Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2019 First Quarter Conference Call. My name is Christa, and I'll be your conference operator today. We will have a question and answer session. Thank you. 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 Mark 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 May 10, 2019. A copy of the press release of our Q1 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 annual report on Form 10 ks for the year ended December 31, 2018, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also available on the Investors section of our website under the heading SEC Filings. While we may elect to update forward looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward looking statements as representing our views as of any date subsequent to today. Also during this call, we'll be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP.
A reconciliation of these non GAAP financial measures to the most directly comparable GAAP measures is available on the press release of our Q1 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 Mark.
Thanks, Ken, and good morning, everyone. Thank you for joining us today for our Q1 call. As you saw in our press release, we had a strong start to the year. We delivered another quarter of excellent growth on both the top and bottom line. We continue to effectively execute our growth strategy to put Thermo Fisher in the strongest position to serve our customers.
We launched a number of innovative new products, capitalized on our leadership in high growth and emerging markets and strengthened our unique customer value proposition. We also continue to effectively deploy our capital, announcing our acquisition of Brammer Bio and returning capital to our shareholders through stock buybacks and dividends. I'll cover each of these topics in more depth in my remarks, but first, let me recap the financials. We delivered another quarter of strong adjusted EPS performance, achieving a 12% increase to $2.81 per share. Our revenue in Q1 grew 5% year over year to $6,120,000,000 Our adjusted operating income for the Q1 increased 7 percent to $1,370,000,000 and we increased our adjusted operating margin in Q1 to 22.4%.
So our team executed well to effectively meet the needs of our customers and carry our strong growth momentum into 2019. The strong conditions we've been seeing in our end markets for some time continued in Q1, and we captured the opportunities we had to drive growth and gain share. From a geographic perspective, we saw good growth across all of our major regions. Let me provide you with some color on our performance by end market. Starting with pharma and biotech, this end market remained very strong and we delivered double digit growth during the quarter.
We continue to see broad based strength in our businesses that serve these customers. As you know, we have a unique customer value proposition for pharma and biotech because we can help them to accelerate innovation and enhance productivity across their business. In academic and government, we had low single digit growth in Q1. Looking at this end market from a geographic lens, we delivered another strong quarter in China, saw good conditions in North America and more muted conditions in Europe. Turning to Diagnostics and Healthcare, we grew in the mid single digits during this quarter with strong contributions from our clinical diagnostics and immunodiagnostics businesses.
Finally, in industrial and applied, we delivered high single digit growth in Q1. Our performance this year was led by strong by strength across our analytical instrument businesses. To summarize our performance, it was a great quarter. Our teams capitalized on the good conditions in our end markets and we continue to gain market share. You can clearly see the impact of our growth strategy in our results.
Now let me touch on some of our business highlights from the quarter. As you know, our strategy is based on 3 pillars: launching innovative new products leveraging our scale in high growth and emerging markets and continuing to enhance our customer value proposition. This is our formula for success, and we continue to execute well to create a clear competitive advantage with our customers. I'll start with innovation. And as you've come to expect from us, we kicked off the year with a range of great new product launches.
Let me take a moment to highlight just a few. In analytical instruments, we showcased a number of new products at Pittcon last month under our Thermo Scientific brand. In molecular spectroscopy, we launched our Nikolay Summit FTIR spectrometer, which is designed for QAQC and teaching laboratories that perform high volume materials characterization. The Nikolay Summit reduces analysis time and provides real time feedback on sample quality to optimize customer productivity. And in chromatography and mass spectrometry, to enable safety in food and animal feed, we introduced a new dioxin analyzer workflow.
It incorporates our Triple Quad TSQ9000 GC mass spec system to enable customers to detect dioxins at the lower levels now required by European Union regulations. At a major trade show in Shanghai, we unveiled the Thermo Scientific Helios 5 dual beam, our latest and most advanced focused ion beam scanning electron microscope to date. This new system is designed for materials characterization and analysis at the nanoscale. It sets the industry standard by helping customers develop new products using complex advanced materials. Last, in specialty diagnostics, we received FDA clearance for a new ImmunoCAP test for peanut allergies.
This blood test is designed to help doctors better identify which patients may be highly sensitive to a certain protein in peanuts that can cause severe allergic reactions. This can be a game changer for patients in terms of appropriately managing their allergy and preventing a life threatening event. Turning to the 2nd pillar of our growth strategy. Our continued strong performance in high growth and emerging markets reflects how well we're leveraging our scale to create an outstanding experience for these customers. Building off of our significant growth in 2018, our China business continues to be strong, delivering another quarter of better than 20% growth.
I was in Asia earlier this month
and there's a lot
of enthusiasm from our colleagues and our customers about the opportunities ahead. In China specifically, we continue to see broad based growth across our end markets. We're providing technologies to advance precision medicine, enable the flourishing biotech industry and reduce air pollution to give you a few examples. And we continue to build on our industry leading scale across the Asia Pacific region to meet customer demand and strengthen our competitive advantage. For example, in Beijing and Delhi, we opened new customer solution centers to help scientists in the food and beverage industry develop advanced analytical workflows that improve quality and safety.
