Kenneth J. Apicerno - Vice President-Investor Relations Marc N. Casper - President, Chief Executive Officer & Director Peter M. Wilver - Chief Financial Officer & Senior Vice President.

Jonathan Groberg - UBS Securities LLC Ross Muken - Evercore ISI Derik De Bruin - Bank of America Merrill Lynch Tycho W. Peterson - JPMorgan Securities LLC Steve C. Beuchaw - Morgan Stanley & Co. LLC Daniel Arias - Citigroup Global Markets, Inc. (Broker) Doug A. Schenkel - Cowen & Co. LLC Isaac Ro - Goldman Sachs & Co. Jack Meehan - Barclays Capital, Inc.

Peter R. Lawson - Mizuho Securities USA, Inc. Paul R. Knight - Janney Capital Markets.

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2015 First 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. Thank you. 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 Investor section of our website, thermofisher.com under the heading Webcast and Presentations until May 15, 2015.

A copy of the press release of our 2015 first quarter earnings and future expectations is available on the Investor section of our website under the heading Financial Results. So before we begin, let me briefly cover our Safe Harbor statement.

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

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's Annual Report on Form 10-K for the year ended December 31, 2014 under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also available in the Investor section of our website under the heading SEC Filings.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change, therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

Also during the 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 first quarter 2015 earnings and future expectations, and also in the Investor section of our website under the heading Financial Information.

Also before we get started, one other item to note is that the commentary that we're going to provide on the company's total organic revenue growth, as well as revenue growth by end market and by geography, now includes the performance of Life Technologies as of February 4, 2015, the one-year anniversary date of the acquisition.

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

developing innovative new products, expanding our presence in emerging markets, and leveraging our unique customer value proposition to gain share. So in terms of innovation, we have a lot to talk about here, but I'll focus on just a few of the new product launches from Q1.

First, at Pittcon, we've been focused on our customers in applied markets and using our analytical instrument leadership to develop new Thermo Scientific products that are both powerful and easy to use. One of the most novel new products we introduced was our Gemini chemical analyzer.

It combines FTIR and Raman technologies in a handheld unit that can identify unknown chemicals and explosives in the field. We have essentially redefined handheld instrumentation with a two-in-one analyzer that can be used by the military to protect troops, or by first responders to keep the public safe.

We also continued to expand our industry-leading Orbitrap Mass Spec franchise by launching the Q Exactive LC-MS. This is a more powerful alternative to Q-TOF analysis for customers working in forensic toxicology, pharma QA/QC, or food and environmental testing.

The advantage of the Q Exactive Focus is its ability to perform high-resolution, accurate mass analysis at a much lower price point than our other Orbitrap-based systems or competing Q-TOF technologies.

Another highlight worth noting was that our customers who read SelectScience magazine voted Thermo Fisher, their Company of the Year, based on peer reviews and ratings. This award recognizes the strong customer allegiance we built through our leadership in analytical instruments.

Separate from Pittcon, we launched a new personal monitor to protect miners from exposure to coal dust, which can cause black lung disease. The new generation PDM3700 delivers improved performance over our original unit, which was developed through a unique collaboration with government agencies, labor representatives and the mining industry.

In laboratory equipment, we introduced a new ultra-low temperature freezer called the TSX, which is an advancement in both efficiency and sustainability. It runs on a natural refrigerant that uses 50% less energy than a conventional freezer and has less impact on the environment.

The TSX is a great example of our commitment to helping our customers protect the integrity of their samples, while achieving their sustainability goals. The last product that I'll highlight is from our next-generation sequencing line and represents our latest development for advancing clinical research in oncology.

Based on our Ion Torrent AmpliSeq technology, the RNA Fusion Lung Cancer Panel is a new tool for detecting gene mutations in very small tissue samples. This panel was confirmed by a consortium of leading clinical researchers from around the world, who are considered pioneers in colon and lung cancer research.

I think these examples clearly demonstrate our commitment to innovation and to fulfilling our mission, which is to enable our customers to make the world healthier, cleaner and safer. Turning now to emerging markets.

As highlighted in our press release, we made great progress here as well and we had good growth in China, South Korea and India during the quarter. We're pleased to report that China grew in the high-single-digits in Q1, strength in biopharma and healthcare led to a strong demand for our laboratory equipment, consumables and bioscience reagents.

We also benefited from good growth in air and water quality monitoring. While this is not yet indicative of a trend, it's certainly going in the right direction. I traveled to China in late March to visit with our key customers and get a first-hand understanding of the local dynamics from our leadership team there.

I came away very optimistic about our long-term prospects. We're seeing strong growth in products we make in China, which means our low-cost region manufacturing strategy is paying off. We also expect to launch several exciting new products this year that have been developed in our China Technology Center.

As China prepares to announce its next five-year plan in early 2016, we're confident that Thermo Fisher will be in an excellent position to capture those opportunities and gain share.

In other emerging markets, we also noted in our press release that we acquired two of our channel partners, one covering South Korea, the other covering Singapore and Malaysia. These channels increase our direct access to analytical instrument customers in Asia.

