賽默飛世爾科技 (TMO) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 Invitrogen Corporation earnings conference call.

My name is Jeremy and I will be your coordinator today. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to your host, Ms. Amanda Clardy, VP of Investor Relations.

Please proceed, ma'am.

Good afternoon and welcome to Invitrogen's third quarter fiscal year 2006 earnings conference call.

I am Amanda Clardy, Invitrogen's Vice President of Investor Relations.

Joining me on the call today are Greg Lucier, our Chairman and CEO, and David Hoffmeister, our Chief Financial Officer.

Before we begin the presentation I want to caution our listeners that our discussion today includes forward-looking statements including, but not limited to, statements about future expectations, plans and prospects for the Company.

We believe that these statements are based on reasonable assumptions, but actual results may differ materially from those indicated.

It is our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995.

Also, on today's call, as we have in the past, we will discuss organic growth and pro forma financial performance, which includes non-GAAP financial measures, as that term is defined in Regulation G. We will believe the inclusion of these non-GAAP financial measures help investors to gain a more meaningful understanding of our performance, and is consistent with the manner in which management evaluates the Company's performance.

The non-GAAP financial measures are not meant to be superior to or a substitute for results of operations prepared in accordance with GAAP.

You can find the comparable GAAP measures and reconciliations to those GAAP measures on our website and in today's press release.

We will begin today's call with a review of our results by David, who will be followed Greg Lucier to discuss the business overview.

We will then end with a session -- with a question and answer session.

I will now turn the call over to our CFO, David Hoffmeister.

Good afternoon everyone.

Thank you for joining our third quarter financial results call.

As reported in this afternoon's press release, third quarter 2006 sales were $311 million, up 7% year-over-year.

Foreign currency translation had a 1% positive impact, which was offset by the previously announced divestiture of our BioReliance German manufacturing plant.

Organic revenue growth for the quarter was 3%.

While it doesn't appear on the page, let me give you little more color on segment performance.

BioDiscovery third quarter revenue was $201 million, up 10% year-over-year, driven by acquisitions and 2% organic growth.

Year-to-date organic revenue growth in BioDiscovery was 4%.

Our BioDiscovery business unit fell below expectations primarily because of ongoing integration efforts and weakness in a couple of regions.

We continue to grow nicely in many areas, such as our cellular and protein analysis businesses.

And we're very pleased with the significant ramp up of our benchtop instruments, such as I iBlot and iPrep.

Europe had strong growth, and Asia-Pacific, ex Japan, grew in the double digits.

As for Cell Culture Systems, the third quarter was better than expected with revenue of $110 million, representing 4% organic growth, excluding the divestitures made earlier this year.

The revenue growth was driven by continued mid single digit growth in Cell Culture research, and greater than expected sequential increase in our Production Media business unit.

Sera production continued to decline year-over-year, although the decline was less than originally anticipated.

BioReliance returned to modest growth, excluding the divestitures.

Returning to the slides, gross margin for the third quarter was 58.2%, which is approximately 3 points below last year and the previous quarter.

The main drivers of the year-to-year decrease were negative impact from mix associated with lower margin products, both from acquisitions and the existing portfolio, and the higher manufacturing and logistics costs.

Although we expect some of these items to turnaround in future quarters, we do not anticipate this will happen soon enough to benefit the fourth quarter.

SG&A increased 4% year-over-year to $87 million.

The investment we have been making in sales, marketing and infrastructure was partially offset by a reduction in accruals for incentive compensation due to our full year outlook.

R&D was flat year-over-year at $26 million, or 8% of sales.

Finally, pro forma earnings per share for the third quarter increased 9% over last year to $0.87 per share.

GAAP earnings per share decreased to a loss of $2.53 per share as compared to $0.42 earnings per share last year.

We go to the next slide, the GAAP loss per share was driven by a goodwill impairment charge of $150 million, or $2.85 per share.

That charge was taken as a result of our portfolio review and resulted in a reduction of goodwill recorded within our Cell Culture Systems business segment.

As reminder, full reconciliation of GAAP to pro forma financials are available on our website for everyone.

We ended the quarter with $513 million in cash and marketable securities.

The decline of cash quarter-to-quarter was driven by our share repurchase program, under which we repurchased $287 million worth of shares within the third quarter.

We were able to buy 4.7 million of shares at an average price of $61 per share.

