賽默飛世爾科技 (TMO) 2008 Q2 法說會逐字稿

Good morning, Ladies and gentlemen.

Welcome to the Thermo Fisher Scientific second quarter 2008 earnings conference call.

I would like to introduce Kenneth Apicerno.

You may begin the call.

Good morning.

Thank you for joining us.

We have Marjin Dekkers, our President, Chief Executive Officer, , our Executive Vice President and Chief Operating Officer and Pete Wilver, our Chief Financial Officer.

This call is being webcast live and will be archived on our website at www.thermofisher.com, until August 29, 2008.

To reach the replay of the call on our website, Click on investors, webcasts and presentation.

Be aware that a copy of the press release setting forth our second quarter 2008 earnings in future expectations is available in the investor section on our website under the heading financial results.

I would like to begin 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 the purposes of the safe harbor provisions under the private securities litigation reform act of 1995.

Actual results may differ materially from the forward-looking statements as a result of various important factors including those discussed in the Company's Form 10-Q for the quarter ended March 29, 2008 under the caption risk factors which is on file with the Securities and Exchange Commission and available on the investors section of our website under the heading SEC filings.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change 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 will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP.

A reconciliation of the non-GAAP financial measures used on this call for the most directly comparable GAAP measures is available in the press release setting forward our 2008 second quarter earnings future expectations and in the tables accompanying such releases in the investor section of our website at thermofisher.com under the heading Financial Results Related information is also available on our website under the heading webcasts and presentation.

With that I would now like to turn the call over to Marjin

Thank you Ken.

Good morning, everyone.

I know a number of companies in our space are competing for your attention this morning.

So thank you very much for joining us.

I think you will be glad you did because it was a very good quarter.

As you saw in our press release we had another record quarter in Q2 with strong performance in all of our key financial metrics.

So let me get right to the highlights.

First, we had a really strong revenue growth quarter with a 14% increase to $2.7 billion.

Adjusted EPS rose by 22%.

And our adjusted operating income increased 18%.

And we also achieved 60 basis points of adjusted operating margin expansion.

So a terrific growth quarter.

I believe our success is the result of our sound business model.

As you've heard me say before we do not run this company quarter by quarter focused on any one single financial goal.

Instead, we work to achieve a balance of our four key financial metrics, which are revenues, operating margin, EPS and cash flow.

And we believe that this approach is the best way for us to generate growth that is sustainable and creates value for shareholders over the long-term.

Our performance in Q2 puts us right where we expected to be halfway through the year and this positions us to meet our growth goals for the full year in 2008.

Our results year-to-date also show that not only have we achieved our cost energy targets from the merger of Thermo and Fisher but we are right on track with revenue synergies in the three areas we have been focusing on since the merger.

You remember that the three areas of energy synergies were one, selling more self-manufactured products through the fisher scientific catalogs.

Two, leveraging the Company's's scale, by growing faster in Asia.

Three, focusing specifically on our top 20 largest accounts to gain share.

We are very encouraged by our success in each of these three areas.

The first one that we started seeing results from early last year while selling more self-manufactured products through our Fisher Scientific catalogs and the success of this has significantly added to our margin expansion in the past six quarters.

And then second by leveraging our total company footprint, we've have also seen faster than market rate revenue growth across Asia.

Not just in China but also in India and even in Japan.

And Asia is now 13% of our total revenue versus 10% at the time of the merger.

So an overall acceleration of growth in Asia of about $300 million in just over one year.

And then lastly, in the past few quarters revenue growth of our top 20 customer counts has been significantly outperforming the Company average indicating that our focus on these large customers is also beginning to pay off.

So we are progressing well on all these three fronts as a result of being the combined Thermo Fisher Company.

Let me make a few comments about our key end markets.

We are especially pleased with our performance given the current global economic environment.

The newspaper headlines continue to point to how much uncertainty there is in the world.

Again, we are not seeing any significant change from what we have reported to you so far this year.

We saw particular strength and above average growth in our scientific instruments business, our specialty diagnostics business and our bio-pharma services business.

