Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2019 Second Quarter Conference Call. [Operator Instructions] I would like to introduce our moderator for the call, Mr. Ken Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin the call.

Good morning, and thank you for joining us. On the call with me today is Marc Casper, our President and Chief Executive Officer; and Stephen Williamson, Senior Vice President and Chief Financial Officer. Please note that this call is being webcast live and will be archived on the Investors section of our website, thermofisher.com, under the heading Webcasts and Presentations until August 9, 2019. A copy of the press release of the second quarter 2019 earnings and future expectations is available on the Investors section of our website under the heading Financial Results. So before we begin, let me briefly cover our safe harbor statement. Various remarks that we may make about the company’s future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the company’s quarterly report on Form 10-Q for the quarter ended March 30, 2019, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and is 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 on the press release of our second quarter 2019 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.

Thank you, Ken. Good morning, everyone, and thanks for joining us today for our Q2 call. As you saw in our press release, we delivered another excellent quarter. From a financial perspective, we achieved very strong revenue and earnings performance. We made great progress in executing our growth strategy and it was an especially fruitful quarter for innovation, which I’ll cover later in more detail. Last, we continue to effectively execute our capital deployment strategy to strengthen our strategic position. Conditions in our end markets were good and I’m proud of all of the effort our teams put forth to capitalize on those opportunities and gain share. With a great first half behind us, we’re well positioned to continue our momentum and achieve another outstanding year. Let me begin with an overview of our Q2 financial highlights. First, we delivered excellent adjusted EPS growth, achieving an 11% increase to $3.04 per share. Our revenue in Q2 increased to $6.32 billion, growing 4% year-over-year. Our adjusted operating income increased 6% to $1.48 billion. And our adjusted operating margin expanded by 40 basis points to 23.5% for the quarter. Before I discuss the quarter in detail, I want to take a moment to provide an update on the data center outage that we referred to in our recent 8-K filing. The outage occurred a few days before quarter end and caused delays in the processing of certain orders and shipments. This resulted in some second quarter activity shifting to the third quarter. The financial impact was not material, and Stephen will provide more detail. Our systems are now back up and running and I want to take this opportunity to acknowledge the efforts of our teams in keeping our customers front and center as they work to get the issue resolved. It…

Thanks, Marc, and good morning, everyone. As usual, I’ll take you through an overview of our second quarter results for the total company, then provide color on our four business segments. I’ll conclude by providing our updated 2019 guidance. Before I get into details of our financial performance, let me provide a high-level view of how the second quarter played out versus our expectations from the time of our last earnings call in April. As you saw in our press release we delivered a very strong quarter in Q2 with 5% organic growth and an 11% increase in adjusted earnings per share. Adjusted EPS was $0.04 higher than we’d assumed at the midpoint of our previous guidance. This was driven equally by four factors: operational performance, the timing of the sale of the Anatomical Pathology business, quarterly phasing of tax planning initiatives and less adverse FX in the quarter. So a very strong performance in Q2. Let me update you on the financial impact of the data center outage. This event delayed shipments for several of our businesses. We estimate that the outage had a negative impact on total company organic growth in Q2 of approximately 1%. Roughly half of that impact was in our Analytical Instruments business with the remainder in Specialty Diagnostics and Lab Products and Services. We see this as a shift in the timing of revenue recognition between Q2 and Q3 of approximately $50 million with no material impact expected for the full year 2019. We have not adjusted the Q2 numbers that we discuss today for this impact, but I thought it would be helpful to give you this context. Now let me cover more detail on Q2, starting with earnings per share. This quarter, we grew adjusted EPS by 11% to $3.04. GAAP EPS…

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

[Operator Instructions] Our first question comes from Tycho Peterson with JPMorgan.

Hey. Thanks. I’d like to start out with Life Sciences Solutions. You put up a terrific number there and you had a difficult comp. I’m wondering if you could provide a little bit more color. I know you provided some consumables to Brammer through that business. Was that part of it? Or could you just maybe talk to trends of Life Sciences Solutions?

