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Thermo Fisher Scientific Inc (NYSE:TMO)
Q2 2019 Earnings Call
Jul 24, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2019 Second Quarter Conference Call. [Operator Instructions]

I would like to introduce our moderator for the call. Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin the call.

Kenneth J. Apicerno -- Vice President of Investor Relations

Good morning, and thank you for joining us. On the call with me today is Marc Casper, our President and Chief Executive Officer; and Stephen Williamson, Senior Vice President and Chief Financial Officer. Please note that this call is being webcast live and will be archived on the Investors section of our website thermofisher.com under the heading Webcasts & Presentations until August 9th, 2019. A copy of the press release of the second quarter 2019 earnings and future expectations is available in 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-Q for the year ended March 30, 2019 under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also available in the Investor section of our website under the heading, SEC filings.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

Also during this call, we'll be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available on the press release of our second quarter 2019 earnings and future expectations and also in the Investors section of our website under the heading Financial Information.

So with that, I'll now turn the call over to Marc.

Marc N. Casper -- President and Chief Executive Officer

Thank you, Ken. Good morning, everyone, and thanks for joining us today for our Q2 call. As you saw in our press release, we delivered another excellent quarter. From a financial perspective, we achieved very strong revenue and earnings performance. We made great progress in executing our growth strategy, and it was an especially fruitful quarter for innovation, which I'll cover later in more detail.

Last, we continue to effectively execute our capital deployment strategy to strengthen our strategic position. Conditions in our end markets were good and I'm proud of all of the effort our teams put forth to capitalize on those opportunities and gain share. It was a great first half behind us, we're well positioned to continue our momentum and achieve another outstanding year.

Let me begin with an overview of our Q2 financial highlights. First, we delivered excellent adjusted EPS growth, achieving an 11% increase to $3.04 per share. Our revenue in Q2 increased to $6.32 billion, growing 4% year-over-year. Our adjusted operating income increased 6% to $1.48 billion, and our adjusted operating margin expanded by 40 basis points to 23.5% for the quarter. Before I discuss the quarter in detail, I want to take a moment to provide an update on the data center outage that we referred to in our recent 8-K filing. The outage occurred a few days before quarter end and caused delays in the processing of certain orders and shipments. This resulted in some second quarter activity shifting to the third quarter. The financial impact was not material and Stephen will provide more detail. Our systems are now back up and running and I want to take this opportunity to acknowledge the efforts of our teams and keeping our customers front and center as they work to get the issue resolved. It was a great example of our culture of intensity and involvement at work.

Now I'll give you more color on the quarter, starting with an overview of our performance in the context of our end markets. Conditions across our end markets were good and our team continue to position the company well with our customers, capture opportunities to drive growth and gain share. Starting with Pharma & Biotech this end market was very strong and we delivered another quarter of double-digit growth. We continue to see strength across all our businesses serving these customers with excellent momentum in our bioproduction and pharma services businesses. Our unique value proposition is resonating extremely well with our biopharma customers and they see us as a strategic partner to help them accelerate their innovation pipelines while enhancing productivity across their businesses.

In industrial and applied, we delivered low single-digit growth in Q2. Our performance in this end market was driven by strong demand for our chemical analysis in chromatography and mass spectrometry business. Turning to academic and government growth, here was flat in the quarter. Looking at this end market by region, we saw ongoing strength in China and more muted conditions in North America and Europe.

Finally in diagnostics and healthcare, we grew in the low single digits in Q2. We continued our good growth momentum in our clinical diagnostics and immunodiagnostics businesses and also saw strong demand in our healthcare market channel conditions in this end market were continuation of what we've seen so far this year.

So going into the second half of the year. We continue to feel good about our markets and look forward to capitalizing on the many opportunities we have to serve our customers and drive growth. On that note, let me turn to our growth strategy, which as you know is threefold and consists of continuously developing high impact innovative new products, leveraging our scale and high growth and emerging markets and delivering a unique value proposition to our customers. We made great progress in advancing our strategy in Q2 with many highlights across our businesses. As usual, I'll touch on just a few examples that bring our strategy to life and demonstrate how we're continuing to build on our success to put Thermo Fisher in the best position to win with our customers.