We're also expanding our commercial presence in Vietnam, Thailand and Indonesia with the opening of new sales offices, demonstrating our commitment to serving our customers across Southeast Asia.

After acquiring the Singapore channel partner, we quickly integrated their operations in demo labs into our Marsiling facility there, which we built into a new Center of Excellence as part of the integration of our Life Science Solutions business.

This is another example of the synergies we're creating as a result of the acquisition of Life Technologies with the goal of combining our capabilities in a way that strengthens our customer value proposition.

Last quarter I mentioned that we began selling thousands of Invitrogen and Applied Biosystems branded products through our Fisher Scientific channel within our Lab Products and Services segment. I'm pleased to report that we're already seeing some incremental growth as a result of that.

Just to give you a quick update on the acquisition synergies, we're off to a great start here as well. We began to see some of the revenue synergies kick in during Q1 and we're confident that we'll deliver the $60 million of revenue synergies we committed to this year.

In terms of the cost synergies, for the full year, we now do expect to deliver $125 million of cost synergies, up from our previous guidance of $150 million this year. Pete will provide a bit more detail in his remarks. Before I turn to our guidance, I'll make a quick comment on capital deployment.

As you know, we started to deploy capital immediately in 2015 buying $500 million of our stock in the first few weeks of the year. We have many opportunities ahead to create shareholder value by effectively deploying capital through a combination of stock buybacks, dividends and strategic M&A.

On the topic of M&A, we spent $300 million in Q1 to acquire a nice bolt-on to our BioProduction capabilities, Advanced Scientific Inc., or ASI, which had $80 million of revenue in 2014 and offers customized single use systems and bioprocess equipment. These products complement our existing single use technologies.

They strengthen our ability to help our life sciences and healthcare customers quickly develop high-quality low-cost solutions for their production of biologics. Now let me give you a quick update on our guidance for 2015.

As you saw in our press release, we're updating our revenue and adjusted EPS guidance to reflect the impact of more unfavorable foreign currency exchange rates as well as stronger operating performance and the acquisition of ASI. We now expect revenue for the full year to be in the range of $16.67 billion to $16.83 billion.

We're also raising the low-end of our adjusted EPS range by $0.03 to a new range of $7.25 to $7.40, which would result in 4% to 6% growth over 2014. Given the additional $0.09 of FX headwind in our guidance, I think it shows that we're managing in this environment very effectively.

In addition to the productivity we always drive through our PPI Business System, last quarter we said, we'd take further actions if FX rates deteriorated. This was the case, so in Q1, we began implementing targeted price increases, putting more focus on gaining concessions from our supplier base and controlling costs more tightly.

Before I turn the call over to Pete, let me summarize my remarks by saying we performed well financially. We had another quarter of solid adjusted EPS growth.

We continued to invest in a bright future by successfully executing our growth strategy, and last, the integration continues to go very well and we're on track to deliver our revenue and cost synergy targets. All of this positions us to achieve another strong year. With that, I'll now hand the call over to Pete..

Thanks, Marc. Good morning, everyone. As usual, I'll begin with an overview of our Q1 financial performance for the total company then provide some color on our four segments and conclude with our updated 2015 guidance. As a reminder, at the total company level, we're reporting organic revenue growth using our standard methodology.

That means that we've excluded the results of Life Technologies up to the one-year anniversary date of the acquisition, which was in early February.

However, for the Life Sciences Solutions segment, we're continuing to provide organic revenue growth on a pro forma basis as if we had owned Life Technologies for all of 2014 and 2015 to give you more relevant insight into the growth performance of that segment.

So starting with our overall financial performance, in the first quarter, we grew adjusted EPS by 7% to $1.63, which represents very strong underlying operating performance given a 10% headwind from FX. GAAP EPS was $0.96 in Q1, down 29% from $1.36 in the prior-year's quarter primarily as a result of the gain on divestitures in the prior year.

On the top line, organic revenue growth was 2% this quarter and our reported revenue was flat year-over-year. Q1 reported revenue included 5% growth from acquisitions net of divestitures and a 6% headwind from foreign exchange. Please note that the components of the Q1 change in revenue did not sum due to rounding.

We strengthened our backlog in the quarter with bookings more than 1% higher than revenue. Looking at our growth by geography, North America grew in the low-single-digits and Europe declined in the low-single-digits. Asia Pacific grew in the mid-single-digits with China growing high-single-digits.

Also of note, Japan declined in the mid-single-digits as a result of government funding delays and a very strong growth in the prior year, as Marc mentioned. Rest of world grew in the low-single-digits.

Looking at our operational performance, Q1 adjusted operating income increased 3% and adjusted operating margin was 21.9%, up 60 basis points from Q1 last year despite a 60-basis-point headwind from FX.

At a high level, our adjusted operating margin expansion for the quarter was driven by continued strong contribution from our primary productivity levers, global sourcing, footprint optimization and our PPI Business System as well as strong year-over-year contribution from cost synergies.

Net acquisitions and divestitures were actually about 25 basis points dilutive in the quarter primarily as a result of picking up January results for Life Technologies, which were at a much lower margin than the company average for the quarter as expected.

