賽默飛世爾科技 (TMO) 2015 Q3 法說會逐字稿

Welcome to the Thermo Fisher Scientific 2015 third-quarter 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.

Thank you for joining us.

On the call with me today is: Marc Casper, our President and Chief Executive Officer; and Stephen Williamson, Senior Vice President and Chief Financial Officer.

Please note, this call is being webcast live and will be archived on the Investors section of our website, ThermoFisher.com, under the heading Webcasts and Presentations until November 6, 2015.

A copy of the press release of our third-quarter 2015 earnings and future expectations is available in the Investors section of our website under the heading Financial Results.

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

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

Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors including those discussed in the Company's annual report and on Form 10-Q for the quarter ended June 27, 2015, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also available on the Investors section of our website under the heading SEC Filings.

While we may elect to update future-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 third-quarter 2015 earnings and future expectations and also in the Investors section of our website under the heading Financial Information.

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

Thanks, Ken.

Good morning, everyone.

Thank you for joining us today for our Q3 call.

I am pleased to report that we delivered a solid quarter, with good growth on the top and bottom line.

Q3 is another example of how we're successfully executing our growth strategy and increasing our depth of capabilities to gain market share.

We had another great quarter for innovation, with important new product launches across our businesses.

We're leveraging our scale in APAC and emerging markets as a key differentiator, and we had another strong quarter in China.

We also continue to make good progress in capturing revenue synergies using our expanded technology portfolio, our commercial capabilities and global reach to show our customers the power of our value proposition.

With a strong nine months behind us, we're on track to achieve our growth goals for the year.

Before I get into the business highlights for the quarter, let me start with a financial overview and some color commentary on our end markets.

Then I'll conclude with our updated guidance outlook for the year.

So in terms of the financials, our revenue in Q3 was $4.12 billion.

Our adjusted operating income increased 2% to $934 million.

We achieved adjusted operating margin of 22.6%, which represents 70 basis points of margin expansion.

Finally, we extended our track record of consistently delivering strong adjusted EPS growth.

We achieved $1.80 of adjusted EPS, which is a 5% increase over Q3 of last year.

We drove good pull-through on our topline growth using our PPI business system to increase operating efficiencies and provide the highest quality products and services to our customers.

Our solid results again this quarter demonstrate our ability to effectively manage the business despite the FX headwinds and achieve our growth goals.

So starting with our performance by end market, we didn't see much change in Q3.

In industrial and applied, our performance was similar to what we've seen all year, with low single-digit growth.

Our core industrial businesses remained soft while those serving applied markets again performed well.

We had good growth in our analytical instrument businesses serving environmental and food safety markets.

We also had another strong quarter in our chromatography business.

Turning to diagnostics and healthcare, our performance in this end market was pretty similar to what we had seen in the first half of the year, with growth in the low single digits.

The key contributors in Q3 were our clinical diagnostics business and our healthcare market channel, which continued to grow well.

In academic and government, we grew again this quarter in the low single-digits.

Conditions in this end market were also basically similar to what we experienced in Q2.

Last, I'm pleased to say that we had another excellent quarter in pharma and biotech, which grew for us at just over 10%.

We continue to capitalize on the strength of this end market overall and effectively leverage our unique value proposition, which really resonates with these customers.

We had strong performance across our businesses that serve this end market and particularly in biosciences, bioproduction and biopharma services.

Let me now highlight some of our accomplishments from Q3 in the context of our growth strategy.

We continue to make great progress on all fronts, which positions us for another successful year.

As you know, our growth strategy is centered around high-impact technology innovation, leveraging our scale in Asia Pacific and emerging markets and developing our unique value -- and delivering our unique value proposition to best serve our customers and gain share.

In terms of innovation, Thermo Fisher has by far the largest R&D budget in our industry at approximately $700 million annually and we continue to target those investments to create the most value for our customers.

Let me hit some of the highlights from Q3.

First in September, we introduced the new Ion S5 and Ion S5 XL next-generation sequencing systems.

This is a significant development that builds on our Ion Torrent platform.

It makes targeted sequencing more accessible to customers working in academic, translational and clinical research labs.

The key advantages of both systems are that they're cost effective and flexible, giving scientists the ability to sequence gene panels as well as small genomes, xenomes and transcriptomes on a single platform.

We're also making great progress in developing new products that improve the speed and accuracy of test results in the clinical laboratory.

At the annual meeting of the American Association of Clinical Chemistry, we launched a number of new Thermo Scientific instruments and assays designed to help clinicians improve patient diagnosis and treatment.

Let me mention a couple of them.

We launched three new immunoassays that have been FDA cleared for detecting autoimmune diseases.

These new EliA assays can help diagnose multiple conditions that could be precursors to kidney disease.

We also introduced the Phadia 2500E instrument, which is now configured to run both our EliA autoimmunity and ImmunoCAP allergy test to significantly increase lab productivity.

In our analytical instruments business, we introduced a new HPLC system, the Thermo Scientific Prelude LX-4 MD, which is listed with the FDA as a Class I medical device for general in vitro diagnostics use.

The Prelude LX-4 significantly enhances sample throughput for high-volume clinical settings.