Beginning with innovation, we released a number of excellent new products across our businesses that reinforce our technology leadership, which is essential to enabling our customers' key scientific advances. I'll start with our highlights on the American Society for Mass Spectrometry conference, which, as you know, is an important customer event and it was a great opportunity for us to reinforce our industry leadership. This was really a milestone year for us at ASMS, and we showcased a range of new hardware, software and workflows. Most significant was our introduction of new generation Thermo Scientific, Orbitrap instruments. First, our new Orbitrap Exploris 480 system combined our industry leading mass spec technology with new intelligence driven data acquisition techniques.

This allows researchers to use mass spectrometry for more rigorous, high-throughput protein identification, quantification and structural analysis in pharmaceutical in translational medicine applications. Second, our new Orbitrap Eclipse Tribrid system provides academic and government and biopharmaceutical labs with access to a high performance mass spectrometer that greatly improved sensitivity over previous generations. This new instrument expense, the ability to characterize and quantify complex biomolecules and biological systems, enabling scientists to study protein structures at an unprecedented level of detail. We also introduced a new high-resolution mass spec workflow called the Thermo Scientific HR Multi-Attribute Method that simplifies and standardizes biotherapeutic characterization and quality control to accelerate the development of biologics.

In our electron microscopy business, we launched the Thermo Scientific MicroED, which is the first electron diffraction solution on the market by integrating this new detectors and automation software into our high performance transmission electron microscopes we can now offer customers much greater speed and ease of use.

Turning to our genetic sciences, business, we further strengthened our leading qPCR offering by launching the QuantStudio 6 and 7 Pro Real-Time PCR systems. These smart instruments feature cutting-edge technology such as voice-activated commands and hands-free operation to significantly improve the user experience. So clearly many great examples from the quarter that show how we're continuing our very long track record of high impact innovation and we look forward to building on our momentum as the year unfolds.

Turning to the second element of our growth strategy, leveraging our scale in high growth and emerging markets. We had another strong growth year again we had strong growth here again in Q2. Our performance was highlighted by another excellent quarter in China, where we delivered mid-teens growth. We're effectively leveraging our industry leading scale in China to create a differentiated experience for our customers. We continue to expand our presence in these markets and we're excited about the new customer experience Center we opened in Seoul, South Korea in the quarter. This center showcases our depth of capabilities for the Life Sciences industry. This serves as a hub for our customers to gain access to our technologies, work with our experts and partner with our industry peers to Advanced Science and technology in Korea. Since our grand opening in May Hundreds of current and potential customers have visited the center. We are confident that this investment will help fuel strategic partnerships and significantly contribute to new growth opportunities for us in South Korea.

The third element of our growth strategy is our customer value proposition and we continually invest to enhance our offering and build on our leading position. Given the leadership we have in serving the pharma and biotech end market, we're very focused on further enhancing the value we can bring to these customers. We're doing this by expanding our existing capabilities and complementing them with strategic acquisitions. To give you a couple of examples of expansion projects we continue to increase our bioproduction capabilities to meet robust customer demand.

We recently committed $50 million to expand our manufacturing network for our leading single use

technologies. We've also announced our plan to establish a new Bioprocessing Collaboration Center at our pharma services site in St. Louis, Missouri. This is a terrific example of how we're combining our bioproduction technologies with our pharma services capabilities to benefit our customers and drive growth. In terms of acquisitions, we were very pleased to complete our acquisition of Brammer Bio, a leader in viral vector manufacturing for gene and cell therapies.

As we discussed in some detail our Analyst Meeting in May Brammer Bio significantly expands our offering in this fast growing market. It gives us the opportunity to leverage our capabilities in gene therapy across our biosciences, bioproduction and pharma services businesses to set a new standard for viral vector manufacturing. We welcome nearly 600 new colleagues to Thermo Fisher and it was terrific to meet many of them during our recent business to Brammer's key sites in Massachusetts and Florida. We're making good progress with the integration and the team is very excited about taking the business they built to the next level as part of Thermo Fisher.

