Thermo Fisher Scientific Inc. (TMO) Q2 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2014 second quarter earnings conference call. [Operator Instructions] I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin the call.

Good morning, and thank you for joining us. On the call with me today is Marc Casper, our President and Chief Executive Officer, and Pete Wilver, 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 & Presentations, until August 22, 2014. A copy of the press release of our 2014 second quarter earnings and future expectations is available on our website under the heading Financial Results. 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 quarterly report on Form 10-Q for the quarter ended March 29, 2014, under the caption, Risk Factors, which is on file with the Securities and Exchange Commission and also available in the 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 second quarter 2014 earnings and future expectations and also in the Investors section of our website under the heading Financial Information. So before we get started, one other item to note is that the commentary we provide on today’s call regarding the company’s total revenue growth and revenue growth by end market and geography are on an organic basis only, and therefore do not include the performance of Life Technologies. So with that, I'll now turn the call over to Marc.

Ken, thanks and good morning everyone. Thank you for joining us on today’s Q2 call. I am very pleased to report that we had an excellent quarter with strong performance on both the top and bottom line. Our teams executed very well and we are seeing the results of our growth strategy. And we continue to build on our industry leadership with investments in technology innovation and global capabilities. We have a lot of great news to cover this morning but I’ll start by reminding you that our primary financial objective is to consistently deliver strong adjusted EPS growth. And by that measure we had an outstanding Q2. Our strong revenue performance, our culture of constantly driving productivity and great execution on the Life Technologies integration extended our long track record of EPS growth. With a solid first half behind us, we are in excellent position to deliver on our growth goals for the year. So let me turn to our Q2 financial results, then discuss our performance in the context of our end markets and geographies. I’ll hit some of the business highlights and then wrap up with our guidance. I want to remind you that Q2 is the first full quarter, including Life Technologies, which is reported in our Life Sciences Solutions segment. As you saw in our press release, our total revenue for the quarter grew 33% year over year. Adjusted operating income was $924 million in the quarter and we expanded our adjusted operating margin by 210 basis points to 21.4%. As I said, we had very strong performance on the bottom line, delivering adjusted EPS of $1.72, which was a 30% increase over last year. I am really pleased with how our teams executed in the quarter, leveraging our PPI business system to translate our strong revenue performance into outstanding earnings growth. So it was an excellent quarter overall and contributed to our first half that played out better than we expected. Let me take a couple of minutes to give you my perspective on our performance in the context of our four key end markets. I’ll start by saying that our growth outlook for the full-year has improved slightly and that's because our performance in pharma and biotech in the first half of the year was a bit stronger than we expected. Aside from that, in aggregate we didn’t see any significant changes in our other end markets that would alter our view for the balance of the year. So starting with pharma and biotech. As I mentioned, the end market continues to be a terrific story. Our teams are performing very well. They’re doing a great job of delivering our customer value proposition and this resulted in another quarter of high single-digit growth. We saw strength in the quarter in pharma and biotech across our analytical instruments, lab equipment and consumables and our biopharma services business also continues to perform very well. In the academic and government end market, we saw improvement in Q2 with growth in the low single digits. We said last quarter that we thought funds would begin to flow in the U.S. under the new appropriations. And that seems to be playing out. Stronger results in North America during the quarter were offset partially by weakness in China which I’ll discuss in a minute. In industrial and applied, we delivered low single digit growth again this quarter and haven't really seen any meaningful changes here since the beginning of the year. Last, in diagnostics and healthcare, we performed very well growing in the mid-single digits in Q2. Strength in the U.S. drove our results here and sales of our immunodiagnostics and transplant diagnostic products remained strong. So a great Q2 offset a slower Q1 resulting in a first half that was generally in line with our original expectations in this end market. To sum up our performance overall, stronger results in pharma and biotech led to a first half that played out a bit better than we expected. As a result, we’ve slightly increased our growth outlook for the full-year. Before I move on to the business highlights, let me make a few brief remarks about our results in key geographies. First, we performed very well in North America in Q2. As I mentioned in the context of our end markets, it’s especially nice to see some renewed strength in the U.S. We also had a very good quarter in Europe with strength in our biopharma services, analytical instruments and immunodiagnostics businesses. As you saw in the press release, we’re expanding our centers of excellence in Lithuania and Germany to support growth in our molecular biology and mass spectrometry products. In China, while we had good growth in Q1, revenue performance