賽默飛世爾科技 (TMO) 2016 Q1 法說會逐字稿

Welcome to the Thermo Fisher Scientific 2016 first-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 today.

On the call with me 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 Investor section of our website thermofisher.com under the heading Webcast & Presentations until May 13, 2016.

A copy of the press release of our first-quarter 2016 earnings and future expectations is available on the Investor section of the 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 these forward-looking statements as a result of various important factors including those discussed in the Company's annual report on Form 10-K for the year ended December 31, 2015, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also available in the Investor section of our website under the heading SEC Filings.

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

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

Also during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first-quarter 2016 earnings and future expectations and also in the Investors section of our website under the heading, Financial Information.

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

Thank you, Ken.

Good morning, everyone.

We're pleased you could join us today for our Q1 call.

As you saw in our press release, we are off to a strong start to the year.

We delivered excellent growth in both revenue and adjusted EPS.

Our great top and bottom-line performance was the result of a few key factors: good growth across all of our major geographies; strong operational execution by our team; plus the added revenue benefit of four extra days in the quarter.

We said last quarter that we expected to come out of the gate strong and we did.

In addition to great operational execution in Q1, we were also very active in capital deployment.

We completed $1 billion of stock buybacks in the quarter.

We also closed on our acquisition of Affymetrix at the end of March, which was a quarter sooner than we originally planned.

We're excited about the new opportunities we'll have with those added capabilities.

I'll talk a bit more about that later.

I'll follow our usual format this morning, starting with the financial results and some commentary on our performance by end market.

Then I'll cover a few of the business highlights from the quarter, provide an update on capital deployment and wrap up with our revised guidance outlook.

So starting with the financials, revenue in Q1 grew 10% to $4.29 billion.

Adjusted operating income was up 9%.

In terms of our earnings performance, we continued our long track record of consistently delivering strong adjusted EPS with a 10% increase to $1.80 per share.

Let me give you a high-level view of our Q1 performance in the context of our end markets.

After a strong year-end finish, we've typically seen a weaker start of Q1, but that was obviously not the case this year, even if you normalize for the four extra days we had versus last year.

In our key end markets, pharma and biotech was our strongest again this quarter, as it has been for some time.

This was driven by excellent growth in our bioproduction, biopharma services and biosciences businesses.

Healthcare and diagnostic grew around the Company average.

Academic and government was slightly below the Company average.

Performance overall in industrial and applied remained muted with continued weakness in industrial end markets and ongoing strength in applied.

In aggregate, the dynamics across our end markets were good, with no material change from what we saw in 2015.

Our strong results in Q1 reinforce that our scale and depth of capabilities are clear differentiators across our end markets.

Let me now highlight some of our key accomplishments from the quarter, which show that we continue to position Thermo Fisher for an even stronger future.

As you know, our growth strategy is based on developing high-impact innovative new products, leveraging our scale in Asia-Pacific and emerging markets and delivering our unique customer value proposition to gain share.

So starting with innovation, we kicked off the year as we always do with a strong showing at Pittcon, which you know is a major event in the US for the analytical instruments industry.

Over the past couple of years, Pittcon has really evolved into an opportunity for us to showcase our Thermo Scientific technologies for applied markets.

Let me give you two quick examples, first in our mass spectrometry business, then in chromatography.

In mass spec, we've been adapting the advanced capabilities of our Orbitrap platform for customers working outside the research lab in applications such as food safety, forensic toxicology and sports doping.

Our recently launched Q Exactive Orbitrap GC-MS MS is a great example of how we've combined gas chromatography with our Orbitrap capabilities so customers can perform comprehensive and sample analysis in a single run.

In our chromatography business, the big headline at Pittcon this year was our new Integrion system, a real break-through in high-pressure ion chromatography.

It gives customers working in busy environmental, food and beverage and pharmaceutical laboratories a flexible system for creating highly efficient and accurate workflows.

Integrion significantly raises the bar on productivity and performance in applied markets.

It was nice to learn that our new ion chromatography portfolio was recognized at the show as the instrument of the year by readers of SelectScience magazine.

This was a great endorsement by our customers and speaks to the strength of this business.

I'll make one more comment on innovation because it's a great example of how we innovate to fulfill our mission, which is to enable our customers to make the world healthier, cleaner and safer.

We all know about the Zika virus because it's been in the news a lot lately.

As you'd expect, when Zika first broke out, we quickly mobilized our teams to begin working with government labs in Brazil as well as the CDC in the US.

Our life science solutions business has been developing a qPCR-based test to detect the virus, which is currently undergoing a validation process.

We're also offering an immunoassay in the US for researchers in partnership with the diagnostics company, EUROIMMUN.

We've already begun selling this through our channel business.

This is a good example of how we're seen by our customers as a thought leader who can help them solve these pressing issues.

In terms of emerging markets, our second growth driver, let me first say that we saw good growth across all of our key geographies in Q1, with strong performance in North America and Europe as well as very strong performance in Asia-Pacific and emerging markets.

The stand-out contributors were China and India.

I'll give you a little more color on what we saw in those regions during the quarter.