In Q2, we also announced our intent to acquire a site in Cork, Ireland from GlaxoSmithKline. With more than 400 employees the site produces complex Active Pharmaceutical Ingredients or APIs that are used to treat diseases, including childhood cancers, depression and Parkinson's. The Cork site will add capacity to our API network to support customer demand. All of these examples to reinforce our commitment to strengthening our offering and create added value for our customers and for our shareholders.

We also continue to effectively execute our capital deployment strategy and I'll give you a quick summary of our activities during the quarter. Because I was just mentioned, we completed our acquisition of Brammer Bio and we look forward to closing the GSK site by the end of the year. Both acquisitions strengthen our pharma services capabilities. We also acquired HighChem, a small business that expands our mass spectrometry software offering, to help scientists analyze complex data and identify small molecules in a variety of applications.

Last, we completed our divestiture of the Anatomical Pathology business for $1.14 billion in Q2. This transaction will provide us with additional capital that we can put to work over time to create shareholder value.

With that I'd like to review our 2019 guidance at a high level. As you saw in our press release, we're raising both our revenue and earnings guidance for the full year, based primarily on our strong operational performance. Stephen will cover the details, but at a high level, we're raising our revenue guidance to a new range of $25.3 billion to $25.5 billion, which would result in 4% to 5% revenue growth over 2018. In terms of adjusted EPS, we're raising our guidance to a new range of $12.16 to $12.26, per share, which represents 9% to 10% growth year-over-year.

So to summarize our key takeaways from Q2, we executed well to capitalize on the good conditions on our end markets and deliver very strong financial results. We made significant progress in terms of advancing our growth strategy, and we also continue to effectively execute our capital deployment strategy and create value for our customers and our shareholders.

With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen?

Stephen Williamson -- Senior Vice President and Chief Financial Officer

Thanks, Marc, and good morning, everyone. As usual, I'll take you through an overview of our second quarter results for the total company, then provide color on our four business segments. I'll conclude by providing our updated 2019 guidance.

Before I get into details of our financial performance, let me provide a high-level view of how the second quarter played out versus our expectations from the time of our last earnings call in April. As you saw in our press release we delivered a very strong quarter in Q2 with 5% organic growth and an 11% increase in adjusted earnings per share. Adjusted EPS was $0.04 higher than we'd assumed at the midpoint of our previous guidance. This was driven equally by four factors; operational performance, the timing of the sale of the Anatomical Pathology business, quarterly phasing of tax planning initiatives and less adverse FX in the quarter. So a very strong performance in Q2.

Let me update you on the financial impact of the data center outage. This event delayed shipments for several of our businesses. We estimate that the outage had a negative impact on total company organic growth in Q2 of approximately 1%. Roughly half of that impact was in our Analytical Instruments business with the remainder in Specialty Diagnostics and Lab Products and Services. We see this as a shift in the timing of revenue recognition between Q2 and Q3 of approximately $50 million with no material impact expected for the full year 2019. We have not adjusted the Q2 numbers that we discuss today for this impact, but I thought it would be helpful to give you this context.

Now let me cover more detail on Q2, starting with earnings per share. This quarter, we grew adjusted EPS by 11% to $3.04. GAAP EPS in the quarter were $2.77, up 50% from Q2 last year numbers. The GAAP results include the onetime gain on the sale of the Anatomical Pathology business. On the top line, our reported revenue grew 4% year-over-year. The components of our Q2 reported revenue increase included 5% organic growth, 1% growth from acquisitions and a foreign exchange headwind of 2%.

Turning to our growth by geography. North America and Europe both grew in the mid-single digits, Asia Pacific grew in the high single digits with China growth in the mid-teens, and rest of the world declined low single digits. Looking at operational performance. Q2 adjusted operating income increased 6%, and adjusted operating margin was 23.5%, up 40 basis points from Q2 of last year. We saw strong productivity from our PPI Business System and good volume leverage, partially offset by strategic investments, unfavorable business mix and a headwind from foreign exchange. The negative impact from FX in Q2 was approximately 4% in our operating income growth in the quarter, 40 basis points in our operating margins and 4% on our adjusted EPS.