Also worthy to note during the quarter, we obtained CE marks for our Prelude MD HPLC, Endura MD mass spec and related ClinQuan MD software, which were all previously introduced in the US.

This designation gives clinical labs in Europe access to advanced technologies for analyzing patient samples using laboratory developed tests.

Let me take a moment now to highlight an example that demonstrates how our customers are recognizing the value we can create through our unique depth of capabilities and our reputation as a scientific thought leader.

We've been collaborating with the Biotech Research and Innovation Centre at the University of Copenhagen to help researchers better understand how gene mutations can lead to cancer progression.

Scientists there recently published two landmark studies in the scientific journal, Cell.

Their work was based on results generated by our Orbitrap Fusion mass spec and our Ion Torrent next-gen sequencing technologies.

These studies offer insight into human cell biology that may eventually lead to more effective cancer treatments and better outcomes for patients.

This is a great example of the new capabilities we're now able to deliver to our customers based on our successful integration of life technologies.

Just to give you a quick update on where we are relative to our revenue synergy target, we continue to make great progress in Q3 building on the momentum we have had all year.

With nine months behind us, we're at $50 million, which positions us to slightly exceed our revenue goal for the year.

Turning to APAC and emerging markets, China seems to be on the top of everyone's mind and I've been getting a lot of questions about it.

I am pleased to report that we had another strong quarter in China, which contributed to good growth for us in APAC overall.

Our China strategy is clearly working and we delivered 15% growth in Q3.

We continue to work with the government and our customers to meet their goals for improving healthcare, the environment and food safety.

Back in August, I had the opportunity to visit some of these customers with our team in China and their feedback reinforces why our technologies are well positioned there.

Here are a couple observations from my trip.

It is great to see our high-end instruments in customer labs there.

Our Q Exactive HF and Orbitrap Fusion Lumos mass specs are being used for proteomics research and our next-generation sequencing technologies are helping to advance oncology research.

We also supplied our gas and particulate monitors to ensure that air quality was safe after the widely-publicized chemical warehouse explosion in Tianjin.

I think this is an example that illustrates why the diversity of our technology portfolio is a key advantage in addressing China's needs.

The investments we've made in our China innovation center are also bearing fruit and we have a number of our products soon to be launched that have been designed specifically to meet the needs of the local market.

So we have great momentum with our customers, our team is executing well, and we continue to feel good about our prospects for growth in China.

In other emerging markets, we continued our strategy of expanding our presence to position us for growth and the most recent example is an investment we made in Brazil.

We opened a new customer experience center in Sao Paulo to serve markets across Latin America.

This center is a showcase for our analytical capabilities and allows us to partner with customers to help them achieve their goals by developing new methods using our technologies.

We made this investment in Brazil despite the current economic challenges that this country is facing in the short term, because we believe it will position us for market share gains as the customer and funding environment improves.

Before I move on to our guidance, I'll make a quick comment on capital deployment.

Just after quarter end, we completed our acquisition of Alfa Aesar for approximately $400 million to expand our offering of laboratory chemicals.

This is a nice complementary bolt-on that gives our customers access to a much broader portfolio whether they're working in research or production.

It is another great example of how we strengthen our strategic position by leveraging our scale and customer reach.

In terms of capital deployment, we bought back $500 million of stock in January, we deployed $700 million to make two strategic bolt-on acquisitions, and we continued to return capital to our shareholders through our quarterly dividend.

So, we've deployed a total of $1.4 billion for the year to date in order to create value for our customers and our shareholders.

Now, let me give you a quick update on our guidance for 2015.

As you saw in our press release, we're raising both our revenue and adjusted EPS guidance.

We now expect revenue for the year to be in the range of $16.81 billion to $16.91 billion.

We are also raising our adjusted EPS guidance to a new range of $7.33 to $7.41.

This equates to 5% to 6% growth over our strong results in 2014.

So in summary, it was a great quarter.

We delivered solid financial performance, we made excellent progress in executing our growth strategy, and we continued to make wise investments to create shareholder value.

With that, I will turn the call over to our CFO, Stephen Williamson.

Stephen?

Thanks, Marc.

Good morning, everyone.

As usual, I'm going to begin with an overview of our total Company financial performance, then provide some color on our four segments and conclude with our updated 2015 guidance.

So starting with our overall financial performance for the third quarter.

As you saw in our press release, we grew adjusted EPS by 5% to $1.80.

GAAP EPS in Q3 was $1.18, up 1%.

On the top line, we achieved organic revenue growth of 4% this quarter.

Our reported revenue was down 1% year over year.

Q3 reported revenue included a 6% headwind from foreign exchange and a neutral impact from acquisitions net of divestitures.

And please note that the components of the Q3 change in revenue do not sum due to rounding.

Bookings were slightly less than revenue in the quarter but grew organically in all four segments.

Looking at our growth by geography, both North America and Europe grew in the mid single-digits; Asia Pacific grew in the high single-digits, with China growing in the mid teens; and rest of the world declined in the mid single-digits.

Looking at our operational performance, Q3 adjusted operating income increased 2%.

