賽默飛世爾科技 (TMO) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Life Technologies Corporation earnings conference call.

I will be your operator for today.

At this time, all participants are in listen-only mode.

We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions).

I would now like to turn the call over to Ms.

Amanda Clardy, Vice President of Investor Relations and Corporate Communications for Life Technologies.

Please proceed, ma'am.

Thank you, Louisa, and good afternoon, everyone.

Welcome to Life Technologies' second quarter 2009 earnings conference call.

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

In addition, we have Mark Stevenson, our President and Chief Operating Officer, and Bernd Brust, our Chief Commercial Officer, joining us for Q&A.

If you haven't received a copy of today's press release, you can obtain one from our web site at lifetechnologies.com.

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

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

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

Additionally, we will be discussing GAAP and non-GAAP measures.

A full reconciliation of the non-GAAP measures to GAAP can be found in today's press release or on our web site.

For today's call, we will be referencing a presentation that you can view online.

Instructions to access the web cast are on our web site.

Additionally, we'll be posting the presentation to our web site upon the conclusion of this conference call.

Greg will begin today's call with highlights for the first half and an update on our integration progress.

He'll then be followed by David, who will give a more detailed review of the Company's second quarter operating results and our expectations for the rest of 2009.

I will now hand the call over to Greg Lucier.

Thanks, Amanda.

We are extremely pleased to have delivered another quarter of solid operating results.

It has been a great first half of the year and with good performance from Legacy businesses despite the tough macroeconomic conditions we all face today.

In Q2, total Company revenue grew 2% to $839 million.

Revenue growth without the impact from foreign currency was 7.5%.

Instrument revenue grew in the mid teens as a result of good growth in all our instrument lines, as well as sales of H1N1-related systems, which I'll discuss in more detail in a moment.

Consumables and services revenue grew as expected in the mid single digits.

Gross margin was a robust 66.7%, equivalent to the first quarter and a result of integration-related savings and positive price realization.

We had another impressive quarter of operating margin expansion, resulting in ending operating margin of 27.2%, a 410-basis point improvement.

Operating income improved 20%, or 36% excluding the impact of currency.

All of this resulted in nonGAAP earnings per share of $0.79 and free cash flow of $105 million.

As we announced in our press release today, we have used a good portion of our cash to repay $200 million of our outstanding debt.

Without question, this was a great quarter.

Everything was firing on all cylinders and we accomplished quite a lot.

I believe this performance once again demonstrations the strength of our operating model, the diversity of our technology portfolio and hard work of our people.

It shows how essential our products are to the everyday work of our customers around the world.

Before I get into the details of the quarter, I think it is important to note a factor that had a significant effect on our performance, so we can keep it in perspective when thinking about the future.

In the last few months, we have all seen the world attention's focused on influenza A H1N1 virus.

The CDC, World Health Organization and other health agencies around the globe have been focused on detection and prevention since the outbreak first began.

Life Technologies was contacted early on in the outbreak, soon after the first case was discovered, to help outfit labs around the world with our 7500 Fast and Fast Dx RT-PCR machines that run the CDC-developed assay.

The assay also utilizes several critical biological components from us.

We were pleased to be able to respond quickly to the needs of these global health organizations and have created a dedicated team to continue to provide as much support as necessary.

Our response to these agencies would not have been possible if Invitrogen and Applied Biosystems had been separate companies.

We were able to provide our customers with a complete solution from instruments to reagents to service.

It's true testament to the strategic rationale for our combination and could not have come at a more critical time.

The revenue we received from this quarter from H1N1-related products was approximately $15 million.

As we do with each quarter, let me now give you an update on our strategic objectives for the year.

Growing our core business, flawlessly executing upon our integration plans and investing for future growth.

The first objective, growing our core business, focuses on delivering to our current customers the best possible products, service, support.

Obviously, our results in the first half of the year are a testament to how we are doing in this area.

In the second quarter, we launched some notable new instruments as well as hundreds of new reagents, successfully implemented a new version of our reagent web site for more convenient transactions, launched our first marketing promotions that combined products from both Legacy Companies and completed a small technology purchase for IP related to digital PCR, which will further expand our considerable PCR patent estate.

These achievements are examples of the continuous improvements we make to grow our business.

In addition, you may recall that we announced a small divestiture several weeks ago.

This business, which generated about $6 million of revenue a quarter, provided an information management system for laboratories.

This is an example of how we are focusing on our core business by finding the rightful owners for pieces that are not a strategic fit for Life Technologies going forward.

It's critical for a company to focus on its core competencies in order to be successful, and we have shown that by making these difficult trade-offs, we deliver better financial results.

The second objective we are focusing on in 2009 is executing a flawless integration of Invitrogen and Applied Biosystems.

The integration is going extremely well and we not only remain on track to deliver our three-year synergy target, we are now confident we'll achieve more than originally communicated for our first year synergies.

We now expect to achieve $95 million of synergy realization in 2009 versus our most recent guidance of $80 million.

This increase in 2009 expectation is because we executed so effectively on our original target, we were able to accelerate a number of actions that we had originally planned for 2010 with no impact on customers or on our business performance.

We could not be more pleased with the effort that our employees from across the Company have put into achieving the promise of this combination.

When we originally announced the deal, there were many skeptics who couldn't see the vision and promise of what our combined Company could be.

But our employees from both Legacy Companies rallied around what we had to accomplish to make one plus one equal more than two, and I can honestly say that they have not disappointed.

