Thermo Fisher Scientific Inc. (TMO) Q2 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. And welcome to the Thermo Fisher Scientific 2016 Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin.

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 & Presentations until August 26, 2016. A copy of the press release of our second quarter 2016 earnings and future expectations is available on the Investors section of the website under the heading Financial Results. So, before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the Company’s future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Company’s quarterly report on Form 10-Q for the quarter ended April 02, 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 second 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.

Thank you, Ken. Good morning, everyone. We’re pleased you could join us today for our Q2 earnings call. We had another great quarter with strong performance on the top and bottom line. We have a proven growth strategy, our team is executing well, and we continue to strengthen our offerings that help our customers meet their goals. Our result in Q2 contributed to a very good first half of the year. We’re also successfully executing our capital deployment strategy. As you know, a big highlight in the quarter was our agreement to acquire FEI. We’re really excited about the new opportunities this will bring, and I’ll discuss that in more detail later in my remarks. As usual, I’ll start by covering the Q2 financial highlights, give you a little color on our performance by end-markets and provide a recap of the quarter in the context of our growth strategy. Then, I’ll wrap up with our revised guidance. Starting with the financials, revenue in Q2 grew 6% to $4.54 billion. Adjusted operating income was up 9% and our adjusted operating margin increased 50 basis points to 22.8%. Last but most important, we extended our long track record of delivering strong adjusted EPS growth, with a 10% increase to a $2.03 per share. So, with another strong quarter behind us, we’re in a great position at the halfway point of the year. As you know, the global economic environment remains uncertain, but we’re using this as an opportunity to help our customers manage through it, and that will strengthen our competitive position and allow us to continue to gain share. Let me now turn to a high level view of our performance in the context of our key end-markets. If we step back and look at the first half, our strong results were really a combination of good end-markets in aggregate and very good execution. Looking specifically at Q2, we were pleased to see continued strong growth in pharma and biotech, which grew in the high single digits. We’re benefiting from both the underlying strength of this end-market and our ability to successfully deliver our unique proposition to these customers. Growth in our bioproduction business was particularly strong in Q2. In healthcare and diagnostics, we grew at about the Company average, highlighted by strong performance in our ImmunoDiagnostics and next generation sequencing businesses. In academic and government end-markets, we continued to deliver low single-digit growth. And, finally, we saw a continuation of low single-digit growth overall in industrial and applied. As we see for quite a time, industrial markets remain soft and applied markets continue to perform well, with especially strong growth in China and our chromatography business globally. Now, I will cover some of our Q2 business highlights in the context of our growth strategy. As most of you know, we increased our capabilities for our customers and drive growth for our Company by focusing on three strategic pillars, which are: High-impact innovation; scale in emerging markets; and delivering our unique customer value preposition to gain share. So, let me start with innovation where we participated in a number of major conferences in Q2, representing a broad cross-section of our customer base from cancer research to bioproduction, mass spectrometry and applied markets. There are great opportunities for us to demonstrate our leadership and our commitment to our mission, which is to enable our customers to make the world healthier, cleaner and safer. I use that as a framework to cover a few of the highlights. First, healthier: We exhibited our leading offering for bioproduction customers at INTERPHEX. In addition to our expanded line of single-use containers, we featured new products from our recent acquisition of ASI such as the ImPULSE single-use mixing system for biotherapeutics. We continue to benefit from strong demand for these technologies as our customers rapidly adopt single-use technology for the production of biologics and vaccines. At ASMS, we launched our new Q Exactive BioPharma mass spectrometer, which we designed specifically to help pharma and biotech customers more efficiently discover and develop new drugs. As these systems become more powerful and data much more plentiful, customers need to better track, manage and share their results, as well as connect and monitor their instruments. We ramped up our efforts to address these rapidly changing needs and also launched a suite of new software and cloud-based solutions at ASMS to support range of applications. So, back to our mission. In terms of enabling a cleaner world, the big event for applied markets in the quarter was analytic test, which has held in Europe. Sustainability is especially important to these customers and a key area of focus for us as well. We featured a range of laboratory equipment design for a cleaner lab including our new TFX ultra-low temperature freezers that use natural refrigerants and reduce energy consumption. We also featured biosafety cabinets that require 75% less energy to operate. Last, a good example of safer is that our Gemini handheld chemical analyzer won the 2016 Edison Award for forensics and security. To remind you, Gemini was the first instrument to integrate Raman and FTIR spectroscopy in the handheld device that can be used by hazmat teams, first responders and military personnel in the field. These are just some of the many examples of how we fulfill our mission by helping our customers meet their goals. Turning to emerging markets, our second pillar of growth, we had another strong quarter in these geographic regions with standout results in China, South Korea, India and Southeast Asia. To mention a couple of highlights, China continues to be a great market for us, and we delivered another strong quarter with growth in the mid-teens. Our businesses across the Company continue to benefit from growth in applied markets such as environmental and food safety as well as life sciences which is expanding into new fields like precision medicine. In June, we announced our partnership with the West China Hospital of Sichuan University to develop a joint platform for advancing research in precision medicine. This is one of the largest single site hospitals in the world, and we’re looking forward to helping our customers there, improve the quality of pathology research and clinical diagnostics. This exciting opportunity underscores the importance of precision medicine as a global initiative and one that was identified as a key priority in China’s new five-year plan. In other emerging markets, robust growth in South Korea was driven by our leading presence in biopharma. It’s also great to see our investments in India paying off with another strong quarter of growth. We had strong performance in Southeast Asia as well. And I was travelling their last month and visited our regional headquarters in Singapore. We continue to expand our centre of excellence in Singapore, which now supports manufacturing of our GC-MS products in addition to our life science solutions instrumentation. This site is a very good example of how we’re leveraging our scale to better serve our customers while improving the overall cost structure of our Company. I’ll make one last comment relative to the third pillar of our growth strategy, which is our unique customer value proposition. I mentioned precision medicine in my recap of China, and I want to give you another example of our efforts here because it illustrates how our scale and depth uniquely position us to play a key role. Precision medicine involves using a patient’s biological information down to the molecular level, to more effectively treat their disease. Cancer is a natural area of focus, and this information is being used to diagnose and treat a patient’s specific type of tumor. We had a significant presence at the American Association for Cancer Research where we featured a range of technologies suited to this important work including CRISPR and siRNA libraries, the iS5 and S5 XL next generation sequencing systems as well as our leading mass spectrometry platforms. Our scientists also led numerous sessions on this topic covering solutions ranging from next gen sequencing to liquid biopsy, qPCR-based pharmacogenomics and targeted mass spectrometry. It’s clear that our customers are committed to finding better ways to treat this terrible disease, and our unmatched capabilities can help them accelerate their progress. Let me switch topics now and turn to capital deployment. We had big news on that front in late May, committing $4.2 billion to acquire FEI. This is a really exciting development, given FEI’s unique strategic fit with our Company and specifically within Analytical Instruments. As you know, we have an exceptional track record of developing Orbitrap mass spectrometry for protein identification and characterization, and it’s been the foundation of our highly successful franchise. FEI’s CryoEM system is also being used in protein research, specifically for the structural analysis of proteins. By combining these technologies of one company, we’ll be in the best position to help our customers capitalize on the rapid growth in structural biology. While FEI made progress moving more into life science applications, our unmatched presence in industry will accelerate adoption with these customers. Since the announcement, I’ve had a chance to interact with quite a few of our future FEI colleagues and it reinforces to me what a great business this is, it’s well-managed, has excellent technologies, and a talented and enthusiastic team. It’s going to be a great addition to our analytical instrument segment and a key growth driver to our Company. Let me also add that we’re making good process towards closing the transaction. We now expect to close by the end of this year, versus our initial estimate of early 2017. The integration from both companies are in place, planning is underway, and we’re very confident in our ability to achieve the $80 million of total synergies we laid out when we announced the transaction. Now, let me give you a quick update on our guidance for 2016. As you saw in our press release, we’re updating our revenue and adjusted EPS guidance for the year. As usual, Stephen will cover the details and assumptions but in summary, we’re revising guidance based on our strong operating performance for the first half, as well as for the more unfavorable foreign exchange environment. We now expect revenue for the year to be in the range of $17.84 billion to $18.0 billion. This would result in 5% to 6% growth over 2015, in line with our previous guidance. We’re raising our adjusted EPS guidance to a new range of $8.07 to $8.20, which is 9% to 11% increase year-over-year. Before I turn the call over to Stephen, let me summarize my remarks with a couple of takeaways. We had another strong quarter of financial performance, which contributed to great first half. We’re executing our growth strategy and complementing that with strategic acquisitions like FEI. We’re in an excellent position at the halfway point and on track to achieve our goals for the year. With that, I’ll now hand the call over to our CFO, Stephen Williamson.