These new facilities are strategically placed to help scientists, partners and regulatory agencies collaborate more effectively. In Singapore, I took part in the ribbon cutting ceremony to celebrate our most recent expansion there. This is a great example of how we continue to scale our instrument manufacturing operations to more efficiently deliver products to our customers globally and meet growing demand. Clearly, a lot of opportunity in the high growth and emerging markets and we continue to execute well to consistently deliver strong performance. Turning to the 3rd pillar of our growth strategy, our customer value proposition.
We continue to increase our capabilities and leverage them across the company to help our customers meet their goals. A great example is pharma and biotech, which as you know is our largest and fastest growing end market. We have industry leading scale, depth and access that differentiates us in serving these customers. Importantly, we continue to build on our position to be an even stronger partner for them at every stage from research through drug development to commercial manufacturing. One of the more significant highlights in the quarter was our agreement to acquire Brammer Bio for $1,700,000,000 Brammer Bio is a leader in viral vector manufacturing, helping pharma and biotech customers provide breakthrough gene and cell therapies to patients with rare diseases.
As you know, these novel therapies involve altering the genes inside a patient's cells to treat or cure disease. Modified genes usually have to be delivered using a viral vector because they can effectively carry the genetic material into the cell. Brammer Bio has a unique position supporting gene and cell therapies because it has expertise in a number of different virus types. Their capabilities cover viral vectors used in the majority of gene therapy clinical trials. These therapies hold great promise for patients who are battling diseases hemophilia, ALS and Parkinson's.
This is why the market is so exciting and growing at a rate of better than 25% annually. Brammer Bio expands our CDMO capabilities and will be part of our pharma services business after the close. It also complements our leading biosciences and bioproduction portfolios serving the gene therapy market. Given our scale, depth of capabilities and customer reach, we believe we can meaningfully contribute to helping our customers launch new breakthrough therapies. For example, we provide regulatory expertise to accelerate bringing these drugs to markets and experience in building and expanding capacity with world class quality systems.
This gives our customers the confidence to outsource their critical development and manufacturing activities to Thermo Fisher. We're excited about the opportunities this combination represents for our company, our customers and of course the patients who benefit. It's another example of our disciplined M and A strategy at work and we look forward to closing the transaction this quarter. One final comment regarding Pharma Services. Last month, we announced $150,000,000 investment to build additional capacity and capabilities at our sites in Monza and Ferentino, Italy and Greenville, North Carolina.
This investment will further expand our global sterile manufacturing network. These projects are part of our strategy of deploying CapEx in this business to meet increasing demand from our customers who rely on our biologics, development and manufacturing expertise. In summary, we're very pleased with the progress we're making in building our pharma services capabilities. The integration work is essentially behind us. The business is benefiting tremendously from our PPI business system, and we're hearing incredibly positive feedback from our customers.
We're building on our strong foundation by expanding capacity and capabilities through a combination of capital investments and M and A. And finally, most importantly, the business is performing very well. On that note, let me give you a quick summary of our capital deployment activities so far this year. As I just mentioned, we announced our acquisition of Brammer Bio for $1,700,000,000 in cash. We also returned significant capital to our shareholders during the quarter.
We repurchased $750,000,000 of our stock in January and also increased our dividend by 12%. So an active start to the year on the capital deployment front and our M and A pipeline remains very robust. Let me now turn to our guidance for 2019. As you saw in our press release, we're raising both our revenue and earnings guidance for the full year. This primarily reflects our strong operational performance in Q1 and the acquisition of Brammer Bio, which as I mentioned, we expect to close in Q2.
Stephen will get into the assumptions behind our guidance, but let me cover the highlights. We're raising our revenue guidance to a new range of $25,170,000,000 to $25,470,000,000 which would represent 3% to 5% growth over 2018. In terms of our adjusted EPS, we're raising our guidance to a new range of $12.08 to $12.22 per share, which would lead to 9% to 10% growth year over year. Before I turn the call over to Steven, let me summarize our key takeaways from Q1. We delivered another excellent quarter of financial performance on both the top and bottom line.
We continue to execute our proven growth strategy to be an even stronger partner for our customers and gain share. We effectively deployed our capital to create significant value for our customers and our shareholders. With that, I'll turn the call over to our CFO, Stephen Williamson. Stephen? Thanks, Mark, and
good morning, everyone. I'll take you through an overview of our Q1 results for the total company, then provide color on our 4 business segments, and I'll conclude by providing our updated 2019 guidance. Before I get into the details of our financial performance, let me provide a high level view of how the Q1 played out versus our expectations at the time of the last earnings call in January. As you saw in our press release, we delivered a very strong quarter with 7% organic growth in Q1. This is driven by continued strong market conditions and share gains enabled by great operational execution.