Starting with India, our commercial teams there are doing an outstanding job of capturing growth opportunities in biopharma, healthcare and food safety markets.

In China, we performed very well in Q1.

Our key focus markets, biopharma, healthcare and environmental remained robust.

As you know, the new five-year plan was announced in March.

Much of it is a continuation of the goals set forth in the previous plan, which is great for Thermo Fisher.

The plan outlines investments in innovation, healthcare and the environment.

Given the industry-leading presence we've built in China, we continue to be well-positioned in this important growth market.

In terms of our customer value proposition, the third element of our growth strategy, you can think of our approach here in two parts.

First, we continue to enhance our offering for our customers to make our value proposition even stronger.

Second, we're focused on strengthening our commercial capabilities to best leverage our scale and depth of capabilities.

Let me give you an example of each from the quarter.

We enhanced our customer offering by completing our acquisition of Affymetrix at the end of March for $1.3 billion.

It was great to be out with the team in Santa Clara for the day-one activities.

We're excited about the opportunities we have to leverage our complementary offerings.

To remind you, Affymetrix is now part of our life science solutions segment.

The business has a strong position in flow cytometry and antibodies, which will strengthen our biosciences offering.

Its innovative micro-array technologies will also open up new growth avenues for us in genetic sciences, particularly in reproductive health and ag bio.

This transaction also offers attractive financial benefits.

We expect to generate $70 million of operating income synergies by year three following the close: $55 million from cost and $15 million from revenue.

So good financial returns and a hand-in-glove fit with our life science solutions business.

The next example I want to share is the investment we've made in our e-commerce capabilities to help our customers take full advantage of our comprehensive portfolio.

As I've mentioned in the past, when we acquire a business, we always look to adopt best practices that will make our Company even stronger.

When we acquired Life Technologies, we gained a gold standard e-commerce platform.

We've since moved our Thermo Scientific products to that platform.

Now our customers can go to one website for our entire self-manufactured offering, which features rich scientific content.

We'll continue to enhance it with added e-commerce functionality over time.

The new website complements our fishersci.com website, where customers can order our products as well as those from third-party suppliers.

We think of our web presence as a highly valuable tool for driving incremental revenue.

We're pleased with our progress to date.

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

As you know, we have an excellent track record of creating shareholder value through our capital deployment strategy.

It's been an active first quarter.

We mentioned on our last call that we had already bought back $500 million of shares in January.

As you saw in our press release, we bought back an additional $500 million of shares later in the quarter as well.

So, including our stock buybacks, the dividend and strategic M&A, we've deployed $2.4 billion of capital so far this year.

Now, let me give you a quick update on our guidance for 2016.

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

Stephen will get into the details, but at a high level, the increased guidance is driven by four factors: the completion of the Affymetrix acquisition in late March; a less adverse foreign exchange environment; the additional $500 million of stock buybacks; and stronger operational performance by our team.

Based on these factors, we're raising our revenue guidance for the year to a new range of $17.86 billion to $18.04 billion.

This would result in 5% to 6% growth over 2015.

We're also raising our adjusted EPS guidance to a new range of $8.05 to $8.19 for strong growth of 9% to 11% year-over-year.

Before I turn the call over to Stephen, let me sum up my remarks with a couple of take-aways.

We started the year with excellent top and bottom-line performance.

We closed the acquisition of Affymetrix.

We're excited about the new capabilities it brings.

We're performing very well in all key geographies and have many opportunities across our businesses to gain share.

All of this positions us to achieve another strong year.

With that, I'll now hand the call over to Stephen.

Thanks, Marc.

Good morning, everyone.

I'll begin with an overview of our first-quarter financial performance of the total Company.

Then I'll provide some color on the four segments and conclude with our updated 2016 guidance.

So, starting with the overall financial performance for Q1, as you saw in our press release, we grew adjusted EPS by 10% to $1.80.

GAAP EPS was $1.01, up 5% from Q1 last year.

On the top line, our reported revenue grew 10% year-over-year.

The Q1 reported revenue includes 10% organic growth, 1% growth from acquisitions and a 2% headwind from foreign exchange.

Please note, the components of the Q1 change do not sum due to rounding.

As I mentioned on the last earnings call, the way our fiscal calendar falls in 2016, we have four extra billing days in Q1 and four less in Q4.

We estimate that we received just under a 5% benefit to our organic growth in Q1 from the impact of days.

The consumables revenue is getting most of the impact of the extra days, while the capital equipment revenue was only marginally affected.

We expect to see the opposite effect on revenue in Q4, when we have four less billing days, but there's no impact on the year as a whole.

So normalizing Q1 minus the extra days, we estimate that our organic growth was approximately 5% during the quarter.

Looking at growth by geography in Q1, I'll provide some color based on the 5% normalized organic growth to provide you with an understanding of the relative performance by region.

Based on that, North America and Europe grew in the mid single-digits.

Asia-Pacific grew in the high single-digits, with another strong contribution from China.

Rest of the world, which represents less than 5% of our revenue, declined in the high single-digits.