Tycho, thanks for the question. Good morning. Yes, we had very strong performance across our Life Sciences Solutions segment, really driven by the strong growth in bioproduction and our biosciences business. And Brammer was truly immaterial to the sales to Brammer in terms of segment results.

And then I guess as we think about Brammer integration and scale up, can you talk a little bit about how we should think about the CapEx cycle? And I know you’re also separately bringing in the Glaxo facility. How should we think about CapEx investment and general costs, cell gene therapy and biomanufacturing?

Yes. So in terms of the Brammer Bio acquisition, part of what we’ve assumed is the expansion of an additional site, which we expect to break ground starting this year, and that’s embedded in our outlook for the year. And in terms of GSK, it’s a world-class facility, well-maintained with capacity that fills the needs across our own demand. So other than maintenance CapEx, we’re not expecting significant new CapEx associated with that facility.

Okay. And then just one last quick one. On lab products and Services, you had a difficult comp. Was there anything – even with that, it was a little bit lighter than we’ve been modeling. Was there anything there that slowed or was negative relative to your expectations?

Yes. It was a little bit impact from that system outage in terms of some of the revenue recognized in Q3 that would have been in Q2. For us, it really is just the kind of like the growth comps in terms of the progression there, Q1 to Q2.

Okay. Thank you.

Thanks, Tycho.

Next question comes from Ross Muken with Evercore ISI.

Good morning, guys. On the industrial markets, I guess, how are you feeling about sort of the cadence there and how you kind of left off 2Q into 3Q and some of the comps you have in the back half of the year?

Ross, thanks for the question. Good morning. So as I think about industrial and applied, we grew low single digits in the quarter. Really, there’s two dynamics there, which is really good performance in chemical analysis and chroma mass spectrometry in the quarter. And as we mentioned last quarter, we’re assuming that industrial and applied is going to grow more modestly in the second half of the year due to the outstanding performance it had last year in the materials and structural analysis business. We saw some of that dynamic play out in Q2, and we expect that dynamic to continue for the balance of this year.

And then maybe on the acquisition side, obviously your leverage has been coming down partially with the strong EBITDA growth. But you’ve had a little bit, at least relative to your capacity, maybe a good year but not a super-active year. I guess, how are you thinking of kind of the current environment and the pipeline for M&A and valuations relative to maybe the size of some of the deals you can look at and execute on?

So, Ross, in terms of the pipeline, we’re very busy. There’s a lot of activity that we’re looking at. And as you know, we have substantial capacity. We outlined that in our May analyst meeting. And over time, you’re going to see us deploy that capacity on the right transactions, and that’s how we think about it. And I’m very excited about what we closed and announced as well as the one divestiture that we did. And we’ll continue to be good stewards of our shareholders’ capital.

Thanks, Marc.

Thanks, Ross.

Next question comes from Derik De Bruin with Bank of America.

Hi. Good morning.

Good morning, Derik.

Can you give us, Stephen, some guidance on the gross margin? It’s consistently a little bit below where The Street tends to model on a quarterly basis. And could you just sort of walk us through how we should sort of think about the gross margin regression? Because I mean, obviously, you hit your operating margin targets because of good SG&A leverage, but the gross margin is a little bit all over the place. Any color you can provide on that would be great.

Yes, Derik, thanks for the question. A couple of factors; one is FX as an impact on gross margins is about 3% headwind on the gross margin dollar line year-over-year. But the main feature really is the mix of businesses and the growth and the relative profitability at the gross margin level. With very strong growth in bioproduction, certain product lines in pharma services, and these have a relatively lower gross margin than other businesses in the company but good profitability, so it’s kind of a mixed element within that is really driving that, the gross margin level.

And so I guess as you talk about adding capacity in your product, in your bioprocess businesses and your contract manufacturing businesses, how – I guess looking at trends into next year, should we expect additional pressure on the gross margin there until you sort of fill the capacity? Or is it too early to tell?

