賽默飛世爾科技 (TMO) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2016 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 your call.

Good morning and thank you for joining us.

On the call with me today is Marc Casper, our President and Chief Executive Officer, and 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 11, 2016.

A copy of the press release of our third quarter 2016 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 of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Company's quarterly report on Form 10-Q for the quarter ended July 2, 2016, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also available in the Investors section of our website, under the heading SEC filings.

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

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

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

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third quarter 2016 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, and thanks for joining us today for our Q3 earnings call.

We're pleased to tell you that we had another great quarter and we're right where we should be at this point of the year.

We delivered strong financial performance on the top and bottom lines.

We continue to execute our growth strategy to best serve our customers and gain share.

And we also completed our acquisition of FEI earlier than we expected and the integration process is in full swing.

So terrific progress across the board.

I'll cover these points in more details in a few moments, but the key message is that with three great quarters behind us, we are well-positioned to deliver another very successful year.

I'll start by covering the Q3 financials at a high level, give you some color on our performance by end market, and provide a recap of the quarterly highlights in the context of our growth strategy.

Then I'll wrap up with our revised guidance.

In terms of financials, revenue in Q3 grew 9%, to $4.49 billion.

Adjusted operating income was up 11% and we expanded our adjusted operating margin by 40 basis points, to 23%.

Finally, I'm very pleased that we achieved a 13% increase in adjusted earnings per share to $2.03.

As you know, adjusted EPS is our primary performance metric and we continued to deliver consistently strong results to extend our long track record here.

In summary, it was a great quarter financially and our teams are really executing well to take advantage of the opportunities we have to help our customers meet their goals.

As you hear from us every quarter, we're committed to building our capabilities to being an even stronger partner for them, whether we're launching new products or making strategic acquisitions.

The global environment obviously has its challenges, but we look at them as opportunities to help our customers be successful and we're effectively leveraging our unique value proposition to gain share and drive growth.

That's a good segue into our end market discussion.

There's been a lot of commentary on the various end market dynamics.

Let me provide you with some color on what we saw in our four end markets in Q3.

In aggregate, our key end markets were in line with our expectations and Q3 was similar to what we saw in Q2.

At a high level, two of our end markets were essentially the same, Academic and Government and Healthcare and Diagnostics.

And the other two changed a little.

Pharma and Biotech was a bit stronger and Industrial and Applied was a bit weaker.

I'll give you a few more details about each one.

In Pharma and Biotech, we grew in the low double digits in Q3.

The market dynamics remained very healthy and we continue to effectively leverage our depth of capabilities to gain share with these customers.

Growth in our bio production and bio pharma services businesses were particularly strong in the quarter and we also had strong performance here in our chromatography and mass spec business.

Academic and Government end markets grew slightly in the quarter and Industrial and Applied end markets declined slightly.

And in Healthcare and Diagnostics, our growth overall was similar to last quarter.

This was highlighted by strong performance in our transplant diagnostic business and particularly strong growth in our clinical NextGen sequencing business.

So again, not much difference in our end markets overall compared with Q2.

Now I'll cover some of our Q3 business highlights in the context of our growth strategy.

As you know, we continue to follow a clear and consistent strategy to strengthen our position in targeted end markets and geographic regions.

We're focused on developing high impact, innovative new products, expanding our scale in Asia-Pacific and emerging markets, and enhancing our unique customer value propositions.

I'll start with innovation, as I usually do.

We launched a number of new products during the quarter across our businesses, but I'd like to focus my remarks today on a few examples of how we're increasing our depth of capabilities for customers working in the clinic.

Late July marked the annual meeting of the American Association of Clinical Chemistry.

We showcased a number of assays, instruments and software under our Thermo Scientific premier brands, so let me highlight a few of them.

First, we were pleased to be cleared by the US FDA to expand the use of our leading BRAHMS PCT sepsis test.

It can now be used in the emergency room or other medical wards before a patient is admitted to the ICU.

Our PCT test was previously cleared only for the use with critically ill patients on their first day in the ICU.

By administering the sepsis test much earlier, clinicians can protect a broader patient population and help to reduce the associated healthcare costs.

We also worked in tandem with our key PCT license partners, Roche Diagnostics and bioMerieux, so that they could receive clearance to run the test on their extensive installed base of instruments in the US.

This will significantly expand access to this valuable diagnostic tool.

We also received clearance for several other diagnostic assays, as well.

One was the DRI Hydrocodone assay, which has a high level sensitivity to help doctors quickly identify possible opioid abuse.

We also received clearance for two new EliA IgG autoimmunity tests for more effective diagnosis of thyroid disease.

Last, for greater accuracy in the clinical lab, we launched LabLink XL 2.0 software so clinicians can compare and validate results in real time from labs around the world.