Thanks, Marc; and good morning everyone. I’ll begin with an overview of our second quarter financial performance for the total Company; then, I’ll provide some color on our four segments; and conclude with an updated 2016 guidance. So, starting with the overall financial performance for Q2, as you saw in our press release, we grew adjusted EPS by 10% to $2.03. GAAP EPS was $1.30 up 2% through Q2 last year. On the top line, our reported revenue grew 6%, year-over-year. Q2 reported revenue increased 4% organic growth, 3% growth from acquisitions while currency translation decreased revenues slightly. Please note the components of the Q2 change do not sum due to rounding. Given the FX volatility, I thought it’d be helpful to provide a little more color on the impact of foreign exchange in Q2. The revenue impact was a headwind of $16 million, but due to the mix of currency changes, the impact to adjusted operating income was actually a $4 million positive tailwind, resulting in a slight benefit to margins for the quarter and a $0.01 positive impact on adjusted earnings per share. At the very end of the quarter, rates changed significantly, and we’re expecting foreign exchange headwinds on both revenue and adjusted operating income for the remainder of the year. I’ll provide more detail on this later, when I go to the assumptions for our updated guidance. Looking at our growth by geography in Q2, both North America and Europe grew in the low single digits; Asia Pacific grew in the low double digits with continued strong momentum in China, good growth in South Korea, Southeast Asia and India. And the rest of the world declined mid-single-digits. Turning to our operational performance, Q2 adjusted operating income increased 9% and adjusted operating margin was 22.8%, up 50 basis points from Q2 of last year. Looking at the components of our adjusted operating margin performance in Q2, we achieved good margin expansion from our organic growth, driven by robust contributions from our PPI business system, price and volume. As we expected, Affymetrix was a 30 basis-point headwind on margins in Q2, but this was offset by the FX tailwinds that I just mentioned. Moving on to the details of the P&L, total Company adjusted gross margin came in at 48.6% in Q2, up 60 basis points from the prior year. The increase in adjusted gross margin was primarily due to strong productivity, acquisitions and the FX tailwind, partially offset by unfavorable business mix. Adjusted SG&A in the quarter was 21.8% of revenue, which is up 10 basis points versus Q2 2015. And R&D expense came in at 4% of revenue, down 10 basis points versus Q2 last year. And R&D as a percent of our manufacturing revenue in the quarter was 6.2%. Looking our results below the line, net interest expense was $106 million, up $11 million from Q2 last year, mainly as a result of financing related to capital deployment activities during the quarter. Our adjusted tax rate in the quarter was 13.5%, which is 50 basis points lower than last year, as a result of our tax planning initiatives. And average diluted shares in the quarter were $396.7 million, down $4.8 million year-over-year, mainly 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, cash flow from continuing operations for the first half of the year was $1.2 billion, and free cash flow was $970 million after deducting net capital expenditures of $210 million. This is $310 million higher than the first half free cash flow in 2015. We ended the quarter with $665 million in cash and investments; and in Q2, we paid $60 million of dividends. As you know, we were very active in deploying capital during the first half of this year. We’ve acquired Affymetrix for $1.3 billion, executed $1 billion of share buybacks in Q1, and distributed about $120 million in shareholder dividends for a total of $2.4 billion in the first half of the year. In addition, we signed an agreement to acquire FEI committing an additional $4.2 billion of capital. Our total debt at the end of Q2 was $14.1 billion, down $900 million sequentially from Q1, as a result of paying down short-term debt. Our leverage ratio at the end of the quarter was 3.2 times total debt to adjusted EBITDA, down from 3.5 times at the end of Q1. And wrapping up my comments on our total Company performance, ROIC continues to improve. Our trailing 12 months adjusted ROIC at the end of Q2 was 9.8%, up 20 basis points sequentially from Q1. 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 13% in Q2, and organic revenue growth was 7%. In the quarter, we continued to see very strong momentum in our bioproduction business, and had good growth in our nextgen sequencing and bioscience businesses. Q2 adjusted operating income in Life Science Solutions increased 14%, and adjusted operating margin was 28.9%, up 30 basis points year-over-year. Adjusted operating margin was positively impacted by strong productivity and volume pull-through, partially offset by unfavorable business mix, acquisitions, and strategic investments. In the Analytical Instruments segment, reported revenue increased 2% in Q2 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 some of our industrial markets. Q2 adjusted operating income in Analytical Instruments increased 4% and adjusted operating margin was 18.3%, up 30 basis points year-over-year. Very strong productivity, volume leverage and favorable FX were partially offset by unfavorable business mix and strategic investments. Turning to the Specialty Diagnostics segment, in Q2, reported and organic revenue, both grew 4%. We saw a good growth in the segment, led by the ImmunoDiagnostics business. Adjusted operating income increased 5% in Q2 and adjusted operating margin was 27.9%, up 10 basis points from the prior year. Adjusted operating margin was driven by productivity, volume