We realized $14 million of benefit from our restructuring actions in Q1 and we also realized incremental synergies of $48 million.

From a quarterly phasing perspective, in 2015, Q1 benefits the most from year-over-year synergies because we had no synergies in January of last year compared to having a full-year 2014 run rate of synergies in January of this year.

For the full year, we now expect cost synergies of $125 million, up $10 million from our previous guidance of $115 million primarily as a result of accelerating realization of head count and sourcing synergies. Revenue synergies during the quarter were $5 million with $2 million of adjusted operating income pull-through.

We expect revenue synergies to accelerate through the year, so we're still on track to achieve our full-year 2015 guidance of $60 million in revenue synergies and $20 million of adjusted operating income pull-through.

In Q1, we continued to make additional strategic investments primarily to strengthen our core technology platforms and commercial capabilities and accelerate growth. Moving on to the details of the P&L. Total company adjusted gross margin came in at 49.3% in Q1, up 110 basis points from the prior year.

The increase was driven by the addition of Life Technologies as well as solid productivity across our businesses. Adjusted SG&A in Q1 was 23.2% of revenue, which is 10 basis points unfavorable to Q1 2014.

The increase was primarily a result of the addition of Life Technologies, partially offset by volume leverage and our cost synergy and productivity actions. Finally, R&D expense came in at 4.2% of revenue, 40 basis points above the same quarter last year.

This increase reflects the impact of that relatively higher level of R&D investment in the Life Sciences Solutions segment. R&D as a percent of our manufacturing revenue in Q1 was about 6.5%.

Looking at our results below the line, net interest expense in Q1 was $101 million, down $4 million from last year, primarily as a result of paying down our debt balance versus the prior year. We also restructured some of our debt during the quarter to lower our interest cost, which was included in the previous guidance.

Adjusted other income for Q1 was $7 million, which was $5 million higher than Q1 2014, driven primarily by non-operating foreign exchange gains. Our adjusted tax rate in the quarter was 14%, 200 basis points below last year, primarily as a result of acquisition tax planning.

We spent $500 million in January to buy back 3.9 million of our shares and we returned an additional $61 million of capital through dividends in the quarter.

Average diluted shares were 401.4 million in Q1, up 3 million or 1% from last year, primarily as a result of the shares we issued to partially fund the Life Technologies acquisition, along with some option dilution, partially offset by the share buybacks.

Turning to cash flow and the balance sheet, cash flow from continuing operations in Q1 was $82 million and free cash flow was negative $15 million, after deducting net capital expenditures of $97 million. This compares to $1 million of free cash flow in Q1 2014.

Compared to the prior year, we picked up about $300 million of non-repeating – from not repeating the acquisition-related payments that you may recall we made last year, which was offset by the timing of interest and tax payments, as well as normalization of Life Technologies into our Q1 results.

We ended the quarter with $870 million in cash and investments, down $480 million sequentially from Q4 2014. The decrease was driven by our capital deployment on share buybacks, the ASI acquisition, and dividends.

Our total debt at the end of Q1 was $14.9 billion, up $300 million from Q4 2014, and our leverage ratio at the end of the quarter was 3.6 times total debt to adjusted EBITDA. We continue to expect to achieve our target leverage ratio of 2.5 times to 3 times by the end of 2015.

So let me wrap up my comments on the total company with my usual update on our performance in terms of return on invested capital. Our trailing 12 months adjusted ROIC in Q1 2015 was 8.9%, down 60 basis points from Q4 2014.

This is in line with our expectations and as a result of adding another full quarter of Life Technologies investment into our five-quarter average invested capital, while only adding an incremental month of Life Technologies earnings.

The acquisition impact is now fully in our invested capital base and we expect ROIC to increase steadily for the remainder of the year. So with that, now I'll walk you through the performance of our four business segments.

As I highlighted for the total company, FX was a significant headwind to the top line for our segments and negatively impacted their year-over-year revenue growth to varying degrees. We also had one less day in the quarter, which mainly affected our consumables-oriented businesses.

Starting with the Life Sciences Solutions segment, in Q1, total revenue grew to $1.02 billion from $840 million in the prior year, primarily as a result of the Life Technologies acquisition, net of the related divestitures. On a pro forma basis, assuming Life Technologies was owned in both periods, organic revenue grew 2%.

In the quarter, we saw strong growth in our BioProduction business, partially offset by some weakness in academic, government, and applied markets.

Q1 adjusted operating income for Life Sciences Solutions increased significantly, primarily as a result of the acquisition, and adjusted operating margin was 29.3%, flat with the prior year, consistent with our expectations.

In the segment, we had very strong productivity, including acquisition synergies, and good pull-through on incremental organic revenue. This was offset by unfavorable FX and dilution from the incremental acquisition revenue which, as I mentioned earlier, represented January results and pull-through a much lower-than-average margin for the segment.

In the Analytical Instruments segment, reported revenue decreased 6% in Q1, and organic revenue grew 1%. In the quarter, we had strong growth in our chromatography business, which was partially offset by weakness in academic and government and some of our core industrial markets.