in Q2 was flat, and this was driven by a slower release of government funds. That said, we remain confident in our growth prospects for China and recorded bookings growth in the high teens in Q2. So to sum up our performance geographically as you know, China has historically delivered very strong growth. And in spite of the results we saw there in Q2, I am pleased that we’re able to deliver strong revenue growth for the company overall. Let me shift now to highlight the great progress we’re making to strengthen our leadership position, so we can best serve our customers and gain market share. As you know, we have a solid strategy for driving growth. It’s based on technology innovation, our unique customer value proposition and our scale in APAC and emerging markets. It was an excellent quarter in terms of innovation, so I’ll focus my remarks there this morning. We had a number of new products that demonstrate our ongoing commitment to technology innovation. As you know, the American Society for Mass Spectrometry Conference or ASMS is always an important forum for Thermal Fisher. It's an opportunity to showcase our industry leadership and we took full advantage of that again this year. At the show, we launched two significant new instruments, complementary software packages and new consumables that improved sample preparation. I’ll start with the Q Exactive HF which was named ASMS product of the show by the industry publication Industry Business Outlook. The Q Exactive HF is an LC-MS system that builds on our highly successful Q Exactive platform by incorporating an ultra-high field Orbitrap massive analyser. It dramatically increases performance for research customers who continue to push for greater analytical speed and sensitivity to accelerate the results. The Q Exactive HF is especially suited to life-sciences applications such as protein identification and reinforces our leadership in Proteomics. Application-specific software is critical to extending the use of mass spec and creating new market opportunities for us. We made significant inroads with biopharma customers by launching PepFinder 1.0 for Biotherapeutic protein characterization. We also launched Proteome Discoverer 2.0 which provides a wide range of bio-informatics tools and customizable workflows to accelerate protein research. Let me give you a quick example of a significant milestone recently achieved by our customers at Mass General Hospital & Harvard Medical School because it illustrates the profound impact our thermo scientific technologies are having on protein research. Using our most advanced mass spectrometry instruments along with our customized reagents, scientists there were able to carry out comprehensive proteome analyses of 32 breast cancer cell lines in just six days. This would have taken up to 10 times longer without the integrated combination of the technologies we provided. According to the researchers, this is the first time that proteome analysis was performed on a scale previously reserved for genomics. Their achievement marks a huge step forward in the scientific community and complements the sequencing of the human genome in 2001. For customers working in applied markets, we expanded our successful TSQ 8000 triple quad offering by launching the TSQ 8000 Evo at ASMS. The system incorporates the new EvoCell technology to significantly increase productivity for customers analyzing food, environmental, pharmaceutical and forensic samples for complex compounds. It's a great example of us focusing on creating new opportunities in applied markets by giving our customers more sophisticated tools for non-targeted analysis. I also want to mention that our GlobalFiler PCR amplification kit received approval from the FBI for use in forensics. FBI labs will use GlobalFiler to generate DNA profiles of suspects for national database that will be instrumental to helping solve crimes. Before I turn to our guidance, let me give you a brief update on the Life Technologies integration. Our teams are making very good progress executing their plans and we're now tracking ahead of our original synergy target for the year. We now expect it to achieve 100 million in synergies 2014, up from the 85 million in synergies we originally anticipated. So we’re pleased to report that we are achieving the first $100 million at a faster pace and we remain confident in our overall synergy target for year three which we increased from 300 million to 350 million at our analyst meeting back in May. Turning now to our annual guidance. As you saw on our press release, we revised our revenue guidance and are raising our adjusted EPS guidance. This is based on our solid operating performance in the first half of the year and the increased synergies from the Life Technologies integration. The new guidance also reflects the estimated impact of the divestiture of our Cole-Parmer business which we announced last week. We expect -- we signed an agreement to sell the specialty channel for $480 million and expect to complete the transaction in Q3. So in terms of our guidance at this point in the year, we now expect our revenues for 2014 to be in the range of $16.86 billion to $16.98 billion for 29% to 30% revenue growth year-over-year as we previously announced. We’re raising our adjusted EPS guidance to a new range of $6.85 to $6.97 which now results in 26% to 29% growth over 2013. So before I turn the call over to Pete, let me leave you with a few takeaways. First, it was an excellent quarter for us financially across-the-board, with strong performance in revenues, margins, adjusted EPS and cash flow. It’s been a very strong year so far on the innovation front, and we look forward to more significant new product launches to come in the second half. The Life Technologies integration is going very well and we increased our 2014 synergy expectations. So at this point in the year, we’re on track to deliver a strong 2014. With that, I’ll now hand the call over to Peter Wilver, our CFO. Pete?