We have $200 million left on the initial authorization, and we expect to continue to be buyers of our stock, although the level of the buyback will depend on several factors, including share price, other cash requirements, and expected cash generation.

Free cash flow for the quarter was $59 million.

This represents an increase of $53 million over second quarter levels, and was driven by a positive change in working capital and lower capital spending.

As explained last quarter, the second quarter was impacted by a few working capital items that, as expected, reversed themselves this quarter.

To date we generated $84 million in free cash flow.

Capital expenditures within the third quarter were $12 million, and $44 million year-to-date.

We expect full year 2006 capital expenditures to be in the range of $60 million to $70 million, as we have reported earlier.

As we look at the rest of the year, we anticipate the fourth quarter to be consistent with the third quarter.

We do expect further improvements in working capital, so free cash flow should be slightly higher than third quarter levels.

Before I end my remarks, I would like to provide a brief update on a few items that were discussed in our second quarter earnings call.

The first being our ERP implementation in Europe.

The issues associated with this implementation are largely behind us as it relates to customer facing activities.

We're still working through back office items such as reporting and collections, but these are expected to be resolved by year-end.

The things we have learned during the European implementation will have to reduce the risk of implementation in the Americas next year.

Second, in the second quarter we mentioned that we were in the process of facilities consolidation associated with our antibody businesses.

This integration effort will be completed by year-end.

And we would expect a growth of those businesses to begin to accelerate soon thereafter.

Finally, Japan continues to be a difficult market for us; however, we're finally seeing positive signs that the management changes and the go to market strategy now being employed in that region are paying off.

We're optimistic that this region will return to growth in 2007.

Now I would like to turn the call over to Greg.

Taking a step back from the third quarter financials, let me address what we have tried to achieve over the last three years.

In 2003 this Company was working through the remnants of a very difficult integration between Life Technologies and Invitrogen Corporation.

And the bulk of the product portfolio was centered on genomic tools that were facing very difficult market prospects.

So we took action to build a continuum of molecular biology, cell biology and biological service assets that will provide an integrated set of solutions for scientists.

That effort is now largely done.

Based on independent market surveys, Invitrogen ranked number one in the eyes of our clients.

There is immense value in the assets we have assembled.

Having said that, we have experienced an array of issues this year that has culminated in results below our expectations and yours quarter after quarter.

Some of these difficulties are self-made, such as facility consolidations and integrations, or our sales approach taken in the past in certain markets like Japan.

But some have also been cyclical in nature, like our Sera business and our BioProduction Media segments.

Either way our business performance has to improve.

I realize that saying this that the credibility of this management team to make the turnaround might be called into question.

I assure you that we have a good grasp of what needs to be done at this point, and that we're making the necessary changes so that this Company earns the reputation, not just as the premier life science tools company, but also as a consistent financial performer.

Let me now talk about the changes we're making in more detail.

At the end of the second quarter we told you we would be conducting a full review of our portfolio to see which product or service lines made sense to remain within our ownership, and which might be better optimized by being owned by someone else.

That portfolio review is now largely complete.

We have addressed our businesses and now need to make a couple of key decisions.

I would expect some divestitures may occur, but we have not made any definitive decisions at this point.

If and when such divestitures happen, we will use the necessary proceeds from the sale to repurchase our shares so that any action is EPS neutral.

I would also say, as part of that review and our results in the third quarter, it is clear we need to adjust our go to market approach in certain markets.

We have the right formula in Europe where we're growing at consistently high single digit rates.

Our work now is to bring that same discipline and playbook everywhere else in the world, and that is going to begin here in the fourth quarter.

In terms of expanding our operating margin, we have been making and taking difficult decisions and actions all year long to consolidate facilities gained through acquisitions, move acquired companies onto new IT platforms, and reduce the workforce accordingly.

By the end of this year we expect most of this integration work to be complete.

Between this consolidation effort, some of the likely divestitures, and further optimizing our sales and pricing process, we expect to improve operating margins 100 basis points in 2007.

Finally, we're focused on improving our ROIC by returning cash to shareholders through a share repurchase program.

To date we have acquired $300 million of our shares, or 4.9 million shares, and we expect to opportunistically continue buying our shares against the $500 million authorization in place.