From a market point of view our major life sciences and health care end markets remain strong in general with particular strength in demand from CRO's.

Biotech demand for research products is also very robust but demand for bio processing products used in drug production continues to be weak.

Our industrial markets are holding their own very nicely with high commodities pricing continuing to drive spending and investments by our customers.

And then in Q2 sales in our much talked about safety catalog business were flat compared with last year and as a result did not create the head winds for us in organic growth that it did in earlier quarters.

The impact of declines we have seen in this business should be less significant going forward.

Again, I believe our size, breadth of portfolio, especially our large percentage of consumables and our global presence give us a key advantage.

All of this makes us less vulnerable to market shifts.

We also have the resources to continuously invest in the business, to develop new technologies and penetrate new markets that will allow us to capitalize on opportunities for growth.

So let me spend a couple of minutes talking about a few of the new developments in our business that will contribute to our growth going forward.

First, new products.

Those of you who attended ASMS the leading conference on mass spectrometry know that we had a good showing again this year.

These instruments are sold under our Thermo Scientific brand.

The highlights included: Two break through systems that expend the use of high end analytical tools to more users and applications.

Firstly, our new Vantage is the latest addition to our successful line of triple quad mass spectrometry systems delivering up to ten times sensitivity for our life sciences customers who continue to demand more accurate analysis for their cutting edge protein research.

Secondly, our new Exactive LC-MS system on the other hand leverages our successful Orbitrap technology in a benched-up system that is easy for non-specialists to operate.

It delivers the high resolution, sensitivity and mass accuracy needed to meet analytical challenges in a range of applications.

So these new systems generated a lot of excitement at the conference and the feedback since then has been extremely positive.

Customers are gaining hands-on experience with them in our demonstration labs around the world and these instruments have already started shipping in Q3.

A quick word on acquisitions.

We continue to augment our internal developments with acquisitions that offer complimentary technologies or greater access to new markets.

You may recall last quarter our bio sciences business launched our new excel gene silencing technology which extends the use of RNAI synthetics by making it possible to deliver these agents into more types of cells.

Well, this quarter we strengthened our leadership in RNAI, with the acquisition of Open Bio Systems.

This business which has about $15 million in revenues adds a complimentary line of RNAi technologies to our existing portfolio.

We can now provide scientists with the most comprehensive RNAi tool kit to accelerate the discovery of new therapies in neuroscience, immunology, stem cell science and oncology.

Just last week our bio sciences business also acquired Affinity Bio Re-agents, a small, but leading provider of antibodies, peptides and proteins with revenues of $6 million.

This acquisition gives us opportunities to create complete new solutions for widely used protein research applications by combining an extensive bio reagents portfolio with our current proteomics offerings.

We also acquired the analytical and environmental instrument businesses of Chemito to strengthen our presence in India.

This is another in a series of investments we have made to expand our footprint in that growing market.

I will ask Marc Casper, our COO, to say a few words about our activities in India.

Marc?

Thank you Marjin.

We continue to make significant investments to strengthen our presence in India, a market we have participated in with the direct presence since 2000 through our laboratory equipment and consumables business.

We began to accelerate our expansion there in 2005 when we opened our state-of-the-art demonstration laboratory in Mumbai.

Since then we have been building our commercial organization, begun construction of a large clinical packing company large clinical packaging facility in Ahmadabad, and supplemented those activities with two acquisitions in Mumbai in the past year.

This is all in an effort to serve the rapidly growing life sciences and industrial markets in that country.

So what do we gain from these investments?

We became the leading supplier of laboratory chemicals to research markets in India with our acquisition of Qualigens in September 2007.

This business added about $25 million to our annual revenues.

Our recent acquisition of two divisions of Chemito totaling approximately $10 million in annual revenues gives us a strong position in India in gas chromatography, and UV Vis technologies.

It adds local manufacturing capabilities and deep a sales and service presence.

Chemito not only allows us to better penetrate the growing analytical and environment instrument market in India but should allow us to offer these low-cost instruments in other emerging markets.