Adjusted operating margin was 22.6%, up 70 basis points from Q3 last year despite a 110 basis points of headwind from foreign exchange.

At a high level, our adjusted operating margin expansion for the quarter was driven by continued strong contribution from our primary productivity levers: global sourcing; footprint optimization; and our PPI business system, as well as continued contribution from cost synergies.

To add some color on our synergies, we realized $32 million of incremental cost synergies in Q3, in line with our full-year target of $130 million.

Revenue synergies during the quarter were $25 million.

As Marc mentioned, this puts us in a great position to slightly exceed our full-year 2015 target of $60 million of revenue synergies.

We've been able to accelerate our actions and are on track to deliver the $150 million of revenue synergies in 2016.

In Q3, we continued to make additional strategic growth investments, primarily to strengthen our core technology platforms and commercial capabilities.

Moving on to the details of the P&L, total Company adjusted gross margin came in at 48.3% in Q3, down 80 basis points from the prior year.

The decrease was driven primarily by foreign exchange and unfavorable business mix.

Adjusted SG&A in Q3 was 21.5% of revenue, which is 140 basis points favorable to Q3 2014, driven primarily by foreign exchange, cost synergies and our productivity actions.

Finally, R&D expense came in at 4.2% of revenue flat to Q3 last year.

R&D as a percent of our manufacturing revenue in Q3 was 6.5%.

Looking at our results below the line, net interest expense in Q3 was $93 million, down $13 million from Q3 last year, as a result of reducing our debt over the past 12 months.

Adjusted other income for Q3 was $2 million, which is flat to Q3 last year.

Our adjusted tax rate in the quarter was 14%, 80 basis points below last year, primarily as a result of realizing the benefits of our acquisition tax planning.

Average diluted shares were 402 million in Q3, down 1.7 million year over year, primarily as a result of share buybacks we completed in Q1 and partially offset by option dilution.

So turning to cash flow and the balance sheet, cash flow from continuing operations through Q3 was $1.6 billion and free cash flow was $1.31 billion after deducting net capital expenditures of $286 million.

We ended the quarter with $505 million in cash and investments, down $265 million sequentially from Q2, as we used surplus cash on the balance sheet, as well as cash generated in the quarter, to reduce debt.

We returned $60 million of capital through dividends in the quarter and just after the quarter end, we spent approximately $400 million on the acquisition of Alfa Aesar.

Our total debt at the end of Q3 was $13.3 billion, down $700 million sequentially from Q2, and our leverage ratio at the end of the quarter was 3.2 times total debt to adjusted EBITDA.

We still expect to achieve a leverage ratio of about 3 times by the end of 2015.

Wrapping up my comments on the total Company performance, we continued to make progress on our ROIC.

Our trailing 12-months adjusted ROIC in Q3 was 9.3%, up 20 basis points sequentially from Q2.

So with that, I will now provide you with some color on the performance of our four business segments.

As I highlighted for the total Company, foreign exchange continued to be a significant headwind to the top line for our segments and impacted their year-over-year revenue growth and adjusted operating margins to varying degrees.

Starting with the life sciences solution segment, reported revenue increased 1% in Q3 and organic revenue grew 5%.

In the quarter, we continued to see strong growth in our bioproduction and bioscience businesses.

Q3 adjusted operating income in life science solutions increased 9% and adjusted operating margin was 30.8%, up 220 basis points.

In the segment, adjusted operating margin benefited from very strong productivity and incremental cost synergies along with some favorable product mix, partially offset by significantly unfavorable foreign exchange.

In the analytical instrument segment, reported revenue decreased 1% in Q3 and organic revenue growth was 5%.

In the quarter, we had strong growth in our chromatography and service businesses, which was partially offset by the continued weakness we've seen in some of our core industrial markets.

Q3 adjusted operating income in analytical instruments increased 6% and adjusted operating margin was 18.8%, up 130 basis points.

In the segment, we delivered very strong productivity and we experienced favorable product mix, which was partially offset by unfavorable foreign exchange and strategic growth investments.

Turning to the specialty diagnostics segment, in Q3, total revenue decreased 4% and organic growth was 1%.

This was driven by good growth in our clinical diagnostics and healthcare market channels businesses, partially offset by the expiration of an OEM contract within this segment.

Adjusted operating income in the segment decreased 9% in Q3 and adjusted operating margin was 26.4%, down 120 basis points from the prior year.

In the segment, unfavorable foreign exchange, product mix and strategic growth investments were partially offset by productivity initiatives.

Finally, in the lab products and services segment, Q3 reported revenue increased 1% and organic growth was 7%.

This segment continues to benefit from our strong performance in the pharma and biotech end market, with our biopharma services business delivering very strong growth, along with good growth across the rest of our businesses in this segment.

Adjusted operating income in the segment increased 1% and adjusted operating margin was 15.2%, up 10 basis points from the prior year.

Margin expansion in the quarter was driven by productivity improvements, partially offset by strategic growth investments.

So with that, I would like to review the details of our full-year 2015 guidance.

As you saw in our press release, we are increasing both the top- and bottom-line guidance, primarily as a result of somewhat better foreign exchange rates and the acquisition of Alfa Aesar, which as I mentioned, closed shortly after the quarter end.

