賽默飛世爾科技 (TMO) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific third quarter 2008 earnings conference call.

I would like to introduce our moderator for the call, Mr.

Kenneth Apicerno, Vice-President Investor Relations.

Mr.

Apicerno, you may begin the call.

Thank you.

Good morning, and thank you for joining us.

On the call today we have Marijn Dekkers, our President and Chief Executive Officer; Marc Casper, our Executive Vice President and Chief Operating Officer; and Pete Wilver, our Chief Financial Officer.

Please be aware that this call is being webcast live and will be archived on our website, thermofisher.com, until November 28, 2008.

To reach a replay of the call on our website, click on "Investors" and then "Webcasts and Presentations".

Please also be aware that a copy of the press release setting forth our third quarter 2008 earnings and future expectations is available on our investor section of our website under the heading "Financial Results".

We need 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 Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Company's Form 10-Q for the quarter ended June 28, 2008 under the caption "Risk Factors", which is on file with the Securities and Exchange Commission and available in the investor relations 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.

Also during this call, we will be referring to certain financial measures not prepared in accordance with General Accepted Accounting Principles, or GAAP.

A reconciliation of the non-GAAP financial measures used on this call to the most directly comparable GAAP measures is available in the press release setting forth our third quarter 2008 earnings and future expectations, and in the tables accompanying such releases in the investor section of our website under the heading "Financial Results".

Related information is also available on the investor section of the website under the heading "Webcasts and Presentations".

So with that, I would like to now turn the call over to Marijn.

Thank you, Ken.

Good morning, everyone.

Thank you for joining our third quarter earnings call.

We are living in interesting times.

In many ways, the world as we've known it has changed.

But we were pleased to again deliver a strong quarter with record performance in Q3.

Let me get right to the financial highlights that you saw this morning in our press release.

First, revenues grew 8% to a record $2.6 billion.

Adjusted EPS rose 17%.

Adjusted operating income increased by 12%.

And we were able to deliver 60 basis points of adjusted operating margin improvement.

Except for the last couple of weeks in the quarter, Q3 was very similar to the first half of 2008.

We saw overall strength in our major life sciences and health care end markets, which represents two-thirds of our business, with biotechs, CROs and academic customers particularly strong and growing in the double digits.

Then in the last couple of weeks of the quarter, we saw some softening in demand that we believe cost us about 1.5% of revenue growth.

We think that as a result of the credit crisis, some of our customers -- particularly in large pharma and industrial markets -- quickly tightened their belts and held off on their decisions to make big ticket purchases.

The good news is now that we are a few weeks into the fourth quarter, things seem to be loosening up and we are definitely seeing increased spending again, certainly above the levels at the end of Q3.

Obviously, in this uncertain financial environment, any company that watched its stock price tumble in the past month has been putting the brakes on spending.

This is why we think mostly large pharma and industrial customers have been affected by this, more so than biotech companies or academic and government customers.

Actually, we ourselves, Thermo Fisher, are carefully watching our own costs -- as we always do -- and have proactively initiated some new actions to curtail spending.

We have a number of additional cost levers that we can pool if we need to, depending how the economic situation unfolds.

While most of what's going on in the global economy is out of our control, we are very focused on continuing to do what we do well and running the Company as we always have.

This involves achieving a balance of our four key financial metrics, which as you know are top line growth, operating margin, earning per share and free cash flow.

And then, of course, we continue to invest in growth opportunities by developing innovative products, expanding into new markets and strengthening our commercial capabilities.

Our sound business model has established us, Thermo Fisher, as the world leader in our industry.

And as the leader, we have four distinct advantages.

First of all, a broad portfolio; second the diverse customer base; third, global reach; and fourth, the strong balance sheet.

And we feel strongly that this combination will continue to create value for our shareholders, customers and employees.

So a few comments on our broad portfolio first.

We've built a very strong portfolio, with an attractive mix of consumables, instruments, software and services.

Nearly half of our sales are consumable laboratory supplies that need to be replenished on an ongoing basis.

We continue to build our portfolio with new technologies that reinforce our position as the innovation leader.

New products introduced earlier this year have been well received by customers and are selling well, particularly our FTIR and spectrometer and microscope, the ITQ Ion Trap, and the Vantage triple quadrupole mass spectrometer.

Key applications for these products range from cutting-edge life sciences research to forensics analysis to food safety testing.

We continue to develop new systems that will set us apart in the marketplace by meeting the need of a range of applications and operating skills, as well as meeting our customers' expectations for performance and price.

On our diverse customer base, as you know, our broad technology portfolio, in combination with our Fisher Scientific catalogs and other sales channels, gives us tremendous access to customers in diverse markets.

Our breadth gives us the ability to help our customers buy more intelligently by standardizing their purchases or building complete work flows using a single supplier.

This allows us to offer a very strong value proposition.

A great example of this is food safety.

