Thermo Fisher Scientific Inc.
Q4 2013 Earnings Call Transcript

Published: 30 Jan 2014

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2013 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. 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. On the call with me today is Marc Casper, our President and Chief Executive Officer; and Pete Wilver, Senior Vice President and Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our website, thermofisher.com, under the heading Webcasts & Presentations, until February 28, 2014. A copy of the press release of our 2013 fourth quarter and full-year earnings and future expectations is available on our website under the heading Financial Results. So before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's quarterly report on Form 10-Q for the quarter ended September 28, 2013, 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 fourth quarter 2013 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:]

Thanks, Ken, and good morning, everyone. Thank you for joining us today. First, I'm pleased to report that we had an excellent fourth quarter. Our teams really executed well to deliver outstanding results across the board. Our strong finish resulted in a very good year for Thermo Fisher, and puts us in a great position going into 2014. Now I know that you're all waiting for news on our close of Life Technologies, so let me give you a very quick update. We're working with the FTC to obtain the last regulatory clearance. We believe we are close and expect to complete the transaction very shortly. Given where we are in the process, we're including Life Technologies in our 2014 guidance, assuming an early February close date. I'll talk more about Life Technologies a little later on. But let me start by covering our financial performance in the fourth quarter. I'll then cover some of the highlights of the past year, talk about Life, and wrap up with our guidance for 2014. So starting with the quarter, I have to say our teams did a fantastic job of delivering excellent results on both the top and bottom line. Our revenue for the quarter was a record, growing 6% year-over-year. Our adjusted operating income increased 9% for the quarter and we expanded our adjusted operating margin by 40 basis points to 20%. Our strong operating performance led to a record adjusted EPS of $1.43 for a 5% increase over Q4 of 2012. Our teams really intensified their focus on our customers and took full advantage of some year-end growth opportunities that materialized with certain customers. We also continued to drive productivity hard as we had all year long to deliver a strong bottom line. Overall, it was an outstanding quarter by all measures. Let me give you some color on our quarterly performance in each of our 4 end markets. Our strong top line growth at the end of the year was a combination of 2 things

[Peter M. Wilver:]

Thanks, Marc. Good morning, everyone. Apparently, someone on the call has an open line other than us. [Operator Instructions] Given that this is a year-end call and we expect to close the Life Technologies acquisition shortly, I have a number of topics to cover in my remarks this morning. I'll start with an overview of our Q4 and full-year 2013 financial performance for the total company, and by segment; then provide you with a recap of the Life Technologies acquisition financing; briefly discuss our new segment reporting structure, which went into effect as of January 1; and conclude with our 2014 guidance. So starting with our financial performance, as you saw in our press release, and heard from Marc, we delivered a strong quarter resulting in a 5% increase in adjusted EPS to a record of $1.43. For the full year, adjusted EPS was also a record at $5.42, up 10% from $4.94 last year. GAAP EPS was $0.92 in Q4 and $3.48 for the full year compared to $1.04 and $3.21 in Q4 and full-year 2012, respectively. Looking at the top line, Q4 total revenue and organic growth revenue both increased 6% year-over-year in the quarter. The effect of both acquisitions and foreign exchange on Q4 reported revenue was immaterial. For the full year, total revenue increased 5% year-over-year and organic revenue was up 3%, exceeding the high end of our most recent guidance as a result of our very strong results in Q4. Full year reported revenue includes 2% growth from acquisitions and a nominal negative impact from FX. Although the net revenue impact from FX for the year was minimal, the mix of currencies specifically the weakening of the Japanese yen negatively impacted earnings in both the quarter and the year. For the quarter, FX resulted in 10 basis points of adjusted operating margin dilution and $0.01 or 1% of adjusted EPS dilution compared to 2012. And for the full year, the FX impact was 25 basis points of adjusted operating margin dilution and $0.09 or 2% of adjusted EPS dilution. In terms of backlog, bookings slightly exceeded revenue in the quarter. By geography. For the quarter, North America revenue grew in the low-single digits. Europe grew just above the company average and Asia Pacific grew in the low teens, with China growing in the mid-teens. Rest of world grew in the mid-teens, primarily driven by Latin America. And for the full year, both North America and Europe grew in the low-single digits, Asia Pacific grew in the high-single digits and rest of world grew in the low teens. Looking at our operational performance, Q4 adjusted operating income increased 9% and we delivered very strong adjusted operating margin of 20%, up 40 basis points from Q4 last year. For the full year, adjusted operating income increased 7% and adjusted operating margin was 19.5%, up 50 basis points from 2012, and at the high end of our previous guidance. Our adjusted operating margin expansion for the quarter and full year were driven by very strong contribution from our primary productivity levers

