Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2013 Second Quarter Earnings As a reminder, this conference 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.
Good morning and thank you for joining us. On the call with me today is Mark Casper, our President and Chief Executive Officer and Pete Wilbur, 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 23, 2013. A copy of the press release of our 20 13 second quarter 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 March 30, 2013 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 future. We specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward looking statements is 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 Q2 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 Mark. Thanks, Kent. Good morning, everyone.
Thank you for joining us today for our Q2 earnings call. I'm pleased to report that we delivered another solid quarter. Our growth initiatives are clearly creating value for our customers. And as always, we continue to carefully manage our costs. The result was good performance on the top and bottom line and I'm proud of our teams for getting the job done.
With a solid first half behind us, we're in a great position for the balance of the year. I'm confident that we'll continue our momentum to achieve the goals we've laid out for 2013.
With that, let me
move on to the highlights for the quarter starting with the financials. Our revenue and adjusted EPS were both 2nd quarter records. Revenues grew 4% and adjusted EPS increased 8%. Turning to operating income. And our adjusted operating margin expanded by 30 basis points.
The environment is still challenging and conditions remain similar to what we've seen during the past services to our customers as efficiently as possible. Our results clearly show that our formula is working. Let me take a moment now to put some color around our performance in the context of our key end markets. From a macro perspective, I would say that the dynamics are pretty consistent with what we've seen in prior quarters. Starting with academic and government.
We grew here slightly in Q2. That said, our view on this end market hasn't changed and we still expect it to remain challenging for the balance of the year. This was the 1st full quarter of sequestration and markets in the U. S. Were slightly weaker as a result.
However, that was offset somewhat by growth in in academic and government markets outside the United States. In industrial and applied markets, they remain weak overall, similar to what we saw last quarter. And again, it declined in the low single digits. Our businesses serving core industrial customers continue to face a challenging environment and we haven't seen an inflection point Applied markets are certainly faring better than industrial for the most part and are providing some offset here. For example, we Continue to see very strong demand globally for our products used in food safety applications.
Turning to Healthcare and Diagnostics, growth was very consistent with Q1 And remained in the low single digits. Looking at this end market by geography, we did see some effect from lower healthcare utilization in the U. S, but that was offset by a slight improvement in Europe. From a product perspective, we continue to see strong demand for our biomarker tests and our clinical diagnostic offerings. Finally, in pharma and biotech, markets were very strong for us again this quarter and we're really strengthening our relationship with these customers and continuing to gain share.
We grew here in the high single digits as we have for quite a few quarters now. So to sum it up, Overall, our end markets are playing out as we expected. We're executing according to our plans and we're well positioned for the balance of the year. Call. Before I get into the business highlights for the quarter, let me give you a quick update on where we are with our pending acquisition of Life Technologies, which we announced in April.
As As I mentioned during our analyst meeting back in May, we appointed the integration leaders and the planning is now in full swing. The teams of both companies are working together well and they're making great progress. As we move forward, we're really energized about the opportunities we see for the combined company. In terms of additional progress we've made to date, we secured a significant portion of our debt and equity financing, which we announced during the quarter and Pete will give you more of those details. We're also making progress on the regulatory front and we continue to expect that we'll complete the transaction early in 2014.
Now, I'll turn to some of the business highlights for Q2 using our 3 key growth drivers as the framework. They are technology innovation, our value proposition and presence in emerging markets. First, it was an exceptional quarter for innovation. As you know, we basically stole the show at the American Society of Mass Spectrometry this year with the launch of 3 new mass spec platforms that have the potential to revolutionize the way our customers work. Customer applications are evolving all the time, getting more and more sophisticated as the knowledge base expands.
That leads them to push the limits of their experiments and the performance of their instruments. This is probably most obvious in life sciences research where our customers want to analyze Increasingly complex biological samples. So we combine the best of the best thermal scientific mass analyzers. Our flagship Orbitrap, our linear ion trap and our triple quad platforms. And the result was an entirely new class of instrument that we launched at ASMS, the Orbitrap Fusion Tri Bread.
With this extremely high resolution system, Customers can perform analyses that were previously not possible. For example, cell biologists can conduct experiments in in parallel for faster and deeper analysis of proteomes and up to a twofold increase in low level protein identification. The Orbitrap Fusion has the potential to dramatically change the way experiments are run and that can greatly accelerate the pace of life sciences research. We also redesigned our triple stage QuadruPulse systems to boost performance and ease of use. The Quantiva provides the absolutely lowest levels Absolute lowest levels of detection for toxicology, food and environmental testing, while the Endura provides maximum uptime and throughput in forensics, Pharma QAQC and other applied markets.
Since many of our customers use both our hybrid and triple quad technologies in their labs, We also made it easier to integrate these platforms and manage all the data. In fact, we launched a suite of 10 new software packages at ASMS. All of these systems have been very well received by our customers. One last point on innovation. We're very pleased that Thermo Fisher was once again recognized by R&D Magazine on its list of the year's top 100 technologies.