As you can see, this management team delivered strong results three years running starting in 2003. 2006 has been a tremendous disappointment for us, and we humbly think it is not representative of our potential or of the assets we have assembled.

We simply must, and we will, do better.

In spite of this challenging year, Invitrogen remains very strong.

We have the number one brand in life sciences.

Our product innovations are accelerating, this year seeing the first of many new benchtop instruments to augment our reagent line.

And we continue to secure important collaborations in key areas of science.

In 2007 our goal is to return this Company to the strong revenue and earnings trajectory we had in years past, and that planning as well underway.

We remain confident and committed to making our future much better.

Amanda, back to you.

We are now ready to start the question-and-answer session.

(OPERATOR INSTRUCTIONS).

Tycho Peterson, JP Morgan.

I guess the first question here is on margins.

If you can quantify to the extent that you are impacted by mix vs. acquisitions?

And then more importantly when do we see things starting to get better, not worse?

The two factors are mix and manufacturing variance, as mentioned earlier.

I would say it is about evenly split.

In terms of mix there are some things that are driving that in terms of the acquisitions that we have made, as we have said before, generally have lower margins than our existing business.

One of the things that we're doing through the integration process with facilities consolidation for antibodies, etc., are driving to take out cost and improve that mix.

We said those integration efforts will continue through the end of this year.

On that front, I don't expect to see any significant improvement in the fourth quarter.

But that should improve next year as those efforts really bear fruit.

On the manufacturing variances that was also driven by several things associated with the acquisitions, as well as changes we're making all through the business in lean manufacturing to improve quality and drive out costs.

And in addition, just increases associated with the business, such as fuel charges.

On the acquisition related things, in lean manufacturing, again we will be working on those over a number of months.

I don't expect that they will have an impact in the fourth quarter, but they will I think drive improvement as we go forward.

On the BioDiscovery business, 2% organic growth.

How do we get comfortable with the fact -- because we saw a pretty good numbers out of some of your peers so far this earning season.

How do we get comfortable with the fact there is not some market share shift happening here?

On the BioProduction side do you think --?

BioDiscovery.

BioDiscovery side.

Look I would humbly say to you that in certain regions I think there was share shift in the quarter.

I think we have a go to market approach issue in some of our larger markets, and we're going to fix that here in the fourth quarter.

The formula is not a mystery to us.

Again, I would emphasize in many of our markets, including all across Europe, we think we're outgrowing the market there.

We're going to take that approach into some other markets here into the fourth quarter and starting into next year.

In terms of share shift, the good news about our business is that because we are a consumable business it is not like you lose share forever.

We can be back in the business here in terms of gaining and growing at market or faster once we make these changes to how we're deploying ourselves into the market.

Derik De Bruin, UBS.

You didn't come out with a specific guidance number.

My slides aren't up on this.

I'm just wondering, did you have -- what are the alterations in terms of your formal guidance forecast?

Basically what we are saying is that we anticipate that the fourth quarter will be similar to the third quarter.

So we're looking at revenues around the $310 million range, and EPS in the mid-80s for the fourth quarter.

That impacts the cash flow guidance -- the free cash flow, you said similar levels.

What have you done in the first nine months in terms of free cash flow?

The first nine months is $84 million.

Okay.

I guess looking at this it sounds like there is -- it is more of a death by 1,000 cuts here.

That you are -- there's a lot of little things going on like that.

Do you have the people in place in the secondary management and so far down the line to take care of all the issues that are facing the Company?

I think there are three major buckets.

The first one is we're implementing a massive overhaul to our IT infrastructure that this Company hadn't invested in in the past.

This is deploying a very large chunk of people, and changing every process we have in the Company, and it is incredibly disruptive.

We're working through that in 2006.

And this is year, obviously, it is most intense.

We went live in Europe in April.

And most of the work for North America is taking place as we speak, and we go live next year in North America.

That is one.

Second was integration.

We have been very aggressive on integrating our acquisitions.

And perhaps for a Company of our size, maybe to aggressive.

But the bottom line is we didn't want to have endless number of facilities, excess cost, and so we made some very tough decisions to shut down a number of facilities this year.

That is the second bucket.

The third bucket is, as we have expanded the Company greatly over the last couple of years, and have a very broad productline, I think it is fair to say that in some of our regions we didn't deploy ourselves into the field the right way.

Because I think we were learning on how to balance all of the 30,000 products we have and get the optimum mix and selling going on.

