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Thermo Fisher Scientific, Inc. (NYSE:TMO)

Q1 2017 Earnings Call

April 26, 2017 8:30 am ET

Executives

Kenneth J. Apicerno – Thermo Fisher Scientific, Inc.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Stephen Williamson – Thermo Fisher Scientific, Inc.

Analysts

Derik de Bruin – Bank of America Merrill Lynch

Tycho W. Peterson – JPMorgan Securities LLC

Doug Schenkel – Cowen & Co. LLC

Jack Meehan – Barclays Capital, Inc.

Steve C. Beuchaw – Morgan Stanley & Co. LLC

Isaac Ro – Goldman Sachs & Co.

Daniel Arias – Citigroup Global Markets, Inc.

William March – Janney Montgomery Scott LLC

Dan Leonard – Deutsche Bank Securities, Inc.

Catherine Ramsey Schulte – Robert W. Baird & Co., Inc.

Operator

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2017 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.

Kenneth J. Apicerno – Thermo Fisher Scientific, Inc.

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 that 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 May 12, 2017. A copy of the press release of our first quarter 2017 earnings and future expectations is available in the Investors section of our website under the heading Financial Results.

So before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company’s future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions 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 21, 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 first quarter 2017 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.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Ken, thank you, and good morning, everyone. Thanks for joining us today for our Q1 call. We accomplished a lot in the quarter, and we had a great start to the year. We delivered strong financial performance on both the top- and bottom-line. We had a very productive quarter for innovation across our businesses. We continued our strong growth momentum in Asia-Pacific, and we enhanced our customer value proposition with two strategic bolt-on acquisitions while continuing to return capital to our shareholders. Our team executed well to deliver a strong Q1, and we’re well positioned to deliver another excellent year.

I’ll cover each of these highlights in my remarks, starting with our financial results. We delivered excellent adjusted EPS growth in Q1, with a 16% increase to $2.08 per share. Our revenue in Q1 grew 11% year-over-year. Our adjusted operating income increased 16%, and we expanded our adjusted operating margin by 90 basis points to 22.6%. So we clearly had a great start to the year.

Turning now to our performance by end market, in pharma and biotech, we continued to see good growth and our performance in Q1 was in the high-single-digits. The combination of good market fundamentals and the strength of our unique value proposition continues to drive demand from these customers.

We had another strong quarter in our bioproduction business, and we also saw strong demand for our biosciences products.

Our performance in academic and government end markets in Q1 was similar to what we saw last year and we grew in the low-single-digits. In health care and diagnostics, conditions really haven’t changed since last year, and we grew in the low-single-digits in this end market as well.

Last, in industrial and applied, we grew at the company average. Applied markets continued to be strong, and we saw good growth in our research and safety market channel with industrial customers.

Now let me turn to our growth strategy and touch on some of the great progress we made in Q1 to position Thermo Fisher for an even stronger future. As you know, our growth strategy is based on three pillars: developing high-impact, innovative new products; leveraging our scale in Asia-Pacific and emerging markets; and delivering our unique customer value proposition.

I’ll start with innovation, and we got off to a strong start here as well with new products launched across our technology portfolios. Let me highlight a few of them. In Analytical Instruments, the new Thermo Scientific products we showcased at Pittcon really emphasized the success of our R&D strategy in this part of the business, which is essentially twofold.

First, we continued to strengthen our leading mass spectrometry and chromotography platforms. And a good example of that was our new iCAP triple-quad mass spec system for clinical research in pharma QA/QC. This is an extension of our successful iCAP product line and combines high-powered analysis with simpler operation.

Second, we’re using these advanced systems to create specific workflows that are powerful yet easy for our customers to use in applications ranging from pharma compliance to clinical research. The new iCAP system allows customers to switch between single and triple-quad modes so they can keep their existing workflow as well as add new capabilities over time.

In our Laboratory Products business, we launched a novel cloud-based application that connects electronic pipettes among individual users in the lab. It’s designed to enable centralized programming, storage and sharing of protocols which increases efficiency in what has traditionally been a tedious and inefficient process that’s prone to human error. This new product is a great example of how we leverage our deep applications knowledge to help our customers improve efficiency at all stages of their workflows.

We were also pleased to learn in the quarter that our TSX Series blood bank refrigerators were recognized by the EPA as the first ENERGY STAR certified lab-grade refrigerators currently available in the market. This demonstrates our commitment to offering customers new technologies that meets their goals for sustainability as well as productivity.

In Genetic Sciences, where our strategy is to extend the menu of assays that run on our instruments, we launched the CarrierScan Assay; the new microarray-based solution detects more than 6,000 genomic variations associated with 600 inherited diseases. CarrierScan is the first pan-ethnic research assay, which means it can serve as a single solution for an increasingly diverse population that helps labs greatly accelerate the screening process.

Turning to the second pillar of our growth strategy, Asia-Pacific and emerging markets. We had another strong quarter in this region. China led the way again, with growth in the high-teens, and we also reported strong growth in India and South Korea.

Our strategy of leveraging our unique scale in driving growth across the region, and we continue to build on our industry-leading presence there as well.