[Kenneth J. Apicerno:]

Thanks, Pete. Shannon, we're ready to open it up for questions.

[Operator:]

[Operator Instructions] Our first question is from Jon Groberg of Macquarie.

[Jonathan P. Groberg:]

I guess, first, just maybe briefly, Marc, any sense as to kind of why the delay with the U.S. FTC. And it doesn't sound like, from yours or Pete's comments that they're requiring any additional divestitures than what you already talked about. Is that correct?

[Marc N. Casper:]

Jon, yes, in terms of the U.S. FTC, as we said back in April, we expected the transaction to close early in the year, and we're still right on track with that. So we're just finalizing the documentation process but we're not expecting any additional divestitures or anything of that sort.

[Jonathan P. Groberg:]

Okay. Great. And then maybe a quick follow-up, I guess, as you think about the Life deal closing -- and I appreciate all the tremendous amount of detail that you went through in this call to help us understand all the moving pieces. I guess, Marc, as you think about the deal, though, when you think about bringing them on board and moving your businesses into theirs. A lot of us here, out there in the space in kind of that more molecular biology, genomics space, hear about people transitioning out, hear about new products that are being introduced from competitors. And I'm just curious, as you evaluate that business, evaluate the competitive position, evaluate the R&D spend that's necessary and in some of your own -- kind of, your own markets as well, that you have both opportunities and risks, just maybe how you're thinking about that, not just this year in '14, but maybe over the next couple of years.

[Marc N. Casper:]

So -- thanks, Jon. So we've had the benefit of a 9-month integration planning process, where the 2 teams have worked incredibly collaboratively to set out a great integration plan, as well as getting even more familiar with the business. Obviously, we know it quite well. And we're very excited about the prospects. And as I've said on a couple of the recent investment bank conferences, basically, Life Technologies hasn't been doing investor relations strategy for the year. They've been intensely focused on their customers. So you haven't seen a lot of communications, but you have seen a lot of great progress in their base operating business in terms of the things they're doing. So we're really excited about the prospects of the business and we're looking forward to closing, and welcoming our 10,000 new colleagues to Thermo Fisher Scientific.

[Operator:]

Our next question is from Ross Muken of ISI Group.

[Ross Muken:]

So Marc, I mean, obviously, a spectacular organic growth rate in the quarter. I mean, this is probably one of your best quarter results in quite a long time. I mean -- I know you touched on some of the upside surprises, but maybe just in terms of where you were most surprised relative to the outperformance, and maybe give us a little bit of cadence of how it proceeded throughout the quarter. Because it seems like from some of the other peers as well, that there was a bit of extra normal budget flush this year than maybe has not happened in some time. So any kind of color you can provide around that would also be helpful.

[Marc N. Casper:]

Sure, so in terms of just budget release and those types of things, the last couple of years, it's always a question we get asked in the fourth quarter, which is, "Do you see a budget flush?" And in those previous 2 years, we didn't see any. Clearly, this year, we saw a release of some funds on projects that had really been delayed, some of which were even considered in 2012. And that cut across a number of customers. So we saw it in Europe, we saw it in big pharma, and we saw it in some of our industrial customers. So it clearly was year-end money. I'm really proud of how nimble the team was, though, in going out and capturing it, right? It's one thing to have funding and another thing to actually convert it into great organic growth. I think the team did a really strong job in that. In terms of the end markets or the positive surprises, I don't think we were surprised as much. I mean, it was nice to see the funds released. I'm very pleased with how we performed in the pharma and biotech market. Our team delivered in excess of 10% organic growth in the quarter, and that's just great execution. So it's not a surprise but it's nice to see it in the bank.

