Thermo Fisher Scientific Inc.
Q1 2016 Earnings Call Transcript

Published: 28 Apr 2016

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2016 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. 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:]

Good morning, and thank you for joining us today. On the call with me today is Marc Casper, our President and Chief Executive Officer, and Stephen Williamson, Senior Vice President and Chief Financial Officer. Please note, this call is being webcast live and will be archived on the Investors section of our website, ThermoFisher.com, under the heading Webcasts & Presentations until May 13, 2016. A copy of the press release of our first quarter 2016 earnings and future expectations is available on the Investors section of the website under the heading Financial Results. So, before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's Annual Report on form 10-K for the year ended December 31, 2015, under the caption Risk Factors, which is on file with the Securities and Exchange Commission, and also available on 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 2016 earnings and future expectations and also in the Investors section of our website under the heading Financial Information. So with that, I'll now turn the call over to Marc.

[Marc N. Casper:]

Thank you, Ken, and good morning, everyone. We're pleased you could join us today for our Q1 call. As you saw in our press release, we're off to a strong start to the year. We delivered excellent growth in both revenue and adjusted EPS. Our great top and bottom line performance was the result of a few key factors

[Stephen Williamson:]

Thanks, Marc, and good morning, everyone. I'll begin with an overview of our first quarter financial performance for the total company, then I'll provide some color on the four segments and conclude with our updated 2016 guidance. So starting with the overall financial performance for Q1. As you saw in our press release, we grew adjusted EPS by 10% to $1.80. GAAP EPS was $1.01, up 5% from Q1 last year. On the top line, our reported revenue grew 10% year over year. The Q1 reported revenue includes 10% organic growth, 1% growth from acquisitions, and a 2% headwind from foreign exchange. Please note, the components of the Q1 change do not sum due to rounding. As I mentioned on the last earnings call, the way our fiscal calendar falls in 2016, we have four extra billing days in Q1, and four less in Q4. We estimate that we received just under a 5% benefit to our organic growth in Q1 from the impact of days, the consumables revenue getting most of the impact of the extra days, while the capital equipment revenue was only marginally affected. We expect to see the opposite effect on revenue in Q4, when we have four less billing days, but there's no impact on the year as a whole. So normalizing Q1, minus the extra days, we estimate that our organic growth was approximately 5% during the quarter. Looking at growth by geography in Q1, I'll provide some color based on the 5% normalized organic growth to provide you with an understanding of the relative performance by region. Based on that, North America and Europe grew in the mid-single digits. Asia-Pacific grew in the high single digits with another strong contribution from China, and rest of the world, which represents less than 5% of our revenues, declined in the high single digits. Looking at our operational performance, Q1 adjusted operating income increased 9%, and adjusted operating margin was 21.7%, down 20 basis points from Q1 of last year. Our margin performance in Q1 was in line with our expectations. We received good expansion from our organic growth, driven by strong contributions from our PPI business system and the benefit of acquisition cost synergies, but this is more than offset by a 30 basis point negative impact from the extra calendar days and a 30 basis point headwind from foreign exchange. The impact of the extra days on margins is not that intuitive, so I thought it would be helpful to take a minute to summarize it for you. There were 66 billing days in Q1 2016 versus 62 in Q1 2015, a 6.5% increase. As I mentioned earlier, this had a positive impact on organic growth of approximately 5%. However, since the level of cost is directly correlated to the number of days, the impact on costs was the full 6.5%. So that means our costs went up more than our revenue because of the days impact. The net effect on this, on our operating margin, is the headwind of approximately 30 basis points in Q1 that I just mentioned. It's important to note there'll be a corresponding positive impact to margins in Q4 when we have four less billing days. Moving on to the details of the P&L, total company adjusted gross margin came in at 48.2% in Q1, down 110 basis points from the prior year. The decrease in gross margin in Q1 is primarily attributed to headwinds from unfavorable business mix, the impact of four extra days, and foreign exchange. Adjusted SG&A in the quarter was 22.4% of revenue, which is 80 basis points favorable to Q1 2015, and R&D expense came in at 4.1% of revenue, down 10 basis points versus Q1 last year. R&D as a percent of our manufacturing revenue in Q1 was 6.4%. Looking at