But this was the first time that we actually won 5 awards for our Thermo Scientific products. Our winners include TRUENARK Handheld Drug Analyzer, The IS-fifty and iCap Q spectrometers along with our Dionys ICS-four thousand and the EZ Spray accessory for our chromatography portfolio. It's clear to see that our commitment to innovation is creating value for our customers and contributing to our growth. Let me spend a few minutes on our value proposition, our 2nd key growth driver and give you some examples that highlight the clear advantages it gives us with our customers. I've already talked about mass spec in the context of innovation, but let me add here that one of the reasons we're so successful in building this franchise is that we've Establish deep relationships with our customers and we've done that by partnering with them over the years to deliver a value proposition that only Thermo Fisher can provide.
This is evident in the research and scientific community, which has contributed significantly to strengthening our position in mass spec. But it's also increasingly evident in applied markets where our customers in food safety for example are turning to us first because of our unique depth of capabilities in chromatography. Another example is in our specialty diagnostics business. A longtime customer Roche recently extended our partnership in the area of biomarkers. They renewed a new long term contract with us to use our PCT assay for sepsis on their instrument Systems outside the United States.
Our widely valued our widely recognized value proposition is very instrumental in helping us open the door to new potential opportunities as well. For example, during my trip to China during the quarter, I had the chance to meet with the party secretary of 1 of the key and his staff. We discussed extensively how Thermo Fisher's mission is aligned with the primary societal issues in China. He was amazed at the value proposition I described and how we're able to address the country's most pressing needs in health care, the environment and food safety. That's a good segue to emerging markets, the 3rd element of our growth strategy.
In short, Asia Pacific was very strong for us again this quarter. Our teams in China delivered outstanding growth, well above 20%, which is the 8th quarter in a row of 20% or more organic growth. Although core industrial markets remain weak in the region, we're seeing very good growth in healthcare and applied markets. This is particularly benefiting our mass spec, Chromatography and Air Quality product lines. To build on our capabilities in the region and support continued growth, we invested about $10,000,000 to establish a new China Innovation and Technology Training Center in Shanghai, which we opened in Q2.
The new center will significantly expand product engineering and development to meet the specific needs of our Asia Pacific customers. The facility will also support the training of a couple of 1,000 customers every year and the The use of our analytical instruments and other technologies, a real differentiator that will help us fuel future organic growth. In other emerging markets, our business in Brazil benefited again this quarter from the government stimulus budget. This continued our momentum in the country, which delivered double digit growth again this quarter. Turning now to our guidance.
We're updating We're updating our revenue range to reflect the increased headwinds we're experiencing from currency exchange rates, which are partially Conference Call, offset by our solid operating performance. We now expect to deliver between $12,830,000,000 $12,950,000,000 in 20.13. This will result in 3% to 4% growth for the year that we previously communicated. In terms of our adjusted EPS guidance, We're raising the low end by $0.02 This primarily reflects our solid operating performance in the 1st 6 months of the Call. And some offset from currency exchange and a slightly higher share count.
Our adjusted EPS growth remains at 7% to 9% over last year. So before I turn the call over to Pete, let me summarize the key takeaways for the quarter. Overall, our end markets played out as we expected and our solid execution led to good growth at the top and bottom line. We delivered a solid first half that puts us in an excellent position to achieve our growth goals for the year. We have a lot to look forward to as we continue to reap the benefits of our commitment to innovation, leveraging our value proposition and expanding in emerging markets.
We now have the opportunity to build on these strengths through our pending acquisition of Life Technologies and are excited about the value this transaction will created for our customers and shareholders alike. Now I'll
turn it over to Pete. Pete? Thanks, Mark. Good morning, everyone. I'll start with an overview of our financial performance for the total company, provide some color on each of our 3 segments, update you on our recent financing actions to Fund the Life Technologies acquisition and then conclude with our guidance.
As you saw in our press release, we delivered a solid quarter of top and bottom line results, result in an 8% increase in adjusted EPS to $1.32 GAAP EPS in Q2 was 0 point 7 $6 up 21% from 0.63 in Q2 last year. Looking at the top line, Q2 total revenue increased 4% year over year and we delivered 2% organic growth. Q2 reported revenue includes 2% growth from acquisitions and a nominal negative impact from foreign exchange. Although the revenue impact of FX in the quarter was minimal, as a result of the mix of currencies, primarily weakening of the Japanese yen, The earnings impact was significant, resulting in about 50 basis points of adjusted operating margin dilution and $0.04 or 3 percent of adjusted EPS dilution year over year. Bookings were slightly less than revenue in the quarter, but bookings grew organically in all three segments.
By geography, North America declined in the low single digits, Europe grew in the mid single digits And consistent with previous quarters, Asia Pacific grew in the high single digits, with China once again delivering very strong growth of over 20%. Rest of World grew in the high single digits as well. Looking at our operational performance, Q2 adjusted operating income was up 6% and adjusted operating margin was 19.3%, up 30 basis points from the prior year. We continue to have very strong contribution from our productivity and cost actions, which was partially offset by foreign exchange, as I mentioned previously. We initiated another $10,000,000 of restructuring actions this quarter to help offset some of the FX headwind we're experiencing.