We’re getting good leverage on our SG&A, which is driving overall good margin expansion of the bottom line. And I think the gross margin profile you’re seeing will play out for some time, but this is about strong growth in the right areas and delivering strong profitability down the bottom line that translates to EPS growth. So I think that’s the appropriate way to think about it.

Great. And if I can sneak in one more; the academic and government outlook – growth this quarter was a little flattish. Is that mostly due to the data center issues or just some general trends on that marketplace?

Yes. So Derik, when I think about the quarter, as you really look into the comps, it’s very similar to what we’ve seen. Geographically, China was strong, a little bit more muted in North America and Europe. The data center outage, in fact, at each of the end markets a little bit, including academic and government, probably affected industrial and applied the most. So as I talked to the teams around the world, they didn’t really see much of a change in terms of what that end market looks like.

Great. Thank you.

Next question comes from Jack Meehan with Barclays.

Thank you. Good morning.

Good morning, Jack.

I was hoping you could give us an update on FEI and with cryo-EM. It wasn’t something that you called out for the Analytical Instruments segment. Just how its performance in the quarter? How are – how does the backlog look? And maybe just remind us what you’re guiding to in terms of revenue there, pacing in the back half?

Yes. So in terms of the – our materials and structural analysis business, which includes electron microscopy and our spectroscopy instruments, we had modest growth in Q2. And our expectation is that we’ll have modest growth in the balance of the year in that business due to the very strong performance that we had in 2018. And we saw some of that dynamic play out in Q2. Pretty much in line with what we had expected during the beginning of the year. So you got visibility with that business usually about six months in terms of how things look. And the outlook looks positive for the long-term. In terms of the life sciences application, we’ve had really nice uptake in the pharmaceutical customer base, still a small proportion of the total. If you recall, when we acquired FEI, it really had the flagship universities around the world acquiring cryo-electron microscopy. And one of the things that we wanted to do was to democratize it towards the pharmaceutical industry, and that’s actually going very well. So that bodes well for the future and expect that over time, life sciences will continue to be a bigger and bigger proportion of total electron microscopy sales, and that bodes well for the long-term outlook for this business as well.

And Jack, as a reminder, that profile for this business is essentially built into our guidance from the beginning of the year and consistently in our guidance through the year.

Great. Yes, that makes sense. And just as a second question. I was hoping you could give a little bit more color on the European region and just how some of the impacts, whether it’s trading tariff or conversation around Brexit and, finally, Easter pacing, how you thought some of those different impacts may have impacted the quarter.

In terms of Europe, conditions were pretty similar to what we’ve been seeing with some level of macroeconomic concern, not Thermo Fisher-specific concern, but there’s lots of buzz about what the world is going to look like. And conditions seem to continue to be stable from that perspective, and our team is doing a good job of serving customers well and helping them navigate the environment. So Europe is playing out with moderate growth.

Any impact on – from Easter that you think?

Not a material impact, no.

Okay. Thank you.

Next question comes from Doug Schenkel with Cowen.

Good morning, guys.

Good morning

Your original core revenue growth guidance for the year factored in the assumption that China would grow in the mid-teens. If this is still the case, I believe mathematically, this would imply that you’re assuming China growth moderates in the second half versus the first half. So my questions are: first, is China guidance unchanged; and two, are you seeing any change in conditions? And I asked the second question because we have seen some trade data that suggests there was a bit of a moderation in China tools experts over at least the first two-third of the second quarter. So any comments on both of those topics would be much appreciated.

Great analytical question. So conditions are fine in China. When I look at the performance, we had mid-teens in the quarter. When I look at the outlook from the year, no change. There’s not a negative change going forward. So it’s not implying any slowdown in the growth relative to what we expected, and conditions continue to be good. So that’s very positive. One of the real highlights in China is the continued, rapid emergence of biotechnology industry in the country. And that bodes well for all of these innovation companies wanting to work with the best company in the field in terms of supporting their scale up. So really a good end market for us from that perspective. So nothing – no yellow flags as well to China.