I also want to make a comment on our NextGen sequencing business, as well, where we're seeing nice momentum in customer adoption of our sequencers, including the new S5 and S5 XL that we introduced about a year ago.

In the quarter, we launched a number of new assays, including additions to our Oncomine family of high-value oncology kits.

Our new lung cell-free DNA, as well as our BRCA1 and 2 assays, are all designed for NGS analysis on our Ion Torrent platform.

We also launched the new Ion AmpliSeq Transcriptome human gene expression kit, which enables the simultaneous analysis of more than 20,000 genes in a single assay using our Ion Chef sample prep technology as part of the workflow.

In terms of highlights from a geographic perspective, we're pleased to deliver another strong quarter of growth in Asia-Pacific and emerging markets, which is the second pillar of our growth strategy.

Our results in Q3 were led by outstanding performance in China and India.

China continues to be a significant contributor, with growth in the high teens during the quarter.

We are positioning Thermo Fisher to not only take advantage of the significant opportunities available in China today, but also to help those customers meet their future plans.

An important aspect of that is understanding the government's longer term focus.

During my last visit there in Q3, I spent time in Guangzhou and had the opportunity to meet with the municipal party secretary.

We formalized a strategic partnership that involves working with local companies and scientific institutions in Guangzhou to advance healthcare, environmental protection and food safety.

This is part of a national plan to boost development in the South China region.

We're also partnering with HEALTH Biomed, a leading provider of clinical diagnostic and pharmaceutical products in China.

The goal is to advance the development of molecular diagnostic kits for infectious disease in pharmacogenomic screening.

The kits will be based on our Applied Biosystems CE platform and is another great example of our ability to support precision medicine initiatives that are part of China's five-year plan.

These are just two of the examples, from the many that we have, in terms of long-term growth in China.

I always leave China even more energized about our prospects.

It's a large and growing market.

Our scale gives us a strong competitive advantage and we are well aligned with the country's strategic priorities.

I also spent some time in South Korea in Q3.

And a specific opportunity I want to highlight there is the demand for our bio pharma services capabilities.

South Korea is a key location for clinical trials research, because of strong government support, its modern infrastructure, and an easily accessible patient population.

During the quarter, we opened a new state-of-the-art facility in Seoul to provide local and global companies with a comprehensive clinical trial support.

This complements our bio pharma services capabilities in the region, including those in Singapore, China, India and Japan.

South Korea is also a great example of how we are leveraging our unique customer value proposition, which is the third pillar of our growth strategy.

Korea's GDP is growing in line with many developed countries, but we are clearly gaining share here.

That's because of the size of our sales force, our full suite of products and services, and the way we effectively bring it all together to help our customers drive innovation and productivity.

We have outstanding customer relationships across Korea and are well-positioned to continue to gain share.

As you know, we continue to invest to strengthen our customer value proposition, and the major highlight in Q3 was our acquisition of FEI, which we completed in September.

FEI is a well-respected business with a leading position in electron microscopy.

We're excited to add these technologies to our analytical instruments offering and extend their reach to our large Life Science customer base.

I attended the Day One town halls at FEI sites in the Czech Republic and the Netherlands.

I was able to meet many of our 3,000 new colleagues and it was great to see their enthusiasm about joining Thermo Fisher.

I've been impressed with the FEI teams and the operations I've visited so far.

The Brno site in the Czech Republic, in particular, is a world-class manufacturing facility that produces a wide range of FEI products.

It's also strategically located in an area with a highly skilled workforce.

The ability to leverage the site to support other parts of our Company will help us to further optimize our global footprint and increase our presence in lower-cost regions.

So we are very bullish about the many advantages that FEI brings to Thermo Fisher.

The integration teams have hit the ground running and are implementing their plans.

We are confident in our ability to achieve the $80 million of total synergies we laid out when we announced the transaction back in May.

Before I move on to guidance, let me give you a quick overview of where we stand with our capital deployment activities so far this year.

With the additions of Accumetrics and FEI, we've deployed more than $5 billion on strategic M&A, $1 billion of stock buybacks, and we're on a path to approximately $240 million of returns in dividends in 2016.

So it's been an active year for Thermo Fisher Scientific in terms of effectively deploying our capital to create value for our customers and our shareholders.

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

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

As usual, Stephen will cover the details and assumptions; but in summary, we are raising guidance based on the addition of FEI, our strong operational performance in the first nine months, and a better foreign exchange environment.

We now expect revenue for the year to be in the range of $18.25 billion to $18.39 billion.

This would result in 8% growth over 2015.

We are raising our adjusted EPS guidance by $0.11 at the midpoint, to a new range of $8.19 to $8.30, which represents 11% to 12% growth year-over-year.

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

It was another great quarter in terms of our financial performance and we extended our long track record of consistently delivering strong adjusted EPS growth.

We closed on the acquisition of FEI and look forward to the new opportunities we will have to create value and drive growth.

