賽默飛世爾科技 (TMO) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Thermo Electron Corporation Fourth Quarter 2005 Earnings Conference Call.

I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President - Investor Relations and Treasurer.

Mr. Apicerno, you may begin the call.

Thank you.

Good morning and thank you for joining us.

Also on the call today is Marijn Dekkers, our President and Chief Executive Officer, Marc Casper, our Senior Vice President and Pete Wilver, our Chief Financial Officer.

Please be aware that this call is being webcast live and will be archived on our website www.Thermo.com until March 6, 2006.

To reach the replay of the call on our website, click on About Thermo, then Investors.

Please also be aware that a copy of the press release setting forth our fourth quarter 2005 earnings and future expectations is available in the Investor Section of our website under the heading Press Releases.

With that I'd like to begin the call by reading the 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 our form 10-Q for the quarter ended October 1, 2005, under the caption forward-looking statements, which is on file with the Securities and Exchange Commission and available in the Investor Section of our web site under the heading SEC filings.

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.

And therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call we'll be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP.

Reconciliation of non-GAAP financial measures used on this call to the most directly comparable GAAP measures is available in the press release setting forth our fourth quarter 2005 earnings and future expectations and in the tables accompanying such releases in the Investor Section of our website www.Thermo.com under the heading Press Releases.

Related information is also available on the Investor Section of our website under the heading Financial Reports, and then under Reconciliation of Financial Information Q4, 2005.

With that, I'd like to turn the call over to Marijn.

Thank you, Ken.

And good morning, everyone.

Thank you for joining us today for a recap of our strong finish to 2005, which we believe places Thermo in an excellent position for continued growth in 2006.

Let me first review the financial highlights in our press release for the fourth quarter and the year.

We are extremely pleased with our quarterly results, which were strong across the board.

Revenues grew by 21%, adjusted EPS rose by 29%, and our adjusted operating margin expended 290 basis points, something we were especially excited about.

And then also we have excellent cash flow with a 42% increase in cash from continuing operations over last year's Q4.

So this is a great way to end the year that demonstrated a trend of improving performance every quarter.

And to summarize what happened in 2005, we achieved 19% revenue growth over 2004. 24% growth in adjusted EPS, an expansion of our adjusted operating margin by 140 basis points, and a 9% increase in cash flow from continuing operations.

As I said, we're especially pleased with our focus -- that our focus on margin expansion lead to such a significant improvement.

We really began making progress in Q3 with an increase of 160 basis points in margin, and then now in Q4 with 290 basis points improvement we're able to complete the year well ahead of our target of 100 basis points of margin expansion.

And this achievement was primarily the result of new products that we introduced with tend to have higher margins, our ongoing pricing initiatives, productivity improvement programs that are taking hold throughout the Company, and then synergies made possible by the acquisitions we made and their successful integration into Thermo.

So we're clearly gaining momentum on our margins at that gives us confidence that we will be able to expend they're margins by well over 100 basis points in 2006, as there is still plenty of opportunities left in the Company to increase our profitability.

Now I'll talk a little bit about where our growth has been coming from, the market situation.

Our industrial markets are very strong.

Boosting the performance of -- of our measurement and control segment, which actually grew 14% organically in the quarter.

And this part of our business is benefiting from two primary drivers.

The first one is capacity expansions in the production of commodity materials such as metals, minerals, oil and gas.

And that leads to an increase demand for online quality analyzers.

And then secondly the build-up in the worldwild -- worldwide power generation industry, which combines with new air quality regulations, leads to greater demand for air quality monitoring instruments.

And we expect both these drivers to continue in 2006.

Now our Life and Laboratory Sciences segment also continues to grow at a nice pace.

And here we are gaining ground by creating more and more integrated work flow solutions for our customers.

We obviously have the key advantage here with the greatest breadth of hardware, software and services in the analytical instruments industry, thanks to the strategic acquisitions we made in our ongoing product development efforts.

A few words on new products.

New product introductions were a key contributor to our growth in 2005 and will be again in 2006.

In previous calls we've talked a lot about our growing Mass Spectroscopy product lines, in particularly the new Orbitrap and its significant impact on the scientific community.

But beyond Mass Spectroscopy, in Q4 we introduced the new LIMS software solution for our Life Sciences customers called Darwin.

And this product combines Thermo's best LIMS technologies with those from our InnaPhase acquisition in 2004, and that will help researchers manage and make sense of the volumes of data generated during drug discovery.

We also continue to place R&D emphasis on adopting analytical technologies for industrial use.

Our latest development here is the iCAP 6000 for elemental analysis in a range of industries including environmental, petrochemical, metals, food and beverage and cement.

This is essentially an ICP technology that we unveiled in January at the conference of Plasma Spectrochemistry in Tucson, and it will also be featured at Pittcon.