We are reading a lot in the papers about melamine contamination in Chinese baby milk powder lately.

But we have a work flow solution for that.

We highlighted three other work flows for food safety testing at a major analytical industry show last month based on our thermo scientific technologies.

One showed how meat samples can be rapidly tested using our revolutionary new exactive LC-MS benchtop system, which allows prepared food samples to be injected directly into the instrument.

Another work flow based on our Arena photometric analyzer check beverages such as juice, wine and drinking water for spoilage and off flavors.

And we also demonstrated how fruit and vegetables can be streamed for contaminants using our TSQ Quantum triple quad in combination with Nautilus LIMS to track and manage the data.

We are investing to expand our presence in food safety; and sales into that market were particularly strong in Europe and Asia in Q3.

In global reach, we made significant investments to expand our footprint in Asia, as we talked about in some detail in the last few quarters on the conference call.

Given our size, we are under-penetrated in that part of the world, and that gives us tremendous opportunities for growth.

We saw very strong growth in China and India again this quarter, with the demand for our products and services coming from a number of markets -- life sciences, environmental and food safety.

Next month, we will officially open our new clinical packaging facility in India, a $17 million investment.

We expect this to significantly increase our share of the market there for clinical trials logistic services, as more pharma companies choose to outsource those activities to improve productivity.

On the balance sheet, finally, all of these strengths are supported by an extremely healthy balance sheet and strong cash flow that allows us to reinvest in the business for long-term growth.

We continue to use some of our cash to make smaller strategic acquisitions that offer complimentary technologies or access to new markets.

We made a number of these in Q3, totaling approximately $60 million in annualized revenues.

So to wrap up my portion, let me review our guidance for 2008.

We are confident that we will deliver on our adjusted EPS guidance for the year.

In fact, we are increasing the low end of our guidance by $0.02 to a new range of $3.13 to $3.17 for the full year.

This will lead to an 18 to 20% growth in adjusted EPS over our strong performance in 2007, which continues our track record of double digit earnings growth over the past eight years.

With better visibility at this point in the year, and factoring in a less favorable impact from foreign currency exchange, we now expect to achieve 2008 revenues of $10.45 billion to $10.55 billion resulting in 7 to 8% growth over our 2007 results.

You know, we have been through challenging times before as a Company, and we are now the world leader in our industry.

With our strong track record and essentially the same management team in place, I'm very confident that we are well-positioned to weather this economy and come out an even stronger leader.

With that, I will turn the call over to our CFO, Pete Wilver, for his financial review.

Pete?

Thanks, Marijn.

Good morning, everyone.

As Marijn said, we had another strong quarter, with 17% growth in our adjusted earnings per share to $0.76 compared to $0.65 in Q3 last year.

GAAP earnings per share in Q3 were $0.51, up from $0.49 in the prior year's quarter, primarily as a result of our improved operating performance and favorable discontinued operations, partially offset by some one time favorable GAAP tax adjustments in 2007.

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

Revenues in Q3 increased 8% year-over-year to $2.59 billion.

Organic revenue growth in the quarter was 3.5%, excluding favorable currency translation of 1.5%, and acquisitions net of divestitures of 3%.

Bookings were slightly above revenues in the quarter by about 1%.

In the Analytical Technology segment, Q3 revenues rose 6% on a reported basis and 2% organically.

In the quarter, we saw softer demand for our analytical instrumentation than in previous quarters and continued weakness in our bioprocess production consumables business.

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

In the Laboratory Products and Services segment, Q3 revenues increased by 10% on a reported basis and 5% organically.

During the quarter, we saw a strong growth in our health care catalog, biopharma logistics services and laboratory work stations businesses, all of which delivered high single digit organic growth.

By geography, we experienced slower growth in North America than in previous quarters and continued our strong growth in Asia/Pacific and the rest of the world.

,North America and Europe grew in the low single digits and Asia/Pacific grew in the mid-teens.

The rest of the world grew at 38%, albeit from a relatively small base.

Q3 adjusted operating income increased 12% year-over-year to $454 million.

Adjusted operating margin was 17.5% up 60 basis points from 16.9% in the year ago quarter.

The margin expansion was driven by pull through on our incremental organic revenues, including increased prices, and by our productivity initiatives such as practical process improvement, global sourcing and infrastructure optimization.

This expansion was partially offset by inflationary pressure in our raw materials and transportation costs, as well as higher stock compensation expenses.

Analytical Technologies' Q3 adjusted operating income increased by 15% year-over-year, and adjusted operating margin was 21.1%, up 170 basis points versus 19.4% last year, primarily as a result of substantial productivity improvements.

Laboratory Products and Services' Q3 adjusted operating income increased by 9%, and adjusted operating margin was 13.9%, down 20 basis points from 14.1% in the 2007 quarter.

Similar to our results in Q2, and as we projected for Q3, year-over-year margin expansion in Laboratory Products and Services was negatively impacted by direct material inflation, partially offset by our pricing actions.