I am very proud to be part of this effort.

I want to thank our people for going the extra mile for our customers and their colleagues each and every day.

I would also like to highlight a major effort within the Company over the last few months to further integrate our product offerings for our customers and offer them even greater choice across our portfolio.

In early July, we launched these key changes, which included making 1,400 AB products available through Invitrogen sales channels, enhancing our systems to support new quoting, pricing, invoicing and distribution processes, and aligning compensation plans for our sales force to support these additional products.

Now, we don't expect these actions to generate substantial revenue in 2009, but they are a significant step towards capitalizing on the full potential of our combined Companies in front of our customers.

As you can see from our integration tracker scorecard, all areas of the project are green, which signifies that everything is on track.

We have over 50 full-time people on the integration effort and track over 7800 individual task line items.

The largest part of the project in the last 90 days has been the development of these commercial systems to enable more cooperation in the field between the Legacy Invitrogen and AB sales teams.

With these changes now complete and fully tested, we believe we'll be able to create a much more powerful solution for our customers.

The third and final objective that I want to talk about today is how we intend to invest for the future.

One of the great benefits of our core business is that our product mix is heavily weighted towards high-margin consumables, allowing us to generate enough cash to continue to invest in the future of our business.

And while we pay very close attention to executing on our strategies of today, we're always look ahead at what might come next.

We also believe that companies that not only weather tough economic times, but perhaps also take advantage of this time to invest for the future are the ones that ultimately achieve even greater shareholder value.

To that end, we plan on investing in some critical R&D and sales and marketing programs that will drive even further growth.

Our areas of interest include further acceleration of our sequencing road map, a ramping up of our synthetic biology tool set to support biofuels research and continued expansion of our sales and service footprint around the globe.

I will now hand it over to David to give you more details on our financial results for the first half and second quarter.

Thanks, Greg, and good afternoon, everyone.

This quarter, we grew revenue 2% including currency, and 7.5% organically.

We're clearly very happy with this level of organic revenue growth.

However, it is worth reiterating what Greg mentioned earlier about the revenue from H1N1-related sales.

We estimate this added approximately $15 million of benefit, resulting in roughly 2 points of organic growth to the quarter.

We don't expect this level of revenue from H1N1-related products in the future.

The rest of our strong business performance was due to the continued strength in all of our divisions and several new product launches.

Molecular Biology Systems grew approximately 8% organically to $399 million in total revenue.

The majority of H1N1-related revenue for products was in this division, resulting in approximately 4 points of organic growth for Molecular Biology Systems.

Aside from H1N1-related revenue, a few notable areas that contributed to growth in this division were next generation sequencing reagent kits, including sample prep, a new transfection product launched last quarter and multiple new product launches this quarter, including predesigned TaqMan assays for disease research, a range of reagents for animal health and a whole transcriptone kit for SOLiD.

Genetic Systems had a strong quarter with $233 million in total revenue representing 11% organic growth.

To better understand the factors contributing to this growth, I'll give some color on the different businesses in this division.

The largest business is CE research with approximately 50% of the total revenue.

This business declined in the low single digits in the quarter.

You will recall that our original guidance called for declines of high single to low double digits but we've had recent success with several large deals in the hospital and clinical labs markets, as well as in emerging geographies.

However, given that these deals are unpredictable and lumpy in nature, we're not prepared to change our original expectations for this business at this point.

The second largest business in the division is our applied markets unit, which includes kits and CE systems, most importantly, for forensics.

This business grew in the mid teens, bolstered by several large orders in the Asia Pacific region.

The last business in Genetic Systems is next-generation sequencing.

We had continued acceleration for demand of our SOLiD next-generation sequencing product this quarter and hit a record win rate for new orders.

Our system is now at the point where we are clearly the leader in throughput and accuracy, which is critically important in such areas as cancer research.

This is clearly paying off in the number of new wins for SOLiD, such as the one we announced today with the University of Queenland's Institute for Molecular Biology.

Our third division, Cell Systems, grew revenue by 4.5% organically to $201 million.

Most product areas within Cell Systems contributed to this growth.

Our most successful Invitrogen product launch ever, Countess, continues to drive meaningful growth and is a great example of how we're increasingly able to solve customer problems with bench top instruments.

Our stem cell business continues to grow significantly as many of the products are now considered the gold standard in stem cell research, and are validated across many protocols.

We have a new web site specifically designed for stem cell researchers that is helping to drive traffic to our product offerings.

We also had our largest revenue quarter ever for our research, cell culture media and reagents, partly due to the success of our new bottle design.

Growth in these business units were slightly offset by a year-over-year decline in BioProduction-related products.

As a reminder, BioProduction revenues, which are approximately 20% of this division, are very lumpy, so fluctuations in growth is typical.

Moving on to the last division, Mass Spec, our joint venture with MDS, revenue declined 12% organically in the second quarter.

Recall Q2 2008 was a high volume quarter for Mass Spec and therefore, created a difficult comparison period.

First half organic growth for the division was negative 6.8%, which is in line with our expectations.

The end markets for this division appear to be stabilizing and, in fact, we saw a good growth outside the United States, especially in Europe and China.

In terms of the future, we still expect this business to be flat to down 10% for the year, and we would anticipate that the NIH stimulus will be of modest benefit growth in the fourth quarter.

Other revenue was $6.8 million.

As a reminder, this is associated with our Mass Spec division, but not in the joint venture and consists of consumable products used on discontinued Mass Spec systems.