Q1 adjusted operating income in the Analytical Instruments decreased 7% and adjusted operating margin was 16.7%, down 30 basis points. In the segment, we delivered very strong productivity that was more than offset by strategic growth investments and some unfavorable business mix.

Turning to the Specialty Diagnostics segment in Q1, total revenue decreased 4% and organic growth was 3%. As Marc mentioned, our clinical diagnostics, immunodiagnostics, and healthcare channel businesses had good growth in the quarter.

Adjusted operating income in the segment decreased 3% in Q1, and adjusted operating margin was 27.3%, up 10 basis points from the prior year. In the segment, we had strong productivity and good pull-through on organic growth, partially offset by strategic growth investments and FX.

Finally, in the Laboratory Products and Services segment, Q1 reported revenue declined 5%, driven by FX and the Cole-Parmer divestiture. On an organic basis, revenue grew 3%. Our research and safety channel showed particular strength, benefiting from good growth with biopharma customers.

Adjusted operating income in Laboratory Products and Services decreased 5%, and adjusted operating margin was 14.7%, flat with the prior year. This was driven by strong productivity offset by unfavorable business mix, the Cole-Parmer divestiture, and FX. So with that, I'd like to review the details of our full-year 2015 guidance.

In terms of adjusted EPS, with a solid quarter behind us, we're raising the low-end of our 2015 adjusted EPS guidance by $0.03 to a new range of $7.25 to $7.40, which represents growth of 4% to 6% versus 2014.

To bridge the $0.015 increase to the midpoint of our adjusted EPS guidance, we're seeing an incremental $0.09 headwind from FX, which we're more than offsetting with $0.035 below the line from other income and a slightly lower share count, $0.02 from the ASI acquisition, and $0.05 of operational improvements, including incremental cost synergies.

On the top line, as a result of the deteriorating FX environment, we're lowering both the high and low end of our reported revenue range, partially offset by the addition of the ASI acquisition.

This leads to a new full-year 2015 revenue guidance range of $16.67 billion to $16.83 billion, which is down slightly compared to our reported revenue of $16.89 billion in 2014.

To bridge the $150 million decline from the midpoint of our previous guidance, we're expecting an additional $240 million headwind from more unfavorable foreign exchange rates, offset by about $90 million of incremental revenue from acquisitions.

To summarize the impact of FX on our current guidance, on the top line, FX is now lowering our revenue by about $985 million, or 6%, so our reported growth guidance would be 5% to 6% on a FX-neutral basis. In terms of adjusted EPS, FX is now $0.67 headwind or 10% year-over-year.

So if you were to look at our guidance on an FX neutral basis, adjusted EPS would be growing 14% to 16%, which represents even stronger underlying operating performance than our previous guidance. Moving on to the details of our guidance, acquisitions net of divestitures are expected to contribute about 1% to our reported revenue growth in 2015.

On an organic basis, there's no change to our organic growth guidance midpoint of about 4%. And consistent with past practice, our guidance assumes current foreign currency exchange rates and we haven't attempted to forecast future changes in rates. Our guidance also does not include any future acquisitions or divestitures.

Turning to adjusted operating margin, we're expecting 60 basis points to 80 basis points of expansion year-over-year. This is up 10 basis points from both the low and high end of our previous guidance primarily as a result of stronger operating performance.

In terms of the adjusted operating margin pull-through on the incremental FX revenue headwind, we're seeing an additional $40 million of unfavorable impact on the bottom line, bringing the total impact to $315 million or 65 basis points of adjusted operating margin dilution.

So on an FX neutral basis, our margin expansion would be very strong at 130 basis points to 150 basis points. Moving below the line, we're still expecting net interest expense to be in the range of $375 million to $385 million although the ASI acquisition pushed us slightly higher into the range.

We're forecasting our adjusted income tax rate to be about 14% consistent with our previous guidance. In terms of capital deployment, we're still assuming that this year we'll return approximately $240 million of capital to shareholders through dividends as well as $500 million through share buybacks, which we completed in January.

Full year average diluted shares are estimated to be in the range of 402 million to 403 million, about the same as 2014 and down about 1 million shares from our previous guidance.

We're expecting net capital expenditures to be in the range of $435 million to $450 million, which is unchanged from our previous guidance and for full-year 2015 free cash flow, we're still expecting about $2.6 billion consistent with prior guidance.

As always in interpreting our revenue and adjusted EPS guidance ranges, you should focus on the midpoint as our most likely view of how we see things playing out. Results above or below the midpoint will depend on the relative strength of our markets as well as FX fluctuations during the year.

In summary, we had a number of significant achievements this quarter while delivering solid operational results, which positions us well to achieve our financial goals for the year. With that, I'll turn the call back over to Ken..

Thanks, Pete. Melissa, we're ready to open it up for Q&A..

Your first question is from the line of Jon Groberg from UBS. Your line is open..

Hey. Good morning and congratulations on another solid quarter. So, Marc, would you mind just, I guess, obviously, one of the big questions is going to be on the low-single-digit 2% organic revenue growth.

Can you maybe talk a little bit more about your conviction that that growth rate improves a little throughout the year? You mentioned you thought academic and government would get a little bit better.