And we also continued to see unfavorable foreign exchange on our European manufacturing cost base.

Total Company adjusted gross margin was 41.1% in Q3, up 30 basis points from 40.8% in the year ago quarter, primarily as a result of volume leverage and the impact of our sourcing and productivity initiatives.

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

And while oil prices have declined recently, we still experienced higher fuel and freight costs in the quarter, a large portion of which we have been able to offset in the form of fuel surcharges and increased rate billings.

Overall, direct material inflation negatively impacted gross margin in the quarter by about 60 basis points, which was largely offset by our global sourcing and incremental pricing initiatives.

Going forward, we expect commodity inflation to moderate slightly and our pricing actions to take further hold, which should lessen the dilutive impact of direct material inflation on our gross margin expansion in future quarters.

Adjusted SG&A was 21.1% of revenue in Q3, down 30 basis points from 21.5% in the year ago quarter, primarily as a result of volume leverage and productivity, partially offset by growth investments and higher stock compensation expense.

R&D expense was 2.4% of revenue in Q3, flat with last year.

Moving to below the line items, adjusted net interest expense was 19 million was flat with last year, as a reduction in our net debt was offset by a slightly less favorable interest rate environment.

Other income was a loss of $2 million, down 3 million from the prior year.

This resulted primarily from currency translation losses on foreign entity cash, partially offset by increased earnings from joint ventures.

Our adjusted tax rate for the quarter was 23.3%, down .3% from Q2 and down 1.3% from the prior year, primarily as a result of the tax planning initiatives we implemented during the second half of 2007 and throughout 2008.

We are currently forecasting our full year adjusted tax rate to be approximately 23.3%, which reflects the benefit of the U.S.

R&D tax credit extension approved early in Q4.

Average diluted shares were $439 million for the quarter, down $8 million from last year, reflecting the benefit of the share buy-back program we initiated in Q3 2007 and completed in Q1.

In mid-September, our Board authorized the repurchase of up to $500 million of our common stock through September 2009.

We did not repurchase any shares under this authorization during Q3.

In terms of balance sheet performance, third quarter year to date cash flow from continuing operations was $961 million.

And after deducting net capital expenditures of $150 million, pre-cash flow from continuing operations was $811 million.

We ended the quarter with $1.25 billion in cash and investments, up $230 million from Q2, as our free cash flow was partially offset by cash used for acquisitions.

Our total debt was $2.18 billion, essentially flat with Q2.

Given the current credit environment, let me just give you a quick summary of our liquidity position as of the end of Q3.

Overall, we are very comfortable with our liquidity position and ability to meet our financing needs for the foreseeable future.

As I just mentioned, we have 1.25 billion in cash and 2.18 billion in debt for net debt of 930 million.

The bulk of our cash is either held in the U.S.

or is readily accessible from offshore sources with minimal tax implications.

Our U.S.

cash is currently invested primarily in money market funds consisting of government and treasury securities.

Our offshore cash is currently invested primarily in money market funds consisting of corporate and government securities.

And, of course, we also have funds in local bank accounts to support our offshore operations, all of which are closely monitored by our corporate treasury department.

The major components of our debt are: $130 million of senior subordinated straight debt due at the end of this month that will be paid off with cash in hand; 1.50 billion of senior and subordinated straight debt due in 2014 and 2015, with no put options; and 975 million in converts in 2023, '24 and 2033, all of which remain currently in the money; and finally, we have a $1 billion committed credit facility in place through August 2012 with a group of 18 U.S.

and international banks, none of which individually represent more than 9% of the commitment.

The five primary banks in the facility are Banc of America, J.P.

Morgan, Barclays, Deutsche Banc and Royal Bank of Scotland.

Moving on to working capital, we had a solid performance in the quarter.

Accounts receivable days outstanding was 54 days, down one day from the prior year, and inventory days of supply was 74 days, down two days from the prior year.

So finally, on to our 2008 guidance.

We are maintaining the high end of our previous adjusted EPS guidance and increasing the low end by $0.02, resulting in the revised guidance range of $3.13 to $3.17.

This range represents 18 to 20% growth compared to the 2.65 we reported in 2007.

With respect to our revenue outlook for the full year, we now expect revenues to be in the range of 10.45 to 10.55 billion, or 7 to 8% growth versus our 2007 actual revenue of $9.75 billion.

This revised guidance reflects impact of less favorable foreign exchange, along with slightly lower organic growth.

In response to our revenue outlook for the year, we have implemented discretionary cost controls and some minor reductions in force, which have enabled us to mitigate the EPS impact of the loss revenue.

All in all, it was a good quarter, and we are pleased to be able to maintain our adjusted EPS guidance, despite an uncertain economic environment.

With that, I will turn the call over to the operator for Q&A.

We can now open it up for questions, operator.

(OPERATOR INSTRUCTIONS).