We delivered adjusted EPS that was $0.08 higher than we'd assumed in the midpoint of our previous guidance. This was driven by $0.04 in operational performance, dollars 0.03 benefit of quarterly phasing of tax planning initiatives and $0.01 from less adverse FX in the quarter versus our original guidance. So we're off to a great start to the year. Now let me cover more detail on Q1, starting with earnings per share. This quarter, we grew adjusted EPS by 12 percent to $2.81 GAAP EPS in the quarter was $2.02 up 41% from Q1 last year.
On the top line, our reported revenue grew 5% year over year. The components of our Q1 reported revenue increase included 7% organic growth, 1% growth from acquisitions and foreign exchange headwind of 3%. Looking at growth by geography. Our markets remain strong across the globe. North America and Europe both grew in the mid single digits.
Asia Pacific and Rest of the World both grew in the double digits. And we had another great quarter in China growing over 20%. Turning to our operational performance. Q1 adjusted operating income increased 7% and adjusted operating margin was 22.4%, up 40 basis points from Q1 of last year. We saw strong productivity from our PPI business system and good volume leverage, partially offset by strategic investments and unfavorable business mix.
Foreign exchange was a headwind of just over 3% on our operating income growth in the quarter and negatively impacted margins by 10 basis points. Moving on to the details of the P and L. Total company adjusted gross margin in Q1 was 46.3%, flat to Q1 last year. In the quarter, strong productivity and volume pull through was offset by unfavorable business mix and strategic investments. Adjusted SG and A in the quarter was 19.9 percent of revenue, which is down 50 basis points versus Q1 2018, driven by a strong top line growth and productivity actions.
Total R and D expense came in at 4% of revenue, flat compared to Q1 last year as we continue to reinvest in our businesses. And R and D as a percentage of our manufacturing revenue in Q1 was 6.7%. Looking at our results below the line for the quarter. Net interest expense was $122,000,000 down approximately $20,000,000 from Q1 last year, driven primarily by debt reduction. Adjusted other income and expense was a net income in the quarter of $12,000,000 higher than Q1 2018, primarily due to changes in non operating foreign exchange.
Our Q1 adjusted tax rate was 10.1%, which was 130 basis points lower than Q1 2018, driven primarily by the impact of our tax planning initiatives tied to U. S. Tax reform. Q1 average diluted shares were 403,000,000, which is $3,000,000 lower year over year, mainly as a result of our share buybacks partially offset by option dilution. Turning to cash flow and the balance sheet.
Cash flow from continuing operations in Q1 was $650,000,000 and free cash flow was $455,000,000 after deducting net capital expenditures of $195,000,000 We ended the quarter with $1,100,000,000 in cash and investments. And in terms of capital deployment, as Mark said, Q1 was an active quarter. We continue to return capital to shareholders with $750,000,000 of share buybacks in January. And in February, we announced a 12% increase in our dividend. We were also active with M and A committing $1,700,000,000 for the acquisition of Brammer Bio.
So over $2,500,000,000 of capital deployment actions were taken in the Q1. Our total debt at the end of Q1 was $18,100,000,000 down $840,000,000 sequentially from Q4. Our leverage ratio at the end of the quarter was 2.9x total debt to adjusted EBITDA. To wrap up my comments on our total company performance, we continue to increase ROIC, which is now at 11.1%, up 100 basis points from Q1 last year. So now I'll provide some color on the performance of our 4 business segments, starting with Life Science Solutions.
In Q1, reported revenue in this segment increased 7% and organic revenue growth was 8%. The quarter, we continued to see very good growth in this segment led by our bioproduction, biosciences and clinical next gen sequencing businesses. Q1 adjusted operating income in Life Science Solutions increased 8% and adjusted operating margin was 34.9%, up 40 basis points year over year. In the quarter, we drove very strong volume pull through and good productivity, which is partially offset by strategic investments, unfavorable business mix and a headwind from foreign exchange. In the Analytical Instruments segment, reported revenue increased 5% in Q1 and organic revenue growth was 8%.
In the quarter, we continue to see very good growth across all of our businesses in the segment. Q1 adjusted operating income in Analytical Instruments grew 15%, and adjusted operating margin was 21.3%, up 170 basis points year over year. In the quarter, we saw a very strong volume leverage and productivity and a favorable impact from foreign exchange, partially offset by strategic investments and unfavorable business mix. Turning to the Specialty Diagnostics segment. In Q1, total revenue grew 1% and organic revenue growth was 4%.
In this segment growth in this segment was led by our Clinical Diagnostics and Immunodiagnostics businesses, adjusted operating income was flat versus prior year and adjusted operating margin was 25.3 percent, down 30 basis points from the prior year. In the quarter, we saw good volume leverage and favorable business mix. However, this is more than offset by strategic investments. Finally, in the Laboratory Products and Services segment, Q1 reported revenue increased 4%, organic revenue growth was 7%. In the quarter, we saw strong growth across all of the businesses in the segment, which includes our pharma services, lab products and research channel businesses.
Adjusted operating income in the segment increased 2% adjusted operating margin was 11.3%, which is 30 basis points lower than the prior year. In the quarter, we saw strong productivity and good volume leverage. This is more than offset by strategic investments and unfavorable business mix. So now I'd like to move on to our updated full year 2019 guidance. As you saw in our press release and as Mark mentioned earlier, we're raising both our revenue and adjusted EPS guidance.