results below the line, net interest expense was $95 million, down $6 million from Q1 last year, mainly as a result of lower average debt levels. Adjusted other income and expense was negative $1 million, which is $8 million lower than 2015, driven primarily by changes in non-operating foreign exchange. Our adjusted tax rate in the quarter was 14%, flat to last year, and average diluted shares were $398.7 million, down $2.7 million year over year, mainly as a result of the share buybacks completed in Q1, partially offset by option dilution. Turning to cash flow and the balance sheet, cash flow from continuing operations through Q1 was $290 million, and free cash flow was $180 million after deducting net capital expenditures of $110 million. Free cash flow was $195 million favorable to Q1 2015. We ended the quarter with $830 million in cash and investments, and we also returned significant capital to shareholders during the quarter. On our Q4 call, I mentioned we'd already completed the $500 million in share buybacks in January. We also bought an incremental $500 million later in the quarter for a total of $1 billion in buybacks during Q1. As I'm sure you're all aware, we deployed $1.3 billion to acquire Affymetrix right at the end of Q1. And we also returned $60 million to shareholders during the quarter through our dividend. So all in all, as Marc mentioned, we deployed $2.4 billion of capital in Q1. Our total debt at the end of Q1 was $15 billion, up $2.5 billion sequentially from Q4, mainly driven by the increase in short-term debt relating to the acquisition of Affymetrix and the share buyback. Our leverage ratio at the end of the quarter was 3.5 times total debt to adjusted EBITDA. And wrapping up my comments on total company performance, ROIC improved in the quarter. Our trailing 12 months adjusted ROIC at the end of Q1 was 9.6%, up 10 basis points sequentially from Q4. So with that, I'll provide you with some color on the performance of our four business segments. As I highlighted for the total company, foreign exchange continued to be a headwind for the top line for our segments and impacted their year-over-year revenue growth and adjusted operating margin to varying degrees. The four extra calendar days impacted segment revenue and margins to varying degrees as well. So starting with Life Science Solutions segment, reported revenue increased 11% in Q1, and organic revenue also grew 11%. In the quarter, we continued to see strong growth in our bioproduction, biosciences, and next-gen sequencing businesses. Q1 adjusted operating income in Life Science Solutions increase 10%, and adjusted operating margin was 29.1%, down 20 basis points year over year. Operating margin was positively affected by volume pull-through, strong productivity, and the impact of days. But this was more than offset by unfavorable business mix, strategic investments, and unfavorable foreign exchange. In the Analytical Instrument segment, reported revenue increased 4% in Q1, and organic revenue growth was 6%. In the quarter, we had strong growth in our chromatography and services businesses, partially offset by continued weakness in some of our core industrial markets. Q1 adjusted operating income in Analytical Instruments decreased 8%, and adjusted operating margin was 14.7%, down 200 basis points year over year. Strong productivity was more than offset by the impact of the extra days in the quarter, as well as the impact of unfavorable foreign exchange and strategic investments. The days impact was very material for this segment, approximately 200 basis points. Given the low consumables mix in the segment, the extra days had little impact on the top line, but they had the full impact on the cost base, causing significant margin compression. This will reverse in Q4, when we have four less days. Turning to Specialty Diagnostics segment. In Q1, total revenue grew 9%, and organic revenue growth was 10%. This was driven by solid growth across all our businesses in this segment. Adjusted operating income increased 7% in Q1, and adjusted operating margin was 26.9%, down 40 basis points from the prior year. Operating margin was positively impacted by good productivity and volume pull-through, but this was more than offset by strategic investments, unfavorable business mix and unfavorable foreign exchange. Finally, in the Lab Products and Services segment, Q1 reported revenue increased 14%, and organic revenue growth was also 14%. This segment continues to benefit from our strong performance in the pharma and biotech end market, with our biopharma services, research and safety market channel and Lab Products businesses all delivering very strong growth. Adjusted operating income in the segment increased 16%, and adjusted operating margin was 15%, up 30 basis points from the prior year. Margin expansion in the quarter was driven by volume pull-through and good productivity, with partial offsets from strategic investments and the headwind of the additional days in the quarter. We'll now review the details of our full-year 2016 guidance. As you saw in the press release, I'm pleased to report significant increases in both our top and bottom line guidance. The improved guidance is due to several factors