Our first question or comment comes from the line of Ross Muken from Deutsche Banc.

Your line is open.

So relative to your comments, Marijn, about sort of the pullback in pharma, as sort of the credit crisis heightens towards the end of the September quarter -- the September time frame, what are we seeing in the emerging market economies now?

And by that I mean sort of China and kind of the other major infrastructure plays globally where there still continues to be a bit of a debt crisis and sort of a less favorable outlook, certainly from an economic perspective than even the IMF or other agencies had, say, three or four weeks ago?

Yes, Ross, good morning.

What I said about the slowing down in the last couple of weeks was not just large pharma, but also in general, the industrial -- larger industrial customers.

I also said that we've seen a pick up on that again clearly so far in the fourth quarter.

So things have loosened up.

With China, it's a little early to tell.

I mean, we read the same newspaper articles that China's economy is probably slowing down.

But at the same time, China is still an enormous area of growth for us.

And I don't know.

It's really too early to tell -- to say what is the effect of a slowdown in the economy on the China for the quarter.

But we haven't seen significant slowdown in China so far.

Okay, that's definitely helpful.

And then the other question is relative to sort of the operating leverage, I mean, I think that is sort of going to be a key for certainly the stock, and for you guys going forward.

I mean, how do you think about that relative to organic growth targets?

And I'm not asking you to sort of prognosticate what you are going to say for '09, because it's obviously too early.

But I mean, how -- is there sort of like break bands, where if we think organic growth is going to be X to X, we know we need to go to plan A?

And if we know it's going to be below that, there is plan B, and even far below that there is plan C.

I mean, is that sort of the way of thinking about it?

And relative to that, how easy are these levers to pull, and how immediate are some of the cost savings you can get?

I mean, people is a relatively, sort-of quick and sometimes painful way to do it.

But -- so in terms of facilities or other levers on the Op Ex side, can you give us a bit more clarity in terms of your flexibility there?

We have a lot of flexibility, I mean, as a result of the Company we've put together over the last number of years.

You know, we have a lot of productivity capability in the Company.

And so you can always drive that part harder if organic growth would not be where we would want it to be.

So that's one lever.

The other lever is, as you know, given an unusual combination in this Company as a result of the merger of Thermo and Fisher, we have a lot of opportunity to drive a different business model to gain share over time that we are investing in very heavily.

It's sales marketing, it's global expansion, it's IT systems.

And that, of course -- some of those investments are costly and go at the expense of margin improvement.

You can also always tailor that to the circumstances.

So it's not like we have been this Company and this format for the last eight years.

We have really a new Company in the last two years and a lot of levers to pull if for whatever reason the top line growth wouldn't be where we expected it to be.

Now, you always have to be careful that you pull these levers too hard, because you may jeopardize long-term organic growth.

But at the same time, I think we have a lot of knowledge about the industry, about our capabilities.

We have a track record here of more than eight years of doing this balance quite well.

And it has lesser double digit earnings growth over the last years, and I see no reason for that to discontinue, even if the economic conditions are less favorable.

And -- apologize for the third, but I just need one other quick clarification, Pete, on the share count.

Yes.

With the convert now I believe being under water, what's sort of the implications of that going forward relative to where we should see share count come out in the future?

Well, all of our converts are still in the money.

They are less in the money than they have been in the past, obviously.

But they are all still in the money, so they're all still diluting our share count.

Certainly, if the stock price stays where it is today all through Q4, our share count will go down.

It's not material.

It's in the range of 1% or something like that.

But it definitely will go down, depending on the stock price.

What is the break point for the sort of nearest --

There's three different converts at different prices.

The highest priced one is right around 40.

Okay.

So we're sort of hovering there.

Got it.

Yes.

All right, thank you, Pete.

Okay.

Thanks, Ross.

Our next question or comment comes from the line of Mr.

Derik De Bruin from UBS.

Your line is open, sir.

Hi, good morning.

Good morning, Derik.

You know, I think the bulk of the questions I'm getting from investors right now are related to what type of forecasts you are going to put through to 2009.

I guess, just how you looking right now.

I guess, you know when you kind of look at your -- you know, the different scenario analyses and stuff that comes on, you know, if -- I guess how good to do you feel about still being able to expand margins in a really difficult environment?

Basically, if you kind of look at your worst case scenario, can you get some operating margin leverage?

Yes, Derek.

Well, first of all, we are not thinking this is doomsday, okay?

So lift your voice just a little bit.

But as I said in my answer to Ross' question, there are a lot of levers that we can pull in terms of margin improvement.

And we have a long history of doing that very effectively, and we have by no means run out of opportunities in the Company to do so.

Plus, we are making a lot of discretionary investments that we are making to come out of the -- come out stronger three to five years down the road that we could curtail to some extent if we would choose to do so.

So I believe that margin improvement is ahead for us, almost irrespective of whatever economy we will have for the next number of years.