[Ross Muken:]

And I guess, relative to the academic channel, I mean, how relieved are you to sort of have that higher degree of budget certainty versus where we are -- where we were last year? And in your conversations with folks throughout that channel, do you feel like we're going to get a bit of a step-up in some portions of the market? And how do you feel like Life's business is sort of positioned for that relative to their outsized exposure bid on at least the NIH campus.

[Marc N. Casper:]

So obviously, our academic and government customers over the last few years have faced both weak budgets and uncertainty. And I think the budget process that's going on now, with some 2-year visibility and some modest increases, NIH is clearly an improved environment. So as we look at that and just the lag between the budget and when funds are released, we should see an improvement in the second half of this year in terms of our academic and government growth. And from a Life Technologies perspective, obviously they have a little bit more exposure to academic and government, so it's good news, right? I mean, it's -- it should be a good opportunity for them. And as you look at their performance, as Pete said, they delivered 2% organic growth in 2013, and we're expecting 2% to 3% organic growth or we're assuming 2% to 3% organic growth for 2014. So I think the funding environment should help us on both fronts.

[Operator:]

Our next question is from Derik De Bruin of Bank of America Merrill Lynch.

[Derik De Bruin:]

So can you just give us a little bit of color in terms of how instruments versus consumables did in 2013 and -- or how do you sort of see that? Is it sort of morphing in 2014? It's more about trying to figure out how to see the mix of the company shifting and sort of what's implied in the numbers.

[Peter M. Wilver:]

Sure. Derik, it's Pete. So in terms of the equipment-consumables-services split, so both equipment and consumables grew low-single digits in 2013, and services grew high-single digits. Consumables was a little bit stronger than equipment and really, that flipped significantly in Q4. I mean, we had really good performance in equipment in Q4, as Marc said, as a release of the budget funds. Going forward, the performance we're expecting is almost exactly the same as in 2013. Now that's, again, on a Thermo Fisher organic basis, so it's not including Life's results, which certainly will be more heavily weighted in consumables when that happens.

[Derik De Bruin:]

And so that releases funds in Q4, so was that -- is that the standard budget flush or is there something more that was going on?

[Marc N. Casper:]

I think it's hard to tell because it was so widespread. But my take is, is that there was more confidence and economic stability. And I think you've heard me say this in the past, which is in Europe, in particular, every month that something bad doesn't happen in the economy, gives more confidence and more ability for spending to happen. And clearly, we saw the government release some money, as well as some of our larger industrial and pharma customers in Europe released some money as well.

[Operator:]

Our next question is from Tycho Peterson of JPMorgan.

[Tycho W. Peterson:]

I actually want to get into some of the give-and-takes in the quarter. You said it's some project delays that came through, I think, in chromatography. I'm wondering if you can touch on that. You called out HLA strengths, so I'm just wondering if there are some underlying dynamics there. And obviously, we hear more from some of the sequencing companies about sequencing moving into that market. So I'm wondering if you can touch on that. And then pharma, were there some big chunky contracts that you got in the past year? Obviously, you're guiding for kind of mid-single-digit growth for pharma. So I'm wondering if you can kind of flesh out your thoughts on the pharma business as well.