leverage, and foreign exchange offset partly by the impact of strategic investments and unfavorable business mix. And finally, in the Lab Products and Services segment, Q2 reported revenue increased 6% and organic revenue growth was 5%. We had good growth across all businesses in the segment. Adjusted operating income in the segment increased 8% and adjusted operating margin was 15.5%, up 10 basis points from the prior year. Adjusted operating margin expansion in the quarter was driven by productivity and volume pull-through with partial offsets from strategic investments and unfavorable business mix. Now, I’ll review the details of our full year 2016 guidance. There are two primary changes from our previous guidance. First, we’re increasing our guidance based on strong operational performance; and second, we’re factoring in the recent changes in foreign exchange rates. And I’ll take you through each of these in detail. The first is the increase in our operational performance outlook. With the good first half behind us, we’re increasing our expected organic growth for the full year from about 4% to about 4.5%. This increases revenue at the midpoint by $60 million from our previous guidance. The stronger organic growth’s outlook results in additional $0.035 of adjusted earnings per share at the midpoint. Given that we’re one quarter further in the year, we’re also narrowing the range of our revenue guidance from $180 million to $160 million and narrowing our adjusted EPS range from $0.14 to $0.13. The second change relates to the impact of FX. And as I’m sure you’re all aware, rates have moved significantly in the past several weeks. Given the continued uncertainty around FX rates, we’ve once again taken a conservative approach to arrive at the FX impact for the year. As a result, the change in FX reduces our revenue guidance for the year by an additional $19 million and reduces our adjusted earnings per share guidance by an additional $0.02. Our 2016 guidance, now assumes the year-over-year FX headwind of $180 million of revenue or 1.1%, $42 million of adjusted operating income, and $0.10 of adjusted earnings per share. In terms of phasing of the $0.10 during the year, we’ve already incurred $0.05 of the headwind year-to-date and we’re assuming $0.03 headwind in Q3 and $0.02 in Q4. So, to sum all this up, the revised 2016 revenue guidance range is $17.84 billion to $18.0 billion, which represents 5% to 6% growth versus 2015, similar to our previous guidance. At the midpoint, revenue is increasing $60 million due to the improved operational performance outlook and decreasing $90 million with additional foreign exchange headwind. In terms of adjusting earnings per share, our increased 2016 guidance range is now $8.07 to $8.20 with a midpoint of $8.135. This represents growth of 9% to 11% versus 2015, also consistent with our previous guidance. Excluding the FX impact, this would represent adjusted earnings per share growth of 10% to 12% for the year. The midpoint of the adjusted earnings per share is increasing $0.015 with the additional $0.02 for foreign exchange headwind being more than offset by the $0.035 of improved operational performance. And we’re now expecting 60 to 70 basis points of adjusted operating margin expansion year-over-year; this is slightly improved my previous guidance of 50 to 70 basis points, primarily as result of the change in FX. So, given the days impact on our 2016 fiscal calendar, I thought it’d also be helpful to add some more color around phasing. As a reminder, our Q1 had four more days and our Q4 will have four less days in the equivalent quarters in 2015. In Q1 2016, I reported organic growth was 10%, and we estimated the days-adjusted organic growth in that quarter was approximately 5%. As we look to Q4, given the days will be a headwind in that quarter, we’re expecting reported organic growth in Q4 to be essentially flat, consistent with our previous guidance. The days had a positive impact on Q1 and will have corresponding negative impact on Q4 organic growth. Overall, for the year, there is no impact. One final comment about the calendar, as I mentioned on pervious calls, in Q4, we’ll have the benefit of four less days of cost, which we all expect to significantly benefit our adjusted operating margin and earnings in the quarter. So, as you think about the phasing of our adjusted earnings per share in the second half of the year, at the mid-point, we currently view approximately 55% being realized in Q4. A few other details behind the revised 2016 guidance, acquisitions are still expected to contribute about 2% to our reported revenue growth in 2016 and FX is expected to be about 1% headwind. We continue to expect net interest expense to be about $390 million. We’re forecasting our adjusted income tax rate to be about 14%, no change from our previous guidance. In terms of capital deployment, we are still assuming we will return approximately $240 million of capital to shareholders through dividends. And our guidance does not include any future acquisitions, divestitures or stock buybacks. Full year average diluted shares are estimated to be about 398 million, slightly lower than our previous guidance. And we’re expecting net capital expenditure to be approximately $440 million, consistent with previous guidance. And finally we’re expecting about $2.72 billion of free cash flow for the full year 2016; this is also consistent with our previous guidance. As always, in interpreting the revenue and adjusted EPS guidance rages, you should focus on the mid points as the most likely view of how we see the results playing out. So, in summary, we delivered another strong quarter in Q2, which positions us well at the halfway point to achieve our 2016 financial goals. With that, I’ll turn the call back over to Ken.