Now, you know, how -- what exactly the margin improvement number is depends on, of course, what's the organic growth number.

How do we feel about these investments?

And also about management's capability to drive productivity faster, which we certainly can do if we want to.

Great.

That actually -- great, that was very helpful.

And I guess, could you talk about how aggressive you are going to be in terms of utilizing 500 million buy-back?

Derik, we really don't talk about how we are going to execute our buy-back strategy into the future.

Okay.

And then one final question.

The price increases that you pushed through in August, are those sticking?

Any push back from customers?

Yes, they are.

Yes.

So that's very helpful.

That has helped us recover some of the materials inflation margin erosion that we saw in the second quarter.

As you know, Derik, we talked about this, that a lot of the price increases were not implemented until the middle of August, and some even haven't -- because of contract limitations -- haven't even been, you know, implemented even as of today.

We will have to wait until the new year for that.

But -- so that's basically coming through the pipe, and we saw some effect of that, but we will see a much larger effect of that price increase showing up in margins again, recovery of margins from materials inflation in the fourth quarter.

Great.

Thank you.

I will get back in the queue.

Okay.

Thank you, Derik.

Our next question or comment comes from the line of Mr.

Tycho Peterson from J.P.

Morgan.

Your line is open.

Hi, good morning.

Good morning, Tycho.

Actually, maybe following up on that last question on price, I'm wondering -- we're hearing a lot more from companies about getting more aggressive on pricing.

So not just passing on higher shipping cost and input costs, but maybe getting more granular in the pricing strategy and using price as more of a lever going forward.

Can you comment -- you know, as we think about the catalog next year and how you are viewing the pricing levers that you can pull with your customer base?

Well, I mean, so far this year, this mid-year price increase that we have implemented on the basis of -- it was strictly done on the basis of much higher raw material costs.

I mean, resin prices, steel prices went through the roof very quickly in the April to May timeframe.

And we had to, quite honestly, scramble to get these price increases passed along mid-year, which is not something the industry typically does.

Usually it's a one time a year price increase at the beginning of the year, not something mid-year.

So that's good.

We got that.

But it's really is just to make up of lost margin that happened earlier, and it's a passing on of costs to the customer.

I think that more generally, pricing is not something our industry has done tremendously well.

I recognized this quite a long time ago, and we started paying a lot more attention to it.

I mean, a lot of -- and we've talked about this a number of years -- a lot of authority that individual sales people have to give discounts on instruments to customers where you -- after you get the order, you wonder, did we really have to do this?

Is this really the best way to sell value versus price?

And we've tightened up a lot of those things and have a lot of pricing strategists in the Company helping the sales force price appropriately.

And I see a level of professionalism in that area also when I sort of look around me in the peer groups.

So I think that it bodes well for our industry.

It's not something that we are particularly are good at historically.

Okay.

That's helpful.

With regard to your comments about pharma, we're obviously seeing a lot about restructuring; and you've talked in the past about your business at pharma growing as you kind of continue to penetrate deeper -- and then with the overlay of kind of the comments you made around pharma getting worse toward the end of the quarter.

Can you just talk about your outlook, given the restructuring that's happening among the pharma base, how you view that market going forward?

Well, you know, there's a number of elements to pharma.

I think first of all, they're tightening their belt to some extent.

That means that they are outsourcing more, and therefore, CROs do better.

So there is a benefit to that.

Also, pharma's problems in terms of drugs that come off patent are, of course, positive for generic pharma.

And therefore, that's a customer base that is doing better.

But I would say in general, large pharma will be under more price pressure.

And this is exactly why we are having the dialogue with them of, hey, we are a large broad-based supplier with terrific technologies, and services, and we can help you drive a more efficient sourcing model than you have exercised so far.

And in these difficult times for large pharma, they are more and more open to listen to us, and actually have the courage to implement some of these changes.

And with courage, I mean not so much that it's a scary thing to do, but large pharma is not known in general for its efficient sourcing capability.

And I think large pharma companies are recognizing that themselves and are changing and upgrading their capabilities in this area.

So we have a better audience over time to talk to.

Okay.

And then with regards to M&A, the buy-back you authorized was a little bit smaller than you have done in the past, and then you announced a handful of tuck-in deals this quarter.

I guess that there is a lot of discussion about whether you guys would look to do something a little bit larger.

Can you just talk about kind of your outlook on larger versus small deals, and what you are seeing in the market right now?

You know, last year we had a large buy-back.

This was immediately after the Fisher merger.

So we were certainly -- didn't have a lot of appetite for a lot of other acquisitions after we just did that big one.

I think now things are a little bit different.

We were taking a very measured approach, acquisitions versus buy-backs.

To tuck-in acquisitions will be an ongoing thing that we will always do.

And as I've said before, large acquisitions, really the stars need to be aligned for them.

It's very hard to plan around it.

And it really depends on each individual case.