A quick note on China. I spent time with a number of our customers there a few weeks ago, and I continue to be energized by the long-term prospects for this important end market and the incredible opportunities we have to continue to gain share. The funding environment overall in China continues to be very positive, and we’re well-positioned to lead in several areas that are a high priority for the government such as precision medicine, pharmaceutical production, and environmental monitoring.

While I was there, I participated in the opening of a new customer demo laboratory for cryo-electron microscopy at Tsinghua University, one of the world’s premier academic institutions. The lab was built by the University to train China’s top scientists in the use of these highly sophisticated tools, including our Titan Krios system, the gold standard for structural biology.

At the new lab, we’re also sponsoring research and educating students through hands-on cryo-EM courses provided by our experts. Understanding the structure of proteins in our blood is the key to advancing precision medicine, and our cryo-EM and Orbitrap platforms are essential to this research.

As you recall, cryo-EM is a powerful technology that we added through our acquisition of FEI. One of our key strategic objectives in acquiring FEI is to use our leadership in life sciences to drive adoption of this technology with those customers. Our collaboration with Tsinghua University is a great example of how we’re leveraging our leading presence to achieve this goal.

I’ll make a quick comment on our progress with FEI now that it’s been part of Thermo Fisher for about six months. The integration is going very well. The technologies are fantastic, and we’re thrilled to have the FEI team as part of the company.

In terms of financial performance, we’re running ahead of the year one accretion target that we articulated at the time of the acquisition. This is driven by both the contribution of synergies and the strong growth of the FEI business. Longer-term, we’re on track to deliver our year three synergy targets, and we look forward to the new growth opportunities we have now that FEI is part of our company.

Turning to the last pillar of our growth strategy, our customer value proposition. In the first quarter, we completed two bolt-on acquisitions that strengthen our offering in areas with great long-term growth potential for us, bioproduction and digital science.

In bioproduction, we acquired Finesse Solutions, a leader in the development of scalable measurement and control capabilities. These proprietary universal systems can be integrated seamlessly with our single-use technologies to further optimize the bioproduction workflow. We continue to increase our bioproduction capabilities and capacity to build on our strong momentum in this high-growth market.

The other opportunity I want to highlight is the emerging trend towards the digital lab. To add to our capabilities here, we acquired a small but well-respected company called Core Informatics. Core provides a leading cloud-based information management platform that’s used in a range of applications from biopharma and genomics to applied markets and manufacturing. This is a scalable platform that complements our existing informatics offering. It’s another step in our strategy to develop new digital solutions that support the way our customers want to work, connecting instruments, data, and scientific expertise.

Let me give you a quick summary of our capital deployment activities so far this year. We had a busy Q1 including strategic M&A, stock buybacks, and dividends. And, in April, we continued to deploy our capital, buying back an additional $250 million of our shares. So at this point, we’ve deployed just over $1.1 billion of our capital year-to-date.

Let me now turn to our guidance for 2017. As you saw in our press release, we’re raising our guidance to reflect our strong Q1 performance, a slightly more favorable FX environment, and the recent acquisitions we completed. Stephen will cover the details, but at a high level, we’re raising our revenue guidance to a new range of $19.51 billion to $19.71 billion, which would now result in 7% to 8% growth over 2016.

In terms of our adjusted EPS, we’re raising our guidance to a new range of $9.12 to $9.28 for 2017, for 10% to 12% growth over 2016.

Before I turn the call over to Stephen, let me summarize our takeaways from Q1. First, we delivered strong financial performance on the top- and bottom-line. We also continued to strengthen our position with strategic investments in innovation, emerging markets, and our customer value proposition. We feel good about our strong start to the year, and we’re confident we’ll deliver another excellent year in 2017.

With that, I’m going to hand the call over to our CFO, Stephen Williamson. Stephen?

Stephen Williamson – Thermo Fisher Scientific, Inc.

Thanks, Marc, and good morning, everyone. As usual, I’ll take you through our first quarter results for the total company. I’ll then provide some color on our four business segments, and conclude with our updated 2017 guidance.

Before I get into the details, let me start with a high-level view of how the first quarter played out versus our expectations at the time of our last earnings call.

We delivered 4% organic growth in Q1 which was approximately one point higher than we had expected at the midpoint of our previous guidance. This was driven by strong operational execution during the quarter.

From an earnings standpoint, we finished $0.06 higher in Q1 than we’d assumed in the midpoint of our initial guidance. This was primarily driven by the pull-through on the additional point of organic growth and a stronger-than-expected contribution from the FEI acquisition. So we’re clearly off to a great start to the year.

Now let me give you more color on the quarter. Starting with our total company financial performance for Q1, as you saw in our press release, we grew adjusted EPS by 16% to $2.08. And GAAP EPS was $1.40, up 39% from Q1 last year. On the top-line, our reported revenue grew 11% year-over-year. The components of our Q1 reported revenue included 4% organic growth, 8% growth from acquisitions, and a 1% headwind from foreign exchange. Looking at growth by geography in Q1, North America grew in the low-single-digits while Europe grew in the mid-single-digits. Asia-Pacific grew in the low-double-digits with continued momentum in China, which grew in the high-teens, and Rest of the World was flat organically for the quarter.