[Marc N. Casper:]

Sure. So Tycho, let me -- I think I got all of them but if I miss something, just ask and I'll try to give some answer. So on HLA, we had strong organic growth performance all year. The team executed well. One Lambda acquisition's been fabulous, the team's done a great job. So we feel good about it and obviously, we have sequencing technologies for HLA with Life Technologies. So we're obviously playing that -- in that market segment as well. In terms of pharma, no, we didn't have any big contract wins. This is all about share of wallet execution and leveraging our value proposition. I mean, effectively, every big pharma is a customer and what we do is just drive incremental value for those customers across by using our portfolios. So we're driving their productivity, improving their innovation and that's allowed us to grow at great rates. In terms of chrome, chrome is less of a budget flush thing than -- or we've had very good momentum in HPLC throughout the year and we finished off very strongly in HPLC. And we saw some nice momentum in the fourth quarter in ion chromatography with our performance in Europe and in China, in particular.

[Tycho W. Peterson:]

And then in terms of how the year ended up, you highlighted that you pulled, I think, $100 million in costs above what you had originally guided to. Can you maybe talk to whether there were some project that were pulled forward in light of the pending integration or was this just kind of executing above plan across-the-board?

[Marc N. Casper:]

In terms of cost reduction, as we say each year, we always have a set of contingencies, right? And as we saw the FX environment be extremely negative from an earnings perspective, our teams did a really good job of reducing costs, doing additional restructuring, using our PPI Business System very aggressively to deliver very strong productivity. And that allowed us, really, to deliver very strong margin expansion and earnings growth during the course of the year.

[Tycho W. Peterson:]

Okay. And then last one, did the assumptions on organic growth for Life come down a little bit? I think you talked about 3% organic growth at the Analyst Day, you're now talking 2% to 3%. Is that just the divestitures or is there anything else in there to think about?

[Marc N. Casper:]

No, actually, Tycho, on that, we've always said that the long-term growth we've assumed in the model is 3%, and then what we said is that shorter-term, as the end markets have been weaker, we hadn't actually articulated a specific number so -- for sort of the year 1 view. So the 2% to 3% is actually better than where the business has been performing, and we would expect in the midterm that 3% is a good assumption for that business.

[Operator:]

Our next question is from Doug Schenkel of Cowen.

[Douglas Schenkel:]

So once again, I'll say what a lot of others have said. Clearly, this was a really great quarter and when you look at LPS, the growth there was as robust as I think you've generated for several years, if ever. One thing that you've done a great job of over the years, and this has come up a couple of times already today, is using your product breadth to gain share of wallet, especially in biopharma. What I'm wondering is, is the Q4 strength at all demonstrative of Thermo having increased success of essentially doing that same thing in other end markets and really, what I'm thinking about specifically, is in health care hospitals?

[Marc N. Casper:]

So Doug, obviously, we're always looking for ways to drive value for our customers. And we have done a very strong job in the biopharmaceutical customer set, and you saw that in Q4. When I think about the healthcare and diagnostics arena, where that's most relevant is particularly in China, where we have a customer base that is expanding the network of hospitals and clinics aggressively. And they're looking for a very simple way of getting the health care system expanded, and our offering is quite compelling. So those customers, clearly, are leveraging it. And we see that a bit in the U.S. as well. Our channel helps us drive an attractive mix of products there. So yes, we do it in healthcare and diagnostics, but probably a little bit lesser extent than we do in biotech and pharma.

[Douglas Schenkel:]

I guess what I was trying to get at is, when we do our checks with hospital administrators, hospital CFOs, especially in the U.S., clearly as we all know, there's a lot of pressures in that end market and they're looking for ways to save money. So I just didn't know how material an opportunity there was for you to go in there and as a broad supplier to potentially create a win-win where you're gaining share and at the same time, cutting costs for them in some areas.

[Marc N. Casper:]

Clearly, we have a very good position in Specialty Diagnostics and I think we're well-positioned to navigate the landscape that the Affordable Care Act creates. So I think over time, that is an opportunity. And we always are looking to drive value for our customers.

[Douglas Schenkel:]

Okay. And 1 more. China, clearly, that's been a nice source of growth for you as you just mentioned, not just in hospital health care but in other end markets, with 20% or more year-over-year growth for, I think, at least the past 10 quarters, really, up until this quarter. You still have some nice growth but maybe not as strong as we've seen recently. And there's been some concern over a China slowdown, something that, clearly, hasn't materialized in a big way for you guys. Understanding that Thermo targets some pretty broad end markets, it's not as cyclical as maybe for some other companies. What are your assumptions for growth in China in 2014, and any concerns that things are slowing down there?