In terms of organic growth by region, excluding the Mass Spec division, the Americas and Europe both grew 6%, Asia Pacific was up 30% and Japan grew 1%.

Currency this quarter impacted revenue growth by approximately 5.5 percentage points, net of our hedging program.

The negative impact to EPS was approximately $0.14, including foreign currency impacts accounted for in revenue, other income and the Mass Spec joint venture.

Before I begin with the additional financial comparisons, let me remind you that we are comparing all of our non-GAAP financial results to the pro forma income statements we've published on our web site that combines Invitrogen and AB for all of 2008.

Second quarter non-GAAP gross margin was 66.7%, an increase of 140 basis points from Q2 2008.

This improvement was primarily due to synergy realization, improved price and manufacturing plant productivity.

This was somewhat offset by product mix and currency exchange.

Second quarter operating expenses were $332 million, a decrease of approximately $15.5 million over prior year's levels, due mostly to reduced currency exchange impact, and savings from integration-related synergies, somewhat offset by increases in employee bonuses and appreciation.

Sequentially, operating expenses grew by approximately 4% due to headcount related expenses and outside service fees, somewhat offset by additional synergy realization.

Operating income was $228 million, an increase of 20% year-over-year including the impact from currency, and 36% excluding the impact from currency.

Operating margin was 27.2% representing 410 basis points of improvement over prior year, including the impact from currency.

This level of operating margin expansion primarily resulted from organic revenue growth and the realization of integration-related synergies.

In terms of the other income line items, we had $700,000 of interest income and $9.6 million of other income consisting of $14.5 million of income from our Mass Spec joint venture, offset by foreign currency losses.

Interest expense for the quarter was $39 million.

As Greg mentioned earlier, we just repaid $200 million of Term Loan B debt last week.

This repayment will result in lower interest expense in the long-term.

However, in the short-term, the related debt issuant costs are expensed at the time of repayment.

The acceleration of this amortization will be approximately $7 million in the third quarter.

Our non-GAAP tax rate was 29.3%.

We expect our full year tax rate to be 29.5%, which is slightly above our previous full-year expectations of 29%.

The increase is due to a greater amount of income earned in the United States than originally expected.

Our diluted share count for the quarter was $179 million.

As you'll recall, our share count is impacted by our stock price in the quarter due to our convertible debt and employee stock options.

Assuming our stock price continues to increase throughout the year, our share count in the second half is expected to be between the range of 183 million and 186 million shares.

Our non-GAAP earnings per share were $0.79.

GAAP earnings per share were $0.22, which includes $0.42 per share of acquisition-related amortization expense, $0.04 per share of noncash interest expense associated with the adoption of APB14-1 and $0.11 per share of business integration costs and other expense.

Comparability year-over-year is limited for our earnings per share figures due to the merger with Applied Biosystems.

Moving onto the balance sheet and the cash flow, our ending cash and short-term investments were $583 million.

This compares to last quarter's balance of $465 million.

Cash from operating activities were $147 million, capital expenditures were $42 million and free cash flow was $105 million.

Our ending debt as of June 30 was approximately $3.5 billion.

This is made up of our convertible debt of $1.15 billion and straight debt of approximately $2.4 billion.

As I mentioned, we've now repaid $200 million of this debt.

For the first half of 2009, revenue increased 6.5% organically and operating margins have expanded by 300 basis points, including the impact from currency.

Clearly, this is the result of a multiple of things ranging from hard work on the integration efforts to conservative expense spending due to the uncertain economic environment we're operating in, and to timing.

Nonetheless, we remain cautious about expecting the first half trends to continue.

With that in mind, I'll now move onto our expectations for the second half of the year.

We now expect second half organic revenue growth to be in the mid single digits versus the low single digits we indicated last quarter.

With that level of organic growth in the second half, we expect full year non-GAAP EPS to be in the range of $2.70 to $2.80.

This revised guidance includes several items that are important to note.

First, we have now included the expected Q4 impact of the NIH stimulus, although we believe it will be minimal in 2009.

As we've stated before, we expect most of the revenue impact from the stimulus package will fall in 2010.

The second item included in our revised expectations is the increased synergy target for 2009 that Greg specified earlier.

Through the second quarter, we have now completed actions that will ensure realization of $80 million of this this year and we expect to generate another $15 million in the coming two quarters, resulting in a full-year 2009 synergy realization of $95 million.

The third item included in the new guidance is a revised impact of currency exchange rates.

In the third quarter, we expect currency exchange at today's rates and with our hedging programs to negatively impact growth rates by approximately two to three points.

In the fourth quarter, again, at today's rates, we expect it will be flat to positive one point of growth.

And the last new item now included in our guidance is the impact from our divestiture mentioned earlier.

The LIMS analytical software business contributed about $6 million per quarter in revenue with approximately 10% operating margins.

We have removed this contribution from our outlook starting in August.

And finally, as is our practice, I'll also give you a few items to take into consideration for the coming quarter.

Although the second half organic growth rate is expected to be in the mid single digits, it will be unequally distributed by quarter.

We expect to grow organically in the low single digits in the third quarter and the high single digits in the fourth quarter.

As you will recall, the majority of the $30 million in royalty revenue declines that we've previously communicated happens in the second half of this year with approximately $12 million to $15 million of the decline occurring in the third quarter.

Gross margins are expected to be sequentially lower due to added royalty revenue decline, lower price realization, lower fixed cost absorption, as well as a shift in mix to more instrument sales.