Let me walk you through the details. I'll begin with revenue. We're raising the midpoint of our revenue guidance by $240,000,000 and tightening the range by $100,000,000 The $240,000,000 increase to the midpoint consists of 2 elements. First, a $100,000,000 increase in our organic growth outlook for the year to reflect our strong Q1 performance. As a reminder, our initial guidance for the year assumes 5% organic growth in 2019.
We're raising that guidance to reflect the strong Q1 performance, and we now expect full year 2019 organic growth to be between 5% 6%. The second element of the increase in our revenue guidance is an addition of $140,000,000 to reflect the acquisition of Brammer Bio, which we expect to close during Q2. Turning to adjusted earnings per share. We're increasing the midpoint of our adjusted EPS guidance by $0.05 and tightening the range by 0 point 0 $6 The $0.05 increase to the midpoint consists of 3 elements: a $0.04 increase to reflect our strong Q1 operational performance a $0.04 increase to reflect the addition of Brammer Bio and a $0.03 reduction to account for more adverse FX environment versus our previous guidance. To sum this up, our 2019 revenue guidance is now a range of $25,170,000,000 to 25 point $47,000,000,000 which would represent 3% to 5% growth versus 2018.
And our updated adjusted EPS guidance for 2019 is now a range of $12.08 to $12.22 which represent growth of 9% to 10% versus 2018. A few other details behind the revised 2019 guidance, starting with FX. Currency rates continued to change in Q1. The mix of the FX rate changes had no net impact on revenue, so we continue to assume that FX will be a headwind on the full year revenue of approximately $400,000,000 or 1.6 percent. However, the mix of FX rate changes did impact the pull through and we now expect FX to be a headwind to adjusted EPS of $0.24 or 2.2 percent for the full year.
The guidance continues to incorporate $0.10 of net dilution for the pending divestiture of the Anatomical Pathology business, which we announced in January. I want to note that with the exception of the Anatomical Pathology business divestiture and the Brammer Bio acquisition, both of which are expected to close in Q2, Our guidance does not include any future acquisitions or divestitures. We're assuming there's no change in the trade tariff environment in 2019 versus our previous guidance. As I mentioned last quarter, our guidance includes a year over year headwind from tariffs of about $30,000,000 or approximately $0.07 of adjusted EPS to reflect the full annualized gross impact of the tariffs that are currently in place. Adjusted operating margin is now expected to be between 23.6% 23.7%, which would result in margin expansion of 50 to 60 basis points for the year.
Moving below the line, we're continuing to assume $1,250,000,000 of debt repayments in 2019, and we expect net interest expense to be about $470,000,000 This is approximately $10,000,000 lower than our previous guidance. We're assuming that other net income will be about $25,000,000 which is $5,000,000 higher than our previous guidance, and we continue to expect the 2019 adjusted tax rate to be 11%. As I mentioned earlier, due to the timing of discrete tax planning items within the year, we had a lower tax lowered rate in Q1 at 10.1%, and we expect the rate in the remaining quarters to be closer to 11.3% and no change to the full year. We're now assuming net capital expenditures to be between $925,000,000 $975,000,000 for the year. This is $125,000,000 higher than our previous guidance to factor in the expected facility expansion investments that will be made in Brammer Bio.
We expect to offset the Brammer CapEx investment with strong operational cash flow performance. And as a result, our free cash flow estimate for the full year continues to be approximately $4,100,000,000 We assume we'll return approximately $300,000,000 of capital to shareholders this year through dividends, no change from previous guidance, and we estimate that the full year average diluted shares will be approximately 404,000,000, an increase of 1,000,000 from our prior guidance. And finally, a few comments on quarterly phasing for the year. Our expectation for the level of organic revenue growth in Q2, Q3 and Q4 is unchanged from our prior guidance. In terms of adjusted EPS, for the remaining 9 months of the year, we expect that it will be phased across those 9 months in a similar way to the same period in 2018.
So in summary, we started the year with an excellent Q1, and we're in a great position to achieve our goals for the year. With that, I'll turn the call back over to Ken.
Thanks, Stephen. Operator, we're now ready to take questions.
Thank you. Your time on the call to one question and only one follow-up. If you have additional questions, please return to the Your first question comes from the line of Ross Muken from Evercore ISI. Please go ahead. Your line is open.
Good morning, guys, and congrats. So coming off of some peer commentary yesterday to see your China business up obviously, a pretty remarkable sort of print. I guess, as you think about sort of the moving parts in China, obviously, we know about the huge push right now on the innovative biotech side. But obviously, we've seen some peers call out generics and food and some of the other areas. It seemed like based on your mix, much of your end markets maybe ex academic were strong and I don't know if that holds true for China.
So maybe a little bit of sector commentary on China would be helpful to start because obviously this has been just a remarkable run you've had where that business has put up 20% now for quite some time?
Ross, thank you for the question. So I was in China in early April. I spent time with our TU government and customers. We had a very good quarter. We had bookings that were stronger than revenue, and it was broad based in terms of the momentum.