Now new products are important in our measurement and control businesses as well, where we continue to develop new air and water quality monitors and radiation detectors that offer greater sensitivity and are easy to use.

So in summary on the new products, I'm very proud of how are our R&D efforts are continuing to pay off.

As you know, we measure our success with a metric we call the vitality index, which is a percentage of sales derived from products introduced in the past two years.

And our vitality index for the full year of 2005 rose again to 23% from 20% in 2004, and 15% in 2003.

Just a few words on our global presence, particularly Asia, which again in Q4 was our highest growth region.

After opening a brand new 100,000 square foot manufacturing facility in Shanghai, China, about a year ago, in the recent fourth quarter we opened two new industry-leading customer demonstration laboratories.

One in Shanghai and the other one in Mumbai, India.

And from an employee point of view between China and India in 2005, we added a total of more than 300 employees in those two countries.

So I believe we have the foresight to invest to [expense] our footprint in Asia, and as a result of that we are now participating in that growing market as a leading company.

Just a few words on the guidance before I hand it over to Pete, with multiple growth drivers in place, I think it's apparent we have incredible momentum going into -- into 2006.

And two reiterate the guidance we gave at the end of December, we expect to achieve adjusted EPS of $1.75 to $1.80 for the full year, which is 13 to 16% increase over our very strong results in 2005.

And this guidance excludes $0.10 per share of stock option expensing that will take effect during the year.

From a revenue point of view in '06, we expect an increase of 6% to 8% over last year in the range of 2.78 billion to 2.83 billion.

Let me remind you that these estimates do not include any acquisitions or divestitures that we may make over the course of the year.

And with that, I'll turn the call over to Peter Wilver, our CFO for his more detailed review of the financials.

Pete?

Thanks Marijn.

Good morning, everyone.

As Marijn Dekkers said, our adjusted EPS for the quarter was $0.49, up 29% from $0.38 last year.

Full year adjusted EPS was $1.55, up 24% versus $1.25 last year, and up $0.10 from the high end of the original guidance of $1.40 to $1.45 we gave at the beginning of the year.

GAAP earnings per share in Q4 was $0.34 below adjusted EPS primarily due to intangibles amortization and down from 74 per -- $0.74 last year primarily as a result of a tax benefit in 2004 related to previously divested businesses that we were able to recognize following the resolution of some prior-year tax audits.

Our press release contains a detailed reconciliation between GAAP and adjusted EPS.

Revenues in Q4 increased 21%, or 127 million year-over-year to 741 million.

Organic revenues in the quarter up 6%, excluding acquisitions, divestitures, and the negative affect of currency translation.

For the full year organic revenues were up over 4% consistent with our guidance of 4% to 5%.

Bookings exceeded revenues in the quarter by slightly more than 1%, primarily driven by high quarter-end order activity.

In Life and Laboratory Sciences, revenues grew 24% on a reported basis, and increased 4% organically.

Our industrial markets rough driving strong growth and Life Sciences markets continue to grow at a good pace.

We also benefit -- benefited, as Marijn said, from several new product introductions.

In measurement control, revenues rose 12% on a reported basis, and a substantial 14% organically.

During the quarter we saw a good strength in our commodity materials and environmental monitoring markets.

In terms of geography, we reported revenue growth in all our key regions.

Asia was our strongest region with good growth across the board and as expected, China rebounded considerably in 2004 to over 20% growth.

Europe also rebounded substantially to grow at mid single digital pace, and growth in North American was in the low single digits.

Finally the rest of the world contributed nicely to overall gross, increasing by over 25%, albeit from a relatively small base.

Adjusted operating income increased 48% or $38 million year-over-year to 119 million.

Adjusted operating margin was 16% up 290 basis points from 13.1% in the year-ago quarter, and up 130 basis points sequentially from 14.7% in Q3.

Life and Laboratory Sciences adjusted operating income increased by 30% year-over-year, and adjusted operating margin was 18.7%, up 90 basis points versus 17.8% last year.

The increase in margin rate was primarily attributable to favorability volume leverage, including acquisition accretion, price increases and the benefit of our productivity initiatives including acquisition synergies.

In measurement control, adjusted operating income increased by a staggering 64% and adjusted operating margin increased by 430 basis points to 13.6% versus 9.3% in the prior year.

The increase in margin rate was primarily attributable to significant volume leverage, increased prices, and solid productivity improvements.

As I mentioned the past couple of quarters, our recent acquisitions has a dilutive effect on our gross margins, primarily due to higher mix of distribution sales in Kendro with a corresponding reduction in selling and G&A costs.

R&D costs for Kendro are also lower than the average for Thermo.

As such, year-over-year comparisons of adjusted gross margin, SG&A, and R&D will not be particularly relevant until we have a reported full year of acquisition results.