From a revenue standpoint, we're raising both the low and the high end of our guidance range and increasing the midpoint by $70 million.

This leads to a new full-year 2015 revenue guidance range of $16.81 billion to $16.91 billion.

Of the $70 million increase in the midpoint, approximately $40 million is due to the slightly improved foreign exchange environment and $30 million relates to the addition of Alfa Aesar.

So we're still expecting organic revenue growth of about 4% for the full-year 2015, consistent with our previous guidance.

Acquisitions, net of divestitures, now contribute a little over 1% to our reported revenue growth in 2015.

Moving to our adjusted EPS guidance, we're raising the low end by $0.05 to a new range of $7.33 to $7.41.

This range represents a year-over-year growth of 5% to 6%.

The midpoint of the new ranges is $7.37, a $0.025 increase from our previous guidance.

To bridge the $0.025, we're driving about $0.01 of improvement from the acquisition of Alfa Aesar, $0.01 from improved foreign exchange and about $0.005 from below-the-line items.

Our current adjusted EPS guidance has a $0.69, or 10% negative, impact from foreign exchange.

If you look at our guidance on an FX neutral basis, adjusted EPS will be growing 15% to 16%, representing very strong underlying operating performance.

On the topline, foreign exchange is now lowering our revenue by just over $900 million or about 5%, so our reported revenue growth guidance would be 5% on an FX neutral basis.

In terms of adjusted operating margin pull-through on the FX revenue headwind, we now expect a total impact of about $325 million, representing an average pull-through of 36% and 80 basis points of adjusted operating margin dilution.

The change in foreign exchange compared to our previous guidance is an increase in revenue of about $40 million with a pull-through of approximately 15%.

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

As I mentioned previously, the guidance now includes the acquisition of Alfa Aesar, but does not include any other future acquisitions or divestitures.

Turning to our adjusted operating margin guidance, we expect 70 to 80 basis points of expansion year over year, which is unchanged from our previous guidance.

On an FX neutral basis, our margin expansion would be a very strong 150 to 160 basis points, also unchanged from previous guidance.

Moving below the line, we're expecting net interest expense to be about $385 million, slightly higher than our previous guidance.

We're forecasting our adjusted income tax rate to be about 14%, consistent with our previous guidance.

In terms of capital deployment, we're still assuming that this year we will return approximately $240 million of capital to shareholders through dividends, as well as $500 million through share buybacks, which we completed in January.

Full-year average diluted shares are estimated to be 402 million, slightly lower than our previous guidance.

We're expecting net capital expenditures to be in the range of $395 million to $410 million, down $40 million from our previous guidance.

Finally, we're still expecting about $2.6 billion of free cash flow for full-year 2015, consistent with our previous guidance.

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 foreign exchange rate fluctuations during the rest of the year.

So in summary, we delivered another solid quarter in Q3, which positions us well to achieve our 2015 financial goals.

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

Thanks, Stephen.

Operator, we're ready to take questions.

(Operator Instructions)

Tycho Peterson, JPMorgan.

First, wondering actually if you can call out Japan.

I didn't hear that in the prepared comments.

Obviously that has been a source of weakness for some of the other companies in the space.

I know it was a little bit soft last quarter.

So can you maybe just touch on dynamics there?

Sure, Tycho.

Good morning.

Asia-Pacific was strong for us in the quarter.

We had great strength in China.

Japan had -- grew but in a muted fashion, not materially different than we would have expected.

There's clearly some government budgeting challenges, which means that the next quarter may be a little muted.

But given the strength we have in China, it shouldn't be a significant factor for Thermo Fisher.

Okay.

Then a question on visibility in some of the core end markets.

If we look at what is going on in the industrial world, obviously the data points have not exactly been encouraging from some of the companies that have reported thus far, in particular with oil and gas exposure.

Can you maybe talk on your visibility into the industrial channel over the next couple quarters?

Then similarly with pharma, you've obviously had great strength there over the past year.

Maybe just talk about the sustainability of those trends, and obviously with the biotech funding window shutting, whether maybe there's some sensitivity around that.

Yes.

So in terms of those end markets, Tycho, the core industrial business that we serve has been weak now for a protracted period of time and our assumption is it's going to continue to be in that state.

So we did not see a further deceleration.

It's just been a -- it's been a soft end market and we've been able to power through that in terms of our driving results.

So, that is what it is.

Applied markets, however, are continuing to have good strength.

Our environmental markets, food safety was strong.

As I look forward to the next couple quarters, the applied markets also benefit from a very nuanced thing, which is, in the US, the Coal Miner Safety Act actually has a deadline in terms of when air monitoring has to be done.

That goes into effect February 1.

So we had a couple nice things going on, on the environmental side that helps us on the applied.

We're making the assumption that, at least for the next couple of quarters if not longer, we're going to be in a muted industrial outlook.

Then for bio and pharma?

Yes.

In terms of pharma and biotech, I can talk about pharma and biotech forever.

We're well-positioned there and the market is doing great; 10% growth in the market.

Clearly, as we saw in the last few quarters, the market is a little better than what it has been, say, in the previous few years.