With a strong nine months behind us, we're on track to deliver another very successful year.

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

Stephen?

Thanks, Mark, and good morning, everyone.

I'll take you through an overview of our third quarter results for the total company, then I'll provide some color on our four segments, and conclude with the updated 2016 guidance.

Before I get into the details of our financial performance, I thought it be helpful to provide a high-level view of how the quarter played out versus our expectations at the time of our last earnings call.

Operationally, we are right in line with our expectations, both on organic growth and earnings generation.

Given the level of volatility in foreign exchange rates so far this year, it was good to see that Q3 FX was $0.02 less adverse than we previously estimated.

And finally, it was great to get the FEI deal closed in September and we were able to deliver $0.04 of additional adjusted earnings per share in the quarter.

So the high level summary is we had a strong Q3 and we were able to deliver $0.06 of adjusted earnings per share, above what we had previously expected.

Now let me give you some more color on the quarter.

Starting with adjusted earnings per share, as you saw in our press release, we grew adjusted EPS in Q3 by 13% to $2.03.

GAAP EPS was $1.19, up 1% from Q3 last year.

On the top line, our reported revenue grew 9% year-over-year.

The components of our Q3 reported revenue included 4% organic growth, a 5% contribution from acquisitions, and a slight headwind from currency translation.

In Q3, we recognized just under $100 million of revenue from FEI.

Looking at our growth by geography in Q3, this was very similar to what we saw in Q2.

Both North America and Europe continue to grow in the low single-digits, Asia-Pacific grew in the low teens, with another strong quarter from China, which grew in the high teens, as Mark mentioned, and the rest of the world declined low single-digits.

Turning to our operational performance, Q3 adjusted operating income increased 11% and adjusted operating margin was 23.0%, up 40 basis points from Q3 of last year.

Looking at the components of our adjusted operating margin performance in Q3, we delivered solid expansion from our organic growth, driven by our PPI Business System and volume leverage, and this was partially offset by unfavorable business mix, strategic investments, and a modest headwind from acquisitions.

This quarter, FX had no impact on operating margin.

Moving on to the details of the P&L, total company adjusted gross margin came in at 48.9% in Q3, up 60 basis points from the prior year.

Adjusted gross margin expansion was driven by strong productivity, positive contributions from acquisitions and FX, and partially offset by business mix and strategic investments.

Adjusted SG&A in the quarter was 21.8% of revenue, which is up 30 basis points versus Q3 2015, and R&D expense came in at 4.1% of revenue, down 10 basis points versus Q3 last year.

R&D as a percent of our manufacturing revenue in the quarter was 6.1%.

Looking at our results below the line, net interest expense was $103 million, which is $10 million higher compared to Q3 last year, mainly as a result of financing related to our capital deployment actions this year.

Our adjusted tax rate in the quarter was 13.1%, which is 90 basis points lower than last year, as a result of our tax planning initiatives and the timing of discrete items; however, this was in line with our expectations.

Average diluted shares in the quarter were 397.4 million, down 4.6 million year-over-year as a result of the share buybacks we completed in Q1, partially offset by stock option dilution.

Turning to cash flow and the balance sheet, for the first nine months, cash flow from continuing operations was $2 billion and free cash flow was $1.7 billion, after deducting net capital expenditures of $290 million.

This is approximately $350 million higher than our prior year cash flow for the same period.

We ended the quarter with $2 billion in cash and investments.

This is higher than normal, due to the timing of the financing activities related to the FEI acquisition.

$1.2 billion of this was used on the first business day of Q4 to pay down debt obligations.

Our total debt at the end of Q3 was $18.9 billion, up $4.8 billion sequentially from Q2, as a result of the financing activities related to the FEI acquisition.

Our leverage ratio at the end of the quarter was 4.2 times total debt to adjusted EBITDA, up from 3.2 times at the end of Q2.

After we paid down the debt on the first day of Q4, the leverage ratio was down to 4.0 times.

Similar to previous quarters, we paid $60 million of dividends in Q3.

And wrapping up my comments on our total company performance, ROIC continues to be strong.

Our trailing 12 months adjusted ROIC at the end of the quarter was 9.8%.

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

Starting with the Life Sciences Solutions segment, reported revenue increased 14% in Q3 and organic revenue growth was 7%.

In the quarter, we continued to see strong growth across a number of the businesses, led by NextGen sequencing, bio production and biosciences.

Q3 adjusted operating income in Life Sciences Solutions increased 11% and adjusted operating margin was 30.1%, a decline of 70 basis points year-over-year.

Adjusted operating margin was in line with our expectations and the year-over-year contraction was driven by unfavorable business mix and the impact of acquisitions, partially offset by positive productivity and volume pull through.

In the Analytical Instrument segment, which includes the FEI acquisition, reported revenue increased 15% in Q3 and organic revenue growth was 3%.