Adjusted gross margin was 46.3% in the quarter, flat with the year ago, as acquisition delusion was offset by favorable pricing, volume leverage and productivity.

SG&A was 25.1% of revenue in Q4, down 240 basis points from the year ago.

About half of this decline was due to acquisition accretion with the balance primarily attributable to volume leverage and lower spending.

Specifically we benefited from lower Sarbanes-Oxley costs as we managed down our external consulting and audit fees as compared to last year.

R&D was 5.2% of revenue in Q4, down 50 basis points from the year ago quarter.

Again primarily due to acquisition accretion.

However, we are continuing to improve the efficiency and effectiveness of our R&D spend.

Our adjusted tax rate for the quarter was 30%, which is 200 basis points higher than last year's Q4 adjusted rate of 28%.

Resulting in a $0.01 year-over-year decrease on adjusted earnings per share.

The Q4 rate is slightly lower than the forecast, primarily as a result of our expectation that we will achieve a slightly more favorable outcome in the U.K. tax legislation matter that we accrued for in Q3.

Net interest expense increased 5 million as a result of our recently issued debt and other income decreased 5 million or $0.02 per share due to significantly lower securities gains.

As of the end of Q3, we had liquidated the vast majority of our securities portfolio and did not -- did not expect to see measurable gains in the future.

Average diluted shares were up 1.8 million to 166.3 million shares primarily as a result of higher option dilution.

In terms of balance sheet performance, we ended the quarter with 295 million in cash and investments, up 93 million from Q3, primarily as a result of very favorable operating cash flow.

Our debt was down 41 million versus Q3 to 599 million, primarily as a result of paying down a portion of our Euro based revolving bank facility.

Receivables came in at 69 days, essentially flat with the year-ago quarter and sequentially with Q3.

Although our receivables were up in Q4 in dollar terms as a result of the year end shipment push, the good news is that our collection performance is improving, and the average age of our receivables is going down.

We expect this trend to continue and are driving to improve our receivables days by 5% during 2006.

Inventory turns were up significantly to 4.4 times, a half a turn increase as compared to the prior year.

During the quarter we made excellent progress in managing down our inventories, which contributed nicely to cash flow.

Cash flow from continuing operations in Q4 was very strong at $126 million.

After deducting net capital expenditures of 10 million, cash flow from continuing [ops] was 116 million, which is significantly higher than the prior year amount and equal to 144% of adjusted net income for the quarter.

For the full year we generated 273 million in cash flow from continuing operations.

After deducting 28 million of net capital expenditures, cash flow from continuing operations was 245 million, or 96% of adjusted net income.

This amount is 20 million above the high end of the cash flow guidance that I provided last quarter, primarily as a result of our favorable inventory performance and lower cash tax payments.

So let me review with you the guidance that we have in our press release.

We're maintaining our recently issued 2006 adjusted EPS guidance of $1.75 to $1.80, which represents a 13 to 16% increase over our 2005 adjusted earnings of $1.55.

Including an estimated $0.10 on favorable impact to stock options expensing that we'll adopt prospectively beginning this year, we expect our adjusted earnings per share to be in the range of $1.65 to $1.70.

We're also maintaining our full year reported revenues guidance of 2.78 billion to 2.83 billion, although we are seeing slightly less favorable foreign currency rates than we did a month ago.

In summary this was an other excellent quarter for us operationally.

We, again, exhibited our and to dramatically expand adjusted operating margin, which keeps us on track to achieve our 2006 margin expansion goal of well above 100 basis points of expansion.

We grew our revenues significantly, both through acquisitions and organically driven by strong industrial markets and new product introductions.

Overall we believe our performance this quarter positions us for a real strong year in 2006.

With that, I'll turn it over to questions.

[OPERATOR INSTRUCTIONS] Darryl Pardi, Merrill Lynch

Hey, good morning.

Good morning, Darryl.

Hey, could you be more specific about the growth rates you're seeing within Life and Lab Science from a customers perspective?

It sounds like industrial is quite strong, a little better than Life Sciences.

Can you just walk through the end markets, general, industrial, environmental, pharma, biotech, and economic government?

For Life and Laboratory Sciences in particular?

Yes.

Yes.

I can try -- the overall organic growth rate was 4% in Life and Lab.

And I would say that probably on the industrial side it's around five six.

And Life Sciences about three, average in the quarter.

Okay.

So -- so it's not -- it's not, far from -- from the mid-point.

Of course, when we talk about commodity materials and air quality, the big drivers that drove measurements and control are more on the manufacturing side.

The capacity expansion relayed it.

In the laboratories you also get the benefit of these customers having more cash available.

But the big push for us comes in measurement and control and these customers are truly expanding that capacity.

And that's more a process instrument than environmental instrument type of play, than a Life and Laboratory Sciences play.

Right.

And the sales trends with your top 20 Pharma customers?