Looking at our operational performance, Q1 adjusted operating income increased 9%.

Adjusted operating margin was 21.7%, down 20 basis points from Q1 of last year.

Now, margin performance in Q1 was in line with our expectations.

We received good expansion from our organic growth driven by strong contributions from our PPI business system and the benefit of acquisition cost synergies.

But this was more than offset by a 30-basis point negative impact from the extra calendar days and a 30-basis point headwind from foreign exchange.

The impact of the extra days on margins is not that intuitive.

So I thought it would be helpful to take a minute to summarize it for you.

There were 66 billing days in Q1 2016 versus 62 in Q1 2015, a 6.5% increase.

As I mentioned earlier, this had a positive impact on organic growth of approximately 5%.

However, since the level of cost is directly correlated to the number of days, the impact on costs was the full 6.5%.

So that means that cost went up more than our revenue because of the days impact.

The net effect on this on our operating margin is the headwind of approximately 30 basis points in Q1, that I just mentioned.

It's important to note that there will be a corresponding positive impact to margins in Q4 when we have four less billing days.

Moving on to the details of the P&L.

Total Company adjusted gross margin came in at 48.2% in Q1, down 110 basis points from the prior year.

The decrease in gross margin in Q1 is primarily attributed to headwinds from unfavorable business mix, the impact of four extra days and foreign exchange.

Adjusted SG&A in the quarter was 22.4% of revenue, which is 80 basis points favorable to Q1 2015.

R&D expense came in at 4.1% of revenue, down 10 basis points versus Q1 last year.

R&D as a percent of our manufacturing revenue in Q1 was 6.4%.

Looking at our results below the line, net interest expense was $95 million, down $6 million from Q1 last year, mainly as a result of lower average debt levels.

Adjusted other income and expense was negative $1 million, which is $8 million lower than 2015, driven primarily by changes in non-operating foreign exchange.

Our adjusted tax rate in the quarter was 14%, flat to last year.

Average diluted shares were 398.7 million, down 2.7 million year-over-year, mainly as a result of the share buybacks completed in Q1, partially offset by option dilution.

Turning to cash flow and the balance sheet.

Cash flow from continuing operations through Q1 was $290 million.

Free cash flow was $180 million, after deducting net capital expenditures of $110 million.

Free cash flow was $195 million favorable to Q1 2015.

We ended the quarter with $830 million in cash and investments.

We also returned significant capital to shareholders during the quarter.

In our Q4 call, I'd mentioned we'd already completed the $500 million in share buybacks in January.

We also bought an incremental $500 million later in the quarter, for a total of $1 billion in buybacks during Q1.

As I'm sure you're aware, we deployed $1.3 billion to acquire Affymetrix right at the end of Q1.

We also returned $60 million to shareholders during the quarter through our dividend.

So all in all, as Marc mentioned, we deployed $2.4 billion of capital in Q1.

Our total debt at the end of Q1 was $15 billion, up $2.5 billion sequentially from Q4 mainly driven by the increase in short-term debt relating to the acquisition of Affymetrix and the share buyback.

Our leverage ratio at the end of the quarter was 3.5 times total debt to adjusted EBITDA.

Wrapping up my comments on total Company performance, ROIC improved in the quarter.

Our trailing 12-months adjusted ROIC at the end of Q1 was 9.6%, up 10 basis points sequentially from Q4.

So with that, I'll 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 headwind for the top line for our segments and impacted the year-over-year revenue growth and adjusted operating margin to varying degrees.

The four extra calendar days impacted segment revenue and margins to varying degrees as well.

So starting with life science solutions segment, reported revenue increased 11% in Q1.

Organic revenue also grew 11%.

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

Q1 adjusted operating income in life science solutions increased 10%.

Adjusted operating margin was 29.1%, down 20 basis points year-over-year.

Operating margin was positively affected by volume pull-through, strong productivity and the impact of days.

But this was more than offset by unfavorable business mix, strategic investments and unfavorable foreign exchange.

In the analytical instruments segment, reported revenue increased 4% in Q1.

Organic revenue growth was 6%.

In the quarter, we had strong growth in our chromatography and services businesses, partially offset by continued weakness in some of our core industrial markets.

Q1 adjusted operating income in analytical instruments decreased 8%.

Adjusted operating margin was 14.7%, down 200 basis points year-over-year.

Strong productivity was more than offset by the impact of the extra days in the quarter, as well as the impact of unfavorable foreign exchange and strategic investments.

The days impact is very material for this segment, approximately 200 basis points.

Given the low consumables mix in this segment, the extra days had little impact on the top line, but they had the full impact on the cost space causing significant margin compression.

This will reverse in Q4 when we have four less days.

Turning to specialty diagnostic segments, in Q1, total revenue grew 9%.

Organic revenue growth was 10%.

This was driven by solid growth across all our businesses in this segment.

Adjusted operating income increased 7% in Q1.

Adjusted operating margin was 26.9%, down 40 basis points from the prior year.

Operating margin was positively impacted by good productivity and volume pull-through, but this was more than offset by strategic investments, unfavorable business mix and unfavorable foreign exchange.