Turning to our operational performance, Q1 adjusted operating income increased 16% and adjusted operating margin was 22.6%, up 90 basis points from Q1 of last year. Looking at the components of our adjusted operating margin performance in Q1, we achieved solid expansion from our organic growth driven by strong contributions from our PPI Business System and volume leverage and this is partially offset by strategic investments and the expected modest headwind from acquisitions. Foreign exchange did not have a material impact on operating margin during the quarter.

Moving onto 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 in gross margin in Q1 is primarily attributed to the positive impact of our PPI Business System and acquisitions; this is partially offset by strategic investments. Adjusted SG&A in the quarter was 22.2% of revenue, which is 20 basis points favorable to Q1 2016 and R&D expense came in at 4.5% of revenue, up 40 basis points versus Q1 last year. And R&D as a percent of our manufacturing revenue in Q1 was 6.8%, up from 6.4% in Q1 2016, primarily due to the impact of the FEI acquisition.

Looking at our results below the line, net interest expense was $117 million, up $22 million from Q1 2016, mainly as a result of incremental debt financing to support our capital deployment actions over the past year. Adjusted other income and expense was a net expense in the quarter of $5 million which is $4 million more of an expense than 2016, driven primarily by changes in non-operating foreign exchange. Our adjusted tax rate in the quarter was 14% flat to last year, just slightly higher than the expected full-year tax rate of 13.3% due to the timing of discrete tax line items within 2017. The average diluted shares were 394.1 million, down 4.6 million year-over-year, mainly result of the buybacks, partially offset by option dilution.

Turning to cash flow and the balance sheet, cash flow from continuing operations through Q1 was $360 million and free cash flow was $270 million after deducting net capital expenditures of $90 million. Free cash flow is $45 million favorable to Q1 2016. We ended the quarter with $715 million in cash and investments. As for capital deployment activities, we had a busy quarter. And as you heard from Marc, we closed two bolt-on acquisitions, Finesse Solutions and Core Informatics.

We also completed a total of $500 million of share buybacks in Q1 and returned $60 million to shareholders through dividends. As Marc also mentioned earlier in Q2, we also completed an incremental $250 million of share buybacks. That brings us to $750 million of share buybacks for the year, which is right in line with our previous guidance. Our total debt at the end of Q1 was $17.1 billion, up $500 million sequentially from Q4, mainly driven by the increase in short-term debt relating to our acquisition and share repurchase activities. Our leverage ratio at the end of the quarter was 3.6 times total debt to adjusted EBITDA.

And wrapping up my comments on our total company performance, ROIC improved once again in the quarter, our trailing 12 months adjusted ROIC at the end of Q1 was 10%, up 10 basis points sequentially from Q4 and up 40 basis points over Q1 2016. So we continue to see good underlying performance in this metric.

So now I’ll provide some color on the performance of our four business segments. Starting with Life Sciences Solutions segment, reported revenue increased 12% in Q1 and organic revenue grew at 7%. In the quarter, we continued to see strong growth across all four of our businesses in this segment, bioproduction, next-generation sequencing, genetic sciences, and biosciences. Q1 adjusted operating income in Life Sciences Solutions increased 23% and adjusted operating margin was 31.8%, up 290 basis points year-over-year. In the quarter, we saw strong productivity, volume pull-through and favorable business mix, partially offset by strategic investments and the dilutive impact of acquisitions.

In the Analytical Instruments segment, which includes the FEI acquisition, reported revenue increased 39% in Q1 and organic growth was 5%. In the quarter, we had strong growth in our chromatography and mass spec businesses. Q1 adjusted operating income in Analytical Instruments grew 72% and adjusted operating margin was 18.2%, up 350 basis points year-over-year. In the quarter, we saw good volume leverage, strong productivity and a positive impact from the FEI acquisition. This was partially offset by strategic investments and foreign exchange.

Turning to Specialty Diagnostics segment, in Q1, total revenue grew 1% and organic revenue growth was 2%. We saw good growth in our clinical diagnostics business. Adjusted operating increased 2% in Q1 and adjusted operating margin was 27%, up 10 basis points from Q1 at the prior year. Adjusted operating margin was positively affected by good productivity, volume pull-through, and favorable FX, offset partially by strategic investments.

Finally, in the Lab Products and Services segment, Q1 reported revenue increased 3% and organic revenue growth was 4%. In the quarter, we had strong growth in both our Channel and Laboratory Products businesses. Adjusted operating income in this segment decreased 9% and adjusted operating margin was 12.7%, down 170 basis points from the prior year. Adjusted operating margin benefited from both volume leverage and productivity; however, this was more than offset by the expected impact of unfavorable business mix by the Biopharma Services business and, to a lesser extent, strategic investments.

So now I’ll review the details of our updated full-year 2017 guidance. As you saw in our press release, we’re raising both our revenue and adjusted earnings per share guidance. We’re increasing revenue guidance by $110 million at the midpoint and increasing our adjusted earnings per share guidance by $0.05 at the midpoint.

Let me walk you through the details, starting with revenue. We continue to expect to deliver 4% organic revenue growth for the full-year 2017. Of the $110 million increase in revenue guidance at the midpoint, $50 million reflects a slightly less adverse foreign-exchange environment, and $60 million reflects the expected increase in contribution from acquisitions, principally the addition of Finesse Solutions and Core Informatics, as well as an increase in the revenue outlook for FEI.