Last, our new clinical packaging facility is on track to open in Q4, the result of a $17 million capital program we initiated last year.

When completed this 150,000 square foot facility will help us to meet growing demand for bio-pharma logistics outsourcing services in response to the increasing number of clinical trial patients in India.

These ongoing investments that we have made at Thermo Fisher really positions us as the leading life sciences company in India by far.

Once the clinical packaging facility is open, we will have more than 20 facilities and offices and roughly 625 employees across the country.

Putting us in an excellent position to capitalize on India's future growth.

We are already seeing the return on our investments there.

Year-to-date we have grown more than 40% over 2007 not including acquisitions with a run rate for the year of approximately $125 million in revenue.

With that, I'll turn the call back to Marjin Dekkers.

Thank you, Marc.

Indeed, a very exciting market with excellent growth prospects.

So let me wrap it up by reviewing our guidance for 2008.

After completing a strong first half, we remain confident in the full year guidance we gave you last quarter.

We are maintaining our revenue estimate of $10.6 billion to $10.7 billion for 2008 which would lead to 9 to 10% growth over our 2007 results.

And then based on our adjusted EPS performance to date we are increasing the low end of our guidance by $0.04 with a range of $3.11 to $3.17 a year.

This would lead to 17% to 20% adjusted rate growth over 2007.

So with that I'm going to turn the call over to our CFO, Pete Wilver for his financial review.

Pete?

Thank you.

Good morning morning, everyone.

As Marjin said, we had another record quarter with 22% growth in our adjusted EPS to $0.79 compared to $0.65 in Q2 last year.

GAAP earnings per share in Q2 were $0.57 up from $0.37 in the prior year's quarter primarily as a result of improved operating performance and favorable discontinued operations.

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

Revenues in Q2 increased 14% year over year to $2.71 billion.

Organic revenue growth in the quarter was 8%, excluding favorable currency translation of 4% and acquisitions net of divestitures of 2%.

Organic revenue growth in the quarter, particularly in our consumables businesses, was enhanced by one day or close to 1% as a result of a shift in the Easter holiday to Q1, as we described on our last quarter's call.

Going forward Q3 will have the same number of days as last year and Q4 will have two more days.

Bookings were in line with revenues in the quarter.

In the analytical technology segment, future revenues rose 14% on a reported basis and 8% organically.

In the quarter we saw strong organic growth across our life sciences and healthcare markets.

Our industrial markets grew at below the average, but at a pace consistent with the past few quarters.

New products continue to be a growth driver specifically in our scientific instruments, environmental instruments, molecular diagnostics and life science research product lines.

In the laboratory products and services segment, Q2 revenues also increased 14% on a reported basis and 8% organically.

Notables in the quarter were our bio pharma logistics services business, which delivered mid-teens organic growth.

And our safety catalog business, which was flat year over year.

By geography, we saw a strong organic growth across all our major regions with the exception of Europe, which grew in the low single digits against strong growth in the year ago quarter.

North America grew at slightly below the company average and Asia-Pacific grew in the mid-20s.

The rest of the world grew at around 35%, albeit from a relatively small base.

Q2 adjusted operating income increased 18% year-over-year to $477 million.

Adjusted operating margin was 17.6%, up 60 basis points from 17% in the year ago quarter.

The margin expansion was driven by pull through on our incremental organic revenues including increased prices, integration synergies and our global sourcing and productivity initiatives.

This expansion was partially offset by increased inflationary pressure in raw materials and transportation costs, slightly unfavorable business mix and 20 basis points of dilution from higher stock compensation expense.

Analytical technologies Q2 adjusted operating income increasing by 21% year-over-year an adjusted operating margin was 21.1% up 130 basis points versus 19.8% last year.

Laboratory products and services Q2 adjusted operating income increased by 14% and adjusted operating margin was flat with the prior year at 14%.

Margin expansion in this segment was negatively impacted by direct material inflation, net of price increases, and unfavorable foreign exchange on our European manufacturing cost base.

Adjusted gross margin was 41.3% in Q2 up 30 basis points from 41% in the year ago quarter, primarily as a result of volume leverage and impact of our sourcing and productivity initiatives.