This brings the total amount of restructuring benefit we expect to realize this year to $85,000,000 when combined of the $75,000,000 of benefit from restructuring actions that we initiated and communicated in previous quarters. In total, we realized about $24,000,000 of benefit from these actions in Q2 and about $45,000,000 in the first half of the year. We continue to make strategic investments to drive growth this quarter, primarily in emerging markets to strengthen our global presence and to continue our growth momentum there. Moving on to the details of the P and L. Total company adjusted gross margin came in at 44.2 percent in Q2, down 50 basis points from the prior year, primarily as a result of unfavorable foreign exchange and the medical device tax, Adjusted SG and A in Q2 was 22% of revenue, down 60 basis points from the 2012 quarter as a result of volume leverage and our restructuring actions.
And finally, R and D expense came in at 3% of revenue, essentially in line with the prior year. Below the line, net interest expense in Q2 was $57,000,000 $7,000,000 above last year as a result of the debt we issued in Q3 2012 to fund the One Lambda acquisition. Our adjusted tax rate in the quarter was 15.6 percent consistent with our previous guidance and 160 basis points lower than last year as a result of acquisition tax synergies and our ongoing tax planning efforts. In terms of returning capital, we paid out $54,000,000 in dividends to our shareholders in the quarter. As we discussed on the Q1 call, we've suspended our buyback program in light of our pending acquisition of Life Technologies.
So there were no share buybacks in the quarter. Average diluted shares were 363,500,000 in Q2, Down $5,700,000 or 2 percent from last year, reflecting the benefit of our previous share buyback programs. However, our share count is up by 1,800,000 shares from Q1, primarily as a result of option dilution. Turning to cash flow and the balance sheet. Year to date cash flow from continuing operations was 778,000,000 And free cash flow was $650,000,000 after deducting net capital expenditures of $128,000,000 Year to date free cash flow was down from the prior year, primarily as a result of increased working capital investment.
As Expected, we also expended $58,000,000 on fees associated with the financing of our pending acquisition of Life Technologies, which lowered free cash flow in the quarter. We anticipate that our working capital performance will improve in the second half of the year, although our full year results will be negatively impacted by the financing fees, which were not included in our previous full year outlook for free cash flow. We ended the quarter with $1,400,000,000 in cash and investments, up $405,000,000 sequentially from Q1, driven by our free cash flow. Our total debt at the end of Q2 was $7,100,000,000 essentially flat with Q1. Now let me wrap up my comments on the total company with a quick update on our return on invested capital performance.
Our 12 12 months adjusted ROIC through the quarter of 2013 was 9.7 percent, up another 10 basis points from Q1. So we continue to make good progress on return on invested capital. Call. So with that, now I'll walk you through the performance of our 3 business segments. Starting with Analytical Technologies.
In Q2, total revenue grew 4% and organic revenue also increased 4%. We saw Strong growth in our bioprocess production business again this quarter as well as in our chromatography and mass spec business, which benefited from strong performance in China. This was partially offset by the softness we continue to see in our core industrial markets, which are more highly represented in this segment. Adjusted operating income in Analytical Technologies increased 5% and adjusted operating margin was 17.7%, up 30 basis points. During the quarter, we delivered very strong productivity, which was partially offset by unfavorable foreign exchange and strategic investments.
Turning to the Specialty Diagnostics segment. In Q2, total revenue grew 8% and organic growth was 2%. We continue to deliver very good growth in our Clinical Diagnostics business and Europe is starting to stabilize across the segment. Adjusted operating income in the segment increased 9% in Q2 with adjusted operating margin at 27.3%, up 10 basis points from the prior year, primarily as strategic investments and the medical device tax. In the Laboratory Products and Services segment, total revenue and organic growth Organic revenue both grew 3%.
Our Clinical Trials Logistics business continued to deliver strong growth And our laboratory consumables business had good growth as well. Beauty conditions in the U. S. Academic and government end market as a result of and Services grew 3% and adjusted operating margin was 14.5%, up 10 basis points driven by improved productivity, offset partially by strategic investments. Before I move on to 2013 guidance, I want to provide a brief update on our activities to finance the Life Technologies acquisition.
As a reminder, we put in place of $12,500,000,000 bridge loan facility when we announced the transaction with the attempt to reduce the amount of that facility as we secured more permanent forms of financing. To date, we've secured $7,500,000,000 of permanent financing, which consists of a $5,000,000,000 term facility, which allows for LIBOR based borrowings and we don't expect to drop on this facility until we're ready to close the acquisition. So there are currently no funds borrowed and therefore no related interest expense at this point and $2,500,000,000 of equity via forward sale of Thermo Fisher common shares. As a forward transaction, no shares have been issued yet, so there's no impact to our share count, except for a slight amount of treasury stock method dilution based on our shares trading about the forward price. We expect to issue the related shares just before we close the acquisition.
With these two financing arrangements in place, We've reduced our bridge commitment by $7,500,000,000 and we'll reduce the bridge facility to 0 once we've secured the rest of the financing. At this point, we expect the remainder of the financing will consist of $3,500,000,000 to $4,000,000,000 in debt, which will most likely to be in the form of bonds and up to $750,000,000 of equity or equity linked securities, the amount of which will be dependent on our available cash upon closing the transaction. Interest rate on new debt. Although rates have gone up a bit, we still expect our average rate to be at or below our previously communicated average of 3.25% to 3.5%. So with that, I'd like to review the details of our 2013 guidance.