And in terms of adjusted earnings per share, the $0.05 increase at the midpoint of our guidance reflects $0.02 dilution from the Core Informatics acquisition, a $0.04 benefit from improved operational performance, and a $0.03 benefit from less-adverse FX environment.

And finally, with one quarter of strong performance behind us, we’re narrowing our revenue guidance range to $200 million and narrowing our adjusted earnings per share range to $0.16.

So to sum all this up, the revised 2017 revenue guidance is now a range of $19.51 billion to $19.71 billion. That would represent 7% to 8% growth versus 2016. We expect acquisitions to contribute just over 4.5% to our reported revenue growth in 2017, and FX is expected to be a headwind of just under 1.5%.

In terms of earnings per share, our increased 2017 guidance is now a range of $9.12 to $9.28 with a midpoint of $9.20. This represents growth of 10% to 12% versus 2016. Excluding the negative impact of FX, this would represent adjusted earnings per share growth of 12% to 14%.

A few other details behind revised 2017 guidance. We’re assuming that foreign exchange is now a $250 million revenue headwind for 2017, or just under 1.5%. The FX headwind on adjusted earnings per share is now assumed to be $0.17 or just over 2%. We expect acquisitions will contribute just over 4.5% to our reported revenue growth in 2017 and $0.31 of adjusted earnings per share increase year-over-year. We continue to expect 40 to 60 basis points of adjusted operating margin expansion year-over-year, consistent with our prior guidance.

We’re expecting net interest expense to be about $450 million, which is at the high-end of our previous range, primarily as a result of the incremental debt financing for acquisitions we completed in Q1.

We’re forecasting our adjusted income tax rate to be 13.3% for the year, consistent with the previous guidance. And as a reminder, this does not include the benefit of any potential tax reform that may occur in the U.S.

In terms of capital deployment, our guidance continues to assume $750 million of share buybacks in 2017, and these have all been fully executed. We continue to assume to return approximately $240 million of capital to shareholders through dividends, and our guidance does not include any future acquisitions or divestitures.

We’re assuming net capital expenditures to be approximately $500 million; no change from the previous guidance. We’re still expecting about $3.15 billion of free cash flow for the full year 2017, consistent with previous guidance. And full year average diluted shares are estimated to be in the range of 393 million to 394 million, also consistent with previous guidance.

And finally, in terms of phasing, we’re expecting organic growth to be relatively even over the remainder of the year. And for adjusted EPS, we expect that it will be phased across the remaining nine months of the year in a similar way to the same period in 2016. As always in interpreting our revenue and adjusted earnings per share guidance ranges, you should focus on the midpoint of the most likely view of how we see results playing out.

So in summary, we executed well in Q1, and we’re well-positioned to achieve our goals for the year.

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

Kenneth J. Apicerno – Thermo Fisher Scientific, Inc.

Thanks, Stephen. Operator, we’re ready to take questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Derik de Bruin with Bank of America Merrill Lynch. Your line is now open.

Derik de Bruin – Bank of America Merrill Lynch

Hi. Good morning.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Good morning, Derik. How are you?

Derik de Bruin – Bank of America Merrill Lynch

Good. So lot of questions, but I’ll limit it to one just in the spirit of things. So some of your competitors were talking about some weakness in the U.S. pharma businesses, it doesn’t look – it looks (26:48) like that materialized for you. Could you just talk a little bit about that environment? And I guess the commentary on the LPS margin being offset by the mix of biopharma services, is that – could you elaborate a little bit more on that in terms of what you’re seeing there? And then I’ve got a follow-up.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Sure. Derik, thanks for the question. At a high-level, when I think about the quarter, obviously a very good start to the year and the team executed well, serving all of the markets. We came out of the quarter very confident with the 4% organic growth guidance that we outlined back in January.

In terms of the color around pharma and biotech, it was a good quarter. It was, once again, our strongest end market. As I mentioned, it grew in the high-single-digits. In addition to the strength in bioproduction and biosciences, we also had good strength from chromatography and mass spectrometry. So, really, a good quarter.

As Stephen mentioned in the LPS segment, you saw margin dilution. That was really driven by something we expected in our biopharma services business which was at the end, in Q4, one of our customers canceled a large Phase III study, a very public one. It had nothing to do with us. The study itself was canceled. And that was a good-sized contract and a profitable piece of business. So it shows up really more in the margin profile within LPS, and we’ll sunset that after the third quarter of this year.

Derik de Bruin – Bank of America Merrill Lynch

So that was the clinical trial logistics business, right? That…

Marc N. Casper – Thermo Fisher Scientific, Inc.

Exactly. Correct.

Derik de Bruin – Bank of America Merrill Lynch

Okay. All right. And then…

Marc N. Casper – Thermo Fisher Scientific, Inc.

A single study that was canceled, basically.