We are continuing to see increased inflationary pressure on our raw material costs primarily in steel, raw resin and plastics.

We are also experiencing higher fuel and freight costs, a large portion of which we have been able to offset in the form of fuel surcharges and increased freight billings.

Direct material inflation in the quarter negatively impacted gross margin by about 40 basis points.

This inflation was offset by our global sourcing initiatives.

However, we did not see the same level of margin expansion we have seen in the past as a result of the higher inflation.

We expect raw material inflation to remain a challenge for the remainder of 2008 and we put in place additional sourcing and pricing actions to offset the expected impact.

However, the net result is likely to be somewhat dilutive to our gross margin rate.

Adjusted SG&A was 21.3% of revenue in Q2, down 30 basis points from 21.6% in the year ago quarter primarily as a result of volume leverage and integration synergies, partially offset by growth investments and higher stock compensation expense.

R&D expense was 2.4% of revenue in Q2, down 10 basis points from the year ago quarter, primarily as a result of volume leverage.

Adjusted net interest expense was $22 million in Q2 down $1 million from the prior year primarily as a result of a reduction in our net debt and a slightly more favorable interest rate environment.

Other income was a loss of $1 million, down $3 million from the prior year primarily as a result of currency translation losses on foreign entity cash and a $1 million write down related to our $9 million portfolio of auction rate securities.

Our adjusted tax rate for the quarter was 23.6% in line with our full year 2007 actual and 2008 forecast rates of 24%.

The Q2 2008 adjusted tax rate was down 0.6% from the prior year primarily as a result of the tax planning we implemented during 2007 and early 2008.

Average diluted shares were $437 million for the quarter, down $9 million from last year, reflecting the benefit share of the buy back program we in initiated in Q3 2007 and completed last quarter.

In terms of balance sheet performance, we ended the quarter with $1 billion in cash and investments, up $272 million from Q1, as our free cash flow and proceeds from stock options were partially offset by cash used by acquisitions.

Our total debt was $2.2 billion, essentially flat with Q1.

We had strong working capital performance in the quarter.

Accounts receivable day sales outstanding was 53 days down one day from the prior year and down three days from Q1.

Inventory days of supply was 72 days down four days from the prior year and down three days from Q1.

Year to date Q2 cash flow from continuing operations was $590 million and after deducting net capital expenditures of $104 million free cash flow from continuing operations was $486 million.

Moving on to our 2008 guidance we are maintaining our previous revenue guidance of $10.6 billion to $10.7 billion, which represents 9% to 10% growth versus our 2007 actual revenue of $9.75 billion.

This guidance reflects current exchange rates, incremental revenues from our recently announced acquisitions and a reduction of approximately $20 million related to the recent two-year extension of our health care catalog businesses contract with Inverness Biosite.

The 2008 earnings impacts related to the Biosite product contract revenue reduction is less than half a cent.

In 2009, we expect an incremental reduction in approximately $60 million in revenue related to this contract for a total annualized reduction of approximately $80 million in revenue from our current run rate.

In terms of adjusted EPS we are increasing the low ends of our guidance by $0.04, resulting in our current guidance of $3.11 to $3.17, which represents 17% to 20% growth versus the $2.65 we reported in 2007.

With that I'll turn the call Q and A.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes from Ross Muken with Deutsche Bank.

Mike is here for Ross.

Ross is actually on another call.

Congratulations on a great quarter.

I want to talk about some of the sourcing initiatives you are taking.

How quickly will those take shape and could you talk a little more about those versus the pricing impact you have and some of the offsets you're making?

Well, in terms of the sourcing initiatives those are something that we have been working on since the beginning of Thermo Electron eight years ago, so it is not anything new for us but which we are initiating some incremental actions to try to help offset some of the inflation that we are seeing.

And as you mentioned, we are raising prices in some specific businesses to try to offset that.

What we expect to see is probably a slightly negative impact in Q3 in terms of the net of those actions and then in Q4 to essentially make it all back up in the quarter with maybe a little bit extra to offset what we missed in Q3.