That's primarily because drugs are getting through the FDA process and getting approved, so the customers are getting a return on their R&D investments and they're spending money.

We are really well-positioned with this customer set.

We have incredible access to the executives at all levels in these organizations.

They understand our technologies and how we help drive both their productivity and innovation.

You're seeing very strong momentum across our entire portfolio from bioproduction, based on a lot of what is going on in the biotech front.

Biotech sciences; really it's a result of the synergies, if you will, in terms of leveraging the Thermo Fisher strength with these customers.

And biopharma services is just a great business that continues to drive momentum.

So we are -- we feel good about the position for biopharma.

Clearly, lots of headlines about pricing; it seems to be a political hot potato.

That obviously is something we pay attention to, but as long as drugs are getting through the pipeline and they're making progress there, we feel that this is going to continue to be a good solid end market for us.

Then just lastly, with valuations getting cheaper in the market, does that change the pace of maybe some of the M&A discussions?

In terms of the M&A, we always have this huge pipeline of activity, where we are always exploring different opportunities and then it becomes a question of when the value creation is going to work for us.

So we're looking at things, as we have for the last many years.

We have an interesting pipeline and should the right deal line up, then you'll see us do it.

If not, we will just get back to normal capital deployment, which is really -- which is coming up soon.

We're only a couple months away from 2016.

Thanks, Tycho.

Derik de Bruin, Bank of America Merrill Lynch.

Can you talk a little bit about the OEM customer in specialty diagnostics and sort of what the monetary impact with that is?

What would have growth been without that hit?

Yes.

So, good question.

In terms of the diagnostics business, we had sunsetted -- or we had an expiration of a contract with one OEM customer at the end of 2014.

The particular customer was acquired by a competitor somewhat before that, so we knew that contract was going to come to an expiration.

It was about 2 points of organic growth headwind in the segment, in the quarter.

It will be about 1 point of headwind in the fourth quarter and then it is gone.

It was totally baked into our guidance at the beginning of the year.

It was something we knew.

We knew it was more of a backend impact on this particular segment.

So it's one of those things that will be behind us and positions our diagnostics business through the other actions we are taking.

Great.

Then just one other quick one.

So you are tracking in the life sciences solutions business at about 4.6% averaging organic revenue growth, so nice 5% average.

Is that a sustainable, something in that 4% to 5% range going forward, given where the markets are?

So as we said back in May, we raised our outlook from 3% for this segment to 4%.

Every quarter that we are doing 4% or better will give us more confidence that it could be higher, but we want to deliver this for a while before we create a new norm.

But the team is doing a really good job of executing in our life science solutions business.

They're leveraging the capabilities of the rest of Thermo Fisher to drive growth and improve our competitive position.

So more to come on that over time.

Great.

Thank you.

You're welcome, Derik.

Ross Muken, Evercore.

So I guess I just want to get back to the emerging market discussion.

So obviously, some of the more industrial focused countries, Russia, Brazil, et cetera, have been troubled for some time.

But I guess many of us are surprised by the resilience of China.

Marc, you spent a ton of time over there.

As you think about the underlying drivers and your confidence in the duration, a little context would be helpful?

Then help us understand the pacing -- I realize you don't have anything out there formally for next year, but the pacing of that market as we get into 2016, just because it seems like the comps will get a little bit more difficult.

So help us frame what that trajectory could look like.

Sure.

So, Ross, in terms of emerging markets, for us this year China is performing very well.

India is performing very well.

Obviously, Russia is really, really soft, so it is what it is.

If I go back and I think about my 15 years at the Company, there is always puts and takes in emerging markets.

There's very few periods where everything is robust.

So it is a portfolio, which is why you typically invest in the downturn in some of these markets so you're positioned when the funding improves, which is --.

While the investment we made in Brazil was not large by any sense, it was more of a statement that we're in these markets for the long term, we have important customers, and, as things improve, we are capitalized to seize on where the funding is.

In terms of China, team's doing a really good job.

All right?

They're really executing very well and they're gaining share as far as we can tell through all the data we look at.

What I would say is the industrial business there has been pretty muted for a while and what is driving the growth really is the applied markets.

The needs on the applied markets are very, very, very substantial, right?

In terms of water issues, air pollution issues and food safety issues, there is a huge need.

What was encouraging was to see that the food safety portion of the business is clearly picking up, which gives an encouraging view that some of those spend will be positive.

China, in this environment, is very hard to forecast, so we're certainly not in a position to talk about 2016 yet.

What I can say is that we had good bookings in the quarter, which positions us for a solid year in terms of China for 2015, and that is good.

To me, it is about making the most of the opportunities and our team is doing a good job of pivoting to where the funding is in the Chinese market.

Got it.

Maybe just on specialty diagnostics, we will stick back there.

So lot of dislocation, at least amongst the public players, in the diagnostic universe.

You play in some unique niche markets.

How do you think about the evolution of your strategy there?

Where you sit today?

And how to think about some of the dislocations that have happened, whether it is from an M&A standpoint or a warning of staying away from certain markets?