Moving on to the details of the P&L. Total company adjusted gross margin in Q2 was 46.7%, down 60 basis points from the prior year. In the quarter, strong productivity was offset by unfavorable business mix, strategic investments and the headwind from FX. Adjusted SG&A in the quarter was 19.4% of revenue, which is down 80 basis points versus Q2, 2018. Total R&D expense came in at 3.9% of revenue. And R&D as a percent of our manufacturing revenue in Q2 was 6.5%.

Looking at results below the line for the quarter. Our net interest expense was $121 million, down approximately $20 million from Q2 last year, driven primarily by debt reduction. Adjusted other income and expense was a net income in the quarter of $18 million, higher than Q2, 2018 primarily due to changes in non-operating foreign exchange. Our Q2 adjusted tax rate was 11%, which is 130 basis points lower than Q2, 2018, driven primarily by the impact of our tax planning initiatives tied to U.S. tax reform. Q2 average diluted shares were 403 million, which is 3 million 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 for the first half of the year was $1.94 billion and free cash flow was $1.53 billion after deducting net capital expenditures of $410 million. This represents 25% growth in our free cash flow year-to-date. We ended the quarter with $2.3 billion in cash and investments. Our total debt at the end of Q2 was $19 billion, up $900 million sequentially from Q1. And our leverage ratio at the end of the quarter was three times total debt to adjusted EBITDA. And wrapping up my comments in our total company performance. Adjusted ROIC increased to 11.4%, up 110 basis points from Q2 of last year. We continue to drive excellent returns on investments.

Now I'll provide you with some color on the performance of our four business segments, starting with Life Science Solutions Segment. In Q2, reported revenue increased 9% and organic revenue growth was 10%. Growth in this segment was led by our bioproduction and biosciences businesses. Q2 adjusted operating income in Life Science Solutions increased 17% and adjusted operating margin was 35.6%, up 230 basis points year-over-year.

In the quarter, we drove very strong productivity and volume pull-through, which is partially strategic investments and the headwind from foreign exchange. In the Analytical Instruments Segment, reported revenue increased 1% in Q2 and organic revenue growth was 3%. Growth in the quarter was led by the chemical analysis and chroma mass spec businesses. Adjusted operating income in Analytical Instruments was 2% lower than Q2 2018, and adjusted operating margin was 21.6%, down 60 basis from the prior year. In the quarter, we saw headwinds from unfavorable mix, strategic investments and FX, partially offset by good productivity.

Turning to the Specialty Diagnostics Segment. In Q2, total revenue grew 1% and organic revenue growth was 3%. Growth in this segment was led by our clinical diagnostics and immunodiagnostics businesses as well as our healthcare market channel. The growth was partially offset by the performance in our Anatomical Pathology business. Adjusted operating income was 4% lower than prior year, and adjusted operating margin was 25.7%, down 150 basis points year-over-year. Roughly half of the margin change was due to the performance of the Anatomical Pathology business. For the remainder of the segment, strong productivity gains were more than offset by unfavorable business mix and strategic investments.

Finally, in Lab Products and Services segment, Q2 reported revenue increased 3%. Organic revenue growth was 4%. Growth in the quarter was led by the pharma services business and the research channel. Adjusted operating income in the segment increased 2%, and adjusted operating margin was 13.1%, which is 10 basis points lower than the prior year. In the quarter, we saw strong productivity and volume leverage. It was offset by strategic investments, unfavorable business mix and a headwind from FX.

Now I'd like to move on to our updated full year 2019 guidance. As you saw in our press release and as Marc 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 $80 million and tightening the range by $100 million. The $80 million increase at the midpoint consists of two elements. First, a $30 million increase in our organic growth outlook for the year. We continue to expect full year 2019 organic growth to be between 5% and 6%. The second element of the increase in our revenue guidance is an additional $50 million to reflect the actual timing of the sale of the Anatomical Pathology business.