Some of our regions have done a phenomenal job figuring it out, and others haven't.

Our goal now is unify that approach that we think we have uncovered, and certainly had success with in Europe, as an example, across the rest of the world.

In terms of having the depth of management, I actually think we have a really solid team, really deep through the organization.

I think we have incredibly passionate people.

And the reality is that our turnover -- and I know that obviously gets discussed at times -- is no higher than any of the industry average.

I think the team is in place.

I think people are committed.

And I think all of us have a very somber approach to not having good success in '06 like we certainly have done in the past.

John Sullivan.

Can you be a little bit more specific about these go to market deficiencies that you're talking about?

Is it distribution channel oriented, or is it actually identifying new product opportunities and creating the assays and creating the products themselves that are causing these deficiencies?

I don't think it is a product issue.

In fact, we have very regular product to product competitive workouts inside this Company, and we think our product lines are extraordinary, actually.

This is actually how do you take this many products and put them into customers' hands in the most optimum way.

We never had to do this I think in the past because we were just a molecular biology company and selling some media to some BioProduction customers.

And so as we made the acquisitions, we beefed up technical sales specialists.

We beefed up account managers.

And I think that whole mix of people as we have invested has not been optimized and led perhaps in the most disciplined way, and we're going to go fix that.

Again, I don't want you to think that this is something that is completely wrong or completely a mystery.

It is actually something we know how to fix.

We actually know and are doing at the right way in certain bigger regions.

We just haven't done it everywhere, and we've got to go do that.

Would you be willing to give us a little more detail regarding the asset impairments?

Was it a range of smaller acquisitions that were deemed to fall on the wrong side of the ruler, or how did we get to that amount?

As I mentioned in the remarks, it was a result of a portfolio review that we said that we initiated in the third quarter and basically concluded at this point.

At this stage we're not prepared to provide any more details about it.

We have said that actions coming out of that portfolio review are likely, and we will keep you informed as they develop.

Quintin Lai, Robert Baird.

With respect to your fourth quarter revenue guidance being flat to Q3, does that imply that some of those big orders that you talked about in the Cell Culture production from Q1 didn't get pushed out into the back half of the year?

So now the question is have they been pushed out to '07, or have they just gone?

Given our quarter to quarter having to lower guidance through 2006, primarily due to reduction in sales in one of our major regions, I think we're trying to give guidance that is conservative.

And so those specific orders are not out of the forecast and we expect to do those at the end of the year.

When gross margins decline like this, I guess, the other obvious question is pricing.

Let me just address the margins in a little bit more detail.

We have -- in the mix, we're going to be in 2007 putting in place compensation plans that drive the right mix.

This year they were not in place.

So that addresses the mix issue.

It is self-induced.

Second, is the manufacturing variances are because our volume is lower.

Most of our costs are people and fixed plant, and so you end up having an underabsorption in manufacturing.

The volume feeds the margin issue.

As volume comes in, it backs the business through better execution in certain regions, then I think we can see margins improve again.

We do not see price being a factor in the business.

And we continue to maintain that this is a good pricing environment in that I think we're priced responsibly, and I don't again factor that as an issue.

With respect to ERP rollout, with the experience that you had in Europe this year, how do you -- how should we be looking at the rollout in the U.S. next year and the impact on the business next year?

Obviously Europe was the guinea pig for the new system and was greatly impacted by it in the quarter.

We have made a lot of changes, obviously, to the system post that integration into Europe.

Our hope, and I would just say again at this point it is a hope, but it is also a plan, is that there will be a lot less disruption into North America.

For example, in Europe when we implemented that ERP system, obviously the customer service people were not as -- in spite of being trained -- still not as adept at working the new system.

They couldn't enter orders through a daily ship shift, and so a lot of orders never got entered.

We ultimately put 30 extra customer service people on board temporarily in Europe to handle the call volume.

We will be taking actions like that of incrementally staffing up quite considerably in certain functions in North America so we don't have the same replication of experience.

I do have one last follow-up, and I promise this is the last one.

With respect to the fourth quarter revenue guidance, is that an absolute number or is that an organic growth number -- the same as Q3?

All organic.

Organic?

Yes.

Tycho Peterson, JP Morgan.

Greg, I am just wondering if you can give us a little bit more color on the portfolio review?