Well, for the year we -- we -- we tracked, the top ten through 12 big Pharma.

For the year we were up 5% with them organically.

And that is not as good as we were in terms of growth the year before.

We were up significantly more with them.

But still, it's not -- large Pharma is not a drain on our organic growth rate.

It wasn't in 2005.

And those top ten customers represent 5% of our overall revenue.

Okay.

And just lastly, Pete, do you know what the impact of FX was on operating profits?

On Operating profits, it's -- it's pretty -- pretty minimal.

It's basically a pull through at the -- the average margin rate.

So, it's at about a 15% rate.

Okay.

Thank you.

Okay.

Thanks, Darryl.

Ross Muken, Deutsche Bank

Hi, good morning, guys.

Congratulations.

Great quarter.

Thank you.

Marijn you talked about pricing initiatives early on in -- in the dialog.

And I just wanted to see, without giving any -- anything too specific, could you sort of talk about where we are with that this year, relative to historically in terms of that price increase being delivered and sticking actually to the end customer.

Yes.

As you know, Ross, we -- we -- we had a big push in 2005 to -- to get price increases on products that are not new.

You know, typically our industry does a good job when we come out with a new product to get a higher price.

Higher value, higher price.

But what we don't really do that well is to just have regular price increases on existing products.

And as a result of that, particularly in the inflationary environment we've been living in, steel, copper, freight, it all got more expensive for us.

There's a risk of -- of margin erosion if you don't diligently manage that.

So in 2005 we put a lot of emphasis on trying to get price increases on existing products.

And that really started happening sort of by the end of third quarter and in the fourth quarter.

So some of the margin improvements that you've seen from us in the third and fourth quarter are the result of those price increases.

If you ask how long is this going to go on, well, this really should be just an annual recurring situation.

Our costs go up, our prices, therefore, need to go up.

Not just on the new products, across the board.

Great.

And, we also talked about the -- the vitality index.

You know, can you talk about what sort of the long-term manageable goal there is for that?

And in terms of that, where are we now versus that goal and versus where we were a few years ago?

I think you had mentioned it.

Just if you could give us a comparison.

Well, as I just mentioned, it's a good connection with the previous question.

The easiest time to get your margins up is when you introduce a brand new product that's significantly better than -- than the previous product you had.

Better than the competition.

So the percentage of sales that comes from new product is really very important for the overall health of the profitability.

We were not that great a number of years ago.

The number I gave in 2003 was 15% of vitality index.

Which is a percentage of sales of products introduced in of the last two years.

In 2005 we ended up at and average of 23%.

So you could say one out of every $4 you sell is from a recently introduced product.

Our ultimate goal is probably around 30% here.

If you go much higher, you -- you start turning over products, probably too fast.

It's not an efficient way of R&D spending.

But I would say, by the time we get 30%, probably reach a healthy status quo for what our markets require.

Of course, Mass Spectroscopy has a -- a much higher vitality index than -- than -- than some other products that are on the lower end of the technology scales.

So this is an average for the Company.

Right and then just one last quick question.

I'll get back in the queue.

You just mentioned Mass Spec.

And certainly you mentioned the call the LTQ and some of the other recent successes that you've had there.

Some of the competitors have come out recently and talked about a lot of new product introductions, et cetera, coming here and later in the year at ASMS.

Could you quickly touch upon the competitive landscape, more specifically at the hot air end of Mass Spec.

Yes.

I mean, competitively in 2005 we believe we gained significant share and some of the -- the surveys like the ASMS survey that was done in the middle of 2005 supports that.

That's not just our opinion.

But of course the competi -- competition isn't sitting still.

They come out with new products.

We're not sitting still.

We're coming out with new products.

So and it's -- it's -- it's a race.

And, we don't take anything for granted.

I do believe that we are, in a good position today. and have some outstanding technologies that can be leveraged in the future as well.

Great.

Thank you .

Thank you, Ross.

Paul Knight, Thomas Weisel Partners

Marijn, you're implying that the t -- that measurement and control group because of the capacity expansion occurring in your end market, are you implying that you see some visibility to this higher level of growth?

Yes.

I think implying that.

Because that's not just a one time sit -- a one quarter situation, obviously.

You know, the way to think about this, Paul, is here you have commodity materials customers.

And that about a year and a half ago saw much stronger demand.

Prices started to go up.

They feel better about themselves.

They are, accumulating cash.

They're saying we're going to run out of capacity.

We should start either running our factories better for better yields or expand our factory capacity so that putting plans together.

They start building these expansions and than sooner or later they need our analytical instruments to control these expansions.

So we have a lag here of at least four or five quarters.

And we've been saying this for a few quarters that this was coming.

Well it came in a big time in Q4.

And from order backlog, et cetera and just from a general economic cycle point of view, this is going to stay with us in 2006, I'm convinced of it.