So if the right opportunity would come along, we would certainly -- would be able from a management capacity point of view to do a larger acquisition.

But it's hard to plan for them.

Okay.

And then just one clarification, you mentioned lab work stations did okay.

Was this based off comp, or are you actually seeing kind of an acceleration in new lab space being built out?

No, I think that we are managing that business so much better now than a number of years ago that this is just really organically doing better in this business.

It was a problem child for us a number of years ago, as you know.

And we really turned it around, and they are probably gaining share right now.

Okay.

Thank you very much.

Thank you.

Our next question or comment comes from the line of Mr.

Quintin Lai from Robert Baird.

Your line is open.

Looking at Analytical Technologies, top line was 6%, but organic was two.

Yet, operating income grew 15%.

So could you give us a little bit of -- you know, what was the impact of FX on that operating income?

And then based off of 2% organic revenue growth and pretty healthy operating income, could that be kind of a preview of kind of what Derik was asking, what happens to operating income growth if a slowdown occurs?

Hey, Quintin.

In terms of the FX, I mean, that certainly doesn't really have much impact on the margin expansion.

It tends to come through at about the average.

Analytical Technologies, I commented on Laboratory Products and Services being a little bit impacted by FX, and that offset comes in through on the Analytical Technology side, so it's about even at the Company level.

So maybe it's 20 basis points or something in that range, but not significantly accretive to the margins.

In terms of the quarter, we just had a number of businesses that performed much better than they did last year in terms of productivity.

Some had a little bit of an easy comp in terms of the margin expansion.

But other businesses we really have just been managing them a lot more tightly to enable us to get the margin expansion.

I wouldn't necessarily extrapolate that out into the future.

But certainly, we can -- we believe that we can continue to get the range of margin expansion that we have gotten in the past within a relevant range of organic growth.

So I don't know if that answers the question or not, but --

No, but it does illustrate our capability to drive productivity in a business that has already a very good operating margin to begin with, which is the point that we have been making over the last few years.

And then, Marijn, your Company has an interesting position of seeing daily sales as well as big ticket sales.

So could you come and decouple that with your comments in the back for the slowdown you saw in September from your big industrial and big pharma customers.

On the daily sales, did you see any change with respect to them?

You know, I think -- what I've tried to say -- and let me just say it one more time very clearly.

At the end of the quarter, we saw from large pharma and industrial customers in particular sort of a -- almost like a deer in the headlights type of reaction to larger ticket items -- not the ongoing consumables so much, but larger ticket items.

It's almost like, "I'm going to spend 100,000 or $200,000?

I read in the paper that there is a credit crisis.

Is this really right now, the time for me to do this?" And we are running our business with relatively short lead times.

We have a lot of emphasis on cash flow, low inventories.

So if some of these orders at the end of the quarter don't come through, that hurts our sort of finishing up in a nice, neat package the revenue at the end of the quarter.

And that's what we saw.

You see that less in the consumables end of it because you are talking about smaller ticket items for the customer, and they are not so focused on that.

So as I said as well, it seems like the system is sort of thawing out again.

That little freeze was there, but it seems like temperatures are above freezing again in the beginning of the new quarter.

Thank you.

Our next question or come comes from the line of Mr.

Jon Wood from Banc of America.

Your line is open, sir.

Thanks.

Pete, let me get the obligatory cash flow question out of the way.

Any change to operating cash flow or Cap Ex guidance for '08?

Cap Ex guidance down a little bit to around $225 million.

But I'm still sticking with the $1.2 billion at this point.

Okay.

And then revisiting this cash deployment question.

If I look back on the buy back and acquisition accretion estimates from the investor day, I think you estimated both avenues are about equal in terms of earnings accretion.

So I would imagine the buy-back -- or the economics around the buy-back are about 30% better now at current valuation levels on the stock.

So why wouldn't the buy-back be a higher priority for the Board at these levels?

Well, that's only true if you assume that you still have to pay the old price for the acquisitions, right?

So is the sentiment more "wait and see" approach to see how valuations shake out in the M&A landscape before making a more concerted decision there?

Yes.

Quite honestly, if you just step back from it -- it's -- you know, I do not believe that a lot of companies say, "Oh, great, my stock went down by 35%.

Let's quickly sell our company".

That is just not the natural inclination that people would have.

So yes, deals will be done.

And maybe a big deal will be done, but I do not think that the people -- that boards of companies now say, "Oh, this is just a great time to sell right now".

So then that could lead you to saying, well, buy-backs may be a better option in the short-term.

But it's hard to predict that, because you only need one of the right exception on that, and there is an opportunity.

So we're playing it sort of in a very balanced way.

Okay, so can I assume from the comments, Marijn, that the deal pipeline really hasn't changed since mid-September?

On large deals?

Just any -- just the landscape -- valuation, as well as opportunities?

Well, no, I wouldn't say that it has changed.

We were still looking at tuck-ins on a regular basis.