Thanks, Stephen. Operator, we’re ready for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Derik de Bruin from Bank of America Merrill Lynch. Please go ahead.

On the Analytical Instruments business, did you just talk a little bit about what the industrial headwinds have been to that business? And also just look back on a broader perspective on the overall Thermo business, can you talk little bit about just what the overall industrial is? And this is going to leading to a question on potential fallout from slowing in Europe as a result of the Brexit and just if you are seeing anything there?

Sure, Derik. Let’s start with the Analytical Instruments. So, there are two business units within that segment, chroma [ph] mass spec continues to grow high single digits and grew that in the quarter. Our chemical analysis, which is really the industrially related business, is declined in the mid single digit. So, when you kind of look at it versus the various kind of sub peers chroma [ph] mass spec continues to do extraordinarily well in the marketplace and chemical analysis is operating like most of the peers are very heavily industrially oriented. Towards the second part of your question, more of the broader Thermo Fisher industrial and applied exposure, about 20% of our revenue is industrial and applied; roughly half of that is applied and half is industrial. Applied markets continue to be strong. As I mentioned in my remarks, China continues to be very good for us. In the industrial markets, we really haven’t seen any inflection point; it’s really been continued soft conditions which we’ve had over the last few years. And then, in terms of Europe and Brexit, really just given how late the UK announcements came in at quarter, really had no impact in terms of the revenue outlook. It obviously had a lot of movement in volatility, and there might have been a little conservatism in the UK spend itself, but nothing significant in the quarter.