I guess first of all when do you expect you'll communicate some of the decisions?

And then you have obviously talked about Sera, but things like BioReliance, how they fit into some of the broader review?

Let me talk about one piece that I am able to make public, and that is on our Sera business.

We have closely done a study on the Sera business, both on the research Sera business and the productions Sera business, as well as the organic material business that we have.

Let me talk about each one.

On the research Sera business we have gone across the world.

We have understood how we have been going to market, some of the best practices employed in that business, and we actually think that is a really good business.

We think that we can optimize the sales of that business in a different way, and so we're going to keep that business.

That is a fairly substantial business for us.

It is about $60 million to $70 million a year and quite profitable.

The second part of our business, and I will lump them together, is the production Sera business or organic elements and materials needed for the production business.

In terms of just pure FBS for production, clearly that is a declining business.

We, as a portfolio, are a bit overexposed there.

But at this point in time our goal and our intent is to hold onto that, and hold onto our assets in New Zealand and Australia.

And serve our customers out that are under contract.

We will be reducing the amount of collections, and therefore inventory and therefore cash being deployed into that business, and pursue FBS in a very opportunistic way going forward, but not in a strategic way any longer.

The balance of our business in New Zealand and Australia is other organic materials for production.

And that is actually a good business.

It is a slower grower, but it is very profitable, very steady.

And we had very good customer relationships there, and we intend to hold onto that as well.

All in all, this Sera business will be held onto.

But you'll see us deploy a lot less capital into it for inventory.

And we think we can run our balance sheet a lot more effectively going forward.

Then in terms of how you will be communicating just the rest of the portfolio review?

And I guess to my specific question on BioReliance, if you have any thoughts there?

I'm not prepared to talk about BioReliance.

BioReliance had a pretty good quarter in the third quarter.

And as we make the final decisions, I will certainly communicate them publicly.

And I was able here to share with you our approach on Sera post the review.

As the next ones get decided upon, then I will be able to communicate any news to you.

Frank Pinkerton, Banc of America Securities.

I guess I'm a little confused on the margin and sales side in BioDiscovery.

It sounds like what happened is you sold more product at a lower margin.

So why was sales growth not higher, or conversely, then why did margins come down?

I'm a little confused there.

I think that is a fair question to ask.

I think there is a couple of points to be made.

One is that -- perhaps I can address the sales versus margin -- is that there was perhaps not the same level of discipline on discounting with certain salesforces.

That would explained one element, and that is easily corrected.

But, Dave, maybe you want to answer the other piece.

I think that we didn't have the sales growth that we had anticipated.

And I think Greg has talked about that in terms of some of the execution issues that we have had.

Then we did have, in terms of impact in the margin, the sales that we did have, some of it was of a lower margin product.

And the other element that really drove it was higher manufacturing variances, higher manufacturing costs affected by the volume and some of the other things that we're doing in our manufacturing area.

Let me add onto that, which is that we set our business up for much higher organic growth this year based on what we thought we were able to do in 2005.

So our manufacturing plants were geared up with trained technicians at a higher volume.

And so when that volume doesn't happen, it is not easy for us to in a matter of a couple of months just reduce that cost back down.

That is the one issue.

In terms of mix, we have an incredible mix of products that have different margins.

And our salesforce ended up selling a different mix than we had seen in the past, and that is what impacted us here in the quarter.

Again, I would say on the mix, this is controllable.

And perhaps in more mature companies where they have balanced selling compensation plans, it doesn't impact them.

But that is not Invitrogen.

That will be Invitrogen 2007, but that wasn't the compensation plan that was implemented here in this business in '06.

If I can just follow that up.

You said part of the reason for the lower margin was the mix of acquisitions which brought on higher sales of lower margin products.

But really the September quarter for BioDiscovery -- outside of BioSource which maybe contributed somewhere around $10 million -- this should be a quarter where we have comped all the other big acquisitions, things like Dynal and some of the others.

What were the products, or can you describe the areas where those margins for the newly acquired products were lower?

That's right.

The only thing I would add there is that sales of those acquisitions are higher than they were in prior quarters, and that did have an effect.

Dan Leonard, First Analysis.

I hate to be a broken record, but I'm still having some trouble with the margin.

You talked about manufacturing costs and sales volume being lower than you expected.

But your sales were pretty comparable to what they were in the second quarter.

