Thermo Fisher Scientific Inc. (TMO) Q2 2012 Earnings Report, Transcript and Summary

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 and Presentations, until August 24, 2012. A copy of the press release of our 2012 second quarter 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 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, 2011, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and 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 will 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 2012 earnings and future expectations and also in the Investors section of our website under the heading Financial Information. With that, I will now turn the call over to Marc Casper.

Well, good morning, and this is Marc. And don't worry, I know Pete is here as well as is Ken, and I know from our investors' perspective, Ken is always the highest rated IR executive out there in the industry, and he's smiling next to me. So no anxiety should be on the phone, we actually have good news to report throughout this call. So I'm pleased to report that we had another excellent quarter, with record Q2 results on both the top and bottom line. The quarter was all about execution. Our team executed well to deliver solid revenue growth and another quarter of double-digit growth in adjusted EPS. Our strong performance in the first half puts us in very good position to achieve our revenue and earnings goals for the full year. I'll frame my remarks this morning by first covering the financial highlights, give you a sense of what we're seeing in our key end markets relative to our results, and then review some of the exciting new developments we announced during the quarter and in recent weeks. First, the financials. As I mentioned, we delivered record adjusted EPS again this quarter, a 23% increase over 2011. Our revenue grew by 9% over last year. Our adjusted operating income increased 16% in Q2, and we achieved 110 basis points of adjusted operating margin expansion. Our Q2 results clearly show that our teams are focused on the right priorities. Our growth initiatives are delivering real value for our customers, and our ongoing cost actions are strengthening the bottom line. On the growth side of the equation, our investments in Asia-Pacific are really paying off, with strong results again this quarter. I'll mention a little more on that in a few moments. In new products, we're seeing nice uptake…

Thanks, Marc. Good morning, everyone. Similar to last quarter, I'm going to start with an overview of the total company's financial performance, and then I'll provide some color on each of our 3 segments before moving on to our updated guidance. As Marc mentioned, we moved our laboratory workstations business to discontinued operations effective with Q2 reporting. So all the continuing operations numbers I'm going to share with you today have been revised to exclude this business from both current and prior periods. As Marc said, our strong financial results this quarter were driven by really solid execution by our teams. This led to another quarter of double-digit growth in adjusted EPS, with a 23% increase to a second quarter record of $1.22. GAAP EPS in Q2 was $0.63, down 54% from $1.36 in the prior year's quarter, primarily as a result of the gain on divestitures last year. GAAP EPS includes a $0.02 operating loss in the laboratory workstations business. So we would have reported $0.02 lower adjusted EPS and 21% growth have we not discontinued this business. Still a great quarter. Starting with the top line. Total revenue increased 9% year-over-year. On a pro forma basis, as if Dionex and Phadia were owned for the second quarter in 2011, reported revenue was up 1%, and organic revenue was up 4%. Pro forma revenue included 1% growth from acquisitions other than Dionex and Phadia, which was more than offset by a 3% headwind from foreign currency translation. Please note that the components of the change in revenue do not sum due to rounding. We continue to strengthen our backlog with bookings exceeding revenue by $15 million or about 0.5%. Looking at revenue by geography, our growth profile was pretty consistent with what we've been seeing for the past few…

Operator, we are ready to take calls.

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

So first, I want to -- I really appreciate all the color that you gave, Marc, but I wondered if you could talk a little bit more -- unless I missed it, you didn't say much about the U.S. and before we've been talking about a bit of a slowing in U.S. I'm just curious kind of what you're seeing specifically in the U.S. and what your outlook there is for the second half of the year.

So, Jon, U.S. was slightly stronger than the first quarter, but not materially so. So U.S. is hanging in there with low-single digit organic growth.

And is that the expectation for the second half as well?

As we look at the second half, basically, when we started the year, we looked at organic growth being around 3% for the full year. We have -- staying with that guidance, so we had 4% first half organic growth, so that implies a 2% organic growth in the second half, and that basically implies a little bit of a slow down. But that's more likely to be in the U.S. and Western Europe than it is really in Asia-Pacific. So it's probably slightly slow in the second half, but we don't really forecast by geography. We typically forecast by our businesses.

Sure, I understand. And then the second, as a follow-up on that, I think you both kind of mentioned the past restructuring, but also same, like given the environment, is very uncertain. So considering maybe doing more, can you maybe just talk about, one, what the trigger would be for that and two, what that would entail on your end?