I think that most companies would still like to get the old price, okay?

So the question is, is that intelligent for a buyer to pay the old price under these circumstances?

Okay, thanks a lot for the comments.

Okay, thanks, Jon.

Our next question or comment comes from the line of Mr.

Isaac Ro from Leerink Swann.

Hi, guys.

Thanks for taking the question.

Just regarding visibility, do you guys still expect to see pharma budgets coming in October and November for next year, and do you think it's possible that you might see a delay there, and that could kind of cascade into delays in spending in the first half of '09?

Well, I think -- I don't know what is -- whether or not budgets are delayed at large pharmas.

It's impossible for me to make an intelligent comment on that.

I mean, as I said before, a large part of what we do is consumables and another big part is services.

So that's hard to delay.

But maybe some of the companies will look at what are we are going to do capital budget-wise, and we will see.

We will see.

But as I said, assuming that the credit crisis inertia is out of the system already, it will be more business as usual rather than this credit crisis-induced inertia.

Okay, great.

And then in terms of your fourth quarter FX headwinds, looks like most of your competitors are looking at anywhere from 1 to 3%.

What are you looking for?

What we have in our forecast numbers and in our guidance is about a 2% impact to revenue.

Okay.

And then just lastly, you know, do you guys think you can take share in analytical equipment businesses to improve your growth prospects?

And to what extent would you use pricing as a weapon?

Well, in analytical instruments, pricing is not the key weapon to gain share.

The key weapon in analytical instruments is performance of the instrument, the technology of the instrument.

So analytical instruments is a technology game and we are -- we are really driving that between hardware capabilities, hardware improvements and software improvements.

So maybe it in some lower end instrumentation where there is not a lot of technology differentiations between competitors -- you know, price becomes more of an issue.

But that's not typical.

Got you.

Service -- as a follow on, service -- the ability to show instruments in demonstration labs all around the world, helping the customers with new applications, putting an integrated work flow together rather than just throwing the instrument over the wall and saying "you figure it out".

I mean, all of these are selling capabilities that we have focused on a lot that don't make price a top priority for the customer.

Got it.

Thank you very much.

Okay.

Thank you.

Our next question or comment comes from the line of Mr.

Jonathan Groberg from Merrill Lynch.

Your line is open.

Good morning, thanks for taking the call.

A lot of questions were asked, and unfortunately you can't answer the question that everybody wants to know, which is what exactly earnings number you are going to do in 2009, so I will focus on just a few clarification questions.

It will be a good number, though.

(LAUGHTER).

On the commentary, you know, I appreciate you spending a lot of time on the strength of your balance sheet, which I think is something that I guess is -- that I think is a little lost a little bit here in the story.

You doubled your cash since the end of last year -- your cash on hand.

People have asked how you're going to use it; but maybe just a more pointed question, Marijn.

Did you pay less for these acquisitions you made in the third quarter than you had paid previously?

Are you starting to see other companies that are maybe concerned about the outlook, or maybe don't have as strong of a liquidity position, or that are willing to pay for a lot -- or willing to sell for a lot lower price -- maybe not the big acquisitions, but the smaller companies?

Yes, that's a good -- we didn't pay less for the ones we did in Q3, because they were obviously well on their way; and really, if you remember, Q3 we thought the world was rosy, and everybody else did on September 15.

Okay?

So it hasn't been that long, although it feels like it's been awhile.

You know, I think that certainly there are always people, particularly privately-owned companies, that need to sell sometimes just for estate planning.

So I think expectations of valuations need to be lower on that in this environment.

And I also think that we are in a particular advantage here, having such a strong balance sheet, having the cash flow, that we can actually pay a few hundred million for something, while other potential buyers would say, you know, I'm going to be conservative, I don't want to spend this money right now.

So it may be a good time to do some good deals.

Just like in the mall you can get better deals.

Okay.

Thanks for clarifying that.

And then two other quick clarifying questions.

You mentioned again as you hit these last few weeks, and it was like the deer in the headlights, I think you used in terms of buying some of these big ticket items.

Can you just quantify at what price points are you talking about where you think there was noticeable --

I'm talking anything up from -- for some smaller customers, a water quality lab, something of 20,000 bucks; to all way up to 500,000 for a large customer.

But a $20,000 piece of equipment for water quality lab in a small geography is also a big ticket item for them.

So that's pretty much across the range of our analytical instruments.

Okay.

So -- interesting.

It was down -- it was --

It really does.

It really does.

And that's why we saw it, not just with large pharma, but also just across the board industrially.

Okay, and then last question here, you mentioned -- I think you were maybe a little conservative in terms of raw material prices and where they are heading.

I mean, at least now it looks like the commodity complex is collapsing -- and isn't just resins, which it looks like are set to collapse with the capacity coming online.

So across your businesses that could happen.

How will that play out?

How long of a lag time, and what happens if you go back historically in previous recessions?