Then your appetite maybe to move upstream into other parts of that complex or maybe other things with sort of a more medical bias.

Sure.

So, Ross, in terms of the end markets and the market landscape, it is a very fragmented market.

We pick very carefully where we play and where we don't play, right?

We want to have good, sustainable industry structure in this segment so that you can maintain really nice profitability with a reasonable rate of growth, and that's how we've played it out.

We've built enough scale so that when we launch new technologies, we can reach those customers easily.

You know we have a focus in clinical oncology in the sequencing business.

You're hearing us talking about some launches from our analytical instruments, that all leverages the scale we have in that market.

So, over time, do I think there's going to be bolt-on M&A activities in the diagnostic realm?

Absolutely.

It's incredibly fragmented.

We have got a good track record in the acquisitions that we have done there in generating really good returns.

So when we see the right opportunities, we will pick them up.

What is important to reinforce is there is nothing we have to do here, right?

We have a great portfolio with a great position.

So we look at them and say, where do we think we can uniquely make businesses better and create value for our shareholders?

Great.

Thanks, Marc.

Welcome.

Jon Groberg, UBS.

Congratulations, Marc, on a solid quarter and the team.

I guess, the main question I have for you, Marc, is, if you look at book-to-bill, it is below 1 for the first time in a while.

I know you recommend don't getting too focused on book-to-bill, so I'm just curious how you're thinking about that metric.

and maybe where you saw orders that didn't come in as quickly as revenues in the quarter.

Good morning, Jon, this is Stephen.

So, I'll take this question.

The book-to-bill was just below 1. For the year to date, it is actually just slightly above 1. We had good bookings growth across all four segments this quarter, so no areas of concern on the book-to-bill.

Okay, great.

Then, Marc, if I look again at acquisitions for the year, you have been kind of silent.

I am curious; I guess I have a little different take.

Do you think that -- given the pull-back in some the public equity prices, do you think that makes M&A more or less likely?

You have some buyers or some sellers who maybe are still thinking about valuations where they were.

How would you expect M&A to influence your 2016?

I like the acquisitions that we have done.

I like ASI; it serves the bioproduction segment, which is one of our fastest growing businesses, and that integration has gone smoothly.

Alfa Aesar is an incredibly complementary acquisition in terms of strengthening both our channel business and our global chemicals business.

I think we'll generate very strong returns there as well.

In terms of the landscape, we're always looking at things.

The way that I think about it is, the depressed stock prices relative to two months ago probably doesn't reduce the price you pay for an acquisition, but it certainly would increase the odds of an acquisition happening.

I'm not saying that there really is.

I don't think you get a bargain because a stock is down from where it was a short while ago.

But I think people say, well, God, I got to work hard to get back to it, so it becomes a little bit easier on some of those things.

I don't think it is materially different, Jon, but that is how I would handicap it.

Jack Meehan, Barclays.

I wanted to start and just ask about the lab products and services segment, now two quarters with really nice high single-digit growth.

Just what are your thoughts on the sustainability of that growth in the near term?

And what have been some of the areas of strength there?

Jack, great question.

So generally, the way we think about this as a business that generally grows in line with the Company average.

It has a larger exposure to biotech and pharmaceutical end market, given that the biopharma services business resides there and our channel business resides there; it has strong presence.

So, what you're seeing right now is with the very robust performance by us in the biotech and pharma market that shows up there disproportionately, but it also shows up in life science solutions.

It shows up in our chroma mass spec business with analytical instruments, but it really gets highlighted in lab products and services segment.

So as long as biotech and pharma continues to do well and we continue to execute well there, we should be driving pretty good growth out of LP&S.

Got it.

That makes sense.

Then, just one bigger question I guess related to something that was asked earlier.

Just around all the change that is happening in the market today around lab reimbursement, I was curious how you thought that could impact the business for Thermo or for some of your customer segments.

Thanks.

Yes, thank you.

So, in terms of reimbursement, right?

There's a lot of recent press around US reimbursement for certain lab tests.

We've been in this environment globally for a while, right?

Where you have a situation where countries are trying to keep their healthcare costs under control and we have been able to navigate that successfully by working with our customers to help them maximize the reimbursement that they can get for their capabilities.

We're making substantial investments in our health economics team, which is really what justifies why health systems around the world should be using our products.

So that is part of the response.

When I think about the most recent dialogue in the US, clearly, it would affect some of our customers, particular in the drugs of abuse area.

It's not a huge business for us, but given that we offer different methodologies that have different reimbursement rates, a lot of what we're doing with our customers now is helping them position the testing in a way that they can get properly reimbursed for their products.

So, we will work hard to navigate through any impacts from what is going on in some of the preliminary discussions on US reimbursement.

Doug Schenkel, Cowen and Company.

Let me just start with a couple of follow-up questions.

On pharma, revenue growth has ranged between mid single-digits to mid teens for the past seven quarters.

I don't have the 2013 figure in front of me, but I think that was a pretty good year for that end market as well.

So recognizing what you said in response to Tycho's earlier question, the comps are getting tougher and there are some building concerns about some recent developments in this end market.