Yes, the way that we think about it is we're always looking at our cost base, right? And that last year, we specifically put in $100 million program that we've been executing against. But in addition to that, we've been looking at selective cost actions, and those programs are not -- those actions that makes sense and have the right result for the mid- and long-term health of the business. We're taking those actions as we go. So it's probably incremental to it, but it's not under the banner of some incremental programs. It is more good management of the business.

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

So as far back as I can remember, at least, since you've taken over, Marc, this was probably the best quarter organically you had versus peers. As you look at sort of the components of where you saw strength, and I know you probably haven't had much time to check out all the earnings reports like we do. But I guess relative to either your internal expectations based on what you're seeing in the macro, based on what you had heard or throughout the quarter regionally, products, specific, et cetera, where do you feel like the biggest out-performance was for the business in the environment?

So Ross, thanks for the question. Welcome back to the conference call. A couple of things. Actually, if you look at the results, and we do actually look at all of those reports, and we do read all of the competitor reports pretty much realtime. Actually, this quarter is actually very consistent to the last 2 quarters. So 3 quarters in a row, our organic growth has been very strong relative to the peer set. So I actually think you're seeing a nice consistent trend of us delivering very strong organic growth, 5% in Q4, 4% in Q1, 4% in Q2 and relative to the share gain initiatives we had. But I'd say where do I feel -- I think the teams are executing extraordinarily well. They're very focused on -- we have great products and are very focused on serving our customer needs. Our value proposition is incredibly relevant in today's environment, right? Our customers are living in a tougher world. They need productivity. They understand our scale. They understand our depth of capabilities. We've been at this for 5 years in terms of -- since the merger in building those capabilities and you're seeing us harvesting those hard work, and it's showing up in our organic growth results. So it's less about a particular geography or a particular product, it's really about a value proposition that resonates in today's environment. We feel great about it.

And maybe on the guidance increase on EPS, obviously, I think that's not something we've seen from many businesses in this environment, given the macro backdrop and what we saw in -- through the June time frame. And so as you guys were sort of debating the forecast and we're looking at sort of early trends in July, how comfortable were you? Or how did you think about sort of how aggressive you wanted to get with sort of the guidance move vis-à-vis sort of the bigger picture and what other large corporates were doing with their outlooks? And then I have sort of a clean-up question on that as well.

Sure. So Ross, in terms of guidance, the world isn't playing out, at least, the first half as we expected and articulated in February, right, when we set out our original guidance. So we expected Europe to get weaker as the year went on. We expected sequestration would not get resolved during this year. We factored those things into our guidance. So when you think about us sitting with good execution at the first half, and the world playing out as we laid out back at the beginning of the year, we don't see a big change in those expectations. When you look at the various actions that we've taken, we've kept the organic growth guidance the same, and which means that we are -- we have a couple of points deceleration in the second half, which is a cushion if you will, right, versus the way we've been trending. But we think that's realistic, given the market outlook. And when you look at the fact that we're doing an incremental buyback, you look at the fact that we closed a nice acquisition in Doe & Ingalls, those things are net positives even offsetting the headwinds from FX. So the $0.02 increase to the midpoint is, we think, a good reflection. And we always focus on the midpoint of our guidance, so we feel like the low end protects for a much more challenging world if it unfolds.

And just one quick cleanup on the guidance. I know One Lambda is clearly not in there from a revenue EBIT perspective. But just to be clear, there is a bit of interest expense assumption in there or not to you?

Yes, we added about $15 million of interest and that's to prefund the acquisition, as well as to fund the share buyback.

So that will happen at some point in 3 or 4Q, I'm assuming?

It will happen some time probably in the third quarter in terms of the debt issuance.

Your next question is from the line of Vamil Divan from Crédit Suisse. Vamil Divan - Crédit Suisse AG, Research Division: So I guess, I just have a couple of questions here more related to what you're seeing kind of sequentially through the course of the quarter, heard some comments from other companies in terms of April through May through June. Have you seen any significant trends kind of through the course of the quarter or into July that give you any cause for -- that things are getting better or worse in any way?

No, we looked at that. And when we do our guidance, we factor in through the first 2 weeks of the quarter that we're living in as well. So we feel that the guidance that we've given is reflecting those trends. We didn't see big changes in June or anything that would lead us to believe of a very different trend and a change in trend or trajectory. So fairly consistent throughout the quarter. Vamil Divan - Crédit Suisse AG, Research Division: Okay, and then just one other one if I could with -- in terms of the -- I know you guys don't give beyond in terms of quarters, looking forward the rest of the year, but you've been getting a lot of questions just in terms of how the fourth quarter might play out with all the questions on sequestration and what's going on in Washington. Any guidance you can kind of give just even more qualitatively in terms of how you expect kind of third quarter versus fourth quarter. Just looking at the numbers right now, it looks like we're still seeing difference [ph] in terms of growth expectations over the third versus the fourth quarter?