Operating expenses will increase sequentially due to several R&D and marketing programs that began late in the second quarter.

We expect capital expenditures to ramp up in the remaining quarters and to be in line with our guidance of $175 million to $200 million for the year, including $50 million of integration-related capital.

Free cash flow for the year is expected to be approximately $475 million.

And this is an increase in our estimate given last quarter of $450 million.

With that, I'll now hand the call back over to Greg for closing remarks.

Thanks, David.

So, to wrap up the first half of the year, without question, we've posted some great results.

To have organic growth in mid single digits and operating margin expansion of hundreds of basis points in this type of economy says a lot about the type of business we have, especially as you look at other companies in this space and beyond.

Clearly, our focus on the academic market continues to pay off, as does the investments that both Legacy Companies have made in Asia.

We remain focused on driving growth in our core business and sometimes that means making hard choices to divest good business units that just aren't strategic to where we want to take the Company.

We will continue to take a hard look at our portfolio and make those decisions as necessary.

We're generating strong free cash flow, which is giving us the ability to rapidly pay down our debt each and every quarter.

And finally, we're making tremendous progress on our integration efforts, so much so that we're able to be a key partner to agencies such as the CDC in something as critical as H1N1 detection.

This is perfect example of the promise of the merger between Invitrogen and Applied Biosystems.

Had we been stand alone companies, we never could have provided the rapid response and full work flow solution that the World Health Organizations needed in this situation.

We're more confident than ever that this was the right combination at the right time.

With that, I'll hand it back over to Amanda for questions and answers.

Thank you, Greg.

Louisa, you can now open up the line for questions.

Sure.

(Operator Instructions).

And your first question comes from the line of Tycho Peterson with JPMorgan.

Please proceed.

Hey, good afternoon and congratulations on a great quarter.

Thank you.

Thank you.

Maybe, David, I'll take the bait on a comment that you had made about SOLiD and you quoted kind of record win rates.

Can you just give us a sense of where these systems are being placed, demand within centers outside the genome centers and maybe U.S.

international and then as a follow-up, the acquisition you announced, it looks like there's some sequencing applications.

So, what's the time line in terms of incorporating that into the sequencing pathway?

Thanks, Tycho.

Let me actually hand that over to Mark Stevenson.

Hi, Tycho.

It's Mark here.

So, firstly, on SOLiD, we're seeing really this uptake of SOLiD going in translational research centers around the world.

I mean, as we quoted in an example of one in Australia, it is really where the labs see the advantage of the throughput and the accuracy.

Particularly, our win rate is in cancer centers where the application is very important and the accuracy.

And also, why customers are doing Gene Expression?

The throughput translates into really a high tag number in those Gene Expression applications.

So, it's really helped carry it around the world for us and it was a great quarter in terms of the win rates, as we said.

In terms of the digital PCR technology, it is really a IP play at this point that we see broader applications, not just in the PCR as you point to but also there may be some applications into next-generation sequencing.

It is something as we invest for the future, you'll see us roll out products as well as a licensing program as we go into 2010.

Okay.

That's helpful.

Maybe turning to the integration process, I appreciate you guys updating the synergy targets.

Greg, can you comment a little bit on what you're pulling forward here, are these facility closures, are these working out input costs a little more aggressively?

Well, I think it is primarily related to the items that we had really targeted for 2009 into the early part of 2010.

So, as we had said before, these were synergies around some of the back office areas, finance, HR, IT, the support structure, as well as eliminating the existing overhead that was in place with the support structure.

And then also, we've seen some ability to accelerate the commercial synergies around where we're putting AB products into supply centers around the world.

And our pricing realization has been able to be a little bit more successful than we thought we would be able to do only in 2009.

So, overall, I think it really was spread across the integration and these were ideas and tasks that we had targeted in the first quarter or so of 2010 that we're able to move into this calendar year and get done.

Okay.

That's great.

I'll get back in the queue.

Thanks.

Your next question comes from the line of Quintin Lai with Robert W.

Baird.

Please proceed.

Hi.

Good afternoon and congratulations from us as well.

Thank you.

With respect to the comments on the NIH and the impact in the back half the year and then 2010, is that guidance based on kind of instruments starting off in the fourth quarter, which I guess are less of a percentage of your overall business, and then as those projects start to really ramp up, that's when we'll start to see it, the impact in 2010?

Well, I think that, yes.

So, what we've said again is that we expect that the impact in 2009 will be minimal.

It is hard to predict because not much of the money has started to flow yet.

We think that most of the impact will be in 2010.

And we think that the purchases will probably start with instruments and then move into consumables.

What we have seen is that there's probably going to be more funds in 2011 than we originally expected as well.

Okay.

And then the guidance in the back half of the year, with respect to H1N1, is that assuming that the instruments that were placed, the reagent consumption starts to come down over the back half?

Or you say you're not expecting another impact, could you talk a little bit about what you saw in Q2?

Was that mostly instruments or instruments and consumables?

Hey, Quintin.

This is Mark here.

So, I'll take the second part of the H1N1.

So, the initial amount was very much the public health labs particularly here in the U.S.

gearing up with instruments.

What we expect during the second half of the year is more consumable usage on those instrument platforms, both here in the U.S.

and also other countries around the world that have started now monitoring.

Okay, so, that is -- so, you are still expecting a bit more H1N1 but at a more modest pacing than you saw in Q2?