Okay. That is super helpful, Marc. And just a quick cleanup, I think, for Stephen. Just back to the data storage outage or the data outage, did that impact margins in the quarter? Yes, I know there was an earlier question about margins. I’m just wondering if that might have had some impact on results as well beyond the top line.

Yes. When you think about the revenue here, these are shipments that were about to be made in the last few days of the quarter. So we basically lost the contribution margins with the seasonal profitability that would have gone with them. So it was some impact, but not a significant impact in Q2.

Great. Thank you.

Next question comes from Stephen Beuchaw with Wolfe Research.

Thanks. Good morning. Thanks for the time here. One bigger picture one for Marc and then just a couple of tie-ups for Stephen. Like some, I think I may be looking here at the trends, particularly in pharma and, to some extent, in LPS in thinking, well, how is it these guys are doing it? And I appreciate some of the commentary you provided earlier. But I wonder if you could zone in specifically on within pharma, the corporate account strategy. Any chance you could give us some color on how much bigger that is today versus 12 months ago and whether that’s a critical driver?

Yes. So when I think about pharma and biotech in the end market, not a really strong quarter for us, and it was broad-based in terms of across our product lines. Excellent performance from pharma services and bioproduction. Our customers really respect and appreciate the value proposition. We help them with their innovation pipelines. We help them drive productivity. Because of the scale of the relationships we have, we have unique access to the decision-makers. And those customers are doing more business with us, but also the pipeline of activities with us is very strong. So that’s part of it. And these small and emerging companies, the innovators that are in the earlier stages of their history, really are about speed to market, and they’re relying on us to help them through their development work and scale up and help them with their logistics and clinical trials, all things that we do, and that’s also been driving very strong growth for us. So it’s broad-based. It’s not only by customer type within pharma and biotech, but it’s broad-based in terms of our product offering as well. So pretty good end market for us, and we’re uniquely positioned to capitalize on it.

Okay, much appreciated. And then two quick ones, Stephen, for you. One is, do you have a sense for what the impact on back half earnings is in total for Brammer? And then given that what happened with the data center was a little bit more concentrated on the Analytical Instruments business, any color on growth phasing, specifically for AI? As you were nice enough to provide it, the total company level would be really helpful.

Yes. So on Brammer, the timing of the announcement of the – of the closure of the acquisition had about $0.14 impact on the year. So that’s really in the second – that all comes in the second half of the year. In terms of the phase, well, I gave the phasing at the company level in terms of the organic growth, and you can think about that for the split between Q3 and Q4.

And sorry, my question was about phasing in AI. Any chance you have any commentary on Analytical Instruments phasing?

So I guess in terms of the phasing, we really don’t go down to that level of detail, and we’ve given you help on that one. So I think that chroma mass spec and chemical analysis are expected to continue to do really well. And Marc outlined the profile for the electron microscopy business, just an idea of how we think the rest of the year will play out.

Okay. Thank you very much.

Next question comes from Patrick Donnelly with Goldman Sachs.

Great. Thanks, guys. Maybe just one, sticking on the AI business. The growth normalized. With the power outage, we had a kind of 5% organic. Still, the latest has been since before FEI became part of organic growth, it didn’t seem like comps were overly demanding there. So I was just wondering, it’s been trending high single, low double digits over the last year. Could you just talk through what you saw there and if any markets were kind of softer than they’ve been in the past few quarters?

No, I’d say pretty normal conditions in terms of the end markets. I think that one of the things that’s really exciting was how ASMS played out for us, and that bodes well for the second half for our chromatography and mass spectrometry business. And it’s probably in the noise level, some stuff there, so I wouldn’t read too much into it. The conditions seem good. The teams felt good about what the outlook is for the business. In terms of the materials and structural analysis business, I think we covered that one already.

