deltas were in the Q at least relative to our expectations, ex maybe one-off things like flu, where do you feel like the core performance really inflected and it was a market or share or underlying dynamic?

Because I think the numbers across the board in some of the pieces were a lot better than certainly we were looking for.

Ross, the team across our businesses and across the globe performed very well.

And the 6% organic growth, the strength in each of our business segments really was -- it was a highlight.

Very nice to see the Life Science Solutions business have very strong growth in the quarter, delivered very nice year overall with about 3.5% growth on the full-year, which is about 1 point better than where it had been growing the prior year.

So that's a real positive.

But we saw good performance in our channel businesses, both in Specialty Diagnostics and in the Research and Safety within our products and services.

And generally, a great year with our Mass Spec and Chrome business as well.

So really strong across the board.

And obviously relative to 2015, a very difficult environment you noticed unprecedented from an FX perspective.

As you saw rates shift in the last several weeks, what other sorts of discussions are you having internally in terms of whether it's prudent to do something more aggressive on the cost side or push up synergy capture, obviously is a hard thing to judge and the magnitude of the moves have been, again, more volatile than we would've thought.

So as you think about the potential offsets or how you plan out the rest of the year because you've never been shy by doing things intra-year, what are the key things we should look for to figure out if maybe we see further offsetting items that come later in Q2 or Q3 or beyond?

So it's a great question.

So the way the team thought about it is the following, which is the Company's performing extraordinarily well operationally, good momentum with our customers, when we looked at the FX headwind, the way the team has responded, it signed up for a more aggressive operating plan, right?

So you look at it the midpoint of our guidance organic growth of 4% is stronger than the last few years.

When you look at the underlying margin assumptions, EPS assumptions, with only $0.5 billion of capital deployment, you're seeing very strong fundamental actions.

Some businesses took incremental cost actions.

Some businesses signed up for more growth and basically, we have a great team of people around the world.

We discussed it business by business and so what's the best way to maximize our performance?

So that's a look at how we are dealing with this situation right now at this moment in time.

Looking forward, if rates improve, we're just going to let that flow to the bottom line and just raise the guidance.

If rates deteriorate, what the team is going to do is try to offset as much as we can without damaging, obviously, the Company for the long term.

So it's not a plus or minus we're only -- we're mostly lead -- if the world gets more difficult, we'll offset what we can do and if the world gets better, then it all goes to the bottom line.

That's how we're thinking about it.

I guess you probably never imagined a year where you'd have as strong a core growth as you have that it would only drop down to 5% earnings growth.

The way I look at is we have managed through lots of different environments and we exit every one of these periods a stronger, more competitive industry leader.

I view the FX changes as an opportunity for Thermo Fisher to plow through this and come out as an incredibly strong Company with great financial performance.

And we'll look back at this period whether it's one month, six months or a couple of years and in terms of this type of environment and I think our shareholders and certainly, our customers will say, wow, Thermo Fisher distinguished itself once again.

So that's how we're thinking about it.

We'll be super aggressive in managing the business.

Thanks Marc.

Isaac Ro, Goldman Sachs.

Sorry.

Can you hear me?

Yes

So I just want to ask a quick question on the LPS business.

Just trying to get a sense of the extent to which you felt like market share or mix might have been part of the strong performance.

So in the LPS segment, we have more exposure to the academic and government customer base there.

And that obviously had strong year-end spend, both in Europe and US, so that helped us from an end market perspective.

Our research channel business, Research and Safety Channel business is doing great.

It's performing well and I think it continues to gain market share.

So it's a combination of those two events.

Got it.

And then in the Forensics business, that's obviously been a really nice business for you guys over the years, both prior to the Life acquisition and since.

Looking ahead, it seems like there's a little new competition coming on the marketplace.

What's your plan to defend your turf there and maybe try and expand the market to sustain a healthy growth rate?

In terms of forensics, we're the industry leader globally.

We have great position between our Sanger sequencing and some customers are starting to look at NGS and we play a role there as well.