That's correct.

We expect some amount of benefit, but not at the level that we saw in Q2.

Okay.

And then just kind of as a strategic question, follow-up to that, the fact that you were able to ramp up so quickly and to help out the public labs, does it cause you to maybe kind of rethink how fast the progress toward maybe a diagnostic strategy, now that you've combined the two Companies?

Yes, I think that's a very good follow-up.

And certainly, we see this as a model for how we might initially enter certainly some of the diagnostics space.

I mean, just this last couple of weeks, we introduced two platforms at the AACC (American Association Clinical Chemisty) meeting, and there we had both the 7500DX and also our new CE instrument, the 3500.

And this opportunity for partner organizations like we did with the CDC to partner with us in different content for different assays allows us now to start to add content on today's platforms as we begin to build out a larger strategy into diagnostics.

Great.

Thanks.

Your next question comes from the line of Ross Muken with Deutsche Bank.

Please proceed.

Thanks.

And again, congratulations.

Can we talk about Asia Pac?

It seemed like growth there was really off the charts.

I want to see what some of the core elements of that were.

If we look at your results, it seemed like you also indicated some of the forensics business was strong ex U.S.

I want to see if there is any sort of correlation there and then, in general, why you think that that growth was more indicative of some of the strength in the end markets or was it some synergy capture as well there from a revenue perspective?

What's the sort of breakdown of the outperformance there?

Hi, Ross.

This is Bernd.

I think it is a little bit of all of the above that you just mentioned.

Certainly, the end markets continue to see considerable strength in both the research as well as the applied markets, synergies, the two teams are certainly starting to work closer together to drive portfolio synergies in that region.

But if I look at Asia Pacific, particularly the greater China markets, the organic growth in all segments continues to be incredibly healthy.

Great.

Greg, when you were going through some of your commentary, you threw out a word I hadn't heard used much before and that was biofuels.

It is sort of another part of the space from Molecular Biology perspective that hasn't been talked about a lot.

Is there sort of a distinct strategy there?

Is that a space that you sell much into with either some of the venture backed companies or some of the larger players who were dealing there in some of the alternative energies?

Ross, we are selling into the biofuels space now.

As you say, primarily into these start-ups that have been funded as well as some work around the energy labs.

As we look forward, with the stimulus funding, a considerable amount of money will go to the Department of Energy, specifically earmarked for biofuels research.

And as we look at what needs to be done in that space, it is very reminiscent of really back into the core, core beginnings of the Invitrogen and an ABI.

And so, we have a lot of the tool set necessary to really create synthetic biology tool kits that we think is what's going to be needed here in biofuels.

Our goal over the next 12 months is to finish off the other 30% and really create a kind of end to end set of tools, if you will, for biofuels researchers around the world.

Great.

Thanks, Greg.

And then, one, one -- well, a couple of quick cleanup things for David.

Just, again, what was the FX impact on the bottom line for the quarter and how should we think about sort of the hedging going forward?

Is it sort of what we've seen throughout the year?

Has there been any sort of change to the strategy?

Is the sort of relative volatility we had seen in the first half here more indicative of what we're likely to see going forward?

And just also, one cleanup on the royalty you talked about with PCR for Q3.

Can you just give us again sort of what the full year impact is that you have spoken to on that number relative to the $12 million to $15 million for Q3?

Yes.

Okay, so, one at a time.

The currency impact in the second quarter was on the bottom line was $0.14 EPS.

Question in terms of what do we expect in the second half in terms of volatility, yes, we're assuming that it is going to be equally volatile in the second half of the year.

And then your final question on the revenue or on the royalty impact.

Full year, we said it would drop $30 million and it would be back-end loaded with the impact particularly in Q3 of $12 million to $15 million drop in royalty income.

Okay.

Okay.

Sorry to point on this on the currency.

That just seems like in terms of margin pull through, a little higher on the EPS line than I would have thought for the quarter.

How does that compare to sort of what we saw in Q1?

It is pretty comparable, but higher, and it is simply due to the mix of currencies.

Okay.

And again, we tried to explain this before.

Our big currencies are sterling, Canadian dollar, Yen and Euro.

And it can swing $0.03 to $0.05 just based on that mix.

Okay, great.

Thank you, David.

Your next question comes from the line of Derik De Bruin with UBS.

Please proceed.

Hi, good afternoon.

Good afternoon.

So, you had an adjusted operating margin of 27.1% during the quarter.

I know you're not going to give an outlook for 2010 on this, but you basically beat my estimate by over 250 basis points.

And I guess, how sustainable is that number going forward as we kind of look at -- I mean, yes, some of the royalties are going to come into that, but I'm just curious as to where given all of the synergies and everything coming in, where that operating margin is going to cap.

I think it is reasonable to have it somewhere in the high 20s.

But again, we expect the operating margin to come down in the second half of the year, as we tried to lay out in the call.

Right.

No, I mean, obviously, the royalties will have an impact.

I'm just trying to say is like a high 20s number is something you think for the overall business is certainly a target longer term going forward.

That's just where I'm trying to get to.

Yes.

I think it is a longer term target, yes.

Okay, that's great.

And I guess, how many -- going back to the NIH question, I guess, how many grants are you aware of that specifically specified SOLiD as part of the grant process?

Mark, why don't you take that one?

Well, yes.

It's Mark here.

We don't have a specific number.

We have a huge increase in the number of grant applications that we've been supporting and we're aware of.