Okay.

Maybe not, at the 14% organic growth rate every quarter.

That's not what I'm promising.

But certainly it'll be a very nice growth driver for us.

Okay.

Thank you.

I had counted Ross had three questions, Marijn.

Are you surprised? [ Laughter ]

No.

Okay.

Quintin Lai Robert W. Baird

Good morning.

Nice quarter and nice end to the -- to the year end.

Thank you.

So going back to the -- to the measurement and control.

So you saw 14% organic growth and yet in North America it was low single digits.

So is a lot of that measurement and control going international?

A lot of that demand?

When Pete said that low single digits, that's for the whole Company.

So he didn't comment on -- on just measurements and control.

But I think your -- your assessment is -- is fair that -- that it was a 5%?

Yes, about 5.

Okay, so we -- we grew measurement and control 5% organically in the U.S.

And total 14.

So -- so your assessment -- assessment is fair.

There's a very strong Asia component to this measurement and control growth.

And then with respect to Kendro, now that you've had a few quarters under your belt, if you -- have you been able to try to take a look at -- has the Thermo platform been able to accelerate the growth rates of Kendro?

Not yet.

I think it's not enough time has gone by with -- with two quarters and a few weeks to say that there is a significant acceleration on the top line.

There is, of course, a -- an acceleration on the margin expansion putting these two businesses together, because we have been able to, get certain cost synergies already, as a result of this combination.

But the -- the revenue synergy, which I believe is there.

Takes -- takes more time to -- to get.

There is a certain overlap of -- of sales forces, there's an initial, confusion with distribution channels, who is telling whom to what.

With all -- which all needs to be straightened out.

And that -- that takes, two, three quarters.

Once you've straightened that out, then, you can really begin to drive the re -- the synergies on the top line.

Okay?

Derik De Bruin, UBS

Good morning.

Good morning, Derek.

So just -- I think we've beaten the M&C question.

So I'll skip that.

Oh no, just -- just ask another -- one more question.

Okay.

Since you insist.

So could you just give us a history lesson in terms of when you see these cycles starting?

When you start seeing the pick up in sales, how long do cycles normally last for you?

You know, I used to work in the chemist -- chemical industry.

And we used to say every ten years we have two good years.

Which -- which was a little overstated.

But typically these cycles do take about two years.

The only difference now is that that performance may not be an indicator of future performance here.

Because in the -- in the cycles in the past, you never had emerging economies.

And it's more than emerging, it's -- it's China, India, with such a demand in their build-up of infrastructure.

You know, just like nobody is talking about oil going back to $35 any more.

I believe this cycle might actually not be so cyclical and be with us for quite awhile, given the -- the demand from Asia for, commodity materials that currently have limited production capabilities.

I just heard this morning that Phillips-Dodge, a copper producer, is opening the first new mine, copper mine in 30 years.

Okay, so it's just a little information that plays right into what's going on in the world. 30 years is a long time.

So the bottom line of it is, it's certainly going to be with us for, through 2006 and the first half of 2007 I believe.

Since we are lagging that overall pattern.

But this -- this may not be so cyclical.

This may stay up there for quite a long time.

Okay.

That's extremely helpful.

Some of your Mass Spec competitors, are sort of indicating that the new products they are going to be launching are going to be priced, as much as 30 to 50% below current products.

Now I certainly realize that sensitivity and performance [instruments] are the kill -- the key say -- sales drivers.

But I mean how do you think this could potentially impact the market dynamics?

Well, it's very hard to say un -- un -- until you have really seen the performance of those instruments, quite honestly.

Instruments that Mass Spec sell all the way from probably 70 to 80,000 or even less to our LTQ FT sells for 800,000.

So, you hit the nail on their -- on the head, it depends on how good is that instrument, and what does it do for the application that the customer requires?

And then that remains to be seen when you have new entrants.

I would say that -- that -- that typically in these -- in the high end instruments, the pricing is -- is quite well organized in the sense that the customers are very educated.

They know what they're buying, they know what they're looking for.

They use our customer demonstration laboratories all around the world to come with the samples and try it out for three, four, five days.

So the price performance balance is very well studied by -- by most of our customers.

And I -- I think that will continue to be the case.

Okay.

And just one final question.

Just because I always get this question from investors.

What's you're current thinking in terms of acquisitions versus share buybacks, versus debt repayment?

You know, are you -- on the acquisition front, are you looking at Kendro-sized deals?

Yes, I mean I think that we -- we always say because we do get this question quite frequently, obviously.

That for as long as the industry is as fragmented as it is, which it's -- which it really is.

We believe that there are opportunities for us to do some very good intelligent good economical acquisitions.

And I think our track record in 2005 has -- has shown that.

We did four acquisitions.

And really working out well.

All four of them.