Thanks, Marc. Good morning everyone. As you can see from our results, we had a strong second quarter and delivered a solid first half. Let me begin with an overview of our Q2 financial performance for the total company, then provide some color on our four segments and conclude with our updated 2014 guidance. As a reminder, at the total company level, we’re reporting organic revenue growth using our standard methodology. That means we will exclude the results of Life Technologies until we reach the one year anniversary date of the acquisition. However for the new life sciences solution segment, which consists primarily of the Life Technologies businesses and our remaining biosciences businesses, we are providing organic revenue growth on a pro forma basis, as if we had owned Life Technologies for all of 2013 and 2014, to give you some insight into the growth performance for that segment. So starting with our overall financial performance. We delivered strong earnings growth resulting in a 30% increase in adjusted EPS to $1.72. GAAP EPS was $0.69 in Q2, down 9% from $0.76 in the prior year, primarily as a result of higher non-cash cost of sales charges related to the acquisition accounting. Looking at the top line. We delivered 5% organic revenue growth this quarter and total revenue increased 33% year-over-year. Q2 reported revenue includes 27 points of growth from acquisitions net of divestitures and a 1% positive impact from foreign exchange. We once again strengthened our backlog in the quarter with bookings exceeding revenue by 1%. By geography, both North America and Europe grew in the mid single digits. As Marc mentioned, China was flat year-over-year resulting in Asia Pacific growth in the low single digits. Our China bookings performance in the quarter was much stronger than revenue and was up in the high teens. As a result, we’re confident that revenue growth in China will be much stronger in the second half resulting in high single-digit growth for the full-year. Rest of world declined in the low single digits. Looking at our operational performance. Q2 adjusted operating income increased 48% and adjusted operating margin was 21.4%, up 210 basis points from Q2 last year. Our adjusted operating margin expansion for the quarter was driven primarily by the Life Technologies acquisition which as you know has a higher overall margin rate compared to standalone Thermo Fisher. However we also continue to see strong contribution from our primary productivity levers: global sourcing, site consolidations and our PPI business system. And for the first time in quite a while, we saw expansion from FX compared to the dilution we've been experiencing for the past couple of years. We realized $23 million of synergy benefits in Q2 and $40 million through the first half. As Marc mentioned, we now expect to achieve $100 million of cost synergies for the full-year 2014, up from the $85 million we previously communicated. This is being driven primarily by accelerating corporate and functional cost reductions as well as modestly increased sourcing savings. Our growth initiatives remain on track and we continue to make strategic investments primarily to strengthen our core technology platforms and commercial capabilities to continue our growth momentum. Moving on to the details of the P&L. Total company adjusted gross margin came in at 49.0% in Q2, up 480 basis points from the prior year. This was primarily due to the Life Technologies acquisition along with solid productivity across our businesses. Adjusted SG&A in Q2 was 23.4% of revenue, 140 basis points unfavorable to the 2013 quarter. Again this was primarily a result of the acquisition and was partially offset by volume leverage in our productivity actions. Finally, R&D expense came in at 4.3% of revenue for the quarter, 130 basis points above the prior year. This reflects the relatively higher level of investment in R&D and life-sciences solution segment. R&D as a percent of our manufacturing revenue in Q2 was 6.6%. Looking at our results below the line. Net interest expense in Q2 was $113 million, up $56 million from last year driven primarily by the deb we raised to fund the Life Technologies acquisition. Adjusted other income for Q2 was $1 million, about the same level as last year. Our adjusted tax rate in the quarter was 14.3%, 130 basis points below last year primarily as a result of our acquisition tax planning. Our year-to-date tax rate was 15.1% in line with our full-year outlook of 14.5% to 15.5%. In terms of returning capital, we paid out $60 million in dividends to our shareholders in the quarter. Average diluted shares were 403.1 million in Q2, up 39.6 million or 11% from last year primarily as a result of the shares we issued to partially fund the Life Technologies acquisition, and to a much lesser degree option dilution. Turning to cash flow and the balance sheet. Cash flow from continuing operations for the first half of the year was a very strong $992 million and free cash flow was $824 million after deducting $167 million of net capital expenditures. This is up significantly from our prior year free cash flow of $650 million primarily as a result of our increased operating earnings from the acquisition, partially offset by higher acquisition related interest expense and cash payments tied to the acquisition and related divestitures which I highlighted on last quarter's call. We ended the quarter with $600 million in cash and investments, down $900 million sequentially from Q1, as we used surplus cash on balance sheet as well as cash generated in the quarter to pay down short-term debt in Q2. As a result, our total debt at the end of Q2 was $15.6 billion, down $1.8 billion from Q1. Our leverage ratio at the end of the quarter was 4.6 times total debt to adjusted EBITDA and we remain on track to achieve our target leverage ratio of 2.5 to 3 times in Q3 of 2015. So let me wrap up my comments on the total company with a quick update on our performance in terms of return on invested capital. Our trailing 12 months adjusted ROIC in the second quarter of 2014 was 9.3%, down 20 basis points from Q1 as expected, driven by the addition of another quarter of the Life Technologies investment – of adding another quarter of the Life technologies investment into the average invested capital base used in the calculation. This was partially offset by higher returns generated in the rest of the business. So with that, now I’ll walk you through the performance of our four business segments. Starting with the life sciences solution segment, in Q2 total revenue grew significantly to $1.10 billion from $181 million in the prior year, primarily as a result of the Life Technologies acquisition net of divestitures. On a pro forma basis, assuming Life technologies was owned for the entire quarter in both periods, organic revenue grew 3%. In the quarter we continued to see strong growth in our bioproduction business as well as in cell biology and next-generation sequencing, which was partially offset by lower royalties. Q2 adjusted operating income for life sciences solution also increased significantly, primarily as a result of the acquisition with adjusted operating margin up 310 basis points to 27.1%. In the analytical instruments segment, Q2 total revenue grew 4% and organic revenue grew 3%. In the quarter we had very strong growth in our life sciences mass spec and instruments