Finally, in the lab products and services segment, Q1 reported revenue increased 14%.

Organic revenue growth was also 14%.

This segment continues to benefit from our strong performance in the pharma and biotech end markets, with our biopharma services, research and safety market channel and lab products businesses all delivering very strong growth.

Adjusted operating income in the segment increased 16%.

Adjusted operating margin was 15%, up 30 basis points from the prior year.

Margin expansion in the quarter was driven by volume pull-through and good productivity with partial offsets from strategic investments and the headwind of additional days in the quarter.

So now I'll review the details of our full-year 2016 guidance.

As you saw in the press release, I'm pleased to report significant increases in both our top and bottom-line guidance.

The improved guidance is due to several factors: the acquisition of Affymetrix; more favorable foreign-exchange rates relative to our prior guidance; additional stock buybacks completed in Q1 and stronger operational performance.

I'll take you to the impact of each of these four items in turn.

The first change related to guidance reflects the acquisition of Affymetrix.

We expect this to deliver $275 million of revenue and $40 million of adjusted operating income over the remaining nine months of the year.

That includes our synergies.

So in all, that will translate to $0.06 of adjusted earnings per share in 2016.

The accretion impact of Affymetrix is very back end loaded, given the phasing of their revenue and a strong ramp of synergies toward the end of the year.

Affymetrix is dilutive to the total Company operating margin in 2016 by approximately 10 basis points.

The second change to guidance relates to foreign exchange.

We've increased our guidance to reflect a less adverse FX environment, increasing revenue by $200 million and adjusted earnings per share by $0.11.

As you know, we've seen tremendous amount of volatility in FX rates this year, so we use an average of rates over the past couple of months for our revised guidance.

Our revised 2016 guidance now assumes a year-over-year FX headwind of [$19 million] of revenue, $32 million of adjusted operating income and $0.075 of adjusted earnings per share.

So still a headwind for the year but much lower than our initial guidance.

The third change to guidance reflects the impact of the stock buybacks we completed in Q1.

In total, we bought back $1 billion of stock in Q1, half of this was already in our initial guidance.

So the revised guidance includes an additional $0.06 for the second $500 million of buybacks we completed in the quarter.

The fourth change to guidance reflects improved operational performance.

Given the strong start to the year, we're raising the low-end of revenue guidance by $25 million and raising the low-end of adjusted EPS guidance by $0.02.

So to sum all this up, the revised 2016 revenue guidance range is $17.86 billion to $18.04 billion, which would represent 5% to 6% growth versus 2015.

The $490 million increase to the midpoint comes from three factors.

$275 million related to Affymetrix, $200 million from an improved foreign exchange environment and $50 million of higher organic growth.

We're still expecting to deliver organic growth of about 4% for the full year, consistent with our previous guidance.

In terms of phasing for the remainder of the year, given the days impact and the strong comp from last year, we expect Q4 organic growth to be essentially flat.

As reminder, the organic growth comp in Q2 is more challenging than the organic growth comp in Q3.

Acquisitions are now expected to contribute about 2% to our reported revenue growth in 2016.

FX is expected to be 0.5% headwind.

In terms of our adjusted EPS, our revised guidance range is $8.05 to $8.19 and represents growth of 9% to 11% over our 2015 adjusted earnings per share of $7.39, with a 1% headwind from foreign exchange.

To bridge the $0.24 increase in the midpoint of our adjusted EPS guidance, we gained $0.11 from the more favorable exchange, $0.06 from Affymetrix, $0.06 from additional Q1 share buyback and $0.01 from operational improvements.

A few other details behind the revised 2016 guidance, we are now expecting 50 to 70 basis points of adjusted operating margin expansion year-over-year.

This includes the 10-basis point dilution from Affymetrix.

We're expecting net interest expense to be about $390 million versus the $380 million in our previous guidance, as a result of the incremental debt related to the Affymetrix acquisition.

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

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

Our guidance does not include any future acquisitions, divestitures or stock buybacks.

This is consistent with our past practice of not forecasting incremental capital deployment beyond dividends.

Full-year average diluted shares are estimated to be in the range of 398 million to 399 million, down about 3 million from our previous guidance as a result of the stock buybacks we completed in Q1.

We're expecting net capital expenditure to be approximately $440 million, up slightly from the previous guidance due to the Affymetrix acquisition.

In terms of free cash flow for 2016, we now expect this to be about $2.72 billion, slightly higher than the prior guidance due to the increase in our earnings outlook related to FX and our operational performance.

There is no net free cash flow impact in 2016 from adding Affymetrix as the operating cash flow for the nine months is offset by the cost to achieve synergies, deal fees and the capital expenditures related to the business.

In Q1, we used short-term borrowings for the acquisition of Affymetrix and the stock buybacks.

Absent any other need, our intent is to pay this down during the course of the year with the cash flow we generate from operations.

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

So in summary, we had a number of significant achievements this quarter while delivering solid operational results, which positions us really well to achieve our financial goals for the year.

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

Thanks, Stephen.

Jessa, we are ready to open it up for questions.