Please note that as I mentioned on our Q1 call, our 2013 earnings guidance does not include the acquisition of Life Technologies or the impact of related financing activities. In terms of our reported revenue guidance, many foreign currencies specifically in the Asia Pacific region have weakened further since our previous guidance And we now expect an additional $50,000,000 of revenue headwind from foreign exchange for the year. On the organic revenue front, We're raising the low end of our organic growth guidance by $40,000,000 based on our year to date performance, which offsets a portion of the FX headwind. That results in a narrower guidance range as well as a $20,000,000 increase in the midpoint of our organic growth. But we're still expecting 2% organic growth for the year at the midpoint.
The net result on reported revenue is that we're lowering the high end of our guidance by $50,000,000 for FX and the low end by only $10,000,000 which leads to our new range of $12,830,000,000 to $12,950,000,000 This range represents reported growth of 3% to 4% over 2012, which is unchanged from our previous guidance. Completed acquisitions are expected to contribute about 1.5% to our reported revenue growth in 2013, No change from our previous guidance. And we now expect foreign exchange to have a negative impact on our top line of about 0.75% which as I mentioned has deteriorated since our previous guidance. The bottom line impact from FX on our full year is even more significant and is now expected to result in 30 basis points of adjusted operating margin dilution and 0 point for 2% of adjusted EPS dilution year over year. In terms of our adjusted EPS guidance, We're raising the low end and tightening our previous range by 0 point EPS guidance range of $5.29 to $5.39 or 7% to 9% growth over 2012.
To bridge the midpoint, which is up $0.01 versus our previous guidance, we lost about $0.03 as a result of the FX headwinds and another penny as a result of a slightly higher share count due to the equity forward accounting. This was more than offset by improved operating performance, which contributed about $0.04 and a slightly lower tax rate, which added another penny. Consistent with past practice, we haven't attempted to forecast future foreign currency exchange rates and our guidance does not include any future acquisitions or divestitures. Turning to adjusted operating margin. We're expecting expansion of 30 to 50 basis points consistent with our previous guidance.
And moving below the line, we're We're expecting net interest expense to be consistent with our previous guidance. We're forecasting our adjusted income tax rate to be at about 14.5% at the low end of our previous guidance. And we're assuming that we'll return a total of about $310,000,000 of capital to shareholders, composed of $90,000,000 in share buybacks that we completed in Q1 and about $220,000,000 in dividends for the full year, unchanged from our previous guidance. Full year average diluted shares are estimated to be in the range of 364,000,000 to 366,000,000 about 1,000,000 shares higher than our previous guidance as a result of the equity forward accounting as I mentioned earlier. Finally, we expect capital expenditures to be in the range of $300,000,000 to $315,000,000 and free cash flow to be in the range of $1,700,000,000 to 1,800,000,000 which is $100,000,000 lower than our previous guidance, primarily as a result of financing fees and transaction costs associated with our pending acquisition of Life Technologies.
In interpreting our revenue and adjusted EPS guidance ranges, as I've said in the past, you should focus on the midpoint as our most likely view of how we see the year playing out. Results above or below the midpoint will depend on the relative strength of our markets during the year as well as the economic factors we've discussed. In summary, we once again managed through the macro environment, executed well and delivered good growth in revenue and adjusted EPS. With half the year behind us, I believe we're well positioned to meet our full year goals. With that, I'll turn the call over to the operator for Q and A.
To Thermo Fisher Management team. I would like to ask that you limit your time on the call to 1 or 2 questions. Return to the queue and pose your question and answer session. Our first question comes from John Groberg of Macquarie. You may begin.
Good morning. Congratulations on another solid quarter. Mark, I just wanted to focus a little bit on the government and academic, because it sounds like If I heard you correctly, overall, you saw some growth in the quarter and I think it was down in the Q1. So just wanted to get a little bit more Inside geographically kind of how you saw things change and maybe in the U. S, How much of a headwind that's being on the LP and S business right now?
And in China, maybe how much it's growing given the industrial business is down?
Sure. So John, thanks. Essentially the end markets are the conditions are the same in academic and The nuance in the quarter was we had our 1st full quarter of sequestration, right? So you had a slightly weaker in the U. S.
That was offset by a little bit of strength in the markets outside the U. S. So we reported Slight growth, but I wouldn't read much of a trend or change from what we saw in previous quarters. In terms of where you see the headwind most, as you I mentioned correctly, lab products and services are going to have the largest exposure to the U. S.
Academic and government proportion. So that's where the headwind would be Most significant.
And just to be clear, is that how much of a headwind is that right now to the Life to the OPS Business?
It's probably in the range of 1% to 2% for that segment.
Okay. And then just a quick follow-up on your Comments on Life, Mark. I'm guessing you're spending a lot of time getting to know the business quite a bit better, the products And markets and customers. And I'm just curious as you kind of look through and think of the potential of combining proteomics and genomics and what you both have in forensics and opportunities in bioproduction. Just as you dig into it, do you have any kind of further thoughts or Some of your early discussions with customers about where you think there are some what's getting you Even more excited I think was your comment on the call?
Thanks.