Derik de Bruin – Bank of America Merrill Lynch

Great. Thanks for the color on that. And I guess – I guess as you – have you noticed any sort of slowdown or hesitation in the academic labs? It doesn’t look like it based on your 7% LSS number, but I would love some commentary on that. And then I’ll shut up.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Well, you don’t have to shut up, but from the quarter, academic and government was low-single-digits, very similar to what we’ve been seeing in recent quarters; Asia-Pacific being strongest. In terms of the U.S. academic and government, we grew slightly and we would have expected by this point to be operating with a budget as opposed to under a continuing resolution. So we didn’t see really significant change. If you get into the details of the U.S. academic and government, consumables was stronger than instrumentation. But again, in aggregate, a low-level of growth in the U.S.

Derik de Bruin – Bank of America Merrill Lynch

Great. Thank you very much.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Thanks, Derik.

Operator

And your next question comes from the line of Tycho Peterson with JPMorgan. Your line is now open.

Tycho W. Peterson – JPMorgan Securities LLC

Hey. Thanks. Nice quarter, guys.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Thank you, Tycho.

Tycho W. Peterson – JPMorgan Securities LLC

Maybe starting with FEI, obviously the commentary there pretty constructive. Can you talk a little bit on demand trends for cryo-EM adoption and interest you’re seeing from pharma? It sounds like you’re starting to bundle a little bit with Orbitrap for your commentary. And then separately on the semi-side of that business, can you talk a little bit about how much you’re seeing a pickup there? I guess, what I’m getting at is, in prior cycles that business can be kind of high-single-digit or double-digit at the right point of the cycle. So just wondering what the inflection point looks like for that business.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Tycho, thanks for the question. Good chance to just talk about FEI broadly. First, from an integration perspective, going very well, really a fabulous team and very good complement to our company. In terms of the growth performance, we had a very strong quarter with an FEI and we’re expecting to have very strong growth. As you know, because we won’t anniversary it until the very end of the third quarter, it’s not going to be meaningful contributor to our organic growth but on a pro forma basis, the business is growing very well. When you look at the pieces of the business, the life sciences portion of the business, which is driven by cryo-EM, is going incredibly strongly and there’s excellent interest both in the academic community as well as you’re seeing the beginning of interest in the pharmaceutical community as well.

We’ve had some orders put in place, we also had, importantly, those customers kind of sharing some of the academic instruments, doing some studies which shows their interest and, ultimately, we think that they’ll become purchasers as well. So that’s very strong growth. Material science, which incorporates all of the non-life-sciences, semiconductor, academic, material science, oil and gas, every single thing that’s not life sciences within the FEI business had very strong bookings growth in the quarter. Revenue growth was more muted in aggregate, but that will pick up as the year goes on, and that’s driven by semiconductor being very strong on the bookings side. So a very encouraging first six months of the integration and we feel very good about the FEI business and how we’ll add value to it and how it will add value to Thermo Fisher Scientific.

Tycho W. Peterson – JPMorgan Securities LLC

And then maybe for a follow-up, just on industrial commentary in general, you talked about research and safety doing pretty well, I think last quarter you’ve made some comments about metals and mining picking up. Can you maybe just talk a little bit about incrementally relative to last quarter where you’ve seen some improvement? And we have heard some peers about more of a pickup in Asia industrial as well. So just wondering if you could comment on that, too.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Yeah, of course. Thanks, Tycho. So as I mentioned in the beginning, industrial and applied grew at about the company average for the quarter. Applied markets were good. Industrial clearly is progressing as we had talked about last quarter. So when you look at the pieces, the shorter cycle portions of the business and the channel reflects that that as would some of the lower purchase price, lower aggregate priced instrumentation, had a good quarter in terms of growth and what was also encouraging is that bookings were continuing to grow in the longer cycle products, the things that we mentioned last quarter. So that’s two quarters in a row of bookings growth there, and that bodes well for the industrial end markets to play out in line with the expectations that we had articulated back in January, which is growth around the company average, and that would be a nice improvement over what we had seen over the last few years. So that’s encouraging.

Tycho W. Peterson – JPMorgan Securities LLC

Okay. Thank you.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Thanks, Tycho.

Operator

Your next question comes from the line of Doug Schenkel with Cowen. Your line is now open.

Doug Schenkel – Cowen & Co. LLC

Good morning. What assumptions are embedded into full year guidance for revenue growth by end market and geography? And how have they have changed, if at all, relative to what you embedded into guidance coming into the year?

Stephen Williamson – Thermo Fisher Scientific, Inc.

Yeah, I’ll take that one. So, Doug, nothing much has really changed when we look at it by end market from where we were at the beginning of the year. Some minor puts and takes across it. So biopharma will still be the strongest grower, expecting that to be kind of mid-to high-single-digits. Industrial and applied, as Marc said, would be about company average, and diagnostics and health care, and academic and government would be about kind of low-single-digits for 2017, same as 2016.

Doug Schenkel – Cowen & Co. LLC

Okay. Thanks, Stephen. And…

Marc N. Casper – Thermo Fisher Scientific, Inc.

From a geographic…

Doug Schenkel – Cowen & Co. LLC

Oh, go ahead, sorry.

Marc N. Casper – Thermo Fisher Scientific, Inc.

From a geographic standpoint, Doug, Asia-Pacific, really no significant changes from the guidance back in January. Asia-Pacific, by far the strongest, and both Europe and North America just below the company average would be our expectations.