And can you also maybe talk about some of your more specific plans to offset FX? I know you mentioned some on the cost side, but is there anything you're doing in terms of pricing? And how are you finding the pricing environment? Thanks..

Jon, thanks for the questions. So, yeah, let's start kind of with the holistic view, right, for organic growth. The key takeaways we feel very comfortable with the 4% organic growth guidance for the full year that we set off back in the beginning of February and we feel good about that today.

When you think about the quarter, if you recall back to early February, we said that this would be in the range of 2% to 4% organic growth and primarily so lower in the first quarter and builds as the year goes on, primarily because of the calendar day difference, right, so we anticipated that.

When we look at the performance of the quarter, really the only big change was Japan didn't approve its budget during the quarter that got approved, I think, on April 9. So that's back in place. Europe was a little weaker, but China was a little bit stronger. So there were puts and takes.

But I felt like the quarter played out within the range of what we expected. Looking forward, so why do we have real good confidence in the 4% organic growth? Straightforward, bookings were very good in the quarter, so that was favorable to revenue. We saw a lot of activity and a lot of interest very late in the quarter as well.

So the funnels look good. When I look at the products that we've launched and the product pipeline that we have coming up for the balance of the year, it looks outstanding. So we have a lot of growth driven from that. The early funnels on revenue synergies built nicely in the quarter and that puts us in a position to drive revenue synergies.

So when I look at the full year, we're in a good spot to deliver the 4% organic growth. In terms of foreign exchange, one of the key messages on the last call, Jon, was what would happen if foreign exchange rates change back as of February 1. And we said that if rates got better, we would let that flow to the bottom line.

If rates got worse, we would try to take actions to offset as much as we possibly could. Rates clearly got worse in the quarter, as Pete highlighted in his remarks. Just focusing on the EPS side of the equation, there was a $0.09 incremental headwind.

And our teams really were very focused on putting additional actions that give us confidence that we can offset those headwinds and deliver an even better outlook on EPS for the year.

Part of that is some very targeted price increases in those markets where foreign exchange has been a factor and where there's not a lot of domestic competition, domestic meaning local competition in those markets. So Japan would be an example that we have some very targeted price increases.

And while it's early to know exactly how it's all working out, pricing was relatively good in the first quarter..

Great. Thanks a million..

You're welcome..

Your next question is from the line of Ross Muken from Evercore ISI. Your line is open..

Good morning..

Hey, guys..

Good morning..

So I'd like to stick on Jon's theme on the core. So you mentioned that booking's pacing towards the end of the quarter kind of gave you some confidence that the ability to hit the 4% target was still on track.

And so as you look at that, I don't know what's the right way to cut it, Marc, by geography or by end market? Where did you see the biggest inflection over the course of the quarter? Because as we look at some of the PMIs and we look at some of the other industry commentary, it's a little bit different than sort of what you saw in the business and so we're just trying to mix-and-match.

And by that I mean Europe seems a little bit better and maybe China, the service seems a little bit worse. And so we're trying to make sense of what you saw bookings versus what the market overall macro is seeing..

So, Ross, Europe improved clearly as the quarter went on. Very, very slow start at the beginning of the year and improved. So that was a positive. China, as I mentioned, I was in China in March.

Generally, the team from the beginning of the quarter right to where it finished felt that they were going to deliver high-single-digit growth and they did, right. So we didn't see much of, I'd say, change in activity level, meaning, it was a better quarter, but the team saw it and it was consistent throughout.

And so China was a little bit better, it's a little early to call a trend there, but we didn't see China deteriorate at the end of the quarter or anything like that based on the data you're referring to. So those are the two factors. Europe got better and China was good..

Got it. And maybe big picture. You talked about sort of M&A. So I was listening to my company's conference call before I jumped on this one and Roger Altman talked about sort of the trend in the market right now as maybe deal volumes are lower, but dollar volumes are higher. So we're seeing a lot more larger transactions.

As you think about this space, it's actually been the opposite. I mean, other than Sigma, we really haven't seen much activity. I mean, in general, are you kind of surprised about what you're seeing in the pipeline? You're able to get there on the ASI, which looks like a really good deal.

But as you think about where your leverage is going, you obviously have some firepower there.

How are you thinking about the trade-off of what may be available versus where valuations are versus sort of what other opportunities you have?.

So great question. In terms of the capital deployment side of the equation, we have an active pipeline of transactions. We always do and we do currently. So we're looking at things. And as you know, we like to look at everything. But at the same point, we are very selective in what we actually do.

And as long as something solidly meets our criteria of strengthening the company strategically, clearly, being understood and adding value for our customers and creating shareholder value, then we'll pursue those things. So I like what the funnel looks like, but you got to drive things through the funnel. ASI was a nice acquisition.

We did two tiny little things in the channel to strengthen our commercial capabilities, and we're looking at a number of other things. So in terms of your bigger question about sort of the space, the bigger transactions, they happen, but they don't happen very frequently.

And when they do, we usually will take a look, but they don't occur with a lot of frequency..

Great. Thanks, Marc..

Your next question is from the line of Derik De Bruin from Bank of America. Your line is open..