Yes. If you since our last update, which I guess was the analyst meeting, We have our integration teams are really in the full action mode at this point. So I've had an opportunity to interact with Several thousand of our soon to be new colleagues at Life Technologies through town halls, and at the same point really get to know the integration teams and their progress. We're excited, I mean, obviously about what the potential is in the future and the feedback we get from our Customers, obviously, we're still 2 separate companies, but the feedback we're getting, kind of on inbound calls has been very, very, very positive. And I think there's great opportunities in the life science research area over time when you think about the workflows That have an intersection between proteomics and genomics.
I actually thought that at the analyst meeting, the microbiologists that we had talk I'll give a good example of how their work has both genomics and proteomics literally side by side In dealing with the challenges of infection in the health care system. So I thought that was a good example that our collaborator in the U. K. Highlighted at that particular venue.
Okay, great. Thanks, Melian.
Thanks, John.
Thank you. Our next question is from Dan Brennan of Morgan Stanley. You may begin.
Hi. Thanks for taking the question guys. Just wanted to get a little more clarity on the pharma customer Certainly, it continues to perform quite well. Maybe just two questions there. Number 1, anything notable, Mark and Pete, on Kind of spending patterns in the quarter.
You hear some rumblings already this quarter about maybe some capital budget restraint as we ended it kind of get towards the end of the quarter. I'm just wondering in your high single digit growth kind of any further clarity you can provide on the pacing and or the dynamics underneath that?
Dan, thanks for the question. PharmBioTek has been really strong for us. It's clear that we're continuing to gain share, which we have for a number of quarters. We've seen really good strength across the portfolio, obviously highlighted by our clinical trials logistics business where our value proposition is just is really is Phenomenal in terms of the ability to have a very high quality offering that reduces our customers' costs and we are benefiting from Our bioprocess production capabilities, which is coming from demand for vaccines and biotherapeutics from around the world. In terms of the pattern through the quarter, no, in fact, the quarter ended fairly strong for us.
So we felt good about the pacing of of the orders and we thought that that gave us confidence that when we thought about our guidance for the year that we slightly raised the organic outlook on the low end as we put a solid first 6 months behind us.
Great. Thanks for that. And then maybe one more customer question Mark and Pete just in terms of industrial. I I know you said things kind of trended as you expected in the quarter, but since that business is the one that you've incorporated the biggest headwind within your full year guidance, just interested To hear kind of anything notable kind of within pacing or geographic and industrial, just If it's spot in line or are there any kind of opportunity maybe to see some improvement in industrial as while China is weak and the rest of the world looks like we're gaining some traction? Thanks.
So Dan, in terms of industrial, in the industrial and applied markets, we were down low single digits, Which was similar to last quarter. It was actually at the low end of our expectations in terms of the market. We have not seen the inflection point in core industrials. So we continue to remain cautious on the outlook. And to give you a little bit more flavor or color, on the core industrial side, We had good strength in molecular spectroscopy, which is primarily a result of strong new products that we've launched over the last 18 months or so.
But in certain parts Parts of the Industrial segments driven primarily by commodity materials, pretty weak. Examples there would be portable instruments used for scrap metal sorting That would be a weekend market right now. And then on the applied side, we continue to see pockets of strength and that's helping offset some of the weakness in core Industrial.
Great. Thanks, Mark.
You're welcome.
Thank you. Our next question is from Tycho Peterson of JPMorgan. You may begin.
Tycho, are you on mute?
No. Can you hear me okay?
Perfect.
Sorry. You made the comment on the healthcare channel About a little bit of a slowdown there. And I guess we going back to 2Q 'nine when you had a bigger slowdown there. I'm just wondering if you can talk in your visibility. I don't think it's anything related to the destocking issues you had before.
But can you talk about your visibility in the healthcare channel? And maybe just elaborate on the comments you made?
Yes. So Tycho, for the quarter in aggregate, the conditions were incredibly similar to Q1, right? So the performance was almost Identical. But we did provide a little more color because as we look at the broad healthcare industry, there's clearly in the U. S.
Some headwinds that aren't particularly significant, but there's a little bit of headwind on utilization. And we saw that nicely offset by some strength in Europe. Really Europe is stabilizing for us and continued momentum in emerging markets. So, for us and continued momentum in emerging markets. So we provide a little bit more color, but the results in terms of organic growth in that customer It was pretty much identical between Q1 and Q2.
Okay. And then on the new MASH spec systems, can you help us just think about sizing the market Tuning for the Orbitrap, the new Fusion and the 2 triple quads. And these things always take a couple of quarters to gain traction, but when do you think they'll start to actually
commentary. We're one of 4 participants in that market that have been in that market forever and We're the company now with the new systems, right? So we have 2 new systems launched and that will allow for both a replacement cycle for our current Customers and a share gain opportunity for taking share from other competitors. On the OrbiTrapp TRIBrid product, the Fusion. We're very excited.
Actually the feedback from our collaborator has been incredibly positive. And it's a little early to call how big it will be. But I would say that when I thought about the enthusiasm I had for the QXACT a couple of years ago and said that was going to be a whole new category of instruments. That was clearly the case. And I would say my early read on the feedback is that call.
This could be very significant in 2014. We clearly will we're already starting to ship the product, so it's not as It's all in the future, but I think this can be a really significant growth driver 6 months out from now with some Nice momentum in the short term.