So in terms of dollars we are talking in the single millions of dollars of hurt in Q3 and maybe a couple of million of benefit net when you get to Q4.

That's what we thought.

Just wanted to clarify.

Then talking a little more about the emerging markets.

China has been a stronger market for you and India showing tremendous growth.

Can you talk about any more of the merging markets and your seeing pockets of growth and next strong opportunities for you?

Obviously China and India have been very good.

Other areas are places like the Middle East.

Quite a lot of investment going into new universities that are being built in Saudi Arabia, for instance, or just in general, with supporting infrastructure with hospitals, universities, and then also petro chemical industries that are doing very well there.

We are also seeing very good demand in countries that are particularly strong in mining, minerals.

So places like Australia, Chile, Russia who are booming right now from a materials point of view.

We see strong demand for instrument systems that help them analyze what it is that they are mining.

Great.

Thanks again and congratulations again on a great quarter.

Thank you.

Thanks.

Our next question comes from Jonathan Groberg with Merrill Lynch.

Good morning.

Thank you for taking the call.

Good morning.

Congratulations as was said.

By all indications it was a phenomenal, phenomenal quarter.

I think one question people will have is probably if anything put a little bit of a lid on a great quarter is the guidance that you gave.

So can you maybe just explain.

Are you seeing anything different in your end is this kind of a cautious view just given you said the headline news you read in the newspapers and not knowing what's going to happen in terms of the top line that you're maintaining given the very good growth obviously this quarter and then maybe some of the margin things you've talked about on the bottom end.

I'm just trying to better understand if you're expecting things to slow a little or if this is just kind of cautious given you want to be conservative?

So from the 30 thousand feet point of view, we did raise the bottom end of our EPS margin by $0.04 and being two quarters into the year we feel comfortable about that.

We raised our overall guidance range by $0.02 last quarter so we are sitting in the middle of the year, we have had a very good first half.

We are confident that we have a very good second half.

But at the same time with the material, raw material pressure, our ability to pass on pricing increases, the overall uncertainty around the industrial economy, there is enough uncertainty in the world and therefore in subtleties around our P&L that we just say let's stay where we are right now.

Okay.

And how -- can you just describe the process -- there was a lot of concern going in about the rising cost of oil-based products.

Can you maybe just describe the lag of how that works?

For example, oil prices have fallen quite dramatically over the last little bit.

Yes.

And so how that would kind of flow throughout a given year and how you have kind of prepared for it at the beginning of the year and where you are today.

Yes.

The way it works is these price increases work themselves through the system very often relatively slowly.

For instance, oil has been going up for quite awhile but it was only two or three months ago that, for instance, a company like Dow Chemical said we just cannot take these increases any more and not really very aggressively try to pass them on.

So they came out with a 20% to 25% pricing increase across the board I think it was three months ago.

A month later another 20% to 25% price increase on certain plastics resin across the board.

So they reached a point where they said, okay, some contracts are expiring, we need to start passing this stuff on.

And that's when, we, as resin buyers, become affected by it pretty much sometimes six to nine months later because it gets held up with the plastic resins manufacturer.

So these pricing increases work themselves through the system from one to the next supplier customer relationship.

We are right now in the middle of the storm of getting these price increases from our suppliers and our job is to find ways to pass these increased costs on to our customers.

And that also leads to some delay again.

More with some customers than with others.

But if we have contracts we cannot just abruptly increase prices.

So it takes time and that's why oil now is suddenly going down by $20 isn't going to rapidly reverse it.

I didn't know if you see oil coming down if some of the price increases they have announced maybe don't stick because customers start saying, no, look, oils coming down.

We have our own demand issues.

I assume you are more a price taker in general on some of these resin-based products?

Yes.

I think everybody understands how this works itself through the system.

The increase in resin prices have been so well documented that all of our customers know that this is reality and it is not something that we are making up.

This is really there.

And that's also why sometimes having these price increases take hold takes some time because customers want to be convinced that indeed you are as a supplier experiencing that cost pressure.

I don't think there is any question.