Doug Schenkel – Cowen & Co. LLC

Okay. So just a couple of quick follow-ups. I mean, it does seem like pharma is holding up at least as well as expected, if not better, NIH and servanti (35:11) doesn’t seem to be hitting you and you already had low expectations for that end market and industrial seems to be tracking a smidge ahead of plan. You beat your Q1 expectations as you indicated in your prepared remarks. But why not bump up organic revenue guidance a bit based on all of these observations? Is it just a function of being early in the year and wanting to have a little bit more conference before making any changes?

Marc N. Casper – Thermo Fisher Scientific, Inc.

Yeah, you know Doug, it’s a good question. The way that we think about it is twofold. First, it is a bit early in the year, and, well, obviously we’re encouraged by the good execution in Q1, so it’s a bit early to make changes on that. The second thing is one of the assumptions that’s embedded in the guidance both in January, in particular was that we would be operating with a U.S. budget and, obviously, that budget that’s been talked about is going to have a nice increase for NIH funding. Obviously we’re sitting here at the end of April and we’re still under continuing resolution. So that’s something that we’re just paying attention to and, obviously, three years ago, the news was discouraging, this morning the news is encouraging, and we just look forward to actually going from continuing resolution of budget and that can be a positive as the year unfolds.

Doug Schenkel – Cowen & Co. LLC

Okay. And one last follow-up on this topic. Marc, you have better visibility than many if not most of your peers given the size of your business in China and how much time you spend there. Do you have any sense if there’s stimulus-like activities or anything else that might be contributing to outsized growth in the near-term? Really what I’m getting at is it doesn’t sound like you have any concerns about the sustainability of recent strong trends in China. I just want to make sure you haven’t picked up on anything that would change your conviction on the durability of trends.

Marc N. Casper – Thermo Fisher Scientific, Inc.

No, when I was in China at the beginning of April, where we’re seeing this excellent, excellent activity is very much aligned with the five-year plan. It’s not a stimulus-driven thing. It’s really around precision medicine. We had a great interaction with a number of thought leaders there, and they’re very aligned with what we’re doing and obviously in food safety, environmental and the expansion of healthcare. Those were really core parts of the five-year plan in China. So we’re not – we hadn’t heard much about, if any, about a short-term stimulus effect but rather really alignment with fundamental government priorities. So we think we’re very well positioned and, obviously, have a very strong team there.

Doug Schenkel – Cowen & Co. LLC

Okay. Thanks again.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Thanks, Doug.

Operator

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

Jack Meehan – Barclays Capital, Inc.

Hi. Thanks. Good morning, guys.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Good morning, Chuck.

Jack Meehan – Barclays Capital, Inc.

I wanted to start digging on mass spec and chromatography. You talked about the nice growth there. I was just wondering if any of the underlying drivers have changed. And, Marc, do you have any updated views on the clinical opportunity?

Marc N. Casper – Thermo Fisher Scientific, Inc.

Yeah, Jack, good questions. From the chroma, mass spec area, we continue to drive good growth. We saw strong performance in our high-end mass spectrometers, the Orbitrap family in particular was very strong, chromatography was quite strong across the board, so there wasn’t anything that particularly jumped out as something special. Obviously, the applied markets in Asia helped drive some of the growth, but we saw a really widespread adoption across the business. So that perspective we feel good about. In terms of our clinical mass spec, a program that something we’re targeting for a launch in 2018 and we’re looking forward to it. As we get to some of the upcoming conferences, ASMS, in terms of the research market, you’ll see some really exciting launches. And in AACC, you’ll get some more views on what we’re doing in the clinical space. So this late spring and summer will be super-exciting for Thermo Fisher Scientific as well.

Jack Meehan – Barclays Capital, Inc.

Great, looking forward to it. And then just wanted to follow-up on the margins in Analytical Instruments, maybe for Stephen, up 350 bps. I know some of this is mix, but how much leverage do you think you can drive here with better top-line performance through the year?

Stephen Williamson – Thermo Fisher Scientific, Inc.

Yeah. So roughly half of the margin expansion really came from the FEI acquisition. The rest came from the core business. So there is good volume pull-through and using our PPI Business System, we think we can drive significant leverage of additional revenue.

Jack Meehan – Barclays Capital, Inc.

Great. Thank you.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Thanks, Jack.

Operator

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

Steve C. Beuchaw – Morgan Stanley & Co. LLC

Hi. Good morning, guys.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Good morning, Steve.

Steve C. Beuchaw – Morgan Stanley & Co. LLC

Just two quick ones, one for Marc and one for Stephen. Marc, during the quarter, there’s been some, I suppose, up and down in terms of sentiment and expectations around bioprocess, clearly, a good quarter for you guys. It’s an interesting business relative to the business overall, in part because it’s a very long-cycle business. I would think you have a good degree of visibility in terms of capital projects and capacity plans for your customer base. It’d just be helpful, given all the questions out there, for you to give us a sense of what you’re hearing from the customer base in terms of how they’re thinking about capacity needs and what that means for the business.

And then one quick one for Stephen. It was a (41:00) really good quarter on the margin front, right? 90 basis points and guidance is still for 40 to 60 basis points. Can you just help us understand why, over the balance of the year, we might expect to see some moderation in the year-on-year trend? Or is this another case where we’re just taking kind of a wait-and-see approach given how early it is in the year? Thanks a bunch.