services businesses which was partially offset by the weakness in China that Marc mentioned. Q2 adjusted operating income in analytical instruments increase 4% and adjusted operating margin was 16.4%, down 10 basis points. We delivered very strong productivity and saw a positive contribution from FX that was more than offset by unfavorable business mix and strategic growth investments. Turning to the specialty diagnostic segment, in Q2 total revenue grew 8% and organic growth was a very strong at 6%. As Marc said, we saw better market conditions in the U.S. versus the slow first quarter. We continued to deliver strong growth in our transplant diagnostics and immunodiagnostics businesses and our healthcare market channel had a very strong quarter as well. Adjusted operating income in the segment increased 9% in Q2 and adjusted operating margin was 27.6%, up 30 basis points from the prior year. In the segment, we had nice pull-through on the organic growth and strong productivity which funded strategic growth investments. In the laboratory products and services segment, Q2 reported revenue grew 7% and organic revenue grew a robust 6%. Our biopharma services business continued to deliver very strong growth and we saw a broad-based strength across the rest of the business. This segment benefited from our strong performance in the biopharma end market as well as the pickup in our US academic and government end market. Adjusted operating income in laboratory products and services grew 8% for the quarter and adjusted operating margin was 15.2%, up 20 basis points driven by strong productivity and volume pull-through. So with that, I’d like to review the details of our full-year 2014 guidance. As you saw in our press release, we’re updating our guidance for our strong performance in the first half and to reflect the divestiture of our Cole Parmer business which we announced last week. On the top line, we’re tightening the range by 40 million resulting in a midpoint that's unchanged. This leads to a new full-year 2014 revenue guidance range of $16.86 billion to $16.98 billion which represents year-over-year growth of 29% to 30% consistent with our previous guidance. To bridge the pluses and minuses to the midpoint of our guidance, we added $80 million in volume, about 45 million of which was organic and another 10 million as a result of more favorable FX rates on the Thermo Fisher stand-alone businesses. These increases were fully offset by a $90 million decrease as a result of the Cole Parmer divestiture assuming a mid Q3 close date. On an organic basis, we’re still expecting standalone organic growth for full-year 2014 of 3% to 4% consistent with our previous guidance although we now expect to be somewhat higher in the range. As I mentioned earlier, this measure of organic growth does not include results of Life Technologies. For the life sciences solutions segment, we still expect pro forma organic growth of 2% to 3% for the full-year 2014, also consistent with our previous guidance and slightly higher in the range. In terms of FX, assuming recent rates, the year-over-year foreign-currency impact on our revenue remains slightly positive at about half a percent. In terms of margin pull-through on the FX revenue impact, we’re expecting a slight improvement versus our previous guidance primarily as a result of our favorable Q2 results. The Life technologies acquisition net of divestitures is expected to contribute about 26 percentage points of our total revenue growth in 2014, unchanged from our previous guidance. And consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates and our guidance does not include any future acquisitions or divestitures other than the Cole Parmer divestiture. Moving to adjusted EPS, we’re raising both the low and high end of the range in line with the change in revenue as well as increased contribution from acquisition synergies. This leads to a new full-year 2014 adjusted EPS guidance range of $6.85 to $6.97 which now represents growth of 26% to 29% over our 2013 EPS of $5.42. To bridge the $0.04 increase in the adjusted EPS from the midpoint of our previous guidance, the acquisition including synergies is up about $0.04 and performance in standalone Thermo Fisher added about $0.03. These increases were partially offset by a decrease of $0.03 related to the pending Cole Parmer divestiture, again assuming a mid Q3 close. Turning to adjusted operating margin, we’re increasing low end and tightening the range by 10 basis points. This results in a revised guidance of 21.8% to 22% of adjusted operating margin and 230 to 250 basis points of expansion year-over-year. As I mentioned earlier, we’re also increasing the synergy benefits we expect to realize in 2014 to 100 million, up 15 million from our previous guidance. The increase in 2014 is driven by realizing some synergies a bit earlier than we had originally planned and therefore does not change the 350 million of total expected synergies by year three that we outlined at our analyst meeting. Moving below the line, we’re expecting net interest expense to be in the range of 425 million to 435 million, down slightly from our previous guidance as a result of paying down debt more quickly. As I mentioned earlier, we’re still expecting our adjusted income tax rate to be in the range of 14.5% to 15.5% consistent with our previous guidance. In terms of capital deployment, we’re still assuming that we will return approximately 240 million of capital to shareholders this year through dividends. And we are also assuming that in the second half we’ll use the bulk of our free cash flow and the net proceeds from the Cole Parmer divestiture of approximately 340 million to pay down short-term debt. Full year average diluted shares are estimated to be in the range of 401 million to 404 million, up about 10% from 2013 and down slightly from our previous guidance. We’re expecting net capital expenditures to be in the range of 460 million to 480 million, also down slightly from our previous guidance. And in terms of full-year 2014 free cash flow, we’re maintaining our previous guidance of about 2.2 billion and we expect that our year-end leverage will be slightly lower as a result of using the net proceeds from the Cole Parmer divestiture to pay down debt. However we do have a headwind versus our previous guidance of over 150 million related to the Cole Parmer divestiture as a result of lost earnings and the cash taxes we expect to pay on the taxable gain. So we’ll need to perform very well in the second half to achieve this forecast. One final note on guidance. We recognize that it’s still challenging to model the newly combined company. So I thought it’d be helpful to give you some insight into what we’re expecting for Q3. In terms of revenue, we’re expecting Q3 to represent about 25% of our full-year revenue guidance midpoint. And in terms of adjusted EPS, we’re expecting Q3 to be in the range of $1.65 to $1.70. As always, in interpreting our full-year revenue and adjusted EPS guidance ranges, you should focus on the midpoint as they’re most likely view of how we see the year playing out. Results above or below the midpoint will depend on the relative strength of our markets during the balance of the year. In summary, we delivered a very strong quarter which positions us well to achieve our financial goals for the year. With that, I’ll turn it back over to Ken.