Just relative to Q2 then of what you saw and what you are expecting, Pete, you were saying, sounds like you were impacted in Q2 but you were able to have gross margin expansion.

Do you expect a bigger impact in Q3 relative to Q2?

I think the impact will be slightly bigger in Q3 than it was in Q2.

But at the same time we have already initiated some mitigating actions.

So it's not going to be a dramatic change.

Again, talking single digit millions which on our revenue base is not a huge margin impact.

Right.

The thing to keep in mind, one of the comments I made about it being dilutive to our gross margin.

If we get $10 million of price increases for raw materials we pass 100% to the customers it doesn't affect our gross margin dollars but it does dilute our rate because we basically get revenue at zero margin.

So it is not hurting our guidance in our earnings per share but it affects the rate a little bit.

Then last question.

You mentioned the Biotech manufacturing business, your bio process business is still weak, do you still expect that to recover, some here in the second half?

Yeah, I think that at some point, maybe not in the third quarter but certainly in the fourth quarter the comparisons will get easier.

This has been going on for two, maybe three quarters.

So I think another quarter probably relatively weak in Q3 and then Q4 should be better.

Thanks a million.

Congratulations.

A very outstanding quarter.

Thank you.

Thank you.

Our next question comes from Derik De Bruin with UBS.

Dan in for Derik.

Good morning.

Obviously it assumes no share purchases but you announced a buy back in I believe last August.

I wonder if you would like to comment whether we could see something similar in terms of timing this year.

We don't really want to comment on our share purchase strategy.

I can make a general comment on uses of cash.

Our top priority for the use of cash is to do acquisitions and you are seeing we have been doing some smaller strategic acquisitions that are well positioned in terms of technology additions or access to markets like what Marc Casper was talking about with India.

So that's the use of our cash and that's the preferred use of our cash but we don't exclude other buy back programs.

There is just not one ongoing right now.

Okay.

Thank you.

Looking at cash again.

I know that you said that you had an interest expense reduction on the quarter but also looks like interest income came up by about 50%.

I was wondering if that was due to anything more than just simply cash in the bank?

As I said there is a slightly more from the interest rate environment but it is the incremental cash.

Thank you.

Thank you.

Our next question comes from Quintin Lai with Robert W.

Baird.

This is actually Matt.

Congratulations on the quarter.

Thank you, Matt.

Touching on some of the markets could you talk a little bit about what you are seeing on the academic front?

Yes.

I think that academic is okay.

It is not super robust.

NIH is not really a fantastic number.

It is sort of flattish as you know.

But that said, I think that we are in a good place in terms of getting a good portion of what NIH is spending because a lot of the spending goes to new life sciences applications, bio markers, proteomics, RNAi technology, stem cell research to some extent.

And being in those sort of hot spots right now maybe helps us get more than a fair share of the NIH funding overall.

And I have also made the comment in the past, something we don't really keep track of because it is so hard to keep track of, but it plays definitely a role, is that there are a lot of charitable gifts, large charitable gifts to life sciences research, health care research, universities, new laboratories that are being built with significant money donated by wealthy people that fuel demands for laboratory equipment, laboratory instruments.

And we don't really count it but it is a really, you know, sort of nice part of the academic growth story.

Thank you for that color.

Just moving back to Asian growth has been really nice here.

Have you been able to kind of draw a line in terms of how the catalog release in China is favorably impacting that business here and kind of the early returns there?

Yes.

The catalog that we came out with three months ago is not really impacting these phenomenal numbers at this point.

It is way too early for that.

I mean, we hope in the future that it will begin to contribute but it has contributed a little bit in the second quarter but not in a meaningful way to affect these numbers.

The catalog is pretty simple.

Legacy Fisher had a very, very tiny position in China and in India from a catalog point of view.

And we have aggressively first in China gone out and put a catalog together in the Chinese language and we expect that over time we will start gaining share there in a market that is about, we estimate, $800 million.

On laboratory consumables at the moment just in China.

Thank you for that and congratulations again.

Thank you.

Our next question comes from Peter Lawson with Thomas Weisel.