[Kenneth J. Apicerno:]

Thanks, Stephen. Jessa, we're ready to open it up for questions.

[Operator:]

Thank you. Your first question comes from the line of Ross Muken from Evercore ISI. Please go ahead.

[Ross Muken:]

Good morning, guys. Thanks for all the helpful color. I guess, Marc, as we think about the end markets, where do you feel like you guys are sort of over-punching in terms of gaining share, more so? Because it looks like when we line up your growth rates versus your peer group – and obviously that's hard – it does feel on a like-for-like basis, you moved from growing in line-ish to now above the comp group. And so just help us feel for where – what market, specifically, you feel like maybe you're sort of outperforming?

[Marc N. Casper:]

Ross, good morning, thanks for the question. You know, when I look at the lens from an end market, I'd say pharma and biotech continues to be a huge strength for the company. As you know, we have a very strong competitive position because of our scale and our unique depth of capabilities. We have great relations with all of our pharma and biotech customers, and that's positioned us to do well. That end market was stronger than our expectations in the quarter also, so we were able to deliver very positive growth there. So that's an end market look. If you take another lens on the same question, which is more of a product look or a business segment look, it's an area we pay a lot of attention to. Very strong start to the year. And all my comments on this is really normalizing for the days as well so that you're getting a kind of apples-to-apples look. You know, our Lab Products business and our channel business, very strong performance. Certainly our bioproduction business not only benefits from a really good end market, but the business is performing extraordinarily well. So that clearly has been above-market growth. Our chromatography and mass spec business, that combined business, had a very strong start to the year as well. So those would be some examples where you take a product lens looking at that and say, how are we doing? That's a nice cut on products, and by the end markets, pharma, biotech, and finally China. Geographically, we're growing very, very strong, continuing the strength there.

[Ross Muken:]

And maybe just following up on that. It feels like the emerging markets, you guys have done a tremendous job. China is continuing on its trajectory, and India, I think, as well has had reasonable demand. Can you just give us a picture? Seemed like that is certainly better than rest of world. What's your thought on how the various high-growth markets kind of pace throughout the rest of the year?

[Marc N. Casper:]

Yeah, when I think about the high-level comments there, China has been, for a number of years, our strongest growing market for the company of any significant market, and we continue to be very positive on the outlook for not only the short term, but for the mid- and long-term as well. India is performing well. Reasonable performance in Southeast Asia and Korea. Obviously, real pockets of weakness in Brazil and Russia, and those are very small markets for us. In aggregate, together, I think the two of them represent about 1% of our revenue, so it's not material. So it's always a portfolio. The good news is that the big ones are doing well and the ones that are very small have weakness. And you take a long-term view, those markets too will turn better, but certainly not a 2016 factor. Thank you, Ross.

[Kenneth J. Apicerno:]

Thanks, Ross.

[Operator:]

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

[Jack Meehan:]

Hi, thanks. Good morning. I just wanted to start and ask about the Lab Products and Services. Even adjusting for the days in the quarter it continues to do a lot better than we would think. Can you maybe just talk about the channel? You mentioned some of the new ecommerce capabilities. Do you think you're taking a little bit more share? Are there any changes in pricing? What are you seeing there?