What happened to your own pricing?

Were you able to maintain it?

Was Fisher able to maintain it, or are you going to have to lower some of your own pricing if some of the -- if the prices come down on these other input costs?

Yes, that is a good question.

Dow Chemical had its earnings this morning, and I was -- I had to leave so I didn't hear the CEO speak on TV, on the different shows.

But knowing him a little bit, I think what he would say is, "we are going to hang on to these price increases that we implemented for as long as we possibly can, because on the way up we really -- you know, had higher raw material prices that we could have instantaneously passed on.

So on the way down, oil coming down, we want to make at least that back".

So I firstly don't think that these resin prices are going to come down as fast and as significantly as oil prices have over the next, say three, four, five, six months.

But if they ultimately do, we will look at our prices.

But I don't think we would have a lot of enthusiasm to adjust them, because we also have suffered from a delayed capability to pass on the prices.

So I think we are well into 2010 to have this become an issue for us.

And by that time, inflation and other annual price increases will muddy the water on it.

Okay, but if you just look back maybe on like the 2002 and 2003 period where there was a significant curtailment of demand for some of the products, was pricing able to maintain itself?

Or was there --

I think pricing was able to maintain itself very well.

Don't forget, these are consumables.

It's not like toothpaste prices came down in 2002 and 2003 for us, right?

I mean, this is -- these are --

Okay, but I guess I'm talking about even like instruments.

I mean, steel prices are collapsing as well.

So I'm talking about all input costs, I guess.

Yes.

Well, on a more expensive analytical instrument, fuel price is not a big part of the total costs.

On laboratory equipment, like freezers and center fusions and things like that, safety -- there it is.

And again, it has been hard for us initially to pass on the price increases.

So we are not jumping at the bit to lower our prices at all on that.

Okay, great.

Thanks a lot.

Operator, we will take one more caller.

Our final call comes from the line of Mr.

Peter Lawson from Thomas Weisel.

Your line is open, sir.

Marijn, just kind of thinking about the worst case scenario with no organic growth, can you still get up margin expansion?

Well, I don't think about that scenario either, okay?

So -- but, yes, the answer is yes.

Because as you said -- you know, as we said before, half of our capability to improve margins comes from productivity.

That certainly doesn't go away when the revenue gets -- is flat.

And then we would push productivity harder in a situation where organic growth would be really unimaginably low.

What are the markets that are still firing -- aren't really showing any signs of slowdown after that kind of pick-up?

Markets that aren't showing any sign of slowdown?

Foods and beverage.

A lot of food quality is very, very strong.

The world is scared around food safety, so that is a very, very good market.

We also actually saw some continued good strength in mining and materials.

So commodity materials seem to be quite robust -- continues to be robust.

And then in general, anything that is related to health care diagnostics is not affected, at least not initially, by stuff that has been going on in the world right now.

Maybe over time it would.

But not initially.

And then, maybe kind of the implied growth -- organic growth coming from that Q4 guidance, does that mostly capture the weakness that you have seen, and has it kind of re-adjusted for a pick up?

It's more of a -- kind of a worst case story?

Why don't you answer that, Pete?

Yes.

Just in terms of the organic growth assumptions that are in there, I talked about the foreign exchange assumption; but the full year, based on where we think FX will be is -- our range is about 4 to 5% organic growth for the full year, and the high end of Q4 would be around 4%.

So I would say it's a mix of what happened at the end of Q3 and some recovery of that.

And you know, it's a fairly wide range in revenues, certainly -- of $100 million -- just because of a little bit of uncertainty in foreign exchange markets, as well as our end markets.

But as Marijn said, early in the quarter the order rate looks a lot more like the beginning of third quarter rather than the end of third quarter.

Okay, so it almost seems that the guidance is closer to worst case rather than a stretch case scenario, and tones kind of getting a lot better.

I would say our guidance is consistent with the way we always give our guidance.

I think we do our best to give you the best information that we have at the time.

And just then finally -- I may have missed it -- are you still executing on the buy-back?

We have a buy-back in place; and as I mentioned, in Q3 we did not purchase any shares on that.

It was approved within a couple of days of our blackout period, so we didn't really have an opportunity in Q3.

And as I mentioned earlier, we don't really like to talk about our future buy-back strategy.

But during the last couple of weeks of Q4, has that been executed?

No, as I said, we were in a blackout.

So we weren't able to make any purchases.

Thank you.

Yes.

Thanks, Peter.

So quick closing comment and -- we were pleased to report a strong quarter in Q3, and I'm confident that we will meet our financial goals for the year, as we have discussed.

And I believe that our end market diversity portfolio breadth and global presence, along with our continued ability to invest for growth, place us in a better position than most to weather economic headwinds and build on our industry leadership.

So as always, we appreciate your support of Thermo Fisher Scientific, and thank you for listening today.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may now disconnect.

Everyone have a wonderful day.