I wonder if you could just talk about the weak Biotech funding market and cutbacks in spending that are affecting you.

Peter, could you repeat the question, please.

I wonder if you could talk about the turn in the pharma market with that weak Biotech funding and cutbacks in spending?

How has that been affecting you?

We have not really seen weakness in Biotech spending other than what I was commenting on in Biotech processing for the production of drugs.

But from an R&D demand point of view of view it has been very robust.

And with pharma -- I was mentioning we are growing significantly with our top 20 customers.

A lot of them are obviously large pharma and we are doing very well on average with large pharma customers.

We believe that we are gaining share at those customers.

So we have maybe seen some conservativism with large pharma in very high ticket capital good items in Q2, but other than that, pharma demands have been very good.

What's the M&A environment like and what do you think that likelihood is of further consolidation in the life sciences bases going to be going forward and the kind of impact?

I'm thinking about coming from ABI & IVGN deal.

Well, I think -- and I have always said this -- when I joined this industry eight years ago I couldn't believe how fragmented the industry is, how unconsolidated, how many players there were.

Now it is eight years later I still cannot believe how fragmented this industry is.

It is less fragmented than eight years ago, but compared to any other industry it is still a highly fragmented industry quite honestly.

Just goes to one of the trade shows, Pittcon, or Analytica and you say how can all these companies exist in one industry?

So I believe that there will be further consolidation going forward.

It just makes sense from an industry dynamics point of view.

You are kind of expecting to see more kind of ABI deals going forward?

Well, you know, I don't know.

I can't comment on exactly what would happen but I would say in general consolidation will continue I would think.

Okay.

Thank you so much.

Thank you.

Our next question comes from Isaac Ro with Leerink Swann.

Please go ahead with your question.

Thank you for reminding me.

I think in the past you talked a little bit about having a couple quarters with visibility ahead of material economic slow downs and I know it is a very macro type of question but I'm wondering, would you still say that's the case today and if so how do you feel about 2009 for your end markets in the industrial segment?

Yes, this is on a certain segment of our products and process instruments where we provide instrumentation that goes into either capacity expansion of existing plans or new plans that are being built to basically do the in-line quality control of say a refinery or something like that, basically a chemical process, and I would say that we see no decline in terms of the next two quarters in that area.

And we relate that to just still exceptionally high commodity pricing.

People have decided to expand their capacity.

They have decided that three months ago and they are drawing up the plans and begin to order this equipment but the lead time on that is sometimes six months or so because they can only receive that equipment when they have made some good progress with building the plant.

So we come in as a last moment just before the plant gets started up.

And that's why we have some visibility from a backlog point of view.

But those decisions have been made already in the past, we just know that our sales will be there for the next few quarters in that particular area.

As I said, you know, this continues to be strong because commodity prices are high.

Sure.

Okay.

Thanks.

Then just regarding the Asian marketplace.

Could you qualify maybe a little bit how that growth is driven when you compare sort of new lab buildouts versus maybe incremental share gains?

Secondly on that question, how would you characterize the nature of your product mix?

Has that evolved in a meaningful way in the last two or three years?

Let me start with the last one first.

Given the tremendous focus that we have had in the legacy thermo business on places like China, the mix in terms of scientific instruments and laboratory equipment is higher in those countries than laboratory consumables.

Now, that will gradually change but right now I would say the mix is richer and sort of the legacy thermo electron product line.

And it is a very, very wide range of applications there in China.

To begin with the obvious, environmental applications are very, very key.

The build out of life sciences laboratories, university laboratories, hospitals is key.

The third one that's very strong right now is anything that's related to food quality monitoring with some of the hiccups that the Chinese exports have had in terms of food safety.

So it is a wide range of applications and I would just say that China is really strong across the border.

Thanks a lot.

Thank you.

Our next question comes from Jon Wood with Bank of America Securities.

Thank you.

Pete, given the better working capital performance in the quarter what's keeping you from raising the cash flow outlook for the year.

I should have expected that question from you, Jon.

Better than ten questions on inflation issue.