And then last quick one on life. Have you guys filed in China at this point for antitrust? And then secondly, as we think about the integration, how easy are Things like PPI to transfer over to their business and how he's used it to put the life products in your catalog. Can you just talk about some of those metrics as well?
Yes. So the integration teams, let's do that one first. I want to go to regulatory. So from an integration team In terms of getting the right products on the right e commerce platform and then the right training, the right commercial teams for that. That stuff is all being thought through and that will get metered out over the 1st year or 2.
If you look at how we phased our Revenue synergies typically really start to roll in year 2 and 3. Cost synergies start on day 1. So there's a little bit of time and obviously we try to shorten that window as much as we can. But we feel very, very confident in our ability to not only successfully integrate the business, but drive good growth out of it. In terms of the regulatory process, we are continuing to To go through that process, it's going according to our expectations.
We're still anticipating exactly as we have before that we're going to close Early in 2014. And we don't really comment on the specific filings and the nuances of where we are with those things, but it's going according to for the plans we laid out. Thank you very much.
You're welcome, Taylor. Thank you. Our next question is from Ross Muken of ISI Group. You may begin.
Hey, guys.
Hi, Robert.
On Europe, we got some decent PMI data today. I know So most of the weakness you've seen has been more so focused on the specialty diagnostics business for Fadi. I mean, as we think about sort of the general trajectory there in the region. If we do get sort of a modest recovery or at least a modest return to growth Overall, what's the correlation between that and some of those businesses that have struggled that maybe has been more reimbursement or utilization related? And
what are
you sort of assuming for that in the back half of the year in terms of growth?
So when we looked at the quarter, our Specialty Diagnostics business, which has a significant exposure To Europe, primarily because of our immunodiagnostics business, which as you mentioned, we definitely saw a stabilization there. So we And the question is, is it 1 quarter or is it the beginning of a trend? And that's hard to tell, but we're watching it closely and we were happy with the stabilization that In terms of what we're assuming in our outlook for the full year, we really haven't changed the geographic outlook Particularly significantly, we thought about it more from an end market perspective as we look at the remainder of the year Ross.
And maybe just on China, you guys have done a tremendous job there. There's been a lot of noise. I mean, you kind of talked about it One of the prior questions in terms of some of the commodity related businesses, industrial related businesses being softer. But as you think about sort of the go forward, I mean today there was a big It's about them continuing to do hospital reform. It seems like healthcare and the multinationals are investing.
I mean, as you try to put all the Pieces together of your performance versus sort of the perception of what's going on in that market, where do you feel like the biggest disconnect is Where you're kind of insulated from maybe some of the concerns that people have had?
So when you look at our business in China, We're using our scale to our advantage, right? We have manufacturing. We have an R and D center. We have multiple training centers. We have a business headquartered there.
We're closing in quickly on 3,000 colleagues. We recruit from the best universities. We are clearly very well positioned in the market and that's helping us It drives significant growth having quite a number of quarters of 20% plus growth and this being one of our stronger quarters that we've had. When I look at why, so that's sort of our strategy, but we're very well aligned with the societal needs in the 5 year plan, right, which is around environmental protection, food safety and expanding health care capabilities particularly in the West. And while I mentioned in my prepared remarks, to get Multiple hours with an entire government for 100,000,000 people in a province to really talk about our capabilities and their challenges and what the opportunities are for alignment gives you a sense of the importance even though they brought up in the dialogue that, yes, the industrial economy in their own province is a little bit Right.
And that has an effect on their GDP growth. But nonetheless, they thought it important enough to actually talk through what we could do and collaborate together to really meet with their needs on their
own priorities as well. Great. Thanks, Mark.
Thanks, Ross.
Thank you. Our next question is from Derik de Roan of Bank of America Merrill Lynch. You may begin.
Hi, good morning.
Good morning, Derik. Good morning.
Hey, I just I sort
of want to follow-up on Tycho's question on Specialty Diagnostics. I mean, you've basically over the last couple of quarters, you've seen Organic revenue growth go from 6% in Q4, 4% last quarter, 2% this quarter. I'm just wondering how we should Think about that business on a go forward basis and just given that particularly since the next couple of quarters the comps actually get tougher on that from an organic basis. Can you just help us think about sort of what's going on in the overall dynamics of that business?
I think it's always most helpful to think about what the long term Trends are for that business as opposed to the next two quarters. And my view is in the long term given the portfolio and the societal needs for our products, that's a solid mid single digit growth business for us. And we feel good about that in the midterm outlook. In terms of the comparisons, yes, you're right. We have tougher comparisons.
And I would say that we're not expecting significant changes in And the organic growth in the second half of the year in Specialty Diagnostics, nothing particularly meaningful.
Great. And then just one Quick follow-up on this. It's like so
what
do you see in terms of your plans for Specialty Diagnostics business once you have the Life Technologies capabilities there. I mean, what sort of I mean, how much do you intend to expand this business? What
So, I think you talked through it from a couple of perspectives. Let me just step back one level, which is Our priority post close is to successfully integrate Life Technologies, maximize the value for our customers and deliver on the expectations for our shareholders. So when we think about our priorities, it's going to be around organic growth. And we do see really great capabilities of leveraging the infrastructure that we have in specialty diagnostics to continue a theme that we've had for many, many years, which Which is taking life sciences tools and moving them into clinical applications. And I think that when you look at the portfolio of life technologies and you look at Next gen sequencing and you look at qPCR, you think about our own mass spectrometry, there are a number of great technologies that can be moved to the clinic and some are already happening and I think you'll see us continue to leverage those capabilities to drive growth over time.