We spend about a billion dollars doing that.

So I don't really see a change in the level of fragmentation to such an extent that we're saying now we run out of things to do with our -- our cash.

So acquisitions is our first priority.

Of course, when we have cash we'll pay down debt, if it's appropriate.

And then on a stock buyback, there -- there 's a possibility that we would do some share buyback to, keep -- keep share count constant.

But -- but -- but not initiate a major share buyback program at this point, because we've run out of acquisition ideas.

And if you say what size, Kendro size?

Yes, if the right opportunity would come along, we could do Kendro-sized deal, because we, I think, have the management capacity to integrate it, and we certainly have the financial strength to do an acquisition of that size.

But if there are smaller, bold ones, that can really work for us as well.

Great.

Thank you very much.

Thank you.

Tony Butler, Lehman Brothers

Thank you, and good morning.

Marijn, when you -- while there has been impressive operating margin improvements, I'm curious if you can qualitatively separate Kendro from the remaining part of your business.

If that's possible?

To ask the question, is the greatest operating improvement actually through Kendro, or does it come from the remaining parts of your business?

And then if I may, the second question relates to actually gross margins.

Again, while I know -- understand the focus maybe on the operating side.

The question is, with imminency seemingly growing better preps than we and others had expected or might expect, is that somewhat of a drag on gross margin, such that to get over the 47% hump, might be increasingly difficult?

Thank you.

I'll take the question.

In terms of the -- the acquisition contribution to the 290 basis points, it's about a third of that number in Q4.

Obviously as -- as we get past the full year, that will --that will contribute a little bit less going forward.

But we're continuing to get synergies out of that acquisition as well going into the future.

So whether you call it Kendro or productivity, we'll -- we'll continue to accrete margins as a result of that acquisition.

I'm sorry -- the gist of your -- ?

Is M&C, because they're growing, do they bring down our gross margin because they have a lower average gross margin.

Yes.

Overall it does bring it down a little bit.

But we have movement back and forth there.

But I don't see any reason why we shouldn't expand gross margins from 2006 from -- from the point that we are today.

Pete, if I may, is it -- is it possible to -- to -- to move beyond the 47% level?

And I'm not trying to peg you on a timeframe.

I'm simply asking is that a possibility?

Oh yes, definitely.

There -- there's no -- no limit at 47.

That would -- to get above that number probably a little bit longer than one year.

But there's -- theoretically if we -- if we get pricing right and productivity initiatives and continue to leverage our -- our fixed costs, there's no reason we shouldn't get above that number.

I don't view that as a feeling at all.

You know, Tony, maybe I can expand on -- on -- on the -- on the answer a little bit.

Sometimes we get asked, okay we now have about 14% operating margin for the year.

EBITDA margin.

And I get asked the question, so where -- where can you end up?

What -- when you you're really running, a good organization, what could Thermo potentially be?

And we believe it's -- it's around 18, 19, 20% EBITDA margins.

So we're not done here.

We think we have at least 500 basis points left in just -- continuing to do the things that we have been doing, driving productivity, focusing on price, and the new products at the higher margins.

Thanks very much, Marijn.

Okay.

[OPERATOR INSTRUCTIONS] John Sullivan, Leerink Swann

Good morning.

Can you just talk for a second about the new LIMS software product that you introduced, and talk about how important the product -- the product area is strategically?

This seems like a pretty competitive area, and I'm just wondering what ancillary benefits you might see to -- to having the -- the product that you have in -- in that software area.

Yes.

That's -- that's -- that's actually a very important question because it goes all the way back to our InnaPhase acquisition in the middle of 2004.

We bought InnaPhase back then, which had about 25 million sales, and we paid about 65 million or so for it.

We paid -- paid a pretty nice price for it.

And that was really done, because we saw an opportunity to combine the LIMS technology that InnaPhase had with our own LIMS technology.

Our own LIMS technology was more focused on industrial labs.

InnaPhase was very focused on Life Sciences, Pharma and biotech labs.

We basically took the best of both technologies and combined them in this new, what we call Darwin LIMS software platform.

And we introduced that in December.

So it's now commercially available and it's now being [demoed] to all of our customers.

And we believe that this is, by far, the best product for these applications in the industry now.

That's what we believed all along. -- That's why we bought InnaPhase.

And it's very rewarding now to -- to see it come out and being tested by our customers.

The other reason that -- that it's important for us to be good at this type of -- of informatics and software capability, is we really see ourselves as a broad solution provider.

So we try to go beyond the scientific instrument in -- on the one hand, sample preparation before you put the sample in the instrument, the lab equipment and automation capabilities.

And then beyond the instrument, once you have generated the peaks, how do you interpret the data, how do you store it, how do you retrieve it, how do you make sense of.

So it is an important leg of the tripod of sample prep sample analysis and data in interpretation and management.