So we really didn't see any headwinds in the Chinese end market. So we had a good quarter in the academic and government sector. Industrial was fine. Pharma and biotech was fine, and we have smaller exposure in that market to diagnostics and healthcare, but that was also okay too. So we didn't really see any challenges and team's got a lot of momentum and super excited for the future.
I have to say, spending some time with some of the biotech customers in the market, the growth there looks like it's going to have very long a long cycle ahead of us, a very positive environment.
Helpful. And maybe quickly on Brammer. Obviously, not a huge revenue base comparative to your overall, but a super exciting business. You sort of bring unique capabilities to that market. Maybe just give us a bit of a feel in general about how you think sort of the gene therapy and sort of the bioproduction side of that is going to evolve and how you guys could theoretically over time kind of help with some of the logistical and manufacturing challenges that that market currently faces?
Yes, Ross. The gene therapy area is one that our customers broadly are very excited about, investing significantly in and have been asking us for help. We already have a reasonable exposure with our biosciences and bioproduction business in serving that customer base. And one of the things that we consistently heard was the need to have the right development partners. And we looked at the landscape and Brammer as the industry leader and the very broad set of capabilities they have in viral vectors gave us confidence that's the right platform to build off.
But the interesting thing is, the big opportunity in gene therapy is actually going through the whole ramping up process where regulatory expertise and scaling the production is new to that segment and something we have incredible experience based across our pharma services business. So we're going to use our regulatory expertise, relationships, our engineering teams to expand capacity, and we're very excited about serving the industry with an exquisite set of capabilities. So we look forward to closing that acquisition this quarter.
And your next question comes from the line of Tycho Peterson from JPMorgan. Please go ahead. Your line is open.
Mark, I apologize. I'm going to ask you another question on Brammer. You've got a couple of early customers here with Sirota, Voyager and Sangamo. Just curious as we think about customer diversification over time, how you think about the pipeline, if you're willing to comment on how much the $250,000,000 in revenue this year is already contracted? And then we've heard from some of your peers in that space that you can actually charge fees on capacity that's reserved but not used.
So I'm curious about whether pricing opportunities in that space may be a little bit different than we see with some of the other manufacturing businesses. And then lastly, if you could just talk about the EBITDA margin potential for that business? I know it's low-20s. I think some of the peer businesses are kind of high-20s with mid-30s targets. So just curious how you think about the margin opportunity for the commerce?
Yes. So Tycho, in terms of the customer mix, there's a number of customers, a few have been publicly announced by Brammer over the years and others are confidential. So there's a good mix of customers. And even within the customers, there's a good mix of programs. So you have diversification because not every program is going to be successful ultimately.
So it has a nice mix. The interesting thing is, because of the capacity expansion that we're excited about and the customer relationships we have, that's going to diversify that base of customers further over time. So that's very good. Yes, because there is pricing the pricing in the short term in this market is attractive because there is a real shortage of capacity. So there are many contracts have reservation fees associated with it, and that helps with the industry economics.
But as the industry scales, you get the economic benefits from the scale leverage. And therefore, as capacity comes online, the economics improve further because of scale. And then finally, in terms of our outlook for this, margins are a little below the company average right now and we see significant opportunity to be accretive to our margins over time.
Okay. And then maybe just as a follow-up sticking with the biomanufacturing piece, obviously, you announced the Patheon capacity expansion there as well. Has your view on Patheon revenue synergies changed at all? And how is the Advanced Bioprocessing acquisition kind of fitting into that part of the equation?
Yes. So Advanced Bioprocessing, we closed in October. That was the bolt on acquisition within our bioproduction business on the product side. Business is off to a really good start. Revenue has been good.
Earnings are good. And as Stephen had said, I think in January, it's $0.04 to $0.05 of accretion this year. So that's really going quite well. In terms of the within our own network, within the bioproduction or the biologics proportion, we continue to expand the network because the demand is very, very strong. The sterile full finished capacity expansions that we just announced is based on the fact that we have customers that have expressed interest for utilizing that capacity as it comes online.
So we're off to a good start. And from a revenue synergy perspective, it's going well. And ultimately, we see the business, which historically was kind of a mid to high single digit growth business, will transition to a high single digit growth business as you layer in the synergies into that business.
Your next question comes from the line of Doug Schenkel from Cowen. Please go ahead. Your line is open.
Hey, good morning.
Good morning.
So Mark, just a quick follow-up on China. You entered the year assuming China would grow mid teens. I think that was the assumption embedded into guidance. You grew north of 20% in the Q1. Should we now expect better than mid teens growth for China for the full year?
Or should we still be maintaining the same assumption given comps do get a bit more difficult over the balance of the year?
Yes. So the way we did the outlook for the year as a whole, Doug, is we banked the operational performance in Q1 over higher that was higher than our guidance both on revenue and operationally and assumed that the remaining three quarters were as we had guided originally back in January. So I actually haven't done the math on the China in my head, but we assumed mid teens type growth for the year. We obviously did over 20% in Q1, so that's going to take it to probably strong mid teens to low high teens. I haven't done the math, but we haven't changed the outlook for the next three quarters relative to our January guidance.