So in terms of our quarterly phasing, just seasonally, Q3 is always a relatively weak quarter just because of the vacations in Europe and really around the world, I guess, and Q4 is always our strongest quarter in terms of the year-end push on instrumentation, so probably slightly stronger in Q4. But all that depends a little bit on what happens with sequestration.

Your next question is from that line of Daniel Brennan from Morgan Stanley.

I wanted to ask a question on the lab products in terms of business. Second quarter in a row, solid organic growth there versus some peers pointing to more challenging environment. Can you just provide some color regarding the strength you're seeing there and the kind of the sustainability of those trends?

Sure. When I look at lab products and services, we saw another good quarter in our Biopharma Services. The clinical trials outsourcing business is doing well. Our channel business is also performing well. So we like the trajectory that we're on in our lab products and services segment.

Maybe related to that, the divestiture of the workstation business, can you just discuss kind of what kind of impact that had on the organic growth in the quarter?

Yes, when you look at organic growth, we would have had as a company about 3.5% organic growth if lab workstations was in the numbers. And we had 4% organic growth with lab workstations out of the numbers. And we would have had $0.02 lower adjusted EPS if lab workstations was in the number versus what we did, as Pete highlighted. So the decision on lab workstation had nothing to do with any of that stuff. It was more a decision that we made as a management team that we really want the best owners for this business and decided that we were going to sell it to a business that could really help it thrive and grow for the future.

Marc, and maybe if I can just sneak one more in. The gross margin strength in the quarter, it was better than we had modeled. Could you just tease out the components? Certainly, Phadia and Dionex coming to the mix are helping margins like is it possible to quantify like Phadia and Dionex contribution versus cost cutting? And in particular, did the company accelerate any facilities closings or any other cost measures that would have led to better gross margin leverage in the quarter?

Yes, so in terms of gross margins, certainly, the acquisitions benefited gross margins. That obviously is going to decrease in terms of the impact throughout the year as we anniversary those in Q2 -- or excuse me, Q3 Dionex will be fully out. And then Q4, both of them will be fully out. But the gross margin improvement is kind of on the core business is really coming from the areas that we continually drive productivity and which is sourcing our PPI business system and restructuring. And the benefit there, it's probably about 1/3, 1/3, 1/3 between those 3 in terms of improvement on the core business.

Your next question is from the line of Dan Leonard from Leerink Swann.

Two quick ones. First off, in lab products and services, now that you've divested or you're planning to divest the workstations business, how should we think about the margin trajectory of that business going forward? Is that a business where you could increase margins commensurate with the corporate average annually? Or will that still be more lumpy?

Yes, I think in Laboratory Products and Services, it's lower than average, and we have the channel business there, which we don't have as much value-added cost that we can actually impact in terms of margin expansion. So there's a lot more direct material costs in that segment. So that segment, over time, will in general have lower-margin expansion than the average for the company just as a result of that.

Okay. And then housekeeping, Pete. What are the foreign currency rates you're using in your guidance versus the euro?

Yes, so for the euro, it's about 121.

Your next question is from the line of Amit Bhalla from Citi.

I wanted to just have you, Marc, elaborate on your comments on the CapEx budget releases within academic government. Can you give us a little bit more detail under the types of products that are being impacted and tie in what you're seeing within mass spec in the competitive environment?

Sure. So academic and government really didn't change very much, didn't really change at all in Q2. Consumables, broadly did fine, which means it's logical, right? Customers, they're working, right, so they're doing research, so therefore, they're consuming plastics, reagents and so forth. Instrumentation really was more aligned with how differentiated the technologies were. So in particular, our mass spec business had a very nice quarter. But things like lab, equipment and more routine instrumentation would be -- would really be a little bit softer and more constrained.

Okay, that's helpful. And the second part for my question is on the Analytical Technologies. You highlighted Biopharma within Analytical Technologies as a strength in the past. This quarter, I don't think Pete brought that one up, but you did talk about Biopharma strength overall. Can you talk specifically about Analytical Technologies, anything going on there that we should be aware of?