In the quarter, we had strong growth contributions from our chromatography and mass spec and our environmental instruments businesses, partially offset by continued weakness in the businesses serving our industrial end markets.

Q3 adjusted operating income in Analytical Instruments increased 30% and adjusted operating margin was 21.2%, up 240 basis points year-over-year.

In the quarter, we saw very strong productivity, favorable FX, good volume leverage and a positive impact from the FEI acquisition.

Expansion from these drivers was partially offset by unfavorable product mix and the impact of strategic investments.

Turning to the Specialty Diagnostics segment, in Q3 reported and organic revenue both grew 3%.

We saw good growth in our transplant diagnostics and immunodiagnostics businesses.

Adjusted operating income increased 5% in Q3 and adjusted operating margin was 26.8%, up 40 basis points from the prior year.

Adjusted operating margin was driven by strong productivity, good volume pull through, and FX tailwinds, partially offset by the impact of strategic investments and headwinds from business mix.

Finally, in the Lab Products and Services segment, Q3 reported revenue increased 7% and organic growth was 6%.

We delivered particularly strong growth in our bio pharma services and channel businesses.

Adjusted operating income in the segment increased 3% and adjusted operating margin was 14.8%, down 40 basis points from the prior year.

Adjusted operating margins benefited from volume and productivity; however, these were more than offset by the impact of strategic investments and unfavorable business mix.

Now I'll review the details of our updated full-year 2016 guidance.

As you saw in our press release, we are raising both our revenue and adjusted earnings per share guidance.

We're increasing revenue guidance by $400 million at the midpoint and increasing our adjusted earnings per share guidance by $0.11 at the midpoint.

Let me walk you through the details, starting with revenue.

We continue to expect to generate about 4.5% organic growth for the full year 2016.

Of the $400 million increase in revenue guidance at the midpoint, $30 million reflects the slightly less adverse FX environment and $370 million reflects the impact of FEI, which includes approximately $100 million we recognized in Q3.

The FEI numbers are net of purchased accounting adjustments to reduce deferred revenue.

Then on adjusted earnings per share, we've increased the midpoint of our adjusted earnings per share guidance by $0.11.

This reflects $0.02 from the less adverse FX environment and $0.09 from the impact of FEI, which includes the $0.04 we recognized in Q3.

And finally, with three quarters of strong operational performance behind us and factoring in the addition of FEI, we are narrowing our revenue guidance range to $140 million and narrowing our adjusted earnings per share range to $0.11.

So to sum all this up, the revised 2016 revenue guidance is now a range of $18.25 billion to $18.39 billion, which would represent 8% growth versus 2015.

We expect acquisitions to contribute about 4.5% to our reported revenue growth in 2016, and FX is expected to be about a 1% headwind.

In terms of adjusted earnings per share, our increased 2016 guidance is now a range of $8.19 to $8.30, with a midpoint of $8.245.

This represents growth of 11% to 12% versus 2015.

Excluding the FX impact, this would represent adjusted earnings per share growth of 12% to 13%.

We are now expecting 50 to 60 basis points of adjusted operating margin expansion year-over-year.

This is slightly lower than our previous guidance of 60 to 70 basis points, primarily as a result of the impact of the FEI acquisition.

A few other details behind our 2016 guidance.

Given the days impact on our 2016 fiscal calendar, I thought it would be helpful to revisit our prior comments around phasing.

Our Q1 had four more days and our Q4 will have four less days than the equivalent quarters in 2015.

As a result, we're expecting the reported organic growth in Q4 to be essentially flat and the days adjusted organic growth in Q4 to be about 4.5%, consistent with our previous guidance.

This would also result in a full-year organic growth of about 4.5%, also consistent with our previous guidance.

Net interest expense has increased $25 million from our previous guidance to $420 million, as a result of the FEI acquisition.

There is no change to our full-year adjusted income tax rate guidance, which is still expected to be about 14%.

This implies a 15% adjusted tax rate in Q4, slightly higher than the full-year average due to the phasing earlier in the year of certain discrete tax planning actions.

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

Full-year average diluted shares are estimated to be about 398 million, consistent with previous guidance.

We're expecting net capital expenditure to be approximately $440 million, consistent with previous guidance.

And finally, we're still expecting about $2.72 billion of free cash flow for the full year 2016, consistent with previous guidance.

We're forecasting that the operational cash flow generated by FEI during our period of ownership in 2016 will be offset by the related transaction and restructuring costs.

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

And then in summary, we've had three strong quarters of operational performance, a less adverse FX environment than expected, and our capital deployment activities are generating strong earnings benefits in 2016 and will enhance our strategic position over the long term.

All of this keeps us on track to deliver another excellent year.

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

Thanks, Stephen.

Operator, we're ready to take questions.

(Operator Instructions)

Jon Groberg, UBS.

Great.

Thanks a billion and congratulations on another solid quarter.