At this stage, a lot of people will put in for grants to get funded, actually by project.

And then both either specify or not specify and we expect to then compete on SOLiD and other projects.

A lot will be disease focused projects where we'll also compete with our consumables going through this as the labs get more funding.

We're pretty optimistic.

This market is really just getting going for us to position ourselves as the money starts to flow at the end of this year and beginning of next.

I'm just wondering, it's like, are there grants out there that have, 10, 15, 20 SOLiD specified in their grant application?

We don't have details on all of that.

What we know is there are multiple units being put in similar to the customer we announced on today that had two originally and have scaled up to 11 instruments.

We'll expect the same as customers get money, they have SOLiDs and we'll scale up with additional units to increase their throughput.

Okay.

And then just one final question.

I mean, during the quarter, there were some issues with manufacturing at Genzyme with respect to some contamination.

I guess were you involved -- were you potentially exposed to that or I guess does that have any impact on your business and I guess just in terms of a broader perspective, it is like my understanding is is that certainly just given the nature of cell culture that those types of contamination issues are probably more common than people would imagine.

I guess, could you talk a little bit just about the cell culture space and specifically what you've seen in that and if there's anything you can say about that particular issue with Genzyme.

Maybe I can grab that one, Derik.

As you know, we never comment on who our customers are for our cell culture by a production business.

So, I really can't comment to Genzyme specifically.

But more broadly, these type of issues that Genzyme is facing are not in the ordinary, but not extraordinary either.

And it is just part of the process of biological manufacturing.

The one highlight I would say that as situations like take place at Genzyme happen, we've created a whole new business around using PCR technology for rapid viral detection, and it is enjoying great growth.

So, it is a nice complement to our BioProduction space and further enhances the overall solution we can give to companies like Genzyme and others in the whole biological manufacturing area.

Great.

Thanks a lot.

Your next question comes from the line of Doug Schenkel with Cowen.

Please proceed.

Good afternoon.

Thanks for taking the questions.

Let me start with a couple synergy-related items.

Does the acceleration in year-one synergies that you talked about in your prepared remarks at all impact your longer term synergy targets?

Specifically, I believe your year three target outlined a couple of quarters ago was for $150 million in cost synergies and $50 million in revenue synergies.

And then, I guess the second question on synergies is in terms of your 2009 increase, is any of that driven by greater than expected sales synergies or market share capture?

Well, as I said in my comments, the overall synergies that we're now increasing in today's release is just for what we've achieved in 2009, and it primarily is a pull forward from 2010.

The overall target for the integration remains the same for the project as we originally specified.

In terms of your last part, in terms of where it is coming from, as I mentioned in an earlier question, really has come from a whole variety of tasks that we had lined up for this integration, including greater commercial synergies in terms of pull-through of products from the new channels or the various channels that we have to the customer.

Okay.

That's helpful.

And then, let me turn to H1N1.

Was there any H1N1 contribution factored into your earlier guidance?

And then, are there specific instruments that have exceeded your expectations in terms of the demand related to H1N1?

Yes, we originally had minimal instruments in that guidance, so it certainly exceeded our expectations.

Really, the instrument that has been most adopted has been the 7500 Fast DX, which was the one that was cleared by the FDA for use with the CDC test.

This is an instrument that's being developed now for the diagnostic use under ISO 13-485.

And so, it's been that instrument and we accelerated manufacturing in Singapore in order to bring forward the necessary shipments in a timely manner.

Okay.

And then last area I wanted to touch on.

In terms of sequencing, in Q1, I believe you indicated that you -- revenue recorded a decent number of SOLiDs in the quarter, maybe more than you had in the previous few quarters and that CE for research held up better than expected, especially at the higher end in part via the use of CE to validate next-gen's's sequencing work.

Can you talk about how these dynamics played out in the second quarter and then one last follow-up on that.

Could you also just talk about timelines for next-gen sequencing pipelines relative to what you've outlined in the past, specifically SOLiD 4 and your initiatives in single molecule?

Yes.

I'll take the three parts to that question.

So, firstly, the dynamics are pretty much the same.

We continue to see, over time, the CE research will decline but in that segment, we have diagnostic customers that are buying their platforms and using them in more validated settings.

We also have, of course, in that genetic systems, the update in the applied markets, which is forensic labs that we continue to talk about, particularly in Asia this last quarter, adopted more systems.

In terms of the road map for SOLiD, we have a really robust road map and as you saw, as we published, the first example of a whole genome with 17X coverage of 50 gigabasis, we're really making tremendous progress on that.

We'll update the system later on during the summer to a version 3.5 for our customers.

That will be a minor update of software and consumables, but really give them tremendous small performance on this road map.

And then, early next year, we'll upgrade our system and introduce version 4, which will really then take us ahead in terms of where we are in terms of performance in the system and really accentuate this end to end applications work flow for these throughput and applications.

So, we're really making tremendous progress on that.

We also continue to invest in next-generation system for single molecule.

We really see that as a complementary application where there will be room for our short read systems and then also be in the market with longer read systems in a competitive time frame as we come out with that product.

Great.

Thanks a lot for taking the questions.

Your next question comes from the line of Isaac Ro with Leerink Swann.

Please proceed.

Hi.

Thanks for taking the question.

Excuse me.

First off, just looking at sort of long-term R&D for new product development, could you maybe give us a sense of how those efforts are being divided up between maybe the three business units these days and Mark did talk a little bit about the genetic systems and the next-gen efforts.