Okay. That's helpful. On the capital deployment side, by our estimates, you still have more than $10,000,000,000 of M and A capacity over the next year, and that's factoring in Brammer, and that's just with cash. If you take in the possibility of using equity, your capacity likely doubles by our math. How are you thinking about the M and A criteria today given where valuations are?
And given most of your recent acquisitions including Patheon, Brammer and Advanced Bioprocessing were all in the CDMO or bioprocessing markets. I'm just wondering whether that means it's more likely you're going to do more of these, especially given the fragmentation and rapid growth of the CDMO market or if there's actually a prioritization to look in some other areas?
Yes. So we have substantial capacity, as you say. And the first thing is our number one priority is to run the business we have and do a great job with it, right? And that's what we do every day. We wake up.
And then we have used the same M and A criteria for the last 17, 18 years, which is will the transaction strengthen the company strategically? Will it be valued by our customers? And ultimately, will it create shareholder value as measured by the returns on is very robust, so we're very active in looking. But we only do the transactions that we feel are really going to be great transactions, right? And so it's very hard to predict which ones will go through.
And we're looking across the whole portfolio. So I wouldn't over read that it's all biologics or bioproduction based. I think part of it is we took advantage of the opportunity as BD was selling a non core asset and Brammer really was looking for a real boost in expansion capital. So situations led to those transactions, but you'll see us look across the portfolio and those that are good will do.
Your next question comes from the line of Jack Meehan from Barclays. Please go ahead. Your line is open.
Thank you. Good morning. I was hoping we could turn to the analytical instruments segment. And could you please give us an update on the growth at FEI and just how the backlog is shaping up across life sciences versus material sciences and semi?
Yes. So in terms of the analytical instruments business, all three of our businesses had good quarters with strong growth. Material Sciences, which includes the electron microscopy and our molecular spectroscopy, had good growth in the quarter. In terms of the segments, you have the material science segment, which includes semiconductor, batteries, advanced materials and academic research. And you also have the life sciences sector, primarily structural biology.
Revenue growth was good in both of those sectors. As you know, we're expecting slower growth in the second half because we have more challenging comparisons in the material science sector or a portion of that product portfolio going forward. So we're expecting, as we originally guided, that the second half will be slower than the growth that we delivered in the Q1.
Great. And then I guess looking at Europe, you called out some more muted conditions on the academic side there. I was curious regionally what you were seeing? And then I know industrial and applied overall grew high single digits, but was there any change regionally in Europe in those end markets that you saw?
Europe actually in aggregate was good. We had good growth in the quarter, and that really ran across 3 of the 4 end markets, industrial applied to healthcare and diagnostics and pharma and biotech. We saw more muted conditions in Europe. So and geographically, probably Germany was an area where a little bit more muted on the release of funds. But other than that On
the academic. On the academic and government.
Europe as a whole was fine, right? And it's actually it's very solid growth. But I called it out just because academic and government in that region was a little bit softer than we had seen recently.
Appreciate it. Thanks.
You're welcome.
And your next question comes from the line of Dan Leonard from Deutsche Bank. Please go ahead. Your line is open.
Thank you. So first off, appreciate the commentary on margins in the LPS segment. How do you view the trajectory there? And what would put that business back on a margin expansion trajectory? Is that primarily the contract manufacturing business?
So Dennis, this is Steven. I'll take that one. So when I think about margins for LPS, yes, expansion in that segment is long term is going to be driven by the pharma services business. As we outlined in the original guide, we're investing in that business as we're preparing for the ramping growth, as we're driving the revenue synergies and putting the investments in place on sterile and the biologics side. So more muted this year, but good long term growth prospects in terms of margin expansion going forward there.
Okay.
Thank you. And then my follow-up. Mark, there was a bioprocessing product acquisition that traded away from you this quarter. Can you remind us how you're viewing the opportunities to incrementally expand your offering on the bioprocessing product front? And do you feel yourself do you see opportunities in areas where there's reasonable concentration amongst only a few players?
Is there an
opportunity for Thermo to participate? Yes, Tim. We have
Ken. We have been building our position methodically in the bioproduction business over time. It actually started with the acquisition of Life Technologies where we went from being a strong player in single use technologies to becoming a leader in cell culture media. We then have done a series of transactions to strengthen our offering, whether it was ASI, adding the controller technologies from Finesse, acquiring DD's business. And so we look on the parts of our portfolio where we can build on our strengths and generate strong returns.
We are very disciplined about the return profiles on M and A. So you have to think about that in terms of which opportunities make sense. And we'll continue to look at things. And if we see the right opportunities, you'll see us do more. Okay.
Thank you.
Your next question comes from the line of Patrick Donnelly from Goldman Sachs. Please go ahead. Your line is open.
Great. Thanks. Maybe Mark, just on the industrial applied market, nice to see you guys be able to put up high single digit growth against a pretty tough high single digit comp. Can you just talk about the strength there and the durability going forward, which pockets you're really seeing some strength?