Thanks, Pete. We’re ready to open it up for Q&A.

(Operator Instructions) Your first question is from the line of Ross Muken from ISI Group.

So I wanted to start maybe a little bit of reflection on sort of the sequential shift in the business. So obviously this quarter turned out a lot better than last quarter and sort of I am sure on your mind as well as sort of investors, as you look at the key changes sequentially and how sort of the business performed, what it means for what actually happened in Q1, could you walk through maybe the two or three key things we should focus on, it seems like China is probably one of them, of what changed sequentially and is it seemed more like 1Q was really now a weather phenomenon versus anything performance wise in the business?

So Ross, thanks for the question. The first one I would think about is we look at the half in total, right? and say if you look at the half we feel like we are right on track from our original expectations in terms of end markets, actually slightly better and obviously we’ve been raising our earnings outlook consistently throughout the year since our original guidance in January. So we feel things are playing out well. From Q1 obviously there were some headwinds that made it for a softer quarter, I thought generally the company performed well but obviously between weather and some other things, we had [ph] little lower organic growth than the target for the full year. Obviously when we look at Q2, we’re ahead, in a strong quarter it averages out okay. When you think about it sequentially between the two quarters, healthcare and diagnostics was much stronger in the quarter and we were able to maintain excellent momentum in pharma and biotech. So those are the two things sequentially worth noting when you think about it from the end market perspective. It’s nice to see actually academic and government growing again, still low single digits but that was good. From a geographic perspective, when you think about, when healthcare and diagnostics is doing well and certainly with some growth in academic and government, the US performed much better. So that’s the positive. The challenge was China, in terms of flat growth in the quarter. And when I look at that especially given that China has been a significant growth driver for the company for us to deliver 5% organic, with the flat China it says how well the company is performing. And within China, we still feel good about the outlook, obviously high teens bookings growth is encouraging and should lead to a stronger second half in China than what we had in the first half.

I guess maybe just if I could dig a little bit deeper on sort of China. I mean I think you’re over there not too long ago. I mean if you think about the different moving parts whether it's the performances, sort of the multinational given as some of the corruption crackdown or sort of the government trying to kind of control the pacing of spend in certain regions or the pocketbook of some of the different outer regions. As you think about the sort of disconnect between raids [ph] and bookings, and you think about the pacing and what’s likely to be the next thing to focus on there, what are you – how do you see those various moving parts basically kind of translating back into superior growth to what we've seen in the last quarter or two?

Sure. So when you look at the quarter, clearly the release of government funds was very muted relative to quite a period of time. An example of what's causing that would be very well-publicized changes in how the food safety administration is being organized, right, so an important buyer of analytical instruments in particular is going through a reorganization, right. So that's an example that clearly slowed things down. The team, as they were seeing those changes, actually focused where funds were more elusive, if you will and that’s why the bookings growth is so strong. Basically they put their focus on other parts of the market segment which is exactly what I would expect the commercial team to do. So that gives us the confidence that the second half would have stronger growth than the first half. I am heading off to China in a few weeks times, it's a very important market for the company and we have a great position there. So the changes that we are feeling right now I don't think have any long-term effect on the business and we’re very confident about not only the second half but also the long-term prospects here. It’s how I would think about it, Ross.

Great, thanks and Marc, jets playoffs? No playoffs.

Playoffs, of course, I am always bullish.

Your next question is from the line of Jon Groberg from Macquarie.

I guess if you think of -- Marc, if you think about – you talked about the different end markets and geographies but I guess I have heard it from a few people, few others recently this idea that given all the investment in genomics so that you’re starting to see potentially kind of equal types of investments on the genomics or the proteomics side from mass spec. And I guess -- my question is, just as you look out there what are you – I guess what opportunities do you see, this incremental spend in R&D, this growth – these investments in R&D and then in SG&A, where are you making those – I guess what do you expect to see – expect the growth drivers to be over the next 6 to 12 months here?

So, Jon, thanks for the question. So let's start with proteomics first which is our mass spec business is doing great. We have excellent momentum in terms of the actual results in the first half of the year, results in the second quarter, bookings outlook, I went to ASMS, I saw a few of you there, fabulous conference for Thermo Fisher. That's obviously the expectation we set every year but it’s nice to actually deliver on it year in and year out and we are dominating that field and doing a great job. And when you have organizations like Harvard Medical School and Mass General using the instrumentation to do totally new types of research, that's opening up more high-end opportunities which is great, but we’re also seeing strength in some of the more applications driven opportunities as well, kind of your environmental food safety, routine pharmaceutical work and that’s why we have some new applied instruments as well. There is clearly lots of interest in on the genomics side as well and we had a good quarter in terms of growth in our next-gen sequencing business. So I feel good about that opportunity. So things that we’re focusing on obviously is innovation, big emphasis on next gen, big emphasis on life sciences mass spec, chromatography, we’re very excited about. Asia-Pacific, very important to us, in or value proposition, that’s what’s going to drive our growth for the foreseeable future.