Great. Thanks.
You're welcome.
Thank you. Our next question comes from Doug Schenkel of Cowen and Company. You may begin.
I have, I guess, a couple of questions on the separation analysis market. So, let me just run through those and I'll get back into the queue. So early data from a couple of your competitors in mass spec suggests the market's growing at mid single digit to high single digit levels. Would you agree with that? And what are you seeing in different product classes and end markets?
And then on the liquid chromatography front, Are there any changes in competitive dynamics or notable changes in demand patterns either on the QAQC or non QAQC And are you confidently gaining share via Dionix? And if so, should we view this as an example of How you can gain share via both growing breadth and innovation in line with the 2 I guess 2 of 3 components of your Your proposition. Thank you.
That's very well said. So I think I have to go back to the transcript and put that on my script Let's do the second half first, which is about chrome and the value proposition. We had a very strong quarter In our chromatography business, HPLC did very well. And while all of the Competitors haven't reported yet. At least from the early read, it looks like we gained share again.
So that's a good thing. And I think customers respect our technology, the great people that we have and the The fact that we have incredible commercial reach, right? I mean, we just have a huge scale set of capabilities and Our customers are very collaborative, right? So we have great momentum in chromatography and food safety as an example and that's a good area to highlight. So we feel good about the momentum in HPLC.
In terms of the market growth on mass spectrometry, I mean, it's somewhere in the mid to high single digits. I think that Seems like a reasonable assumption. We feel good about our performance. We're particularly excited about the new products that we launched and feel like that positions us for continued momentum going out into the balance of this year and into of 2014.
Great. Thank you.
You're welcome.
Thank you. Our next question is from Brandon Couillard of Jefferies. You may begin.
Hey, good morning.
Good morning. Pete, could you parse out
the puts and takes around the gross margin experience in the quarter between mix, currency, acquisitions and productivity? I'm assuming the medical device tax was still around 15 basis points of headwind, but what exactly changes in the second half to get you towards The operating margin expansion goal for the year.
Well, so I'll do it at the EBITDA margin expansion level rather than gross margin just Because the numbers are more relevant probably to our full year guidance of 30 to 50 basis points. In the quarter, We had, as I said, 50 basis points of FX dilution. We actually had over 200 basis points of productivity, which is consistent with what we've Had in the past and even that of inflation, we were still over 100 basis points. We spent about 80 basis points on investments, which I said in my comments It's really around emerging markets. And then we got 50 basis points of benefit from acquisitions, which is really around our One Lambda acquisition, which really performed very well in the quarter.
That's what nets down to the 30 basis points. For the full year, the numbers aren't dramatically different than that Obviously, FX the acquisition will be only for basically 3 quarters of a year. FX is around 30 basis points for the full year and then the productivity and investments I would assume is about the same numbers in the full year bridge. Thanks.
That's helpful. And then Mark, I realize Japan is a relatively small market for you, but could you speak to how that market performed? And in particular, Did you see any impact from any stimulus related orders yet?
Yes. So in terms of Japan, you're right. It's not a huge market for us. But given our scale, we actually Have a large organization there. We grew in line with the company a little better than the company average.
I would say that We have seen some meaningful orders on the stimulus and those should translate into revenue in the second half of the year, Which is clearly a good thing. All right. Thank you. You're welcome.
Thank you. Our next question is from Dan Rias of UBS. You may begin.
Hi, good morning. Thanks. Pete any change to the yen assumption for the year relative to last quarter?
It's deteriorated a little bit. We're now using an assumption of 100.
Okay. And then maybe Mark to follow-up on the China question. As we get these sort of up and down macro data points and kind of go back and on whether we're doing better or worse. Are you finding that ordering patterns at all move with the macro sentiment interquarter or for the most part is spending fairly smooth? I mean, Clearly the growth speaks for itself there, but I'm just trying to get a sense of whether you do see any fluctuation maybe month to month?
We've had an incredibly Stable business in aggregate in China for less few years, right? So we haven't noticed particularly big patterns In the quarter, so we had a very strong quarter well over 20% growth. I was in the quarter and I was in China in late May, early June And the business was doing was kind of at that rate then and it obviously finished then. So we saw nice stability in terms of the strong momentum. So So we clearly read the headlines that we see about the various ups and downs, but at least in the end markets that we're serving in aggregate, they continue to be strong and And quite stable.
Got it. Thanks very much.
You're welcome.
Thank you. Our next question is from Isaac Ro of Goldman Sachs. You may begin.
Hey, guys. Good morning. Thank you. Good morning. Just want to ask a little bit about market share and specifically with regards to trends in LPS.
I think earlier in your comments you did mention that you saw some broad market share gains in the business and That's been in the last few quarters, of course. And if you look at the sales funnel going forward, do you think it's possible that you could see continuation or acceleration in those share gains? Or is it fair to say that over the last 12 or 18 months you've been unusually strong on the market share front?