[Marc N. Casper:]

Jack, thanks for the question and good morning. In terms of Lab Products and Services business, you look back over the last number of quarters, we've delivered very strong growth. And that's been a blend of first, our biopharma services business, or our clinical trials and outsourcing business, where we don't really have much in the way of external competition. You have – the customer choice is primarily do you do it in house or do you outsource to us. And that business has performed very well for a long period of time, and that trend continued again in the first quarter. The channel business also has been doing well, really benefiting from strong demand in the biotech and pharmaceutical customer base. So that business has been a strong performer, and our self-manufacturing business within that segment, Lab Products, also did very well, where we're the largest provider of lab consumables and lap equipment in the world. That also is benefiting from strong biotech and pharmaceutical end markets.

[Jack Meehan:]

Got it. And then just one on academic to follow up. Just curious whether you're starting to see anything through the NIH just yet, and maybe just your visibility? I think the growth in the quarter, you mentioned, was a little bit below company average. For the full year, do you still think it's more in line? Thanks.

[Marc N. Casper:]

Jack, in terms of academic and government, what we're seeing there has been consistent with the last few quarters. Adjusted for – normalizing for days, it would be low single-digit growth. If you don't normalize for days, it would just be under the company average. We continue to be encouraged by the more favorable environment in the U.S., right? So U.S. improved in Q1, so you're starting to see the release of NIH funds, and that should continue in Q2 and Q3. So that's really been a positive, and it should be a reasonable end market from our perspective.

[Operator:]

Your next question comes from the line of Derik De Bruin from Bank of America. Please go ahead.

[Derik De Bruin:]

Hey, good morning.

[Marc N. Casper:]

Good morning.

[Derik De Bruin:]

Hey. Marc, we got a lot of questions on the tax rate, just obviously, given some of the things that were going on with the Pfizer-Allergan deal, and some of the things coming out of Washington. And I know the low tax rate of the company has always been one of the things that people have always asked questions about Thermo. So can you walk us through does the changes that are going on have any impact in the company, number one? And then, how sustainable is the 14% tax rate? And how should we think about that over the next few years? Thanks.

[Stephen Williamson:]

So, good morning, Derik; I'll take the question. So obviously we pay very close attention to the tax regulations and changes there, and there's regulations across the world as well as domestically, and we have a great tax team. Recently, the Treasury Department laid out kind of two new tax regulations. One set of regulations is very concentrated to reduce the impact, the benefit of inversions. And those just simply don't apply to the company. The second set of regulations were targeted at limiting U.S. companies' ability to tax-efficiently repatriate cash from overseas. And when I think about that impact on our company, our existing tax structures, which aren't impacted by these regulations, provide pretty substantial cash repatriation capacity in a very tax-efficient way. So, at this point, I don't see any material impact from the regulatory changes on the company for the foreseeable future. So bottom line is we're comfortable with the tax rate and the corporate tax planning strategies that we have in place across the company. When I think about the tax rate going forward, we'll probably talk more about this at the Analyst Day. Just to remind you, the messaging form last year is the tax rate – the earnings that accrete going forward over and above the earnings we have today generally come in at a higher marginal tax rate than the 14% that we have in place on average for the company. So, absent any other changes in terms of our structuring, the tax rate will creep up slightly. We've done a pretty good job of making sure that that doesn't happen over time. If you look back over the past three years, I think we've effectively navigated through that. Part of that comes from some structures that we can put in place with acquisitions that we do. But the rest of it really comes from just good management of our tax strategies and just thinking about the different regulatory changes. So more to come at the Analyst Day, but that's kind of a recap on how we've seen it for the last couple of years.

[Derik De Bruin:]

Great, that was very thorough. Thanks for the overview. I'll get back in the queue.

[Stephen Williamson:]

Thanks, Derik.