Your manufacturing costs I don't see changing that much quarter to quarter.

But margin dropped about more than 200 basis points from Q2 to Q3.

I just feel like there is a piece I am missing.

I'm looking at the business sequentially rather than year-over-year.

Sequentially, yes.

We have looked at it both ways, obviously.

If you look at it sequentially, or quarter to quarter the primary drivers are the same things.

There is a mix change in the quarter.

And there were some increased manufacturing variances.

There were a couple of other things that I will point out.

One is royalties quarter to quarter.

We just happened to have higher royalty revenues in the second quarter than we did in the third.

Royalty rate fluctuate quarter to quarter throughout the year.

Royalty revenue is basically at 100% margin.

They have a much larger impact on the margin than they do on the salesforce.

Fuel costs, freight costs have continued to up throughout the year, and that affects the margin quarter to quarter.

And one of the things I mentioned provides a little more detail when I said that the actions that were taking related to the fully integrating the acquisitions also had an impact.

One of the things we're doing related to BioSource was they did all their distribution out of the West Coast facility, out of their plant.

In order to better serve our customers, we have stocked up our East Coast distribution facility as well.

That stocking took place in the third quarter.

And so there were a number of onetime charges associated with the transportation and stocking of the Fredericks Distribution Center.

Those are some of the things that explained the quarter to quarter sequential margin change.

It is really just a compilation of a bunch of different smaller items that equal the 200 basis point difference?

That is exactly right.

Okay.

There is no one big thing either year-on-year or sequentially quarter to quarter that is causing the decrease.

But some of those things like the cost of shipping products coast-to-coast, that to me sounds like it would be a Q3 specific issue and something that wouldn't exist in the fourth quarter.

But you communicated that the fourth quarter margin won't be -- we shouldn't look for too much of a recovery just yet.

You are absolutely right.

That is correct that many of those things are onetime items.

The only other thing that is going to happen in the fourth quarter, and we mention this before, is that we have some OEM contracts that are filled every year.

And to those contracts we're looking for them to -- those sales to occur in the fourth quarter.

Those sales tend to be at lower margins.

So if you take a look at our fourth quarter last year, you'll see that the margin was pretty similar to what our third quarter margin is.

Dave, on the revenue guidance and the pieces of the variance there, back in July when you communicated the organic revenue growth in the back half of year could be anywhere from 2% to 8% organic growth, and the main swing factor in that guidance was going to be Sera.

Now this quarter you're saying Sera -- if I heard you right, Sera wasn't as bad as you thought it would, and yet you're now looking for back half revenue growth organic to be about flat when you back out the -- but we would leave a little bit of a benefit for currency.

Where there any -- what were the big swing factors if not Sera that took you from a range of 2% to 8% now to flat?

Let me start, and then Greg may want to jump in here.

I think, as Greg alluded to it, I think we've got some issues about our go to market strategy in certain regions.

I think we're just not seeing the sales growth -- the same sales growth in the first half of the year, much less the acceleration that we had anticipated in some of our businesses, BioDiscovery -- including the BioDiscovery segment that we thought that we would see.

I would simply add, we are well aware of how our colleagues have done in this industry in the quarter.

And when we look forward, when we gave that guidance, we figured that was the type of performance we would expect out of our major regions in the world, and it wasn't achieved.

I think that is the basic difference.

The delta versus your forecast is really broad based and there is not one specific thing you could point to this time around on the revenue side?

I sounds like it is more just -- when you say go to market --.

The Sera business is now stabilizing.

It is still in decline, but the rate of decline, as David highlighted, is flattening out.

That was impacting us in the past, and we think that is coming towards the end of its huge effect on us.

Paul Knight, Thomas Weisel Partners.

This is Peter Lawson in for Paul Knight.

What were the acquisitions that did poorly in the quarter?

The acquisitions have actually done well.

This is not about the core business versus acquisitions per se.

This is really about what country are you talking about.

That is the real issue that was impacting us in the third quarter, and quite frankly I would argue through 2006.

I was under the impression, you said there were a couple of acquisitions that underperformed.

Because of the facility consolidation they underperformed our expectations.

Yes.

The BioSource acquisition, as you know, we're consolidating Zymed, Caltag, BioSource altogether, and so as we have done that we have impacted the growth rate of that business.