Marc, obviously there's a lot of concern out there in the investor community about the bio pharma market.

You noted another strong, almost looks like accelerating growth in that market.

Any comments at all around early indications of what you may be seeing there?

Any potential concern around what you're hearing from customers or elections?

Yes, Jon, thanks for that question.

It's been a great end market for us.

The outlook continues to be very bright.

Let's talk about why the market is generally good.

The science is good, and the number of approved drugs continues to go well.

Vaccines are continuing to play a more and more important role in healthcare.

And that's a good positive, as well.

And as more and more biotech, large molecule drugs are making it through the pipeline versus small molecules, biotech is a larger consumer, on a relative basis, of Life Science tools and Diagnostics, because it's not just in the research and clinical trials phase, but all the way into production you'd use our products.

So actually the industry looks very bright.

And then obviously, on top of that is the Company's position within the industry.

And we have a great value proposition with these customers, and we have consistently gained share for a number of years.

We have strong relationships across all of the major bio tech and pharmaceutical companies, and they see us as their partner to drive innovation and productivity.

And that has allowed us to have a great historical performance, but more importantly, position for a very bright outlook in this end market.

Great.

And then a quick follow-up, Marc, on it looks like to me like Affymetrix is still a little bit underperforming relative to maybe where you expected, or at least what they were doing.

And so I'm just curious as you initially get to know FEIC and given some of the end markets out there, are you feeling comfortable with your initial outlook of FEIC as you've gotten to know it better?

Any updated thoughts there?

Thanks.

Yes, so in terms of FEI, really we're very excited to have the company as part of Thermo Fisher Scientific and a great addition in terms of colleagues.

The business is on track to have a good year in terms of growth and obviously had a nice contribution in Q3 and a good contribution to our success in Q4.

So integration is just getting underway.

We did the planning between announcement and close, and the teams are executing well, and we're very excited about what FEI is going to bring to the Company over time.

What we expect over time, as we said back in May, is that this business will grow faster than the company average.

Thanks, Jon.

Thanks.

Derik de Bruin, Bank of America Merrill Lynch.

Hello.

Good morning.

Good morning, Derik.

Marc, I know it's a little early to start thinking about 2017 maybe, but you're doing 11% to 12% EPS growth this year, 12% to 13% FX adjusted.

At your analyst day, you said that with capital deployment, 12% to 15% EPS growth was how we should think about the Thermo model going forward.

Is that still the best way to think about, given the FEI and the Affy deals that are in there, is that a good starting point for next year?

Derik, thanks for the question.

Obviously, we'll give our guidance in early 2017 on the Q4 call.

The way that I see it is you have the base operational assumptions and the capital deployment assumptions.

And if I think about the environment, the environment looks very similar to what it was in May, so that puts us in a range of 4% to 6% organic growth in terms of that.

And in terms of capital deployment, we will clearly benefit from the accretion that we get from FEI on a year-over-year basis, and certainly the accretion that we get from the Affymetrix transaction.

So at a high level, the way you articulated it, I agree with you.

Obviously, you have to work through all the math, but given the strong acquisitions that we've done this year, we're going to get a nice contribution to our earnings from the capital deployment actions in this year.

One quick follow-up.

So was there any signs at all that delayed equipment purchases in the academic labs in both either the US or Europe?

The academic end markets, the government end markets, were very similar to what we saw in Q2, with the US growing in the low single digits and the rest of the world a little bit more muted than that, and we didn't really see any meaningful changes in the trends.

Great.

Thank you.

You're welcome.

Ross Muken, Evercore ISI.

Good morning, guys.

So I want to dig back into pharma.

I was hoping you could maybe parse out what your expectations are going forward within those sub segments by some of the key areas.

So we've heard from the pharmas themselves and from the CROs and from the CMOs and from the CDMOs varying comments around demand.

So if you can give us a feel for what you're seeing in base discovery and the tools and equipment that get sold there versus production, which seems like it's still on fire.

And then maybe your bio pharma service business, just give us a feel if it's consistent across the three or four key buckets and across the customer bases, or if there's maybe one or two areas that you're either more or less constructive on.

We're doing well.

So that is the summary.

So you can parse it different ways and the growth is strong, no matter how you parse it.

Obviously, the bio production and the clinical trials logistics for bio pharma services businesses continue to perform very well and are growing a little bit above the rates there.

But if you just do the math, it implies that the rest is growing very strongly, as well.

So there wasn't much nuance in terms of the strong performance.

I would say that our chroma mass spec business obviously had a good quarter serving that business, as well.

But that's not implying that something did poorly, but given that there's been a lot of questions about what's going on in capital equipment, it's actually been pretty good.

So we feel good about the end market.

It's been a good nine months and it's been a good number of years, and we're well-positioned.

On the industrial side, and applied, is there any geographic bias to the weakness there?