Okay, and if I could just follow up on thinking about the portfolio little bit. Can you maybe talk about your rationale for divesting Cole Parmer? I mean it seems to be a third party distributor, kind of like some of your other channels, and are there other things that you're looking out there from a divestiture standpoint that you can share? Thanks.

Yes, so, Jon, so two big questions there. So first in terms of we have other divestitures in the queue, the answer is no. Nothing, nothing planned and certainly nothing materially there, so in terms of why the divestiture of Cole Parmer. It’s one business that actually – I don’t think we’ve really ever talked about in the many years but it's a niche specialty channel. It was purchased by Fisher Scientific when the company was purely a channel business. We ran it separately from the other channels because there was less opportunity to sell. Our Thermo Scientific self-manufactured products through the channel and we felt like it was appropriate timeframe to sell that particular business because of the really separate from our channel business, separate from our self-manufacturing business and thought that selling it made the most sense. And we’re going to use the proceeds, as Pete said, to repay debt more quickly.

Your next question is from the line of Derik de Bruin from Bank of America Merrill Lynch.

So Marc, can you go – I am a little bit surprised, I am pleasantly surprised by the 6% growth in the LPS business which I haven't seen numbers like that for a while. Can you give us a little bit more color on the segments, what lab products, biopharma and the research and specialty market channels grew, I know you don’t usually give that color of detail, I just wonder just qualitative on this, I am just curious in terms of where the strength was?

Very strong quarter, biopharma service is a great business, it’s been doing great for a long period of time, continues to do well. So that’s no change in the trend. Pharmaceutical companies continue to outsource that activity to us, we’re the low-cost provider, the high-quality provider, so it’s a terrific business. Our channel business had a good quarter, our lab consumables business had a good quarter, our lab equipment business had a good quarter. So each of the components of lab products and services did well.

And just I will have one follow up. I’ve had some questions lately from people asking about alternative lab channels, things in the catalog business, particularly like Amazon some of these things. I mean have you seen any impact at all from some of these other venues trying to the muscle in on the catalog business?

No, we haven't seen any impact. We obviously take all competitors very seriously and I think Alan Malus did a really nice job with the analyst meeting articulating how we’re leveraging the added strength in our e-business approach that Life technologies brought to the company to make it even better channel to market. So – but we take all competition seriously and – but we haven’t seen any effect there.

Your next question is from the line of Tycho Peterson from JPMorgan. Tycho Peterson – JPMorgan: Given the momentum coming out of the quarter, I am wondering if you could talk a little bit about some of the expectations in the back half of the year in particular on pharma. You talked about some momentum in biopharma services, previously you talked about a little bit of an anticipated slowdown in that business. So can you maybe talk about what’s baked in the guidance for pharma? And then also can you quantify what you're expecting in China in the back half of the year, you talked about it rebound to double digits previously so?

So Tycho, starting with the back half of the year for pharma and biotech, our comparisons get more challenging, so we’re assuming mid single digit growth in the back half of the year. That would lead in aggregate for the full year for pharma and biotech for us to be mid to high single-digit growth. And if you recall back to our January guidance we assumed mid single-digit growth. So little bit better outlook for that segment, or that customer set in total. In terms of China, we’re assuming high single-digit growth for the full year. We had mid-single digit growth in the first half of year, so that’s implying a stronger second half of the year based on the strong bookings performance we just delivered. Tycho Peterson – JPMorgan: Okay and then on your comments earlier on proteomics, post the ASMS, you announced the [indiscernible] system, can you talk a little bit about your strategy on the chromatography side, are you making a bigger push here, on particularly around UPLC?

So Tycho, in terms of – after the quarter closed, we launched our next generation UHPLC, I will save the detailed victory lap for our October remarks, but I will give you a little bit of a highlight. So we acquired Dionex a few years ago, the business has done well for us. We took the R&D teams from legacy Dionex and Thermo Fisher and we really have brought out a fabulous new UHPLC which we launched around July 15 and we think it's a very meaningful product launch and it’s going after a large market where we have a presence but we’re not the industry leader and we’re targeted at gaining some market share there. Tycho Peterson – JPMorgan: And then one last one, you talked about potentially looking at some bolt-ons before 3Q ’15, when you’re going to start to more fully utilize capital fund, just any thoughts on the tuck-in environment right now?

There’s certainly some things out there but nothing significant and – there is some activity level, you’ve seen some things announced in the marketplace and we did a small food and animal health deal last quarter, very small and -- but it's not super active right now is the way I would characterize it. And again as I said in the past that if something looked exciting and compelling and create a shareholder value, we would consider it.

Your next question is from the line of Doug Schenkel from Cowen & Company. Doug Schenkel - Cowen & Company: So actually maybe building off of that last question, you’d previously talked about getting down to 2.5, 3 times debt to EBITDA by Q3, you reiterated that this morning. But when you look at the Cole Parmer divestiture, synergy is tracking ahead of plan and looking at this quarter where you had a really strong cash flow performance and paid down debt at a pretty good good cliff. It does seem at least mathematically increasingly possible that you get to closer to 3 times in the first half maybe in the – maybe even in the first quarter with a couple other – couple more strong quarters. Would you agree? And if so, at what point would you declare that you can actually confidently do a little bit better than previous guidance?