No, within Analytical Technologies, we have our BioProcess Production business, which had another terrific quarter. That was there, I would say, on the instrument side of the business, so it was kind of an okay quarter in terms of Biopharma. It was up, but it was not probably as strong as some other quarters.

Anything regionally that's impacting that or is it just across-the-board?

I didn't really see any particular regional explanation. I think, generally, Europe was pretty soft.

Your next question is from the line of Jon Wood from Jefferies. Jon Davis Wood - Jefferies & Company, Inc., Research Division: So you guys have previously talked about something like 50% of free cash flow back to the shareholder dividends and repurchases. Obviously, you're going to do a lot more than that this year. But just wondering, should we think about a different rule of thumb going forward specifically in '13 just given the leverage ratio post the One Lambda deal, meaning, is deleveraging a greater priority for '13 at this point?

I think when we get to -- we'll do that really in the February guidance. I mean, at a high level, our capital deployment strategy hasn't changed, which is a portion of our capital is going to get returned to our shareholders. A portion is going to be used for M&A that meets our strict criteria and in any given year may vary based on the environment. We're comfortable with our leverage ratios hovering between 2.5 and 3 at year-end. They should be relatively close to 2.5, so I don't -- I wouldn't assume major changes in the capital deployment strategy for '13, but we'll figure that out and communicate it crystal-clear in February. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Got it. Marc, one last one. Any view on the timing of Hamilton divestiture? And anything you've -- it looks like you've written the book value down to close to 0, is that accurate? And would you expect to get any material proceeds there?

In terms of the divestiture process, it's ongoing. In terms of the gains and losses, I don't want to speculate on that because I want to wait til we actually have the buyer negotiate, and I don't want to handicap or really comment on the valuation. But I think the write-down is a reflection of what we think was an appropriate accounting at the point of time of the decision to divest it.

It is above 0 though.

Yes.

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

Maybe just building off of that last question, I think the conclusion has been you've done a good job divesting businesses when you think about Athena and Lancaster last year and certainly the one you're in the process of divesting makes sense. Could you just describe what the environment is like for these opportunities? And maybe more importantly, what's the criteria you're going to use moving forward to make divestiture decisions? Is it simply a question of in your words whether or not you're the best owner for an asset? Or is there something we can also look at in terms of size, margin profile, growth rate, any other criteria that you would be willing to share with us?

Doug, so we're not contemplating any material divestiture. So if you want to define material, anything nearly as large as lab workstations. So we always do tiny little things and we'll continue to do that. But we like the portfolio. Our strategy is clearly working when you look at the organic growth that we're delivering over the last few quarters. That's because the package of businesses we have today fit together, work together and are valued by the customers. So I wouldn't expect really much more on the divestiture front. And if you think about it, you go back over the last 5 years, the ones we've divested are very logical and they've been telegraphed, if you will. We've never liked competing with our customers, so we sold our 2 testing labs, which is Athena Lancaster. And lab workstations has been a business that is a very heavy manufacturing business. It's very different than what we do. And when we look at the long-term fit, we think there are companies that have a better ownership with it than we would.

Okay. So if I have it right, it looks like restructuring expense picked up a little bit, Q1 to Q2. Was this as planned, assuming I have this right, or was it in response to anything that you're seeing in the environment? Or is there anything else that caused this to accelerate that was different than planned?

So we obviously put whether the $100 million restructuring plan last year, and we've been executing against that throughout the year. We're always doing some level of restructuring actions in addition to that. As Marc said, it's not kind of at the program level, it's more the one-offs, so I wouldn't necessarily read anything into that other than just normal actions that we do throughout the year.

Okay. And last one, you continue to pick up shares, the numbers suggests and as you mentioned in your prepared remarks, some of this is easy to see via new products in Analytical Technologies like Q Exactive. But beyond specific new product launches, are you evolving how you go-to-market with products, how you sell products within Analytical Technologies? In our channel checks and our conversations with some of your competitors, we're starting to hear more about Thermo doing a better job selling applications-wide solutions, if you will, really connecting different products and services across your analytical technology product portfolio? Is there something that's changing in terms of how you commercialize customer solutions? And if so, how far along are you in this process?

That's a good comment, not much more to add, Doug. I like the feedback. I would say it's an area that we're focused on, and I think we're doing a better and better job of representing our solutions-based capabilities for our customers. And I still think we have a lot of work to do and a lot of opportunity ahead. So it's still young, if you will, but we've been working at it and our customers understand the value of it. I actually think when customers are more constrained and customers are trying to make sure they're successful, the broader your capabilities and the deeper your applications are, the better off you're going to be, and I think that's really paying off for us.