Yes. So we were expecting a strong start to the year in industrial and applied because obviously there's some visibility from how the year ended within our bookings. So we grew high single digit growth in the quarter. And that strength, we saw it in chromatography and mass spectrometry. We saw it in chemical analysis and we saw it in electron microscopy.
And what we're assuming is that the going in the second half of the year is going to be a little bit softer given the more challenging comparisons. So that's kind of the view on that market.
Okay. And then as we approach the Analyst Day next month, you guys are coming off an 8% growth year, 7% growth quarter here. You have that 4% to 6% long term guide out there. Can you just help us put that in perspective as you kind of plan ahead of the Analyst Day? What's your thoughts are in terms of where we are currently versus that long term growth rate?
Yes. I was looking at the calendar and the best day of the year is coming up. It's May 22 in New York City as my team here always smiles. So I can't wait to get in front of each of you and the investment community. And I know that Stephen will be talking about the 3 year model and our long term outlook as part of that.
So that will clearly be a good topic of discussion back at that point in time.
And your next question comes from the line of Dan Brennan from UBS. Please go ahead. Your line is open.
Great. Thanks. Thanks for the questions and congrats on the quarter. I just wanted to start with biopharma, obviously another really robust quarter. Mark, can you just point to regionally, were there any big deviations there?
And maybe point out where the strength came from within your businesses? And then related to that, you cited share gains. So would be interested in some color on kind of where you're seeing the most share gains and the opportunity?
Yes, Dan, thanks for the question. When I look at the pharma biotech end market, the market was very strong. We grew in the double digits. And when I think about the business lines, we saw strength really across the portfolio, bioproduction, chroma mass spec, our research and safety channel and our pharma services businesses all had excellent quarters in terms of growth. So broad based strength as we have been seeing for quite some time.
Geographically, it was good across the markets. I was looking at that, and we didn't see any anomalies in any of the regions. So very strong geographically. And I think part of it is that science is good, funding is good, but we're clearly gaining share. Our value proposition is truly unique in terms of how we help our customers be more innovative and productive, and we have very incredibly strong commercial reach that gives us access to those customers and the scale of the relationship gives us unique access at each of the customers as well.
So that combination has sustained very strong performance for quite some time.
Great. And then maybe related to that, Mark, you highlighted in China the excitement over kind of future biotech growth there. Can you just elaborate on that a bit? Is that the push for China to be more therapeutically oriented or excuse me, branded oriented? So maybe just some color between what your business looks like today in biopharma in China and what it could look like going forward?
Thanks a lot.
Yes. So 5 years ago, roughly, when you were thinking about the industry in China from a biotech and pharmaceutical perspective, it was a blend of generic manufacturing on the pharma side and traditional Chinese medicine. Over the last 5 years, there really has been an explosion of growth interest and new company formation on the biotech side, in addition to the small molecule in traditional Chinese medicine. And that continues to look very bright in terms of the outlook. And because many of the customers have worked outside of China, they're very familiar with our capabilities and the companies that they're setting up, they're standardizing on our technologies.
It's really an exciting opportunity, and we're doing very well.
Your next question comes from the line of Derik De Bruin from Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hi, thanks. This is Mike Ryskin on for Derek actually. You touched on Europe previously, but I want to follow-up a little bit specifically on Brexit. It doesn't sound like you've seen any impact in the UK or in Northern Europe as the negotiations are ongoing. But I just wanted to see what your thoughts are and what's embedded into guidance as we move through the year.
That's been an area that's been a focus recently as a potential cause of concern. So I want to see how you're thinking about that.
Yes. In terms of Brexit, U. K. Continues to be it's a small market, but the conditions were fine. We did a lot of preparation work, for an assumption of a hard Brexit really effectively last week.
And obviously, that's been kicked down the can for a while. So we're prepared should that happen, but it doesn't seem to be flowing in any material way positively or negatively towards our business in terms of market conditions.
All right. Thanks. And then
a quick follow-up. Could you give us an update on some of the other capital deployment events that are expected in 2Q, the divestment of the Anatomical Pathology in terms of timing and then also an update on Gatan?
Sure. So we expect in Q2 to close the divestiture of the Anatomical Pathology business. We did clear all of the regulatory events that we need to clear, and now we're just working with the acquirer on all of the closing conditions on that contract. We also expect, as Steven said, to close the Brammer acquisition in Q2. In terms of Gatan, we are as well as Roper Technologies have been working with the UK Competition and Markets Authority to come to a reasonable resolution, and it's been challenging.
We expect to get their final decision by the end of Q2. So that's where we are with Gatan.
Your next question comes from the line of Steve Willoughby from Cleveland Research. Please go ahead. Your line is open.
Hi, good morning. A couple of guidance questions for you. First, Stephen, I believe you said that you beat your Q1 expectations at the midpoint by $0.08 But then in the earnings bridge for the full year, you're only attributing $0.04 related to the Q1 beat. So just wondering on that. And then secondly, operating margins were up 40 bps here in the Q1.