So as we think about the next few quarters ahead, are the fundamentals and, frankly, the value proposition that's unique to Thermo enough to overcome what really is, if nothing else, a mathematical challenge of continuing to drive growth in this end market that has been close to 10% for at least a couple years?

Yes.

When I think about the performance -- I was looking back to 2013 as well.

We grew high single-digits in 2013 in pharma and biotech.

We've been able to deliver that mid to high single-digit growth.

Obviously, this year we've had a couple of quarters above that.

Again, some difficult comparisons.

We're going to have difficult comparisons next year.

But we're really well-positioned here and when I think about our end markets in aggregate, I feel good about our outlook.

There is always some puts and takes in the various markets, but we're well-positioned here.

I think about the dialog we're having with our big pharmaceutical customers and the dialog we're having with our small biotech customers, there is so many of them, I remain bullish about the outlook for these end markets.

Okay.

Then really a follow-up on China.

I don't know if you'd be willing to get this specific, but could you share anything on the book-to-bill there?

Would you confirm that assumptions that you had embedded into full-year guidance, specific to China, remain unchanged?

Then, any insights you can provide on what you think we should expect with the release of the new five-year plan over the next few weeks?

Yes.

Good morning, Doug.

So, the book-to-bill is a positive book-to-bill, it's over 3% above revenue, so we've had good bookings all year, really, for China.

In terms of the outlook for the year, we didn't really do much in terms of guiding by China.

We called it -- we took a pass on it saying there was just the Company average because it was hard to forecast at the beginning of the year.

Clearly, China is growing meaningfully above it and has offset some other things, right?

So we feel good about delivering the 4% organic growth for the full year.

Like every other year, you do it usually in a slightly different way than what you think you're going to do it at the beginning of the year because it's our job to put the resources where the best opportunities are.

So, China's been good.

The team is executed well.

It is offset some softness in other markets and we feel good about the short term positioning there.

Okay.

Then the five-year plan, any insight there, Marc?

The five-year plan -- only to the respect that at least -- obviously, they don't release it early.

The priorities that have been driving our growth over the last number of years around healthcare expansion, food safety and environmental seem to be highly likely that those will continue to be priorities.

So, while they haven't published it yet, we feel like these are things that have been a priority for China and are likely to continue to be a priority going forward.

Okay.

Thanks so much for taking the questions, guys.

Thanks, Doug.

Dan Arias, Citi.

Maybe just one for me on the biopharma side.

Marc, you're obviously having a lot of success with the large players there.

Can you just talk a little bit about how you're finding the ability to be a strategic partner with some of the smaller emerging biotech companies?

The reason I ask is just trying to understand how spending might be post a funding event for these guys over time.

We're well-positioned with the smaller biotech.

You may recall, a couple years ago, we started to expand our coverage model.

We always called on those customers, but calling on them as a Company level as opposed to a business level, and that has worked really well.

Even if the spend might be pre-IPO, might be $1 million or $2 million with a decent sized startup, over time those spends really can grow with the ones that have product developments making it through the pipeline.

So we're serving those customers well.

We're doing really good job of leveraging our capabilities there.

So we think that in terms of biotech, as they convert their cash into products moving through the pipeline, we'll be one of the beneficiaries of that.

Okay, thanks for that.

Then maybe if I could just move to the academic markets.

Could you just give a sense of how you are seeing spending there?

Is there any reason to believe that spending patterns in fourth quarter will be different than in previous periods where you've had a CR, or is there some dynamic ahead of 2016 that you might think be pertinent?

Yes.

We've been growing low single-digits in the end market.

It is very hard to forecast what is going to happen with the US government.

Clearly, we play a very active role in making sure that the government stays open.

I do actually spend time on that, because it is disruptive to our customers when we get into that debate.

But right now, it looks like -- at least for the next month or two, it looks like things will continue to be funded and hopefully, we will get to a period where we get out of this very short-term environment.

There are some really better things on the midterm, the 21st century cures, so just a general dialogue around the NIH is much more positive.

So if we can ever get to a period where we can get a budget done, we should benefit as our customers are benefiting from improved funding.

Right.

Okay.

Thanks very much.

You're welcome.

Isaac Ro, Goldman Sachs.

First question on pharma.

Can you maybe comment on the strength you saw this quarter; the extent to which you thought market share might have helped relative to the actual growth rate in the underlying end markets?

Isaac, it is pretty hard to pin down what the market share is versus the end market.

I need to see what some of the other companies report to get the very crisp feel to that.

What I would say is, in that growth, there is not like big account flips.

What it really is, is just good share of wallet execution, just picking up share at our existing customers, driving more biosciences revenue, capitalizing on our strength in biopharma services.

And bioproduction continues to be very strong for us.

Great.

Then just a follow-up on diagnostics.

If we look at the nine months year-to-date trend over a couple years, a two-year stacked comp, so to speak, it looks like a low single-digit number.

I imagine your ambitions in diagnostics are to grow a little faster.

What do you think it's going to take to realize the sustained growth rate that is above the corporate average?

Yes.

So, in terms of the business there, when I think about the mid term for the business and the long term, we have some really cool products in the product development pipeline that we foreshadowed a little bit.

You're seeing some of the earlier versions of those.