[Operator:]

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

[Isaac Ro:]

Good morning, guys. First question was on just a little bit more geographic color. I think you gave us a general sense of how things played out globally, but was curious if you could offer a growth rate in China and in Europe.

[Marc N. Casper:]

Sure, so in terms of the growth rates, you had strong double-digit growth in China, and when you adjust that for the days, it's going to be in the teens. When you look at Europe, it grew pretty much in line with the company average in terms of growth. So it was a good, good, solid quarter in Europe as well.

[Isaac Ro:]

Okay, that's helpful. And then, maybe Stephen, a follow-up on margins. Appreciate all your comments regarding the puts and takes in the first quarter, and some of the corresponding benefits in the fourth quarter. But if we kind of look away from that, I was wondering if you could comment a little bit on just PPI. I know that's an ongoing focus for the company every year, and I was wondering if you could talk to a little bit about what the key initiatives are this year. And just looking for some color on the underlying efforts you guys are making to improve margins. Thank you.

[Stephen Williamson:]

Sure, so yeah, think about the PPI drivers of productivity. It's a group of levers that we use and have continually used since I've been at the company. And it's kind of a combination of – larger type of restructurings where you're consolidating the footprints of the organization in terms of the manufacturing operations and the back office. It's also the micro aspect of PPI. So we're – day in, day out, we're just being better at leaning out the operations and the back office functions and kind of the way that we work. So the combination of all of that is a continual set of efforts. So there's nothing – no major shift in terms of low-cost region plays that we're doing, the footprint optimization, and the use of sourcing and pricing levers. Those are kind of continuing. But the one new thing this year, as I said on the last earnings call, is that we're looking to reinvest the benefit of the medical device tax into some longer-term projects. And one – a set of projects around the footprint and more complex footprint changes in terms of manufacturing, and then being more efficient in our financial back office. Those projects are underway and are progressing well. So I think it's just a continuum in terms of the impact of the PPI business system, and then we're kind of stepping it up a little bit in terms of using the opportunity to reinvest the medical device tax.

[Isaac Ro:]

Got it. Thank you.

[Stephen Williamson:]

Thanks.

[Operator:]

Your next question comes from the line of Tycho Peterson from JPMorgan. Please go ahead.

[Tycho W. Peterson:]

Hey, thanks. Maybe just first question on biopharma. I know in your initial guidance, Marc, for the year, I think you'd kind of factored in a 600 basis point, 700 basis point headwind just from the tough comp. Maybe just – can you think about what you think the growth trajectory looks like for that segment for the rest of the year? And are there kind of larger strategic deals out there that you're looking at as well in the biopharma business, particularly around bioprocess and bioproduction?

[Marc N. Casper:]

Sure. So, Tycho, thank you for the question. In terms of the end market, we had our easiest comparison in the first quarter. So we had a very strong start, better than we expected. As you look at the outlook for the rest of the year, we expect that the growth will continue to still be very strong, but a little bit less robust rate than what we saw in the first quarter, in terms of the biopharma end market. But it'll be our fastest-growing market for the year; that's our expectation. In terms of strategic M&A, we have a really good M&A pipeline. Bolt-ons primarily, but we consider many different transactions, and if the right ones line up, you'll see us be active. So that's kind of the normal course for us. We're always thinking about and taking actions to strengthen the company's competitive position.

[Tycho W. Peterson:]

And then in Stephen's comments by division, he mentioned strategic investments for each of the different segments. Can you maybe just talk from a higher level where you're placing more incremental investment this year?

[Stephen Williamson:]

So it's the usual areas around improving our commercial capabilities in some specific areas, particularly around service infrastructure, as well as some specific R&D new products introduction and product launch-type of investments. So it's – the growth areas for the top line are what we're focused on.

[Tycho W. Peterson:]

Okay. Thank you.

[Marc N. Casper:]

Thank you, Tycho.

[Stephen Williamson:]

Thanks.