[Marc N. Casper:]

We're assuming mid-teens growth in 2014 for China. So -- we've enjoyed 20% for a while and we think that mid-teens is a reasonable starting point for the assumption. Demand continues to be strong. Our position continues to get strong, but we think that's a prudent way to start the year from an outlook perspective. And then, obviously, we're seeing a little bit of improvement in the U.S. and Europe, which is the positive that keeps us with a good revenue growth outlook for the year.

[Operator:]

Our next question is from Amit Bhalla of Citi.

[Amit Bhalla:]

Marc, I wanted to just hone in on the comment you made on health care utilization ticking up towards the end of the quarter in the U.S. Obviously, it's not the budget flush you're talking about there. So what are the actual signals that you saw that was indicating that comment?

[Marc N. Casper:]

So it's a combination, and in the U.S., we saw a fairly widespread improvement across our various businesses. The second thing is, we called a number of our larger customers and just asked them what were they seeing from a dynamic perspective, and that seemed to be the feedback we were getting. So it was broad-based improvement in the second half of the quarter, as well as customers validating they saw a little bit of utilization uptick. That's our best take on what happened.

[Amit Bhalla:]

Got it. And secondly, in the past, you have pointed to some of the bigger box companies, such as GE, Siemens and Philips as indicators and you guys have more of a 6-month lag versus what those guys put up. I'm wondering if you can comment on their performance thus far and impacts that you may see in the emerging markets going forward.

[Marc N. Casper:]

So in terms of the outlook and the data that we look at, there seems to be at least some improvements in the metrics in terms of what's going on, holding aside some of the currency issues over the last couple of weeks. So there seems to be a positive outlook. But we do lag it, so it's a little bit early to call.

[Operator:]

Our next question is from Daniel Brennan of Morgan Stanley.

[Daniel Brennan:]

Marc, as you meet with investors and customers -- and just to inch in your opinion or your take on what you think is kind of not understood or what's most not understood in terms of what you think the Life deal's going to bring Thermo?

[Marc N. Casper:]

So we've had, obviously, the opportunity to have a fair amount of interaction with our investors and our customers. Let me start out with the customers. Very enthusiastic about the combination and looking forward to closing so that we can bring together the unique value proposition that we have. And that has now expanded, right? It gives us a broader set of genomics capabilities, it gives us a leadership position in bioscience reagents. And our customers are looking forward to the combination. So there's a lot of enthusiasm out there. From the investor perspective, I think that the strategy is understood and I think that folks are just really waiting for the transaction to get closed out. And really, probably more than anything, was to get a sense of what was our view on the guidance in terms of accretion. And I think that coming out with $1.25 to $1.30 of first full year contribution shows that the actions that we took in terms of how we financed the transaction, the integration planning, really has put us in a good position to deliver a strong year. So I think that's -- I think these are very exciting times at the company right now. Actually, I've never been more enthusiastic in terms of what our prospects and outlook is like. And I think the team here has done a great job of navigating not the easiest of economies and putting the company in an incredibly bright, incredibly strong position going forward.

[Daniel Brennan:]

Great. And Marc, should we expect, in terms of maybe an updated view, once you do close the deal in terms of the vision and the strategies, is that something that we should expect more so at the Investor Day or could something come prior to that post closing?

[Marc N. Casper:]

I think the Investor Day will be the right time frame for kind of the bigger picture items around the business.

[Daniel Brennan:]

Okay. And then maybe just circling back to 1 question that came up earlier, just to understand kind of the '14 guidance in terms of the deceleration in pharma/biotech that you're assuming, which impacted kind of offsetting the recovery in kind of academic and industrial and applied. So is this something going from double digits down to mid-single digits in a year? Is that something -- I know someone asked a question before about some big contracts, maybe can you just expand upon kind of what you're seeing in pharma/biotech and is there a level of conservatism in mid-single-digit growth?