Hi. Good morning..

Good morning..

Morning, Derik..

So just to clarify your China comment, you said you're seeing some improvement.

Is that still mostly lower-end lower-priced products, i.e., chromatography as opposed to pushing the higher-end mass spec? Just a little bit more color just sort of given some of the anti-corruption activities and stuff that were going on in the past?.

Yeah. So, Derik, if you look at China and you saw a clear increase in, what I'd say, your run rate activity, your bioscience reagents, your lab equipment, your lab consumables, those types of businesses, were very improved, meaning, that customers have money, they're spending it, activity is good. The bigger ticket items clearly continue to be muted.

And that affected clearly our Analytical Instruments business. Chrome was quite strong, but things like mass spec were clearly affected by a tighter budget and more scrutiny, if you will, by the government..

Great. That's very helpful. And just one follow-up. On Specialty Diagnostics, we were expecting a little bit higher number there. We're expecting a little bit more tailwind from flu and some other things.

Could you talk about what you sort of saw in the diagnostics space globally? And just sort of the push and pulls in that business?.

Yeah. I think when you look at the result in diagnostics, the one day difference probably is your biggest factor from....

Got it..

...what you would think from the other things. So I actually look at the underlying fundamentals or how the business performed, it's actually pretty solid; so not much there. We got a tiny benefit from seasonal, pollen season in Japan was slightly worse, so the net of seasonal was just slightly better in aggregate..

Great. Thanks very much. I'll get back in the queue..

Sure..

Your next question is from the line of Tycho Peterson from JPMorgan. Your line is open..

Hey, thanks. Just want to follow up on some of the questions around guidance.

And just so we're clear on what you're embedding now for Japan, now that we're through the March fiscal year, are you assuming a recovery here in the second quarter? And maybe just, you could quantify your overall expectations for the year in Japan?.

So what we're expecting in Japan is that you'll see growth return back to a more normalized level. And typically, we assume kind of low-single-digit growth in Japan is kind of the baseline assumption. We've actually had performance better than that in the past, but that's the baseline assumption.

So, just given the timing of where the budget was, we would expect growth to start to normalize back to the traditional growth rates..

And then, following up on a question on China a minute ago, I think you're still cautious about calling any sort of inflection, but obviously high-single-digit growth this quarter.

Can you maybe just give us a sense of what could get you closer to high-single-digit growth versus mid-single-digit growth guidance for the year in China? Are there specific catalysts we should be paying attention to, or is it just....

Yeah. I mean, the team is clearly working towards that objective, right. So all of our colleagues, 4,000 colleagues, that's what they're driving towards. But they don't control sort of the government environment, right. So there's – the reason we just didn't put a hard-line type commitment to it is that, it is variable what the environment is.

But clearly after a few very challenging quarters, we saw some nice bright spots. And if we can line up two or three quarters like that in a row, then that clearly would be a trend. So that's what the team is focused on. It's just executing well..

And then just lastly on BioProduction, you called it out as an area of strength. You obviously did the ASI bolt-on.

Maybe just talk a little bit about what you're expecting for that business this year, and your visibility around that business?.

Yeah. So BioProduction, market-leading position in media and sera through our Gibco range of products, in a very strong position, and single-use technologies through the Thermo Scientific and ASI set of products. That will be a very fast-growing business for us. It is a double-digit type growth business for Thermo Fisher.

INTERPHEX is going on right now. I know the early feedback is very positive on our range of capabilities, in terms of what we show to our customer base there..

Okay. Thank you..

You're welcome, Tycho..

Your next question is from the line of Steve Beuchaw from Morgan Stanley. Your line is open..

Hi. Good morning, everyone..

Good morning, Steve..

Good morning..

First off, Pete, I just want to say thanks for all your help over the last year. Thank you so much. And we'll miss you on the calls..

Thank you..

And then for Marc, I guess I'll ask a question on China. Sorry for asking the fourth or fifth of these.

But taking a longer-term view, Marc, you made some interesting comments about the longer-term outlook in China, specifically how you are thinking about the impact of the new five-year plan and your positioning for relative share there, given your positioning there as a local manufacturer.

Be really interesting just to hear you expound upon those comments, to think about maybe the 24-month view for the market there?.

So, Steve, a couple of things. One is, we've been in China for 30-plus years. And one of the things that helps the company get successful is anticipating the changes in the environment to continue to be out in front of them so that you can benefit from the evolution of the economy.

Our assumption is, and this is not a bold statement, is that GDP growth will be more moderate in China than what it had been in the previous five years.

And because of that, there's going to be a more emphasis on jobs in China and therefore, we've made a big commitment to manufacturing in China, having a very strong R&D presence, having great talent out of the best universities so that when we're meeting with the government and talking about initiatives for growth, they're seeing the brightest Chinese people that work for Thermo Fisher actually saying why we want to push forward these environmental applications, these food safety regulations, these sequencing applications, and that puts us in a great position to compete.

And as we look to the development of the next five-year plan, we feel like we'll be incredibly well positioned to capitalize on that. Our goal is always to have very strong growth in China. We've invested a lot there.