(Operator Instructions)

Ross Muken, Evercore ISI.

Thanks for all the helpful color.

I guess, Marc, as we think about the end markets, where do you feel like you guys are sort of over punching in terms of gaining share more so?

Because it looks like when we line up your growth rates versus your peer group -- obviously that's hard.

It does feel like on a like-for-like basis, you moved from growing in line-ish to now sort of above the sort of comp group.

So just help us feel for where -- what market specifically you feel like maybe you're sort of outperforming?

Ross, good morning.

Thanks for the question.

When I look at the lens from an end market, I'd say pharma and biotech continues to be a huge strength for the Company.

As you know, we have a very strong competitive position because of our scale and our unique depth of capabilities.

We have great relations with all of our pharma and biotech customers and that's positioned us to do well.

That end market was stronger than our expectations in the quarter also, so we were able to deliver very positive growth there.

So that's an end market look.

If you take another lens on the same question, which is more of a product look or a business segment look -- it's an area we pay a lot of attention to, a very strong start to the year.

All my comments -- this is really normalizing for the days as well, so that you're getting an apples-to-apples look.

Our lab products business and our channel business, very strong performance.

Certainly, our bioproduction business not only benefits from a really good end market but the business is performing extraordinarily well.

So that clearly has been above market growth.

Our chromatography and mass spec business, that combined business had a very strong start to the year as well.

So those would be some examples where you take a product lens looking at that and say, how are we doing?

That's a nice cut on products and by the end markets, pharma, biotech -- then finally China geographically, we're growing very, very strong, continuing the strength there.

Maybe just following up on that, it feels like the emerging markets -- you guys have done a tremendous job.

China is continuing on its trajectory and India I think, as well, has had reasonable demand.

Can you just give us a picture?

It seems like that is certainly better than rest of world.

What is your thought on how the various high-growth markets pace throughout the rest of the year?

When I think about the high-level comments there, China has been for a number of years our strongest growing market for the Company, of any significant market.

We continue to be very positive on the outlook for not only the short-term but for the mid-and long-term, as well.

India is performing well.

Reasonable performance in Southeast Asia and Korea.

Obviously, real pockets of weakness in Brazil and Russia.

Those are very small markets for us in aggregate.

Together, I think the two of them represent about 1% of our revenue, so it's not material.

It's always a portfolio.

The good news is the big ones are doing well.

The ones that are very small have weakness.

You take a long-term view of those markets too will turn better but certainly not a 2016 factor.

Jack Meehan, Barclays.

I just wanted to start and ask about the lab products and services, even adjusting for the days in the quarter, continues to do a lot better than we would think.

Can you maybe just talk about the channel?

You mentioned some of the new e-commerce capabilities.

Do you think you're taking a little bit more share?

Or are there any changes in pricing?

What are you seeing there?

Jack, thanks for the question and good morning.

In terms of lab products and services business -- you look back over the last number of quarters, we've delivered very strong growth.

That's been a blend of first our biopharma services business or our clinical trials and health sourcing business, where we don't really have much in the way of external competition.

You have the customer choice is primarily do you do it in-house or do you outsource to us.

That business has performed very well for a long period of time.

That trend continued again in the first quarter.

The channel business also has been doing well.

Really benefiting from strong demand in the biotech and pharmaceutical customer base.

So that business has been a strong performer.

Our self manufacture business within that segment of lab products also did very well.

We're the largest provider of lab consumables and lab equipment in the world.

That also is benefiting from strong biotech and pharmaceutical end markets.

Got it.

Then just one on academic to follow up.

Just curious whether you're starting to see anything through the NIH just yet?

What -- maybe just your visibility, I think the growth in the quarter you mentioned was a little bit below Company average for the full year.

Do you still think it's more in line?

Thanks.

Jack, in terms of academic and government, what we're seeing there has been consistent with the last few quarters adjusted for -- normalizing for days it would be low single-digit growth.

If you don't normalize for days it would just be under the Company average.

We continue to be encouraged by the more favorable environment in the US.

So, US improved in Q1, so you're starting to see the release of NIH funds that should continue in Q2 and Q3.

So that's really been a positive.

It should be a reasonable end market from our perspective.

Derik de Bruin, Bank of America

Marc, we've got a lot of questions on the tax rate, just obviously given some of the things that were going on with the Pfizer/Allegan deal and some of the things we had at Washington.

I know the low tax rate the Company has, has always been one of the things that people have always asked questions about there most.

Can you walk us through -- do the changes that are going on have any impact on the Company, number one?

Then how sustainable is the 14% tax rate?

How should we think about that over the next few years?

Thanks.

Good morning, Derik, I will take the question.

Obviously, we pay very close attention to the tax regulations and changes there and as regulations across the world as well as domestically.

We have a great tax team.

Recently, the Treasury Department laid out two new tax regulations.

One, set of regulations was very concentrated to reduce the impact the benefit of inversions.

That's -- those just simply don't apply to the Company.

The second set of regulations were targeted at limiting US company's ability to tax-efficiently repatriate cash from overseas.