Turning to adjusted earnings per share. We're increasing the midpoint of our adjusted EPS guidance by $0.06 and tightening the range by $0.04. The $0.06 increase at the midpoint consists of three elements; a $0.04 increase to reflect stronger operational performance; a $0.01 increase to account for a less adverse FX environment versus our previous guidance; and a $0.01 increase to reflect the timing of the Anatomical Pathology sale. To sum it up, our 2019 revenue guidance is now a range of $25.3 billion to $25.5 billion, which represents 4% to 5% growth versus 2018. And our updated adjusted EPS guidance for 2019 is now a range of $12.16 to $12.26, which would represent growth of 9% to 10% versus 2018. Adjusted operating margin is now expected to be about 23.6%, which would result in margin expansion of 50 basis points.

A few other details behind the revised 2019 guidance. Starting with FX, currency rates continue to fluctuate in Q2. The mix of the FX rate changes since our last guidance had no net impact on revenue a $10 million adverse impact from adjusted operating income and a $15 million positive impact on FX below the line. So for the full year, we continue to assume that FX will have a negative impact of approximately $400 million on revenue or 1.6%, 10 basis points of margin and $0.23 or 2.1% on our adjusted.

The sale of our Anatomical Pathology business is now complete. This creates a year-over-year headwind of approximately $120 million on revenue, $50 million of adjusted operating income, 10 basis points of margin and $0.09 of adjusted EPS. We're seeing that there's no change in the trade tariff environment in 2019 versus our previous guidance. And as a reminder, we expect that the year-over-year growth tariff impact to be $30 million, which is just over 10 basis points of margin and approximately $0.07 of adjusted EPS.

Moving below the line, we're continuing to assume year-end debt will be approximately $17.7 billion and that net interest expense will be about $470 million. We're assuming that other net income will be about $40 million, which is $15 million higher than our prior guidance, reflecting the additional benefit of non-operating FX realized in Q2. We continue to expect that the 2019 adjusted tax rate to be 11%, unchanged from our previous guidance. And we continue to assume net capital expenditures will be between $925 million and $975 million for the year.

Free cash flow is expected to be approximately $4.1 billion, no change from previous guidance. And we assume we'll return approximately $300 million of capital to shareholders this year through dividends, no change in the previous guidance. And we continue to estimate the full year average diluted share to be approximately 404 million. Note, our guidance does not include any future acquisitions or divestitures.

And finally, a few comments on our latest view on the quarterly phasing for the remainder of the year. In terms of organic revenue growth, we see Q3 being around the average for the full year. In terms of adjusted EPS, for the remaining six months of the year, we expect that it'll be phased across that second half of 2019 in a similar way to the same period in 2018. In summary, we delivered an excellent first half and are in great position to achieve our goals for the year.

With that, I'll turn the call back over to Ken.

Kenneth J. Apicerno -- Vice President of Investor Relations

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

Questions and Answers:

Operator

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

Tycho Peterson -- JPMorgan -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Tycho Peterson -- JPMorgan -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Tycho Peterson -- JPMorgan -- Analyst

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

Stephen Williamson -- Senior Vice President and Chief Financial Officer

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

Tycho Peterson -- JPMorgan -- Analyst

Okay. Thank you.

Marc N. Casper -- President and Chief Executive Officer

Thanks, Tycho.

Operator

Next question comes from Ross Muken with Evercore ISI.

Ross Muken -- Evercore ISI -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Ross Muken -- Evercore ISI -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Ross Muken -- Evercore ISI -- Analyst

Thanks, Marc.

Marc N. Casper -- President and Chief Executive Officer

Thanks, Ross.

Operator

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

Derik de Bruin -- Bank of America. -- Analyst

Hi. Good morning.

Marc N. Casper -- President and Chief Executive Officer

Good morning, Derik.