So we're leveraging our install base and decades-long of relationships with these customers to make sure that they're getting what they need.

It's a conservative customer base and we're well-positioned there.

We work with a variety of governmental agencies as well to help them expand the market and create new opportunities in forensics testing; we're right in the midst of that.

That rewards us with good market share.

Got it.

Thanks so much, guys.

You're welcome.

Tycho Peterson, JPMorgan.

Nice quarter.

Maybe just going back to the prior questions on some of the offsets for FX and maybe for Pete.

I'm wondering if you could talk about whether any of the tax strategies that you alluded to could have an impact this year and then on the repo, I assume you'll complete the remaining $400 million.

That sounds like that wasn't embedded in guidance but beyond that, should we assume that buybacks are a bit more of a priority than bolt-on or larger M&A in this environment?

Let me do the capital deployment one and then Pete will cover the other part.

In terms of capital deployment, our assumption in the guidance is the $0.5 billion that we completed.

In terms of the balance of how we think about the year, we will continue to look at bolt-on M&A and where it makes sense.

We have a good pipeline so we'll look at that.

And then obviously as the year unfolds, we'll determine whether it makes sense to do additional share buybacks or not.

So right now, what's embedded in guidance is what we've done and then we'll update you in the future quarters about how we're going to deploy capital.

And then on the tax rate, so Tycho, we've baked in a significant amount of tax planning actions into our guidance.

As I said, we've included the R&D tax credit so that's worth about $20 million.

It hasn't been approved yet but it's been approved the last number of years so we decided to put it into our guidance this time around.

So if that doesn't happen for some reason then we would actually have to come up with $20 million of incremental tax planning in order to offset it, which we feel confident that we can do.

But that's the way it's set up in our guidance.

And then in terms of some of the assumptions that are by segment or customer base embedded in guidance, you guys talked about mid-single to high single digit growth in Pharma and Biotech.

Can you maybe just talk about the momentum there?

Is this largely from some of the larger global accounts and then on academic, low single digit seems like a reasonable starting point.

I think there was some discussion in DC, you could see a more meaningful prompted has been proposed to the NIH.

So any intel you can share from you're hearing out of DC on the budget?

In Pharma and Biotech, it obviously had a strong year in 2014, high single digit growth in the quarter and the year.

As we look to this coming year, we're mid to high single digits simply because we have the Life Technologies included in the end market calculations.

So that makes it bit of a broader base but we focus on gaining share.

Academic and government, right now the funding level in the NIH is modest growth.

There's a lot of dialogue going on about increased opportunities but that hasn't yet obviously translated.

Obviously there was a little of a mention in the State of the Union and Dr. Collins, Head of NIH, has been out actively talking to industry and the constituents about opportunities to make investments there.

So we'll see how that plays out if it gets even stronger than what we anticipate at this point.

Okay, and just lastly, as we think about the strong dollar, any chance you would maybe accelerate some international investments?

I know you're moving manufacturing to Singapore.

Are there other opportunities to maybe benefit from this strong dollar in terms of your manufacturing footprint?

It's a good thing.

So a good question, Tycho.

So in terms of manufacturing, one of the things that we're doing, we're moving more of our production of reagents to our Lithuanian site, which is both low-cost and obviously will benefit from the exchange rates.

So over time, we'll increase the natural hedge in our business by increasing our manufacturing footprint in Europe but selecting our lowest cost facility to do that.

So we've got a very substantial presence in Lithuania and continue to expand that out.

Great.

Thank you.

You're welcome.

Doug Schenkel, Cowen and Company.

Good morning.

Thanks for taking the questions.

My first question is on M&A.

So the Life deal was completed about the year ago.

You're in a position to get the debt to EBITDA ratio down to 2.5 times this year.

Could you just give us a refresher on your M&A criteria, including size parameters, maximum leverage parameters, and ROIC targets and over what period?