Okay. And then maybe just specifically on the Fisher channel business. Can you just talk through the performance there? Any change in the end market trends? Any change in the competitive landscape? Would be helpful to hear.

Yes. So when you think about our products and services, our pharma services business had an excellent quarter. We had good growth in our channel business and more moderate growth in our lab products business. So that’s sort of how you get to the numbers that we reported in that segment. No change to the competitive dynamics in the channel business, and that business continues to perform very well.

Thanks, Marc.

Next question comes from Dan Brennan with UBS.

Great. Thanks for taking the question. I was hoping, Marc, you can walk us through a little bit in China, just go to the various segments and how they performed to you in particular, just give us an update on anything related to generics and food as well.

Yes. So Dan, thanks for the questions. China continues to be very strong. And when I look at the details of that, we have minimal exposure to the generics industry, so not a factor for us. And food continues to be fine from that perspective. When I think about the growth in the quarter, we had good growth in our materials and structural analysis business, but not as strong as it was in the prior year. So that’s probably the single biggest driver of the slight change in growth, but no change in the robust outlook for China for us for the year.

Great. And then to some – back to biopharma business, really strong again. I think your guidance for the year was high single. You guys are running low double digits right now. Is low double digits sustainable? Or should we be expecting kind of a moderation in the back half implied in your guidance?

Yes. When I think about the full year outlook, Pharma & Biotech is going to come in somewhere between high single and low double. That’s the range that it’s going to come in for the year.

Yes. And Dan, as a reminder, the way we guided for the year is essentially a normal year-end spend by our customers, which will include Pharma & Biotech in Q4, wherein we’ll see how that plays out in terms of comparison against two years of strong year-end spend in Q4.

Next question comes from Dan Leonard with Deutsche Bank.

Thank you. So first off, staying with pharma. Marc, can you disaggregate the performance there between bioproduction and the rest of your exposure to Pharma & Biotech? Is that – how important is bioproduction to the double-digit growth rate? And will you be growing double digits if you thought about the business excluding that?

It’s a good question. I haven’t done all of the math that way. But I would think it would have been high single. If you took bioproduction out, you probably will have high single-digit growth in all the other businesses. We had businesses that – other businesses that also grew double digits beyond bioproduction and certainly a customer set. But bioproduction continues to be incredibly strong because of the outstanding market position we have in single-use technologies and cell culture media. Our customers are simply choosing to work with the industry leader and respect our technologies and our expertise, and that bodes well for the future.

And then a follow-up, Marc. Can you comment on whether or not the pharma M&A environment is impacting your outlook at all there? We now have the third large mega merger announced this year. And I know you’ve historically been well positioned, but the three in one year is kind of a lot. So could you comment on that?

Yes. So we have done well when the pharmaceutical industry has consolidated because we are part of the synergy plans, and we bring our best thinking and help our customers meet their innovation and productivity level. So we will come with proposals to help them be more effective and meet their targets, and our growth has benefited from those events .So we have plans for each of those different combinations. And for the one that’s closed, we’re actively working with the customers; and the other ones, we’re in the planning phase

Okay. Thank you.

You welcome.

Next question comes from Steve Willoughby with Cleveland Research.

Hi, good morning. Thanks for taking my question. Just a couple for you. First, just following up on Dan’s question. I was wondering if you could just give us some insight on how much your bioprocess or bioproduction business grew this quarter. I believe in the past, you’ve been talking about how it’s been growing over 20% the last few quarters. And a few of your competitors in that space have highlighted how that business maybe even accelerated for them in 2Q. So just wondering if you saw that as well. And then I have a follow-up.

We had another outstanding quarter in bioproduction. And of the results that I’ve read so far, we’re the fastest-growing bioproduction company organically. That’s how I would characterize it

And then, Marc, on more than one occasion here this morning, you’ve called out strength in chroma and mass spec. And so I’m just wondering if you can maybe elaborate a little bit more on that, if you see that strength as being more market-related versus share-related, and is that strength or the growth you’re seeing in chroma mass spec any different than what you’ve seen over the last several quarters.