Right.

Basically if we -- I have given guidance of $1.2 billion in cash flow for the year.

If we are going to beat that number it will be in the working capital area but we do have a lot of headwind versus last year on taxes.

We are just paying more cash taxes this year than we paid in 2007.

So at this point the working capital metrics are better, but if you look at the cash usage on working capital it is actually up significantly versus last year.

At this point I'm not sure whether that's because of where the quarter ended which this year we kind of got dinged both in Q1 and Q2, the last calendar day was outside of our fiscal calendar.

So if things go well in Q3 I will raise the number.

Okay.

Then cap-ex?

You're running a bit below annualized guidance, are you still looking for 230 to 240?

Yeah, its definitely going to be in that range, 250 I think is the guidance that I have given in the past.

Okay.

And then Marjin, back on the momentum in the top 20.

Can you quantitate that growth profile?

Is it in excess of 10% organically?

I want to be careful with that because it is such a small number of customers.

So competitively I want to be careful with that.

But if I say we have 8% organic growth.

If I say that we are significantly outgrowing the average of the Company I think you can conclude that it is higher than 10.

Okay.

Where is that share coming from?

Are you consolidating more product to the channel?

Is it coming from other distributors?

What's your sense of where that's coming from?

I think it is a very broad based growth.

You know, first of all I think that those large customers want to consolidate their purchasing with fewer suppliers.

We are obviously there with a very focused sales executive team of each of these customers to make them very aware of what Thermo Fisher can offer.

Help them make it easier to do business with us.

So I think just our focus and our size is making them do more business with us.

We go really the extra mile for these customers.

That's one.

Then I think there is also a number of programs that we have initiated around standardization at some customers where you say we can help you standardize your purchases.

Have less fragmentation in the types of products you buy.

And that is also beginning to contribute.

Okay.

Thanks a lot.

Okay.

Thank you.

Our next question comes from Tycho Peterson with JPMorgan.

Hi guys.

I'm sitting in for Tycho today.

Thanks for taking the question.

First question, going back to your top 20 accounts.

Can you to the extent that you can break out the rough breakdown of the accounts by end markets in geography.

I will try.

It is a typical suspect -- the usual suspect, I guess.

It is basically when you say large pharma, larger Biotech are in there.

And some of the larger reference labs.

So I would say probably 65% of that is in the US and 35% in Europe.

And then could you also comment on your overall mass spec business, given the new product launches -- recent product launches?

How is thermo doing competitively?

If it is taking market share and also kind of comment on pricing?

Mass Spec continues to be a very good story for us.

As I was mentioning in my comments we came out with again some exciting new platforms at ASMS, which we have had very good reaction to.

Now, I think in terms of share I believe we are gaining share in this market.

In the end hard to know because most competitors including us don't specifically comment on growth in mass, but from what we are seeing and what we are hearing and the feedback we get from the surveys, we believe that we are continuing to gain share.

And have done so quite honestly for the last four to five years.

I think from a pricing point of view this is not a price sensitive market in general with maybe a few exceptions in some certain industries or certain product lines.

But in general life sciences researchers are very keen on having the best instrumentation and why do all the work if you then put your sample into an a mass spec that doesn't give you the answers that are truly available today.

So there is a strong demand from the high end researchers to really want to have the best possible equipment.

And that drives the replacement cycle that works in our favor.

Great.

Thank you.

Okay.

Thanks.

Again, ladies and gentlemen, if you have a question please press the one key at this time.

(OPERATOR INSTRUCTIONS).

Okay.

No more questions?

I'm not showing any questions.

Okay.

All right.

Let me just make a quick closing comment.

As you've heard record performance in Q2, very strong first half.

We believe as a result of that we are well positioned to meet our growth goals for the year.

We continue to invest in new products and new markets that will contribute to our growth in the future.

And want to thank you for your support for being on the call today and we look forward to reporting on our progress again after Q3.

So, thank you for listening.

Thank you.

Ladies and gentlemen, thank you your participation in today's conference.

This does conclude the conference.

You may now disconnect.

Good day.