That will help drive very good long-term growth.

In the short term, at this level, I would say primarily what you are looking at is you have got one contract that we are just sunsetting at the end of the fourth quarter, that creates a little bit of a headwind this year.

But other than that, it is pretty normal, right?

In terms of where it is.

So, I love the long term outlook.

It is a great profit generator for us, with moderate growth in the very short term as we have been going through this expiration.

Got it.

Thanks a bunch.

Welcome.

Steve Beuchaw, Morgan Stanley.

Just a couple of follow-ups.

Maybe I will start first on revenue synergies.

You spoke in some detail about how revenue synergies with the integration are going this year, tracking a little ahead of plan.

I wonder if you could give us a bit of incremental color on how that is tracking.

Specifically, where are you seeing things play out a little bit better than you might have expected?

Yes.

Steve, great question.

So really what you are seeing is things are driving results faster.

They are materializing a little bit faster than we expected.

So basically, our revenue synergy plans were zero in year one, $60 million in year two, $150 million in year three.

That was roughly the ramp up.

We will do a little better than $60 million and it puts us in a great position to achieve the $150 million.

The thing that is a real highlight for us in this year, in the second year of our integration, really is how effectively the channel business and our life science solutions businesses are working together.

So that execution has gone very well.

What is to come is more around the e-commerce platform and leveraging that.

You probably have noticed that the ThermoFisher.com looks differently than it did a few months ago.

You now see it much more commerce oriented, as we integrated a couple of our key web properties and you'll see more product access on that platform over time.

So we have a lot of really cool things in process.

Our customers are recognizing it, and it's really helping drive nice growth for the Company and nice growth for the life science solution segment.

Then, last one for me actually, comes back to pharma, maybe a little bit of a finer point.

As you think about end of year and the tendency for budget flush in pharma, how are you budgeting for that potential budget flush?

Do you assume that there is a budget flush?

If so, is it similar to last year?

Higher?

Lower?

How are you thinking about those dynamics?

Thanks.

So Steve, thanks.

It is always challenging to know how customers will spend at the end of the year.

The last two years, we have had very strong year-end spending.

We assume a reasonable level of year-end spend.

When I think about the fourth quarter, as I just think about how to look at the revenue growth, what you have is the benefit of an extra day, which is good, and you have a very challenging comparison, which is a headwind.

But when we put it all together, we still feel very good about our ability to deliver the 4% organic growth for the full year.

So that is our view.

You really don't know on the budget flush, literally, until the last two weeks of the year, is really how that plays out.

Got it.

Thanks, again.

Welcome.

Brandon Couillard, Jefferies.

You have done a solid job this year offsetting the FX headwinds with cost actions.

Should we expect any variable costs to come back into the model next year?

No.

In terms of the way we have managed through it; basically, we've pushed pricing harder selectively.

We're having a good year on pricing.

We did manage our cost base tightly.

We always manage our cost base tightly.

We put a little bit more emphasis, but we did the right things for the long-term health of the business as well, so you're not going to see costs come back in because of something we did this year.

In fact, you'll see us drive meaningful productivity as we get into 2016 as well.

Thanks.

Then one more follow-up for Stephen.

In terms of the full-year free cash flow outlook of $2.6 billion, that would imply about as much cash as you've generated year to date coming in the fourth quarter.

Can you just help me bridge the dynamics of really how you get there in the fourth quarter?

Is there anything one-time or unique?

Yes.

Sure, Brandon.

So, yes, we're just over $1.3 billion year to date.

When I look at Q4, Q4 is always historically our strongest cash flow quarter.

Then when you think about the year-over-year dynamic, one or two significant items really, cash taxes and cash interest in 2015 are pretty much largely being done in the first three quarters, which wasn't the case last year.

So very little cash tax, cash interest payments in Q4, which helps us drive a strong cash flow, free cash flow in Q4.

Super.

Thank you.

Jeff Elliott, Robert W Baird.

Really two follow-ups on the last of the questions.

Marc, you talked about pricing being strong selectively.

I guess, can you give us an update on where pricing is at?

Then the second follow-up is on PPI.

Obviously, that program has been huge home run for you guys.

Can you talk about your visibility into future initiatives to help keep up that strong pace of margin expansion that you've been seeing?

Yes.

So, pricing, which over the last few years has bounced around between 0.5 point and 1 point, is probably in the range of about a 0.75 point year to date.

Q3 was stronger than that.

So we're having a good year on pricing from that perspective.

In terms of PPI, it is who we are.

It's how we operate.

It's how we come to work every day, in terms of driving productivity and efficiency, and it will drive meaningful opportunities.

When we talked about our longer-term goals of getting our margins to 24% to 26%, PPI is a key contributor to doing that.

It gives us great confidence in our ability to have really solid growth prospects in terms of earnings for many, many, many years to come.

So, with that, let me wrap it up with just a couple quick things.

One, thanks for joining us today.

We had another solid quarter.

We're in a great position to deliver another very strong year at Thermo Fisher Scientific.

We look forward to reviewing our year-end results in early February.

Thanks, everyone.

This concludes today's conference call.

You may now disconnect.