So I will take that one. So when you look at the forecast certainly adding 340 million of proceeds net from the Cole Parmer divestiture gets us earlier in Q3 but it doesn't necessarily pull us into the first half. Seasonally first quarter cash flow is generally weak, obviously it was very weak this year but we don't expect that next year. So when you look at first half versus second half free cash flow, it doesn’t necessarily flow pro rata. I would say we’re down to early in Q3 at this point. But we’re not into the first quarter anything like that.

Obviously we’re driving our cash flow hard, we’re focused on debt repayment. This company is focused on creating shareholder value. If we can get there sooner, we well but just as we modeled it out right now we think Q3 is a reasonable assumption. Doug Schenkel - Cowen & Company: Maybe I can just ask another China question. So if we think back to Q1 earnings season, you really only had about two or three companies across the group talked of challenges in China related to the delayed release of government funds. Thermo wasn’t one of them, as I remember that. And then over the course of the quarter, if anything I kind of got the sense that you guys downplayed this dynamic and it seems like maybe something at the end of the quarter just didn’t come in the way that you expected. So I just want to get your take on that, really specifically, when did you start to see this slowdown, how broad is it across the different segments? And you did reference the high teens bookings in China and clearly your guidance as you talked about assumes that these bookings come through in the second half as you talked about high single-digit growth for the year. But if anything it seems like you didn’t bump up Q3 guidance at least relative to how the Street has been modeling things. So it’s not necessarily clear that you assume that’s come through in some bullish in Q3, maybe more Q4 than Q3, is that the case? Really the questions are when did you see a slowdown, how broadly is this impacting you by segment in China, and do you have a lot of visibility on when this comes through in the second half?

It’s a good question. So lot too, I guess so I would say it is very straightforward, some of the bookings that we had in Q2 shipped in Q3, some shipped in Q4. So it's not as if you get everything over the next [ph] quarter, some of them are the longer lead time items. So it’s a balance between the two quarters. So the strong bookings growth helped the second half of the year, it doesn’t particular favour Q3 versus Q4. When you think about the view on the quarter, we didn’t really talk much to my recollection about China other than on the earnings call, at the analyst meeting, you talked really just about the long-term, talked about the five year outlook for China, I don’t recall talked much about it in the quarter one way or the other. We didn't see in the second and third months, obviously we had the first two weeks of benefit which seemed okay when we started the quarter. But when we did our call, but after that it wasn’t particularly strong throughout the quarter. So it wasn’t as if we had something happened at the end of the quarter per se, it’s just government was slow in releasing funds, and that was – food safety is the biggest driver but there has been a skittishness on government spending or release of funds fairly broad-based across the economy. And I think that’s actually been extraordinarily well publicized in terms of some of the things going on there.

Your next question is from the line of Isaac Ro from Goldman Sachs.

Marc, could you maybe talk a little bit about Europe, that’s probably one region that hasn’t got a lot of attention here. I am curious about the performance you saw and then maybe outlook for the back half of the year?

So Europe had a very strong quarter, feel so good about the performance broad-based, biopharma services did well, our instruments businesses did good well. There is excitement around the horizon 2020 funding. It's actually things are continuing to improve, so that's good. For the full-year we’re expecting the growth to be in the range of the company average and so slightly better than our original assumption. So if you think about it geographically, Isaac, the US and Europe outlook for the full year is slightly better than our original thoughts, and obviously China a little bit weaker but the net of it from geographically it was obviously still a little stronger in aggregate.

And just a follow up on the guidance assumptions, if we look at the guidance you gave us for 3Q revenue, it does imply a pretty solid fourth quarter growth rate again this year. If you could give us a little bit of color as to what gives you confidence that you can do, it looks like to me that you had something like 4% organic on a 6% comp?

No, its actually pretty, pretty balanced in terms of the stack comp. So there's deceleration assumed in Q4 organic growth from Q3.

The deceleration sequentially?

Sequentially from Q3 to Q4, yeah.

Your next question is from the line of Paul Knight from Janney Capital Markets.

Hi Marc, some customers have been saying the Ion PGM assays, there are some new development, more products they are seeing. Are you accelerating new product that -- with the Ion PGM or is it kind of the same pace in the past?

So Paul, thanks for the question. So in terms of next gen sequencing, there is a lot of buzz around the PGM these days because there is work in the clinical trials area for oncology using the platform for matching patients to the right drug for various cancer types. So that’s kind of a lot of buzz, when I was at the American Society of Clinical Oncology in June, that was clearly a lot of – actually that was the most important buzz in that particular conference, around anything in next gen sequencing because that’s really where the clinical application is. So yes, there is products being developed and launched and a lot of good feedback on that product line.

And then service business does seem to have been slower than other parts of Thermo Fisher, any color there?

Pete will hit that a little bit.

Yeah, we actually had a pretty strong growth in services certainly in the quarter. As I mentioned in analytical instruments, we had as one of the first times you’ve actually called out our service business in that segment. So we had very strong growth there. So it was actually on the strong side.

Analytical did have a good quarter versus the last four, five, six, is this the economic cycle we’re seeing in analytical or academic, do you have any thoughts there, Pete or Marc?