We've heard varying comments on Eastern Europe much worse than Western Europe and maybe mix out of Japan, but China good.

I'm just curious to see your perspective on that and where, maybe if anywhere, you're seeing any positive signs of stabilization or improvement?

From the industrial and applied markets, they declined very slightly in the quarter.

As I read things outside of Thermo Fisher, what's going on in the broader world, clearly the industrial markets are soft globally.

It didn't seem like any particular geography really jumped out at us as a particular standout off of that.

The applied markets in China continue to be good, so that's obviously positive, things like food safety and environmental protection.

So that's a bright spot.

But we didn't really get any particular pockets of weakness on the industrial and applied that we saw.

Great.

Thank you.

You're welcome.

Tycho Peterson, JPMorgan.

Thanks.

Marc, I want to go back to the academic markets.

Obviously, there's heightened sensitivity and I appreciate your business has been holding up better than others.

It does seem like academic went from low single-digit growth to slight growth.

But can you give us a sense, from your perspective, on the market, on what's going on?

You were very positive at the beginning of the year on NIH dynamics, and now we've seen the outlays drop off about 13% in September.

Obviously, university endowments are under pressure, as well.

So I guess what I'm trying to get to is this the risk that you may actually start to see some of this in the fourth quarter?

If we go back to 3Q 2011, you saw things later than some of your peers.

And what's the risk for bigger ticket items, like Cryo-EM, which you now have with FEIC?

Tycho, the first thing I'd say is I think we're performing incredibly well.

I don't think anything other than that.

And in terms of the academic and government markets, if you go back to what we said at the very beginning of the year, which is probably the best way to think about what's different or what's the same, we expected that the year would start slower in the US in academic and government and then build as the year went on.

And actually, the year started a little bit stronger than we had expected and has stayed study with that at low single digit growth.

So it came a little bit early and it's been very steady.

In terms of the other geographies, obviously given that we expected academic and government to be a little better in aggregate, it basically says it must be a slightly weaker, and clearly that's been offset by the strength in bio pharma.

So that's the sort of looking back in late January, what's changed.

In terms of are we off cycle versus others, I don't know, I think we're gaining share versus others, but that's my opinion.

When we thought about our range of outcomes for the year, we felt comfortable with raising the guidance at the end of Q2 to 4.5% organic growth and we feel comfortable reaffirming that 4.5% outlook.

And the way I think about it is our commercial teams cover a range of customers.

We focus them on where the best opportunities are, and in a way, we don't force a lot of micro level analysis for the investment community.

It's our job to manage through it and we feel well-positioned to deliver a really nice year in terms of performance.

And then on FEI, one of the dynamics they had talked about prior to the acquisition was an anticipated recovery in the semi market, as you had the shift to 10 nanometer production.

Can you maybe talk about whether your view on that has changed at all and whether we might see that at some point next year?

Yes, so given that we owned the business for nine days, but obviously been working with the team for a while, the Life Sciences business is performing very well, both with strong revenue growth and strong bookings performance.

The industrial-related and material science businesses are a little bit more muted.

And as we look at the numbers, it seems like the industrial businesses have bottomed out, which is encouraging, and then obviously as we get into owning the business longer and in the future, we can give you more color on that.

Okay.

Thank you.

Thanks, Tycho.

Jack Meehan, Barclays.

Hi.

Good morning, guys.

Good morning, Jack.

Marc, I appreciate your perspective on the healthcare channel.

There's been a little bit more noise on the provider side as of late.

As you've talked with your customers, what are they saying about volumes?

And then as it pertains to the Specialty Diagnostics business, which of the segments need to improve to get us back to the 4% to 6% target range?

So Jack, good question.

As I think about the healthcare and diagnostic end market, it was very similar in Q3 to what we saw in Q2.

What I would say is the more, the super high-value added businesses, transplant diagnostics, the allergy and autoimmunity business, the clinical NextGen sequencing businesses, those businesses are performing very well.

The more routine, volume-related businesses, your basic consumables used every day, has been a little bit softer, but not a change in trend.

So what would have to happen for pickup in growth, two different factors could help drive it.

You don't need both, which is a little bit higher level of activity in the basic consumption of the products for consumables would help, and the other is we have a number of programs that are driving our Life Science tools into the clinic and they will be meaningful drivers, as well.

So the driving into the clinic, that's in our control entirely and that puts us very optimistic about the midterm prospects for the diagnostic business, and then we'll always take the upside if the markets get even better.

Great.

That's helpful.

And then just a follow-up on the Affymetrix integration, how that's going, and any update on the array environment, any sequential changes you've seen there?

Thank you.

Jack, in terms of Affymetrix, let me give you an update on the integration, let me give you an update on the business performance.

Integration's going really well.

We are running very smoothly there.

Our synergies are running ahead of plan.