Your next question is from the line of Tycho Peterson from JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Actually, I want to kind of take a slightly different angle to Doug's last question there and this is really the second quarter in a row we've seen you outperform a lot of your equipment peers. Can you talk to how much of that is share gains versus other factors? We obviously, as Doug said, see it in mass spec. Are there other obvious areas where we should think about you pulling share? And then how much is pricing a factor in this environment, in particular, within mass spec?

So there's no pure -- each company is a little bit different. So when we look at our mix of analytical technology, it's different than the other companies. I do think we have a good share gain in mass spec. I think our biosciences business is doing well and generally I view that the performance is strong. Pricing has -- was up slightly in the quarter, but it wasn't a big change from what we've seen. So I don't think price is a big factor one way or the other in the performance. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. Just a couple of housekeeping ones. Is Phadia kind of back on track? That was a little bit soft last quarter. There was some seasonality there. Can you just talk to whether that's recovered?

Yes, so Tycho, let me give a more holistic update on both acquisitions that we are almost at the one year anniversary. I think it's a good question. It hasn't been asked. So when you think about Dionex, when you think about Phadia, let's look at it in the 3 criteria that we look at which is how is the integration going, how's the business performing short term or what's the long-term prospects. Integration for both businesses has gone extraordinarily well. It's Thermo Fisher, I mean, at this point, both of them. They're very well integrated. The culture is very harmonious, and it's very positive. Synergies are ahead of plan when you look at accretion, which is now the reflection of the full package or performance. In 2012, accretion is going to be better for both of those acquisitions than the acquisition model. Phadia, in particular, will be very meaningfully more accretive than we articulated back on the $0.30 that we had talked about. When you look at the short-term performance of the business, both businesses actually have more European exposure than the company average. So both of them actually are growing slightly less than the company average in terms of organic growth. But if I look at the longer-term prospects for both businesses, we're very, very bullish on what both bring to our company and feel good about it. So generally feel good, but European exposure hasn't been particularly helpful. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay, and then last one. I know you've a number of questions on Hamilton, not to spend too much time on it, but I mean if we go back years and years ago, this was always viewed as a bad business. I think you and I used joke the competition was 2 guys in a sauce. So it hasn't gotten better over the years presumably. Why did it take so long to divest it? I mean, was there a period where you thought you could actually really truly turn it around?

We have a terrific team of employees in that business, and they work very hard to make it the very best business that it can, and we gave them significant resources to try to make the most of it. And when we look at it today, we just think there are companies that it's more core to their activities than ours and we decided that that's right thing, so it's a decision. It's a tough business but at the same point, we think it has good prospects, and we think the right owner will bring it to its full potential.

The next question is from the line of Derek De Vries from Bank of America Merrill Lynch.

So you're -- in Q3, you're going to anniversary the weak academic environment that hit you last September. Since comps get easier, I guess, what's kind of built into your academic numbers? Are you still expecting academic to be down year-over-year or is it more flat? I'm just kind of wondering how you're -- where are you on that thought process?

So when you look at the comps, industrial gets harder both in Q3 and Q4 and obviously in academic, the comparison is easier. When we laid out our guidance, we obviously don't do quarterly guidance. When we laid out our guidance, we assumed that academic and government would be down low-single digits for the year. It's down low-single digits in the first half, and that sort of implies that it's going to be still down off of an easy comp. I mean, that would be what the math would imply, although, we're not -- we don't really sit down and say what's Q3 exactly going to be versus Q4 but hopefully, that helps you think about modeling.

Yes, that's very helpful. So you've gotten beaten up in the past in your LPS business because organic growth lagged. Now that you've divested it, I know that you're planning to divest it. It's been 0.5% drag in your overall organic growth rate in Q2. But can you just give us a flavor of what it has been historically as a drag on the LPS segment?

In terms of lab workstations, in particular?

Yes, lab workstations, what was the drag on the overall LPS business? Because when the focus has been that business had not -- it did not grow as fast as it had previously thought, and I'm just wondering if this was a bigger -- if it's the large reason why that business have not done as well in the past?

The results in 2011 were relatively weak, but the numbers are so small that the accretion dilution on both organic growth and the margins is pretty minimal. For this year, it didn't really even affect our guidance taking the numbers out, so it wasn't so materially off of the averages that it was making a big impact.