Stephen Williamson – Thermo Fisher Scientific, Inc.

Thanks, Steve. I’ll take the margin one first. So we delivered 90 basis points of expansion in Q1. For the full-year, we’re still – I reiterated 40 to 60 basis points with a midpoint of 50 basis points. So if you do the math, we would be delivering just under 40 basis points for the remainder of the year, on average. A couple of key drivers between that and the Q1 expansion: timing of investments, more loaded into Q2 and Q3, a little bit in Q4; and then the other piece is that we had a very profitable stub period in Q3 last year from the FEI acquisition. We had a lot of revenue and very little cost, so that’s causing a little bit of pressure on the Q3 margin. But overall, 50 basis points for the year.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Steve, in terms of bioprocess, really a very strong fundamental end market, and we have a very, very strong competitive position. So we’ve had good growth for a number of years in that business. Q1 was a good quarter for us as well, with high growth as well. As a reminder, we have leadership positions in the media used to grow the product, and then obviously in terms of the single-use technologies that the products are made in, we have market leadership positions. We’re excited about the Finesse acquisition because it complements our single-use technologies. We’ve been expanding our capacity in terms of our manufacturing plants over the last few years and we’ve had a number of openings, both in Grand Island and in Inchinnan in Scotland, where the customer feedback has been incredibly positive. So we feel good about the underlying aspects. There’s always some lumpiness in the business, so we don’t over-read that too much. I mean, yes, you have a lot of visibility, but sometimes shipments happened in one quarter, moved to the next quarter. But for us, we’ve had pretty smooth growth over the last few years.

Steve C. Beuchaw – Morgan Stanley & Co. LLC

Thanks a bunch. Have a good morning.

Stephen Williamson – Thermo Fisher Scientific, Inc.

Thanks.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Thanks, Steve.

Operator

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

Isaac Ro – Goldman Sachs & Co.

Hey. Good morning, guys. I just want to dig a little bit more into the organic growth assumptions by division for the rest of the year. Starting with Diagnostics, I mean, you had a pretty tough comp in the first quarter, so that’s understandable, but as we think about the rest of the year, is it fair to assume that the organic growth will pick up?

Stephen Williamson – Thermo Fisher Scientific, Inc.

So in terms of what was in our initial guidance and still in our revised current guidance, Life Sciences Solutions will be the fastest-growing segment that we have, Analytical Instruments will be about the company average. Lab Products and Services will be slightly higher than company average, and Diagnostics will be similar to what we saw last year, is the way we’re thinking about that.

Isaac Ro – Goldman Sachs & Co.

Okay. That’s helpful. And then just in terms of LPS, if I think about the overall end market, you guys went through the various customer segments, I’m curious about just market share trends. Where do you feel like you’re executing the best in terms of share gains in LPS? Where could you be doing better? Thank you.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Yeah, when I look at the three sub-components of Lab Products and Services, you have the channel business, you have our manufacturing business for lab products, which is basically when you walk through a lab, kind of everything you see, the plastics, the equipment, the refrigeration, all of that. And you have our clinical trials logistics, or what we call biopharma services.

I actually think all three teams executed very well in the quarter, right, and when I look at the channel business, we had very strong growth in the channel business. Really, both in North America and Europe, the business is doing very well. Lab Products had a very strong start to the year in terms of growth.

And when I look at the biopharma services business, the activity excluding sort of the one large trial that a customer discontinued, I feel good about the execution there. And then obviously it’s going to take a few quarters to sunset. So I don’t think there was areas that we under-executed, but we always try to be better, right? And our goal is to continue to drive additional growth, and our teams are focused on that.

Isaac Ro – Goldman Sachs & Co.

Got it. Thanks, guys.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Thanks, Isaac.

Operator

Your next question comes from the line of Dan Arias with Citi. Your line is now open.

Daniel Arias – Citigroup Global Markets, Inc.

Good morning, guys. Thank you. Marc, maybe just back on FEIC. Can you just talk a bit about where you are in the new product cycle there? When you guys did the deal done, it sounded pretty good on some of the things coming down the pike, so just curious about how much of what you’re seeing has to do with new introductions, and then what you think about portfolio additions or refreshes there?

Marc N. Casper – Thermo Fisher Scientific, Inc.

In terms of where the momentum is coming from currently, it’s really the existing range of products. We have some exciting products in the pipeline, so that will help sustain a very bright outlook for the business. But the momentum you see right now is not really being driven by new products, per se. So that’s something that we’ll unfold as the year progresses.

Daniel Arias – Citigroup Global Markets, Inc.

Got it. Okay. And then maybe just back on industrial, I’m looking at the developed markets. Can you compare U.S. to Europe? And to the extent that the recovery carries through the year, do you see one of those leading the way versus the other, or should it be pretty balanced? Thanks.

Marc N. Casper – Thermo Fisher Scientific, Inc.

I would say that from the industrial, our channel business performed well in both geographies, so we didn’t see a big difference versus our expectations there. I would expect pretty balanced improvements in both the U.S. and Europe, and encouraging signs in Asia.

Daniel Arias – Citigroup Global Markets, Inc.