[Operator:]

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

[Jonathan Groberg:]

Great. Thanks, good morning, and congratulations on a solid start to the year. So, Marc, I guess – you've answered a lot of end market questions, so I'm going to steer away from some of those. I think we get the sense as to what's changed the EPS and the impact from some of what you're seeing operationally. So I want to focus on maybe two quick things. One, on Affymetrix, can you maybe talk a little bit about how you're – a little bit more about how you're thinking of integrating that asset, and what could drive upside to the accretion that you've talked about? I know you distribute some products from Affymetrix. To me, it's always looked a little bit more like a product line. Seemed like there could be a lot of G&A overlap. So can you maybe just talk a little bit about what might drive upside to your accretion targets?

[Marc N. Casper:]

Sure. So, Jon, we're really excited to have the business as part of Thermo Fisher and have welcomed our new colleagues. And they're not only running the business well but actively looking at how do you maximize the impact with our customer base and the competitive position? I'd break it into two different themes. One is a product theme, and one is a geographic theme. The geographic theme is quite easy, right? Where we'll be looking for upside is really the commercial reach around the world. Thermo Fisher has incredible reach, and Affymetrix was a much narrower company, so that will help over time, focusing on accelerating growth and capturing revenue synergies. And over time, we'll obviously drive to the upside to the most extent possible. From a product fit, the reason the acquisition is so compelling is really the way you framed it. Which is, it was a whole company, but really it is two great product lines that fit so incredibly tightly with our Life Science Solutions business, and we're able to combine our flow cytometry and antibody businesses and the biosciences business, which gives us a much stronger competitive position. And we're able to add the micro-array technologies to our large genetic sciences business, which really puts us in a very unique position, because we will be truly technology agnostic for solving customers' problems, because we will be the only company that has next-gen sequencing, Sanger sequencing, microarrays, and qPCR with leading positions across that array of technology. So that a customer will say, here's the challenge I have, and we will give them the optimal work flow. And these are very complementary fits. So with good execution we'll obviously focus on delivering what we committed to, and then always looking for the upside. So – from an accretion perspective, as we announced when we announced the deal in January, we see the $0.10 in the first full year, which translates to basically $0.06 this year, $0.04 in Q1 of 2017. But, as you know, as time unfolds we'll be looking for opportunities to drive to the upside. That's probably more of a 2017 benefit than a 2016 benefit.

[Jonathan Groberg:]

Okay. Great. That's really helpful. And then just a quick follow-up. I've gone back over your comments, Marc, maybe over the last couple years. Two categories you consistently call out have been, in terms of growth, have been chromatography and actually also NGS. You're a huge company, so I'm guessing if you're calling those out, they must be particularly strong growers. Would you be willing to kind of size those businesses for us today, kind of relatively, how big they are?

[Marc N. Casper:]

The specifics doesn't matter as much, but the next-gen sequencing business is approximately a couple percent of revenue. And the chromatography business, kind of order of magnitude, just shy of $1 billion, it's a little under that. So NGS is a small business growing rapidly. Chromatography is a pretty-good sized business growing rapidly. And that really, to me, I like the chromatography business, because what you saw was Thermo Fisher, years ago, having a strong niche position, Dionex having a strong niche position. The combination is a very strong business, and the two businesses together are growing faster than what the individual businesses were growing as standalones. So that's the kinds of capabilities that Thermo Fisher Scientific brings when we combine businesses because of the very strong advantages we have from scale and depth of capabilities.

[Jonathan Groberg:]

Great, thanks.

[Operator:]

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

[Doug Schenkel:]

Hi, good morning, guys. Thanks for taking the questions. I really wanted to just try to cover two topics. One is Specialty Diagnostics; the other is innovation. So, starting on Specialty Diagnostics. This has been an area where you guys have underperformed relative to the corporate average and I think everybody's expectations, including yours, for several quarters. This quarter you did really, really well. Can you help us think about how we should think about the underlying growth rate of Specialty Diagnostics moving ahead? And are there some investments being made in Specialty Diagnostics that are driving better performance?