Yes, I mean, I think, Derek, you know us well enough and following this stuff which is it's not going -- it's not big enough to make a material change, but it was the right decision to sell it, so we're selling it. But we're not sitting here and trying to change the gross rate by 0.10 point one way or another. It's just -- in the scheme of things, it doesn't make a difference.

Right. No, that's right. And then finally, can you just give us some more color on Asia? Is the growth you're seeing there share gains from peers? For example, the multinationals that you're selling to, are you just getting better share there? Are you taking share? Or is it brand new business from domestic Chinese or Asian customers that are showing up? Can you just give us a little bit of flavor of where you're seeing your growth and how that's working?

Yes, so let's focus on China. China was very strong in excess of 20% of growth organically again. When you look at it, we had very good performance widely across the business, and I think a nice example is we talked about the 5-year plan and the focus on healthcare, the focus on environment, so it's not a surprise that our Specialty Diagnostics business is doing very well and growing rapidly in China, in particular, because basically there's a big healthcare availability opportunity in China, where they're trying to create more capacity, if you will, to serve the population. The other area that's doing incredibly well in China is our environmental business. There is regulations called PM2.5, which is basically breathing in particulates in your lungs, and the government has actually decided to accelerate on implementation of those regulations, and we're capturing about 70% share of all of the air monitors that are being used for that particular application. So it's really -- it's not taking share from the New York Stock Exchange listed competitors, taking share from companies that might be local or really, we don't think as much about. So the business is performing very well, and we continue to be optimistic about our outlook in China in particular.

Your next question is from the line of Dan Arias from UBS.

Marc, I guess, just given the focus on cost control these days, curious whether you can give us a sense of where you think the biggest need to spend is in order to keep innovation where it needs to be and to keep people in the right places? Can you just update us on your current view on investment focus?

Yes, I mean, I think the investment focus is straightforward. We're going to continue to support our R&D efforts, and we're going to continue to expand in emerging markets. Those are clear. We'll also make commercial investments around the applications marketing as Doug asked earlier, some things on the website, things that continue to strengthen the company. We will manage our costs tightly on all other areas, right? So we're being prudent and frugal on those other things, so making sure that we're as efficient as we can and looking for opportunities to streamline our cost base.

And just a follow-up. I'm wondering if you can comment a bit more on applied market demand. Some reports elsewhere have maybe some potential slowing in food and environmental testing areas. Is that something that showed up anywhere for you guys at all?

Nothing that really jumped out from our material perspective one way or the other. We continue to have good momentum in our applied markets.

And that question will come from the line of Isaac Ro from Goldman Sachs.

Just wanted to ask a general question on pricing. I think you guys mentioned in the earlier comments that pricing generally, not a big swing factor, but if you could maybe add a little bit of color in diagnostics and then in pharma. I think in diagnostics, we're clearly dealing with pretty stagnant volume environment and the lab companies have generally suggested they're going to look to try and save expenses. So what are you seeing in the diagnostics channel with regards to your basic supply side of the franchise? And then in pharma, some of these larger contracts, just wondering what kind of a tone you see on pricing there?

Yes, in terms of pricing in diagnostics, I mean, that's not an area where we generally get a lot of price. So that's consistent with the past. It's basically flat overall. I don't have a lot of data by market segment in relation to the price, but in overall, it's about flat.

Okay, and then in pharma?

In pharma, again, we don't cut the business that way. I would say that probably the takeaway message on pricing in Q2 was pretty similar to what we saw in Q1 in aggregate and not really any major changes that we observed. So we pay a lot of attention to it. Obviously, we have a very high focus on pricing. We generally do a good job with it, so -- but we're not seeing anything, Isaac, that on the upside or downside that's material.

That's helpful and just one last one for me on China, I know mentioned earlier the comments on the environmental business. But if we look at the economics side, there were some questions elsewhere in the industry about phasing on government funds, getting released over the course of this year, any update and commentary on that part of the China end market?

No, when we look at China, we've been consistently growing north of 20%. And really, there wasn't major swings one way or the other within the business. So we feel good about the overall performance in China, and actually feel good about the outlook as well. So Isaac, thank you. Let me just wrap up the call and add a few quick closing thoughts. One is that I think our team's executed very well to deliver a strong first half. Their focus on new products, emerging markets and strategic acquisitions is clearly driving growth. We continue to manage our costs tightly in line with the economic environment, and we're confident that we'll deliver on our growth goals for the year. Thanks for your support of Thermo Fisher Scientific, and we look forward to updating you on our Q3 call. Thank you, everyone.

And ladies and gentlemen, this concludes your presentation. You may now disconnect, and have a great day.