You're going against more difficult organic growth comps in the remainder of the year. So we'd expect organic growth to slow. Just wondering in terms of margin expansion, what gets margin expansion greater with what's believed to be slower organic growth rest of the year? Thanks so much.
Yes. So Steve, in terms of the $0.08 in Q1, dollars 0.03 of that was timing of tax, which kind of unwinds each quarter as you go out in Q2 to Q4. That's the $0.03 of the difference. And then $0.01 was FX. And the way that rates changed, we actually had a below the line FX benefit versus the original guide, which is a positive one in Q1.
And then as we look at the rest of the year, Q3 and Q4, it's $0.04 more adverse FX pull through on the revenue. The net for the year is a $0.03 change for FX. So, but the $0.04 operational carried forward to the full year. So that's kind of bridges you the $0.08 to the $0.04 And then on the 40 basis points for the quarter, just as a reminder, that included headwind from FX and from gross tariffs as well. So about 20 basis points of headwind that we offset and still delivered to 40 basis points.
The tariff headwind declines as we go into the second half of the year, which is so that headwind goes away. And then from an FX standpoint, it also lessens from a basis points standpoint. So and then this really comes down to the scale of revenue in Q4 is sizable. The timing of certain of our projects in terms of spend, that helps with margins as well. So that gives you an idea of the margin profile for the rest of the year.
Okay. Thank you.
Thanks, Steve.
Your next question comes from the line of Sung Ji Nam from BTIG. Please go ahead. Your line is open.
Hi. Thanks for taking my questions. Just a couple of quick ones. Mark, could you just going back to Gatan, how critical is the asset for your cryo EM business overall? Is it a nice asset to have, if you could comment on that?
And then also, Stephen, you talked about some strategic investments for Specialty Diagnostics. And I don't mean to be nitpicking at this point, but given that segment is kind of a laggard in terms of top line growth, I was curious as to are there opportunities to potentially further accelerate growth for that segment? Thank you.
Yes. So thanks for the question. So first, in terms of Gatan, we think it's a nice fit with our electron microscopy business, and we'll see whether that gets closed or not. We did sign a new long term supply relationship with Gatan. So if it doesn't close, it has no negative impact on the strategic outlook for the electron microscopy business.
So that's a nonfactor. In terms of Specialty Diagnostics, the business is performing well. And when I think about the growth in the Q1, that includes powering through a reasonable level of flu headwind and still delivering solid mid single digit growth in the quarter. And we're making good progress on the product development programs that we have and that should benefit growth in the midterm.
Great. Thank you. Your next question comes from the line of Paul Knight from Janney Capital Markets. Please go ahead. Your line is open.
Hi, Mark. If you look and see the customer tone and think about organic growth in the industry and financing that's going on in the industry as well, what's your visibility on the current core organic guidance? Do you think it's a multiyear look? Or is it this year's look? What are your thoughts on that?
Yes. So when I look at the outlook for the market, Absence a macro recession, right, if I look at the sleep at Life Science Tools and Diagnostics fundamentals, they look very strong. You're seeing excitement in pharma and biotech in terms of the science and the investments that support it. You see it in funding going to biotech. You see that looking very good.
If you look at the commitments around the world to academic and government, especially on the academic side globally, There's big commitments to NIH in the U. S. There's real excitement in the U. K. About kind of a post Brexit world, the new horizon program in Europe, and China continues to have a 5 year plan that gives the outlook there that looks robust.
So you go there. Diagnostics and health care continues to have a bright outlook because really the only way you can control medical costs is to get accurate diagnosis, so you're spending the right money on things that actually benefit patients. So when you look at the fundamentals, super positive in our industry. And I saw with the recession, actually, when I look at the what's going on in our business, it looks great. We don't see any recessionary factors.
But at some point over the next, who knows, 5 years, you can predict, there'll be some slowdown in economic growth. And the great thing about Life Science Tools and Diagnostics is our industry performs great in a recession. It's incredibly low exposure to the volatility that other sectors have. So we're bullish about the outlook in our industry.
And then lastly, Mark, I know your IT infrastructure, your distribution channel of selling product has been one of your great advantages over the last several years. Is your CapEx, I mean, how do you maintain a barrier and keep that advantage in the market? And specifically, is it requiring more CapEx? Or is the pace of CapEx and investment there the same or not?
Yes. So we create a fantastic e commerce and e business experience for our customers. And we have invested substantially historically to build a leading platform that created that advantage. And now we continue to invest to maintain and build our lead, but you're investing at a lower rate than what we had historically because effectively we have that leading platform. So yes, we continue to add new capabilities.
And if you go to our Fisher site or thermofisher.com, you see how strong those experiences are, and we'll continue to invest to make sure that we maintain early.
Operator, we're going to end it right there. We're just about out of time. So let
me just wrap up by summarizing that we're off to a strong start. We're on track to deliver another outstanding year. And as always, thank you for your ongoing support of Thermo Fisher Scientific. Thanks, everyone.
This concludes today's conference call. Thank you for your participation, and you may now disconnect. Have a great day.