When I think about that impact on our Company -- our existing tax structures which aren't impacted by these regulations provide pretty substantial cash repatriation in capacity in a very tax-efficient way.

So at this point, I don't see any material impact from the regulating changes on the Company for the foreseeable future.

So bottom line is we're comfortable with the tax rate and the corporate tax planning strategies that we have in place across the Company.

When I think about the tax rate going forward, I'll probably talk more about this at the Analysts Day.

Just to remind you, kind of the messaging from last year is, the tax rate -- the earnings that accrete going forward over and above the earnings we have today generally come in at the higher marginal tax rate than the 14% that we have in place on average for the Company.

So absent any other changes in terms of our structuring, the tax rate will creep up slightly.

We've done a pretty good job of making sure that doesn't happen over time that if you look back over the past three years, I think we've effectively navigated through that.

Part of that comes from some structures that we can put in place with acquisitions that we do.

But the rest of it really comes from good management of our tax strategies and thinking about different regulatory changes.

Some more to come at the Analyst Day, but that's kind of a recap on how we've seen it for the last couple of years.

Great, that was very thorough.

Thanks for the overview, I'll get back in the queue.

Isaac Ro, Goldman Sachs

First question was on just a little bit more geographic color.

I think you gave us a general sense of how things played out globally.

But was curious, if you could offer a growth rate in China and in Europe?

Sure.

So in terms of the growth rates, you had strong double-digit growth in China.

When you adjust that for the days, it's going to be in the teens.

When you look at Europe, it grew pretty much in line with the Company average in terms of the growth.

So it was a good solid quarter in Europe as well.

Okay, that's helpful.

Then maybe, Steve, a follow-up on margins.

I appreciate all your comments regarding the puts and takes in the first quarter and some of the corresponding benefits in the fourth quarter.

But if we look away from that, I was wondering if you could comment a little bit on just PPI.

I know that's an ongoing focus for the Company every year.

I was wondering if you could talk a little bit about what the key initiatives are this year?

Just looking for some color on the underlining effort you guys are making to improve margins.

Thank you.

Sure.

So to think about the PPI drivers is the productivity.

It's a group of levers that we use and have continually used since I've been at the Company.

It's kind of a combination of larger type of restructuring is where you're consolidating the footprints of the organization in terms of the manufacturing operations and the back office.

It's also the micro aspect of PPI.

So we're a day in day out, we're just being better at [cleaning] out the operations and the back-office functions in kind of the way that we work.

So the combination of all of that, it's a continual set of efforts.

So there's nothing -- no major shift in terms of look of region plays that we're doing, the footprint optimization, and the use of sourcing and pricing levers.

Those are continuing.

The one new thing this year, as I've said on the last earnings call, is that we are looking to reinvest the benefit of the medical device tax into some longer-term projects.

One -- a set of projects around the footprints and more complex footprint changes in terms of manufacturing and then being more efficient in our financial back office.

Those projects are underway and are progressing well.

So, I think it's just a continuum in terms of the impact of the PPI business system and then we're stepping it up a little bit in terms of using the opportunity to reinvest the medical device tax.

Got it.

Thank you.

Tycho Peterson, JPMorgan.

Maybe just first question on biopharma.

I know in your initial guidance, Marc, for the year, I think you'd kind of factored in a 600, 700 basis point headwind just from the tough comp.

Maybe just can you talk about what you think the growth trajectory looks like that segment for the rest of the year?

Are there kind of larger strategic deals out there that you're looking at as well in the biopharma business, in particular around bioprocess and bioproduction?

Sure.

Tycho, thank you for the question.

In terms of the end market, we had our easiest comparison in the first quarter.

So we had a very strong start, better than we expected.

As you look at the outlook for the rest of the year, we expect that the growth will continue to still be very strong but at a little bit less robust rate then what we saw in the first quarter, in terms of the biopharma end market.

But it will be our fastest growing market for the year.

That's our expectation.

In terms of strategic M&A, we have a really good M&A pipeline -- bolt-ons primarily.

But we consider many different transactions.

If the right ones line-up, you will see us be active.

So that's kind of the normal course for us, we're always thinking about and taking actions to strengthen the Company's competitive position.

Then in Stephen's comments by division, he mentioned strategic investments for each of the different segments.

Can you maybe just talk from a higher level where you're placing more incremental investment this year?

Is the usual areas around improving our commercial capabilities in some specific areas, particularly around service infrastructure, as well as some specific R&D and new products introduction and product launch type of investments.

So it sits there -- the growth area is for the topline of what we're focused on.

Okay, thank you.

Jon Groberg, UBS.

Congratulations on a solid start to the year.

Marc, you've answered a lot of the market questions, so I'm going to steer away from some of those.

I think we've get the sense as to what's changed the EPS and the impact from some of the -- of what you're saying operationally.

So I want to focus on just maybe two quick things.

One, on Affymetrix, can you maybe talk to a little bit about more about how your thinking of integrating that asset?

What could drive upside to the accretion that you've talked about?

I know you've distributed some products from Affymetrix.