But we're actually very bullish on that business, and believe once all of that consolidation is done, which will happen at the end of the year, that is a very robust business.

That is the only one that comes to mind.

Is that where the manufacturing issues were?

The manufacturing issues -- pardon me?

I'm assuming you're referring to the cost increases, right?

Yes, there was cost increases associated with that, and as I said before with the distribution.

Did you see a large amount of pricing in the quarter from larger competitors?

I don't think there was anything extraordinary with pricing that we saw in the quarter.

In terms of pricing pressure?

Yes.

No.

Okay.

No, I think as Greg said, it remains to be -- it seems to be a pretty decent pricing environment.

Just for the fourth quarter, what is the pro forma tax rate?

Pro forma tax rate for the fourth quarter, just one minute.

Well, that is the third quarter.

For the fourth quarter it is 31.4%.

We're looking for the year to be 31.5%.

John Sullivan, Leerink Swann.

As we think about this portfolio review and how it is going to get applied to the BioDiscovery area, for ,example can you just give us some sense of the areas within BioDiscovery where you feel like there is a combination of attractive growth and your franchise being particularly strong, maybe market leading?

In terms of BioDiscovery, as we have gone through that, for most of the major pieces of that portfolio we're number one or number two, as we see the marketplace.

I would give you some encouragement, although I don't want to be final on this, but most of the BioDiscovery portfolio is pretty robust.

As we have said before, some of those businesses are really terrific businesses, like our probes business that is growing high teens, 20% per year.

Drug discovery, PanVera business now growing high teens, double digits.

Exactly.

And very profitable.

Could you characterize it broadly as still the legacy kind of single gene analysis technologies that are the drag in the BioDiscovery business unit?

There are certainly some of these older genomic tools that are just not going to have the growth rates like they had in the era of 2000, but they're very profitable.

They still chug along at a somewhat reasonable rate.

But we don't expect them to come back anytime soon.

That is the nature of what those portfolios are.

But they're very profitable and we intend to hold onto that.

You are sort of giving the impression that the portfolio review would not yield a lot of changes in BioDiscovery.

Is that fair?

There could be some slight changes in BioDiscovery, but again, I would give you the early sign that there's not going to be a lot of change in BioDiscovery.

Elise Wang, Citigroup.

Since you are indicating that the product mix is actually a very controllable item, and that there are measures related to compensation that you could put into place, why wouldn't have that anticipated in the past in light of that?

In December of last year we were on the heels of completing eight acquisitions in 2005, and obviously did a fairly large number in 2004.

We inherited a lot of salesforces, and we obviously still had the salesforce that was Invitrogen.

Putting together a comprehensive compensation plan was the first time we had ever done it across all those different salesforces.

We got it pretty right, but we didn't get it all the way right.

That is learning through 2006.

I think that the compensation plan going forward into '07 will be really good.

How soon are you going to be implementing this?

It starts, like all sales plans, it starts in January 1, 2007.

Just to clarify what you said about guidance now for Q4, essentially what you're saying is revenues will be flat.

The EPS, which is inclusive, I gather of stock option expenses is now going to be around the mid 80's?

It is not inclusive of stock options expense.

That is not inclusive?

No.

And we should assume margins are going to be about the same?

Correct.

How about some of the other operating expenditures in terms of trends?

I would assume that they would be roughly in the same ballpark, no significant change from the third quarter.

Derik De Bruin, UBS.

Just a couple of quick follow-up questions.

How can we look at the interest expense?

I know you have paid off -- you have got some debt that you have paid down.

You have been buying back shares.

You've got interest rates including -- could you just talk about how you see that this year and then how you see that shaping up in '07?

Let me talk through some of the details there, and hopefully I'll hit the main things.

Interest income for the fourth quarter we are projecting it to be about $3.5 million.

Interest expense would be about $8 million.

Pro forma tax rate, 31.5%.

Options expense, $10 million pretax, or about $0.16 per share.

And a share count of about 50 million shares.

What was that $1.8 million charge that showed up in the line here.

Because usually it has been running about $500,000 benefit for the last couple of quarters.

It is basically a charge related to foreign currency.

It fluctuates periodically.

It goes up and down quarter to quarter.

It just happened to be flat in the previous quarters.

Just because I am getting e-mails from clients who want to be absolutely clear on this, so the revenue guidance, you're saying you're going to be flat, that is flat as an absolute number or flat as in organic?