Your next question comes from the line of Jack Meehan from Barclays. Please go ahead.

I wanted to ask a little bit about China and the underlying drivers there for the mid-teens growth. Could you remind us the rough mix of the end-markets there and just how strong was applied in the quarter?

So, in terms of our China business, in China at the end of last quarter really good strength across the end-markets. The pure industrial continues to be soft but applied markets very good, healthcare was very good in the quarter, as well as big focus on the life sciences area, which is the convergence of historically, life science tools into the diagnostic applications with precision medicine. While we don’t manage our business by the end-markets, we manage by our businesses, what you see is in that particular end-market, applied markets because of the importance of environmental protection and food safety, is much larger as a percent of the total mix than the other markets around the world. So, those markets are good. China continues to deliver very strong growth, and bookings once again exceeded revenue in the quarter and it bodes well for the short-term as well.

And then, just one follow-up on biopharma high single-digit in the quarter, I caught some of the feedback on bioproduction. Could you just maybe talk about the consumable service, clinical trial logistics, just how some of the other segments within there, performing will be great? Thank you.

Yes. So, in terms of biotech and pharma customers, another strong quarter, because of the benefits of both the good end-market as well as really how well our value proposition resonates. In the quarter, the high single digit growth, it really had the most challenging comparison year-over-year. So, that end-market continues to perform well. Bioproduction was the strongest of the businesses; the consumables channel business had a good quarter there as well as did biosciences. We did get growth in our clinical trials logistics business, a little bit slower growth than the last few quarters, but that was something we anticipated because of very, very strong comparison in Q2. So, the fundamentals there are good and the outlook continues to be strong in the biopharma end-market.

Your next question comes from the line of Tycho Peterson from J.P. Morgan. Please go ahead.

Marc, maybe to follow up on that last line of question for life science solutions, can you maybe just talk about how much of the outsized performance there is bioprocess versus nextgen sequencing? And on the latter point, are you starting to drive some revenue synergies between what we’re you doing on the sequencing side and what the addition of Affymetrix would raise?

Sure. So, in terms of the life science solutions business, had a very strong quarter, and it really is driven by good performance across the businesses. So, when you look at it, bioproduction had a very strong quarter, biosciences continues to grow well. Our nextgen sequencing business grew very strongly in the teens, and our genetic analysis business had organic growth that was also quite stable across all of its platforms. So, very strong execution across the quarter; obviously, the fastest growing portions are bioproduction and the nextgen sequencing businesses.

And then, as a follow-up to go back to Derek’s question earlier on industrial, we have seen I guess more constructive commentary from some of your peers, [indiscernible] had a good quarter, Danaher talked a little bit more positively about a recovery. Can you maybe just talk about when you think you bottom out on the industrial side, and do you expect it to pick up in the back half?

Yes, I would say -- I am not -- while I have an economics degree, I am not an economist, and I’m not going to call the bottom. When I look at the various reports, they were quite mixed, Granger [ph] had very negative outlook, some companies were very positive, specifically about the industrial end-markets. So, I think it’s too early to call a bottom. But, if we see it, obviously that would be clearly a positive upside because we’re not baking in any improvement in the balance of the year. So, if that happens, that clearly would drive us above the organic growth rates that Stephen outlined.

Your next question comes from the line of Ross Muken from Evercore ISI. Please go ahead.

So, one of your peers this week sort of dropped idea that possibly this CapEx cycle for pharma will look different than prior and that maybe the sort of period will be elongated or we may actually not see sort of a down part of the cycle. And so, I guess as you step back and you think about, obviously you have a more unique view point into a broad base of biopharma, what’s your sort of view on the sustainability of sort of the current trend and what is the pushes and pulls, whether it’s some the emerging market pharma that are growing well, and the level of visibility or your feeling on that relative to maybe time past?

So, you’re clearly seeing an expansion of the biopharma industry in terms of the activity, not necessarily where drugs are consumed, but the activity in the South Koreas, the Chinas of the world. So, I think back over various cycles, they become so small relative to the U.S. and western Europe but more meaningful. So, that’s clearly a positive. We’ve seen good growth there. India has been a good growth driver as well. So, it’s encouraging from kind of longevity. When you look at what’s going on, I think the single biggest driver is that the quality of the research and new entities getting approved, right? And because the funding ultimately is Western Europe and the U.S., and as long as drugs are getting through to the market and demand is strong there, they will be funding that’s very robust in R&D. So, it’s less to me cyclical than right now they are in a sweet spot of the science turning into drugs that’s turning into demand for our products. So, we feel good about it. And the fact, even in what I think is very good end-markets, there is an efficiency driver amongst that customer base, whether it’s small biotech or large pharma, and that plays to our sweet spot for sure. We see it in the results across quarter in and quarter out, the very strong performance in the biopharma customer set for us. So, we feel very well-positioned in a good end-market.