On sequencing, I'm wondering how you kind of gauge that versus your investments in the consumables like stem cells and maybe the animal-origin free media.

I can say we're very active in looking at that portfolio.

I mean, our first priority in our largest investment is in sequencing.

We certainly talk about investments there.

We absolutely have a strong road map and Greg talked about some of the many new products we've introduced in real-time PCR within that Molecular Biology franchise.

We're really investing around our core QPCR, the reagents, the Ambion brand, some of the Transfection device that you saw.

So, we're really building out those everyday needs for the lab in that Molecular Biology section and that takes nearly a third of our proportion of our investment that goes in R&D.

And the third area is really investing around the cell, particularly as you say around stem cells.

It continues to be active growth.

You saw us launch a new web site for that.

There's new products and cell lines we've been introducing, as well as investments around the cell analysis base.

We think in the same way we've been able to really automate and simplify the work flow around Molecular Biology and sequencing, we can also do around the cell analysis space.

So, we're investing heavily against that and we see good opportunity to grow as evermore people go to single cell work or they go to look for analyzing within a cellular context.

Okay, great.

And then, David, a question on the numbers here.

I think you said $50 million of this year's CapEx budget going into integration-related activities.

Is it fair to say the majority of that $50 million would roll off in 2010?

No.

A portion will.

A portion will, but I think that -- and we haven't put together our detailed budget yet for 2010, but I think that our capital expenditures will still have a significant portion of integrated related investment -- integration-related investment in them in 2010.

Okay, great.

And then just to follow up on Derik's question regarding long-term up margin potential at the Company, I'm just wondering, could you maybe highlight a couple of areas where you see upside today versus when the merger closed last year and then how has that list sort of evolved?

Have a couple of things moved up here where you're seeing new opportunities?

You bet.

In terms of where the upside is happening, first one I would tell you is we have been putting together a dynamite manufacturing strategy where we're taking the best practices of some of the key facilities that AB and Invitrogen had, bringing it together and then applying it across the entire operational network.

That's giving us good improvement.

As I mentioned before, we've also seen really accelerated improvement with price realization across the AB consumables portfolio and now moving into the AB instrument portfolio.

I think we had outlined that was going to be key area of integration when we put the project together and it is certainly meeting or exceeding our expectations.

Great.

Thank you very much.

Your next question comes from the line of Jon Wood with Bank of America Merrill Lynch.

Please proceed.

Hey, thank you.

So, David, on the cash flow outlook, it looks like you've done about $200 million, $250 million or so in operating cash the first half and then your net income -- your guidance applies about $250 million in net income in the back half of the year.

So, it's basically about $150 million of, I guess, balance sheet changes and I noticed the DSO or the receivables ticked up.

So, is that the primary source of cash from the balance sheet to get you to the 650?

Yes, so he's referring to the difference between the 650 and without the integration-related.

Ok, yes.

Yes, so, it is.

In this quarter, we did see an increase in our accounts receivable.

We do expect that we'll be able to bring that down and we also expect some improvement in inventory.

Offsetting that in terms of free cash flow, we expect capital expenditures will be higher in the second half of the year.

Okay.

And then you referenced in the prepared comments, $7 million of debt, I guess accelerated debt amortization.

That's not in the adjusted numbers, right?

Of the guidance.

Yes, it is.

It is?

Yes.

Okay.

And then also on the synergy, you mentioned you exited 2Q on an $80 million run rate, so is it reasonable to assume there was about $20 million of synergies in the second quarter?

No.

What we meant by that $80 million is that we've taken actions through the second quarter that will generate $80 million in savings for the full year.

And what we expect to do is we'll take further actions in the second half of the year that will generate another $15 million in synergies, so that our total realized synergies for the year will be $95 million.

Understood.

Okay.

Thank you.

Your next question comes from the line of Marshall Urist with Morgan Stanley.

Please proceed.

Yes.

Hey, guys.

So, a couple of questions on the geographic trends.

I mean, the U.S.

or the Americas and Europe both moved around sequentially, pretty meaningfully.

Could you give us some idea of what were there particular end markets that improved or sort of got worse or some of the one-time stuff in the quarter that might have caused those changes?

All right.

This is Bernd.

If you look at the Americas and Europe, I mean, fairly stable in what we're seeing there.

The U.S.

is seeing more and more strength in academic, the research markets are healthy there at this point.

We continue to see some challenges in the industrial markets in pharma and biotech, although I think they're starting to stabilize a little bit as well and we're seeing good strength in Latin America if we look at our Americas region.

In Europe, it is really the core countries in the U.K., Germany and France that are holding their own fairly well, the U.K.

particularly was very strong.

But that region really has been at that level for some time now and we seem pretty consistent in the market segments around the academic world over the last three or four years now.

Ok.

Great.

Thanks.

And then, I appreciate the detail you guys gave on CE, but could you help us to understand a little bit better, is this true sort of installed base growth on the applied market side or are we seeing kind of an upgrade cycle of people going to higher end or higher throughput instruments on the CE side and how that impacts your visibility in that business.

Yes, this is Mark here.

It's really is true in install-base growth.

So, what we see, for example, in China, is that the forensic labs, while the primary labs may have been equipped, now we're equipping the secondary and tertiary labs as they build out their forensic strategy.

As you see in diagnostic labs, we see some content that goes into diagnostic companies that runs very well where you really want to sequence it on a CE platform, it is robust, it is proven.