[Marc N. Casper:]

I think our take on that one, it's not about the big contracts, it's just simply that market, end market, has probably been growing 2 points, roughly, over the last few years, somewhere in that range, 2 to 3. And we've been growing much faster. And when we look at the comparison, we think the starting point of mid-single digit growth, which would represent continued share gain, is the right place to start. And our teams will focus on driving the best possible performance. And as the year unfolds, we'll continue to calibrate on what the outlook is.

[Operator:]

Our next question is from Peter Lawson of Mizuho Securities.

[Peter Lawson:]

I'm going to ask a question around the Ion Torrent business, so please be prepared. So any thoughts about how that business is going to be run? It's a high, R&D-rich business. Any changes in your thoughts around that? And then just the strategy in that business and the focus over the next couple of years?

[Marc N. Casper:]

Yes, so Ion Torrent and the genomics capabilities that Life Technologies brings to the company is very exciting. And as we think about our focus, our focus is really on having very excited, enthusiastic customers. And there's been a huge amount of work that the Life Technologies team has done during the course of 2013, and very ambitious plans in 2014 to position for great success with our customers. I think that what we've talked a little bit about over the last 6 months or so with the investor community is, this is a small proportion of our total revenue, a couple percent of the total company's revenue. So it doesn't get that same heightened focus with the investor community than maybe some other companies might have that are much smaller. But it does get very heightened focus in terms of our customer community, and we're very focused there. So we're excited about Ion Torrent. The business invests very substantially in R&D and the business has what we think will be a very bright future.

[Operator:]

Our next question is from Isaac Ro of Goldman Sachs.

[Isaac Ro:]

Marc, Marc, I just want to kind of dig a little bit deeper on that utilization question earlier regarding the overall health care volume environment. And the reason I ask is it does look like some of the managed care companies talked about a little bit of a pull-forward effect in the fourth quarter, ahead of the ACA implementation. And if that's the case, it would sort of imply you might see a suddenly bigger seasonal dip in the first quarter than you have in the past. So just trying to figure out what you think is baked into assumptions for your guidance this year and how you're seeing that part of the dynamic.

[Marc N. Casper:]

For the full year, we're expecting conditions to be pretty much the same for our health care and diagnostics business. So we didn't spend a huge amount of time looking through the seasonality effects of a strong Q4, and does that mean that there will be a little less activity in Q1? I guess it's possible, Isaac, but it shouldn't be hugely material, one way or the other.

[Isaac Ro:]

Got it. And then a similar question for your biopharma end market, I think a similar question was asked, but just maybe a little more specifically, we've seen a lot of noise regarding budget visibility, M&A activity in areas of spec pharma. So I do think there's been a little bit of volatility in -- I'm assuming a lot of volatility in your biopharma R&D customers. So that being said, do you think there's some element of that, that is now, perhaps, a little bit more secular rather than situational? And so I'm just curious sort of how much back-end seasonality you might expect this year in those end markets.

[Marc N. Casper:]

That's a good question. I mean, in terms of the seasonality, I think, generally, the customers plan fairly constantly across the year in terms of their activity because it's mostly driven by people and keeping those folks actively engaged in developing new products. So I wouldn't expect a big change in seasonality during the course of the year. I do think the teams just execute incredibly well at Thermo Fisher to grow our share position in the fourth quarter, and I also think there was just a few meaningful projects that customers felt enough confidence in their pipelines to release the funds, which clearly was a nice thing to happen as well.

[Operator:]

Our next question is from Steve Willoughby of Cleveland Research.

[Steve Willoughby:]

Just wondering, I know you said 3% to 4% organic growth for the existing Thermo business in 2014. I was wondering if you can provide a little bit more color as it relates to the different reporting segments and what your thoughts are in 2014 versus what you did in 2013.