And maybe just, it seems like broadly on the life sciences solution side, you had a good numbers and I’d say generic business did well. What about Affy? Obviously that one, you’ve now seen a little bit in terms of being in the organization, not very long but enough to sort of get your hands around it. How are you feeling about sort of the different components there? And then in general, I think at the Analyst Day, you sort of highlighted the flow business a bit. I mean how are you feeling about that end-market?

Sure. So, let me give you our first read on Affy, we don’t refer basically one quarter. The integration is going extremely well. We continue to be on track to deliver the EPS accretion for 2016 loss that we outlined, which is about $0.06. Synergies are running ahead of schedule in terms of timing on the cost side, so that’s very good. The eBioscience business is performing well; the flow cytometry market looks attractive. Our Attune flow cytometer has good adoption, the revenue synergies there should come out very strong. So, of all that’s very positive. The microarray business is softer than we had seen before. And really what’s going on in microarray is that before the close of the transaction, the primary competitor micro will raise really dramatically drop [ph] price and then Affymetrix as an independent company chose not to follow suit. So, in Q2 we focused the R&D and marketing teams on addressing that competitive dynamic. And in early July, you may have noticed that we launched the Axiom Precision Medicine Research Array. And that’s a broad base genotyping array that’s very valuable in providing interesting information around health questions. And we’re offering that at very attractive price points. So, generally, I feel good about the integration, the synergies, the accretion, and the flow and eBio business. And we are putting some countermeasures in place for microarrays.

Your next question comes from the line of Doug Schenkel from Cowen & Company. Please go ahead.

My first question is on the academic government end-market. Does your guidance still embed an expectation that U.S. academic government demand picks up with the release of funding in the second half of this calendar year? And in Japan, recognizing others in the group have indicated that academic research demand was pretty weak in Q2, I’m just wondering if this is something you’re seeing as well.

Yes. So, Doug, from an academic and government perspective, as I mentioned, we grew in the low single digits. Q1, we saw a bit of an uptick in the NIH release of funds; Q2 was consistent with that improvement. And we expect the balance of the year kind of being consistent with that. In terms of Japan, we grew low single digits, in line with our expectations in the quarter. Academic was a little bit soft, biopharma was quite good. So, Japan for us continues to be not particularly noteworthy; it’s not a very big end-market and generally performing in line with expectations.

Okay. And just one quick cleanup question. In terms of share repurchases, you did put an additional authorization in place over the last two months or so, doesn’t seem like there is any change in share count assumptions embedded into guidance. So, should we think that you’ve an incremental share reauthorization or larger share authorization to purchase more shares in place now but that’s something that’s probably not going to be acted on until you get into next year and closer to the closing of the FEI M&A closure?

Yes, I think that’s good observation and good assumptions. Effectively -- generally, we like to have an open authorization in place. And we used up the authorization when we did our share buybacks earlier in the year. The 1.5 billion just reflects kind of consistent with our long-term capital deployments strategy; I wanted to have a little bit larger authorization. But, given how active we’ve been in capital deployment in the first half of the year, we don’t have any immediate plans to use it. It’s more just the housekeeping to have that in place to be opportunistic and consistent with our long-term capital deployment strategy.

Okay, that’s great. Thank you.

Your next question comes from the line of Jonathan Groberg from UBS. Please go ahead.

Marc, at the very macro level or the high level, the quarter seems solid [ph] with a lot of moving products, it seems very much in line, not a lot of changes to your guidance. Can you maybe help us think through, as you went through the quarter, anything that was particularly noteworthy to you that maybe -- again, when it all rolled up to the top, it doesn’t seem particular -- nothing really stands out but is there anything that you think that was particularly noteworthy or positive that we should be aware of?

Yes, I wish it was a video conference, so I have a big smile on my face. This was actually an excellent quarter, Jon. When I think about it, many of you have heard me saying is generally, I don’t like to have investors have to really think about Thermo Fisher in terms of any of the nuances because it’s our job to manage through the various puts and takes in the economy. We executed very well. Effectively we were able to raise our organic growth outlook for the full year, based on the half. We don’t typically raise organic growth guidance during the course of the year; we typically are more focused on the EPS, so we did both, which is I think is great. When you look at the geographic strength, we went out of the way to highlight the strength in four different end markets in Asia Pacific that really is doing very well, which bodes well for the second half, given the fact that there is clearly some volatility in Europe that -- an uncertainty in Europe that we don’t know, nobody knows exactly how that will play out. But given how the U.S. is doing and given how Asia Pacific is doing, we’re very well-positioned to have an outstanding year. Capital deployment has gone well; margins were good. So, I like the fact that there is really not a tremendous amount of nuances. It’s a very clean ahead of expectations quarter and our ability to offset the FX headwinds that are there and raise guidance. And then, finally, as Stephen said in this remarks, we are a bit conservative on the outlook on foreign exchange in our guidance. And if foreign exchange stays exactly as they close on the spot rates, we actually have a little bit of upside to the guidance there. But given the volatility, we don’t think it was prudent to put that in. So, really, a very good time at the halfway point of the year.