Absolute number.

Absolute number.

Thank you.

What about the option expenses going forward?

How do you see that?

You've got a pretty big burden on that relative to the rest of your peers.

How do approach that?

I think in terms of a number going forward, again, we're not commenting on what we are going to do and the absolute number in 2007.

We're just going through our planning process right now.

This is one element of that, but I think we can talk philosophically at a general level.

If you look at the last at least two years, I think we have been prudent and in line in terms of the amount of equity put out.

Our issue really relates to when some larger inducement grants were made back in '03 and then '02.

As we move bother out the options expense becomes a lot less, and I think more in line with peers.

I would just say that the current options granting process in Invitrogen is very much in line with other companies in this space in high technology.

And our expense has come down.

It was $50 million last year.

It is going to be $40 million 2006.

I think that will do it.

I guess the question is like what gives you the confidence to think that you can turn those around in '07?

It has been a number of quarters that we have just continued to see this trickle of issues.

And certainly I know the quality of the portfolio is there, but I just having a really hard time to -- about executing and your ability to execute.

What gives you the confidence that you can do it?

I guess we ought to face that question head-on.

We know where some of the stumbles happened this year.

I think when you have a difficult year like this, it makes you a lot more aware and sensitive to what things you thought were buttoned down that need to get buttoned down.

And so I would just say that the sensitivity and intensity around the management team and what we're doing is very high.

That is what I can tell you, is that we're probably even more disappointed then you.

We certainly have made our sacrifice personally financially and we are fine with that.

In the end we're just incredibly determined to put this thing right back on track in 2007.

I'm disappointed, but I'm not holding the stock at the moment.

I am.

So are your shareholders.

I will get back in the queue.

Bob Ai, Wall Street Access.

It seems like there are too many moving parts in the Company.

Have you thought about that maybe just too much.

Maybe sort of slowing down a bit of the old integration.

It seems like so many things are moving and that is where things are difficult to control.

Look, we have slowed down the acquisition this year.

We have gone back through the portfolio and reviewed it.

I think we have done everything prudent to put the Company on better foundation, a foundation for example in information systems that never existed here.

That is the painful work we're going through in 2006.

Back on the other question again.

Since you know you had experience in Europe, why not anticipated that and say -- not make a plan, make sure that we will not have any problems at all in the U.S. before we really take on this transition?

I just don't understand if you saw the problem in Europe why you have the problem in the U.S. again?

We don't have a problem in the U.S. yet.

We're scheduled to implement the ERP system in the United States in April next year.

And what Greg was talking about earlier, and what I mentioned in my remarks, was that fortunately like all ERP implementations there is unanticipated issues and problems that arise.

We need that ERP system in order for us to be able to manage the business and grow it going forward.

What we decided to do was to implement it in Europe first, which has similar complexity to the United States, but has a much smaller scale.

We're now going to take that basic system and not redo it in the United States, but take it from Europe and just put it in place here in the U.S.

And we are spending a lot of time and effort making sure that we have catalogued the issues that we faced in Europe, and that we are prepared to address them in the United States.

So we have every intention to ensure that the ERP implementation in the United States leverages what we learned in Europe and goes more smoothly.

Again, that is scheduled to happen in April of next year.

I somehow thought that -- I may have misunderstood.

I thought some of the problems were good integration in the U.S. of the systems.

Not due to systems, not due to the ERP system this year.

We do have issues because of the acquisitions that we have done.

This may be your point.

They all come with their own set of systems.

So understanding and getting a grip on those takes a lot of real work.

I have a final question, kind of a follow-on to Derik's question.

I think you give a low guidance, really low for the fourth quarter.

I think this is probably (indiscernible) strategy, but when do you (indiscernible) first quarter, the last four quarters?

I don't know how to say this.

When are we going to -- how are we going to have confidence that the problems are going to gone?

I think you earn confidence through results, and our results obviously have to get better.

That is how an investor should decide if and when they want to put money into this stock.

We understand that.

Thanks.

That ends our question and answer session now.

And that --.

Yes, this now is going to conclude our third quarter earnings conference call.

As a reminder, this call will be available via replay on our website for one week.

Thank you again for joining us this afternoon.

Thank you for your participation in today's conference, ladies and gentlemen.

This concludes the presentation.

You may now disconnect.

Have a great day.