[Marc N. Casper:]

So, in terms of Specialty Diagnostics, we are investing very significantly in areas that will create a brighter future for the growth rates in that business, right? And they don't have a big short-term impact. Very large programs in the next-gen sequencing area. Very large programs in mass spectrometry. Obviously they're driving some level of growth, but they really are positioning for the long term, right? So that's one thing, which is why, when we take a long-term perspective on the business, we're very, very bullish and optimistic about the long-term growth prospects there. In terms of the performance of the business in the quarter, a better quarter strength across really all of the businesses within the portfolio. The seasonal businesses really were no effect one way or the other, so there was no special causes. And we didn't have to talk about OEM contract and all that other stuff that was – again, had a lot of talk, but in the scheme of things wasn't that material. So it was a reasonable quarter, and really we're taking the actions to make sure that in the long term that business is a good, fast-growing business for us.

[Stephen Williamson:]

So, Doug, I don't want to take any shine off a good quarter, but just to remind you that the organic growth that I gave in my script around the segments were the reported organic growth and not the days adjusted. Days adjusted is still good in that segment, so it's about the company average. So I'd just try and remind everybody that those percentages I gave out are non-days adjusted for the segments.

[Doug Schenkel:]

Got it. All right, that's all very helpful. And I guess on the innovation topic, and some of this ties into what you described in terms of your longer-term investments or your investments in longer-term opportunities within Specialty Diagnostics, Marc. In reading your proxy, I won't read the exact language, but you noted that the percentage of 2015 revenue attributable from products commercialized in the last two years was down relative to what you saw in 2014. And relatedly you had appointed a new CSO. Can you provide a bit more detail on what changes you're making to improve this metric over the next few years? And does the strength you're seeing early in the year afford you an opportunity to maybe invest more pursuant to improving this metric? Thank you.

[Marc N. Casper:]

Doug, that's a great question. So one of the things in the metric, which is kind of fun, which is we use a very short window on momentum. So the metric was down slightly year over year, and that's primarily because the Orbitrap, one of the Orbitrap derivatives that had unbelievable success, which still has that same great momentum, came off the two-year anniversary, so they don't consider it a new product, right? So you have the ebbs and flows on the metric. When I look at the dollars of products that we're deriving from – dollars of revenue – that number's been pretty solid for the company. The actions we're taking to create an even brighter future from innovation, we have a great Chief Scientific Officer and a very strong team, and you'll get that – a little bit of a highlight of some of the things we're working on at the analyst meeting in less than a month's time. So reserve the date. I'm sure Ken has sent that out. It's the best day in New York of the year, as I know – at least from my perspective. And so you'll get a sense of it, but we're very confident about the investments we're making. And in fact, two weeks ago, I was out with 300 of our leading scientists at the company, at a symposium we were doing, where they were actually working on new business ideas and new technology ideas, leveraging the strengths of the company. And I came away just so unbelievably energized by some of the things our teams are working on. We have incredible talent within R&D. So (53

[Operator:]

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

[Steve C. Beuchaw:]

Hi. Good morning, everyone.

[Marc N. Casper:]

Good morning.

[Steve C. Beuchaw:]

One question on the balance between consumables and instruments. It's a little difficult, given the relative impact of the selling days issued here in the quarter, to look at on an organic basis how consumables are tracking relative to instruments. Maybe not necessarily for the quarter, but on a trailing two- or three-quarter basis. Could you give us a sense for how consumables are tracking relative to instruments? And historically, as cycles have strengthened, you might have seen a few more points of strength early on in instruments. Is that happening here? And if we see more consumable strength going forward, what does that mean on a relative basis for the potential for margin expansion?