To me, it's always looked a little bit more like a product line, it seems like there could be a lot of G&A overlap.

So can you maybe just talk a little bit about what might drive upside to your accretion targets?

Sure.

Jon, we're really excited to have the business as part of Thermo Fisher and to welcome our new colleagues.

They were not only running the business well but actively looking at, how do you maximize the impact with our customer base and the competitive position.

I'd break it into two different themes; one is a product theme and one is a geographic theme.

But the geographic theme is quite easy, right?

Where we'll be looking for upside is really the commercial reach around the world, Thermo Fisher has incredible reach.

Affymetrix was a much narrower Company so that will help over time focusing on accelerating growth and capturing revenue synergies.

Over time we'll obviously drive to the upside, to the most extent possible.

From a product fit, the reason the acquisition is so compelling is really the way you framed it, which is, it was a whole Company.

But really it is two great product lines that fit so incredibly tightly with our life science solutions business.

We're able to combine our flow cytometry and antibody businesses in the bioscience business, which gives us a much stronger competitive position.

We're able to add the micro-array technologies to our large genetic sciences business, which really puts us in a very unique position, because we will be truly technology agnostic for solving customers' problems because we will be the only Company that has NextGen sequencing, Sanger sequencing, microarrays and qPCR with leading positions across that array of technology.

So that a customer will say, here's the challenge I have, we will give them the optimal workflow.

These are very complementary fits.

So with good execution, we'll obviously focus on delivering what we committed to and then always looking for the upside.

From an accretion perspective, as we announced when we announced the deal in January, we said $0.10 in the first full year, which translates to basically $0.06 this year, $0.04 in Q1 of 2017.

But as you know -- as time unfolds, we'll be looking for opportunities to drive to the upside.

That's probably more of a 2017 benefit than a 2016 benefit.

Okay, great.

That's really helpful.

Then just a quick follow up, I -- going back over your comments, Marc, maybe over the last couple years.

Two categories you consistently call out have been -- in terms of growth, have been chromatography and actually also NGS.

You're a huge Company, so I'm guessing if you're calling those out, they must be particularly strong growers, is there any -- would you be willing to size those business for us today, relatively how big they are?

The specifics -- it doesn't matter as much, but the NextGen sequencing business is approximately a couple percent of revenue.

The chromatography business --kind of order of magnitude just shy of $1 billion.

It's a little under that.

So, NGS is a small business growing rapidly.

Chromatography is a pretty good size business growing rapidly.

That really -- to me, I like the chromatography business because what you saw was Thermo Fisher years ago having a strong niche position, Dionex having a strong niche position.

The combination is a very strong business.

The two businesses together are growing faster than what the individual businesses were growing as standalone.

So that's the kinds of capabilities that Thermo Fisher Scientific brings when we combine businesses because of the very strong advantages we have from scale and depth of capabilities.

Great, thanks.

Doug Schenkel, Cowan and Company.

I really wanted to just try to cover two topics.

One is specialty diagnostics.

The other is innovation.

So, starting on specialty diagnostics.

Yes, this has been an area where you have underperformed relative to the corporate average.

I think everybody's expectations including yours for several quarters.

This quarter you did really, really well.

Can you help us think about how we should think about the underlying growth rate of specialty diagnostics moving ahead?

Are there some investments being made in specialty diagnostics that are driving better performance?

In terms of specialty diagnostics, we are investing very significantly in areas that will create a brighter future for the growth rates in that business.

They don't have a big short-term impact.

Very large programs in the NextGen sequencing area, very large programs in mass spectrometry.

Obviously, they're driving some level of growth but they really are positioning for the long-term, right?

So that's one thing, which is why when we take a long-term perspective on the business, we are very bullish and optimistic about the long-term growth prospects there.

In terms of the performance of the business in the quarter; a better quarter, strength across really all of the businesses within the portfolio.

The seasonal businesses really were no effect one way or the other.

So there was no special causes.

We didn't have to talk about OEM contract and all that other stuff that was -- yet had a lot of talk but in the scheme of things wasn't that material.

So it was a reasonable quarter.

Really we're taking the actions to make sure in the long-term that business is a good fast growing business for us.

So, Doug, I don't want to take any shine off a good quarter but just to remind you that the organic growth that I gave in my script around the segments where the reported organic growth and not the days adjusted.

Days adjusted is still good in that segment.

It's about the Company average.

So just trying to remind everybody that those percentages I gave out are the days -- it's nine days adjusted for the segments.

Got it.

All right, that's all very helpful.

On the innovation topic, some of this ties into what you described in terms of your longer-term investments or your investments in longer-term opportunities within specialty diagnostics, Marc.

In reading your proxy, I won't read the exact language but you noted that the percentage of 2015 revenue, attributable from products commercialized in the last two years, was down relative to what you saw in 2014.

Relatedly, you had appointed a new CSO.

Can you provide a bit more detail on what changes you are making to improve this metric over the next few years?

Does the strength you're seeing earlier in the year afford you an opportunity to maybe invest more pursuant to improving this metric?

Doug, that's a great question.