It now will have a CE IVD mark on it, so it is very much a validated solution.

So, this is new install base that will also take new consumables.

On the downside, what we see is the deinstallation goes on within the genome centers as they switch to next-generation sequencing and that trend has been the offsetting trend we've seen in this business.

Okay, great.

And then, last question, just you guys alluded to some increased spending, R&D and SG&A into the end of the quarter that will flow through next quarter.

Can you help to just quantify that a little bit better in terms of the magnitude there that we should be looking for?

This is Amanda.

So, what I'll -- I'll give, in terms of the numbers, and then I'll let Greg talk more about kind of where we're investing, and it is not sizable.

Otherwise, we would have said that, but we're trying to get across that our expenses will go up sequentially.

But clearly, there is only so much you can start in one month, so it is not going to be significant but they will go up sequentially.

And maybe, Greg, you can talk a little bit about more where we're investing for growth in the future.

You bet.

As I mentioned in the prepared comments, we're taking advantage of the strength we're having in the business to further build out the whole biofuels tool set kit.

We have a number of great projects that I think Mark's talked about in sequencing that we're further investing into, be it the SOLiD road map or single molecule detection.

And then importantly, we're also investing into the commercial front end of the business.

We have a number of very positive changes going on.

For example, continuing to build up and build out our web site, not only in Europe and the Americas, but now moving into Asia and so we're just taking advantage of the strength of the business to continue to try to grow the business even faster in subsequent quarters.

Okay, great.

Thanks, guys.

Your next question comes from the line of Jon Groberg with Macquarie.

Please proceed.

Thanks for taking the call.

I just had one question.

I know -- I don't know if who wants to answer this, Greg, or if you want to have someone else.

But I know this quarter, one of the big issues or perhaps areas of caution was you were going to start moving towards some of these more customer facing integration initiatives and it looks like you pulled that off fairly well, but maybe you can just talk about kind of how that went, if there are some issues that either arise or that you're dealing with or just kind of maybe how that process went because I think that was a bit of a concern for investors.

Hey, Jon, this is Bernd.

Maybe a couple of things.

The biggest customer facing change probably that has happened has been some of our customer service consolidation in both the U.S.

and Europe that has moved very smoothly and it is pretty much done at this point without much issue actually.

The second one that has happened in the second half or that began in July that is now in place for the second half of the year is where we've made some changes to the portfolio for selling teams.

And so although there's some change in what the teams are carrying, as you noted, two separate selling teams were not consolidated.

So, the Invitrogen sales force continues to be focused on selling the biological products, best in class reagent offerings and the Applied Biosystems team continues to focus on providing the customers with integrated work flow solutions.

The big change that we've made in the second half now is that we've moved about 1400 or 1500AB SKUs into the Invitrogen selling team's bags, so that we have much broader channel coverage to our customers for that portfolio.

Those teams have now been trained and are actively selling those products in addition to the AB teams.

The final change that we made effective July 1 was consolidation of some of our front end systems.

So, we're now in a common CRM and although there is some training involved in that, that also has gone very, very smoothly and really so far from what we've seen, there's been no issue in any of the changes that we've made that have negatively impacted our customers.

So, just so I got the timeline right, the customer service, that kind of already -- we're kind of seeing the results in this quarter, meaning they showed up.

The other ones are going to be more in the second half.

Is there any -- I know it is going smoothly, so you don't really anticipate any -- you don't foresee any potential hiccups here in terms of the second half.

At this point, we don't see any issues with the changes that we have made.

Okay, great.

And then, David, it looks from -- I was looking at your cash flow statement that you have, it looks like you probably -- this $200 million that you paid, you probably replaced with new debt and I'm just curious if that's right, what the terms of the new debt are in terms of what you're paying.

No, we didn't.

We repaid.

We've taken on no new debt.

We repaid the debt in the third quarter, so the cash flow statement you would be look at doesn't reflect the $200 million you pay down.

That's balance is just all out of your own cash?

Yes.

Okay.

Is there anything you can do given that this floor of kind of LIBOR at 300 and given where LIBOR is, is there anything that you can do to potentially lower that payment?

No.

Other than repay it, there isn't.

That's the floor.

So, it is not worth trying to get some potentially the credit markets have eased a little bit in terms of trying to potentially alter that structure with some new debt.

I mean, as the credit markets, we're constantly taking a look at what we could potentially do to lower the interest cost, but as of yet, they haven't moved enough so that it makes sense.

Ok.

And then last question as we think about this H1N1 and the potential comp, is how -- what's kind of been the -- what's your take on how prepared some of these public health centers are if we get another -- if next year turns out to be worse than this year as many people potentially suggest that it could be.

How prepared are they?

Would it be a matter that the instruments are now there and it is just an issue of the reagents or would we need even more instruments if we look at it for next year?

Yes, it's hard to predict at this stage.

So, what we have factored in is there is a good in-store base up there and we would expect an ongoing level of monitoring.

That's really what we factored in at the moment to our estimates.

Okay.

Thanks.

Louisa, I show that we are at the end of our hour, so unfortunately, we will not be able to take anymore questions.

However, as you know, you can always follow up with me afterwards if there are still additional callers in the queue.

This will now conclude our second quarter 2009 earnings conference call.

This web cast will be available via replay on our web site for three weeks.

And thank you, again, for joining us this afternoon.

Thank you for your participation in today's conference.

This now concludes the presentation.

You may now disconnect, and have a great day.