And that's why we're very happy with this Darwin coming out now.

Thanks very much.

And then one separate question.

Regarding the strength in the Mass Spectroscopy business in 2005, can you outline any plans you might have to leverage that strength into either ancillary products or nearby technologies to -- to the Mass Spectrometer ?

Yes, well it goes -- goes back to that previous answer.

You know, we believe very much in work flows.

When a -- when a customer is in a [lap], it's not just about how good is their Mass Spectrometer, how sensitive is it, what's the dynamic range, et cetera.

It's also how do they prepare the actual sample before it goes into the Mass Spectrometer?

And then at the end, how do you interpret the data so you get the -- the best possible answer.

I don't know if you've been to our BRIMS, our buyer market research institute for Mass Spectroscopy in Cambridge.

But there we have completely designed a work flow all the way from a blood sample coming in to a total protein analysis of -- at the end.

Of the different steps that the customer goes through, separations, concentration, then ultimately the experiments for the Mass Spec and then the data interpretation.

And more and more we're able to -- to sell these full packages to our customers.

So work flow solutions are -- are very important.

And we stress it significantly, because we think with our breadth of portfolio, we are in a unique position there, competitively to -- to serve our customers.

Thanks very much.

Thanks John.

[Vivic Connor, August Partners] Good morning.

Congratulations on the -- on the quarter and god cash flow Marijn.

Thanks for that.

I just want to ask you a couple questions here.

Just how -- how have you seen order activity going through in January?

And then, as I look at your cash flow, it looks like you'll have about 600 million in cash by the end of '06.

And I don't know how much debt you have, but it seems like that's significant cash to drive earnings growth.

I'm just wondering how you're thinking about that too?

Well I'll -- I'll do the first question.

Pete can -- can talk more about cash flow.

It's his favorite subject.

On the orders of January looks like the same as the trends we had the fourth quarter.

So -- so positive.

Okay.

And that's really the answer on that so, Pete.

Yes, well your question was really around usage for -- for cash, which Marijn answered that, your -- your -- your round ballpark numbers are -- are probably right.

If we don't pay down any debt, we do have about 100 million of short-term debt still primarily in Europe that we would, probably pay down with excess cash.

If -- if we didn't have good acquisitions to put the money in.

And then are you seeing -- still continuing to see good op -- good targets?

Or is -- or are you are not -- you haven't been looking recently?

Just can you update us, how -- what it looks in terms of the pipeline of acquisitions?

Well I -- I mentioned it earlier, the -- the companies are there.

We are a fragmented industry.

It's that simple.

You have to -- to, get the right opportunity at the right time for the right price.

But there's no doubt in my mind that we will see further consolidation in our industry and there's no doubt in my mind that we will be one of the companies that participates and drive that.

Great.

Thank you.

[Jim Saviodus, Elaine]

Hi Marijn.

Hi.

Could you give us an update on your services emphasis and how that performed in 2005?.

And whether you are, at your -- where you want to be with in terms of acquisitions there?

Are you still looking around for small bolt-ons in that -- in that particular discipline?

Yes.

Let me first say something about acquisitions and services.

There are not that many of any significant size.

This is not an area that a lot of outsiders, outside of our industry have been able to successfully built -- a business of significant size.

The only one that we always saw out there was USCS and we acquired them almost a year and a half ago, almost two years ago now.

So and that has been a great addition as an asset management capability.

Our services in 2005 organically grew 8%.

And a lot of that has to do with our emphasis on -- on talking to the customers and almost on a one-to-one basis and saying what else can we do for you.

Why are you doing some of these things yourself?

Let us help you with it.

So it's growing organically at 8%, obviously faster than the average of the Company.

And I believe that we'll continue to be the case given our focus on it.

Is that growth coming from taking, share from say other players that might be -- that might have been offer those services to customers?

Or are you seeing these customers actually outsourcing more of this type of spend?

It's mostly that -- that -- that they stop doing it themselves or try to do in an [amateuristic] way.

Sometimes that is just really doing the maintenance on an instrument or a piece of equipment.

But sometimes it's also the management of all of these maintenance contracts.

That's when you get into asset management.

Okay.

So then that's more -- that's really more of a -- it's -- it's -- it's almost like a consultant, a managing situation.

While -- while - while the other one is really physically doing the work.

Am I clear on my answer?

You are.

Yes.

Thank you Marijn.

Thank you, Jim.

Tycho Peterson, J.P. Morgan.

Hi, thanks for taking my call.

Not to beat a dead horse on a work flow issue.

Can you give us an idea on a percentage basis how often you're actually bundling orders to include automation and service and LIMS?

That's still a very small number.

It's it's -- it's -- it happens -- you ask for me for a percent, it's a 1%, 2% of total sales-type of situation.

Where we are able to go in -- in an integrated way.