Derik de Bruin -- Bank of America. -- Analyst

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

Stephen Williamson -- Senior Vice President and Chief Financial Officer

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

Derik de Bruin -- Bank of America. -- Analyst

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

Stephen Williamson -- Senior Vice President and Chief Financial Officer

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

Derik de Bruin -- Bank of America. -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Derik de Bruin -- Bank of America. -- Analyst

Great. Thank you.

Operator

Next question comes from Jack Meehan with Barclays.

Jack Meehan -- Barclays -- Analyst

Thank you. Good morning.

Marc N. Casper -- President and Chief Executive Officer

Good morning, Jack.

Jack Meehan -- Barclays -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

Yes. So in terms of the -- our materials and structural analysis business, which includes electron microscopy and our spectroscopy instruments, we had modest growth in Q2. And our expectation is that we'll have modest growth in the balance of the year in that business due to the very strong performance that we had in 2018. And we saw some of that dynamic play out in Q2. Pretty much in line with what we had expected during the beginning of the year. So you got visibility with that business usually about six months in terms of how things look. And the outlook looks positive for the long-term.

In terms of the life sciences application, we've had really nice uptake in the pharmaceutical customer base, still a small proportion of the total. If you recall, when we acquired FEI, it really had the flagship universities around the world acquiring cryo-electron microscopy. And one of the things that we wanted to do was to democratize it toward the pharmaceutical industry, and that's actually going very well. So that bodes well for the future and expect that over time, life sciences will continue to be a bigger and bigger proportion of total electron microscopy sales, and that bodes well for the long-term outlook for this business as well.

Stephen Williamson -- Senior Vice President and Chief Financial Officer

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

Jack Meehan -- Barclays -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Jack Meehan -- Barclays -- Analyst

Any impact on -- from Easter that you think?

Marc N. Casper -- President and Chief Executive Officer

Not a material impact, no.

Jack Meehan -- Barclays -- Analyst

Okay. Thank you.

Operator

Next question comes from Doug Schenkel with Cowen.

Doug Schenkel -- Cowen -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Doug Schenkel -- Cowen -- Analyst

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

Stephen Williamson -- Senior Vice President and Chief Financial Officer

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

Doug Schenkel -- Cowen -- Analyst

Great. Thank you.

Operator

Next question comes from Stephen Beuchaw with Wolfe Research.

Stephen Beuchaw -- Wolfe Research -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

Yes. So when I think about pharma and biotech in the end market, not a really strong quarter for us, and it was broad-based in terms of across our product lines. Excellent performance from pharma services and bioproduction. Our customers really respect and appreciate the value proposition. We help them with their innovation pipelines. We help them drive productivity. Because of the scale of the relationships we have, we have unique access to the decision-makers. And those customers are doing more business with us, but also the pipeline of activities with us is very strong. So that's part of it.

And these small and emerging companies, the innovators that are in the earlier stages of their history, really are about speed to market, and they're relying on us to help them through their development work and scale up and help them with their logistics and clinical trials, all things that we do, and that's also been driving very strong growth for us. So it's broad-based. It's not only by customer type within pharma and biotech, but it's broad-based in terms of our product offering as well. So pretty good end market for us, and we're uniquely positioned to capitalize on it.

Stephen Beuchaw -- Wolfe Research -- Analyst

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

Stephen Williamson -- Senior Vice President and Chief Financial Officer

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

Stephen Beuchaw -- Wolfe Research -- Analyst

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

Stephen Williamson -- Senior Vice President and Chief Financial Officer

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

Stephen Beuchaw -- Wolfe Research -- Analyst

Okay. Thank you so much.

Stephen Williamson -- Senior Vice President and Chief Financial Officer

Thanks, [Indecipherable].

Operator

Next question comes from Patrick Donnelly with Goldman Sachs.

Patrick Donnelly -- Goldman Sachs -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Patrick Donnelly -- Goldman Sachs -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Patrick Donnelly -- Goldman Sachs -- Analyst

Thanks, Marc.

Operator

Next question comes from Dan Brennan with UBS.