No. This is a business that we have consistently gained market share, I don’t know, for the last five, six years, maybe longer. And when I look at what the outlook is for the business, I look how the team performed, I look at the feedback from ASMS, it felt like another typical quarter for us.

Okay. Thanks very much.

Next question comes from Sung Ji Nam with BTIG.

Hi, thanks for taking the question. Marc, just another one on pharma. Could you remind us what’s your exposure to small molecule versus large molecule? Just curious if there’s anything to call out on the small molecule side this quarter.

We obviously have exposure to all modalities. On a percentage base, I don’t know the exact split off from my head, but it’s going to be more weighted towards large molecule because life science tools and diagnostics, the industry has more activity in the value chain in biologics than they do small molecules. As you think about it, the technologies are actually used in the production of the medicines; whereas instruments in small molecule, well, they’re not. They’re just used in the QC of those medicines. So as the pipelines have shifted and activity has shifted to biologics, that’s benefited our industry and, in particular, it’s benefited us.

Okay. And then just on the genetic analysis side, you highlighted some good – some innovations there on the PCR side. Could you give us an update on the next-gen sequencing side, kind of how that segment has been performing?

Yes. A very small proportion of the total company, but another very strong quarter in oncology as we continue our strategy of helping oncologists diagnose patients, and we’ve had a very strong quarter in that segment of the business.

Thank you.

Next question comes from Catherine Schulte with Baird.

Good morning, thanks for the questions. Turning to China, with 2020 being the 5th year in China’s 5-year plan, any color on what you’ve seen in prior cycles in that final year? And have you historically seen any budget flush-type dynamics? Or conversely, any slowdown as they position themselves for the new Five-Year Plan?

Historically, we have not in terms of sort of a real dramatic change. And usually, the new plan is well socialized so that folks know what to focus on within the customer base.

And their revenue base is actually pretty broad-based across different needs across China. So if you’re more a pure-play competitor, more exposed to one specific end market, it could be more material. But for us, the breadth really helps.

Okay. Great. And then, Marc, you’ve talked about Brammer quickly becoming a $0.5 billion business for you potentially. Once you have the Lexington facility up and running along with the other currently planned expansions, would those give you the capacity to reach that $500 million threshold? Or will you need more expansion to get there?

Yes, that will cover the capacity needs to meet that number.

Great. Thank you.

And our next question comes from Mike Gokay with Janney.

Hi, Marc, it’s Paul Knight. How are you? Yes, sorry to hop on late. The acquisition in Cork, Ireland, can you talk about your strategy behind that? And I guess we should expect more pieces to follow as you build a kind of a global strategy in this market. But I guess the question is, what’s the strategy behind the Cork deal?

Sure. Paul, thank you for the question. So a small proportion of our pharma services business is making highly complex Active Pharmaceutical Ingredients that are made in the West. And we have a state-of-the-art facility in Linz, Austria, and we acquired a couple of years ago a state-of-the-art facility from Roche in South Carolina. As we looked at all of the development work that we have won, our capacity utilization is getting high. And it was much more cost-effective to buy another state-of-the-art facility from GSK and never thinking about breaking ground because facilities like this would cost $0.5 billion plus if you try to build it from scratch, if not more. And we’re acquiring that for EUR90 million with a base of business. And capacity utilization is attractive to a divesting entity because the facility is not fully utilized, and they know that we will be able to continue to utilize that facility, improve the economics through volume leverage and create a very strong assurance of supply for the existing medicines that are produced there. So it’s kind of a – it’s a – in a way, it’s a CapEx project is the way to think about it, but you’re buying it with some level of volume, an amazing workforce and state-of-the-art facility. So that’s the essence of the strategy there. So let me wrap up here. We’re pleased to have delivered an excellent first half. We’re in great position to achieve another outstanding year. And as always, thank you for the support of Thermo Fisher Scientific, and we look forward to updating you at the end of Q3. Thank you, everyone.

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