Yes. My view is We like our prospects and we feel like our value proposition is such that it will continue to deliver Good organic growth for us going forward. So we're not assuming big changes in the end markets. So we're not assuming big changes in our performance, Meaning that the share gain momentum we have we expect it to continue, right? And as obviously when we think about our guidance range, Stronger end markets mean we'll raise our aspirations and weaker end markets means we'll come in more on the lower end of things.
So that We try to drive that same steady share gain momentum and the variable that changes is just what are the market conditions.
Sure. And then just one follow-up, sort of a big picture question. If you look broadly at your portfolio, can you maybe comment as to what percentage of your products and services are purchased via maybe a centralized procurement method and maybe what percentage are purchased by the individual user? And the reason I ask is I'm trying to just assess kind of how modality will change post life. Thanks so much for anything you can say there.
Yes. So in terms of Call. It's a very tricky question because it's always collaborative, right? There are some customers that the end user with very little business insight and there are others that business has a heavier weighing. But people don't buy things without the end user involved.
I would say My best estimate of the customer base that is more heavily business oriented is very much in the biopharma area, It's going to be your biggest area. So that represents 25% of our revenue and a meaningful proportion The business community plays a significant role. And when you look at the mix, it doesn't change all that much when you combine the company in terms Of the exposure. Got it. Thanks, Isaac.
Thank you. Our next question is from Amit Bala of Citi. You may begin.
Hi, good morning. Good morning. Pete, a question for you on some of the cost actions. You've added some incremental cost actions in each of the first two quarters. I'm just wondering how you're thinking about the remainder of the year and any incremental cost savings you're assuming to put in place in 3 and 4Q?
Yes. So the $10,000,000 that we put in place this year or excuse me, this quarter brings the total for the year to $85,000,000 So those are actions We didn't actually shut down the factories in this quarter or do the restructuring actions there. They will actually be executed in Q3 3 in Q4, so that's when we'll realize the benefits. We're expecting $85,000,000 for the full year. We've Realize $45,000,000 through the first half, so that would say we're going to get around $20,000,000 a quarter for the rest of the year.
I guess anything you're seeing that would make you put additional cost savings in place? That's the core in place.
Well, certainly, we've continued to put cost actions in place and primarily because of the FX headwinds. So we're trying to offset the negative impact of the FX headwinds. So at this point, we're not expecting that to deteriorate further if Our markets deteriorated further and or FX deteriorated further than we would potentially put more actions in place. But at this point, we don't have any plans to do that.
Okay, great. And just on pricing, any comments you can give just on the global environment for pricing and if there's anything notable within and Diagnostics. Thanks.
So it's very similar this quarter to what it's been in previous quarters. The split in pricing between consumables and equipment is stronger on consumables and relatively weak on equipment, Somewhere between 0.5 percent net for the total company. Specifically in diagnostics, It's probably around that same range. I mean, obviously, that's a consumables business for the most part. So we do get some price Conference in that business.
Thanks, Pete.
Thanks, Amit.
Thank you. Our next question is from Steve Willoughby of Cleveland Research. You may begin.
Hi, everyone. Just wondering if you could provide a little bit more color regarding your business in China. And just maybe remind us What it looks like in China compared to your overall business in light of some of your comments regarding LC and mass spec seeing some strength there and Also in light of maybe some industrial slowdown going on in China these days.
So when you think about the end markets in China, The LC MS spec clearly used very heavily in food safety, used in the academic setting for life science Research, which are the big drivers. The other big business we obviously have there is environmental, which The minute you get off the airplane in China, you realize that environmental opportunity is huge, which is why the business is actually headquartered in China. Healthcare is a strong growing market for us as well. Industrial has been weak now for quite some time, as infrastructure build hasn't been particularly Strong. So those businesses have felt the softening.
But we've been able to power through that softening actually delivered very consistent and strong 20% Or better organic growth now for the last couple of years.
Is the mix of your business in China, is it any different than the overall company really?
Yes. I mean the answer is yes. There's going to be less exposure in aggregate to lab products and services and specialty diagnostics more exposure to the analytical Technologies portion.
Thanks so much.
You're welcome. Operator, we have time for just one more.
Thank you. Our last question is from Jeff Elliott of Robert W. You may begin.
Good morning and thanks for sneaking in here. When you look at the Clinical Trials and Logistics business, where do you think we're at in terms of the overall shift towards outsourcing And what do you think the long term growth prospects are for that business?
We feel good about the prospects for our clinical trials logistics business. In fact, we delivered very strong growth now consistently for quite a few quarters and feel like there's still a huge amount of in house Activity that goes on in biopharma that allows us to continue to drive significant growth. So we feel like That business is well positioned for quite some time ahead and it's been traditionally growing somewhere between the mid and high single digits on a fairly consistent basis. Thank you. Welcome.
So let me just make a couple of quick Closing comments. First of all, I wanted to just to note that I am pleased with our solid first half performance. We remain confident that we'll continue our momentum to achieve our goals for the year. Call. And we of course look forward to updating you on our progress in the Q3 call.
And finally, thank you for the continued support of Thermo Fisher Scientific. Thanks everyone.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.