[Marc N. Casper:]

So I'll start. When I think about the instruments business, and you look at it, very little revenue effect from days. About 6% organic growth in the quarter, in terms of how the instruments business did. Which, when you peel that back, you have a large chemical analysis business serving some very weak sectors of the industrial market, and then a very large chromatography and mass-spectrometry business. So, when you think of that level of growth, it's very strong performance, and that's been like, that bifurcation of weak industrial, weak chemical analysis, very strong life sciences, mass spec, and chromatography, has been a continuation trend. So that business is good. From the consumables mix – and pretty steady on good performance, right? Our channel business has done well; Life Science Solutions has done well. When I think about profitability, it's not a huge driver. We make a little bit more money on consumables for the self-manufactured portion, but embedded in there is the channel business. So, as you know, we don't manage the mix that way, but generally I'm not concerned by sort of the rates of growth in the businesses. In fact, the consumable growth shows that we have pretty steady, stable performance in the end markets.

[Steve C. Beuchaw:]

Got it. And then just one clarification. Can you remind us in the outlook for the year, to what extent you've incorporated expectations for stronger trends on the NIH in the back half, given the normal 3Q disbursements that one would expect? Thanks.

[Marc N. Casper:]

Yeah, so we pretty much expected the funds to flow from NIH in the first three quarters. And as you alluded, probably the strongest in Q3. But it should be reasonable in each of those three quarters during the course of this year.

[Steve C. Beuchaw:]

Thanks so much.

[Operator:]

Your next question comes from the line of Brandon Couillard from Jefferies. Please go ahead.

[Brandon Couillard:]

Thanks. Good morning. Just one question for Stephen. In terms of the free cash flow, could you help us bridge the gap between the 25% conversion we saw in the first quarter and sort of if there was discrete dynamics weighing on that in the first period? And how we get really from there to what seems to imply about 85% conversion for the full year?

[Stephen Williamson:]

Yeah. So it's a dynamic we see pretty much every year. It's very front-end loaded in terms of interest and cash tax payments, as well as we pay bonus – bonus payouts come out in the first quarter. And then, generally, there's a depletion of working capital, an increase in working capital. And there's a decrease at the end of the year, an increase at the beginning of the year. So it's a pretty similar seasonal dynamic that we've seen play out for the past many, many years. So actually I feel good that we're ahead significantly from last year. We're almost $200 million higher, free cash flow than this point back in Q1 2015.

[Brandon Couillard:]

Thanks, that's it. Thanks.

[Stephen Williamson:]

Thanks.

[Kenneth J. Apicerno:]

Jessa, we have time for one more.

[Operator:]

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

[Daniel Arias:]

Yeah, good morning, thank you. Maybe just a question on pharma from the services side. Can you just talk to growth for Unity in the quarter? And then maybe as a follow-on, Marc, each of the big players there has been doing well for some time now. Just curious how you would characterize the competition these days? Are you bumping into those guys more than in the past? Or is everybody operating in their own sweet spot, so to speak? I think you get the competitive dynamic question pretty often there, but just curious about the runway there as we try to get our hands around the continuation in biopharma strength. Thanks.

[Marc N. Casper:]

Yeah. So in terms of the services portion of the company. About 14% of our revenue is services, and that's split between our biopharma services or our clinical trial services business and the Unity Lab Services, which is basically a combination of supporting our instruments and equipment and doing some outsourcing of that for our customers as well. Both of those businesses have demonstrated good growth, and growing at or above the company average in terms of performance. And the competitive set on the Unity Lab Services side really hasn't changed much. You have a couple other companies that are in that market. And each have their own strategy. We feel good about our outlook there.

[Marc N. Casper:]

So, let me wrap it up here. Thank you for the interest, and from my perspective, we had a great start to the year, with a great Q1 behind us. We're very well-positioned to deliver a strong 2016. We look forward to updating you on our progress next quarter and of course, seeing you in New York City in May at our Analyst Day. Thank you, everyone.

[Operator:]

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