Okay, that’s helpful. And as a quick follow-up to that Marc, if you think about the second half, as you mentioned you have the UK decision; you have the politics going on in the U.S.; you have the China precision medicine initiative, which seems to be really kicking up. I guess are you kind of handicapping your second half outlook?

So, the way we’re thinking about it is the outlook in the second half in aggregate is similar to the very original guidance we gave at the start of the year for the second half. So effectively, first half was better than we expected, we put it all in the bank, raised our organic outlook, we’re assuming consistent with our original guidance for the second half of the year. Geographically, probably it will be slightly different, meaning that it’s likely to be Asia Pacific and U.S. a little better than Europe, but we have enough room to achieve our goals even with some up and downs in the various end markets.

Your next question comes from the line of Isaac Ro from Goldman Sachs. Please go ahead.

First, a question on one product specific item and then, second on the financials. Marc, you mentioned you don’t want to get too into the [indiscernible] products, but I was curious on your NGS comments, hoping to put that in context with the performing in OSS [ph] in total, just kind of curious how significant that was. And maybe curious to the extent that hat business has been doing maybe better over the last couple of years than you might have expected; is it really a function of still growing the install base or is it really about the consumables pulling through a lot of utilization on the install base you have?

Isaac, I appreciate the question. And the reason I would say that I won’t get too much into the details of the products is that we have such a broad range of products and really it’s how we manage the portfolio. But I am happy to get into the NGS discussion. We had a very good quarter. The adoption of S5 and S5 XL sequencers going really well, the feedback is very positive and customers love the ease of installation and the ease of use of the instruments, and it’s fantastic feedback. The other thing that was exciting and may not be as clear, but at the European Association of Cancer Research conference, we were the first company to bring to market, a kit for liquid biopsy for cancer. And that was very well received as well. So, consumable is doing well, our product development is going well, and option of instrumentation is going well in the quarter.

And then, Steve, a question on tax rate; you guys have still maintained that 14% number; it was a little better than that this quarter. So, I’m wondering, if we should assume an uptick in the back half or is there a possibility that you guys could -- if the geographic mix plays out, if you could feel upside to that tax rate, in terms of better tax rate?

So, we’re still guiding to 14% for the full year. I see that’s where it will end up, given what I can see now in terms of the desecrate items. The lower tax rate in Q2 was really due to the timing of some of the discrete tax planning activities coming in stronger in Q2. I expect that to continue in Q3, so similar tax rate in Q3 versus Q2 and slightly high in Q4, but overall for the year, 14%.

Your next question comes from the line of Steve Beuchaw from Morgan Stanley. Please go ahead.

Marc, if I look at the growth rate in China in the quarter, on the one hand, it’s clearly a very good number, but then when I consider the comp and how tough it was, it’s actually the best quarter, growth wise you’ve had in China in I believe at least a few years. So, I wonder, given that context if you could refresh your thoughts the impact of some of the initiative we’re seeing China, as much as they relate, not so much to what we’re seeing here in 2016, but a medium term outlook there, now that you’ve got a little bit more evidence? And then, just one housekeeping question for Stephen. Sorry, if I missed it, but did you refresh any thinking on the free cash flow or working capital outlook for the year?

I’ll start with the second question on free cash flow. So, we didn’t change the guidance; it’s still $2.72 billion. At the half year point, we’re actually doing very well, so $310 million higher than the same half year point last year, and that’s where some phasing of cash taxes and cash interest, more front end-loaded this year. So, working capital is going well, still got six months to go. If we continue the way we are, we will meet or exceed the full year cash flow guidance.

And Steve, you’re 100% right, the stack comparison, was the best performance in China in a while. So, as you know, we’ve been positive on China for a very long time. And when we came out of the one soft year where we had the mid single digit organic growth couple of years ago, what you’re seeing is a consistent trend of improvement. And when I -- my takeaways from my visit was, precision medicine will be a forward-looking driver but the focus on environmental, food safety as well as healthcare expansion is very positive. When I was there, I had the opportunity to meet with of the Vice Minister of Ministry of Science, and really talked about precision medicine. And that is a huge focus. So, we continue to be very bullish on the long term prospect for China.

Your next question is from the line Steve Willoughby from Cleveland Research. Please go ahead.

I have two questions, first for Stephen. If you could just kind of walk me through a little bit what you -- how you are thinking about FX. And it was my understanding that you are largely naturally hedged in the UK. And then I was thinking you should be getting some benefit from the stronger yen. So, what’s the offset that’s pulling back things a bit as it relates to EPS for FX?