Dan Brennan -- UBS -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Dan Brennan -- UBS -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Stephen Williamson -- Senior Vice President and Chief Financial Officer

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

Dan Brennan -- UBS -- Analyst

That's great. Thanks guys and Marc, let's go Jets.

Marc N. Casper -- President and Chief Executive Officer

Exactly

Operator

Next question comes from Dan Leonard with Deutsche Bank.

Dan Leonard -- Deutsche Bank -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Dan Leonard -- Deutsche Bank -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Dan Leonard -- Deutsche Bank -- Analyst

Okay. Thank you.

Marc N. Casper -- President and Chief Executive Officer

You're welcome.

Operator

Next question comes from Steve Willoughby with Cleveland Research.

Steve Willoughby -- Cleveland Research. -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Steve Willoughby -- Cleveland Research. -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Steve Willoughby -- Cleveland Research. -- Analyst

Okay. Thanks very much.

Operator

Next question comes from Sung Ji Nam with BTIG.

Sung Ji Nam -- BTIG -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Sung Ji Nam -- BTIG -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Sung Ji Nam -- BTIG -- Analyst

Thank you.

Operator

Next question comes from Catherine Schulte with Baird.

Catherine Schulte -- Baird. -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Stephen Williamson -- Senior Vice President and Chief Financial Officer

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

Catherine Schulte -- Baird. -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

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

Catherine Schulte -- Baird. -- Analyst

Great. Thank you..

Marc N. Casper -- President and Chief Executive Officer

Operator. We're going to take one more.

Operator

And our next question comes from Mike GOK with Janney.

Paul Knight -- Janney Montgomery Scott -- Analyst

Hi, Marc, it's Paul Knight. How are you?

Marc N. Casper -- President and Chief Executive Officer

Good, Paul. Nice to hear from you.

Paul Knight -- Janney Montgomery Scott -- Analyst

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

Marc N. Casper -- President and Chief Executive Officer

Sure. Paul, thank you for the question. So a small proportion of our pharma services business is making highly complex Active Pharmaceutical Ingredients that are made in the West. And we have a state-of-the-art facility in Linz, Austria, and we acquired a couple of years ago a state-of-the-art facility from Roche in South Carolina. As we looked at all of the development work that we have won, our capacity utilization is getting high. And it was much more cost-effective to buy another state-of-the-art facility from GSK and never thinking about breaking ground because facilities like this would cost $0.5 billion plus if you try to build it from scratch, if not more. And we're acquiring that for EUR90 million with a base of business.

And capacity utilization is attractive to a divesting entity because the facility is not fully utilized, and they know that we will be able to continue to utilize that facility, improve the economics through volume leverage and create a very strong assurance of supply for the existing medicines that are produced there. So it's kind of a -- it's a -- in a way, it's a CapEx project is the way to think about it, but you're buying it with some level of volume, an amazing workforce and state-of-the-art facility. So that's the essence of the strategy there.

So let me wrap up here. We're pleased to have delivered an excellent first half. We're in great position to achieve another outstanding year. And as always, thank you for the support of Thermo Fisher Scientific, and we look forward to updating you at the end of Q3. Thank you, everyone.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Kenneth J. Apicerno -- Vice President of Investor Relations

Marc N. Casper -- President and Chief Executive Officer

Stephen Williamson -- Senior Vice President and Chief Financial Officer

Tycho Peterson -- JPMorgan -- Analyst

Ross Muken -- Evercore ISI -- Analyst

Derik de Bruin -- Bank of America. -- Analyst

Jack Meehan -- Barclays -- Analyst

Doug Schenkel -- Cowen -- Analyst

Stephen Beuchaw -- Wolfe Research -- Analyst

Patrick Donnelly -- Goldman Sachs -- Analyst

Dan Brennan -- UBS -- Analyst

Dan Leonard -- Deutsche Bank -- Analyst

Steve Willoughby -- Cleveland Research. -- Analyst

Sung Ji Nam -- BTIG -- Analyst

Catherine Schulte -- Baird. -- Analyst

Paul Knight -- Janney Montgomery Scott -- Analyst

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