The majority of our customers is still buying like they always have.

You know, use the home entertainment analogy, often still buying the DVD player and the amplifier separately from Sony and Panasonic, and trying to monkey with that whole thing, putting it together themselves.

I think as we are showing our customers how this can work, they will -- they will, sign up for this more and more.

And you have to be very selective as a supplier in which -- which applications you do that in.

As you cannot it just for everybody, put an integrated solution together.

So we have focused on -- on the larger applications that have a lot of revenue opportunity where quite a lot of customers are struggling with the same work flow issues. [inaudible] is an example, Biomarker, protein research is an example, Blood screening for -- for various infectious diseases is an example of that.

So we don't just go to every single customer and say why don't you buy an integrated work flow.

Because we don't -- we don't offer integrated work flows for each and every application.

Where we do see bundling opportunities is, of course, in new labs.

When people are building an entirely new lab and they have to equip it, then it's not so much around to specific work flow, but more an opportunity to help them in -- in a very efficient way with their equipment, instrument needs and the services that come along with it.

Okay.

That's helpful.

Second, with regards to some of the products, you talked about the demand for LTQ, can you give us an idea, now that's it's been out there for a while, have there been any surprises in terms of where you're seeing demand?

And then also have you placed any of the LeadStreams yet?

On the LTQ, Orbitrap, we have also a regular LTQ, which is a linear ion trap, and then the LTQ Orbitrap is the linear ion trap with the Orbitrap capability.

So the Orbitrap as the demand has been very, very, very good.

So, almost surprisingly good.

This instrument is really a wonderful -- a wonderful instrument.

And there haven't been any surprises of where the demand is coming from.

Just as much from large Pharma as, a small university in the Netherlands.

Okay.

So it's a pretty broad range of customers that want to get their hands on -- on an instrument like this.

LeadStream, disappointing from a sales point of view in 2005.

We actually did not sell a single one of them.

This is the ADME/Tox integrated work flow integration.

Turns out that a lot of our customers are liking the product, are evaluating it, are putting in their budgets for 2006.

But for us coming out with this -- at the beginning of 2005 when a lot of budgets were already set, in a year where there was some quite some conservatism in spending, particularly in big Pharma, we were, I think a little bit ahead of our time in our expectation that we could drive such a dramatic work flow change in a short period of time.

You know, we need a budget cycle to go through before this sticks.

Because it is a significant improvement in the work flow.

But our customer also has to throw basically the old way of doing it, by the way side.

And that decision is not easily being made.

Okay.

We believe in the product.

But not a lot of sales yet.

Okay.

And two other very quick ones if I may.

On measurement and control, with regards to the oil and gas business, there was some talk post-Katrina, that you are going to have potentially some demand pulling through here in the U.S. for new capacity build-out?

Has that materialized?

And then second, can you just tell us your headcount in China.

You mentioned some additions there.

Yes, I mean, oil and gas, we have benefited from that.

But again, it's a global business.

So -- but we're not going to say any other quarter, oh, Q4 was particularly strong because of Katrina.

It's just a very small -- very, very small portion of the total demand.

So on China we have over 500 employees now in China.

And there's going to continue to -- to grow we think over the next few years.

Great.

Thank you very much.

Okay.

Thank you.

Operator, we'll take one more question.

[Jonathan McCarthy, Infinium Capital]

The last question on ADME/Tox and Mass Spec for ADME/Tox .

Can you talk a little bit about whether you've been gaining share there?

And what it would take to -- to continue to gain share in the ADME/Tox or Mass Spec for ADME/Tox?

And I guess that would be triple quads and then anything else that your other -- other instruments would be Mass Spec instruments you'd be selling into that segment?

Yes, I don't want to go down the list of the different instruments technologies and talking about share gains and loss for competitive reasons.

I'm willing to make the overall statement that we believe that we have gained share, across the board in Mass Spectroscopy.

But I don't want to single out, share gains by -- by -- by technology.

Partly also because I don't think the data is good enough.

Because, we really don't know everybody's data on this obviously.

But I would say that our triple quads are growing very nicely.

Okay.

So -- but I don't know how compares with our competitors.

They don't break it out either so.

Great.

That's helpful.

Thank you.

All right.

Thank you.

I think at this point we'll -- Marijn, you want to?

Yes, I would like to make a closing comment.

You know, I think it's clear from -- from our numbers for Q4 that we had great momentum throughout the year on a number of fronts.

We're improving our financial performance, significant new product introductions, expanding our market presence around the world.

And we really expect this momentum to continue into 2006 and are looking forward to reporting on our progress again in April for Q1.

So thank you all -- all of you for -- for listening in.

And thank you for your support of Thermo Electron.

Thank you.

Thank you.

This concludes this morning's Thermo Electron conference call.

Please disconnect your lines at this time and have a great day.