Sure. So, when you look at the currencies we have overall and the year-over-year change at this point, the yen is a positive, and that’s helping the overall picture for full year FX impact. Majority of the revenue headwinds, about 75% of it is coming from that change in the pound. And then the mix of all the other currencies pretty much negative against the dollar at this point. So, the mix of all of that basically gets you to where we are. Now, as I said in my prepared remarks, we have a cushion against the current spot rate. So, if current rate still stand, we’ll have some upside to the guidance that we give. Yen is a positive but it’s really offset by the other pretty every single other currency.

Okay, it makes sense. And then, just secondly, within the LSS business, it’s been a number of quarters now in a row where you guys are showing strong growth there. I was wondering, Marc, if you could comment at all on how much of that is end-market versus revenue synergies you might be experiencing with the Life Tech business?

So, revenue synergies are very strong. And if I think about the performance there -- it’s really embedded in the organic growth at this point, given where we are, how long it’s been close to transaction. But we achieved the revenue synergies for the full year -- we had uptick of $60 million of revenue synergies; we achieved that on the first half, meaning that we will far exceed the revenue synergy number. And if you’ll ask about tracking, it’s showing up in the organic growth. So that obviously continues to be a big benefit. As I’ve said other times, probably one point of the aggregate performance of the step up in Life Sciences Solutions is the end market is better than it was at the time we announced the transaction in 2013. And the rest has been just really good execution by the team, and the unique benefits that Thermo Fisher Scientifics reach brought to that business segment.

Your next question comes from the line of Dan Arias from Citigroup. Please go ahead.

Maybe just two quick ones on the outlook, Marc, tying out the end market commentary on industrials with the softness that you are still seeing there, is flattish still the right way to think about things for the year? And then, Stephen, what at this point are you looking for in terms of the FX impact to gross margins for the year?

In terms of industrial and applied, while, we don’t give a precise outlook during the course of the year, flattish to low single digits is a good assumption for the industrial and applied markets for the year. In terms of the FX…

Basically, I’m not expecting a significant impact on gross margins or operating margins for the full year the way the rates are today.

Your next question comes from the line of Paul Knight from Janney Montgomery. Please go ahead.

Hey, Marc, your internet strategy is obviously helping drive organic growth in your pricing ability. Can you talk about the investments you are making there and talk about where you are with your ability to price and even to discount?

Yes. So, first on pricing, another good quarter, in aggregate, about 60 basis points of price. We’ll look towards the change in currency rates that we saw at the end of the quarter, should create some incremental pricing opportunities. Whether that will flow this year or flow into next year hard to tell but that should be additional pricing opportunity. In terms of e-commerce, it’s been a really positive driver for the Company. As everybody knows, we have integrated down to two web platforms, our fishersci platform and our Thermo Fisher Scientific platform. And when you look at that, we continue to enable more products on the Thermo Fisher platform to be available on e-commerce. We took the old backbone from Life Technologies, we’ve been adding and recorded now -- adding new capabilities and new products that are available for purchase online. And that’s really good from a customer convenience, stickiness and ultimately growth, and growth in profitability.

And Marc without the metrics, any estimate on your part as to how much of an increase in their addressable customers they have with their microarray and their reagent business, is it you can open up the doors to 50% more customers, 25%, what are your thoughts there?

The way I would think about it, Paul, is for the flow cytometry business and the antibody business, we really have an exquisite reach around the world, and that’s going to be a very big expansion opportunity. In terms of the microarray, they were well-penetrated in the U.S. and Europe, and we will be able to expand the Asia Pacific presence where we have very strong presence in genetic analysis. Asia Pacific probably represents say 20% of the world opportunity, they obviously cover the bigger hospitals and the bigger research customers but it should be a nice expansion within that.

Thank you.

Operator, we’re going to take just one more.

Thank you. Your last question comes from the line of Sung Ji Nam from Avondale Partners. Please go ahead.

I just have one question. Marc, maybe if you could talk about the bioproduction business, obviously strength across the industry over the last number of quarters. And I was curious as to is the key driver essentially the number of new molecules entering the market or are there kind of other drivers like single-use technology kind of being the bigger driver or maybe if you could just talk about other drivers as well?

Yes, Sung Ji, thanks for the question. So, bioproduction market continues to be very strong. We have the leadership position in both cell culture and in the single-use technologies, which is two of the four verticals within that market. We’re seeing strong demand from drugs getting on market where volume really picks up. The number of drugs actually in the process development stage also is a big consumption of demand. Vaccine production and the increase in vaccines is a big driver of demand. And then, on top of all of that, for existing approaches, there has been a very large shift from stainless steel to single-use, and that also accentuates the good growth in the market. So that’s been an excellent growth market for a number of years for us and one with a very bright future. So with that, let me bring the call to a close with a couple of quick comments. First, thank you for participating. We had a really strong excellent first half, that’s behind us; we’re very well-positioned to deliver another strong year. And of course, we look forward to updating you on our progress in the third quarter. Thanks everyone.

This concludes today’s conference call. You may now disconnect.