And the exact details of it we always give each year in our guidance, but it should be a double-digit type growth market for us for a long period of time..

Much appreciated.

And then, I'm not sure if this is for Marc or for Pete, but just in the interest of completeness, given all the questions out there in the industrial channel, I'd say I take your comments about the cadence of growth through the quarter, with it being strong in March, is to suggest there's no knock-on impact, or sign of any knock-on impact, from what we've seen in oil and gas CapEx.

Is that a fair assessment, or is there more nuance to it? Thanks..

Yeah. So what I would say is that clearly, the oil and gas end markets are soft. But they're very, very, very small for us, right. So there's some effect, but it doesn't hit any level of materiality to the company. So that's how I think about that.

And you can just kind of lump it into the commodities material markets are soft, and oil and gas is soft, but there is nothing much to spend – dwell in there. And generally, industrial and applied should be a reasonable market for us this year..

Got it. Thanks so much, guys..

Thanks..

Your next question is from the line of Dan Arias from Citigroup. Your line is open..

Hey. Good morning, guys. Thank you. Just wanted to see if I could understand the comments on academic and government. Marc, does the softness that you saw there pertain mostly to Japan, or is that something that showed up in the U.S. and Europe, too? Just a little bit clarification there if you could..

So Japan was the primary driver, right. So we had been growing in the low-single-digits last year. We declined in the low-single-digits. The full delta between sort of flat and the decline was driven by Japan, maybe the difference between flat and the rest was just a little bit of softness that we saw in Europe.

So that would be the academic and government story, really is a Japan story..

Okay. Great.

And then just maybe going back to capital deployment and following up on Ross' M&A question, I guess, in general, when you think about the candidates or the targets that are in your pipeline and sort of the mid to smaller size of things, I mean, are the majority of them on the private side? Are you actually finding a handful of public assets that are interesting, too?.

Yeah. I mean, this industry is mostly private companies, right, in terms of the number of companies, right. So there's a huge pipeline of those. We continue to look at those closely and every once in a while you'll see us be able to get one over the goal line..

Thanks very much..

You're welcome..

Your next question is from the line of Doug Schenkel from Cowen & Company. Your line is open..

Good morning, Doug.

Doug, you're on mute?.

I'm on mute. Sorry about that. Talking to myself again. All right. So thanks for taking the questions, guys. So my first question and this has been asked, I guess, in different forms. But just to be pretty direct about this, you guys came in at the low-end of your organic revenue growth guidance for the first quarter.

This came after Q4 growth that was much stronger than most of us expected.

In hindsight, was there some pull-forward of revenue into Q4 at the expense of Q1? And if so, in what geographies and end markets was this most notable and was this not apparent to you until the very back end of the quarter?.

So, Doug, interestingly enough, if you think about what happened a year ago and what happened this year, you have similar patterns. Very, very strong finish to the year and then a softer Q1. And Pete when he laid out the guidance said, Q1 will be a little bit softer than the balance of the year.

And what I would say the dynamic is, if you think about what happened in both of those years, nothing really bad happened in the world. And one of those calls, you heard me say this, right. Customers keep a certain level of money on the side to manage for a disaster, right. In both 2013 and 2014, the way the world ended, things were okay.

So people release funds very late in the year. That dynamic does the following, which is if you want to buy something exciting and expensive you buy it, but sometimes if you have a little extra money, you wind up buying something you absolutely know you're going to need, right.

And so I'm sure that some high-tech consumables, bioscience reagents, if people had a little bit of money they bought a little bit knowing that they'd use in the first quarter. Does that have a tiny bit of an effect? Sure. But is it something worth calling out? No, is the way I would think about it..

Okay. And this is very short-term focused, but recognizing it is a quarterly call, I think it's important to ask the question. I'm a bit surprised that you guys have called out Japan academic government as a source of weakness relative to what you expected in the quarter.

A lot of what you described seems like it should have been embedded in your expectations.

Just to be clear, I mean, was Japan really worse than what you had embedded into expectations? And if not, where else was academic government weak? I mean, you point a slight weakness in Europe beyond your expectations, but it doesn't sound like there's anything real notable there.

I just want to make sure there's nothing that would suggest there's particular areas where maybe you were a bit weaker than expected from a competitive standpoint..

Yeah. So, Doug, I guess, a couple ways I would think about that. One is, Japan not a huge market for us, right, in aggregate, top five, top six market, but not a huge market, accounted for the whole academic and government about a little more than a 3% decline for the company, right, in the quarter. So it gives you a sense of how soft it was.

There were two factors, as I mentioned in my prepared remarks, one which we clearly understood and embedded in our guidance, which was a very challenging comparison in Japan because of the consumption tax last year, which had customers pull things forward.

Not having the budget pass until after the quarter end, I don't think it was – from everything I've read from the team that we've worked with for many, many years, was not something that they anticipated nor, as far as I can tell, was really expected. So that's the difference in the performance, right.

So I don't know maybe other people saw that happening and we missed it, but from my understanding, I think we planned it appropriately and that's the way it played out..