Yes, so when you look at the growth in the quarter, all the China government release of funds is most felt in our instrument business because we have very very strong position there. It’s a high percentage of that business’ total revenue mix. So while the growth was pretty good, it was a little bit less than the full-year target, really it’s driven by what’s going on in China. The enterprise services business which is also part of that segment did very well, so that’s obviously encouraging. And there is -- a question was asked earlier, we just launched a new UHPLC product line after the quarter end, which also will help us in the second half.

Your next question is from the line of Dan Arias from Citi.

If I could just go back to China funding one more time, on the environmental monitoring business, can you just make a quick comment on where we are in terms of tapping into the money that's being devoted to air quality? I think we’re coming up on a year since the government announced the big investment in that area. So with the idea of going where the funds are flowing, how open has the spigot been there and just knowing that that’s been one of your stronger applications?

We’re focusing on tier 3 and tier 4 cities now in installing the air monitoring network in the country. So it’s well into implementation. So we did two years ago kind of tier 1, last year kind of tier 2 cities and now we are into the broad market. EPM, the environmental processing business grew in the quarter, so that was encouraging. And I would say that amazingly how time flies, soon we will be getting into the servicing aspect of those instruments and kind of the recurring stream of revenue which will be exciting as well.

Maybe just a hypothetical on op expenses in the context, Marc, of your comment on proteomics and genomics. If the stronger top line did allow you to invest a little bit more in incremental R&D, which of the businesses do you think you'd be more apt to allocate to?

So right now we did invest a little bit of additional funds based on our strong performance and are allocating some additional funds for the second half of the year. We want to make sure that in our life-sciences solution segment that we have very good growth prospects for the mid to long-term. So the 3% growth that we set as our target, was actually stepped from where the business was performing, I am very pleased with the 3% in the quarter, but we’re making some investments to soar up that area of the business and then of course in other parts of the company like chrom and mass spec we’re making investments to capitalize on those opportunities as well.

Your next question is from the line of Jeff Elliott from Robert W. Baird.

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

Yeah in terms of rest of world, a softer quarter, it's a very very lumpy business because there are substantial tenders primarily in the mining sector, interestingly enough it was very big in parts of South America that drive that. So a little bit of a softer quarter but expect it to be for the full-year kind of in the mid to high single-digit growth range. Brazil was soft in the quarter but generally we feel like the outlook is good for the full-year.

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

To be honest with you, we haven't calculated that number. I mean obviously a significant portion of the year-over-year increase is a result of the just adding the number in, but as I said we picked up in the quarter $23 million of acquisition synergies which is actions that we've taken as a business and the life-sciences solutions segment does productivity and sourcing and restructuring and all those things just the same way as the rest of the business does. So they are driving productivity in addition to just the addition of the Life Technologies numbers.

Your next question is from the line of Tim Evans from Wells Fargo.

Just wanted to dig into the biopharma services business a little bit. Do you have any thoughts on what the penetration rate in this service area would be? Just trying to get a sense for what inning we might be in of this pretty substantial growth phase for that business.

The business -- it's hard to define the exact penetration rate because the customer base is actually -- is expanding the definition of what we’re doing with them which is interesting. I mean part of it is we continue to add service lines but we’ve had customers say you do this so well, we like you to do syringe work with us, where we might have been doing other types of outsourcing works. So the market keeps expanding but when we just did our strategic plan review which is a five your outlook for that business, growth prospects look fabulous. So I don’t know what my baseball analogy is but we are using football as we’re almost at training camp time is probably the end of the first quarter with three quarters to go.

Your last question comes from the line of Steve Willoughby from Cleveland Research.

Just wondering if you could clarify a couple of things for me as it relates to the guidance? Just looking through things it looks like your interest expense for the year has come down a little bit, your share count's come down a little bit, FX is a little bit better than expected. You mentioned that there is maybe a $0.04 benefit from acquisitions relative to what you were thinking before. I understand the Cole-Parmer divestiture impact, but I'm just wondering, with only raising the high end of the guidance by $0.02, is there a little bit of extra conservatism built into the guidance now?

No, I would say there's less conservatism built in than there was before. When you look at it we’re raising the midpoint by $0.04 and then we have $0.03 from the Cole Parmer divestiture, so that’s $0.07, if you look at kind of the actual versus consensus in Q2 about $0.02 of that was tax rate which doesn't affect the full-year. So you get pretty close to the $0.10 being added in to the full-year. So that reflects our good performance in Q2, and are basically carrying through that performance into the full year.

And then just the final thing is on China, what gives you the confidence or what could prevent the business in China not being delayed for another quarter or for another six months? Do you have confidence that as that business starts to come back here in the third quarter?

The team is very experienced with a great track record. In the quarter that we had, we didn’t have cancellations, in that sort, so usually when bookings happen they ship. I mean so from that perspective, we have high confidence that the business is going to perform. It is a centrally controlled economies, so if the government wants to do something different anything is possible but that wouldn’t be available a Thermo Fisher specific thing, that will be a major macroeconomic factor which no one is predicting. So I would say we feel good about the outlook in China, Steve.

Okay, thanks.

All right. Let me wrap it up. We had a very strong Q2, it puts us right on track at the halfway point of the year and positions is to achieve a very strong 2014. As always, thanks for your support of Thermo Fisher and we look forward to updating you our progress next quarter.

Thank you for joining. This concludes today’s conference call. You may now disconnect.