We'll achieve about $11 million in synergies this year, which is a $5 million to $6 million better than we had assumed for this year.

In terms of the business performance, the bioscience business is doing very well, growing sharply and that's very positive, the micro array business, like we mentioned last quarter, is soft.

We expect it to be soft for a few more quarters, as we really drive adoption of the precision medicine micro array, and we're obviously actively marketing that.

So that's a quick update on Affymetrix.

Great.

Thank you.

You're welcome.

Doug Schenkel, Cowen and Company

All right.

Good morning.

Thanks for taking the questions, guys.

Based on what we've heard from peers in the group, I think it's fair to assert that your organic revenue growth performance in the quarter and your guidance for Q4 looks fairly solid, certainly relatively speaking.

Other companies do have seemed to have suggested that the end of the quarter was maybe not as strong as expected and that the order book oat the end of Q3 and then the early part of Q4 maybe they didn't build as much as they might've expected.

Could you comment on end of quarter and early Q4 order trends, relatedly if there's anything notable by geography or end market?

And also related and assumingly more uncertain environment, are there any changes you're making regarding spending or operational plans relative to how you were planning a quarter ago?

Yes, in terms of the sequencing of the quarter, nothing really jumped out as particularly meaningful in terms of what happened in each month.

And obviously, we have the benefit of the first three weeks of October's results, so if they were off that trend line, that would is factored into our thinking, and it wasn't.

So from that perspective, we didn't really see anything from a calendarization that was any particular impact.

In terms of spending and those things, we're managing the business like we always do, which is we spend aggressively in the areas to drive value added and we are very conservative and frugal on the things that are low value added.

And that's kind of how we run the Company day in and day out, so no significant changes on that front, either.

Okay.

Thanks for that, Marc.

And a quick follow-up.

Would you guys be willing to provide growth by end market in Europe and parse out how growth compared in Eastern versus Western Europe?

I don't know the growth by end market for Europe, because we don't manage the Company that way.

Qualitatively, Western Europe was a little bit stronger than Eastern Europe, in terms of performance.

But that's not a change in the trajectory over the last several quarters.

But that's what we've seen.

And from recollection, Germany had a pretty good quarter in terms of growth within the Western Europe, but that's not implying anything particular about any of the other countries.

Okay.

Thanks again.

You're welcome.

Steve Beuchaw, Morgan Stanley.

Steve, are you there?

I am.

Sorry, got a little feedback there.

Good morning and thanks for taking the questions.

We've covered a lot of ground here in the Q&A and discussions around what's going on out in the end markets, but Marc, I wonder if you could put it into broader perspective for us and think about as you go into business planning for 2017, from your perspective, what are the two or three things that you want to focus on most acutely as you make a decision about where to put the budget within the 4% to 6% range?

The things that I think about in planning always goes to the one, new product launches and what are the exciting things we've got in the pipeline and what the impact's going to be and making sure that that's well characterized; two, any particular special causes year-over-year one way or another.

And at least as I sit here today, I don't see any special effects one way or another, so next year should look like this year in terms of some of the high level things.

One of the things we mentioned at the beginning of the year, which we're continuing to execute on, which I'm encouraged about is when the medical device tax was put on a two-year hiatus, we spent the savings on investing in some mid-term restructuring activities.

We will get one more year of that hiatus and we will invest those monies, as well.

So there's no effect year-over-year, but that means we'll have invested about $30 million in actions to drive more efficiency in the second half of 2017 and 2018, which I think is really good and encouraging and is something that we embedded into our long-term model.

So those are some of the things we're thinking about.

And I know that Stephen is looking forward to giving a detailed set of guidance at the beginning of 2017.

And follow-up for me is actually on competitive positioning.

I think as you can tell from the questions here in Q&A, we're all struggling to try to develop a broader perspective on the environment, given the fairly varied results in terms of growth from the companies in broader life science tools and diagnostics here over the last few weeks.

Marc, do you think that you are getting stronger over the course of the year in terms of your competitive positioning?

Is market share, even in certain specific verticals, a driver for you more so than it was even 12 months ago, now that in some areas, thinking about maybe e-commerce, you're a stronger player than arguably you were 12 or 24 months ago?

Yes.

It's our job to widen the gap versus others in the industry every day.

That's what we're paid to do is to make the Company stronger and get better every day.

And when I think about how we're performing this year, I think the Company's performing very well.

I'm very proud of the effort and the capabilities of our team and they're delivering.

So I think that's very positive.

Obviously, we benefit from the strong competitive position we have.

We have a very strong e-commerce platform, as you said.

We have the largest commercial team.

We have the best commercial team, in my mind.

And when I think about it, we've got great products, we've got unique position in the emerging markets, which allows us to capitalize on those opportunities.

I highlighted a couple during the quarter, but the way I really believe, and when I visit a customer in China, it's rational for them to do a disproportionate amount of their business with us, because they simply get a better experience.