Okay. Last one real quick. The LSS pro forma growth, I believe, was 7% in Q4 that moderated to, I think, 2% this quarter. I think you had previously provided Life Tech guidance for this year that was above your long-term goal.

Does that remain unchanged after Q1?.

Yes. So basically, the segment played out pretty much the same story as the company, right, 2% growth in the quarter versus 3% to 4% for the segment for the full year. We feel good about the 3% to 4% for the segment for the full year. I'll spend some time talking about that at the Analyst Meeting coming up, which I believe is May 20. So mark the date.

And Ken's happy, he's smiling that I'm doing a plug for that. But, yeah, nothing has changed in terms of our outlook for Life Sciences Solutions segment..

Okay. Thanks so much..

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

Good morning. Thanks. Just a couple cleanups for me.

Could you maybe, Pete, give us a sense of the impact to gross margin in terms of the FX headwind, just how much of a headwind that was?.

Yeah. So in terms of gross margin, it's about 45 basis points year-over-year, negative..

Right, right. Okay. Thanks. And then just another question on BioProduction, if we just kind of look at the competitive landscape, it seems like three out of the four players there or major players all seem like they had pretty good quarters like really strong actually.

So I'm wondering if there's a sense at the market there is inflecting and if so, why? Obviously, there's been a lot of momentum in biotech with new biologics and funding, but just curious about what's actually going on in the underlying level, because it seems like everyone there is growing strong double-digits..

Yeah. I think you have the combination of drug approvals, biosimilars and vaccines. That combination of those three are really driving substantial growth in that market..

And is it fair to say that will kind of progress throughout the course of the year at the current pace?.

I would say that it should be a strong end market for a number of years ahead..

Okay. Got it. Thank you..

Thanks, Isaac..

Thanks..

Your next question is from the line of Jack Meehan from Barclays. Your line is open..

Hi. Thanks and good morning. I want to ask just around healthcare utilization maybe for the clinical lab, part of the Lab Products and Services business.

Just curious what you're seeing there within the 3% organic growth that you put up seeing some signs from HCA put up a good quarter and some of that, I think, is optics, but just really around utilization and your thoughts there..

Yeah. So in terms of the diagnostics and healthcare, I think U.S. was generally okay in terms of utilization. You still have the pattern, which is incredibly exaggerated meaning that it's now the lowest. That set of activity is Q1 and it builds steadily as people meet their deductible limits during the course of the year.

But I think that pattern is roughly normalizing. So you have low level activity, but your growth rates are somewhat similar throughout the quarters. I mean, it's basically what's going on. So nothing dramatic to note in Q1 in terms of utilization..

Got it. And then just the last one.

And leaning sort of into the FX with the cost synergies coming up a little bit for life through year end, I was just curious if it changed your thoughts at all around what you viewed as being the three-year opportunity around what you could potentially earn on that side?.

In terms of the three-year outlook, we're still holding to the $300 million of cost synergies and $50 million of pull-through on revenue synergies..

Got it. Okay. Thank you..

You're welcome..

Next question is from the line of Peter Lawson from Mizuho Securities. Your line is open..

Pete, just with the FX impact, has that made you to think differently about hedging programs or degree of natural hedging or the debt structure?.

Well, we obviously we put in some euro debt last year, which helps a little bit. We're actually seeing a little bit of below the line impact from that. Part of the synergy actions that we're putting in place is trying to convert some of our suppliers to local currency to improve our natural hedging position. We don't have a ton of that.

But we are out of sync in a few geographies. So we're working on that. In terms of just regular overall hedging program, we don't intend to put anything in place with regard to that..

And is there any change in the debt paydown strategy? I'm wondering if you could just talk to the targets again?.

No. We haven't changed our strategy on debt paydown. We're shooting to get down to about between $12 billion and $12.5 billion by the end of the year. That gets us in just below the 3 range so back in our target leverage ratio range..

Great. Thank you so much..

Melissa, we're going to take one more question..

Your last question is from the line of Paul Knight from Janney Capital. Your line is open..

Hi, Marc.

Convenient INTERPHEX yesterday looking at your products, the question is where are you with the API (sic) [ASI] (59:37) acquisition and the integration of it?.

So in terms of – Paul, thanks for the question. In terms of the ASI, we closed in February. I had a great opportunity to meet the team there and the integration is going very smoothly.

Very complementary to our existing single-use technologies, it brings some new product range as well in terms of connectors, which is an important step in the workflow and gives our customers the choice now of the second film, which for certain biologics would be very useful for them.

So it gives us a more complete offering, which we very much value..

So....

Go ahead, Paul..

On the consolidation within the biological production market, is there much left to do in that market? Is it fragmented or not fragmented in your view?.

There's a lot of competitors still out there. So for sure there's quite a competitive landscape. And we have our niches of strength, others have theirs. And so it's an area with great market growth and we have great competitive position, but there's quite a few different companies there out in the landscape..

Great. You seemed excited there. Thank you..

Paul, thanks. So let me wrap it up. We feel good about our accomplishments in Q1. We are in a great position to deliver another strong year and, of course, we look for to updating you on our progress next quarter and seeing you in New York City later in May. Thanks, everyone..

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