[Peter M. Wilver:]

So actually, all 3 kind of legacy segments are within 20, 30 basis points of the average for the total company. So they're all very close. And then in terms of sort of the year-over-year, it's probably a little stronger in Analytical Technologies and a little weaker in Laboratory Products and Services. Specialty Diagnostics, about the same.

[Steve Willoughby:]

Got you. And then just curious on one of the comments you made regarding the kind of end markets and expecting a little bit better industrial growth in 2014. Obviously, we saw much better growth here in the fourth quarter. Just what kind of gives you the outlook or the confidence that industrial gets a little bit better in 2014?

[Marc N. Casper:]

I think our expectation is that we'll see some stabilization in the core industrial, and that's what's driving -- applied has been pretty constant and the fact that some funds were released late in the quarter should at least, from a comparison standpoint, tend to stabilize as the year unfolds.

[Operator:]

Our next question is from Dan Leonard of Leerink.

[Daniel L. Leonard:]

You talked a bit about taking full advantage of the year-end growth opportunity. Was there any opportunity for you to maybe push some of those opportunities into Q1 and thus, offer yourself some cushion in a quarter with a lot of moving pieces?

[Marc N. Casper:]

Our take, as you said, just like we don't pull things forward into one year, we don't push things out. We actually just close business when customers want to spend money. So we didn't sit there and say, "Let's stop working. Holiday time." In fact, I spoke to a few of our colleagues, I think it was on the 31st, they weren't probably enjoying it as much, but we worked right until the end of the year and we didn't push anything out into the first quarter.

[Operator:]

Our next question is from Jeff Elliott of Robert W. Baird.

[Jeffrey T. Elliott:]

I appreciate all the updated thoughts on the cost synergies but I'm wondering, now that you've had additional time to evaluate the business, can you talk about your updated thoughts on the revenue synergies? Because when I look at those, that actually looks like an area of conservatism relative to your historical performance on transactions.

[Marc N. Casper:]

So Jeffrey, great question. So when we look at the synergies, $275 million of year 3 synergies, $25 million of earnings from revenue, which is $75 million in revenue. Our assumption is they start in the second year. So there's nothing in that first $100 million that Pete talked about. And then they start to ramp up at the beginning of the second year of ownership. We are very focused on maximizing those synergies, but it's obviously a little bit early. Right? I think it's one of those things where if you look at acquisitions that we've done previously, we've probably driven higher on a percentage basis in terms of revenue synergies. We certainly draw a lot more in the combination of Thermo Fisher, but it's a little bit early to call it out one way or another. So we'll focus on, obviously, maximizing our organic growth long-term and capturing as much synergies as possible. And as it gets a little bit deeper into the integration and we've owned the business for a while, then clearly, we'll talk more about it.

[Operator:]

Our next question is from Paul Knight of Janney Capital Markets.

[Paul Richard Knight:]

Marc, when you were talking about mass spec and gaining leadership there, people thought you were probably a little crazy or something. But when you look at the business today, are there a couple 3 things that kind of stand out to you, just like that, where you're like going, this is a no-brainer where I'll be the market leader?

[Marc N. Casper:]

As I first look back at the lessons learned, right? The first thing we did was ramp up our customer communication focus and actually ramped down our investor relations focus on mass spec. If you think about it, actually -- probably even doing this long enough with us. If you go back a decade ago, we used to talk a huge amount about mass spec and every single product, and every single quarter. And we said, "You know what? That creates a undue pressure internally as opposed to just have them focus on getting customers to win." And the silence allowed us to actually grow our share position with providing less information to our competitors quarter in and quarter out. And I enjoyed the days when people used to kind of say, "Wow, how could this $100 million mass spec business ever have aspirations back in 2001?" And today, we're a clear industry leader and customers literally can't wait for the Annual Scientific Conference to see what new breakthrough innovation that we'll bring out. So that methodology is a methodology we use for all of our high-tech businesses. We do it in our handhelds, and I think you can see us -- we're going to do that in some other parts of the portfolio as well. It's all about having the best scientists and creating an environment for them to be able to develop breakthrough products and help our customers win. And that's what is so core to our innovation success at Thermo Fisher.