Okay. Thanks a ton.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Thanks.

Operator

Your next question comes from the line of Paul Knight with Janney. Your line is now open.

William March – Janney Montgomery Scott LLC

Hey, guys. This is actually Bill March on for Paul. How are you doing?

Marc N. Casper – Thermo Fisher Scientific, Inc.

Good.

William March – Janney Montgomery Scott LLC

First question, if I could, on microarray. Last summer, you talked about seeing some pricing pressure from a competitor in that business. And with the new product launch, just an update on that end market and your channel strategy there.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Yeah, so in terms – Bill, thanks for the question – in terms of the microarray business, we’re expecting modest organic growth for 2017 for that business, as we said shortly after the acquisition. The first year of ownership, which we sunsetted in March, was softer for that business, primarily about pricing that the competitor had dropped during the sale process of that business. And we launched a number of products and commercial initiatives, and we expect to see some momentum build as we move through the course of 2017.

William March – Janney Montgomery Scott LLC

Got it. And then just one question on organic growth in the quarter. Could you give us a sense of what the organic growth was for recurring revenues versus instruments? Just trying to understand the growth dynamics, considering the tough 1Q 2016 comp with the extra week of selling days. Thanks, guys. Have a good one.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Thanks, Bill.

Stephen Williamson – Thermo Fisher Scientific, Inc.

So the growth was actually good across both instruments and consumables for us. Yeah, so good growth across both areas.

Operator

And your next question comes from the line of Dan Leonard with Deutsche Bank. Your line is now open.

Dan Leonard – Deutsche Bank Securities, Inc.

Thank you. My first question, Marc, has your outlook on the U.S. changed at all given the discussion of cuts in science funding and also environmental?

Marc N. Casper – Thermo Fisher Scientific, Inc.

Yeah. In terms of the outlook for the U.S., not really. Pretty consistent with the original guidance provided we get a budget at some point in time, right? The continuing resolution is probably a month later going on and we had put into our original guidance we would’ve thought sometime in early April we would move to a budget, something of that standpoint in our original plan. So if that plays out, then the U.S. should be similar to what we thought. In terms of the science funding, Congress continues to be very focused on strong growth and support for NIH in particular. You can see that in the 21st Century Cures, you can see that in the funding for the Cancer Moonshot. I’ve had the opportunity to be in D.C. and meet with a number of members of leadership and there’s strong support there from that perspective. So that’s – that we’re focused on making sure that that continues and feel like that’s – it should be okay.

Dan Leonard – Deutsche Bank Securities, Inc.

And I know your environmental business is headquartered in China, but nothing to flag on the environmental front?

Marc N. Casper – Thermo Fisher Scientific, Inc.

No, I thought about that in more detail as we’re in the discussion around policy, around the EPA. So obviously the business is primarily driven by activities outside the U.S. in terms of our air monitoring business in particular, primarily in China. In terms of the U.S., the Federal EPA is a tiny customer directly. So truly, hundreds of thousands of dollars, nothing significant. In terms of – bigger customers are really the states (51:13) EPAs that do the monitoring of the air quality and those regulators are typically more stringent than the federal level, so that’s encouraging. Longer-term, obviously, a less desire for regulation on EPA is going to be a longer-term headwind for the air quality business. And to frame the magnitude domestically, that business is maybe $50 million, roughly in size. So it’s a very small business. Short-term, you don’t really see any effect. And with these policies, no new regulations go into effect over the next four years, then obviously that has some longer-term headwinds on that business.

Dan Leonard – Deutsche Bank Securities, Inc.

Okay. Thank you for all the color.

Stephen Williamson – Thermo Fisher Scientific, Inc.

Thanks.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Thanks, Dan.

Kenneth J. Apicerno – Thermo Fisher Scientific, Inc.

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

Operator

Your final question comes from the line of Catherine Schulte with Robert W. Baird. Your line is now open.

Catherine Ramsey Schulte – Robert W. Baird & Co., Inc.

Hi, guys. Thanks for the question. Going back to China, you talked about being well-positioned to continue to gain share there. Are there particular areas within your portfolio or particular end markets where you’re seeing the most share gains in China or is it more broad-based?

Marc N. Casper – Thermo Fisher Scientific, Inc.

We’ve had broad-based success, Catherine, but clearly precision medicine, the food safety, kind of chromatography and mass spectrometry, genetic sciences, businesses have done very well. There’s lots of demand and interest in vaccines and pharmaceutical production. That’s been good for both our biosciences business and bioproduction. So it’s been pretty broad-based but precision medicine, food safety are probably the two areas that jump out the most to us as big opportunities for continued momentum.

Catherine Ramsey Schulte – Robert W. Baird & Co., Inc.

Great. Thank you.

Marc N. Casper – Thermo Fisher Scientific, Inc.

Thanks for the question.

Marc N. Casper – Thermo Fisher Scientific, Inc.

So let me wrap up the call. First, thank you for joining us. We’re very pleased to have delivered a strong start to the year. We feel we’re very well positioned to deliver another great year in 2017. And of course, thanks for your support of Thermo Fisher Scientific. Thanks, everyone.

Operator

And this concludes today’s conference call. You may now disconnect.

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