And related to this, is it fair to conclude that while it would be tough to do anything in Life Science Solutions given ongoing life tech integration efforts that sizable deals that have overlapped with other business units are fair game if they make sense?

Great question.

So given that we haven't done -- if you're doing a very large transaction and have acquire a year, it's a good opportunity to refresh everyone on our M&A approach, right?

It's obviously been fine-tuned over 15 years.

We have a great track record here.

The strategy is around acquisitions have to strengthen the Company strategically.

It has to be well understood and appreciated by our customers.

And it clearly has to create shareholder value as measured by return on invested capital.

Our hurdle rate has remained the same over very long periods of time, which is an 8.5% cost of capital is what we assume is the hurdle rate meaning that we're targeting double digit returns or better when we deploy capital internally or externally.

In terms of the areas of focus for M&A, it would cut across our higher tech portions of our portfolio, Life Science Solutions, Specialty Diagnostics, Analytical Instruments.

In terms of the scale of deals, we don't have any size constraints although the way I think about it is over the last 10, 15 years, we've done two large deals and we've done, I don't know, 75 to 100 bolt-ons, right?

So the predominance of what we do is bolt-ons and in any given year, you should expect us to look at some smaller transactions and then once every few years, when the stars line up, sometimes larger things happen.

In terms of the target leverage ratios, we like to operate day-to-day in the 2.5 to 3 times.

We're willing to spike up to about 4.5 times so we have plenty of capacity at any point in time if we want to deploy capital on something that clearly create shareholder value.

And occasionally, those larger opportunities present themselves but I think you should expect us to be doing bolt-on acquisitions as based on where the number of companies really are in terms of opportunities.

And the last part of the question on fit by segment, is it right to assume that LSS is probably not ready for something big but other areas might be, if the opportunity presents itself?

Yes, I mean, generally the -- and not generally -- specifically, the LSS team is doing an incredible job of managing the business.

The team is nailing it.

Is it likely that we have very large transaction there?

No, I think it's a little likelihood event.

But I'm very confident in the team but I would say we're really focused on running what we have and where -- things to create shareholder value and strengthen the Company, we'll look at them.

Okay and then, I guess my second question is really on the pharmaceutical end market.

It clearly sounds like momentum has continued there for, not just you but others in the group.

For Thermo specifically, you guys have been pretty strong in this end market for awhile.

That's a function of not just recent cross-group trends but also new products and really your ability to package products across different verticals.

Could you talk about two things?

One is, how are you feeling about your ability to continue to pick up share the way you have over the last few years via your portfolio approach?

And I guess the second part of it is, how should we think about visibility on sustainability?

Q4, for example, was really, really strong.

Is there any risk that there were some pull-forward of spend that might lead to a moderation in growth, at least in the first half of the year and how do you factor that into guidance?

Thank you.

So we -- in terms of the continuation of the ability to gain share, the leverage our value proposition, I'm highly, highly confident.

We've gotten only better, right?

We have more experience, more case studies, more customers willing to do referrals, and even more capabilities with the addition of Life Technologies into our portfolio.

So we're doing well and we have lots of opportunities to continue to drive that.

We're expanding the number of accounts we're focused on and generally, I feel great about it.

In terms of visibility, we have pretty good visibility into the end market.

I mean, it bounces around a little bit quarter to quarter.

In terms of the easiest way to answer it is more how to think about the year.

If we're saying -- we are saying the 4% organic growth is the midpoint of the guidance for the full year for the Company, we have a little lower organic growth in Q1, as Pete mentioned in his opening comments.

We expect the second half of the year to be slightly stronger than the first half of the year on an organic basis.

That is a comment on all the end markets as opposed to comments specifically on Pharma, Doug.

Okay, thank you.

You're welcome.

Steve Beuchaw, Morgan Stanley.

Good morning and thanks for taking the questions, everyone.

Marc, I wanted to follow up on a comment you made in your prepared remarks about academic spending trends.

It's clearly embedded in the overall outlook and you referenced it a couple of points where academic was particularly solid at the end of the year.