[Paul Richard Knight:]

Yes, great. We'll look forward to that. And then lastly, China, everybody wants to worry about that region every other month. What do you think gives you so much visibility, is it the makeup, that there's a lot of academic or healthcare customers, is it you're building a plant out there, what gives you such confidence?

[Marc N. Casper:]

First of all, the 5-year plan is very aligned with what we do, right? In the 5-year plan, around environmental protection, food safety and health care expansion, we're right in the midst of it. When I was meeting with government officials late October, early November, really discussing economic outlook, very clear that the discussion amongst the government officials in China was there's going to be good growth but it's going to be slower than historical growth. But the focus on environment, food safety and health care, incredibly important, especially in the environment. I mean, it's a huge issue about sustainable economic growth, and that positions us incredibly well. I think 5 years ago or so, when we moved our environmental businesses headquarters to China, it might've seemed like a bold move but it's obviously paid off in spades in a huge way. Because we're really considered the domestic provider of those products and we manufacture products locally for the market, and we have a great competitive position. So we feel like we have good growth prospects in China going forward.

[Operator:]

Our next question is from Brandon Couillard of Jefferies.

[S. Brandon Couillard:]

Pete, could you elaborate on the core Thermo margin expectations for the year, specifically between gross margin and operating expense growth?

[Peter M. Wilver:]

Well, to be honest, it gets a little muddy when you start talking about the details of the P&L because Life Technologies is coming in partial year. As I said, just for standalone Thermo Fisher, we're expecting about 60 basis points of margin expansion in the year, if you add back the loss benefit of the divestitures, which is about 30 basis points and the FX incremental headwind that we're going to experience, which is about 30 basis points. Certainly, when we report our results in Q1, including Life Technologies, our gross margin is going to be up from where it has traditionally been, probably something in the 500 basis points range. Our SG&A will also be up and R&D will be up. And as I said, we're expecting around 230 to 250 basis points of margin expansion for the year.

[S. Brandon Couillard:]

Could you speak to your net pricing expectations for the year and sort of how that compares versus '13?

[Peter M. Wilver:]

So we're actually expecting a little bit of an uptick in pricing in 2014. Pricing was pretty muted all year in 2013, very little positive benefit overall net, and we're probably expecting around 50 basis points positive net in 2014.

[Operator:]

Our last question is from Dan Arias of UBS.

[Daniel Arias:]

Maybe just one on chromatography. How at this point, Marc, are you feeling about Dionex, UHPLC? Obviously, a tough set of competitors there, but do you feel like you can or you are taking a bit of business from the 2 strongholds there, especially given the momentum in mass spec?

[Marc N. Casper:]

Yes, Dan, when we look at the HPLC and that UHPLC business that we have, obviously, we're in kind of a #3 position in terms of our market share but at least, as I look at the reported results of the other 2, it appears that we're growing consistently faster than them. So it's a good position to be in. But they're good companies and tough competitors, so we just focus on helping our customers be successful and working to use all of our competitive strengths to gain share in that portion of the business. So we feel good about our outlook there.

[Daniel Arias:]

Okay. Actually, maybe let me sneak one more in, and apologies if you mentioned this, but now that you've assumed command of the numbers for Life, should we look for them to report the quarter or are you just going to wait out the close there?

[Marc N. Casper:]

So in terms of the process, there'll be an 8-K at some point a little bit later in the quarter that actually report out their final results. So that happens to the SEC process a little bit later in the quarter. Okay so let me wrap it up with a couple of last comments. First, we're very pleased to deliver a strong finish to the year and to be in such a great position going into 2014. Our customers are really seeing the value that we've created through our technology innovation, our value proposition and our growing presence in emerging markets. And we're really excited about the new opportunities that we'll have once we complete the acquisition of Life Technologies, and welcoming our new colleagues to the company. So thanks for your support for Thermo Fisher, and we look forward to updating you during the course of the year. Thanks, everyone.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.