We've got better people, better supply chain, and a more comprehensive set of offerings.

So I think we're very well-positioned and we feel good about the outlook for the balance of the year, and certainly as we get into 2017 and beyond.

Really appreciate the perspective.

Thanks again.

Isaac Ro, Goldman Sachs.

Good morning, guys.

Thank you.

Maybe one more question on the academic side.

We're obviously trying to reconcile what we've seen elsewhere in the sector this earnings season versus what you guys are seeing, which is clearly more dovish.

And as we look at the end of this year and into next year, it seems like the overall budget, at least in the US, should be a little bit better, Europe hopefully stable, and China hopefully better.

So if we look at the global picture for academic funding, is there any reason to think why we might see pockets of softness?

And I know you guys only speak for yourselves, but as the prior question pointed out, we're trying to reconcile disparate data points in the context of a generally better funding environment

Yes, I guess it's hard -- there's always challenges in the world.

We do our very best to navigate through them so that we don't have to spend a lot of time explaining all the things that go wrong.

And I think we do a good job of that, because we deliver good results consistently.

I guess I really can't reconcile for you.

I think the only two comments I can make is that we had a very good growth in chrome and mass spec, so if I look at what I've read about that, we did really well in that end market.

And when I look at our clinical NextGen sequencing business, we grew very quickly.

So I really can't reconcile for you what others are saying.

It's hard to do.

Sure, I understand that.

Maybe just follow up on the NGF comment, you guys called that out in the script, you mentioned it again here.

Can you talk a little bit about the types of customers where you think you're seeing the most traction?

Clearly, it's a high-growth marketplace and a rising tide for all boats, but it has been a market where we had really obviously one pretty strong player here.

And in the context of that competitive dynamic, I'm interested to know where you guys are finding the best upside and the path forward to continue that momentum.

Thank you.

Yes, Isaac, our business is really focused on the clinical applications of sequencing, and we benefit from the ease-of-use, the low capital cost, and one of the very low volume of sample that you need to run an oncology panel on our sequencer.

And that's allowed for really good adoption.

And you're seeing a steady cadence of new assays that we're launching, which reaffirms to our customers that we're investing and meeting their needs.

So that's the area that we've seen good momentum in.

Thanks, Isaac.

Dan Arias, Citi.

Yes.

Hello.

Good morning.

Thanks, guys.

Marc, maybe just on pricing, obviously a mixed operating environment for [interested] sales, with industrials pretty choppy but pharma doing well.

So could you just maybe touch on net pricing in the AI business and then what your expectations there are as we look out a bit?

Dan, this is Stephen.

I'll take the pricing one.

So we look at pricing on a total for the Company and we're about 60 basis points of price.

So it's very consistent with what we've seen for the rest of this year and actually what we saw pretty much for all of last year.

We're lapping some of the things that we did in Japan in terms of the FX offset, but that's going to be offset by some pricing actions we're taking in the UK, as well.

So pricing has been pretty consistent for us.

Got it.

And then maybe a follow-up on China and what you're seeing there with the precision medicine programs that you highlighted.

I'm just curious about how you're finding predictability there or just maybe visibility there.

Any reason that would be more or less speculative in nature than some of the other things going on in China?

We've been on a really nice, consistent roll for a number of quarters.

And having visited China twice last quarter, the business is performing well, the bookings are strong, the outlook is good, and so we really haven't seen anything that would say the visibility is any different or if there's any particular strong clouds on the horizon.

The business seems to look good and we're benefiting from our strong competitive position there.

Okay.

Thanks very much.

Operator, we have time for just one more.

Sung Ji Nam, Avondale Partners.

Hi.

Thanks for taking the questions.

Marc, I was wondering, you guys seem to have a pretty unique diagnostic business with decent margins.

Given your recent announcement about your participation in the Cancer Moonshot initiative, and I believe you also have a prostate cancer testing under development, I was curious as to if your interest in the diagnostic market has shifted a little bit and potentially considering higher risk opportunities?

We have a really strong position there.

It's been a core part of our business for a long time.

But we really haven't changed the risk profile as much.

We do have, obviously, a couple big investment areas that will position us for accelerating growth over time.

One is in the adoption of clinical NextGen sequencing and those applications, and our announcement, as you highlight, on the Cancer Moonshot is an example of that.

And the other is obviously in the area of mass spectrometry, where we've got a fairly big program, as well.

We're not really taking a different strategy, but we've been pursuing one for a number of years, in driving new applications into the clinic while benefiting from a very strong, highly profitable consumables business.

So thank you for the question.

Let me wrap up with just a quick comment, which is, as I reflect back, we're certainly on track to deliver another excellent year and we look forward to announcing our year-end results early in 2017.

And of course, thank you for your support of Thermo Fisher Scientific.

This concludes today's conference call.

You may now disconnect.