I wonder if you could point us to where, over the course of 2015, you think there's the most opportunity for improvement -- not so much in terms of execution but in terms of the end market, specifically in academic and government.

Yes, so Steve, as we look at 2015, we're expecting low single digits but a little bit better than the low single digits we delivered in 2014.

We're expecting the US to be slightly stronger because the customer base has more visibility to the budgets now and that allows them to spend.

So let's just play that exactly as we thought on the academic and government which was weaker spending in the first half of the year, stronger spending in the second.

We expect this year the environment to be stable and modest growth.

So US, a little better.

We think Europe will be a little bit more muted just given the economic environment there but still a little better in aggregate across the globe.

And then a broader question on seasonality in the model.

When we look at 2013 and again, in 2014, in both years, we were surprised a bit to the upside on organic growth.

We can point to different factors in each year.

But I wonder is it possible that we're getting into a world where the business is a little bit more seasonal where the fourth quarter does trend a little bit stronger than it might have on a relative basis as compared to prior years?

And we should think about that in terms of how we model the second half of 2013?

Thanks.

In terms of overall activity, the fourth quarter is by far the strongest because you're -- you've had some factors change over the last few year.

One is the way healthcare utilization patterns have operated with low activity in the beginning, and it ramps so in terms of absolute dollars, Q4 is very strong.

In terms of the organic growth, it shouldn't affect things, right?

Organic growth, in that respect, shouldn't be affected by that change.

What has happened, at least as we look back at the last couple of years in the fourth quarter, is the economic environment has been pretty stable and customers have been willing to release year-end funds.

In both years, right, it was always at the beginning of those years some uncertainty, could the world be bad and at the end of the year, the world played out okay and people released money.

So I think there's a bit of people holding back until the end of the year, a little of caution and then things look okay, then they release funds.

So I think that's going on a little bit.

Thanks so much.

Melissa, we have time for just one more.

Steve Willoughby, Cleveland Research.

Thank for taking my question.

Really, just two things.

First, I guess Pete, as it relates to your guidance for 2015, looking at operating margins, I know you broke out the negative impact from FX.

Could you maybe also help us think about the 50 to 70 basis points you guys are guiding to operating margin expansion in 2015?

How does -- what is the makeup of that expansion?

Is there any incremental benefit from Life's gross margins versus leveraging other expenses?

Sure.

So just in terms of the split between the elements of the P&L, if you take the midpoint at 60 basis points, about 30 comes from gross margin and about 30 comes from SG&A.

We expect to hold the R&D percent of revenue pretty much flat year over year.

And then in terms of how it breaks out between the different elements, FX and price volume mix, so price volume mix is about 50 basis points.

As I mentioned earlier, foreign exchange is a 70 basis point dilution.

There's about 10 basis points net between the acquisition and divestiture so that represents the divestiture is related to the acquisition as well as the Cole-Parmer divestiture and then just picking up one month of Life Technologies that we didn't get last year.

Productivity, about 190 basis points; synergy, 70 basis points; inflation, negative 90 basis points, and then about 100 basis points of investments.

That's a pretty similar profile to what we've seen in prior years, with the exception of obviously the foreign exchange dilution is very significant.

So other than that, it's pretty much a normal year.

Okay, thanks so much for that.

And then just secondly, in terms of the revenue synergies, Marc alluded to you guys are starting to do some of that in 2015.

I might have missed it but did you give a number of what you are factoring in for revenue synergies in 2015 in your guidance?

Yes I did.

It's $60 million in revenue and we're assuming about a $20 million EBITDA pull-through on that.

Okay, thanks so much.

Great, so let me thank everyone and wrap up the call.

Obviously, we're pleased to deliver an outstanding quarter, a great year in 2014.

We're looking forward to build on that momentum and have a really strong 2015.

Of course, thanks for the support of Thermo Fisher Scientific and we look forward to updating you on our progress next quarter.

Thanks everyone.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.