One of the things in the metric which is kind of fun, which is we use a very short window on momentum.

So, the metric was down slightly year over year and that's primarily because the Orbitrap, one of the Orbitrap derivatives that had unbelievable success, which still has that same great momentum, came off the two-year anniversary.

So they don't consider it a new product, right?

So you have the ebbs and flows on the metric.

When I look at the dollars of products that we're driving -- from dollars of revenue that number has been pretty solid for the Company.

The actions were taken to create an even brighter future from innovation -- we have a great Chief Scientific Officer and a very strong team.

You'll get that a little bit of highlight of some of the things we're working on at the Analyst meeting in less than a month's time.

So reserve the date, I'm sure Ken has sent that out.

It's the best day in New York of the year as I know -- at least from my perspective.

You'll get a sense of it, but we're very confident about the investments we're making.

In fact, two weeks ago I was out with 300 of our leading scientists of the Company, at a symposium we were doing, where they were actually working on new business ideas and new technology ideas, leveraging the strengths of the Company.

I came away so unbelievably energized with some of the things our teams are working on.

We have incredible talent within R&D so (inaudible).

Steve Beuchaw, Morgan Stanley.

One question on the balance between consumables and instruments.

It's a little difficult given the relative impact of the selling days issued here in the quarter to look at on an organic basis, how consumables are tracking relative to instruments.

Maybe not necessarily for the quarter but on a trailing two or three quarter basis.

Could you give us a sense for how consumables are tracking relative to instruments and historically as cycles have strengthened you might have seen a few more points of strength early on in instruments.

Is that happening here?

If we see more consumable strength going forward, what does that mean on a relative basis for an potential for margin expansion?

I will start.

When I think about the instruments business and you look at it, very little revenue effect from days, about 6% organic growth in the quarter in terms of how the instruments business did.

Which when you think -- when you peel that back, you have a large chemical analysis business serving some very weak sectors of the industrial market and then a very large chromatography and mass spectrometry business.

So when you think of that level of growth, it's a very strong performance.

That's been -- that bifurcation of weak industrial, weak chemical analysis, very strong life science, mass spec and chromatography, that's been a continuation trend.

So that business is good.

From the consumables mix -- I'm pretty steady on good performance, right?

Our channel business has done well, life science solutions has done well.

When I think about profitability it's not a huge driver.

It would make a little bit more money on consumables for the self manufactured portion but embedded in there is the channel business.

As you know, we don't to manage the mix that way but generally I'm not concerned by sort of the rates of the growth in businesses.

In fact, the consumable growth shows that we have pretty steady, stable performance in the end markets.

Got it.

Then just one clarification.

Can you remind us in the outlook for the year and to what extent you've incorporated expectations for stronger trends on the NIH in the back half, given that the normal 3Q disbursements that one would expect?

Thanks.

We pretty much expected the funds to flow from NIH in the first three quarters.

As you eluded, probably the strongest in Q3.

But it should be reasonable in each of those three quarters during the course of this year.

Thanks so much.

Brandon Couillard, Jefferies.

Just one question for Stephen.

In terms of the free cash flow, could you help us bridge the gap between the 25% conversion we saw in the first quarter and sort of if there was discrete dynamics weighing on that in the first period?

How we get really from there to what seems to imply about 85% conversion for the full year?

Yes.

We save pretty much -- every year it's very front end loaded in terms of interest and cash tax payments as well as we've paid bonus payouts come out in the first quarter.

Then generally there's a depletion of working capital and an increasing in working capital -- a decrease at the end of the year and an increase at the beginning of the year; so it's a pretty similar seasonal dynamics that we've seen play out for the past, many years.

I feel good that we're ahead significantly from last year.

We're almost $200 million higher free cash flow from this point back in Q1 2015.

Thanks.

That's it, thanks.

Dan Arias, Citigroup.

Maybe just a question on pharma from the services side.

Can you just talk to growth for Unity in the quarter.

Then maybe as a follow-on, Marc, each of the big players there has been doing well for some time now.

Just curious how you would characterize the competition these days?

Are you bumping into those guys more than in the past?

Or is everybody operating in their own sweet spot, so to speak?

I think you get the competitive dynamic question pretty often there but just curious about the runway there as we try to get our hands around the continuation in biopharma strengths.

Thanks.

Yes.

So in terms of the services portion of the Company, about 14% of our revenue is services.

That's split between our biopharma services or our clinical trial services business and the Unity Lab services, which is basically a combination of supporting our instruments and equipment and doing some outsourcing of that for our customers, as well.

Both of those businesses have demonstrated good growth growing at or above the Company average in terms of performance.

And the competitive set on the Unity Lab services side, really hasn't changed much.

You have a couple other companies that are in that market and each have our own strategy.

We feel good about our outlook there.

Let me wrap it up here.

Thank you for the interest and from my perspective, we had a great start to the year with a great Q1 behind us.

We are very well positioned to deliver a strong 2016.

We look forward to updating you on our progress next quarter and of course seeing you in New York City in May at our Analyst's Day.

Thank you, everyone.

This concludes today's conference call.

You may now disconnect.